Chapter 35-Monitoring Experience Flashcards
List reasons for monitoring experience as part of the control cycle
(6)
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
List 4 reasons a life company may need assumptions regarding future experience
(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
List ways in which experience analysis may help provide management information and take corrective actions (5)
By helping management to identify
Profitable
+products
+sales channels
+markets
Efficient sections of business
Successful management strategies
Discuss the data required for monitoring experience
Basic requirements of good data (3)
Splitting data (2)
Period (2)
Level of detail (2)
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
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)
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
List some advantages of big data
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
List some disadvantages of big data
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
List the types of experience investigations an actuary might conduct (4)
Mortality and other contingencies
Persistency
Expenses
Investment return
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
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)
List classifications by which data (both claims and exposed to risk) would be sub-divided for the purpose of analysing the persistency experience (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
Give 3 other factors, external to life company, that may also influence persistency rates (3)
What impact would they have on the persistency analysis?
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
Outline how full withdrawal rates can be determined for each homogeneous group of lives analysed (7)
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
An expense investigation can be used be used to produce the following results?
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
What is meant by a direct expense and an overhead expense? (2)
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
List 4 catergories into which non-commission expenses are split for the purpose of an expense analysis (4)
For expense analysis we consider following 4 non-commission expenses splits
initial expenses (new business expenses),
renewal (maintenance) expenses,
termination expenses,
investment expenses
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)
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
Explain how investment expenses are normally treated?
Normally treated as a percentage of funds under management
Normally treated as a deduction from earned investment return
Describe the division of expenses into cells
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
List main items of expenses for a life insurer (6)
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)
Explain how to deal with commission expenses (1)
May exclude commission from expense analysis groupings on basis that its format is known and can be added in later by a formula approach
Explain how to deal with salaries and salary-related expenses in the expense analysis (6)
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)
Explain how to treat property costs in the expense analysis (3)
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
Explain how to treat computer costs (2) and investment costs (3) in the expense analysis
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
Explain how to treat once-off capital expenses (other than purchase of a new computer) (4)
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
List reasons why an insurer would undertake an analysis of surplus arising over a given period (6)
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
List the main contributors to surplus (or loss) that you might expect to see in an analysis of surplus
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)
Give reasons why an insurer may analyse the change over a year in its EV (5)
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
List items of management information yielded by an analysis of changes in the EV (6)
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
List uses of the results of a monitoring exercise (18)
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
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
(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
