Chapter 39

Question 1

Reasons for monitoring? (7)

Answer 1

1. Update the method and assumptions so that they are more relevant to future experience
2. Monitor any trends in experience, particularly adverse trends, so as to take corrective actions
3. Validity of models
4. Risk management
5. Identify adverse experience and act
6. Provide management information
7. Regulatory information

Question 2

Data required for monitoring (4)

Answer 2

• Reasonable volume, stable, consistent data
• Credible
• Relevant
• Consistent
• In a useful form
• Data needs to be sufficiently divided into sufficiently homogeneous risk group by using relevant risk factors (age, sex, occupation, location etc)
• Data on the feature being assessed, it is necessary to have data on the exposure to risk, divided into the same cell structure as the experience data - Match with exposure (principle of correspondence)

Question 3

How is monitoring administered?

Answer 3

• Experience investigation
• Industry analysis

Question 4

The analysing process:

Answer 4

1. Compare experience with assumptions (Investigate actual vs expected experience)
   - Mortality, morbidity, claims volume and mix, expenses, lapses, new business, investment returns,
2. Analysis of surplus
3. Items to the analysed
   * Economic factors (interest rates and investment returns)
   * Demographic factors (claims/exposed to risk)
   * Operational factors (expenses)
4. Measures for comparison
   - Insurer assumptions
   - Industry experience
   - Use of standard tables
   - Indices

Question 5

Measuring investment performance

Answer 5

1. Consider the investment strategy and asset allocations
   * Appropriate for liabilities
   * Solvency position and funding position
   * Expectations of investors
   * Regulatory requirements
2. Identify deviations from the investment policy document
3. Consider investment performance in light of investment objectives, benchmark and performance of other funds/fund managers
4. Consider CFs into and out of fund

Question 6

Things to consider when interpreting results:

Answer 6

1. Consider whether experience Is typical
   * Identify unusual experience
   * Random events and unusual fluctuations
2. Identify the trends and cycles (will they continue in the future?)
3. Consider whether past experience is a good indication of future experience
   * Changes in business profile
   * Changes in policyholders

Question 7

What are the uses of the results found in the monitoring process: 5)

Answer 7

1. Risk management strategy
    Assessing the adequacy of risk management strategy and processes
2. ACC!!!
    Feedback into problem and solution – e.g. benefits and pricing
3. Revise model and assumptions
    Take experience and changes in the environment into account when setting assumptions
4. Factors to be taken into account when setting assumptions
    Need for accuracy and margins
    Allowance for future trends
    Differences between past and future experience
5. Iterative process
   - As time goes by, more information is known and so the closer the actuary will get to what the future experience actually looks like.

Question 8

Summary of monitoring process:

Answer 8

1. Divide data into homogeneous risk groups
2. identify past trends, cycles and anomalies and random variations in the past data
3. use results to revise models and assumptions