Chapter 12: Actuarial investigations

Question 1

Steps involved in a rating analysis:

Answer 1

1. Estimate ultimate claims from past experience
2. Estimate profitability of existing rates
3. Project forward to a new rating period
4. Review the suitability of the existing rating structure
5. Compare rates with those of competitors
6. Assess the profitability of old years at new rates

Question 2

In an expense analysis, we:

Answer 2

• Split between direct and indirect expenses
• Split between types of expenses (e.g. initial, admin, renewal, claims, investment)
• Allocate by class and rating group
• Express the expenses as a proportion of numbers of policies/claims or of amount of premiums/sum insured/claim

Question 3

Main items of expenses:

Answer 3

• Salaries and salary-related expenses
• Property costs (rent, property taxes, heating, lighting and cleaning)
• Computer costs
• Investment costs (investment department, stamp duty, commission, etc.)
• One-off capital costs
• Claim handling costs

Question 4

Aspects of the reinsurance requirements of an insurer to analyse:

Answer 4

• The amount of risk the insurer can safely retain, considering its solvency position
• The extent and likely exposure to accumulations of risk and the need for aggregate excess of loss reinsurance
• The need for catastrophe reinsurance, considering the insurer’s exposure to natural and man-made catastrophes and the appropriate upper and lower limits of such cover
• The extent and need of reinstatements of cover
• The value for money provided by the existing reinsurance programme and whether it meets the objectives of the business
• General assessment of the appropriateness of covers, e.g. proportional vs non-proportional
• Profitability of layers
• Effects on capital
• Cost of commutation
• Reinsurer’s solvency levels and the need for bad debt provision

Question 5

Reasons for monitoring business written (policy experience):

Answer 5

• Assessing performance against the organisation’s goals
• Manage risks – assess how much risk is inherent in portfolio, how much capital the company should hold and what the reinsurance purchasing strategy should be
• Gain market intelligence – useful information about competitors’ strategies and compare itself against the market and assess the underwriting cycle
• Satisfy the regulators
• Influence the market
• Assist with reserving – outputs from the monitoring exercise can be used as input in the reserving process
• Validate assumptions as part of the actuarial control cycle

Question 6

Key factors monitored when monitoring policy experience (business written)

Answer 6

• Premium rate changes
• Portfolio movements
  o Lapses at renewal/renewal rates
  o New business volumes
  o Quotes that result in written business (strike/conversion rate)
  o Mid-term cancellations
  o Policy endorsements
  o Mix of business
• Volumes of quotations
• Persistency and profitability by source

Question 7

Main methods of calculating premium rate changes:

Answer 7

• Direct calculation for each risk separately
• Direct calculation using a standard risk
• Measuring rate changes on individual renewals
• Using underwriters’ views

Question 8

Features of a good system for monitoring business:

Answer 8

• Tailored output
• Accurate and validated data/results
• Easy to use and well documented
• Consistent over time and with other data sources and analyses
• Minimal delay between data cut-off and production of results

Question 9

Reasons for estimating reserves:

Answer 9

• To determine liabilities in published, solvency and management accounts
• To value an insurer for purchase or sale
• To assess the accuracy of the company’s case estimates and/or IBNR claims reserve estimation in previous year-end exercises
• To provide management information on performance and profitability
• To estimate the cost of claims incurred in recent periods as an intermediary step in the rating process

Question 10

Other common reserve investigations:

Answer 10

• Comparison of best estimates against reserves to understand the extent of margins held in the reserves
• Calculation of ranges of results to understand the potential for reserves to be insufficient
• Transforming an underwriting year into an accounting year
• Calculating movements in reserves from one period to the next and analysing reasons for these

Question 11

Investigations relating to investments:

Answer 11

• Evaluation of existing portfolio
• Asset-liability modelling to determine optimal investment strategy considering the inherent risk/uncertainty in the business
• Allocation of capital and hence investment income between different classes of business
• Determination of return on capital

Question 12

Main claims analyses:

Answer 12

• Changing frequency and severity of reported and settled claims
• Impact and incidence of large claims
• Concentrations of claims and aggregations of risk
• Splitting indemnity costs from expenses
• Types of claims reported – identify new types of claims emerging or effectiveness of exclusions/changes to policy excesses in removing certain types of claims from the experience
• Recoveries made on gross claim amounts
• Nil claims
• Partial payments on accounts
• Reopened claims

Question 13

When presenting results we must communicate:

Answer 13

• The source of the data, its preparation and verification
• Our reliance on assumptions and the uncertainty of the results
• Methodologies and definitions used
• Key features of the results and why they have happened
• How actual compared with expected

Question 14

Results of actuarial investigations can be used to:

Answer 14

• Carry out a profit testing exercise
• Estimate price elasticity curves
• Create lifetime pricing models
• Redesign rating tariffs
• Help make other pricing and reinsurance decisions
• Feed into other processes such as reserve estimation and capital modelling
• Carry out financial projections for budgeting, strategy and solvency purposes
• Value a general insurer for sale, purchase or merger