Chapter 7: Analysis of experience

Question 1

Analysis of claims data on their own may be needed for: (3)

Answer 1

• estimating the cost of outstanding claims to set reserves
• monitoring the actual run-off of outstanding claims against estimated amounts
• monitoring the adequacy and use of reinsurance

Question 2

Analysis of claims data along with data on exposure may be needed for: (5)

Answer 2

• comparing the relative profitability of various parts of the account
• reviewing premium rates, and for pricing new or amended products
• financial planning
• monitoring the insurer’s asset-liability position
• establishing the need for and values of reserves e.g. URR

Question 3

Estimation of outstanding claims

Answer 3

The level of risk classification required for this depends on the account concerned.

The basic requirement is that there is a reasonable volume of stable, consistent claims data, from which projection patterns and trends can be deduced.

The data ideally needs to be divided into sufficiently homogeneous risk groups. However, this has to be balanced against the danger of creating data cells that have insufficient data in them to be credible for projection purposes.

Question 4

Issues with the definition of a claim

Answer 4

If the claims department changes the definition of a claim, there is a danger that this will lead to distortions in an analysis unless it is identified within the data.

Question 5

Issues with Administration

Answer 5

Statistics are also distorted by inevitable delays between the occurrence of an event and its appearance on office records, and by changes to the administration and processing of data.

The delays occur because claims are not reported immediately, and this delay in reporting is not necessarily constant.

Question 6

Issues with Re-opened claims

Answer 6

Re-opened claims payments should be allocated to the risk group and claim year of the original claim.

If a separate claim is created for the additional amount involved, this could create distortions in the apparent overall experience of the subgroups concerned, the numbers of claims and hence the average cost per claim.

Question 7

Issues with recoveries

Answer 7

A recovery from a reinsurer should be recorded separately on the same claim record as the gross claim payments.

This allows the analysis of claims both gross and net of reinsurance which, as well as being a statutory requirement, may also help produce more reliable projections.

This is especially important where the reinsurance takes some form of Excess of Loss cover, particularly where there are limited reinstatements.

Question 8

Possible CAUSES of changes to the administration and processing of data (4)

Answer 8

• backlogs in processing
• computer breakdown
• public holidays
• changes in procedure

Question 9

Effect of changes in the RATE at which items of claims exposure are processed

Answer 9

Affects claim payment patterns and the apparent in-force position of the portfolio.

Question 10

Why is it important to be able to separate nil claims from those settled at some cost?

Answer 10

Because nil settlements (if not separated) will change the aggregate number of claims, but the aggregate cost will remain the same.

The effect of this will be to distort:

• claim frequency
• average cost per claim

Question 11

Issues with partial payments

Answer 11

It is important - for each claim - to record each payment separately, with the date(s) of payment, and the status of the claim (settled or outstanding).

Question 12

Why is it important to be able to distinguish between payments on settled claims and those still outstanding?

Answer 12

If not, the average cost of settled claims and the claim payment patterns will be distorted.

There is also the danger that, under some projection methods, the value of claims outstanding may be overestimated.

Question 13

Issues with individual large claims

Answer 13

If left unadjusted in the aggregate data, individual large claims would unduly dominate the experience of the risk group.

Hence a report should be produced detailing all claims that exceed a certain size, so that such claims can be removed or truncated. The threshold points for reporting and truncating will differ according to the class involved and the purpose of the analysis. An example would be to truncate all large claims at say the 95th percentile.

Question 14

Issues with concentrations of claims

Answer 14

As with individual large claims, it is important that concentrations of claims can be identified so that they can be dealt with separately from the main body of data.

In some cases, this may be possible from the individual claim records, by suitable use of such factors as class, date of claim, peril, type of claim, geographical area, etc.

However, this approach may not be perfect. Therefore, when it is apparent that an event of significant proportions has occurred, it is usual for the insurer to set up a catastrophe code for the event, which is then placed on the claim records for all claims arising from the event.

This will also assist with any reinsurance recovery.

Question 15

3 Ways in which Exceptional claims may be treated

Answer 15

• If the claims are thought to be completely once-off, and not likely to be repeated in the future, exclude them altogether from the data and account for them elsewhere.
• If the claims are likely to occur occasionally, include only part of the cost of such claims, corresponding to the probability of their recurrence and the length of the periods being analysed and projected.
• Debit the cost of such claims against the specific rating group in which they occurred, but only up to a maximum amount per claim. Any excess above this cut-off amount would be spread over the experience of all other relevant rating groups.

Question 16

How to adjust the data for a change in zero claims

Answer 16

This cannot be dealt with unless zero claims are recorded separately.

The way to handle these would normally be to exclude them since they will affect the frequency and average cost per claim.

Any change in the way these are recorded should also be noted.

Question 17

How to adjust for a change in the type of claim

Answer 17

If such a change occurs, it can only be allowed for by projecting separately for the different types of claim.

E.g. if a contents claim was previously grouped under buildings type claims, and is now separated out, this would yield different results than previously.

Question 18

How to adjust for a change in claim development patterns

Answer 18

If the data are to be used for a projection model, this can be a difficult problem to overcome.

The extent to which the data can be adjusted to make them suitable for projection purposes depends on the cause of the change.

Question 19

How to adjust for a change in claim development patterns:

If it is due to a change in the mix of risks involved, or the types of claim occurring.

Answer 19

the data can be separated out into the relevant subgroups or claim types.

Question 20

How to adjust for a change in claim development patterns:

If it is due to a more obscure reason, such as a change in administration procedures, or simply due to processing delays.

Answer 20

Effectively, it requires the estimation of the extent to which the claim development pattern has been affected by the change and the extent to which these changes or delays are permanent. It may be possible to rebase the data for the change if you know exactly what happened and when the change occurred.

Question 21

3 groupings usually used to collect claims cohorts of common origin

Answer 21

• year of accident
• year of reporting
• year of underwriting

Question 22

The claim rate can be split down into 3 component parts:

Answer 22

• number of claims per policy
• claim amount per claim
• exposure per policy

Question 23

Why might data be kept at an even more detailed level than the present rating factors?

Answer 23

• enables investigation of the reasons for poor performance in a particular rating group
• and to refine or change the present rating structure when costing new products or re-pricing existing products.

Insurers may also keep information that they intent to introduce into their rating structure in future - recording it in advance allows the insurer to check if it is as useful as they believed.

Question 24

Why is it important to match individual claims against the corresponding policy record in force as at the date of the incident?

Answer 24

Ensures that - for each risk group and period examined - the calculations include only claims and exposure data relating to that analysis cell.

In this way, the risk of distortion in the analyses is reduced.

Question 25

Portfolio analysis

Answer 25

An investigation of the risks covered, broken down into various levels of sub-group.

The main aim is to check on business volumes and exposures.

A portfolio analysis is a form of census as at a given date.

Question 26

4 Purposes of portfolio analyses

Answer 26

• to give basic information on the amount of business being written
• to provide evidence that the premium rates for particular rating cells are out of line with the rest of the market
• to show where the company is over-exposed to particular types of risk. This will allow the company to take corrective action, e.g., through reinsurance or by ceasing to write new business for those risks
• to provide information for planning and budgeting exercises

Question 27

Analysis of movements:

Movements are normally monitored in respect of (4)

Answer 27

• lapses or renewals
• new business
• mid-term cancellations
• endorsements

Question 28

4 Purposes of an analysis of movements

Answer 28

By studying the movements of the business, and their trends, an insurer can:

• measure the extent to which different parts of the portfolio are growing or contracting
• get an early indication of undue losses or gains in business, that might indicate rates are out of line with the market
• assess the effects of a new set of rates or marketing campaign on the business and, hence, the sensitivity of the portfolio to market influences.

Movements give an important early warning on adverse changes that might indicate the need to review premium rates for certain risk groups. Hence movement analysis will usually be done at least monthly.

Movement rates can also be used as a check that all exposure data are accounted for in a claims analysis.

Question 29

Calculation of movement rates for:

lapses or renewals

Answer 29

Lapses from a particular period, by definition, can stem only from those policies actually invited for renewal in that period. the best way of measuring lapses is therefore to express them as a percentage of the renewals invited in that period.

This may be done both in total and for specific subgroups.

Lapses will normally be monitored on a monthly basis. Care needs to be taken to allow for the time lag between the renewal date and the point at which it becomes apparent that a policy has lapsed. This lag might be estimated from recent past experience, but it cannot necessarily be assumed that such an estimate is accurate for current experience.

Question 30

1. Explain why persistency of business may be an important issue to a general insurer. (4)

Answer 30

• with falling business volumes, it becomes more expensive to spread fixed costs over each policy
• as a large proportion of the costs may be fixed, this could have a material impact on the profits
• it is usually more expensive to acquire/regain new business than it is to process renewals but the same premium is usually charged for both new and renewed business
• it is a sign of client satisfaction, so low persistency may imply a poor level of service and that premium rates are not competitive.

Question 31

2. Give reasons why a company may want to monitor its new business rates.

Answer 31

• assess performance against goals (e.g. minimum level of new business by volume or a maximum loss ratio)
• manage risk (e.g. accumulations)
• gain market intelligence (e.g. assess the underwriting cycle)
• assist with reserving (e.g. adjust a priori loss ratio in the BF reserving method)
• validate model assumptions as part of the actuarial control cycle

Question 32

How to allow for endorsements?

Answer 32

There will be a change in the number of policies when analysing movements by risk factor.

Perhaps the easiest way of allowing for this is on the same lines as for mid-term cancellations.

It would be necessary to create both an exist from the old subgroup and an entry into the new subgroup, with exits and entries measured separately or netted off.

Question 33

How to allow for endorsements?

Answer 33

There will be a change in the number of policies when analysing movements by risk factor.

Perhaps the easiest way of allowing for this is on the same lines as for mid-term cancellations.

It would be necessary to create both an exist from the old subgroup and an entry into the new subgroup, with exits and entries measured separately or netted off.

Question 34

Best measure of exposure for the rate of endorsements

Answer 34

Mean in-force policy count

Question 35

Purposes of expense analysis

Answer 35

Monitor and control efficiency.

Allows the insurer to allocate expense costs correctly among the different classes and rating groups in the portfolio.

Enables the insurer to measure the past performance of each insurance class and to determine a level of expense allowance in any future premium-rating exercise.

Detailed expense analyses are needed in connection with the various forms in the statutory returns.

Question 36

Expense allocation:

Direct expenses

Answer 36

Direct expenses may arise from a department dealing purely with one class of business, in which case the expenses relating to that department can immediately be allocated to the relevant class.

Other direct expenses, however, may arise from departments dealing with more than one type of business. The expenses of such departments need to be allocated in some way between the relevant classes. This is normally achieved either by means of time sheet analysis, or by functional costing.

Question 37

Time sheet analysis

Answer 37

Salaries and related costs of staff are allocated between classes on the basis of time records.

These records are either maintained throughout the year by the employees concerned, or based on a representative sample by season and type of employee.

The records analyse the time spent on each class or line as required.

Other related direct costs of that department can be allocated by more approximate means, appropriate to the relative size and nature of those costs.

Question 38

Functional costing

Answer 38

Relative unit costs are established for the various identifiable functions performed for each class.

The number of operations carried out by the department is summed, separately for each of the functions identified and multiplied by the appropriate relative unit costs.

The department’s total expenses can then be divided among the classes pro-rata.

Question 39

Advantages of functional costing

Answer 39

• objective
• factual
• quick to prepare

Avoids the repetitive and often inaccurate system of time sheet returns.

Moreover, the unit costs of each function, being used only in a relative manner, do not need to be changed unless the mix of business by type changes substantially, or the administration of the insurer changes to any marked extent.

Question 40

Indirect expenses:

2 Main options for the purpose of analysing profitability by class

Answer 40

• Exclude indirect expenses altogether from the revenue account result for each class, and bring them at the end as a single total for the whole company account.
• Allocate indirect expenses to the relevant classes by some approximate method, so that the measured profitability of each class then reflects its share of all expenses.

Question 41

3. Name 5 categories into which expenses can be split and state whether each type of expense is direct or indirect

Answer 41

direct:

• initial expenses
• administrative expenses
• renewal expenses
• claims expenses

indirect:
- investment expenses

Question 42

Why perform an analysis of persistency and profitability by source?

Answer 42

This should reveal where the better quality, longer-lasting business comes from.

• to avoid less profitable sources of business
• to devise incentive schemes or commission terms to retain or attract the more profitable business.
• to adjust the expense loading on business with lower/higher persistency

Question 43

Why perform an analysis of persistency and profitability by source?

Answer 43

This should reveal where the better quality, longer-lasting business comes from.

• to avoid less profitable sources of business
• to devise incentive schemes or commission terms to retain or attract the more profitable business.
• to adjust the expense loading on business with lower/higher persistency

Question 44

The level of detail for any analysis depends on (2)

Answer 44

• its purpose

- the volume of reliable data available

Question 45

When analysing claims data, we should be aware of possible problems cause by (9)

Answer 45

• claim definitions
• large claims
• claim concentrations
• re-opened claims
• nil settlements
• partial payments
• recoveries
• poor administrative procedures
• claim handling expenses

Question 46

The overriding principle of all claims analyses

Answer 46

To determine the basic characteristics, values and trends of past data.

Question 47

The use of movement analysis

Answer 47

A movement analysis is useful to reconcile other data and as a sensitivity guide to trends and changes in the portfolio.

The analysis measures:

• rates of lapses,
• new business,
• mid-term cancellations and
• endorsements.

Question 48

In the expense analysis, expenses can be split between (3)

Answer 48

• direct variable
• direct fixed
• indirect