Chapter 48: Monitoring

Question 1

3 Reasons why experience is monitored

Answer 1

• to update assumptions as to future experience
• to monitor any adverse trends in experience so as to take corrective actions
• to provide management information

Question 2

What are the conflicting objective in terms of the data required for monitoring?

Answer 2

• the data needs to be divided into sufficiently homogeneous risk groups for it to be relevant,
• but there needs to be enough data in each cell to be credible.

Question 3

In order to model mortality or withdrawal rates, what 2 pieces of data are needed?

Answer 3

Data on the feature being assessed, eg number of deaths or withdrawals.
Data on the exposed to risk.

Its important that both bits are consistently determined.

Question 4

How would you analyse demographic factors such as mortality?

Answer 4

For each age band, calculate the number of deaths, divided by the number exposed to risk of deaths.

The results can then be compared with existing assumptions - often a standard table to identify differences.

Results should also be compared with other relevant standard tables to determine if these would provide a better fit to the data.

Question 5

How would you monitor economic factors such as investment returns?

Answer 5

By simply comparing the actual investment return with that assumed.

Question 6

Why should investment strategy be monitored?

Answer 6

• liabilities change over time
• the funding or free asset position changes over time
• monitoring helps identify whether the fund manager is underperforming.

Question 7

What is an appropriate target against which to assess the performance of a fund?

Answer 7

The return that would’ve been achieved by an index fund, which had maintained the benchmark asset allocations of the actual fund.

Question 8

Why not assess performance against the returns earned by other funds or against the valuation discount rate?

Answer 8

Assessing against other funds takes no account of the constraints on the fund manager (eg size of funds, or timings of new money or disinvestments).

Assessing against the valuation interest rates ignores the volatility of returns year-on-year.

Question 9

Why should the results of the monitoring exercise not be used blindly?

Answer 9

The period under investigation may not have been typical.
The results may not be representative of future experience.

E.g. the experience under investigation may have been affected by

• ABNORMAL events,
• significant RANDOM fluctuations,
• economic CYCLES,
• TRENDS, and
• HETEROGENEITY in the data used.

Question 10

Discuss monitoring and the actuarial control cycle

Answer 10

Monitoring of experience is a fundamental part of the actuarial control cycle.

As a result of monitoring, the problem may be respecified in terms of the risks

• identified,
• assessed and
• ways of managing them.

Or assumptions may be updated in the model used to develop the solution.

Monitoring should be:
- regular and
- ongoing,
as the environment in which a provider operates is constantly changing.