Category Archives: Insurance

Capital management in a Solvency II world: A non-life perspective

Insurance and reinsurance companies have charted a new approach to capital management. The financial crisis has shown that undertakings cannot assume that capital will be readily available as and when it is needed and, even if it is available, it may not be accessible at the right price. Solvency II will change the way insurance and reinsurance undertakings determine their regulatory capital requirements, as well as introduce new rules with regard to what forms of capital can be used to meet those requirements. As a result, Solvency II will bring about both challenges and opportunities for undertakings. This paper aims to address some of the key issues for insurers and reinsurers with regard to capital management in a Solvency II world.

Milliman Solvency II Readiness Assessment Tool first industry survey: Ireland – Life Assurance

Milliman developed the Solvency II Readiness Assessment Tool to help companies prepare and plan for Solvency II. The tool is designed for life and nonlife direct writing and reinsurance companies. It enables companies to rate themselves using a range of detailed questions covering the full scope of Solvency II. A score of 5 identifies areas that are 100% ready, whereas a score of 1 identifies areas where no progress has been made.

Thirteen life companies based in Ireland shared their current levels of preparedness. In this briefing, Milliman’s Andrew Kay and Mike Claffey have consolidated the results to give an overall idea of the issues facing companies.

EIOPA announces more details on 2014 Europe-wide insurance stress test

In October 2013, the European Insurance and Occupational Pensions Authority (EIOPA) announced its intention to undertake stress testing of the European insurance industry in its 2014 work plan. They have now (20th January) updated their website to give more details on this insurance stress testing exercise.

The stress testing exercise is expected to include:

• Market risks under a combination of historical and hypothetical scenarios
• Insurance risks
• Impacts of low yields and low interest rates

EIOPA plans to consult with the industry in March 2014 and launch the Europe-wide stress test exercise by 30 April. National Supervisory Authorities (“NSA”) will collect and validate submissions by 20 June for onward submission to EIOPA. EIOPA currently expects to publish the results in November 2014.

As in previous stress testing exercises, each local NSA will be responsible for identifying and contacting individual insurers for inclusion in the exercise. It is not clear at this stage which insurers will be asked to participate in the stress testing exercise.

A link to the EIOPA 2014 insurance stress testing timetable and process is here.

If you have any questions or comments on this eAlert or any other aspect of Solvency II, please contact your usual Milliman consultant.

Disclaimer
This e-Alert is intended solely for educational purposes and presents information of a general nature. It is not intended to guide or determine any specific individual situation and persons should consult qualified professionals before taking specific actions. Neither the authors, nor the authors’ employer, shall have any responsibility or liability to any person or entity with respect to damages alleged to have been caused directly or indirectly by the content of this e-Alert.

Recapping insurance industry’s 2013 with a look ahead to 2014

In this interview with InsuranceERM (subscription required), Milliman’s Neil Cantle and Elliot Varnell reflect on key issues impacting Europe’s insurance industry in 2013. They also discuss some challenges the industry may face in 2014.

Here’s an excerpt from the interview:

What will 2013 be remembered for?
Varnell: I would suggest that it was the year that Solvency II was finally “agreed” at the top level after a few years of debate and wrangling between the Council, Commission and Parliament.

Ironically, it was also the year when economically based regulatory capital was to some extent de-emphasised as the PRA published on Early Warning Indicators (see IERM, 4 October) and the FSB announced its G-SII list (see IERM, 19 July) and kicked off a project through the IAIS to come up with a global metric for regulatory capital (see IERM, 12 December.)

But also the year that many insurers – especially life insurers – rebalanced their focus away from Solvency II and regulatory capital and turned to looking for the best opportunities for value creation in their business. The refocus on product development and investment in infrastructure stand out as examples of areas that insurers have re-focused onto value creation.

What will be the biggest ERM challenge of 2014?
Cantle: I think many firms are still struggling to bring ERM to life and make it truly operational. If ERM is done simply as a compliance exercise then it can cost a lot of money and simply be a burden. If it is done to bring insights to the business and improve the opportunity for discussion about performance uncertainty then it can improve resilience and add significant long-term value to the business. The challenge is therefore to look beyond templates and documentation and make it strategic. Concepts like risk appetite require a multi-variate view of performance, so that indicators are seen in context, and many firms still cannot do that.

Lack of management action plans may leave European insurers exposed

This Risk.net article (subscription required) highlights Milliman’s “Dynamic policyholder behavior and management actions survey report”. In the article, Ed Morgan discusses how the absence of management action plans by European insurance firms can lead to shortcomings in governance. Here is an excerpt:

The majority of European insurers are not formally documenting how management teams plan to respond to changing economic conditions and are not modelling the impact of such management behaviour in stress scenarios, a survey has found.

Only five out of 20 European firms currently possess an official plan listing the actions management will take in certain economic scenarios, according to the survey by actuarial consultancy Milliman.

This is despite such plans being a requirement for European insurers under the Solvency II directive.

Ed Morgan, managing director of Milliman’s operations in Italy and Central Eastern Europe, says not having well-documented management actions is a governance issue, as well as being an issue for modelling and financial reporting.

“The absence of management action documents and model functionality can sometimes be because firms haven’t fully appreciated their importance,” says Morgan. “But you could also argue that sometimes management themselves might prefer not to be subject to this high spotlight governance in case it makes it harder to justify the actions they take in real life after the event.”

… The reason why some European firms have to do model management actions, despite regulatory pressure, is unclear, says Morgan.

“One thing may be lack of awareness of how modelling management actions can materially improve results. If you model management actions in an overly simplistic way, then they’re very likely to be suboptimal under various stress scenarios, and likely to overstate required risk capital,” he says.

The way companies are organised may also play a part in how management actions are modelled, says Morgan. For example, the actuaries that are building the model may not be close to the personnel setting investment decisions. “So when it comes to modelling management actions in regards to investment decisions, one set of people have one view on what they’re doing, another set of people are doing the modelling, and potentially a lack of communication and of understanding prevents a proper linkage being made between the two,” Morgan adds.

Dynamic policyholder behaviour, management actions, and life insurance

D Clark - J  Kent - E  MorganMilliman has just published a new report summarizing the results of a recent survey of current practice in the modelling of dynamic policyholder behaviour (DPB) and management actions (MA) for life insurance business.

There are 56 companies represented in the survey, across Europe, the United States, and Japan.

The survey revealed some interesting results. For instance:

• For variable annuities/unit-linked with guarantees, only around 50% of respondents model at least one type of DPB. This increases to 85% for other types of products (what we have termed “traditional” products).
• Of respondents offering guaranteed annuity options (GAOs) on traditional products, only around 16% of respondents were modelling them with dynamic take-up rates.
• Around 60% of companies have monitored DPB experience against that predicted by their models; of these, almost half say their models predicted experience well.
• Most companies in the United States and Europe model assets and liabilities, the interactions between them, and some type of future investment strategies (a form of MA) for certain classes of business. However, future investment strategies modelled are often oversimplistic, for instance being invariant to economic conditions.
• Only a minority of companies hold a formal documented plan for management actions. Most companies also don’t monitor actual management actions against those predicted by their models.
• Actuaries were the most prominent group involved in setting modelled MA rules, followed by investment and risk management professionals. Other professionals were more rarely involved.

DPB and MA are becoming increasingly important aspects of modelling as more focus is placed on stochastic calculations and the tails of distributions. In particular, Solvency II in Europe specifies requirements for both DPB and MA, so we expect significant work will be required of companies in these areas, particularly as they should form a key component of a company’s risk management.

Market turmoil in recent years across various regions highlights the importance of working to understand and model how management may react to such scenarios. However, the survey results show that many companies are failing to model DPB for some key options. Modelling of MA is also underdeveloped in many cases, with some key actions not being modelled at all, or in an oversimplistic way that doesn’t appropriately reflect reality.

DPB and MA predicted by models should also be monitored against actual experience as it emerges, with models being refined over time.

To download a copy of the DPB and MA study, click here. For further information email Jeremy Kent.