Many life insurers need to develop their actuarial models to embrace dynamic policyholder behaviour and management actions, according to Milliman.
The actuarial and consulting firm conducted a survey of major insurance companies across Europe, the US, and Japan, asking them about current practice in the modelling of dynamic policyholder behaviour and management actions for life insurance business.
“Realistic modelling of how management may react to future economic and other circumstances (dynamic management actions) is a key aspect of modern actuarial modelling,” says Ed Morgan, principal at Milliman. “This new survey from Milliman shows that many life insurers need to develop their models much further in this area, if projected results are to be fully meaningful.”
Dynamic policyholder behaviour and management actions are becoming increasingly important aspects of modelling as more focus is placed on stochastic calculations and the tails of distributions, according to Milliman.
Solvency II in Europe specifies requirements for dynamic policyholder behaviour and management actions, “so we expect significant work being required of companies in these areas, particularly as this should form a key component of a company’s risk management,” added the firm.
Milliman’s survey results show that many companies are failing to model dynamic policyholder behaviour for key options, while modelling of management actions is also underdeveloped in many cases, “with some key actions not being modelled at all, or in an over-simplistic way, which doesn’t appropriately reflect reality”.
Dynamic policyholder behaviour and management actions predicted by models “should be monitored against actual experience as it emerges, with models being refined over time”, concluded the firm.
