Chapter 39 - Monitoring

Question 1

Outline the main reasons for monitoring experience

Answer 1

Check whether method and assumptions continue to be appropriate
- If not, what changes should be made to achieve strategic objectives

Update methods and assumptions to reflect expected future experience more closely

Monitor trends in experience
- Particular adverse trends in order to take corrective actions

Provide information to management and key stakeholders

Question 2

Discuss the data requirements for monitoring experience

Answer 2

Basic requirement
- Reasonable volume of stable consistent data from which future experience can be projected and trends can be identified and managed

Consistency of data when comparing experience of different groups related to:

• Similar format
• Extracted from same source
• Grouped according to same criteria
• Reliability

Data should ideally be divided into homogeneous risk groups according to relevant risk factors

• Number of homogeneous groups (i.e. detail) should be balanced with statistical reliability of group (i.e. amount of data per group)
• Larger volume of available data means more detail can be extracted reliably

Question 3

Discuss the process for analysing results from the homogenous data groups

Answer 3

In each case assumptions are compared with actual experience

Effect of differences can be measured by retrospectively substituting actual values into model used and comparing with original results

STATISTICAL FACTORS

• Includes mortality rates, morbidity rates and withdrawal rates
• Actual amount calculated by number of occurrences/exposure to risk for the period

ECONOMIC FACTORS

• Usually have greatest impact on experience but are outside of management control
• Includes interest rates, expense inflation, salary growth and investment returns

Investment returns

• Calculation should reflect (think of normal return calculations):
  1) Timing of cashflows, positive and negative
  2) Investment income received or accrued over the period
  3) Investment expenses
  4) Tax

Expense inflation
- Should consider change in unit costs rather than changes in actual total expenses

Salary growth

• Should identify:
  1) general “across the board increases”
  2) individual promotional increases
• These should be extracted separately as assumptions are normally made separately
• See example on pp.10-13

Question 4

Discuss how the results of the analysis in the monitoring process will be used

Answer 4

Identify differences in economic and statistical experience

Determine whether future assumptions and/or models should be amended based on the results

• Should identify whether differences occurred due to:
  1) trends - long-term underlying change in values
  2) cycles - periodic fluctuations of values around a trend
  3) random fluctuations
• Goal should be to determine any changes in past trends or at which point in the cycle it is and adapt future assumptions to reflect this
• Should include margin in assumptions to reflect assumption and model risk

Other considerations

• Is it likely trends continue into the future
• Will the data represent the same homogenous group in future years