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.