Chapter 35-Monitoring Experience

Question 1

List reasons for monitoring experience as part of the control cycle

(6)

Answer 1

Update assumptions as to future experience

Provide management information to aid business decisions.

Monitor adverse trends in experience

Monitor actual compared to expected experience and take corrective actions as needed

Make more informed decisions about pricing and adequacy of reserves

Develop earned asset share

Question 2

List 4 reasons a life company may need assumptions regarding future experience

Answer 2

(1) Model office work
\+EV work
\+profitability monitoring
\+financial projections
\+asset-liability modelling for setting investment strategy
\+determining reinsurance requirements

(2) Pricing
(3) Valuations
(4) Setting discontinuance terms

Question 3

List ways in which experience analysis may help provide management information and take corrective actions (5)

Answer 3

By helping management to identify

Profitable
+products
+sales channels
+markets

Efficient sections of business

Successful management strategies

Question 4

Discuss the data required for monitoring experience

Basic requirements of good data (3)

Splitting data (2)

Period (2)

Level of detail (2)

Answer 4

The basic requirement is for data to be
+of sufficient volume
+consistent
+adequate to deduce trends and future experience

Data should be split into homogenous groups
+according to relevant risk factors
+balance between homogeneity and credibility

Period over which data is collected is very important
+sufficiently long time period for enough data volume
+…but too long time period, might not give info about recent experience

Level of detail depends on
volume of data available
+ideally want split at least for different contract classes

Question 5

What do we mean by ‘big data’ and how have technical developments changed the insurance landscape in this regard?(2)

Give an example of big data (1)

Answer 5

Big data

big data essentiallly refers to large volumes of data
technical developments => insurers can handle/analyse large volumes of data more easily

Big data example

banks with insurance subsidiaries selling insurance mostly to own customers (‘bancassurers’) amass large volumes of additional data on the insurance customers eg personal spending habits and travel locations

Question 6

List some advantages of big data

Answer 6

Allow better understanding and analysis of risks…

Develop more sophisticated and detailed risk classification…

…allowing for more accurate rating and greater ability to select preferred risks

Monitoring may help drive better experience
earlier identify changes in individual risks
or being able to intervene/influence policyholder’s behavior

Question 7

List some disadvantages of big data

Answer 7

Reputational damage
+privacy concerns
+data protection failures

Regulation changes
+regulator preventing certain data being used
+fines for misuse of data

data issues
+collected data may be inaccurate, incomplete, or irrelevant

Modelling risk: complex models=> choice of wrong model

Expenses: collecting/analyzing data vs benefits

Question 8

List the types of experience investigations an actuary might conduct (4)

Answer 8

Mortality and other contingencies

Persistency

Expenses

Investment return

Question 9

Mortality experience

List the classifications by which data (both claims and exposed to risk) would be ideally sub-divided for the purpose of analyzing the mortality experience

Answer 9

Most useful classifications would be

type of contract
age
sex
duration from entry
smoker/non-smoker status
medical/non-medical status
source of business
location

Further classifications useful if sufficient data

eg location broken down to postal code

occupation (at least broad occupational group)

Question 10

List classifications by which data (both claims and exposed to risk) would be sub-divided for the purpose of analysing the persistency experience (10)

Answer 10

Subdivision and analysis of persistency experience data would usually be by:

(1) Type of contract
endowments usually > persistency than term assure

(2) Duration in force
usually lower at start of contract

(3) sales method
more suitable product sold => better persistency

(4) target market
more suitable product sold => better persistency

(5) frequency of premium
monthly prem=> more chance stop paying than annual prem

(6) size of premium
big annual prem may be less affordable than smaller monthly prem

(7) premium payment method
debit order persistency > cash payment persistency

(8) original term of contract
(9) gender

(10) age
usually worse experience for younger ages

Question 11

Give 3 other factors, external to life company, that may also influence persistency rates (3)

What impact would they have on the persistency analysis?

Answer 11

External factors influencing persistency

(1) Economic situation
(2) Competitive situation of product
(3) Perceived value of product to customer

Impact on analysis

these factors wouldn’t be used explicitly in analysis
but may be used to understand/explain patterns in experience

Question 12

Outline how full withdrawal rates can be determined for each homogeneous group of lives analysed (7)

Answer 12

For each homogeneous group

Divide contracts issued in company’s last financial year into corresponding number that survive in-force until first policy anniversary
to give first-year persistence rate

first year withdrawal rate = 1- first year persistency rate

exclude deaths and maturities from calc (if material)

Repeat for subsequent years to obtain second-year, third year, etc withdrawal rates
by looking at number surviving from number of contracts, in each group, that have their first, second, etc policy anniversary in last financial year

Question 13

An expense investigation can be used be used to produce the following results?

Answer 13

Consider desired end results through purpose of investigation

Contribution method
analyse expenses into policy groups so can apportion dividend per group

Asset shares
terminal bonuses/terminal dividends, or surrender values…
…historical expenses to be apportioned between different policy types

Pricing/reserving
essential for policy’s fair share of insurer costs are established, so correct premiums/charges can be levied

Question 14

What is meant by a direct expense and an overhead expense? (2)

Answer 14

Direct vs overheads

Direct expenses are usually variable and can be directly attributed to a product or policy

Overheads are the balance of expenses, relating to general management and service departments which are not directly involved in new business or maintenance activities

Question 15

List 4 catergories into which non-commission expenses are split for the purpose of an expense analysis (4)

Answer 15

For expense analysis we consider following 4 non-commission expenses splits

initial expenses (new business expenses),

renewal (maintenance) expenses,

termination expenses,

investment expenses

Question 16

Show how initial, renewal, termination expense can be split further (3)

Give 2 examples of expenses that are not proportional to the number of contracts written or in force (2)

Answer 16

Can be split further according to whether an expense is proportional to:

(1) Number of contracts written (Fixed per policy)
(2) Amount of premium written or in-force
(3) Amount of sum assured written or in-force

2 examples of expenses that are not proportional to the number of contracts written or in force

(1) marketing expenses: may relate to amount initial commission paid
(2) underwriting expenses

Question 17

Explain how investment expenses are normally treated?

Answer 17

Normally treated as a percentage of funds under management

Normally treated as a deduction from earned investment return

Question 18

Describe the division of expenses into cells

Answer 18

Cells can be separated by
+accounting fund
+each main product line of company

these may be further sub-divided between regular premium business and single premium business

choice of cells will vary across companies depending on
+types and volumes of business written
+requirements of analysis

cells chosen should not be so small that analysis becomes unreliable

Question 19

List main items of expenses for a life insurer (6)

Answer 19

commission (where payable)

salaries and salary-related expenses

property costs

computer costs

investment costs

once-off capital costs (other than purchase of a new computer)

Question 20

Explain how to deal with commission expenses (1)

Answer 20

May exclude commission from expense analysis groupings on basis that its format is known and can be added in later by a formula approach

Question 21

Explain how to deal with salaries and salary-related expenses in the expense analysis (6)

Answer 21

split into 3 groups

(1) staff whose work falls entirely within single analysis cell
(2) staff whose work falls within multiple analysis cells
(3) other staff eg catering staff or IT staff

Treat as follows

Group 1 staff salaries allocated directly to the appropriate cell

Group 2 staff salaries allocated across cells using timesheets as a sharing mechanism

Group 3 staff salaries split pragmatically between overheads and direct expenses (which can be further split in proportion to the overall split of Group 1 and Group 2)

Question 22

Explain how to treat property costs in the expense analysis (3)

Answer 22

if insurer owns any buildings it occupies (within long-term fund), notional rent is charged to relevant departments

if the company rents any buildings it occupies, actual rent is used

this rent, plus property taxes, heating costs, etc can be:

+split between departments, eg by floor space occupied, then

+allocated in accordance with salaries in each department

Question 23

Explain how to treat computer costs (2) and investment costs (3) in the expense analysis

Answer 23

Computer costs

costs of purchasing a new computer could be amortized over its useful lifetime and then added to ongoing computer costs

these can then be allocated according to computer usage

Investment costs

normally expressed as a percentage of funds under management

directly allocated to investment expenses through a reduction in return

hence allowed for in assessing investment return to use for pricing etc

Question 24

Explain how to treat once-off capital expenses (other than purchase of a new computer) (4)

Answer 24

need to be amortized over expected useful lifetime of item purchased

amortized cost may then simply be treated as part of overheads

if item can be treated as asset of long-term fund (eg new head office building), cost not amortized
instead, charge (eg notional rent) usually made

Exceptional items, not likely to recur, excluded completely from analysis

Question 25

List reasons why an insurer would undertake an analysis of surplus arising over a given period (6)

Answer 25

show financial effect of divergence between valuation assumptions and actual experience, indicating which assumptions are more financially significant

to show financial impact of writing new business

to provide check on valuation data and process, if carried out independently

identify non-recurring components of surplus , thus enabling appropriate decisions to be made about distribution of surplus to with profits PHs/shareholders

obtain management information on trends in company’s experience

comply with regulatory requirements

Question 26

List the main contributors to surplus (or loss) that you might expect to see in an analysis of surplus

Answer 26

difference between actual experience and valuation assumptions for

mortality (and other contingencies)

expenses

withdrawal rates

investment returns

and impact of new business

changes in valuation assumptions would also contribute to surplus (or loss)

Question 27

Give reasons why an insurer may analyse the change over a year in its EV (5)

Answer 27

validating assumptions and data used in EV calculations

reconciling EVs for successive years

providing management information

providing data for use in executive remuneration schemes

Providing detailed information for publication in accounts, in particular value of new business taken on by the company

Question 28

List items of management information yielded by an analysis of changes in the EV (6)

Answer 28

value of new business written, normally by product

amount of any expense profit or loss

amount of any mortality profit or loss

amount of any withdrawal profit or loss

impact on free assets on EV growth (i.e. whether spared capital being used efficiently)

impact of supervisory minimum solvency capital requirements on rate of return achieved

Question 29

List uses of the results of a monitoring exercise (18)

Answer 29

update pricing basis

revise product design

change product mix/launching new products

revise underwriting process

revise reinsurance
arrangements

implement/improve retention activity

change market message,
target market/distribution channel

revise sales procedures

improve policy contract wording

improve adequacy of staffing resources

improve systems/data recording processes

improve actuarial models

change investment strategy

change with profits surplus distribution approach

update reserving basis

raise additional capital

alter capital allocation methodology

improve risk management controls/governance

Question 30

Can you try and ‘fit’ the various uses of results from experience monitoring into the context of the classic product cycle?

The standard product cycle includes the following aspects

Think of the product cycle covered earlier in the course

prod design
pricing
prod admin
marketing & sales
underwriting
claims management
experience monitoring
valuation

Answer 30

(1 )Capital uses

alter capital allocation methodology
raise additional capital (if surplus emerging is negative)

(2) Prod design

revise product design
launching new products

(3) Pricing

update pricing basis

(4) Product administration

improve systems/data recording processes
improve the adequacy of staffing resources

(5) Marketing & sales

improve policy contract wording
revise sales procedures
change market message, target market/sales channel
implement/improve retention activity
change product mix

(6) Underwriting

revise the underwriting process (poor mortality experience)

(7) Claims management

revise reinsurance arrangements (high claims volatility)

(8) Experience monitoring
(9) Valuation

improve actuarial models
update reserving basis

(8) Other items that fall more into ‘risk control’

improve risk management controls/governance
change investment strategy
change with profits surplus distribution approach