Assessing the appropriateness of the Solvency II standard formula

The assessment of the appropriateness of the standard formula is a key part of the Own Risk and Solvency Assessment (ORSA) process under Solvency II. As part of this assessment, (re)insurers must identify any material deviations in risk profile compared to the assumptions underlying the standard formula. This briefing note by Milliman’s Andrew Kay and Sinéad Clarke outlines what is expected under this assessment, including the key challenges such as the treatment of risks that are not reflected in the standard formula, the qualitative assessment and what is required if a material deviation is identified.

The actuary and enterprise risk management: Integrating reserve variability

The first step in managing reserve risk is measuring that risk. Risk management is linked to risk monitoring, measurement, and reporting. The quality of measurement and reporting often determines to what extent monitoring is possible.

Routinely assessing reserve variability, as part of the regular reserve analysis process, can greatly benefit the risk management process. Integrating elements of reserve risk measurement within a continuously monitored enterprise risk management (ERM) framework can offer a number of advantages to your organization, including, but not limited to:

1. Ensuring that reserving assumptions are tracked and validated over time and that changes in those assumptions are justified relative to performance

2. Formalizing the governance around the process (i.e., clear assignment of risk ownership and consistent, accurate, and auditable controlling of deterministic methods, stochastic models, and actuarial methodology, etc.)

3. Providing a framework that allows actuarial resources to assess the effectiveness of the distributions of possible outcomes resulting from the reserve variability analyses (e.g., approximately 10% of observations as of each valuation date should fall within the highest and lowest 5% of the distribution of possible outcomes)

4. Providing a framework that includes an early warning system which translates actual outcomes of paid and outstanding loss into likely reserve estimate changes prior to any analysis

5. Enabling management to use key performance indicators (KPIs) to anticipate the results of future actuarial analyses and better understand and assess how prior assumptions have held up

6. Providing a framework that allows both managers to efficiently allocate actuarial resources (e.g., assigning the most experienced resources to the most challenging segments) and actuarial resources to hypothesize whether deviations are the result of a mean estimation error, a variance estimation error, or a random error.

Continue reading

Brewing insurance solution for craft brewers

Craft beer companies need unique insurance solutions to address the distinct risks inherent in their industry. Companies can minimize the financial effects that these risks can create by purchasing specialized craft brewery coverage. In the article “Crafting insurance for the new brewery industry,” Milliman’s Michael Henk explores some of the larger risks a craft brewer faces along with the type of coverages the brewery should consider obtaining.

Here’s an excerpt:

Boiler/machinery liability
Boilers and machinery expose breweries to multiple liabilities. First of all, with production being reliant on machinery, any major breakdown could be devastating for business. When a brewery does not produce a lot of beer to begin with, even a temporary halt in production could have large consequences.

Along with a halt in production, brewers have the extra added risk of injuries if something more serious happens. An exploding boiler doesn’t just affect the production and finances of the brewery, but may also result in damages and injuries for workers, contractors, and tour-goers.

There are many steps that craft brewers can take to mitigate the potential economic impact of this risk. For the production side of the liability, brewers can obtain boiler and machinery coverage that will cover them for replacement or repair costs. Property insurance can also cover some of the loss of income from a breakdown in production.

Tour liability
One of the more interesting phenomena with respect to craft brewing is the great popularity of brewery tours, where breweries open their doors to the public (sometimes while the brewery is still in full operational mode). This serves craft breweries well as a marketing tool because it gets people in the door learning about and sampling the product. Popular tours sell out with regularity and have even become “must-see” tourist attractions in many cities. Macro-breweries have gotten in on the tour game as well. However, tours at larger breweries tend to avoid the production floor and tend not to include areas of the brewery that are currently operating.

With these production floor tours of active breweries comes unique liability. Paying customers are invited to walk around the brewery among the fermentation tanks and machinery (accompanied by a tour guide, of course). A brewer needs to make sure that conditions are safe for customers and take preventive measures.

In one specific case, a fermentation tank explosion during a tour led to customer injuries at a craft brewery in Texas.7 Not only was there an obvious halt in production in this case, but also two years after the incident, customers who were on the tour went to court for damages, citing pain and suffering as a result of the incident.

Brewers need to be covered for less “explosive” events as well. Slips and falls are a lot more likely, especially when the brewery tours contains stairwells and wet floors. Brewers must obtain general liability insurance with sufficient limits to cover the bodily injury caused to tour-goers or the potential property damage caused by them.

The 2016 Data Science Game winner is…

Russian Data Mafia from the Moscow Institute of Physics and Technology (MIPT) won the 2016 Data Science Game. The final phase of the game featured teams of students from 20 universities competing in a 30-hour hackathon challenge.

DSC_0347 (2)

Microsoft provided its support by giving free access to its Azure computing clusters while the final challenge was set by AXA. Each team worked on a dataset containing requests for auto insurance quotes from different brokers and comparison websites. Students were asked to predict whether the person who requested a given quote bought the associated insurance policy. Teams were ranked according to their prediction score.

The final phase took place September 10-11 at Capgemini’s Les Fontaines campus in France. This year, 143 teams participated from more than 50 universities and schools in 28 different countries.

To learn more about the Data Science Game, click here.

European Parliament rejects Level II regulatory technical standards, but this is not the end of PRIIPS

Murray-KarlOn Tuesday, 13 September, I participated in a panel discussion on PRIIPs along with Kevin Manning, a principal from the Milliman Dublin office. The event was co-hosted by Silverfinch and Maples & Calder in London. Attendees of the event, including a mix of insurers, asset managers and data providers, expressed various views on the potential outcome of the vote by the European Parliament on the PRIIPs Level 2 regulatory technical standards (RTS), scheduled for the following day, and the possibility of a delay.

Kevin Manning
Milliman Principal Kevin Manning offered perspective regarding the European Parliament’s vote on the PRIIPs Level 2 regulatory technical standards (RTS).

Yesterday, the European Parliament backed the view of the Economic and Monetary Affairs Committee to reject the Level 2 regulatory technical standards (RTS) for implementing the new PRIIPs legislation on the basis that the RTS did not protect PRIIPs consumers. While many of the attendees at the panel discussion the day before had predicted this outcome, most contributors highlighted the need for clarity on the roadmap for PRIIPs implementation – something that yesterday’s vote did not deliver.

Continue reading

Milliman Pixel

Milliman’s Pixel is a web-based, competitive analytics platform that helps insurers use objective and comprehensive information to grow their business.

In this video, Milliman actuaries Nancy Watkins, Peggy Brinkman, and Cody Webb discuss how Pixel helps insurers compare their premiums with those of competitors, identify market sectors where they might be experiencing adverse selection, and access competitive information needed to make sound pricing decisions.

To learn more about Pixel, click here.

NORCAL Mutual chooses Milliman Datalytics-Defense to help improve claims handling with data driven decision support

Milliman today announced that NORCAL Mutual has chosen Milliman Datalytics-Defense® as its platform for managing its defense costs. Datalytics employs powerful data mining algorithms to help insurers evaluate costs associated with defending claims in order to identify opportunities to improve results.

“We chose Milliman Datalytics-Defense® because of its ability to provide an efficient approach to managing defense costs while increasing our ability to turn data into information…,” says Timothy J. Friers, NORCAL Mutual Senior Vice President and Chief Operating Officer. “The tool allows us to gain greater insight into our results and improve our claim defense strategies for the benefit of our insureds.”

Milliman Datalytics-Defense® provides real-time, actionable intelligence through responsive reporting dashboards that are built upon a robust data warehouse. The web-based tool is available on a subscription basis and can perform peer comparisons, allowing insurers to credibly benchmark their defense costs. The tool’s predictive analytic engine helps insurers develop best practices of claims defense.

“Milliman Datalytics-Defense® uses advanced text mining to unlock information that was previously hidden in defense costs invoices,” says Chad C. Karls, Milliman Principal and Consulting Actuary.

To learn more about Milliman Datalytics-Defense®, click here.

Optimising non-life reinsurance strategy under risk-based capital measures

This research report by Jeffrey Courchene and Vincent Robert explores the possible impact of risk-based economic capital and enterprise risk management (ERM) frameworks on a non-life insurer’s reinsurance strategy. It provides a brief overview of common types of non-life reinsurance coverage currently available. The paper also describes the broad context in which reinsurance decisions are made, highlights the importance of aligning reinsurance decisions with risk appetite, and describes an economic perspective for optimising the reinsurance strategy.

Reading list: Florida’s private flood insurance market

Advances in catastrophe models and new state insurance regulations have opened the door for an affordable, risk-based private insurance market in Florida. This reading list highlights articles focusing on various issues and implications related to the market. The articles feature Milliman consultants Nancy Watkins and Matt Chamberlain, whose knowledge and experience is helping insurers to understand and price flood risk more precisely.

Forbes: “The private flood insurance market is stirring after more than 50 years of dormancy
The reemergence of private flood insurance has piqued the interest of carriers seeking to enter the market. Some catastrophe (CAT) modeling companies are creating flood models to help insurers price policies. Here’s an excerpt:

Nancy Watkins, a principal consulting actuary for Milliman, likened the current level of interest from insurers to enter the private flood insurance market to popcorn.

“We are at that stage where you can hear the space between pops. You can hear one kernel at a time,” she said. “What I think is going to happen is, in one to two years, there’s going to be a lot more going on.”

Bradenton Herald: “Important for homeowners to compare flood insurance options
Florida homeowners must consider the issues related to the National Flood Insurance Program (NFIP) and private flood policies. Private insurers can use predictive modeling technology to determine a home’s distinct flood risk.

Tampa Bay Times: “Remember the flood insurance scare of 2013? It’s creeping back into Tampa Bay and Florida
Real estate and insurance experts comment on the possible effects that high flood insurance rates may have on homeowners. Insurers express interest in the granular modeling of flood-prone territories.

Tampa Bay Business Journal: “Why some Tampa Bay property insurers are offering flood coverage and others are not” (subscription required)
Insurers need to weight the risks and rewards associated with the underwriting of flood insurance. A few carriers have already decided to participate in Florida’s private flood insurance market.

Pooling autonomous vehicle risk

The production of autonomous vehicles is shifting the responsibility of automobile-related insurance risk. Some manufacturers have already stated that they would assume liability for accidents caused by faulty technology in their cars. However, autonomous carmakers would likely spread that liability out among the suppliers of the cars’ software, systems, and devices.

According to Milliman’s Chris Kogut, a Supplier Product Liability Autonomous Share (SPLASh) insurance pool may help manufacturers and suppliers effectively manage the risk associated with autonomous car accidents.

Continue reading