Chapter 31 Monitoring & feedback into the control cycle

Question 1

Experience will be monitored in order to:

Answer 1

• update assumptions for future experience
• monitor any adverse trends in experience
• monitor actual compared to expected experience and take corrective actions as needed.
• provide management information to aid business decision
• make better informed decisions about pricing and about the adequacy of reserves.
• monitoring undewriting procedures: check effectiveness of underwriting, identify anti-selection.
• monitoring reinsurance: assess need for RI, calculate profit share entitlement under treaty.

Question 2

By keeping its experience under review, it may be able to identify such things as

Answer 2

• profitable products
• profitable sales channels agents
• profitable markets
• profitable markets
• efficient sections of the business
• successful investment strategies

Question 3

Data required for monitoring experience

Answer 3

• the data should be of a reasonable volume and stable
• it is important to agree period over which data will be collected.
• the data should be consistent: eg age can be calculated as age next birthday or last birthday.
• the data need to be divided into sufficiently homogeneous risk groups.
• the data within the cells needs to be credible.

Question 4

Experience investigations would include

Answer 4

• new business and renewal rates
• mortality, sickness and other contingencies
• claims amounts
• persistency rates
• expenses
• investment returns

Question 5

The purpose of New business analyses is to check:

Answer 5

• new business strain
• business mix against that assumed in the pricing basis
• adequacy of staffing levels against those required by the business written.
• commissions paid against those assumed

Question 6

Renewals

Answer 6

• lapse rates will be compared with those assumed by policy type, distribution channel.
• such analyses will be important from the viewpoints of sales management, commission clawback and marketing impact.
• The impact of lapses will be more crucial to profitability where pricing bases have amortised initial costs over a number of years of renewal.

Question 7

Data for analysing mortality & morbidity would be subdivided by:

Answer 7

• type of contract
• age
• gender
• duration from entry
• smoker/non-smoker status
• underwritten status
• source of business
• occupation or industry for group business
• benefit conditions
• geographical location
• size of group(for company contracts)

Question 8

When analysing claims the following will need to be considered

Answer 8

• allowance for the problems of heterogeneity
• allowance for unsettled, unreported and re-opened claims
• large or exceptional claims
• changes in types of claims
• changes in claims development patterns
• seasonality pattern of claims

Question 9

Claims amount experience

Answer 9

• in classes of insurance where the claim amount is not fixed nor rising according to an index, the actuarial monitoring of experience will seek to compare the amounts of claims incurred with those expected in each risk cell.
• the trend of claim amount escalation in relation to standard inflationary index is important.
• analysis of claims incidence by sum insured groupings may reveal underwriting practices which encourage claims from higher sums insured.

Question 10

Other important factors

Answer 10

• analyse trends: analyse any trends in propensity to claim. eg gov compaigns may increase screening test & hence more diagnosis.
• divide data to credible cell level
• compare to market experience
• competitors’ performance

Question 11

Compare to market experience

Answer 11

• actuary’s analysis of competitors’ products and processes is a necessary part of expereince monitoring.
• A competitor’s approach to risk selection in pricing cn represent problems when the competitor is subdividing the population by more rating factors: company using more rating factors will select better risks and 2nd company’s experience will deteriorate.
• it can also present opportunities where the market has failed to recognise risks thus a more profitbale experience can be achieved by more appropriate segmentation & pricing.
• can look at the market underwriting methodologies and adopt these.
• actuary needs to consider whether the risk inherent in his portfolio is different from those of competitors before drawing conclusions.

Question 12

Competitors’ performance

Answer 12

-Actuary will keep a close eye on what competitors are doing in terms of risk selection , policy coverage, pricing, product design, etc.

Question 13

Persistency experience: Factors by which the data could be analysed are?

Answer 13

• Type of contract: PMI policies have different persistency compared to long-term policies.
• duration in force: persistency is generally lower at the start of a contract.
• sales method used and target market.
• frequency & size of premium: more likely to lapse with monthly premiums.
• premium payment method: premiums paid in cash lead to lower persistency rates because they’re more noticeable.
• Original term of contract: longer term contract is more of a committment hence lower persistency rates.
• Gender and age: persistency tends to be worse for younger ages.
• claims experience/NCD level for PMI contracts: Policyholders with good claims records are less likely to renew.

Question 14

Persistency rates in future are also affected by the following?

Answer 14

• current economic situation
• competitive situation of the product eg introduction of a more attractive product can have an adverse effect
• perceived value of the product to the customer

Question 15

The process of persistency experience analysis

Answer 15

• for each homogeneous group lapse rates can be determined as follows.
• Number of contracts issued by company’s last financial year is divided by number of in force until 1st anniversary to give 1st year persistency rate. 1st year lapse rate is 1 less persistency rate.
• 1 similar procedure can be used to determine the 2nd year, 3rd year, etc.
• calcs should be adjusted to exclude effects of deaths and maturities where these are material.

Question 16

Expense experience aim

Answer 16

• Expense investigations aim to convert known total costs such as salaries, systems etc into initial, renewal, termination and investment costs per policy.
• The allocation will need to assume that some policy costs are independent of policy premium size, some vary by premium size and some vary by benefit size.
• many assumptions some rather arbitrary and pragmatic, will be needed in allocating costs down to cells.
• it is also concerned with allocating these expense by class of business in order to measure past performance of the products.
• this will be compared to assumptions in pricing.
• this should be allowed for in future premium rating.

Question 17

For each of the initial, NB & termination expenses we need to identify whether the expenses are expressed as?

Answer 17

• proportional to premium payable
• proportional to benefit payable
• fixed amount per policy

Question 18

Expenses of an insurance company can be sub-divided into:

Answer 18

• direct expenses; expenses that depend on either volume of new business or level of in-force business
• overheads: the balance of expenses ie those that relate to general management and service departments which are not directly involved in new business or policy maintenance activities and which are insensitive both to the volume of new business and the level of in-force business.
• in practice there is no clear dividing line between these two categories and some judgement will have to be made.
• overheads should be modelled independent of number of policies.

Question 19

For the purpose of expense analysis non-commission expenses can then be split into:

Answer 19

• initial expense - proportional to nr of contracts written.
• renewal expenses - proportional to nr of contracts in-force.
• termination expenses - proportional to nr of contracts in-force.
• claims expenses
• investment expenses

Question 20

The following expenses are not proportional to number of contracts in force:

Answer 20

• marketing expenses
• underwriting expenses: related to size of benefit
• long-term care claim costs: typically related to size of benefit.

Question 21

Now that the expenses have been split by type they still need to be split further by?

Answer 21

• each accounting fund
• or main product line of the insurer
• these may be further split by single premium and regular premium business.
• the choice of cells will vary across insurance companies.

Question 22

The process of expense analyse

Answer 22

• The next stage is to split expense by main items:
• salaries and salary related expenses
• property costs
• computer costs
• investment costs
• there is no definitive way of splitting these.

Question 23

Salaries and salary related expenses

Answer 23

• a large part of expenses are staff-related
• in short-term these expenses may remain fixed howver will vary in long-term to match changes levels of new & existing business
• Staff can be split into 3 groups:
• staff working on a single cell (direct)
• staff working on more than one cell (direct) : timesheets can be used to split salaries between appropriate cells.
• other staff (part direct expenses)

Question 24

How can we split overhead expenses(salaries)?

Answer 24

• in proportion to direct expenses already identified
• splitting them in proportion to expense charges from the policies
• splitting them down in proportion to something else eg in proportion to number of new business staff they serve.

Question 25

property costs allocation

Answer 25

• if a company owns (eg assets in it long-term fund) any of buildings that it occupies a notional rent needs to be charged to the relevant departments.
• this rent plus property taxes, heating, lighting, cleaning costs, etc can be split for example by floor space occupied between departments and then allocated in proportion to salaries.

Question 26

Computer costs allocation

Answer 26

• the cost of purchasing a new computer could be amortised over its useful lifetime and then added to ongoing computer costs.
• These can then be allocated according to computer usage.
• most computer usage should be readily identifiable as belonging to one of the cells.
• other expenses not readily identifiable could be split in proportion to other known computer costs.

Question 27

Investment costs allocation

Answer 27

• should be split by assets class
• the costs would be directly allocted to investment expenses and hence allowed for in assessing the investment returns to use for pricing etc.
• this can be allowed for via a lower yield.

Question 28

Once-off capital costs allocation

Answer 28

• these expenses need to be amortised over the expected useful lifetime of the item purchased.
• the amortised cost may be then be treated as part of the overheads.
• if the item can be treated as an asset in the long-term fund them cost is not amortised, a notional rent is charged rather.
• exceptional items which are note likely to occur would be excluded from this analysis.
• but future incidence may be allowed for in margins in future expense assumptions or risk discount rate.

-commission should be excluded because this is already known.

Question 29

Investment experience analysis

Answer 29

• a company will want to assess the return it is achieving on its investments.
• the experience is likely to be analysed by main asset types and may be done both gross and net of investment expenses.

Question 30

For long-term insurer an analysis of surplus arising may be performed in order to:

Answer 30

• show the financial effect of divergences between the valuation assumptions and the actual experience, exposing which assumptions are the more financially significant.
• show the financial effect of writing new business
• provide a check on the valuation data and process, if carried out independently.
• identify non-recurring components of surplus, thus enabling appropriate decisions to be made about the distribution of surplus to any with-profits policyholders so entitled or to shareholders to members.
• comply with regulatory requirements

Question 31

Long-term insurers, may also analyse the change in embedded value in order to:

Answer 31

• validate the calculations, assumptions and data used
• reconcile the values for successive years
• provide management information
• provide data for use in executive remuneration schemes
• provide detailed information for publication in the company’s accounts or those of any parent company, in particular the value of new business taken on by company.

Question 32

The results of experience analyses may be used to help control risks in a number of different areas including:

Answer 32

• improving the pricing basis
• establishing/revising the reserving basis
• changing/improving the marketing message
• revising sales procedures in terms of training and selection of distributors
• providing adequacy of staffing
• revising underwriting processes
• revising claims handling processes
• altering the capital allocation methodology
• improving the systems and data recording process
• revising policy design
• improving wording of policy contract