Chapter 48: Monitoring

Question 1

3 Reasons for monitoring experience

Answer 1

Monitoring the experience is a fundamental part of the actuarial and risk management control cycles.

The experience will be monitored so as to:

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

Question 2

3 Reasons why it may be desirable to review the continued appropriateness of any investment strategy at regular intervals

Answer 2

• the liability structure may have changed significantly
• the funding position may have changed significantly
• investment performance may be significantly out of line with that of other funds

Question 3

Data required for modelling

Answer 3

The basic requirement is that there is a reasonable volume of:
- stable
- consistent
data from which future experience and trends can be deduced.

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

Question 4

Analysis process

Answer 4

For statistical factors, such as mortality and withdrawal, this will involve the calculation for each age band of the number of deaths divided by the number exposed to risk of death.
The results can then be compared with assumptions or standard tables.
For economic factors, such as interest rates and investment returns, the analysis is simply a comparison between the actual returns and those assumed.
Other economic factors include expenses and salary growth.

Question 5

Use of the results

Answer 5

The results of an analysis 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.

Allowance should be made for:

• Trends
• Cycles
• Abnormal events
• Random fluctuations

Question 6

Monitoring and control cycles

Answer 6

Monitoring of experience is fundamental to effective implementation of the actuarial control cycle and the risk management control cycle.
This is an iterative process and may result in:
- changes to assumptions or models used, eg in pricing, setting contributions and provisioning
- a change in the assessment of the risks faced by a provider or in its risk management strategy

Question 7

Meaning of “consistent” data

Answer 7

Consistent means that, when comparing the experience of one group with another, the data used as a basis for the calculations for each group should be:

• in a similar form
• preferably extracted from the same source
• grouped according to the same criteria
• equal in terms of reliability

Question 8

3 Statistical factors

Answer 8

• mortality rates
• morbidity rates (inception and transition)
• withdrawal rates

Question 9

Economic factors

Answer 9

Economic factors usually have the greatest significance on the result for a company or scheme, but are also in general outside the management’s control.

Economic factors include:

• interest rates and investment rates
• expenses
• salary growth

Question 10

List 11 tasks and/or investigations that a life insurance company performs that require assumptions about future experience.

Answer 10

• pricing
• provisioning (statutory assessment)
• provisioning (realistic assessment)
• profitability monitoring
• investment policy investigations, e.g. asset-liability modelling
• modelling capital requirements
• investigating resilience of the company to adverse future experience
• determining appropriate types and amounts of reinsurance
• determining appropriate underwriting policy
• analysis of surplus investigations
• setting discontinuance terms

Question 11

why is having heterogeneous data in a single group a problem?

Answer 11

we would not be able to tell whether a change in some observed variable was genuine or just the result of having a different mix of business within the cell.

Question 12

2 main economic factors for a benefits scheme or insurance company

Answer 12

• interest rates

- investment returns of various sectors

Question 13

Monitoring of experience is an iterative process as it may result in (2)

Answer 13

• changes to assumptions or models used, eg in pricing, setting contributions and provisioning
• a change in the assessment of the risks faced by a provider or in its risk management strategy

Question 14

What factors should be taken into account when translating the results of an experience investigation INTO ASSUMPTIONS? (6)

Answer 14

• PURPOSE for which the assumptions will be used
• SIGNIFICANCE of a particular assumption to the overall result
• RELATIONSHIPS / consistency between the parameters
• TIME HORIZONS over which assumptions will apply
• CREDIBILITY of results and hence need for margins
• margins in assumptions vs risk discount rate

Question 15

Investigations to analyse the volumes of sales (4)

Answer 15

• sales volumes compared with projections
• Have there been new entrants to the market who would have taken some of the market share?
• Investigate whether competitors have launched new variations of the contract that have proved more attractive in the market.
• The effects of competition on persistency.

Question 16

5 Claims investigations

Answer 16

• Claims analyses of the effect of a change in the PREMIUM BASIS
• Analysis of general claims trends for example unusually LARGE CLAIMS, high frequency, catastrophe events, etc.
• Analysis of COVERAGE and POLICY WORDING to see if any changes in premium were in line with the resulting changes in claims experience.
• Analysis of EFFECTIVENESS OF REINSURANCE arrangements to see if poor experience is due to inappropriate cover.
• RESERVING ADEQUACY / changes to reserving practices as the level of reserves may have been set at unnecessarily prudent levels. If the reserving basis has strengthened over the period, then this will increase the claims figure in the income statement.