Milliman releases Arius 2.8, with new documentation tools and the ability to build more complex analysis projects

Milliman announced today that it has released version 2.8 of Arius®, its state-of-the-art loss-reserving system for property and casualty insurers. This is the tenth major release of new functionality since Arius’ introduction three years ago, and an eleventh release of new features is planned for fall 2016. This latest update focuses on usability and project structure, allowing actuaries to build multi-layered and interrelated analyses to more realistically reflect the complex nature of today’s insurers.

Milliman does reserve analysis very much like our clients, under similar time constraints and quality standards. We understand that in addition to actuarial or statistical functionality, sometimes the best way we can help our clients is by improving their process and approach to their analysis. Our latest release of Arius demonstrates Milliman’s continued commitment to providing the best solutions to enhance the efficiency of our clients’ work.

With this release, Arius adds a number of capabilities:

• Reserving projects can now include multiple reserving segments that are interrelated, including segments completely or partially derived from other segments in the project – for example, for summarizing regions, sub-lines, or coverages.
• New reserving segments can be easily created from existing segments in the same project file, while preserving the original’s selections and other items of actuarial judgement.
• Notes are now available throughout the system to allow users to document their work at the point that specific decisions are made.
• Additional flexibility is now available in setting up interim projects that require more advanced interpolation capabilities, to more realistically address insurance contracts based on accident, policy, report, and underwriting periods.
• The system’s stochastic models are updated with the latest yield curve tables for Swiss Solvency Test and EIOPA risk free rate term structures. Both sets of curves reflect multiple currencies.

To learn more about Arius, click here.

Walking through a minefield in $500 heels: Rent the Runway and the risks of renting haute couture

Ryan-DanaWedding season is in full swing, and recently I looked into renting a designer dress for a wedding I was attending. I didn’t want to wear a dress everyone had already seen me in, but I also didn’t want to spend a lot of money on a dress I would likely only wear once or twice. Renting a dress seemed like a perfect fit.

Fashion rental companies such as Rent the Runway, Bag Borrow or Steal, and ArmGem are on the rise because of the high expense of designer clothes and the desire to wear the latest fashion. According to a Business Insider article, Rent the Runway has grown since it was founded in 2009 to a company with 5 million members and $1 billion in inventory. With these rental companies growing is there a need for designer rental insurance?

As someone who works in the insurance industry, I started to ponder what would happen if I damaged or lost a rental, some of which can be worth thousands of dollars. If I’m being honest, I am very klutzy. I tend to spill things when I’m eating and have been known to catch a piece of jewelry on my dress, leaving a pull or tear. Immediately my mind tends to think of the worst-case scenarios. What would happen if I accidentally leaned into a candle at the dinner table and left a burn mark on the dress? If I rented earrings, what would happen if one of them fell out on the dance floor and got lost? What if makeup spilled in the designer bag I rented and destroyed the inside of the bag? Suppose I stumbled in my new heels and scuffed them up or broke a heel. The possibilities seemed endless.

Concerned about the risk of damaging or losing a rental I started to question if I could purchase insurance through the rental company. According to Rent the Runway’s website, an insurance policy can be purchased with a rental for a small fee. This insurance policy covers only minor stains or damages and does not cover theft, lost items, or damage beyond minimal wear and tear. Other companies did not offer any insurance at all.

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Pokémon GO and the non-augmented reality of risk

Pikachu and his friends have caused quite a frenzy recently. While people are enthralled with Nintendo’s Pokémon Go, the GPS-based augmented reality (AR) game presents several risks to its developer and its gamers. In his article “Pokémon Go and augmented reality: Not all fun and games,” Milliman consultant Michael Henk discusses some of these AR technology-related risks.

Concerning personal injury risks:

Firstly, AR products like “Go” provides yet another “distraction.” We’re all aware of the dangers of being “distracted.” Texting while driving is illegal in a number of cities and states throughout the country. However, drivers aren’t the only ones being distracted. Distracted walking is a growing problem, one that has arisen naturally with the increasing dependence on mobile electronic devices and one that “Go” is already contributing to. There are anecdotes all over social media about players so engrossed in catching virtual monsters that they’re running into walls and walking in traffic. …

…“Go” may lead to an increase in distraction-caused injuries and pedestrian-vehicle injuries, which is currently the fifth-leading cause of death for children ages 5 to 19. It’s not inconceivable to imagine an incident in which both the driver and the pedestrian are distracted, maybe by the same “rare” Pokémon.

What about cyber risks?

Aside from “IRL” (in real life) dangers, there’s a data security concern with some early installs. Some iOS installs of the software require the user to provide the app with full access to their google accounts, which allows access to their Gmail (theoretically being able to send e-mail from your account), files stored on Google Drive and Google Photos, among other content. The developer has responded and said this was done erroneously, and that permissions will be corrected soon, but it’s important to make sure that users know exactly what programs on their devices have access to. There are other concerns about downloading the program from non-official app stores as well, but that stands for all programs and is definitely not a “Go”-specific concern.

Legal risks?

…There’s a significant risk for trespass with AR games that utilize real-world locations. It remains to be seen whether an AR developer placing cyber-content on your property constitutes trespassing or if AR users are “engaged on a cyber plane on which you have no exclusive property claim.” There’s another legal concern with “attractive nuisance,” which states that property owners are responsible for eliminating dangerous conditions on their property which may attract children. “An individual who fails to rectify an attractive nuisance on their property is civilly-liable to injury a child sustains on it, even if the child was trespassing.” Sounds like something that may happen in the pursuit of a rare Pokémon.

Cyber risk landscape exposes insurers to new opportunities

As the cyber liability insurance market catches up with constantly evolving exposures, opportunities also continue to present themselves. In a recent Risk & Insurance article, Milliman’s Tom Ryan and Elizabeth Bart discuss some of the cyber market’s challenges and opportunities. They also discuss the sector’s current state and what lies ahead.

Here is an excerpt:

Tom Ryan, principal and consulting actuary at Milliman, describes the cyber insurance market as both “crystalizing and diversifying.”

“There are at least 40 different policy forms in use right now for cyber liability,” he said. “It’s like comparing apples to oranges to kumquats. However, Insurers are now in the process of smoothing out the wrinkles and developing some standardization of language and coverage.” …

…Insurers benefit by going beyond coverage and offering risk management tools and services to their insureds.

“Some carriers are getting really savvy about cyber. They want to avoid the losses as much as their insureds do,” [Elizabeth] Bart said. “So they get the right people in the right place. The right lawyers, the right PR team, and the right IT vendors.”

“We are seeing a lot of experts come into the insurance industry with knowledge of the hardware and software components of internal systems,” Ryan said. “They have a better understanding of how hacking happens.”

Limited capacity in cyber liability insurance is another hurdle that companies and insurers must navigate. The formation of an industry cyber insurance pool could increase options on the market and reduce the risk incurred by individual insurers. Tom’s article “Cyber liability insurance: As the market heats up, is it time to cool off in a pool?” provides more perspective.

Milliman survey reveals reactions to UL/IUL regulatory changes

Milliman today released new results from participants in its annual comprehensive study of universal life (UL) and indexed universal life (IUL) issues, namely, the reaction of issuers of universal life products to recent and upcoming regulatory changes. Principle-based reserves (PBR) will be effective January 1, 2017, and nine survey participants reported they anticipate implementing PBR immediately. Nineteen expect phasing-in the implementation of PBR over the three-year phase-in period allowed. Factors impacting the rationale for participants’ implementation plans include resource issues, the impact on reserves and capital, the need for preparation and research, and competitive reasons. Fifteen participants do not know what approach they will use for pricing new UL/IUL products in a PBR environment for products that require one of the VM-20 reserve components (VM-20 includes valuation manual minimum requirements for PBR for life insurance products).

On September 1, 2015, sections 4 and 5 of Actuarial Guideline 49 (AG 49) became effective, impacting issuers of IUL contracts. These sections of AG 49 provided guidance regarding the determination of the maximum indexed crediting rate that may be used with IUL illustrations. The survey included 22 IUL participants and the majority (19) reported they had made adjustments to illustrations based on AG 49, but few participants had made changes to their product designs because of AG 49. Eighteen of the 22 IUL participants reported the rate that was calculated for the Benchmark Index Account per Section 4A of AG 49. The rates ranged from 5.02% to 7.77% with a median of 6.87% and an average of 6.72%. This was also the range reported for the rate typically illustrated by reps in IUL illustrations for participants’ most popular strategies. The median illustrated rate was 6.70% and average was 6.59%. This compares with the median illustrated rate one year ago of 7.50%, and average of 7.10%. Twenty of the 22 participants reported the illustrated rate decreased relative to the rate one year prior.

The ninth annual Milliman study, “Universal Life and Indexed Universal Life Issues,” focuses on current topics relative to universal life with secondary guarantees (ULSG), cash accumulation UL, current assumption UL, and the corresponding indexed UL (IUL) versions. A new high of 35 carriers of universal life and indexed universal life products participated in this annual survey.

In addition to PBR and AG 49 information, the survey also indicates that the popularity of IUL products generally and UL/IUL products with living benefits has continued, consistent with the past several years. IUL sales during YTD 9/30/15 accounted for 51% of total UL/IUL sales combined (reported by survey participants) during YTD 9/30/15, increasing from 37% in 2012. During YTD 9/30/15, sales of chronic illness riders as a percentage of total sales were 23% of UL products and 41% for IUL products, at or near peak levels. Despite a shift away from single premium business to limited pay business for sales of UL/IUL with LTC riders, during YTD 9/30/15 sales of LTC riders as a percentage of total sales by premium were 19.2% for UL products and 9.4% for IUL products, both at peak levels.

The study includes detailed information on product and actuarial issues, such as sales, target surplus, reserves, risk management, underwriting, product design, compensation, pricing, administration, and illustrations.

The 444 page “Universal Life and Indexed Universal Life Issues – Detailed Report” is available for purchase by visiting the Milliman website or by calling Gina Ritchie at (312) 499-5605. Participating companies receive a complimentary copy of the detailed report, as well as individual company responses reported on an anonymous basis.

PRIIPs guidance considerations

Murray-KarlI joined the live streaming of the workshop hosted by the European Commission on the implementation of the Packaged Retail and Insurance-based Investment Products (PRIIPs) framework in Brussels today, 11 July 2016. There were lots of clarifications coming out of today’s industry workshop. Finally. No more excuses now to delay PRIIPs implementation projects.

The Joint Committee of European Supervisory Authorities (ESAs) indicated that the Level 3 guidance will mostly be in the form of the promised Q&As. This guidance will likely be released in tranches over this summer.

My key observations of the comments made today are outlined below. You may need to refer to the Regulatory Technical Standards (RTS) to follow my comments.

Scope
• ESAs consider top-ups and switches on insurance products likely to be out of scope. They are deeming such transactions as variations on an existing contract. But you need to check your Terms and Conditions (client contract). However, they still suggested that it might be “best practice” to offer a KID.
• Disclosures for underlying investment options (i.e., risk, performance and cost) could be considered under general groupings or categories of investments (e.g., low/medium/high risk) as opposed to the full list of actual underlying funds. This could significantly help the open-architecture funds and discretionary asset management structures in particular.
• Generally, no credit risk look-through is needed for funds investing in equities and bonds as the credit risk element is deemed captured in the market risk measure. Credit risk assessment really only relates to structured funds (e.g., tracker bonds) and derivatives where a fund contracts a credit exposure. This could significantly reduce the volume of look-through effort required for most funds.

Risk
• The risk narratives still need to explain both market and credit risk separately even though the quantitative risk measure is an overall 1-7 for the combined risk.
• Firms can’t opt into high-risk categories voluntarily to avoid the hard calculations. However, the ESAs are considering whether the market risk measure can be voluntarily changed in response to certain market events. This would avoid misleading customers because the general update process follows a four-month monitoring window which could be slow to react to market events.

Costs
• Cost information to be reassessed at least annually on an ex-post approach.
• Lots of detail on transaction costs and look-through.

Performance scenarios
• My take from the workshop today is that the underlying performance disclosure doesn’t necessarily need to reflect the PRIIP wrapper for multi-option products (MOPs) although it was mentioned at another point that entry and exit costs should be reflected. • No further prescription on the fourth scenario (where necessary). It should generally illustrate a specific event beyond the 97.5% VaR.

Data
• Firms need to use five years actual data when available (but two years is enough if daily priced).
• Benchmark data to be concatenated with actual data where necessary.
• Where only benchmark data is being used, it’s subject to a max of five years and at least the same minimum requirements as actual data, e.g., two years for daily observations.

KID communications
• Recital 22 of the RTS relating to informing existing customers of changes to KIDs is considered best practice rather than mandatory.

I am sure the debate on interpreting PRIIPs will continue. I look forward to joining the debate.

Milliman does not certify the information in this update, nor does it guarantee the accuracy and completeness of such information. Use of such information is voluntary and should not be relied upon unless an independent review of its accuracy and completeness has been performed. Materials may not be reproduced without the express consent of Milliman.

Chief risk officers identify threats and opportunities

Modern organizations are complex and having a chief risk officer (CRO) to look across the organization and its environment is hugely valuable. The CRO is uniquely positioned to scan across unfolding trends, both within the organization and outside it, and work with colleagues to determine whether there are opportunities or threats. In this video, Milliman’s Neil Cantle explains the management of risk and the role of a chief risk officer.

Solvency II opening up outsourcing opportunities

European insurance companies should consider how outsourcing certain business functions can create value for their entire organizations under Solvency II. The latest edition of Milliman Impact entitled “Added value outsourcing” highlights some factors that make outsourcing advantageous and also explains how Solvency II requirements may ultimately impel insurers to outsource actuarial work.

Here’s an excerpt:

Outsourcing offers the function a wide range of benefits, says [Roy] O’Neil: flexibility to deal with variable workloads; access to leading practices; freedom for senior management to focus on other business priorities. For established players, outsourcing presents an avenue to carve out repeatable, non-core tasks; for new market entrants, it provides core actuarial back office support while the organisation grows ….

…Pressure on actuarial departments responsible for assumptions informing firms’ reserving models is particularly acute. Many—and perhaps especially the smaller organisations less prone to outsource such functions in the past—will struggle to meet the new requirements on their own, argues [Lars] Hoffmann.

“In Germany we have almost 100 insurance companies, and about 80 of them are pretty small. Of those it seems likely a large portion will move toward some sort of outsourcing,” he says.

“The additional work from Solvency II is considerable,” confirms Ulrich Starigk, senior counsel at Milliman. “It requires more people and training for staff on the new requirements. In many cases it’s going to be more efficient to buy these resources from outside.”

Select tail factors that incorporate unique exposure characteristics

The selection of loss development tail factors for workers’ compensation claims may have a significant impact on the unpaid claim liability for years. Milliman has created and used a workers’ compensation database that includes $55 billion of incurred losses to assist in selecting appropriate tail factors. In this article, Milliman’s Tony Bloemer and Tim Vosicky explain how selecting tail factors that consider three key variables—retention, location, and industry—can prevent understated or overstated incurred but not reported (IBNR) estimates.

Investment strategies of U.S. life insurers in a low interest rate environment

The search for investment yields is a constant challenge faced by U.S. life insurers because of persistent low interest rates. This Milliman report features an analysis of life insurers’ asset portfolios and investment strategies as they focus on generating higher returns while managing risks in a low interest rate environment.