As part of the our new series on life insurance you have already seen extracts of Challenges in Life Insurance Marketing by Rizwan Ahmed Farid that are being serialized on a weekly basis at FinanceTrainingCourse.com. Given the interest we receive from actuarial students, we are now running another special on actuarial valuation of life insurance liabilities. Our first post starts off with data requirements for such an engagement.
Life Insurance Valuation Data Requirements
Any actuarial valuation exercise begins with data. Obtaining data of sufficient quantity and quality is an essential, though often a consuming part of the valuation process. In terms of the life insurance valuation process data requirements may include:
- Plan of insurance or product type. It is vital to have detailed descriptions of the plan benefits, including non-forfeiture / surrender benefits, if any, for each product offered by the company. Valuation methodologies differ based on the underlying benefit structure of the plan. To accurately estimate the policy reserve values we must first understand the obligations that a plan creates for an insurance company.
- Terms and conditions of policy contract. In order to evaluate the expectations that a given policy contract may create for a policy holder it is important to review the terms and conditions provided to a policy holder when a policy is issued. These expectations may need to be taken into account for calculating the contingency obligations.
- Number of policies in force: For each product, issue year, issue age, term, premium paying term, premium paying frequency and gender cohort we would required the number of policies in force as of the date of valuation. These groupings would ensure that reserve values are determined appropriately for a given cohort as well as that each group is accurately represented in overall policy reserves.
- Issue year / issue age and gender: The mathematical calculation of policy reserves in general involves determining the excess of the present value of future benefits over the present value of future premiums. We discount the future benefits and future premiums for not only the time value of money but also for the probability of survival/ death. To determine the appropriate mortality factor for a given cohort we therefore require the issue year, issue age and gender. The latter is required because mortality experience is different for male and female insured lives and the valuation formula used may either employ separate gender wise mortality tables or rate-downs for female lives. For policies that cover both lives we would require details for both policyholders/ insureds.
- Sum Assured per policy: For each product, issue year, issue age and gender group we would require the sum assured or face value of the policies in that cohort. The sum assured is the amount at risk; the amount that is used to determine the benefits and office premiums.
- Term of the policy: Period of time under which the insurer is obligated to cover the policy holder/ insured under the terms of the contract.
- Office Premium: For each product, issue year, issue age and gender group we would require the basic office premium (as in premium applicable to a standard life on the base policy), total office premium including extra premiums for substandard lives and premiums on riders (such as accidental death benefits, additional term insurance riders, etc). We would also require the premium basis used by the life insurer for determining their office premium rate schedules. We would also require the premium term and premium paying frequency.
- Bonus amount: For each with-profit product, issue year, issue age, term, premium paying term, premium frequency and gender group we would require the guaranteed bonuses accrued/attached to date on the policies in that cohort. This bonus will be included in the present value of future benefits calculations. In addition to the accrued bonuses, we would also require the insurer’s past history of bonus distribution. In some instances even when bonuses are not guaranteed, obligations may exist when past practices raise policyholders’ reasonable expectations (PRE) regarding future bonus distributions. Case in point is terminal or persistency bonuses that are paid to reward policy holder’s who make timely payments of premiums and keep their policies current.
- Movement in policies during the year: Besides product, issue age, issue year, term, premium paying term, premium frequency and gender –wise details (number, sum assured, basic office premium, extra premium, bonus, etc) for in force policies as of the valuation date, we would also require this data for, new policies issued, renewals, lapses/ surrenders/ paid ups, deaths, etc during the year. This will help to separate those policies which have decayed and will not be included in the valuation process. Also it will help in assessing the lapse and mortality assumptions used in the premium setting process as well as how effective the insurer is in maintaining and sustaining current business.
- Reinsurance ceded: To evaluate the extent to which risk is passed onto the reinsurer.
- Expenses/ Expense ratios. We would require (preferably plan-wise), initial expenses, renewal expenses, renewal expense charge as a percentage of premium, renewal expense charge as a per policy amount. This will help in identifying the effectiveness of management in handling expenses and whether expense margins in premiums are appropriate.
Investment or asset portfolio details: To determine solvency of the insurer, the assets will need to be assessed against the liabilities to see if they are sufficient to meet the insurer’s obligations. To value the life insurer’s asset we would require, the complete investment portfolio details such as the composition of the portfolio, i.e. instrument type, date of issue, date of Purchase, date of Maturity, Coupon, Yield to maturity, Face value, latest book value, Holding and Accounting Classification. If investment is delegated to an asset management then portfolio report would also be helpful.