Tag Archives: Dominic Clark

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.

Managing operational risks

As companies implement Solvency II programs, operational risk, often seen as a catch-all for ‘other’ risks, is being recognized as having greater impact than was previously realized.

Modeling and management of operational risks—and preparing companies to be more robust to these risks—are now seen as a key aspects of sound insurance management.

Operational risk is also moving up companies’ agendas because the capital charge under the Solvency II Pillar I standard-formula calculation is a rather crude measure—it is essentially based on business volumes. While this has the benefit of simplicity, it may lead to what could be considered excessive capital requirements and falls short of the principles underlying the Own Risk and Solvency Assessment (ORSA).

A new white paper by Milliman consultants provides a brief summary of how companies are currently approaching operational risk under Solvency II, and offers some suggestions for improvements using innovative techniques.

Here is an excerpt from the paper:

The modeling and management is rapidly moving up companies’ priority lists as recognition is growing of the potentially lethal nature of these risks, their often inherent unknowability and, if nothing else, the significant capital charges that can emerge from the standard-formula approach.

More sophisticated approaches are becoming available that not only integrate the modeling and management of operational risk but also generate insights into the complex risk stream running unseen through the bedrock of a company. This approach allows appropriate risk mitigation and increasingly robust measures to be developed and embedded into business processes.

Download and read the white paper here.