Chapter 35 - Monitoring experience Flashcards
Reasons for monitoring
UMIE
- To UPDATE methods and assumptions adopted so they reflect expected future experience more closely.
- To MONITOR any trends in experience, particularly adverse trends, so as to take corrective actions.
- To provide INFORMATION to management and other key stakeholders.
- To develop EARNED asset shares
What kind of corrective action might be taken as a result of identifying adverse trends in experience?
POD SIRUP
- Re PRICING of products
- Re ORGANISE the workforce and IT systems to make more efficient use of expensive resources
- Re DESIGN of products
Change the:
- SALES strategy
- INVESTMENT strategy
- REINSURANCE strategy
- UNDERWRITING strategy
- PROFIT distribution strategy
What is the basic requirement w.r.t data
It is that there is a reasonable volume of stable, consistent data from which future experience and trends can be deduced
When is data ‘Consistent’?
Consistent means that when comparing the experience of one group of policyholders with another, say, the data used as a basis for the calculations for each group should be:
PEGS
- Preferably extracted from the same source
- Equal in terms of reliability
- Grouped according to the same criteria
- Similar
The factors by which the data can be analysed for persistency experience
SOFTS PD
- Sales method used and target market
- Original term of the contract
- Frequency and size of premium - with monthly premiums there are more opportunities to stop paying premiums than if premiums are annual
- Type of contract (e.g. term vs with-profits)
- Sex and age
- Premium payment method
- Duration in force - Persistency rates are generally lower near the start of a contract
What are the external factors that can affect the withdrawal rates
- Economic situation
- Competitive situation of the product
- Perceived value of the product to the customer
In what ways do expenses need to be subdivided into
- securing new business
- maintaining existing business (renewal and investment)
- terminating business (including claims)
- Investment expenses
Different ways of loading premiums for expenses
- Fixed amount per contract - administration expenses
- Fixed amount per claim - death benefit processing expenses
- % of SA - underwriting expenses
- % of funds under management - investment expenses
- % of premium - commission
- % of claim amount - general insurance claims administration expense
- A combination of the above
What are the main types of expenses
- Direct expenses - The expenses that can be attributed directly to a particular product or policy
- Overheads - the balance of the expenses, i.e. those that relate to general management and service departments which are not directly involved in new business or policy maintenance activities
What are the main items of expenses
- Salaries and salary-related expenses
- Property costs
- Computer costs
- Investment costs
List the reasons why providers analyse surplus
VV MANDATED RN
- VALIDATE calculations and assumptions
- demonstrate that the VARIANCE in the financial effect of individual sources is a - complete description of variance in the total financial effect
- provide MANAGEMENT information
- determine ASSUMPTIONS that are most financially significant
- show the financial effects of writing NEW business
- show the financial effect of DIVERGENCE between valuation assumptions and actual experience
- provide information for publication in ACCOUNTS
- give info on the TRENDS in experience that feed back into the actuarial control cycle
- provide data for use in EXECUTIVE remuneration schemes
- provide checks on valuation DATA and processes
- RECONCILE values for successive years
- identify NON-RECURRING components of surplus: enables appropriate decision making about distribution of surplus
What action might you take if the surplus arising from a particular source is negative
- Consider changing your best estimate assumption for that parameter
– If the phenomenon is of significant size, and the same thing happened the previous year or couple of years, then it is likely your current assumption is incorrect and should be revised.
– This might make you consider repricing the product, if profit testing on this revised basis shows unsatisfactory profitability
What is the impact on embedded value of writing new business
- The EV will increase if the business is profitable on the EV basis
– Considering the two components of EV separately, the PVFP will increase, whilst the free assets will normally decrease
What will the sort of information of an analysis of embedded value movement provide management
- The value of new business written, normally by product
- The amount of any expense profit or loss
- The amount of any mortality profit or loss
- The amount of any withdrawal profit or loss
- The impact of free assets on embedded value growth
- The impact of supervisory minimum solvency margin requirements on the rate of return achieved
List the reasons why providers analyse embedded value
RAVE M
- RECONCILE values for successive years
- provide information for publication in ACCOUNTS
- VALIDATE calculations and assumptions
- provide data for use in EXECUTIVE remuneration schemes
- provide MANAGEMENT information
