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IAI Actuarial Core Principles · Business Management · Using data, company functions, people skills, influence and clear communication

An actuary at a Mumbai life insurer is preparing a lapse analysis for the product committee. The data set shows that policies sold through one agency channel have a much higher lapse rate, but that channel also sells mainly to younger customers in lower income bands. The committee proposes closing the channel immediately. What is the most appropriate response from the actuary?

The actuary should present the channel lapse result alongside a breakdown by age and income and explain that these factors may account for part of the difference. The channel's higher lapse rate is a correlation, not proof of cause, so immediate closure is not justified.

  1. ASupport closure, because the lapse rate is clearly caused by the channel
  2. BIgnore the age and income information because it complicates the message
  3. CPresent the channel result together with a breakdown by age and income, noting that these may explain part of the differenceCorrect
  4. DReport only the overall company lapse rate to avoid confusion
  5. Recommend collecting no further data as the existing data is sufficient to prove causation

Explanation

The channel is correlated with other factors (confounders). Showing the breakdown lets the committee see whether the channel effect persists after allowing for age and income. Assuming causation, as in the first option, is the error the scenario invites.

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