What are the main reasons for monitoring experience?
- To ensure that premiums and reserves are set at appropriate levels.
- To update assumptions for future experiences.
- To monitor any trends in experience.
- To use as information for managers to make business decisions.
- For management to see potential profit sources and opportunity to correct profit inefficiencies.
- To compare actual experience to the assumed experience, and see if corrective action needs to be taken.
What is the purpose of analysis of surplus?
On supersize me, they have a competition to see which ass can have most money stuffed into it. Only the new Mandela money was used, as it was the only money the business could get access to. The people who had to stuff the money on the show were actually neuro divergent but were making tons of money and could only appear on the show once. They got this money in data and Chequers written out by John from the valuation team. The profit could only be split if there was never a recurring episode of the Supersize me played again otherwise regulation would immediately declare company loss making.
- Expose which assumptions are more financially significant.
- Show the financial effect of writing new business.
- Show the financial impact of divergences between the valuation assumptions and the actual experience.
- Provide a check on the valuation data and process, if carried out independently.
- Identify non-recurring components of surplus to enable appropriate decisions to be made about the distribution of surplus to:
- with-profits policyholders so entitled (if the health insurance is written within a wider long-term business fund)
- to shareholders (if a proprietary company)
- to members (if a mutual organisation).
- Comply with regulatory requirements.
What is the purpose of analysis of embedded value profit?
- To provide insights into the value generated by the insurance business over time.
- To assess the profitability of the insurance contracts.
- To help in the comparison of performance with other companies.
- To identify the sources of profit and loss.
- To aid in strategic decision-making regarding product pricing, reserving, and capital management.
How can the results of experience analysis be used?
- To adjust future pricing and reserving assumptions.
- To improve underwriting standards and guidelines.
- To identify areas for cost control and efficiency improvements.
- To refine risk management strategies.
- To enhance product design and benefits offered.
- To support regulatory reporting and compliance.
How will PMI claims experience data be analysed?
Data Collection:
- Collect data over a long enough investigation period to ensure credibility.
- Ensure the investigation period is not too long to avoid outdated data.
Divide Data into Homogeneous Groups:
- Sufficient data in each group to be credible.
- Combine cells if data is insufficient.
- Determine groups based on:
- Age and gender of PH.
- Duration since policy purchase.
- Benefit plan (e.g., simple or comprehensive).
- Smoker status of PH
- Underwriting decision of PH.
Calculate Claims Incidence Rate:
- For every risk group, for every benefit class k, calculate total claims divided by number of exposed years to get the incidence rate.
- Compare incidence rate to pricing assumption.
Calculate Average Claim Amount:
- For every risk group, for every benefit class k, calculate total claims amount divided by number of claims.
- Compare average claim amount to pricing assumption.
Analyze Trends:
- Consider any once-off trends.
- Consider seasonality.
- Consider IBNR or claims outstanding.
- Consider inflation and compare to index.
How will CI claims experience be analysed?
-Investigation period should be long enough to collect credible data but short enough to ensure data is up-to-date and relevant.
- obtain claims data but date incurred, broker down by CI, or by discipline if PMI (GP, SPECIALIST, hospital etc)
- Remove outliers and add IBNR claims using run off patterns.
- Determine appropriate exposure per month using join and lapse dates.
- Divide data into homogenous groups according age, gender, benefit size etc.
- For every group calculate total claim cost/exposed to risk.
- Allow for inflation.
- compare this to pricing assumption and to previous year
- Look at claims incidence rates for different diagnosed conditions.
- Consider impact of medical advancements and technology.
- Look at escalation of claim costs in comparison to various indexes.
How can experience analysis results be used?
- Improving the pricing basis
- Establishing / revising the reserving basis
- Changing / improving the marketing message
- Revising sales procedures in terms of training and selection of distributors, wording and format of literature and the mechanics of any commission payments and clawback
- Providing for the adequacy of staffing (numbers and competence)
- Revising underwriting processes
- Revising claims handing processes
- Altering the capital allocation methodology
- Improving the systems and data recording processes
- Revising policy design
- Improving wording of policy contracts
How can expenses be monitored?
*Know expenses e.g. salary costs, computer costs etc.
*Exclude commission as this is allowed for explicitly
*Subdivide non-commission costs into required “cells” depending on function e.g. initial, renewal, termination, claim and investment
* Split by expense driver: per policy, per premium or sum assured
*Some expenses can be allocated directly to a particular cell
*Other may need to be allocated otherwise:
*Staff expenses may need to be subdivided between cells using timesheets
*Overhead expenses may need to be allocated pragmatically e.g. in proportion to direct expenses
*Property expense can be allowed for by charging a notional rent to each department in proportion to the floor space occupied, then allocated to the different cells in proportion to the department’s salary costs.
*Costs of new computer equipment can be spread over their future expected lifetimes and then allocated to departments in proportion to usage.
*Investment costs would be subdivided by asset class and usually allowed for by a reduction in yield for each class.
*One-off capital costs would be spread over the expected future lifetime of the item, then just treated as an overhead.
*Exceptional expense items may be ignored in the analysis, but their future incidence may be allowed for in margins in the future expense assumptions or risk discount rate.
*Reconcile results (sum expenses for in-force and terminated policies over all policies) with total expenses in published accounts
*Compare results to previous expense investigations, including inflation
*Compare results with industry rates to identify possible problem areas
What are the different ‘assumptions’ that we monitor?
NICE RAMP
- New business rates
- Investment return rates
- Claims experience
- Expenses
- Renewal rates
- Analysis of surplus
- Mortality/ Morbidity rates
- Persistency analysis
