Monitoring

Question 1

What is the monitoring process?

Answer 1

1. Ensure data is consistent
   - similar form
   - extracted from same source
   - reliable
   - grouped using same criteria
2. Divide data into homogenous groups
   - consider credibility
   - group using risk factors
   - consider any changes
3. Analyse the data
   - look at past data for trends, anomalies, cycles
   - statistical factors: mortality, morbidity, withdrawls (make acutal calculation number of claims/ exposure) vs. assumption
   - economic factors: inflation, interest, investment return simply compare actual to expected
   - for expenses look at change in unit cost (to avoid including volumes in calculation)
   - salaries need to take into account effect time and age has on increases
4. Use results to change assumptions and models used
   - depends on purpose and need for accuracy of the model – if it doesn’t matter don’t bother
   - allowance of future needs
   - difference in future and past experience
   - more info more accurate assumptions will be

Question 2

Why do we monitor experience?

Answer 2

• to update models/assumptions
• to provide management with information
• to monitor trends so corrective actions can take place

Question 3

How do we monitor investment performance?

Answer 3

Reasons:

• Liability structure may have changed a lot
• Funding position/ free asset position has changed a lot
• Manager’s performance not in line with other funds

1. Performance objectives
   - Sometimes manager’s performance is judged relative to other manager’s
   - This is not appropriate if there are lots of restrictions on the type of assets that can be held, how much of asset etc.
   - In this case it is better to use an index fund which maintains asset allocation set in benchmark
   - Some schemes give a strategic benchmark and operating bands as performance objective
   - Some managers are given performance objectives with regards to allocation of assets and stock selection
   - Asset liability modelling can help to set appropriate strategic investment policy
2. Constraints on manager’s performance
   - Sometimes there may be capital restrictions so certain investments cannot be made
   - May lead to ill-timed disinvestments
3. Analysis of performance relative to benchmark