Chapter 39 - Monitoring

Question 1

Why monitor experience ?

Answer 1

The experience will be monitored so as to:
- update the methods and assumptions adopted so they reflect expected future experience more closely
- monitor any trends in experience, particularly adverse trends, so as to take corrective actions
- provide information to management and other key stakeholders.

Question 2

Data required for monitoring

Answer 2

Reasonable volume of stable, consistent data, from which future experience and trends can be deduced is critical

The data ideally needs to be divided into sufficiently homogeneous risk groups, according to the relevant risk factors

Question 3

Analysis of data for monitoring

Answer 3

1. Statistical Factors
   For statistical factors, such as mortality and withdrawal, this will involve the calculation, for each age band, of the number of deaths (or withdrawals) divided by the number exposed to risk of death (or withdrawal).
   The results can then be compared with the assumptions adopted to determine whether there is a significant difference and also with other relevant standard tables to determine if they appear to be more appropriate.
2. Economic Factors
   Economic factors usually have the greatest impact on the result for a company or scheme, but are also generally outside the management’s control

The main economic factors for a benefits scheme or insurance company are:
- interest rates
- investment returns of various sectors

For these the analysis is simply a comparison between the actual returns and those assumed.

The results of an analysis of experience should not be used blindly. Consideration should be given to whether the period under investigation was typical and whether the experience is likely to be representative of future experience

It is also possible that there is a gradual change in the experience from period to period, as has been the case in the past with mortality rates. Before adopting the results of the investigation, it is therefore necessary to consider the changes over time and whether it is likely that any past trends will continue into the future.

If it had not been possible to split the analysis into sufficiently homogeneous groups, it is important to consider whether the individuals to whom the investigation related are relatively homogeneous with the individuals whose benefits will be affected by future experience

Question 4

Summary of the Monitoring Process

Answer 4

Monitoring investigations typically involve the following stages:

1. Division of data into suitable groups that are homogeneous by risk – need to consider:
   - volume of data in each cell
   - the risk factors for the investigation (e.g. age, gender)
   - changes that have occurred that will reduce the relevance of old data
2. Identification of any past trends, cycles and anomalies and random variation in the past data
3. Using the results to revise models and assumptions used – need to consider
   - the need for accuracy and margins for prudence
   - allowance for future trends
   - likely differences in future experience from past experience