Chapter 48: Monitoring Flashcards
3 Reasons for monitoring experience
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
3 Reasons why it may be desirable to review the continued appropriateness of any investment strategy at regular intervals
- 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
Data required for modelling
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.
Analysis process
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.
Use of the results
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
Monitoring and control cycles
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
Meaning of “consistent” data
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
3 Statistical factors
- mortality rates
- morbidity rates (inception and transition)
- withdrawal rates
Economic factors
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
List 10 tasks and/or investigations that a life insurance company performs that require assumptions about future experience.
- pricing
- provisioning (statutory assessment)
- provisioning (realistic assessment)
- profitability monitoring
- modelling capital requirements
- investigating resilience of the company to adverse future experience
- determining appropriate types and amounts of reinsurance
- determining appropriate underwriting policy
- investment policy investigations, eg asset-liability modelling
- analysis of surplus investigations
- setting discontinuance terms
why is having heterogeneous data in a single group a problem?
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.
2 main economic factors for a benefits scheme or insurance company
- interest rates
- investment returns of various sectors
Use of the results of an analysis of experience
The results should NOT BE USED BLINDLY.
Consideration should be given as to whether the period under investigation was typical and whether the experience is likely to be representative of future experience.
When considering whether the past experience is likely to be representative of future experience, the actuary should attempt to separate the effects of: (3)
- trends
- cycles
- random variation
- abnormal events
Monitoring of experience is an iterative process as it may result in (3)
- 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