Monitoring the Emerging Experience

Question 1

Why analyse experience and trends?

Answer 1

To understand drivers of experience
To identify corrective actions
Develop a history for modelling
To provide information to management
To review and update your model

Question 2

What are the main things analysed?

Answer 2

Because of time and resource constraints: we analyse factors with a large financial impact or a large impact adversely. Look at Actual vs expected experience.
Can see what has large financial impact by sensitivity testing
Minor deviations can be analysed less frequently

Question 3

What are causes of minor vs large deviations

Answer 3

Often ‘minor deviations’ are caused by demographic factors while major deviations arise from economic

Question 4

Why can claims experience sometimes be tricky to analyse Actual vs Expected

Answer 4

The time frame of the review might be too short so there might only be
limited decrements. Lack of data
May have too few data points on claims, etc. to give a statistically credible graduation of the experience.

Question 5

What are the main actuarial decrements?

Answer 5

mortality, morbidity, claim experience.

Question 6

What are two main purposes of analyzing experience

Answer 6

Two purposes of analysing experience can be for management reporting on profit and for modelling improvements.
Management will often want analysis of profit by categories ex: distribution channel, product grouping, geographical area (which will mp to one manager)

Question 7

Name the types of experience to analyse

Answer 7

Demographic, economic, expenses, business volume, profit and return on capital
Note there are links between these

Question 8

Give examples of demographic experience and business volume experience things that could be analysed

Answer 8

Demographic: Claims experience, persistency, lapses, surrenders
Business Volume: Conversion rate of: How many potential customers turn into actual customers.

Question 9

Give an example of links between different categories of experience

Answer 9

Business volume and many expenses - more business means more expenses but also should mean more profit
Profit and all of the other headings

Question 10

What are some sources of deviations in actual vs expected

Answer 10

Mortality, morbidity, withdrawal or lapse - in number or amount
Investment income and gains
Expenses
Inflation
Salary growth
Taxation
Premiums or contributions paid
New business levels

Question 11

What are the key sensitivities in business model for general and life insurers?

Answer 11

General insurance: Key item is claims experience
Life Insurance: Hard to know if its risk or investment business.
General insurance: Key item is claims experience
For risk element: Claims experience and expenses are key
For investment business it is expense and persistence that tend to be crucial.

Question 12

What are the key sensitivities in the business model for pension funds

Answer 12

Relationship between salary escalation and investment performance over the period for DB Pension Funds has direct effect on liabilities.

Question 13

What are the key sensitivities in the business model for banking and health insurance

Answer 13

Banking: default on loans and pricing of credit risk (borrowing vs lending spread)
Health insurance: persistence and claim rates, including (medical) inflation in claim costs.

Question 14

What is significant about pricing of health insurance in ireland?

Answer 14

Insurers in Ireland have premiums set which can only be changed based on their age so everyone aged 30 has to get the same pricing. The insurers avoid this laws by having lots of products with slight tweaks.

Question 15

How to analyze experience: Process

Answer 15

1. Establish the objectives
2. Collect the data
3. Analysis of Actual to Expected
4. Validate results
5. Report the results:

Question 16

How can validating results be done?

Answer 16

Validating results is key but can be difficult: Could use consultants, industry data, recent hires from other companies.

Question 17

How can one get an idea for expected experience

Answer 17

Expected experience is needed to analyse experience
A way to do this is to use a cash flow model, modelling all decrements
We also need all this original analysis to detail all assumptions made.

Question 18

How might one analyse the demographic assumptions

Answer 18

Calculate the expected outcome, under best estimate assumptions in the model. Then compare actual claims with expected or actual lapses with expected.
Compare Actual to expected rates. But generally cannot estimate reliable rates as data too sparse - may need to group data.
Be aware: unusual outcomes whether good or bad could be an issue
Actuarial models typically have demographic assumptions rated by age, gender, and duration and other

Question 19

What issues can arise when analysing the demographic assumptions

Answer 19

Incurred claims/lapses etc that are not reported can occur depending on the timing of notifications.
So some ‘appropriate’ time after period ends is needed before investigation AND make an explicit IBNR estimate
Should also compare long run trends and compare to your demographic experience.
Question arises: How much sub division can data support Balance between credibility and homogeneity.

Question 20

What issues can arise because of data

Answer 20

How much sub division can data support Balance between credibility and homogeneity.
Data needed is : financial amount of occurrences AND the exposed-to-risk for that incidence. Mya have to wait a long time to get this or settle for less accurate analysis.
Audited data is more reliable
If grouping of data is used issues can arise if there is change in the composition fo the exposed to risk (so cannot aggregate data):
Underwriting standards changing with time
Selective lapse experience changing with time
Average premium size changing with time
Policies from different sales channels

Question 21

How might a company analyze its critical illness claims experience

Answer 21

Exploring claim rates experienced vs assumed - may need to group experience is lack of data
Exposed to risk would be average of in force policies
Only dealing with a full year’s exposure with critical illness
Allowance for IBNR claims needed
Only business accepted at standard rates should be included
Experience Net and gross of reinsurance should be looked at
Analysis goals will split data into homogenous groups
Key levels to investigate are: sex, age, smoker status

Question 22

Why might the results of analysis not be indicative of future experience?

Answer 22

Underwriting standards change
Changes in sales process/target market may affect experience
Average premium size may have changed, if analysis is not split by premium size may skew results
Reductions in premium rates over period may have led to selective lapses, worse experience.
Changes in definition of critical illness
Claims admittance standards may have changed
Small volumes of data - may not be credible. Not sufficient data for indication of future trends.
Past trends may be caused by medical advances that will not continue
Future medical advances might improve illness detection

Question 23

What is the largest part of deviation between actual and expected experience usually.

Answer 23

The variation in economic experience accounts for the larger part of the overall financial variation - tends to be systematic risk within the industry which management cannot control.

Question 24

How will the analysis of expenses assumption be carried out?

Answer 24

Compare actual vs expected and then find where abnormalities are.
We wish to attribute expenses to each line of business/each policy
Generally accounts categorise expenses by type of expense and organisational unit. However we need to regroup expenses by product - timesheets?
Expenses usually attributed to number of contracts, except for marketing (relate to commission paid), underwriting and sickness and long term care claims (relate to size of benefit)
You spend more time investigating larger claims

Question 25

Why is the expense analysis so important

Answer 25

This tends to be a big contributor to profitability, gives competitive edge.
Biggest expense for businesses is usually salaries - want to get the msot work for the salaries theyre paying

Question 26

What are the types of expenses we can divide the business into

Answer 26

Commission is normally excluded from total expenses because it is known and directly attributable to each product
Initial expenses
Renewal expenses
Termination expense
Investment expenses

Question 27

What are the main expenses for a business

Answer 27

Salries, property costs, computer costs, inevstment costs

Question 28

What is required in a business volumes analysis

Answer 28

Need to analyse New business and in force business changes.
Important to understand actual vs expected behaviour
If a product is selling well: WHY

Question 29

How is profit analysed for the firm?

Answer 29

Rather than estimate ‘profit’ will estimate a product line’s ‘contribution to overheads and profit’.
Important to see that the product line is at least breaking even.
Key part of profit analysis and return on capital calculations is apportioning capital to different lines of business. Key is to consistently adopt one approach

Question 30

In analysis of ROC why can apportioning capital be difficult?

Answer 30

Apportioning capital to each line of business for analyses is tricky, as there are diversification benefits from having different lines of business that ensure the sum of capital required to support each separate line of business is (materially) higher than the overall capital required.
May assess which of these products are providing the diversification benefit

Question 31

What are some important thoughts to consider when interpreting analysis and experience

Answer 31

Heterogeneity of data
Gradual trends developing
Random fluctuations
New sources

Question 32

What management actions might the results of the analysis of actual vs expected experience prompt?

Answer 32

1. Controlling expenses
2. Reducing number of controls/lapsing/increases renewals.
3. Reduce likelihood and severity of claims
4. Reduce impact of large claims/random volatility in claims
5. Maximise investment return
   6.Effective tax management

Question 33

What does it mean if company goes insolvent? as per regulation

Answer 33

Regulation of insurers require they meet capital standards,
Most likely firm are probably still economically solvent (able to meet the liabilities) but not able to meet the prudent provisions demanded by the regulator.

Question 34

How might regulator intervene if a firm is unable to meet required provisions

Answer 34

May not allow them to write new business
Demands an analysis of what went wrong.
A projection, under several different scenarios
Sale or merger with another insurer.
May wind-up company

Question 35

What is insolvency for pensions since the regulation of pension funds is different

Answer 35

Insolvency of the sponsoring employer or simply unwillingness to continue the scheme will cause it to cease.
Assets will not cover the transfer of the liabilities to a third party (insurer)
So transfer will be an amount of money in some way deemed to be equivalent to the benefits foregone.

Question 36

What are three reasons why valuations may change from a surplus to a deficit

Answer 36

Change in basis, inter-valuation experience and actions taken as a consequence of the previous surplus.

Question 37

What are reasons why change of basis would change valuations may change from a surplus to a deficit - how could one analyse

Answer 37

Run based on previous methods and compare what has changed between valuations.
Basis change can come in many forms: may have changed to reflect expected future experience, realistic assumptions are now different.
Fundamental change in approach maybe, method is therefore less optimistic
May be based on long term stable return and the other on market return.
Future investment returns to be linked to the underlying assets held or those regulator specifies for the liability profile.
The treatment of discretionary benefits could have been tightened up.

Question 38

What are reasons why change in experience would change valuations may change from a surplus to a deficit - how could one analyse

Answer 38

Asset values falling
Taxation privileges may have been reduced
Inflation or salary growth
The pattern of mortality or withdrawal experience could have been adverse
Redundancy or early retirement exercise
Transfers with insufficient assets.
Options or guarantees may have bitten.
Expenses of running the scheme could have increased.

Question 39

What are reasons why some event would change valuations may change from a surplus to a deficit - how could one analyse, what types of events might occur

Answer 39

The benefits for members could have been improved as a one-off cost or ongoing cost
Suspension of contributions to the scheme. surplus may have been refunded to the employer.
Tax must be paid on any
surpluses
May have been unanticipated expenditures
There may have been legislative changes
Data errors in the previous valuation that are now correct.

Question 40

Define underwriting

Answer 40

Underwriting is the process by which life insurance companies divide lives into homogeneous risk groups by using the values of certain factors (rating factors) recorded for each life.

Question 41

How does CLT work in insurance

Answer 41

If a product provider can pool independent homogeneous risks, then as a result of the Central Limit Theorem the profit per policy will be a random variable that follows the normal distribution with a known mean and standard deviation.

Question 42

Give some factors affecting mortality/morbidity

Answer 42

Age, sex, time,geographical areas, social class however these can eb proxies for the real factors causing differences:
Nutrition, Wealth and Income (good proxy for healthcare )
Education,Behaviour , Public, Heath, Medicine, Housing

Being in a couple gives a concentration or risk for certain products

Question 43

Explain how life offices and insurers use selection to their benefit

Answer 43

First, their offerings are often voluntarily top-up schemes to the basic state Benefits, so generally wealthier seek cover
Even before any medical underwriting, these lives are advantaged
Females have lower mortality rates than men of the same age but higher morbidity rates.
Active members in pension scheme have lower mortality as active employment means good health

Question 44

Name types of selection

Answer 44

Class selection
Time selection
Temporary intial selection
Adverse selection
Spurious selection

Question 45

Explain class selection

Answer 45

The population can be divided into classes, for example, male and female. The stochastic models (life tables) are different for each class.E

Question 46

Explain time selection

Answer 46

Time selection: Mortality and morbidity normally varies with calendar time, an effect observed at all ages. Tables based on the experience of earlier calendar years tend to have higher rates

Question 47

Explain temporary inital selection

Answer 47

A group can be defined by a specified event (the select event) happening to all the members of the group at a particular age.
The mortality or morbidity patterns in each group differ from the general population only for the first s years after the select event.

Question 48

Explain adverse selection

Answer 48

Adverse selection (or anti-selection) is the new policyholder taking advantage of inadequacies in a provider’s underwriting and pricing basis to secure better terms than is justified by the risk. Winners curse auction idea evident here.

Question 49

Explain spurious selection

Answer 49

When homogeneous groups are formed we usually assume that the factors used to define each group are the cause of the differences in mortality observed between the groups, however there be other true causes

Question 50

What is mortality convergence?

Answer 50

The variations in mortality rates by many factors are high at working ages…and can have a material financial impact on insurance companies. These variations have been seen to continue after retirement but reduce at the very highest ages: mortality convergence

Question 51

What are the decisions that can be made when presented with a risk

Answer 51

Accept
Declined or deferred
An addition may be made to the standard premium
A deduction may be made from the standard benefit
An exclusion clause

Question 52

What is a key concept in medical underwriting to ensure for costs

Answer 52

Office must ensure expense incurred leads to less of a loss due to better estimate of health of applicants