Chapter 39 - Monitoring

Question 1

Reasons for monitoring

Answer 1

UMI

1. To UPDATE methods and assumptions adopted so they reflect expected future experience more closely.
2. To MONITOR any trends in experience, particularly adverse trends, so as to take corrective actions.
3. To provide INFORMATION to management and other key stakeholders.

Question 2

Outline the broad data requirements for monitoring

Answer 2

• There should be a reasonable volume of stable, consistent data, from which future experience and trends can be deduced.
• Data should be divided into homogeneous risk groups, subject to there being a sufficient quantity of data in each group to give credible results.
• When assessing decrements, e.g. withdrawal rates, data is required on both the risk event and the exposed to risk; consistency between the two is essential

Question 3

How should economic factors such as investment returns and interest rates be monitored?

Answer 3

Simply compare the actual returns / rates with those assumed / expected.

Question 4

When considering whether the past experience is likely to be representative of future experience, the actuary should attempt to separate the effects of:

Answer 4

• Trends: a trend is a long term underlying increase or decrease over time
• Cycles: a cycle causes higher or lower values with a frequency of several years
• random variation

Question 5

Summary of the monitoring process

Answer 5

Monitoring investigations can be broken down into the following stages:

DIR

• the DIVISION of data into groups that are homogeneous by risk - need to consider:
  – the volume of data in each cell (its credibility)
  – the risk factors for the investigation (e.g. age, gender)
  – changes that have occurred that will reduce the relevance of old data
• the IDENTIFICATION of any past trends, cycles and anomalies and random variation in the past data
• using the results to REVISE models and assumptions used - need to consider:
  – the purpose, and hence the need for accuracy and margins for prudence
  – allowance for future trends
  – the likely difference in future experience from past experience