Project 1: Predicting Financial Impairment Among Life Insurers Luckily, financial impairments in the life and health insurance industry are rare occurrences with an average yearly frequency of 0.83% over the past forty-five years. However, the failure of an insurance company can have disastrous impact on policyholders, shareholders, employees, other insurance companies, creditors, the general public, and the overall economy. Moreover, given the nature of M Financial’s business, evaluation of counter-party credit risk is a high priority. It is important for the M Financial to be able to evaluate the financial stability of a life insurer and to detect indicators for possible future financial distress. Toward that end, they asked that our students perform statistical analysis of publicly available data from A.M. Best in order to identify indicators of downgrades or insolvency. It is a statistically difficult task to predict such an infrequent event; working with highly imbalanced data presents unique challenges. Using the Random Forest Classification Algorithm, a reasonably modern data mining technique, we: Project 2: Credibility Methods for Life Insurance Credibility theory is important for actuaries as it provides a means for using company- or group-specific experience in pricing and risk assessment. While credibility theory is used widely in health and casualty insurance, it is generally not used in life and annuity business. The 2009 report sponsored by The Financial Reporting and the Product Development Sections as well as the Committee on Life Insurance Research notes, “The major conclusion from this survey of 190 US insurers is that credibility theory is not widely adopted among surveyed actuaries at United States life and annuity carriers to date in managing mortality-, lapse- and expense- related risks.” Actuarial Standard of Practice 25 (ASOP 25) recommends that credibility theory be used and provides guidance on credibility procedures for health, casualty, and other coverages. In 2013, the Actuarial Standards Board revised ASOP 25 to include the individual life practice area; thus, it will be important for life actuaries to start to use credibility methodology. Moreover, credibility theory is increasingly important for life actuaries as the Standard Valuation Law (SVL) is changing to require that Principle Based Reserving (PBR) be used in conjunction with the traditional, formulaic approaches prescribed by state insurance regulations. PBR relies more heavily on company-specific experience; thus, it will be important for actuaries to have a sound credibility methodology. There is a proposed ASOP for PBR that places significant emphasis on credibility procedures. Finally, M Financial’s voluminous data show that M clientele exhibit better mortality and lapse experience than the general population. It is critical that M have clear and compelling credibility methods as they work with carrier firms on pricing proprietary products. Our charge was to: The two main credibility methods are Limited Fluctuation (LF) Credibility and Greatest Accuracy (GA) or Bühlmann Credibility. LF Credibility is easy to apply as it requires only company-specific data, but the method has many shortcomings. GA addresses these shortcomings, but it requires experience data from other companies as well; as a result, it is rarely used in practice. We performed LF analysis on the client’s experience data and computed credibility factors. In addition, we did a qualitative comparison of the LF and GA methods on a simulated data set and made recommendations based on our observations. Credibility Methods for Individual Life Insurance (Submitted for Publication)
