Why do companies need help with experience analysis? It seems so simple, and often the data and reports involved are processed in the same way every year. On the other hand, is there something your company may be missing?
Is it possible that there is a more efficient way to evaluate experience data? What about whether or not the analysis is consistent with Department of Insurance (DOI) requirements for rate increase justifications? More globally speaking, does your experience analysis lead to actionable conclusions for management to evaluate?
We have found many companies are not setting up administrative systems to capture appropriate data for experience studies. Or, in other cases, the systems only allow for limited extraction of data. In almost all cases where data is limited, we have found that the effort required to correct the deficiencies is not as significant as it initially appeared. Unfortunately, once a process is established, it can be hard to devote resources to make system changes. The solution is usually as simple as having actuarial, finance, and IT staff come together and communicate more openly.
Many times, actuarial staff need to be more flexible and creative with their request. Too often, we see actuaries requiring a rigid and complicated format, which results in IT and systems departments to scope out a huge undertaking to create or change the data files. In reality, actuarial staff might be able to take raw data along with decoding logic to create their own databases. While this solution might be less than ideal, it can get the job done until broader system changes can be made. As consultants, we do this type of work all the time with our clients.
Mortality & Morbidity Studies
Most companies are updating these experience studies periodically to be used for anything from determining company budgets and cash flow projections to also doing pricing, reserving, and appraisals.
However, do we always use the same studies for different purposes? Maybe not.
A good example would be cash flow testing versus an appraisal. Cash flow testing is performed to evaluate adequacy under moderately adverse conditions. But, if you are selling a block of insurance, you want to use the most aggressive assumptions you can reasonably justify.
Another example is the use of mortality or morbidity improvement, which is often not allowed for reserve assumptions, but could be reasonably supported for pricing or block valuations.
It’s important that studies are not just updated periodically as part of an internal process. But rather, you want to make sure you have clearly defined the purpose and audience for the results of these studies.
Considering Rate Increases
The ultimate result of an experience analysis could be justification for filing a rate increase with state insurance departments. For a variety of reasons, the requirements in each state jurisdiction change over time. In recent history, the requirements for justification have become more detailed. If you have a block of long-term care (LTC) insurance, then the data needed is very extensive. We have significant experience preparing the filing information needed to obtain rate increases.
What We’ve Seen in Our Practice
Coming into new client work, we have received the results of internal experience studies or work done in prior years from outside sources. In some cases, the results have beautiful detailed output, allowing the client to view the results in every way imaginable. While this sounds great, the big picture can often get lost. It’s wonderful to have the ability to review many levels of detail, but the question becomes, what are you going to do about it when you find trends in the detailed results? The reality is that if you can’t stand in front of senior management and make a good argument for changing (or setting) an assumption, then you need to step back and look again. It may take a little artistry to reasonably compile experience to get credible and actionable results. And, if necessary, industry data can be used to supplement company experience.