Monitoring Experience Flashcards
List reasons to monitor experience
1) To develop earned asset shares
2) To update assumptions as to future experience
3) To monitor any adverse trends in experience so as to take corrective actions
4) To provide management information
List features that management can identify to make its operations more profitable
1) Profitable products
2) Profitable sales channels/agents
3) Profitable markets
4) Efficient sections of the business
5) Successful investment strategies
List types of experience investigations
1) Mortality
2) Persistency
3) Expenses
4) Investment experience
Expense investigations will split known expenses into…
- Initial costs
- Renewal costs
- Termination costs
- Investment costs
Expense investigations will assume known expenses are…
- Fixed per policy
- Fixed per claim
- Proportional to premium
- Proportional to benefit
The main items of expense are…
1) Salaries and salary-related expenses
2) Property costs
3) Computer costs
4) Investment costs
5) Once-off capital costs
6) Exceptional items
How are expenses from salaries allocated?
1) Allocated directly to appropriate cell, or
2) Split according to staff timesheets, or
3) Allocated in proportion to already-split direct costs
How are expenses from property allocated?
If we rent the building, the rent can be allocated in proportion to floor space occupied
If we own the building, a notional rent can be allocated in proportion to floor space occupied
How are expenses from computers allocated?
Amortised over the future expected lifetime of the computer, then allocated in proportion to usage
How are expenses from investments allocated?
Subdivided by asset class and then incorporated as a reduction in yield
How are once-off capital costs allocated?
Amortised over expected future lifetime of the asset purchased, and then treated as an overhead
How are exceptional items of expense treated?
Past items are excluded from analysis, future incidence of such costs may be allowed fot in margins in future expense assumptions or in future risk discount rates
What does it mean for expense data to be consistent?
1) In a similar form
2) Preferably extracted from the same source
3) Grouped according to the same criteria
4) Equal in terms of reliability
List the benchmarks against which the results of an expense investigation can be compared
1) Total expenses in published accounts
2) Competitors’ expenses in their published accounts
3) Market benchmarks
How does monitoring available data help the insurer to drive better business?
1) Through early identification of changes in individual insured results
2) Through being able to intervene and influence customer behaviours
List the factors by which persistency data may be analysed
1) Type of contract
2) Duration in force
3) Sales method and target market
4) Size and frequency of premium
5) Premium payment method
6) Original term of contract
7) Sex and age
List the external factors that may influence persistency
1) Economic conditions affecting policyholders
2) Competitive situation of the product
3) Perceived value of the product to the customer
Annual persistancy rate formula
(# contracts surviving year) / (# number in force at beginning of year)
Cumulative persistancy rate formula
(# contracts surviving year) / (# in force at outset of contract)
Withdrawal rate
1 - persistency rate
List the reasons for an analysis of surplus arising
1) Show financial effect of divergences between actual and expected outcomes
2) Thus exposing which assumptions are most financially significant
3) Show the financial effect of writing new business
4) Provide a check on the valuation data and process (if they were carried out independently)
5) Identify non-recurring components of surplus
6) Thus enabling appropriate decisions to be made about the distribution of surplus to with-profits policyholders
7) Give management information on trends in the experience of the company
8) Comply with regulatory requirements
Total surplus/strain arising can be broken down into…
1) Interest surplus/strain
2) Mortality surplus/strain
3) Expense surplus/strain
4) Withdrawal surplus/strain
Formula for change in valuation surplus
= Surplus1 - Surplus0
= (A1-L1) - (A0-L0)
= (A1-A0) - (L1-L0)
Formula for change in embedded value
= EV1 - EV0
= (net assets1 + PVFP1) -
(net assets0 + PVFP0)
EV
Embedded Value
= free assets + present value of future profits
PVFP
Present Value of Future Profits
List reasons for an analysis of EV
1) Validate the calculations, assumptions and data used
2) Reconcile the values for successive years
3) Provide management information
4) Provide data for use in executive remuneration schemes
5) Provide detailed information for publication in company or group accounts
List the types of management information provided by an analysis of embedded value
1) The value of new business written, normally by product
2) The impact of free assets on EV growth
3) The impact of supervisory minimum solvency margin requirements on the rate of return achieved
4) The amount of profit/loss from:
- expenses
- mortality
- withdrawal
AoS
Analysis of Surplus
AoEV
Analysis of Embedded Value
List the ways in which the results of these investigations may be fed back into the ACC
1) Updating the pricing basis
2) Revising product design
3) Changing the product mix
4) Revising underwriting processes
5) Implementing/improving rentention activity
6) Changing the:
- marketing message
- target market
- distribution channel
7) Revising sales processes in terms of:
- training and selection of distributors
- wording and format of sales literature
- mechanics of any commission
payments and clawbacks
8) Improving the wording of policy contracts
9) Improving the adequacy of:
- numbers
- competence
10) Improving systems and data recording processes
11) Improving actuarial models
12) Changing the investment strategy
13) Changing the with-profits surplus distribution approach
14) Updating the reserving basis
15) Raising capital
16) Altering the capital allocation methodology
17) Improving risk management governance and controls
