Monitoring

Question 1

Why monitor

Answer 1

1. Management - provide management with information
2. Actuarial control cycle fundamental
3. Appropriate assumption and methodology
4. Trends - monitor trends and adverse experience
5. Experience - use experience to update assumptions for the future
6. Environment is consistently changing

Question 2

Data for monitoring

Answer 2

1. Reasonable volume of stable and consistent data
2. Ideal to split data into homogenous groups
3. Balance splitting of data into cells with size of cells to maintain credibility
4. Data must be credible
5. Exposure to risk data needs to be divided into the same cells as experience data

Question 3

Monitoring- statistical factors

Answer 3

Mortality/withdrawal
1. Need data on feature being assessed
2. Need exposed to risk data
3. Both need to be determined consistently
4. (#of event of interest)/(#exposed to risk)
4. Compare results to existing assumptions used
5. Compare data to relevant standard tables

Question 4

Monitoring - economic factors

Answer 4

1. Interest rate and Investment return
2. Expense inflation
3. Salary growth

**realest impact on company result
**not much control management has on this

Question 5

Monitoring - economic factors - interest rates and investment return

Answer 5

1. Actual return calc may present calculation difficulties
   * cash flow timing
   *investment income received/accrued
   *investment expenses
   *tax
2. Most significant and easiest to compare
3. Calc the effect of difference between actual end expected - rerun expected model using actual economic experience

Question 6

Monitoring - economic - expense inflation

Answer 6

1. Remove any expenses either included in only the current data or past data
2. remove impact of change in volume - consider change in unit cost (per policy), not the overall expense changes
3. Expense items should be subdivided into divisions that correspond to how assumptions are made in most actuarial models
   * fixed vs. variable
   * direct vs. indirect
   * initial vs. renewal vs. termination
   * product with which they are associated
   * proportionality to
   **number contracts
   **amount claim
   **amount payments
   **amount of funds under management

Question 7

Monitoring - economic - salary growtg

Answer 7

1. 2 methods of salary growth to consider
   * across the board inflation related growth
   *individual promotional increases
2. Separate assumptions are used for each method
3. NB to extract each element separately when doing analysis

Question 8

Treatment of Monitoring results

Answer 8

1. Should not be looked at blindly
   **abnormal events
   **significant random fluctuations
   **economic cycles
   **trends
   **heterogeneous data
2. Used to respecify problems
   **risks identified, assessed, and managed
3. used to update assumptions and models