Back to Basic - Movement of Policy (MOP)

If you ask me what a fresh graduate should learn first when he joins your actuarial department, I will definitely answer he needs to learn movement of policy (MOP).

In my view, MOP is the basic of all actuarial studies - it is about how a policy " behaves" during the entire life cycle, i.e. from when the policy is set in force until the policy is terminated (including maturity / expiry). By having a good understanding in MOP, it will be easier for us to visualize the relevant cash flows occur during policy term - especially when we setup an actuarial model to project cash flow. When I setup the Takaful Library for my client, the "base" variables I setup first are MOP related variables.

From what I learn from friends in the industry, many companies are struggling to get the "correct" MOP statistics - which are known as L6, L7 & L8 for conventional insurers and FT5, FT6 & FT7 for takaful operators (namely "New Business", "Termination/Alteration" & "In Force Business" respectively). These statistics are the most widely used statistics (especially in measuring industry performance & competitor analysis), unfortunately they are normally done by junior staffs without adequate guidance from their seniors (perhaps used to be the seniors' nightmare previously) to improve/correct the MOP statistics.

Well, in case you are looking for some info on how to preparing these statistics, I hope the summarized write-up below can provide you some insights. For the purpose of reporting, normally we will compile statistics on no. of policies, sum assured and annualized premium.

1. New Business (L6/FT5) - all new policies issued during the current reporting month. You should refer to the issue date of the policy instead of effective date / risk commencement date. By right, issue date should be the date when a proposal is converted to in force status.
    
2. Termination / alteration (L7/FT6) - all policies terminated & reinstated during the current reporting month, or the changes (i.e. alterations) done on the in force policies.
   
   Types of terminations are (1) maturity/expiry, (2) lapse (due to non-payment of premium / exhaustion of funds), (3) surrender (voluntarily withdrawal), (4) free look cancellation, (5) cancellation due to other reasons such as non-disclosure or administrative errors, (6) claim (that terminates policy, such as death, accelerated total & permanent disability (TPD) and accelerated critical illness (CI)).
   
   Alterations refers to (1) reinstatement, (2) the changes done on sum assured amount and premium amount to the in force certificates, (3) addition/termination of riders.
    
3.  In Force Business (L8/FT7) - the in force policies which are considered as in force as at end of the month. You may find out the "in force" policies may have various policy statuses, such as "In Force (normal premium paying)", "In Force (premium waived)" and "Paid-up", "Reduced Paid-up (RPU)" and "Extended Term Insurance (ETI)".

Hence, I think now you can easily understand the important MOP equation above - let's take no. of policies (NOP) as the example:

• NOP at beginning of current month (also NOP at end of previous month)
• Add: New business acquired during current month
• Minus: "Net" Terminations occur during current month (Termination NOP - Reinstatement NOP)
• Equal to NOP at end of current month

The same concepts apply to sum assured and premiums. Of course, the actual actuarial reporting work require more considerations - which I will share in my subsequent articles. You are most welcomed to your opinions/ideas on MOP here as well.

It depends...

If you ask someone: "Do you think you can complete all required tasks by this evening?" and the answer you get is "Well, it depends...", do you feel irritated? I would say most of us will answer "Yes", as it is not much different compared to not getting any answer at all!

This was one of the most valuable lesson I learned from Mark Saunders, the speaker of Presentation 4: "Actuaries and communication skills -- an oxymoron? Some thoughts and tips", during Jointly Regional Seminar 2011 recently held in Kuala Lumpur, Malaysia (19-20 July 2011). I totally agree with Mark that "it depends" is a really bad answer that does not give any meaningful / value-added feedback to the person who is looking for answer - especially if we would like to make the CEO upset.

I posted Mark's "it depends..." in my Facebook and my friends shared with me other irritating ways of answering a questions, such as:

• "I will get back to you ..." which most of the time no feedback after the meeting ends.
• "See how things go..." which also have the same meaning as "I don't feel like giving you an answer now..."

OK... I admit I used to answer in these ways before and I already promise to myself I will avoid these words in the future. Oops... Is this how you upset your bosses as well?

Talking about Claim

I have a great discussion with the HOD of life claim department this afternoon, and I have learned plenty of things. I always like to talk to the HOD of claim department (either in the previous company or current company I work), as he/she shares a lot of real life examples which make make me know better how insurance works in reality, and the problems and challenges he/she faces in managing insurance/takaful claims.

Actually, the main purpose I had the discussion with the HOD was to understand how the claim process is carried, so that later the system development team starts working on the claim module enhancement, the problems the claim assessors facing now (that related to system) can be resolved together. Well, I am glad that he shared some real life cases with me during the discussion, helping me to understand better how he & his staffs assessed claims.

I always agree that claim department is an important “gatekeeper” of insurance/takaful companies, apart from the underwriting department. Theoretically, claim assessor should only pay claims if the disabilities/events meet the definition in the contract and he should reject the claim if otherwise – unfortunately, this is too ideal in practical. Although some claims do not meet the definition stated in the contract, the customer may complain to some body/regulator or take legal action towards insurance/takaful companies, which eventually the insurance/takaful companies have to pay the claims which are initially rejected.

The reason we have contracts for insurance/takaful contracts because we want to properly draw up the exposure under a certain products, so that we can set the premium rates accordingly – if an insurance/takaful is very “lenient” in paying the claims (i.e. still pay claims even though the disability/event doesn’t really meet the definition stated in the contract), eventually the victims are the policyholders – they will have to pay a high premiums to cater for high claims. Insurance/takaful companies are not welfare bodies and they definitely will not charge low premiums for high claims.

If you find out an insurance/takaful company accepts risks easily and pay claims generously, and you are actually a healthy life, I would urge you to think twice if you intend to purchase a policy from that company… Remember you are the one who pay claims.

Chat with an Actuarial Junior Staff

I have a chat with my ex-staff, J, last Friday in UAT Room. I was assisting the Business Analyst (BA) in supervising the new product User Acceptance Test (UAT), and Jeff was one of the user from Actuarial Department.

Since J joined the company, he has been working in the system implementation team – well, in short, most of his work is to carry out UAT for new products and migrated products. I asked him: “How long you have been here already?” He answered 2 years, and he hasn’t had any chance to really involve in other actuarial works like pricing and valuation. I was a bit worried with his limited experience – I told him it was high time for he to start to learn other types of jobs, as he doesn’t even have any experience in preparing the statistical reporting (like new business report & termination report) or experience studies (like mortality study and persistency study). The situation will be more difficult when he becomes a senior executive but doesn’t know how to really do a junior executive’s work.

J seemed to be not so agree with my opinions… He told me some more senior actuarial people told him that it is OK to work in other areas for a few years and switch to Actuarial Department later, just like Ms. S who has been working as an underwriter before she joined actuarial department. I respected their opinions, but I told him I have another view: when Ms. S graduated from the university, the supply of actuarial talent was very low, hence she did not face any obstacle in switching to actuarial field; however, the current environment (in Malaysia’s actuarial industry) has changed, the supply seems to exceed the demand, especially for fresh graduates. If J continues to do system work for another year without learning any pricing/valuation work, I’m doubt if any other employer will pay a senior executive salary when he gets a pricing/valuation job in other companies – especially if he has passed many papers.

We didn’t really have any concrete conclusion for our conversation… Well, there is no right or wrong answer. But I do really hope he will progress well in his career.

Prophet Modeling (4): How did I setup my Takaful Library?

Hooray, I finally completed the Takaful Library! Working together with Ms. H, we finally setup the Takaful Library from scratch and created 32 “Products” (and another 19 “Same As” products). I am glad that the Valuation Team (headed by my ex-boss Mr. R) can now using a consolidated workspace to do the actuarial studies, especially asset share study and reserve & liabilities capital charges for new valuation basis and Risk-based Capital (RBC) submission.

After around 4 months of hard work, finally I can really sit down and “document” this exercise. I will share the experiences I have in this article and several subsequent articles later – hopefully they can help to provide some ideas to you…

The above flow chart summarizes the approach I used to complete the Takaful Library project for my Client:

Approach Papers
I started the project by preparing documentation (Excuse me, I think I heard someone just shouted “Oh no!!”…), which I generally called them as “approach papers” for convenience. There are few documents to be prepared a this stage:

1. Product documentation
   To document the product features and product specific rates that are required in the model.  I only documented those required in the product setup – I didn’t spend time to document items such as exclusions of a products.
    
2. Model approach
   To document how the model should be setup, such as movement of policy, cash flow, asset share, profit/surplus declaration and others. You also need to document the simplifications/assumptions used to setup the model – for example, I did not create a separate movement of policy for riders, i.e. assuming the policyholder will not terminate a rider while the base plan remains in force. Such assumptions need to be documented so that users and future Prophet Managers are aware of these assumptions (instead of wasting time to study the model all over again).
    
3. Reserve approach
   To document how the reserves (e.g. statutory reserves) & solvency are calculated. I did not combine the “reserve approach” and “model approach” in a single document because “reserve approach” is product specific and it requires more frequent updates.

These documents are similar to the BR (Business Requirements) of IT projects. However, I didn’t request my Client to sign-off the documents as we definitely need to further enhance the documents along developing the models (instead of wasting time on too many formalities).

Modeling
Although my focus was to develop the Takaful Library in Prophet, I still setup the similar model in spreadsheets – spreadsheet modeling is the basic form of actuarial modeling that every actuarial people should know.

The spreadsheet models are mainly used to check the results produced by Prophet. They helped me a lot in detecting errors which were difficult to identify by reading the variable definitions.

Of course, spreadsheet models were easier to be reviewed by my Client.

Review & Validation
As mentioned above, I used spreadsheet models to validate my Prophet results. In fact, I also reviewed the variable definitions one-by-one – I printed out the definitions on recycled papers (more than 200 pages!!) and went through every single definition. I admit that this was a very painful exercise.

The review & validation exercises were split into 2 stages: (1) single model point; (2) portfolio. The single model point run used spreadsheet models to validate the Prophet results (the differences due to different ways of rounding are extremely small); while portfolio run was done by my Client using the in force data for annual valuation exercise, mainly for reasonableness checking.

Apart from using a single deterministic scenario, ideally we should do sensitivity testing for single model point run & portfolio run as well – however, due to time & resources constraints, I only managed to do very limited sensitivity testing, mainly on movement of policy.

Sign-off
Of course, sign-off was the final stage of this project – my Client & I needed to sign-off not only on the Prophet Library & workspace, we also needed to sign-off documents. I have also prepared a “project closure document” to summarize what we have achieved in this project – this project was considered after we provided sign-off for this document.

I will share my experience learned from this project in more detailed in my coming articles. Feel free to provide your comments & suggestion.

More Heart Attack during World Cup Tournament?

Are you a hardcore football fans? Are you extremely stressed when you are watching the match which the team you support is about to lose? If your answer is "Yes", you better take care your heart well during the World Cup Tournament...

I learned an interesting fact during a seminar yesterday, i.e. a study reported that during World Cup Tournament time, hospital admission from people having heart attack increases tremendously due to emotional stress - the example given was when Argentina beat England in a penalty shoot-out during the 1998 World Cup, there was a 25% increase in hospital admissions for heart attacks in England (You may refer to "Can Watching Soccer Give You a Heart Attack?" for details).

Oops, look like football can appear as a hazard which affect the losses arising for health / critical illness insurance...? (I never understand how the emotional stress is because I have no interest in football...)

Prophet Modeling (3): Something About Documentation

I was a bit surprised when Ms. Z called me. She asked me for a favor if I could provide a brief explanation on how actuarial modeling is done, especially related to Prophet – because she needed to review of the actuarial modeling processes.

“OK, I can only share with you whatever I did in the past. But you need to check with Actuarial Department for the latest practice they have.” I am no longer with Actuarial Department, hence I couldn’t say on behalf Actuarial Department – furthermore, there is a new leader for the Modeling Team. What I could do was only sharing my past experience when I did my reserve workspace and simplified asset share workspace.

I met Ms. Z the next day, together with her colleague (Oops, I didn’t ask what her colleague’s name is…). I explained how Prophet works in a very brief way, so that they could have some ideas how Prophet helps actuarial people doing the job. “Then what were the documentations you had when you setup the actuarial model in Prophet?”

Yes, it was really a good question. I was trained by my previous Appointed Actuary to have a proper documentation in most of the works I have done – my AA told me: “You will not be forever here and other colleagues who take over your work in the future will not know what you think now”. So what are the documentations I had when I developed those workspaces?

1. Approach papers – this document states the methodology I would like to adopt when I setup my Prophet model. In this document, I listed the assumptions (not the projection assumptions we use to project cash flows) and formulas used to calculate a certain value. For example, I prepared a document explaining how the model calculated the statutory reserves for a mortgage plan.
   
   This approach paper could be “product specific paper” (like reserve paper) or “general paper” (for the calculations which the formula didn’t vary by product, such as asset share calculation).
    
2. Spreadsheet – Based on the methodology I stated in the approach paper, I also prepared a spreadsheet model so that I could use to counter check with the results generated by Prophet – for a single model point record. I found out this was very useful in helping me to detect the errors/mistakes which I didn’t realize when I checked the coding (I have to admit that checking spreadsheet was easier than checking coding). Of course, this spreadsheet was setup using recursive method like Prophet.
    
3. Reconciliation – Before I setup the Prophet models, the valuation work was done by an actuarial consultant. When I did my reserve workspace, I managed to reconcile the results generated from Prophet to the model the consultant used, and the major differences were explainable (e.g. the consultant used annual projections and the interpolations; Prophet used monthly projections). The comparisons were documented properly – so that we understood the impacts of changing model.

This reconciliation is particularly important if we discover any errors in an actuarial model, so that we can understand the impacts of correcting the errors, the implications to the financial statements (if any) and also learned a lesson (and not to repeat the same error in the future)!

Of course, there were some other documents I have prepared for the users and the developers, such as training manuals and user manuals. I agree that doing documentation is a painful experience but you will find out that the documents will help you a lot in the future – especially dealing with the auditors. It’s very true, trust me.

Prophet Modeling (2): How to Organize Variables?

During my discussion with Mr. L & Ms. H on Prophet modeling, I briefly touched about how to organize variables more efficiently into various Variable Groups (from A to Z).

In the existing reserving workspace and simplified asset share workspace (deterministic models) which set up by Ms. H & I (also Ms. B) previously, we also split the Variable Groups into “core variable groups” and “input variable groups”, which is similar to the standard Conventional Library. The major different between our approach and the standard Conventional Library is we have the same type of classifications for both core variables & input variables – i.e. A-M for core variables, and N-Z for input variables.

For example, we have created Variable Groups for decrements like mortality rates – say we used Variable Group “D” (the 4th alphabet starting from A) for core variables (D – Decrements (C)), and similarly we use Variable Group “Q” (the 4th alphabet starting from N) for input variables (Q – Decrements (I)). This is because for the same types of variables, they can appear as either core variables or input variables:

1. The variable used to define the valuation mortality table needs to be an input variable because different valuation mortality tables may be used for different products.
   
2. The variables used to calculate monthly mortality rate (i.e. 1-(1-qx)^(1/12)) needs to be a core variable because the same formula is used regardless of the valuation mortality table used (i.e. generic for all products).

Of course, we also use different way classifying the variables – which we think to be more helpful in term of managing the variables systematically. For example, we have a variable for policy profile which most of the variables are read from model points – such as entry age, gender and sum assumed. “Systematic” is very important especially once we have more and more variables in our library.

Prophet Modeling (1): Some Thoughts on Setting Up Takaful Library

I had an hour chat with Ms. H & Mr. L on Prophet Modeling yesterday. Ms. H is my ex-staff when I was the leader for the Modeling Team, she is quite brilliant in helping me setting up the Prophet models (simplified) the Valuation Team currently uses; while Mr. L is my replacement. The objective of the short chat was to exchange some thoughts on how to proceed the work to model a comprehensive cash flow projection model for the Takaful business.

Well, although I have partly did the projection model before I resigned from Actuarial Department, I suggested to Mr. L that he should start setting up the model from scratch – instead of continuing from my partially complete model or doing amendments from the Conventional Library. Well, doesn’t this consume more time? This sounds correct if we only have a quick thought, but if we really make a thorough consideration, actually setting up the model from scratch is easier and more efficient.

Let’s talk about doing amendment from Conventional Library first. When I was with my previous employer, the Prophet model I used in my valuation work was modified from the standard Conventional Library. I told Mr. L (who also previously worked in a conventional insurer) that it was alright for the models we used previously to use the standard Conventional Library as a base, because how the conventional insurance business works is close to what the standard Conventional Library has modeled. Mmm… The takaful business doesn’t work the same way as the conventional insurance business (not only different naming for the terms to be used) – modifying the standard library may take more time and may even tends to have more errors – furthermore, there are variables in the standard library that we may not have any idea what they are. Hence, it is better to create the Takaful model from scratch.

How about modifying from my partially complete model? In my view, Mr. L may have his own modeling philosophy and it may not be right to force him to follow my modeling philosophy – unless I have completed the model. Furthermore, he will have better control on the Prophet model he is going to setup – most importantly, he will have better understanding on what he is doing. I remember that one of the appointed actuaries I have worked with commented that there was a tendency that actuarial models worked like a “black box”, which the actuarial people who used the model didn’t understand how the model really worked. Consequently, many mistakes happened here and there in the actuarial analysis – and the errors were EXPENSIVE.

Mr. L also told me that he has some other tasks on his plate, apart from setting up the Takaful model. “Mmm, this is no good.” I commented honestly. Setting up model requires full focus, especially if he has a limited time to complete the model. I even told him that he should even lock himself up in a separate room which doesn’t have interruption.

“Otherwise, you will be in the same boat…”