Policyholders may not act rationally and sometimes are not paying
attention. But the agent is and will motivate the insured to take action
because doing so earns money for the agent.
Actuaries are sometimes placed in similar circumstances, such as when they are
asked to opine on the adequacy of assets
to fund future liability cash flows. That is
a binary event. Either they are adequate
or they are not adequate.
Auspices and auguries never thought
about running scenarios. But actuaries
do. When asked to opine on the adequacy
of assets, actuaries can say that they are
adequate 95 percent—or 99 percent—of
the time, depending on how much capital is available and the range of scenarios
studied. Actuaries do this by running
thousands of scenarios modeling future
economic conditions and then factoring
in a company’s behavior to economic
conditions and, ultimately, factoring
policyholder behavior to both economic
conditions and company reactions.
Looking at possible future results using the current methodology does not
deter the actuary and management from
making decisions based on a multitude of
assumptions. One major problem, however, is that the assumptions are often not
founded on a good analytical system for
extracting experience, especially as it is
linked to agents. Very few data warehouse
applications are designed to support
financial-based analytics that relate to the
agents who write the business. Certainly,
policyholder behavior is modeled. But no
one seems to consider agent behavior, and
this is a flaw in actuarial analysis.
Agents are some of the most astute peo-
ple in the world when it comes to guiding
their clients. They usually always work
in the interest of the customer, particu-
larly if it means remuneration to them.
If a policyholder has a deferred annuity
earning 4 percent and another company
is paying 5 percent, the agent will be
aware of this and move to get the better
rate. Policyholders may not act rationally
and sometimes are not paying attention.
But the agent is and will motivate the
insured to take action because doing so
earns money for the agent.
Tracking Agent Experience
Companies that have installed the ability
to track experience by agent have learned
some interesting facts. And they have
saved considerable amounts of money
by learning that some of their agents’
lapse or morbidity experience is significantly different from what was used in
the pricing assumptions. Checking for
fraud, one company tracked experience
by producing agent and compared it with
expected experience. After probing investigations, the company concluded
that even though there was no fraud involved, the target population of certain
agents was generating claims experience
that was materially worse than the pricing assumptions. These companies have
either fired those agents or renegotiated
contracts to bring their compensation in
line with expectations.
The art of prediction has moved well
beyond the time in which pondering
sheep’s livers or the flight of birds was useful in divining the future. In some respects,
however, actuaries continue to base financial expectations on indicators that ignore
the control that agents have on blocks of
business. Actuaries need to look at their
analytical systems and focus on agent experience. This would help improve their
ability to predict the future.
ROBERT J. LaLONDE, a fellow of the
society of actuaries, is vice president
and senior account manager for Insight
Decision solutions Inc.
This article is solely the opinion of its author.
It does not express the official policy of the
American Academy of Actuaries; nor does it
necessarily reflect the opinions of the Academy’s
individual officers, members, or staff.
14 CONTINGENCIES JAN | FEB. 13