Table of Contents
Identification of the problem
Analyze and implement the solution
The actuarial controls cycle is based on the following principles:
Finding a company problem
Addressing or analysing a problem in order to find solutions
This process is repeated when a new problem arises, or if solutions do not work. The cycle is therefore a constant.
All of this is done as part of actuarial calculations.
Identifying ProblemsIn regards to the reserves set by life insurance companies, business have determined that there are many uncertainties surrounding the figures. These include data error, risks associated with underwriting, assumptions made and regulatory environment. These uncertainties can lead to companies paying more than they reserved, which could impact their profit or even cause them to go bankrupt depending on the magnitude of the difference. Under-reserving may result, for example, when not all information from an analysis of a financial portfolio was considered. If we make too conservative assumptions about mortality and the table does not accurately represent the target population we may underestimate our death costs. Also, there could be instances where expenses were not allocated properly according to the policy or inflation was not correctly assumed. In all these situations, reserves may not be sufficient to cover future liabilities.
Analyze and implement the solution. One way that businesses have approached this issue is by examining the impact on reserve if the assumptions are higher than expected. It is possible to perform stress and sensitivity testing. So, the company can look back at its past to determine the degree of variance. This is one way of addressing the problem by adding a risk-margin to the reserve. It acts as a cushion if actual experience exceeds the calculated reserves. It ensures that the company will be prepared for any unforeseen circumstances.
Regulators also assist in this area by ensuring all reserves of the company are at least 75% confidence. In general insurance, this is referred to by the term 75% probability.
Monitoring ExperienceIt’s one thing setting a level of risk, and another to ensure it’s realistic for your business, yet sufficient. This is especially true for businesses who are always expanding their portfolio. Monitoring experience is important for a number of reasons.
Understanding the trends behind emerging experiences and the factors that facilitate them;
Develop a trend and history of experience with time.
Profit analysis is a tool that can be used to help you.
It is important to communicate with different stakeholders, including regulators, shareholders and management.
This result would interest shareholders as they’d want to know what drove the profits and the management would need to be able justify the high risk margins set for the company. In an ideal world, risk margins should be high when the company’s business is dominated by a high risk area. The analysis of experience helps businesses to review their assumptions. The risk management team can also focus on the emerging trends and analyze them, and then speak with the relevant team for efficiency. So, risks can be managed. Businesses can, for example investigate why their lapse rates increase faster than they anticipated. If the economy continues to perform poorly, a business may decide to review investment contract guarantee rates.
This process allows a company to decide whether or not it wants to reset its assumptions and risk margin. This process is crucial for ensuring data quality.
When determining the level of risk, we must also consider factors that affect our work. We must consider the regulatory opinion on risk margins, as well as what inflation rates or interest rates we expect to occur in the future. The majority of life insurance contracts have a long-term nature. Therefore, the discount factor is crucial, especially in long-term contracts. When deciding on the assumptions, it is important to consider our physical environment and any possible outbreaks of disease.
ConclusionRisk management is a good way to reduce risk. In a way, allowing for such risks helps a business to avoid insolvency. Before deciding on the level of risk-margin to be used, it is important to identify and analyze the risks that are associated with the company.
The risk margin can be used in many other areas as well, including in pricing, economics, and embedded valuation calculations. This is important for a company that wants to know the value of a new business.
The risk margin is the amount of profit declared. Margin of Surplus is used when the liability that best estimates will increase during the year of a change. This reduces the profit margin. The liabilities should be fully recognized as soon as practicable, ideally during the year in which premiums were earned. So, the provision for future claim payments is made before they are due. The risk margin affects not only initial profits or losses, but future profits as well. A portfolio without a suitable risk margin can overstate profits, which could lead to insolvency.