Managing Risks Persistency Case Study

2. Managing Risks – Persistency Case Study Persistency – Percentage of an insurance company’s already written policies remaining in force, without lapsing or being replaced by policies of other insurers. Since persistency is a critical factor in the viability and success of insurance companies, they constantly look for ways to increase this percentage. www.businessdictionary.com What is persistency? When Liberty’s problems became public in 2009 a journalist said that “persistency was a term coined by actuaries to confuse the public”. Definition is deficient in that it doesn’t include premium paying What is persistency? When Liberty’s problems became public in 2009 a journalist said that “persistency was a term coined by actuaries to confuse the public”. Definition is deficient in that it doesn’t include premium paying

3. The Problem Rate of policies lapsing/surrendering had increased gradually over a number of years Significant increase in 2008/2009 Data was not available at a sufficiently granular level to identify trends Focus was on sales, not retaining policies Actuarial assumptions were behind the deteriorating experience On one book of business the ultimate surrender assumption had doubled between 1997 and 2008 Did not know what was giving rise to reduced persistency – initially thought that economic climate had significant effect Management reluctant to commit significant resources until they understood the reasons for the problem Sales gives increased number of policies over which to spread expenses Assumption setting policy was to try and smooth out variations but did not allow for trends On one book of business the ultimate surrender assumption had doubled between 1997 and 2008 Did not know what was giving rise to reduced persistency – initially thought that economic climate had significant effect Management reluctant to commit significant resources until they understood the reasons for the problem Sales gives increased number of policies over which to spread expenses Assumption setting policy was to try and smooth out variations but did not allow for trends

4. Persistency Assumption Losses due to operating variances and assumption changes amounted to R1.2bn in 2008 (EV loss of R2bn) Further losses of R1.6bn in 2009, mainly in H1 (EV loss of R2.3bn)Losses due to operating variances and assumption changes amounted to R1.2bn in 2008 (EV loss of R2bn) Further losses of R1.6bn in 2009, mainly in H1 (EV loss of R2.3bn)

5. The Investigation Built system to track persistency monthly By Product, intermediary, duration Interview clients who are surrendering/lapsing Engage intermediaries

6. The Conclusions Intermediaries are driven to maximise their income Evidenced by churning and commission choice Policyholders generally follow the advice of intermediaries Significant correlation between persistency and experience of intermediary Churning is the practice of replacing one policy with a new similar or identical one so that the intermediary receives initial commission again New intermediaries generally have lower persistency rates than longer serving intermediaries Churning is the practice of replacing one policy with a new similar or identical one so that the intermediary receives initial commission again New intermediaries generally have lower persistency rates than longer serving intermediaries

7. The Actions No initial commission paid on replacement policies Management focus on retaining policies Removal of intermediaries with poor persistency rates Incentives for intermediaries to improve persistency rates Review of products Sales force needs to be managed Retention initiatives include regular communication with clients and offering clients alternatives to surrendering/lapsing policies (premium holidays, reduced premiums, paid up, etc) Products must be relevant to needs of clients (product that was relevant 10 years ago might not be relevant now).Sales force needs to be managed Retention initiatives include regular communication with clients and offering clients alternatives to surrendering/lapsing policies (premium holidays, reduced premiums, paid up, etc) Products must be relevant to needs of clients (product that was relevant 10 years ago might not be relevant now).

8. Persistency Assumption Losses due to operating variances and assumption changes amounted to R1.2bn in 2008 (EV loss of R2bn) Further losses of R1.6bn in 2009, mainly in H1 (EV loss of R2.3bn)Losses due to operating variances and assumption changes amounted to R1.2bn in 2008 (EV loss of R2bn) Further losses of R1.6bn in 2009, mainly in H1 (EV loss of R2.3bn)

9. The Results Unintended consequences – less risk policies sold - more recurring premium investment policies sold Intermediaries still need to earn a living Economy didn’t seem to make big impact on withdrawalsUnintended consequences – less risk policies sold - more recurring premium investment policies sold Intermediaries still need to earn a living Economy didn’t seem to make big impact on withdrawals

10. Lessons Learnt The quality of the data defines the quality of the assumptions Assumptions must be a joint agreement between the actuary and management Assumption setting policy must not be too rigid Don’t be afraid of taking action early – it forces management to take action Lessons for setting best estimate assumptions under SAMLessons for setting best estimate assumptions under SAM