Data

Question 1

Sources of data

Answer 1

1. Benefit providers own data
2. Population data
3. Reinsurers data
4. Market data
5. Other sources - actuarial consultants , overseas

Question 2

Data considerations

Answer 2

Relevance : similar class of lives and policy conditions to those expected for the benefit

Credibility : implies a sufficiently large volume of data to enable precise estimates to be calculated

Cost of obtaining and analysis no the data and suitability of format

Question 3

When using past data to set assumptions - insider how to deal with:

Answer 3

• abnormal fluctuations
• changes of experiences with time
• random fluctuations
• changes in the way in which the data was recorded
• potential errors in the data
• changes in the balance of any homogenous groups underlying the data ( business mix)
• geterogeniry within the group to whom the assumptions are to relate

Question 4

Mortality and morbidity data

Answer 4

• medical advances
  Different depending on the source and the underlying group/populaton
• differs by type of the employement or social class

Question 5

Future projections

Answer 5

• claim incidence rates , claim termination rates, average claim size
• mortality and withdrawal rates
  -yields to maturity on real and nominal government bonds
  -inflation risk premiums
• estimates of future risk premiums on other assets
• salary and pension increases
• contributions or premiums
  -expense

Question 6

PMI - Average claim size :

Answer 6

Dep on
- inflation , current protocols and hospital charging structures
Availability of treatments under state healthcare

Question 7

Mortality projection methods - two deterministic ways

Answer 7

1) Process-based projections - model trends in causes of death.
Drawbacks: death classification and insufficient understanding of the major cause of death processes
And lack of understanding of relationships between diseases
- can include scenario testing

2) Extrapolative methods- trends in mortality are projected in the future.
Drawbacks- subjectivity associated with the choice of period over which such trends are to be determined.

Mortality improvements - stochastic model or simple assumptions

Question 8

Pros and cons of using population data

Answer 8

• important source of information for health and retirement where benefits depend on mortality and longevity and very few insures and benefit providers have enough data for credible actuarial investigations .
• readily available
• free
• size of the data available makes it credible

Drawbacks:
- the accuracy and reliability may be questionable
- especially in healthcare where definitions may be subjective and the scope for double counting is significant

• may not be available in the appropriate format
• the population experience may be somewhat out of date before it becomes published
• the national experience may not be relevant to a benefit provider;s subset of lives
  Since insured and uninsured lives are likely to behave differently - particularly evident in the increased utilisation of medical services in terms of frequency and cost of treatment when people are insured

Question 9

Reinsurer’s data

Answer 9

• provide statistics relevant to risk to be insured - assist in pricing and reserving
• the statistics are accurate as possible
• reinsurers will have access to more data that is diverse since they deal with many insurers
• charge by reinsurer for providing this service - but provided on the basis of accepting a share of profits from the business written
• actuary must assess the divergence of reinusrer’s data from their compnay’s future expernece and make appropriate adjustments - adjust for their compna’s specific underwriting and claims management

Question 10

Market data

Answer 10

Insured lives data - industry data
- agreement between benefit providers to pool claims and policy statistics so that overall industry-wide information may be available that would be more credible - regulatory facilitated
- can be used as a base reference for experience monitoring purposes and for setting assumptions
- it represents insured experience while is more relevant
- generally of sufficient volume to to be statistically credible
- reflects local benefit providers - reflecting market practices
- drawback : average market experience and not strictly relevant t any one benefit provider
- actuary will need to consider the extent to which a benefit provider’s own experience will differ from this market average and make adjustments

Published returns
* statistics of this type can also be drawn from the unlisted returns to the local regulator
- benefit providers may end to publish returns to their local regular to at regular intervals - who then pubslishes an annual industry report which freely available on its website

• may be more detailed - number or policies in force
• this information can provide a high-level check on premiums produced from other sources

Question 11

Other sources

Answer 11

• overseas :
  Less relevant than equivalent population an insured lives data of the home territory
• even if it is insured, carefu with differing cultures differing state healthcare provision , differential market practices , differing legislation and differing policy conditions

Actuarial consultant
- charge a fee for their services

Question 12

Data validation

Answer 12

• recording accuracy
  Important for claims and policy data is accurate
• controls on data acceptance
  ( the software for accepting data inputs, should have built checks that prevent erroneous items from being accepted ) ( certain errors may have exceptions that can only be overwritten by a person of a pre-specified status)
• compulsory fields
  ( an individual policy record will have certain fields that are mandatory - the input will not be accepted unless all such information is included ) ( age , gender and benefit )
• regular vetting and spot checks
• auditing the accuracy of information will entail the regular inspection of the process by which data are accepted by the system as well ass considering whether the data captured are comprehensive
• policy or member records should be checked “E2E” - from input to eventual use
• Member data and data checks

Question 13

Member data and data checks

Answer 13

1. A reconciliation of the total number of members and changes in membership , using previous data and accounts
2. Checks for existence of new members - can be validated against employer, payroll or insurance data to ensure that there are no omissions
3. Comparison of average benefits level or of average values of components of the benefit calculation
4. Checks for consistency between salary-related contributions and in-payment benefit levels indicated by membership data and the corresponding figures in the accounts
5. Minimum and maximum levels of benefits , their components n , ages - checking the individual items of data on each member’s record, a comparison can be made between previous and current records for members who have been active throughout.

Question 14

Asset data

Answer 14

• to place a credit value - obtain a full listing of the individual assets held
• these individual holdings should then be checked o detrmine whether they are permitted or ae subject to valuation restrictions imposed by scheme rules or legislations
• a retirement scheme my also have assets in the form of insurance policies - details of these policies will be required - including any policies covering death-in-serviece benefits

For funded benefit schemes - the confidence in the asset data may be increased by cross-referencing against -
* audited accounts - this is signed off by a practising auditing professional
* investment manager reports - giving listing of assets held, purchased and sales
*consistency between investment income and assets actually held

Such document are not just useful for valuation but to check other aspects of scheme operations
- asset allocation - to check that assets held are appropriate to the liabilities in accordance with any professional guidance for th actuary
- self-investment - check compliance with any restrictions on any investments related to the1 sponsor

Question 15

General assumption setting consideration

Answer 15

1. Use of the assumption will be
2. Choice of the assumption that will have the most financial significance
   - potential financial significance of errors in the assumptions will also determine the degree of prudence
3. Achieve consistency between various assumptions
4. Consider any legislative or regulatory constraints
5. Consider the needs of the covered lives
6. Ensure that the parameters serviced from data are produced as accurately as the body of data will permit
7. Ensure tha the data used to derive these assumptions are relevant to the risks that the policies encompass
8. Ensure that bases used for periodic valuation and reserves are flexible to reflect changing risk circumstances
9. Sensitivity test, especially those assumptions which are most significant in determinin given outcome

Question 16

General assumption setting process

Answer 16

1. Investigate historical experience and make best estimates of the parameters from that experience
2. Consider what the conditions , including commercial and economic environment, will be like in the future period for which the assumptions are being made
3. Determine what the best estimates of the assumptions will be , given the expected future conditions
4. The best-estimate may need to be adjusted in order to include a margin for prudence

Question 17

The demographic assumption - the expected future experience will depend:

Answer 17

• the target market for the benefit
• the underwriting controls applied or not applied at the start of the policy
• the claim controls applied , or not applied at the claims stage
• the benefit provision wording
• the expected change in the xperience since the time of the last historical investigation to the point in time at which the assumption will on average apply

Question 18

Claim incidence rates assumption calc

Answer 18

• reinsurance or makret data may come in the form of incidence rates
• otherwise these have to be calculated using exposed to risk techniques

The rates will be broken into discrete risk cells

The split for LTCI:

• age
  -Gender
• smoker status
• occupation -
  Size of benefits selected
• type of benefits selected
• class of product
• individual or group
• distribution source
• region
• underwriting status
• duration since policy entry
• after rates for each disease or whatever is calculated
• project it to be future experience by each cause in each future calendar year using a projection factor
• the projection factor could also be age specific as the changes in morbidity over time may not be the same at every age

Question 19

Trends that may impact the incidence rates -

Answer 19

Social and economic welfare
1. Changing attitudes to health , greater access to healthcare services, better diagnosis of medical ,conditions, and the avilability of new technology
2. The future plans for state welfare provision
3.The economic well-being of the country
4. Inflation generally

Changing health environment
Government promises in welfare provision
- the more generous the state promises in relation to long term care support and medical acre provision - the more difficult it wi; be to acquire and retain business

Pessimism in the economic and the level of unecomment
- this may encourage employees to take advantage of group PMI cover while they are still employed

High inflation
- this will impact the renewal price of PMI and is likely to reduce renewal rates

Recovery rates
- where the benefit will cease if the policyholder recovers from a disability or dies - is usually unlikely and therefore is ignored in pricing

Question 20

Mortality rates

Answer 20

Non-claiming vs claiming policyholders
( healthy or active ) vs claiming or pensioners or deferred
- mortality of active or heathy - likely to be standard mortality table with adjustments for future
- of claiming ( LTCI - sick ) - the mortality assumption would merit much more effort in order to estimate the future rates as mortality of sick lives is a lot less predictable than he population

Claims within the survival period
- special consideration needs to be given to survivorship requirement for CI
- this is allowed for by an adjustment to the claim incidence rate

Policies without a death benefit
- - shouldn’t’t be over estimated as it would lea to contracts being under costed

Question 21

PMI lapse rates dep

Answer 21

• is there a better competitor product
  -rate of premium or contribution increase
• the perceived service delivery by state
  ( waiting lists etc )
• the current confidence in the economy
  ( where PMI competes with state )
  -sales channel can have a direct effect on persistency or renewal , experience
  ( high persistency can be associated with insurance intermediaries )
• after-sale service ( mostly affected short term where there is a regular contract)
  Persistency rates are likely to be affected:
• the level of financial sophistication
  Whether it was the policyholder who initiatives the sale

Question 22

The effect of lapses

Answer 22

• an early lapse can cause financial loss - where insufficient premiums or contributions have been received to recover the intial strain , that is commission and initial expense , involved in the writing the policy
• if no surrender is payable and +ve asset share has been accumulated - the lapse can benefit he insurer
• the effect of the lapses may be selective - the healthier lives will be more likely to lapse , leaving a worsening propensities t claim amongst those continuing
• ## lapse and re-entry

Question 23

Economic / financial assumptions

Answer 23

• benefit amount
• benefit inflation
• expenses
• expense inflation
• commission and clawback
• investment return
• taxes
• price inflation
  -pension increases
• earnings inflation

Question 24

Alternative reimbursements - result in some transfer of risk relating to the cost of providing the services to the healthcare provider

Answer 24

• indemnity or fee for service
• modified fee for service
• per-diem
• per case
  -Capitation
• salary

Question 25

Trends in PMI benefit inflation -

Answer 25

1. Medical inflation 2. Change in medical treatment protocols 3. Cost of treatments - increase due to innovations 4. Demand for more expensive treatments 5. The future age profile and other risk aspects of the portfolio 6. Prevalence of chronic conditions or increased morbidity

Question 26

Allowing for expenses that do not vary by size of contract

Answer 26

1. Individual calculation of premium rates or charges - loading explicitly for per policy expenses , 2. Policy fee addition to premium, or deduction from income benefits - policy fee would represent the per-policy expense costs , and the premium rate would only cover the other, proportionate, expenses 3. Sum-insured differential - f different premiums is charged for different bands of sum insured This would require an estimation of number of policies likely to arise with each band

Question 27

More expensive to develop a health and care product

Answer 27

- extra underwriting effort - product development costs might also be higher as more effort is needed to derive incidence rates , develop policy literature and train sales employees - more time and medical information required to determine the validity of a claim

Question 28

Expense inflation loading

Answer 28

1) short term: implicit allowance for expense inflation by simply increasing per-policy expenses to the level that would apply at the average time those expenses are expected to be incurred 2) - rates of inflation will be partly related to prices and related to salary costs

Question 29

Expenses analysis

Answer 29

Data and adjustment : - recent expense inflation experience of the company - to detrmine the way in which the compnay’s expense inflation behaves - 20% price inflation and 80% earnings - use these proportions for average of expected future inflation Considerations when setting a value for this paramter: - current rates of inflation - expected future rates of inflation - the differential between return on govenermnet fixed interest and on government index-linked securities - recent actual experience of the company 2 distinct aspects of expense inflations - inflation of expenses during the term of a future new policy from issue date to its termination - the final action of all expenses from now to the date at which the future new policy is actually issues

Question 30

Clawback

Answer 30

- where a salesperson is paid a higher commission in year 1 than in subsequent years - there is a probability that the insurer will lose out if the policyholder lapses at an early duration and the product has a level annual commission loading in the premium - credit risk

Question 31

The significance of investment returns assumptions will be influenced by

Answer 31

- the importance of the assumption for the profitability of th contract ( level of reserve built up and the duration of the policy and the guarantees gives) - The intended investment mix for the contract as affected by reinvestment , the current return on the investment and likely future returns - the extent of any reinvestment risk and the extent to which this can be reduced by a suitable choice of assets

Question 32

estimating future investment return

Answer 32

The process: - consider the likely mix of assets that will back the contract in the future - investigate the returns that such assets are yielding now and in the past - attempt to predict the returns that will be btained from the future asset mix , bearing in mid the impact of future changes to the economic environment The asset mix: - match liabilities - level of free assets * if market consistent approach - expected investment return can be set as risk free rate - risk neutral calibration approach

Question 33

Tax

Answer 33

1. Tax on profits - benefit provider is taxed on profits arising from the contracts being written 2. Tax on investment income less expenses 3. Tax on premiums or contributions

Question 34

Risk discount rate

Answer 34

1. Return required by the company or shareholders in investing the insurance company ( market risk - CAPM) ( difference between return from a well diversified portfolio of shared and some irks free assets ) 2. Level of statistical risk attaching to the cash flow under the particular contract or project

Question 35

The level of statistical risk can be assesses by

Answer 35

1. Analystically by considering the variances of the individual parameters values used 2. By using sensitivity analysis with deterministically assessed variations in the parameter values - by using this increased area meter value in the profit test - a revised rerun on capital from the product can be calculated - keeping all other items unaltered . The change in return will show how the variance of an individual parameters translates into the variance of return on capital 3. By using stochastic models for some or all of the parameter values and simulations 4. BY comparison with any available market data

Question 36

Mark-to-makret or market consistent

Answer 36

Assume that all DB funds risk are fully diversifiable Appropriate disocuunt rate to use is the risk free rate - expected return on portfolio of govt bond whose nature and term match the liabilities - however not all risks may be fully diversifiable Therefore, add risk premium to reflect these systematic risks Can use CPM but pensions - try and identify the portfolio of traded assets whose cash flows best match the likely cash flows of a set of liabilities - the disocunt rate is set equal to the expected return on this set of best matching assets - “ bond yields plus a risk premium method”

Question 37

EV assumption consideration

Answer 37

1. Purpose for EV calc ( reserves need to be calculated using supervisory basis - to get future shareholder profits ) ( projection basis - to project the company’s experience into the future ) - the company may use different basis - dep on purpose

Question 38

Allowing for risk in EV calc

Answer 38

1. Risk discount rate is higher than risk free rate 2. Stochastic - stochastic projection would highlight the range of possible values that future profits might take 3. or market consistent approach ( risk free ) And risk margin would be deducted form EV to reflect non-investment risks