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1

What do you need to consider to assess claims experience?

1. Recent data taken (past few years) so relevant
2. Trends e.g. claim amount inflation
3. Homogeneous groups (risk cells) split by risk factors
4. Credible groups
5. Volumous
6. Stable
7. Consistent
8. Consider competition
9. Analyse overall experience then by subdividing eg. by member/type
10. Split by:
Given list

2

How will data for an experience investigation by split (and analysed if credible)?

1. Type of contract
2. Age/Sex/Location
3. Smoker status
4. Marital status
5. Job/Industry (group)
6, Source of business
7. Dur_if
8. Dur_claim
9. Benefit conditions e.g. deferred period length
10. Underwriting status
11. Size of group (group)


3

What data would you look at for a PMI claim experience investigation?

12. Excess amount (PMI)
13. NCD status (PMI)
14. Hospital band (PMI)
15. Type of procedure (PMI)
16. Actual and expected claims (PMI)
17. Surgeon/Consultant (PMI)
18. Trend in claim amount escalation vs competitors/standard price index (PMI)

4

Process of an expense experience investigation? (unit 14, 3.10)

1. Split expenses into and analyse by required cells
2. A possible split of expenses may be by
a) Salary/Salary related expenses
b) Property Costs
c) Computer costs
d) Investment costs
e) One-off capital costs (excluding computer purchases)
3. Exceptional items unlikely to reoccur will be excluded from the analysis
4. A possible split of cells may be by:
a) Whole business of insurer
b) Business fund
c) Product line
5. We may divide further by single/regular premium
6. Split also by RAPID COST
a) Initial/renewal cost
b) Claim
c) Termination
d) Investment
7. Split also by direct costs vs. overheads
8. Commission excluded
9. May be exceptions

Salary and Salary Related Expenses
10. Make up large part of expenses as administering is labour intensive
11. Fixed in real terms in short term
12. Variable in longer term to meet changing levels of NB/EB
13. Can split into groups by:
a) Staff who work in only one cell
b) Staff working in more than 1 cell
c) Staff entirely on overheads
d) Staff mixed with direct costs and overheads
14. For a) can directly allocate expense to cell, for b) use timesheet to proportion
15. c) staff are obvious, d) staff split pragmatically

Property costs
16. Notional rent to be charged for occupying building it owns
17. Split by floor space in allocate according to salary

Computer costs
18. Amortise cost of new computer over useful lifetime
19. Allocate according to usage or something else sensible

Investment costs
20. Directly allocate to investment expenses and allowed for in investment returns

One-off capital costs (other than new computer)
21. Amortise these over useful lifetime of item
22. Include in overheads

5

What are the large splits in an expense experience analysis? What isn't included?

2. A possible split of expenses may be by
a) Salary/Salary related expenses
b) Property Costs
c) Computer costs
d) Investment costs
e) One-off capital costs (excluding computer purchases)
3. Exceptional items unlikely to reoccur will be excluded from the analysis

6

What is the staff split in an expense experience? How are expenses allocated to them.

13. Can split into groups by:
a) Staff who work in only one cell
b) Staff working in more than 1 cell
c) Staff entirely on overheads
d) Staff mixed with direct costs and overheads
14. For a) can directly allocate expense to cell, for b) use timesheet to proportion
15. c) staff are obvious, d) staff split pragmatically
Property costs

7

What are the required 'cells' in expense experience?

4. A possible split of cells may be by:
a) Whole business of insurer
b) Business fund
c) Product line

8

How to split property/computer/investment/one-off costs in expense experience?

Property costs
16. Notional rent to be charged for occupying building it owns
17. Split by floor space in allocate according to salary

Computer costs
18. Amortise cost of new computer over useful lifetime
19. Allocate according to usage or something else sensbile

Investment costs
20. Directly allocate to investment expenses and allowed for in investment returns

One-off capital costs (other than new computer)
21. Amortise these over useful lifetime of item
22. Include in overheads

9

Explain the salary/salary-related expenses in expense experience

Salary and Salary Related Expenses
10. Make up large part of expenses as administering is labour intensive
11. Fixed in real terms in short term
12. Variable in longer term to meet changing levels of NB/EB
13. Can split into groups by:
a) Staff who work in only one cell
b) Staff working in more than 1 cell
c) Staff entirely on overheads
d) Staff mixed with direct costs and overheads
14. For a) can directly allocate expense to cell, for b) use timesheet to proportion
15. c) staff are obvious, d) staff split pragmatically

10

If date of first sickness is 1/1/2012 and notification is 5/4/2012, with a 6 month deferred period, when is payout started?

1/7/2012

11

Give the reasons to reinsure headings (unit 11, 1)

SAD LIFE (RST)
Smooth results
Avoid single large losses
Diversify risk
Limit exposure to risk
Increase capacity to accept NB volumes
Financial assistance
Expertise
Regulatory/Solvency/Tax Arbitrage

12

List personal circumstance changes that MUST be disclosed

Age
Sex
Location of living (address/territory)
Occupation
Alcohol consumption
Smoker status/habits
Drug use
Personal health
Family health
Hazardous leisure activities taken up
Frequency/duration of overseas travel

13

Describe how to find a retention limit (unit 11, 8)

1. There are 2 possible ways to do determine a retention limit
Method 1: (minimum of reinsurance + fluctuation reserve)
1. Sum of the following 2 costs:
a) Cost of reinsurance
b) Cost of financing a risk experience fluctuation reserve (use simulation approach below to find)
2. If retention limit increases, (a) decreases and (b) increases
3. We can find an optimum retention by finding min(a+b)
Method 2: (Simulated solvency levels)
4. Set a retention level to keep probability of insolvency below a specified level
5. ie. Find retention level s.t the company stays solvent for 995/1000 scenarios say. Do this by:
6. Use stochastic model for expected claim rates
7. Estimate statistical distribution of risk experience costs based on varying retention limits
8. Use stochastic model for expected claim rates
9. Project expected claims, company assets and liabilities together

14

What are the 2 ways to determine a retention level? (unit 11, 8)

1. Minimise sum of Cost of Fluctuation Reserve + Cost of Reinsurance
2. Determination by simulation of solvency levels (99.5th percentile)

15

Why use initial underwriting for risk management? (unit 12, 1.2)

FORE AIDSS-APP
1. Anti-selection - protect from
a) Particularly those lives who are so seriously impaired it's impossible to assess the risk accurately
b) AS can lead to higher than expected Frequency/Cost of claims
2. Identify substandard lives whom special terms must be quoted
a) Note that a company would aim to write a large proportion of business on standard rates
3. Identify appropriate approach/premium level for 2.
4. Fair classification of all risks
5. Ensure morbidity experience = expected in pricing
6. Reinsurance requires/better terms
7. Over-insurance - reduce risk in large proposals

16

What's the story related to experience investigation data, including PMI

On 1/1/2014 (dur_if)
Mum sells (distributor)
a CI policy (type)
to 1 (size of group)
27yo (age)
Fat (underwriting status)
Male (sex)
Smoker (SS)
Druggy (DS)
Actuary (occupation/industry)
Living in KND (location)
By himself (marital status)
On 1/2/2014 he starts claim (dur_claim
After his deferred period (benefit conditions)
He was treated by Dr Patel (surgeon/doctor)
Of BUPA (hospital band)
For toxic gas surgery (type of claim)
For 20% off (NCD status)
Which was £80 after his £20 excess (Excess)
Which was unexpected (Actual vs. expected claims)
Given todays prices (Trends in medical expense inflation vs. competition/prices)

17

When thinking about the different types of staff and their expense allocations, what's the story?

MP - work relates to 1 cell - direct allocation to the cell
CWH - multiple cells - split by time sheet
AS - overheads - direct allocation
RY - direct and overheads - split pragmatically

18

What examples for property/computer/1-off expenses are there?

Property:
Total notional rent = 1000
Floor space = 20%
Salary = 10%

Computer:
Cost = 100
Usable years = 2
Time spent on it for me = 100%
Allocation in 1 year = 100*(1/2)*100%

One-off expenses:
Buy hot air balloon = £20k
Usable years = 3
So expense = 1/3 * 20k
Hot air balloon goes OVERHEADS

19

Purpose of calculating technical reserves

MIAnAmAR
M&A value
Investment strategy influence
Accounts - Liabilities shown in published accounts
Accounts - Liabilities shown in solvency supervision accounts
Accounts - Liabilities show in internal management accounts
Reinsurance arrangements assessment

20

Principles of Investment

Version 1
a). Select investments appropriate to NTC of liabilities
b). These should be selected to maximise overall return on assets (investment income + capital gains)
c). The extent to which (a) can be departed from to meet (b) depends, inter alia, on extent of company's free assets and risk appetite

Version 2

1. The company should invest to maximise overall return on assets
2. Subject to the risk being taken on being within financial resources available

21

Why do an analysis of surplus/profit?

NB CRED

1. NB - Financial effect of writing NB
2. Check - on valuation data and process if carried out independently
3. Regulatory requirement
4. Experience not expected - Find financially significant assumptions by looking at financial effect of experience not equal to valuation assumptions
5. Distribution - Identify non-recurring surplus, enabling appropriate decisions on distribution to s/h or with-profits p/h

22

Why do an AOEV?

MME RVP

1. MI
2. M&A
3. Exec remuneration scheme data
4. Reconcile values in successive years/Regs
5. Validate calculations, assumptions, data used
6. Provide detailed info for published accounts or company/parent company, particularly the value of NB taken on

23

12 events to exercise an option?

1) Marriage - normal/start civil partnership
2) Divorce - normal/end civil partnership
3) Death of spouse/family member
4) Child birth/adoption of child
5) Salary change from promotion/change job
6) Buy new residential property
7) Mortgage/loan increase
8) Business expansion if own business

24

How do you reduce risks of an option to increase sum assured without further health evidence?

1. Limit exercise to special events and time limit after this
2. Max increase (fixed or percentage of sum assured)
3. Underwrite original contract on assumption option taken up for maximum amount
4. Limit times allowed to exercise e.g. age/annually
5. Publicise option to make sure many take-up not just unhealthy
6. Attractive premium rates so less anti-selection
7. Only offer to standard lives at outset, not special terms
8. Reinsurance of option

25

Advantages/Disadvantages of formula approach? (unit 6, 3.7)

Advantages:

1. Simple application
2. Doesn't require sophisticated modelling package..
3. ..Quicker to run
4. Easier checking/audit

Disadvantages:

Doesn't allow for..SPPAND
1. Proper timing of events
2. Accumulation of reserves
3. Negative net cashflows in any period
4. Separate inspection of premium related cashflows
5. Dynamic returns/assumptions over time
6. Properly for capital needs

26

Typical cashflows? (unit 6, 4)

1. Premiums
2. Expenses - initial/renewal/claim
3. Commission - initial/renewal
4. Claims
5. Contribution to statutory reserves
6. Contribution to solvency capital requirements
7. Interest on cashflows and reserves
8. Tax
9. Reinsurance
10. Lapse rates

27

Explain cashflow techniques (unit 6, 4)

1. Developed to overcome formula approach problems
2. Widely used for long-term, formula still mainly for short term e.g. 1 year PMI
3. Difficulties in implementing the approach now are mainly overcome by commercial software packages
4. Sensitivity tests can be performed by varying assumptions
5. Iterations done to find premium to meet shareholder profit criterion
6. Stochastic cashflow modelling can be performed for complex products including guarantees and options

What it does but formula doesn't

7. Allows multi-state modelling which formula doesn't
8. Allows for shareholder return on capital (RDR) which formula approach doesn't

28

Compare the formula and cashflow approach to pricing (find premiums) (unit 6,3+4)

Formula:

Advantages:

1. Simple application
2. Doesn't require sophisticated modelling package..
3. ..Quicker to run
4. Easier checking/audit

Disadvantages:

Doesn't allow for..SPPAND
1. Proper timing of events
2. Accumulation of reserves
3. Negative net cashflows in any period
4. Separate inspection of premium related cashflows
5. Dynamic returns/assumptions over time
6. Properly for capital needs

Cashflow:

1. Developed to overcome formula approach problems
2. Widely used for long-term, formula still mainly for short term e.g. 1 year PMI
3. Difficulties in implementing the approach now are mainly overcome by commercial software packages
4. Sensitivity tests can be performed by varying assumptions
5. Iterations done to find premium to meet shareholder profit criterion
6. Stochastic cashflow modelling can be performed for complex products including guarantees and options

What it does but formula doesn't

7. Allows multi-state modelling which formula doesn't
8. Allows for shareholder return on capital (RDR) which formula approach doesn't

29

Big list of risks (unit 10)

Data
Claim rate/amount
Investment performance
Morbidity/mortality
Aggregation/concentration of risk
Lapse
Expense and expense inflation
Operational risk
Internal audit failure/fraud
Actions of management
Counterparty default risk
Regs/legs
Tax
Fraud
Option take-up
Guarantees biting
NB volume
NB mix (source/size/type)
Reputation
Competition
Anti-selection/non-disclosure

30

What controls on investments may be implemented by a regulator? (unit 9, 2.4)

Mismatching:
1. Hold a mismatch reserve
2. Limit on extent mismatching allowed at all
3. Must match by currency whatever the case
4. Valuation assumptions encourage matching
5. Returns to regulator demonstrate compliance

Other:
1. Type of assets which can invest
2. Amount a particular asset type can be used so solvency demonstration
3. Limit single counterparty/country exposure
4. Hold certain proportion of assets in certain class e.g. 50% gilts
5. Custodianship of assets
6. Self-investment
7. Effect choice through their relationship with basis used for valuing liabilities e.g. 1 asset by allow use of higher valuation assumptions

31

Developing an appropriate investment strategy in 20 points! (unit 9, 3.1)

1. Use stochastic model to project A/L/free assets for various investment strategies
2. Determine appropriate time frame for projection
3. Deterministic assumptions BE
4. Sensitivity/scenario testing may be carried out

Asset model:
0. Starting point to be current assets held
1. Investment income including timings/amounts
2. Reinvestment
3. Growth in investment income
4. Investment expenses
5. Inflation rates to be used for A and L
5. Stochastic model for income/capital growth, inflation

Liability model:
0. Model points to represent EB
1. Include benefit payments (amount and timing)
2. Benefit escalation
3. Probability of death before claim
4. Expense outgo
5. Premium income

1. A and L models should be dynamically linked
2. Calculate A-L at end of each year on supervisory basis, this should cover solvency capital required comfortably
3. Comfortable depends on regulatory requirements/other companies/support etc.
4. The stochastic model produces a statistical distribution of solvency levels for each investment strategy, hence a probability of future insolvency
5. We can identify from this probability, acceptable investment strategies e.g. solvent in 995/1000 scenarios.

32

Give possible reserves, S or L (and total number of S, L, overall), descriptions

S=9, L=8, tot = 12
1. UPR - SL - premiums not yet received for remaining insurance period
2. URR - SL - reserve for that needed above (1) due to poor pricing
3. IBNR - SL - claim event happened, not yet notified company
4. IBNER - S - event happened, insufficient detail to pay
5. CiT - S - event happened, notified, not yet assessed/recorded
6. OCR - SL - event happened, notified, recorded, not fully paid
7. Cat - S - and below, current year atypical, hold back reserves for future abnormal events
8. Eq - S
9. MM - SL - when mismatching A and L
10. Pol - L - expected future claims, expenses, premiums
11. Options - L - for policies moving ITM (bites)
12. Guarantees - L

33

How to find an investment strategy?

1, Stochastic model for A and L
2. Suitable timeframe
3. MP representing EB (or full data points)
4. Assumps to be BE
5. Liabs on current basis
6. Time 0 assets as current MV
7. A-L is of interest
8. Find A-L on supervisory basis at end of each year
9. Needs to be comfy above SCR
10. Comfy means in terms of regs/RA/comp
11. Using stoch and sims can find stat distn of A-L for different inv strat
12. Rerun model for various inv strat to optimise
13. Use the stat distn to find prob of ruin for each strat
14, e.g. solvent in 995/1000 scenarios
15. Stress and scenario testing will be done too, to find effect of incorrect assumptions
16. Stoch model of inv ret (I+C gains)
17 Expense inflation can be included in stoch model
18. Dynamic inv strat/assumps possible, depending on inv conditions
19. Optimise by finding strat with highest shareholder profit for allowed prob of ruin and free assets