Chapter 32 - Policy Data Checks

Question 1

List the checks that would be used to verify the policyholder data used to calculate the policyholder liabilities [2]

2017_S2

Answer 1

Checks include:

• Reconciliation of current data with data from previous valuation using data movements
• Check data movements against accounting data (e.g. movements off with claims paid).
• Consistency checks (e.g. average sum assured for each class of business is sensible and consistent with values from previous valuation).
• Check for unusual values (e.g. unreasonably large sum assured or low premium).
• Spot checks for accuracy for individual records using other records and administration files.

Question 2

The company’s actuary has just extracted policy data from the company’s database to perform the annual valuation and prepare the company’s financial statements including the balance sheet and income statement for the year.

Accounting information and information from the fund manager have also been received for the preparation of the financial statements.

ii. List 4 items of accounting information and 4 items of fund management information that you expect to have been received by the actuary. [2]

2022_s2

Answer 2

Accounting information:
Revenue account:
* Premium income
* Investment income
* Charges collected (from premium and unit-linked)
* Claims outgo (death, maturity, surrender)
* Expenses outgo (commissions, life office costs)
* Tax outgo

Balance sheet
* Asset values (including current assets)
* Accountign provisions (including current liaibilities)

Fund management information:
Overall and per fund if more than one fund

• Asset values for the fund (including a breakdown of holdings and their values)
• Investment income (e.g. dividends, interest, rental)
• Capital gains (realised adn unrealised)
• Net cashflows received for investment or paid out (e.g. to meet claims)
• Transactions costs paid from fund assets

Question 3

For the past fifteen years a life insurance company has sold unit-linked single premium investment bonds. It regularly reviews the pricing of this contract by performing profit tests.

To date it has assumed in its profit testing that the surrender rate is a level 3% per annum in each projection year.

The company has recently performed its first surrender rate experience investigation for this product. It has used data on surrenders that occurred during the previous calendar year. The data was split by the duration that each bond had been in force.

The results of the investigation are as follows:

curtate duration (in years): | Annualised surrender rate
0 : 6.8%
1 : 4.5%
2 : 4.7%
3 : 4.2%
4 : 4.4%
5 : 9.7%
6 : 3.9%
7 : 3.4%
8+ : 1.9%

Discuss the next steps that the company should take in light of these results, including further investigations that might be required and possible changes to the profit testing surreder rate assumptions [18]

(you are not required to discuss ways in which the actual surrender rate experience could be managed)

~2008 - s1 - uk

Answer 3

Validation

• The company needs to check that ther are no errors in the calculation and data, particularly since this is the first time that it has been done for this product.
• it needs to check that the data is complete
• In doing these validations, it should look at both the data on surrender rates and the data on total exposure.
• It should check that all of the data is in respect of this product only
• It could be use a recent analysis of surplus to check if the surrender profit / losses are consistent with the surrender experience shown.

Credibility
* The company should consider the amount of exposure for each of the in-force durations..
* It should then decide whether the experience investigation results are credible
* For example there might be very few bonds sold more than 8 years ago , which would make the 8+ results unreliable.

Relevance

• The surrender rate assumptions used in profit tests should reflect the future expected experience in respect of these contracts.
• The company therefore needs to decide whether this historic investigation is a fair reflection of future expected experience.
• ~
• It therefore needs to consider whether any changes have been or will be made which might reduce the relevance of historic experience. such as:
• -
• Product design and / or charging structure
• Distribution channel
• Target market
• Investment performance

~

The company should consider whether any external influences might have affected surrender rate experience during the past calendar year such as:
* Economic environment
* Level of competition in investment bond marketplace

It also needs to consider the extent to which these external influences are expected to continue.

Trends

• The company has only one year’s worth of experience analysed and so it is not possible to identify trends in surrender rates that might be expected to continue in future.
• ~
• The company should therefore perform further investigations of previous years’ experience, and repeat the analysis in the future.
• This depends on historic data being available
• This additional analysis will also help to help to give credibility to any proposal

Assumption changes
* Based on the limited analysis performed, the surrender experience would suggest that the magnitude of the profit test assumption should be changed, since the average is very different from the 3% per annum currently assumed.
* ~
* There also appears to be some variation in experience by duration in-force, and so the profit test approach migh be changed to reflect this, rather than continuing to use a level assumption throughout the whole projection period.

Comments on specific durations
Curtate duration 0:

• there is a significantly higher rate in the first year
• Hence the first year rate should be increased e.g. to 7%
• However, it needs to be checked that the experience data does not include policices which “cool off” at very early durations and simply receive their premium back under statutory lay and so which do not consititute a normal surrender.

Curtate duration 5:
* The experience suggest a significant increases in surreders at curtate duration 5
* This might be a feature of the product desing, for example surrender penalties being removed after the fifth policy anniversary
* if this is the case and it is supported by previous years’ experience (if available), then the profit test should reflect this higher surrender rate.
* However if there is no apparent reason for the spike and it occured only in the last calendar year, the company might choose to average it across other durations

Curtate duration 8+:
* For policies of over 8 years in-force, the surrender experience appears to be lower than that assumed.
* Given that bonds have been in-force up to fiften years, then if there is sufficient volume of data available it would be useful to split this figure into individual years in order to see whether there is any marked trend by increasing duration.
* Particularly since around 65% of policies might be expected to continue in-force beyond this duration.

Other durations:

• The surrender rate appears to be higher than assumed and it would therefore be appropriate to increase the assumptions, for example to 4.5% per annum for the second to fifth projection years.

Other considerations

• The profit test assumpiton of 3% per annum might include a prudential margin, in which case the proposed changes would be even greater
• ~
• if that is the case then the cost of changing the system will have to be weighed up against the benefit of the possible increased accuracy
• ~
• The company should consider whether other assumptions should also be reviewed in light of this investigation, such as those used in the valuation of in-force business or in reserving calculations.
• ~
• The company should look at the sensitiviy of profit to changes in the surrender assumption
• ~
• The company might wish to look at industry-wide experience for this type of contract, if available
• ~
• The company might wish to carry out further investigations, splitting the data by other factors (e.g. distribution channel or size of policy)