Monitoring

Question 1

Reasons for monitoring experience

Answer 1

• update the method and assumptions so that they are more relevant to future experience

• monitor any trends in experience, particularly adverse trends, so as to take corrective actions

• provide management (and other stakeholder) information

Question 2

Data required for monitoring

Answer 2

The basic requirement is that there is a reasonable volume of stable, consistent data, from which future experience and trends can be deducted

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

However, this ideally has to be balanced against the danger of creating data cells that have too little data in them to be credible

As well as data on the features being assessed, it is necessary to have data on the exposure to risk, divided into the same cell structure as the experience data

Question 3

Analysis process

Answer 3

For statistical factors, such as mortality and withdrawal, this will involve the calculation for each age band of the number of deaths (or withdrawals) divided by the number exposed to risk if death (or withdrawal)

The results can be compared with assumptions or standard tables (if these exist)

For economic factors such as interest rates and investment returns, the analysis is simply a comparison between actual returns and those assumed

Other economic factors include expense inflation and salary growth. Expense analysis are covered in an earlier chapter. A salary growth analysis is likely to distinguish between general inflation-related salary increases and promotional salary increases

Question 4

Use of the results

Answer 4

The results of an analysis of experience 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

Before being used as assumptions, the results of experience analyses should be adjusted to allow for data and modeling risk

Question 5

Monitoring and control cycles

Answer 5

Monitoring of experience is fundamental to effective implementation of the ACC and the risk management control cycle

This is an iterative process as it may result in:
• changes to assumptions or models used, e.g. in pricing, setting contributions and provisioning
• a change in the assessment of the risks faced by a provider or in its risk management strategy