MA922: Actuarial Risk Management 2 – Assessment ( October 2017)

MA922: Actuarial Risk Management 2 Autumn 2017

Marked Assessment set by Peter McQuire and Ian Rogers

Feedback and model solution

Overall

You showed that you had worked hard in understanding the material covered so
far in the course. There was evidence in several of the scripts that you had also
done wider reading, or brought in your experiences from your working life.

The key area to work on ahead of the exams is to make sure your answers
focuses on the specific scenario given in the question. For example, if the
question refers to a ‘small insurer, specialising in pet insurance’, your answer
needs to emphasise how to manage the particular issues this company will face.
How does being ‘small’ impact it? How does being ‘specialist’? What significance
is there about ‘pet insurance’?

Many of your answers in this Assessment just gave general comments, that
would apply to any insurer.

This same point will apply in work too. You will of course need to make sure you
are managing your own company’s situation, not that of an ‘average’ company
somewhere in the world.

There are further comments on this below.

Marks across the group were generally good, with the following statistics:

Upper quartile: 78%

Median: 70.5%

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Part (a)
Feedback
Not all points listed below were required to obtain full marks. There were also some
valid points made by students which aren’t listed below.

The main issue with a number of solutions was that they included discussions
surrounding possible solutions – this part of the control cycle is simply identifying the key
areas which you should be researching. Although the question stated “before you start
identifying the risks” a valid point was to still to outline a couple of key risks which you
suspect will form a major part of your project eg falling student numbers

Note that the question asked you to “outline” key areas, so a brief comment on each
area was all that was required

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MA922: Actuarial Risk Management 2 – Assessment ( October 2017)

general info about university - age, size, no. of centres, typical students, balance
between research and teaching, location, corporate governance, transport links (4)
who are the key stakeholders - students, lecturers, employees, managerial staff,
government, taxpayers
types of degree programmes (ie products) - u/g, post graduate, faculties eg medicine,
maths, history
how are courses advertised
how advanced is the IT?
costs – what are the major components eg staff pension costs?, building costs, how do
they compare with other universities?
student numbers and history/trends, split by department/course/post/undergraduate
what are the key basic risks - likely to be losing students, loss of funding, competition,
economic, pension scheme
competition - uk and overseas, also lower education facilities
quality - quality of teaching, entry standards, research, rankings
finances – revenue, profits, and trends/recent changes, split by department and
compared with other universities
regulations relating to universities - limits on numbers, government funding, overseas
students, student loans
plenty of accommodation?
Any unusual aspects of the university? USP’s?
taxation position of universities - do they operate like companies? tax breaks?
which parts of the economy may affect the university eg interest rates, inflation,
exchange rates
links with industry

part b
feedback
This part was answered well by most students. Don’t just use this as another test – put it
into practise in future presentations you do and for reports you write. Perhaps use it as a
checklist (and add to it) for each presentation you do.

 The role of the client is and, if the client has more than one role, in which role the
client is being briefed on the results.
 The communication should be made in a way that ensures the client understands.
Avoid jargon; also the method of communication must be appropriate eg
report,email etc
 It will also be necessary to check that the client has fully understood the main points
of the briefing.
 The results should be set out in an unbiased manner – unless the client has been asked
for a clear recommendation.
 You should include pros and cons of the key options
 The results should be presented in a way which shows how the investigation has
addressed the problem posed but should not be so cluttered with information that the
client will have difficulty in seeing how the results have been arrived at.
 Similarly, the assumptions made and the areas of risk and uncertainty which arose
in the course of the investigation should be clearly presented - but again the clarity
should not be lost by being overwhelmed by the amount of detail.

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MA922: Actuarial Risk Management 2 – Assessment ( October 2017)

 Any issues which arose during the investigation which could reduce the
effectiveness or the validity of the solution, eg difficulties in gaining accurate data,
should also be made clear to the client along with the impact of such issues.
 The actuary will also need to show to the client how the results help to provide an
optimal solution to the problem posed.
 Your work may produce more issues for investigation. You should highlight where
further issues have arisen and require additional work.
 the advice may not be appropriate to other stakeholders or in other
circumstances.
 Throughout the communication the actuary should take account of any and all
professional guidance on the content and format of reporting the results of
professional actuarial investigations.

1 mark for any well made point

2 Feedback

(a) Most of you were able to come up with (at least) two marks worth of
ideas about the characteristics of the target population.

Note that I wasn’t looking for information about their needs, or general
reasons why they might buy the policy. However, it was useful to link
their typical characteristics to how that may impact the provision of
insurance. For instance, if referring to a typical characteristic as being
‘highly educated’, then make the link to ‘they may have a general
understanding of the benefits of insurance, and how policies work’.

(b) It was useful to group your ideas here into the different reasons why
data may be collected. One approach you can think about:
- data that is needed administer the policy (name, term, sum assured,
bank account details, dependent contact details)
- data that gives you general information about their longevity risk (eg
postcode, age). Note that several of you said gender would be used
to set individual premiums. That is not the case in the EU, where
gender neutral pricing applies. However, gender would still be a
relevant data item as it would be used in reserving / assessing claims
experience.
- data that gives you info about an individual’s risk (own medical history,
family medical history)
- data that helps you test for insurable interest (level of assets,
dependents’ details, other insurance held)
- data that helps you assess the likelihood they will take up the increase
in sum assured every 5 years (eg income levels, dependents’ details)

You will see there is some overlap between these data items eg

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MA922: Actuarial Risk Management 2 – Assessment ( October 2017)

dependent info has several uses. You can therefore discuss these
data items as being useful for several reasons.

(c) It was important here to focus on the specifics of this situation: an

insurer writing a new product, but which has experience of writing a wide
range of other products. There will therefore be no data directly related
to claims experience about this policy. You therefore need to explain how
it will make assumptions in light of this.

There are two particular areas to cover: the policy focuses on a particular
type of policyholder, who may have different mortality experience than
policyholders in general; the policy has the option to increase cover – so
you need to model how many of them will take up this option.

Remember to focus on what you are told in the question about the type
of policy and the policyholders. They are Partners in professional firms in
the EU. Many of you talked about other types of individuals, including
miners, police, people who live in Japan, and the malnourished. It is
unlikely that Partners in professional firms in the EU are also any of these
other things.

(d) This leads on from (c). In the earlier part, you will have identified a
difficulty setting assumptions for this new policy, and so being reliant on
external data, or margins. Therefore in (d) you would note that over
time, your knowledge of your experience of these policies will improve
over time, so you become less reliant on industry experience, and more
reliant on your own – and with less need for margins for uncertainty.
You can also note there may be changes to experience eg because of
general trends in population mortality over time.
(e) Again here, I was looking for you to focus on how to reserve for a new
policy. Many people just talked about fitting models against data,
maximum likelihood estimation etc. For a new policy, where there is no
past data, you need to be clear what you are fitting against.

Specimen solution

(a) age: typically 30-50 1

income: high, with a potential for further increases, so likely to want 1

high levels of sum assured

wealth: likely to have built up a significant level of wealth 1

healthy: likely to be healthier than the population as a whole – 1

despite the possibly sedentary and stressful work

max 2

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MA922: Actuarial Risk Management 2 – Assessment ( October 2017)

(b) data about the product taken out – term, sum assured, start date. 2
Needed for pricing and administration of the policy

basic risk information: eg date of birth / age. Needed to help set the 1
general longevity risk

health: body-mass index, current health conditions, past health 2

conditions. Needed to assess the likely mortality risk of this individual

health: family medical history. 2

Needed because some medical conditions which affect mortality are
inherited.

data about wealth: occupation, salary, assets, liabilities. 2

Needed to help assess the insurable interest eg is a potential
policyholder looking to over-insure.

Also useful for helping us cross-sell other products to these

policyholders.

contact details: eg address, name, details of dependents, bank 2

details.

Needed to administer the policy

lifestyle: participation in dangerous sports, smoking, alcohol 2

Needed to assess the likely mortality risk

max10

(c) The challenges here are that we are focusing on a particular type of 1
policyholder, and that we are giving an option to the policyholders

Relating the mortality assumption to this group of policyholders:

Consider data we have in relation to similar policies we have written 1

in the past

from that data, look to subdivide it, to identify experience in relation 1

to those similar to the new policyholders eg the high-earning
policyholders in other policies we have written

also look for industry data in relation to high-earning individuals, or 1

relationships between experience for high-earners and others

use this external information to help guide how to adjust standard 1

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MA922: Actuarial Risk Management 2 – Assessment ( October 2017)

industry data for the particular target market we have

modelling the additional risk from the take-up of the option is more 1
difficult

however, could assume that all those who are ‘less healthy than 1
standard’ will take up the option

use experience from existing policies to understand what proportion 1

of policyholders are ‘less healthy than standard’, and how their
experience compares with ‘standard’ mortality

are also likely to consider use of margins to assumptions to reflect the 1

uncertainty

consider also changes in experience since any past data was 1

collected, and any allowance for future changes over the period these
assumptions will be used.

also consider any legal requirements: are we required to use 1

particular assumptions (eg gender neutral pricing in this case)

max 8

(d) as we gain more experience of this product, we will be able to revise 1

our assumptions, to place more reliance on our own experience, and
less on industry data

also, less need for margins for uncertainty 1

We may also see general changes to experience eg population 1

improvements in mortality as a result of improvements in medical
care

max 3

(e) As we already operate a range of products, we are likely to model the 1

new product’s reserves using an existing reserving model, adapted for
this product

The key issues will be the option to increase benefits, which will 1
require additional coding, and different assumptions compared with
models for other policies

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MA922: Actuarial Risk Management 2 – Assessment ( October 2017)

Coding changes will be checked line-by-line, and by running test- 1

cases through the revised model

And the output of the new model will be checked compared with a 1
similar existing model, to check for consistency

Alternatively, we may start from the pricing model for this new 2
product, adapting it to calculate reserves, using new assumptions

max 4

3. Here, the most productive way to score marks seemed to be to use

headings to focus on the key factors that would influence a decision between
internal and external development of models. Once you have identified the key
factors, you can then say how internal and external development would meet
each of these decision factors.

Several of you used headings of ‘internal development’ and ‘external

development’ and then discussed advantages and disadvantages of each. This
didn’t quite answer the question asked.

Again, it was important to focus on the specific information given, and not just
reproduce general notes on model development. What is the relevance of it being
a company that wants to provide ‘cutting-edge advice’? How might the fact that it
covers SE Asia and Australia impact? Would this lean more towards internal
development or external development?

Specimen solution

Costs: 2
- the cheapest option is likely to be to update a current internal
model, as it is building on existing work. Most expensive would likely
be to purchase a purpose-built external model. However, a ‘standard’
existing external model is likely to be cheaper than developing our
own from scratch

Reason for change of model 2

- how much do we need to change in the existing model? If not
much needs changing, this supports updating the existing model,
rather than seeking an external model

Desire for ‘cutting-edge’ advice: do we need to look externally for 2

such a product? Or would this then lead to us have the same product
that others in the industry have, and hence we are not ‘cutting edge’

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MA922: Actuarial Risk Management 2 – Assessment ( October 2017)

Appropriate for our market: we advise life and general, in several 2

different countries. Is there an external product available – or a
provider capable of developing one – which can cover all of these
markets? This may lead to internal development being required.

Ongoing flexibility: if we are likely to want to extend or develop the 2

model of time, will external providers allow us to do this ourselves, or
would we be tied in to their development programme.

Availability of expertise: do we have the expertise internally to make 2

the changes? Are there external providers who can do what we are
looking for?

max 8