Chapter 35

Question 1

List the reasons for monitoring the experience

Answer 1

• Develop asset share (investment returns, expenses, mortality/contingency, withdrawals)
• Update assumptions of future
• Identify trends and take corrective action
• Provide management information

Question 2

List the reasons for doing an analysis of surplus on a supervisory basis (6)

Answer 2

DANCe To Regulations
* Show the financial effect of a divergence between AvE
* Show the financial effect of new business
* Identify non-recurring items of surplus for with-profits business
* Check valuation data and methods
* Provide management with trend information
* Comply with regulatory requirements

Question 3

What kind of management information an experience analysis provide? (3)

Answer 3

• Profitable products, markets and sales channels
• Efficient sections of business
• Success of investment strategy

Question 4

List the reasons for an analysis of embedded value profit (7)

Answer 4

PREM-Value
* detailed Published information (company accounts or parent company)
* Reconcile EV values for successive years
* Executive remuneration package
* Management information ( incl. value of NB, financial effect of A v. E)
* Validate data, assumptions and calculations used in EV calc
* To be consistent with the reporting being performed by competitors.

Question 5

What kind of information can we gather from an analysis of embedded value profit? (4)

Answer 5

• value of new business
• impact of free assets on embedded value
• impact on minimum solvency capital requirements on achieved return
• Amount of mortality, expense and withdrawal profit/loss

Question 6

What are the pros and cons of an insurer using BIG DATA? (7)

Answer 6

Pros:
* helps with underwriting
* targeting good risks
* pricing

Cons:
* reputation risk => privacy and protection
* misuse could lead to fines
* expenses
* could be inaccurate, irrelevant and incomplete

Question 7

Describe how data is subdivided for mortality analysis (7)

Answer 7

• Age
• sex
• contract type
• smoker/non-smoker
• source of business
• duration in force
• location

Question 8

Describe how a persistency analysis is done (12)

Answer 8

Step 1:
* choose an appropriate time period and collect relevant data

Step 2:
Subdivide data into:
* sex
* age
* sales method used
* premium size
* premium frequency
* term of contract
* duration in force
* target market

Step 3:
For each group, calculate the persistency rate
= (#surviving the year)/(#in-force @beginning of year)
and cumulative persistency =(#surviving the year)/(#in force @outset of contract)
* Then exclude deaths and maturity if they are substantial

Step 4:
* Present results appropriate for the use of the information

Question 9

Describe how an expense analysis is done (12)

Answer 9

Expense analysis will exclude commission because they are loaded by formula

Step 1:
* Decide on an appropriate time period:
* if over multiple years= expense inflation must be accounted for
* if over 1 year it will take into account seasonal effects
* if under a year it wont

Step 2:
Subdivide data
* Either into direct and indirect
* Initial, renewal, termination, claims, investment
* accounting fund or main product line
* single premium vs regular premium

Step 3:
For each expense item split them and load them appropriately for each product

Step 4:
* reconcile the results by summing the expenses for the new +in force + terminated products with the sum of expenses on published accounts

Step 5:
* compare these with previous years, adjusting for expense inflation
* compare with industry as well

Question 10

Describe how an expense analysis would be done on salary-related expenses (5)

Answer 10

For those direct to one product, that would be simple and they would be loaded either per policy, SA or prem

For direct expenses but on many products:
* use a time sheet them load per policy, prem or SA

For indirect salary expenses
* use a pragmatic approach
* load per policy
* either as a %of direct expenses
* # of new business or renewal staff they serve

Question 11

Describe how an expense analysis would be done on on property expenses (5)

Answer 11

If these are owned in the long-term fund:

Then they are indirect expenses
* use a pragmatic approach
* charge a notional rent which includes water, heating, property tax, electricity, etc.
* these would be loaded per policy
* can be attributed as a % of floor space occupied

Question 12

Describe how an expense analysis would be done on computer expenses (5)

Answer 12

There would be some that are direct to many products:
* amortise the costs over the useful lifetime of the machine
* charge per policy
* can be loaded as a % of computer usage

The indirect costs like ongoing ones:
* pragmatic approach
*loaded per policy
* as a % of computer usage

Question 13

Describe how an expense analysis would be done on investment expenses (3)

Answer 13

These are direct costs
* load them as a % of funds under management
* or a reduction in yield

Question 14

Describe how an expense analysis would be done on one-off capital costs (3)

Answer 14

Amortise the cost over the capital’s useful lifetime
Take pragmatic approach
Load per policy

Question 15

Describe how an expense analysis would be done on exceptional items (3)

Answer 15

These would be excluded from an expenses analysis
Rather allowed for in a margin directly
OR increase risk discount rate

Question 16

What can the results of an experience analysis be used for? (18 )

Answer 16

IMP^2RO^3Ve R^2ESULTS C
Updating actuarial models
Model office work

*Investment strategy
* Marketing & distribution changes
* Pricing basis + product design
* Reinsurance arrangements
* Operational efficiency =staffing, systems, and data recording
* Valuation / reserving basis

R
Retention + risk management
* Expense control or resource adequacy checks
* Sales procedure or channel adjustments
*Underwriting basis refinements
* Launching new or redesigned products / changing product mix
*Terms and wording of policy contracts
* Surplus distribution and capital strategy (raising or reallocating capital