Tag Archives: Elliot Varnell

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.

Milliman’s enterprise risk management thought leaders recognised

Neil Cantle and Elliot Varnell are among the ten actuaries to receive the Chartered Enterprise Risk Actuary (CERA) qualification from the Institute and Faculty of Actuaries “in recognition of their exceptional roles as thought leaders in the field of enterprise risk management.”

Here is an excerpt from the official press release:

Philip Scott, President of the Institute and Faculty of Actuaries said:

“This award not only recognises the major contribution these individuals have made to thought leadership in the field of Enterprise Risk Management, but also their commitment to embedding ERM within industry practice.

“There are now 108 CERA qualified actuaries working in a wide variety of roles. From regulators and consultants to insurers and asset managers, the CERA qualification is proving an invaluable asset to actuaries as they apply their skill-sets to new challenges

“Our new ERM thought leaders will act as ambassadors for both ERM and the CERA qualification, impressing on both actuaries and the wider business community the value of the qualification.”

Solvency II presents challenges on management actions

Milliman’s Elliot Varnell, Jeremy Kent, Russell Ward, Russell Osman, and Andrew Gilchrist published a new paper on InsuranceERM.com assessing the implementation of management actions (subscription) to reduce technical provisions and capital charges by firms as well as their desire to carry over credit previously taken for these actions into Solvency II.

Here is an excerpt from the paper discussing the modelling of management actions:

In order to take credit for management actions, the actions need to be reflected in the model used to calculate the best estimate. This can be challenging where actions depend on the solvency of the insurer, creating a circular logic in the calculations which need sophisticated techniques to solve or model simplifications to remove the circularity.

There may be a number of actions available and the action, or actions, taken will depend upon the circumstances applying at the time. Some modelled management actions may not be undertaken in circumstances where the model assumes they will be taken. In this case, the board will need to consider whether it remains appropriate to take credit for that action and regulators may well seek justification from firms wishing to continue to take credit for such actions.

There may also be some non-modelled actions which will be available to the insurer in adverse circumstances. For example, a mutual insurer will need to reduce, or remove, discretionary policyholder benefits in significantly adverse circumstances to meet minimum benefits guaranteed to all policyholders. If the mutual is currently well capitalised, then it is unlikely to be modelling such an action, because the consequential reduction in liabilities and capital would be small. That is, the implicit margin included in the reserves by not modelling that action would be small. However, if capital becomes constrained, then the implicit margin would increase and it is likely the model would be enhanced to include that action.

For more insight about management actions and how they provide a crucial link between Pillar I and Pillar II of Solvency II, read this research paper on dynamic management actions.

Model limitations for risk management

While model building will always be a core element of insurance, being aware of the limitations of models and techniques to manage those limitations is crucial to successful risk management.

A new article authored by Pat Renzi and Elliot Varnell for the Actuarial Post focuses on the challenges risk managers face given their responsibility for an internal or Own Risk and Solvency Assessment (ORSA) model. The article highlights three issues that risk managers need to make allowance for in managing their models: model scope and historical data; associative dependency; and the problems that arise when elegant models confound transparency and understanding.

Here is an excerpt:

…Model building is at the core of the insurance sector and we will never stop building models. But awareness of their limitations and the techniques to manage those limitations is crucial to successful risk management.

Simplifications and expert judgment are a fundamental part of building models too and should be recognized as such. However they should be applied with full transparency and in full knowledge of their limitations rather than couched in mathematical derivations where they cannot be readily challenged.

The article was published in the July 2012 issue of the Actuarial Post. Read it here.

UK Risk and Investment Conference 2012, Leeds, 25-27 June 2012

It was my pleasure to be the Co-Chairman of the Risk and Investment Conference which has just taken place between 25 and 27 June in Leeds, UK. I was the Chair for the Risk element of the conference with Margaret de Valois of Mazars the Chair of the Investment side of the conference. This blog post reviews the conference and offers some personal perspectives as the chair.

This year we managed 250 members and guests attending, which was a record and so good that we had to close registration earlier than intended. This was pleasing as it provides the Actuarial Profession Events team with some confidence that they can book a larger venue next year and continue growing the conference.

Highlights of the conference were a keynote talk from leading global financial journalist Gillian Tett of the Financial Times which I was very pleased to be able to chair. Gillian discussed the application of anthropological ideas to the cultural aspects of risk management and updated the audience on the latest geopolitical developments in financial markets. Gillian is an anthropologist by training and frequently makes use of her training in her journalism. She was joined in her session by leading anthropologist, Michael Thompson of the IIASA Research Institute and Alice Underwood of Willis Re, who have been interpreting the ideas of The Cultural Theory of Risk for practical use. Michael explained the Cultural Theory of Risk as pioneered by Mary Douglas before Alice Underwood helped put the ideas into an actuarial context and highlighted where most actuaries tend to operate – i.e., in the hierarchical solidarity. We ended the session with a short Q&A for Gillian before she had to head back to London; it was very encouraging to hear her endorsement for the work that Michael, Alice (and ex-Milliman Principal Dave Ingram) had been doing.

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EIOPA Annual Conference – Frankfurt

I didn’t manage to get to the Life Convention this year but did manage to make it to the EIOPA conference held in Frankfurt the week before. I’ve always found it an interesting conference to attend. This year, as well as our friends in Group Consultatif, there were a number of UK Pensions representatives.

The conference followed the usual format of 3-4 panels and a couple of keynote speeches, this year by Michael Barnier, EU Commissioner for the Single Market and Gabriel Bernardino, Chairman of EIOPA. Interesting as it was to hear the views of these two gentlemen neither served as the highlight of the conference with the panels rather stealing the show. The FT did, however, pick up on Gabriel’s speech for his comments about needing to consider the risk in sovereign debt. I don’t think I was alone in thinking that these were not intended to say anything that we haven’t heard before from EIOPA. Clearly it was very good to have M. Barnier attending the event to lend support, but having been to previous CEIOPS conferences Sharon Bowles has had more in depth comment to make and for my money is a better conference speaker. What M. Barnier did say – many times – was how we all had to stick together to get through the current crisis. Undoubtedly this is at the forefront of his mind as these are dangerous times for the European Union and those who have worked hard over decades on the European Project.

What was more interesting for me were the discussions on Solvency II, Pensions and Consumer Protection each of which held the attention well.

The Solvency II debate was particularly good with Oliver Bate, Group CFO at Allianz and Karel van Hulle, Head of Insurance and Pensions Unit at the European Commission in particularly good form. H. Bate was very forthright in his criticism of Solvency II and the balance sheet volatility that Solvency II was bringing. In particular he cited that the Allianz SCR had moved by around 50% in the space of a month as yield curves shifted rapidly in the summer. This, he told the conference, made it extremely difficult to manage the firm as shareholders needed confidence over the return on capital they were getting and the management needed stability to plan the business. Both Karel van Hulle and Carlos Montalvo pushed back that the framework was necessary to protect policyholders.

The pensions debate centred on the proposals to apply a Solvency II style regime to pension schemes. A green paper had been published on this by the commission and an EIOPA consultation is currently out and being responded to by – amongst others – the actuarial profession. It was good to see a decent contingent of the UK Pensions industry there and questions asked from the floor by representatives of the BT Pensions Fund. They asked if the Commission would drop its proposals if the impact assessment showed the costs to outweigh the benefits. The answer from Karel van Hulle was that the costs and benefits were always considered but to date there had not been proposals made where the benefits didn’t outweigh the costs. I, and others, took that as a sign that the Commission was minded to proceed.

The emerging role of EIOPA in consumer protection was discussed in the final session of the day chaired by Pauline Chantillon of the ACP who has moved on to a consumer protection role in France having led the FINREQ stream of Solvency II for EIOPA. The recent Variable Annuity retail paper (which many may have missed when it came out a couple weeks ago) was referred to many times as an example of how EIOPA was rising to the challenge of protecting consumers on the conduct of business side of regulation too. One of the best points was a long list of things that a consumer would need to know in order to make optimal financial decisions to deliver the outcome they wanted. The point was well made that consumers want to buy an outcome and this is what the financial services sector should focus on giving them. It wasn’t lost on several audience members that the EIOPA conduct of business regulation on VA, if poorly drafted and executed, could yet prevent the delivery of a product line that seeks to deliver a controlled outcome for the customer.

The tone of the EIOPA conference is quite different to those in the UK and it is interesting to observe the styles of this conference in the light of discussion on culture theory with my colleague Neil Cantle and Willis Re’s Dave Ingram over recent weeks. The collegiate nature of our European friends is abundantly evident at the conference with many warm words exchanged between panellists and statements of intent to edge the European project ever-forward. There was little mention of the chaotic collapse of the Euro Zone (EZ) edging ever nearer and (if we are to believe Angela Merkel) with it the end of the European Union. The Germans I spoke to seemed certain the EZ would continue OK but echoed the German fear of hyperinflation and the quantitative easing that has been used in the US, UK and previously in Japan. Little seemed to have changed from a year earlier when I was told by a Bundesbank representative that inflation (even moderate) could never be the answer to the debt crisis. Yet a week after the conference in Frankfurt the German Bund Auction faltered and Bund yields rose above the UK suggesting the pound could become the European reserve currency of choice.

This doesn’t sound like such good news for UK insurers who could well see their discount rates pushed ever lower on a wave of gilt purchases – even if their government bond holdings appreciate in value. One thing that UK insurers with EUR exposure need to be wary of is whether they are tied into using a AAA EUR GOV bond spread. With Belgium (amongst others) downgraded by S&P on Friday pressure may be building on the French AAA rating. If it does fall below AAA the AAA EUR Govt yield curve could fall sharply as the French Bonds get excluded and the German Bunds come to dominate the AAA government curve.

The Bank of England has already told the UK banks to prepare for a dis-orderly default of the EZ in their contingency plans so it would be wise for insurers to consider how they would cope too. Fitch – at least – seems happy that the European insurance sector will not be too badly affected but its always best to have a plan in the bottom drawer just in case, as time will be in short supply and questions will come thick and fast, if and when the EZ does break up. They certainly did in the Autumn of 2008.

It’s the price we pay to live in interesting times.

Elliot Varnell
@RiskActuary

Some of the conference keynote speeches are here: https://eiopa.europa.eu/press-room/speeches-and-presentations/index.html