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.

ORSA, Sovency II and rugby: A day in the life of a Dublin actuary

Michael Culligan is the practice leader for Milliman’s Dublin practice. He manages a team of 35 consulting actuaries. While management issues take up a large portion of his work day, what Michael enjoys the most is working with clients. A recent Finance Dublin article chronicles a day in his professional life.

Complex nature of private ILS valuation

The valuation of private collateralized reinsurance deals in insurance-linked securities (ILS) funds is complex because of their customizable features. An actuarial reserve analysis is essential to create an appropriate valuation for these types of reinsurance transactions. A recent Artemis article, based on a paper written by Milliman actuary Aaron Koch, highlights the challenge involved with this process.

Here is an excerpt:

“This expansion of collateralised reinsurance and other private risk-taking structures (such as Lloyd’s syndicates and fund-sponsored reinsurers) enables funds to underwrite a much broader range of risks and access higher returns, but it also poses a set of new challenges,” explains Koch, in a white paper within a recent publication by Clear Path Analysis …

…Koch explains, “One such challenge is the valuation of these generally illiquid instruments.”

Unlike traditional 144A catastrophe bonds the large majority of private ILS contracts and ventures don’t have a secondary trading element and are far less liquid.

As a result of this Koch explains that for most private ILS transactions there is no suitable “mark-to-market” price that reflects risk seasonality, meaning that funds that wish to value private reinsurance business consistently with mark-to-market instruments (such as 144A catastrophe bonds) need to create a “mark-to-model” valuation approach that incorporates elements such as risk seasonality into the valuation.

While in theory this might sound simple enough, Koch notes that in reality, some private ILS deals have complexities such as covering multiple perils and regions across both property and specialty lines, as seen with traditional reinsurance contracts.

The above, combined with the potential inclusion of un-modelled risks, “requires substantial modelling resources,” says Koch, that perhaps certain ILS investors may lack when compared with traditional reinsurers.

To read the entire Artemis article, click here.

Indonesia Life Insurance Newsletter, June 2016

According to the 2015 market statistics released by the Indonesia Life Insurance Association, the life insurance market in Indonesia experienced a modest growth in weighted new business premium of 4% in 2015 after a decline of 3% in 2014. Over the five-year period from 2011 to 2015, the industry experienced a compounded growth of weighted new business premium of 7.2%. In terms of market share, Prudential Life Assurance remains the leading player with a market share of 21% of weighted new business premium in 2015. Distribution of life insurance in 2015 continued to be dominated by the agency channel and bancassurance. Milliman’s Halim Gunawan, Iwan Juwono, and Richard Holloway offer more perspective in the latest Indonesia Life Insurance Newsletter. Continue reading

Insurance pool may increase cyber liability market capacity

The cyber liability insurance market faces several challenges limiting insurers’ offerings. Forming cyber liability insurance pools could result in greater capacity for the market and less risk to individual insurers, according to Milliman consultant Tom Ryan. In his co-authored article “Cyber liability insurance: As the market heats up, is it time to cool off in a pool?,” he details the benefits of such a pool.

Broader participation and greater capacity. Smaller insurance companies looking to expand their business could participate in a cyber liability pool. This would allow them to access this growing market without the customary start-up costs and limit their liabilities to match their own appetite for risk. In addition, capital could be provided by other financial entities looking to diversify their investment portfolios.

Sharing of information regarding risks. As pool members and policyholders are confronted with new types of cyberattacks, they can share information rapidly. This can result in a quicker reaction and response, hopefully limiting the spread of the problem. A possible additional benefit of a pool (particularly one with a credible number of participants) could be to seek government approval for liability protection for the sharing of data between pool members and insureds. Similar protections for sharing of information were implemented previously to combat the perceived Year 2000 (Y2K) threat.

Standardization of application process. Applications for cyber insurance today have become increasingly detailed and complex and vary by insurer. It is often hard for potential policyholders to get all the information required, which may discourage them from purchasing the insurance. A standardized application may lead to greater efficiency in the underwriting process and to more potential insureds entering the market.

Elevation of cyber protection standards. Cyber protection standards for acceptance by the pool can be selected and maintained at higher levels. Pooling information can result in quicker identification of best practices, which can be shared with all members. This may result in improved protection and lower projected losses.

Uniformity of policy coverage. Pools could offer standardized policies making it clear what is covered and what is excluded. This would cut down on the time and expense policyholders currently spend comparing policy offerings.

Elimination of duplicate claims costs. The greater the number of insureds covered by the pool, the less likely claims will overlap. For example, if there were multiple breaches at different retail entities covered by the pool, identity theft monitoring could be performed by the pool for those consumers with exposure at each of the retail entities, instead of multiple monitoring covered by each different insurer if the retail entities were covered separately.

Protection of insurer pool members. A larger pool results in greater business volume and greater leverage for the potential purchase of protection for the pool from reinsurance or capital markets. The concentration of risk may also help in the discussion of potential government backstops that could become available.

Decentralised governance enhances risk management

Assessing organisational culture is an integral aspect of a company’s risk management framework. Most companies, though, contain diverse groups of experts who interact with one another daily, and each group has its own distinct subculture. According to Milliman consultant Neil Cantle, companies that adapt decentralised control structures, allowing experts to make local decisions based on the company’s risk tolerance, can become more resilient and successful.

Neil’s Raconteur article “Achieving resilience by harnessing people power” provides more perspective. Here’s an excerpt:

[Companies] are complex ecosystems where people go about their daily tasks, interacting with countless others inside and outside the company. In the real world, people are faced with situations every day that don’t quite match the process manual, and they will use their initiative and try to find a way through to a successful outcome. Their judgments will reflect their values, so the question is whether those values are consistent with the culture your board wants to see? …

…In a world such as this, the notion of control, therefore, requires modification. We can no longer deliver the outcome we want with certainty, but can only choose our next action. Of course, we would like to select an action that will help take the company towards a successful outcome, but we simply don’t know for sure which one that is. We have to retain flexibility and learning as core skills, with the certain knowledge that things around us will not always go to plan.

In fact, in situations of complexity, where the environment is dynamic and changing, a model of centralised control is far from optimal and often leads to unintended outcomes. The more appropriate approach to guiding progress here turns out to be empowering local experts to make localised decisions, with the proviso that they are aware of what is happening in the wider overall context.

Organising in this way, we need to empower our experts to make local decisions in the best interests of the whole, and are much more concerned about whether their attitudes and behaviours are consistent with what we would like. We are trusting them “to do the right thing” rather than directly controlling what they do. There will be some things we are so keen to avoid that we will implement very strict controls, making it hard to do the wrong thing, but we are largely going to be using our values to guide behaviours.

For more perspective on organizational culture and risk management, read “Cultural compass,” also written by Neil.

Milliman launches Solvency II Compliance Assessment Tool

Solvency II has finally arrived. From January 1, 2016, the focus has changed from the “best efforts” approach acceptable in the preparatory phase to ensuring full compliance with all the detailed requirements of Solvency II. This new reality has placed much more onerous requirements on insurance companies across their business activities, ranging from reserve calculations to governance frameworks to reporting requirements.

This means companies are faced with a need to demonstrate compliance with the full detail and complexity of Solvency II. The Directive, Delegated Acts, and Level Three Guidelines alone cover 2,390 pages. To show compliance, you need to assimilate this vast amount of information and collect evidence from a wide range of experts and department heads in your company.

We have used our Solvency II expertise to develop an intuitive and flexible tool to help companies assess how compliant they are with the Solvency II requirements. This builds on our experience of developing our Milliman Solvency II Readiness Assessment Tool over the last few years. In developing this tool, we have partnered with ViClarity, a compliance software company, to ensure that users will get the benefit of Milliman’s knowledge and will also get the functionality and platform that would be expected of a market-leading compliance tool.

The Milliman Solvency II Compliance Assessment Tool distills the Solvency II requirements into easily digestible self-assessment questions. Assessing compliance across an entire organisation requires collaboration across all business operations and departments. The Milliman Solvency II Compliance Assessment Tool is based in an easy-to-use cloud-based platform, facilitating the gathering of all necessary information across the whole organization.

This enables both life and nonlife insurance and reinsurance companies to easily monitor and assess their levels of compliance across all three Pillars of Solvency II, while simultaneously creating an audit trail of work done and a development plan for future actions and ongoing review.

To learn more about the Milliman Solvency II Compliance Assessment Tool, click here.

Reinsurance: Optimizing your strategy

The latest edition of Milliman Impact entitled “Reinsurance: Optimising your strategy” offers perspective on how insurers should approach their reinsurance options in light of changing market conditions.

Here’s an excerpt from the article:

Increasingly, insurers are seeking bespoke reinsurance solutions to address a range of issues, from dealing with property risk accumulations to protecting reserves or achieving capital efficiencies under Solvency II. There is also a wider emerging trend towards more innovative internal and external reinsurance mechanisms, and a growing business case to bring certain reinsurance purchasing functions in-house.

“Despite an increasing complexity of reinsurance mechanisms, there are a number of factors leading insurance companies to internalise their reinsurance strategies, underpinning a sound and efficient decision process in terms of reinsurance,” says Fabrice Taillieu, principal at Milliman in Paris….

With changing regulation, a shift to enterprise risk management by insurers, and the increasingly cross-border nature of insurance, a number of firms have sought innovative capital management and reinsurance frameworks to help enhance earnings and deliver on their corporate strategies.

Many of the large multinational insurance groups have now centralised their reinsurance purchasing, taking a more sophisticated and global approach. Typically, these groups use dedicated legal entities to more effectively manage risk and capital across the group through internal reinsurance agreements. They also use such entities to leverage their purchasing power, consolidating their reinsurance purchasing globally.

While these types of arrangements tend to be favoured by the large multinational insurers, there are ways in which other insurers can achieve many of the same advantages, according to Adam Senio, senior consultant at Milliman in Paris.

“There are now many options open to insurers looking to optimise their capital and reinsurance purchasing. More insurers are using internal and external reinsurance schemes to optimise and transfer capital at the group level,” he says.

For example, Milliman has worked with a number of European insurers, helping them take a more global approach to reinsurance and establish internal reinsurance mechanisms that cede portions of portfolios from local subsidiaries back to the parent company, highlights Senio.

Measuring the impact of “locked collateral” on collateralized reinsurance returns

Collateralized reinsurance has become an essential tool for catastrophe-focused investment managers (insurance-linked securities managers). These private, customizable deals can provide exclusive investment opportunities. But they also require specialized underwriting expertise and a network of relationships not every insurance-linked securities manager possesses. Milliman consultant Aaron Koch provides some perspective in this article.

Credit risk sharing transactions considerations for insurers

Credit risk sharing transactions offered by Fannie Mae and Freddie Mac present a new business opportunity for insurance companies seeking to invest capital. Milliman’s Jonathan Glowacki and Michael Jacobson say insurers must first understand the risks associated with these transactions before investing in or insuring them. Their Contingencies article “The trillion-dollar marketplace” provides some perspective.

Here’s an excerpt from the article:

Given FHFA’s focus on de-risking the GSEs, mortgage credit risk offerings are likely to continue to become more prevalent in the marketplace as the GSEs seek to meet their annual conservatorship scorecard requirements and reduce capital. According to FHFA’s 2015 conservatorship scorecard, Fannie Mae and Freddie Mac were instructed to collectively transact credit risk transfers on reference pools of mortgages of at least $270 billion for the year. In actuality, the GSEs’ transactions covered reference pools exceeding $400 billion of the nearly $1 trillion of mortgages acquired by the GSEs in 2015. The 2016 scorecard requires the GSEs to transfer the credit risk on at least 90 percent of the unpaid principal balance of targeted groups of newly acquired mortgages, which represents the majority of expected acquisitions. Thus, it can be assumed that there will be a similar level or greater amount of credit risk transferred in 2016, assuming GSE mortgage acquisition levels remain consistent with 2015 acquisitions.

Insurance companies will have the opportunity to participate in this marketplace in 2016 through investment opportunities in the STACR and CAS debt structures as well as by writing credit insurance through anticipated ACIS and CIRT transactions. While the debt offerings require principal outlays equal to 100 percent of the notional amount of the securities, the credit insurance transactions to date have typically only required collateral between 15 and 20 percent of the credit risk assumed. The collateral requirements for the credit insurance transactions vary based on the rating of the insurance entities assuming the risk and the type of participation. For context, the $2.8 billion of credit insurance risk placed through the 10 Freddie Mac ACIS transactions in 2015 required minimum collateral of approximately $440 million (or approximately 16 percent of the risk assumed).

These debt securities and insurance opportunities may offer attractive risk/return profiles to strategic companies in the insurance sector. However, before entering into such agreements, it is important to understand the risk profile of the underlying collateral and the performance volatility inherent in the structure of the transactions. With data being published by the GSEs, it is now easier than ever before to evaluate the risk profiles of these exposures.