A low interest rate environment has stymied the development of Thailand’s life insurance sector. In this Asia Insurance Review article (subscription required), Milliman consultants Michael Daly and Clement Bonnet discuss some product solutions that may help insurers meet their consumer needs.
Here is an excerpt:
What options are available to life insurers in Thailand in the wake of such challenges?
One could adopt a relatively passive “wait and see, ride out the storm” strategy, avoiding any re-pricing of existing products or development of new innovative products, instead subsidising margin compression on new business from profits generated from older business backed by higher-yielding bonds, and hoping fixed interest yields will rise. This strategy obviously carries material risks.
Alternatively, one could be more proactive and re-price existing “guarantee heavy” products. This may boost profit margins, but carries the risk that such products offering less attractive policyholder returns may struggle to sell, especially if competitors do not re-price. It also increases disintermediation risk if fixed interest yields do rise in the future.
Or one could be bolder and make more radical changes to product strategy, seeking to take advantage of areas of untapped potential that have arguably been overshadowed by the plethora of “X pay Y” conventional endowments sold to date.
…Can unit linked business ever be successful in Thailand, as it has nearly everywhere else in Asia? If low interest rates are to become the norm, perhaps there will be greater urgency given to clear some of the stumbling blocks that have historically held back the growth of unit linked business.
In many Asian markets such as Hong Kong, Singapore and Malaysia, we have seen strong sales of participating products in recent times. The ability of these products to combine upside investment potential with a downside cushion of investment guarantees has proved appealing to customers wanting to avoid locking into non-participating products offering low returns or taking the investment risk associated with unit linked products.
Participating products have been sold in Thailand for many years, of course, but companies offering versions with greater discretionary benefits have historically struggled, and in many cases, participating products are almost indistinguishable from non-participating products.
Forecasting loss costs is difficult with any new product. Currently, there is a lack of historical exposure information and little claim data for drones. In order to estimate the loss costs, one would first need to consider the risks associated with drones. If we exclude malicious acts, there are many risks associated with drones:
• Property damage to the drone itself
• Property damage to drone accessories (cameras, applicators, other payload)
• Theft of drone/accessories
• Liability due to property damage caused by drone (accidentally flying through window, etc.)
• Liability due to bodily injury caused by drone (flying drone into person or object that causes bodily injury)
• Libel or slander due to privacy issues from data collection
• Cyber liability due to theft of data collected by drone
• Product liability from the drone manufacturer
The magnitude or severity of the liability associated with drones can range from a small amount to an extremely large amount. While many of the worst-case scenarios may be caused by malicious acts, it would be possible for some to occur because of accidental or careless acts of the drone operator. One of the worst-case scenarios would be a drone interfering with the takeoff or landing of a large commercial aircraft. While regulations are being written to avoid this terrible scenario, it is not out of the range of possible events. Other scenarios could include causing large traffic accidents, etc.
Once an incident has happened, the assignment of liability to responsible parties would occur. The aviation insurance market is well versed in assignment of liability among operators, manufacturers, and owners/lenders. However, new laws, regulations, and legal theories may complicate the process. In most aviation events, the airline is held to strict liability and needs to find contributing parties (manufacturers, airports, traffic control, other aviation parties) during the settlement of the claim. This may be similar for drones although there may be a systemic risk associated with manufacturing of drones, production of software to operate drones, leasing to irresponsible parties, etc. This could be further aggravated by many operators not wishing or being unable to purchase insurance in the first place.
Business risks are not linear but consist of multivariate factors that constantly change and can be difficult to understand across a large organization. Risk management should therefore be agile and focus on shared business goals according to Milliman consultant Neil Cantle. In this article, he discusses why it is important for organizations to align their risk management processes around issues that lead to business success.
Here is an excerpt:
Risk, by definition, lies in the future so we need to anticipate the ways in which current trends might unfold. Many risk assessment frameworks assume too much about the degree to which we “know” where we are and therefore build upon false foundations to make spuriously accurate statements about the future….
In a world of complexity, we have to get back to the business of making sense of things rather than pretending we can control everything. This requires an evolution of enterprise risk management into a new form – this is Agile Risk Management™.
Agile Risk Management embraces the complexity of modern business and offers a more useful path to organising business activity in such a way that goals are delivered within the board’s appetite for risk. Recognising that “controlling” complexity means bringing visibility of enterprise context to managers who deal locally with risk and uncertainty is crucial. It is a proven fact that central command-and-control structures cannot efficiently guide complex dynamic outcomes as efficiently as a decentralised, but well-informed, approach can.
Aligning the organisation around clear outcomes means that local “best endeavours” accumulate to provide better overall outcomes. And accepting that some things cannot be known ensures people remain sceptical, alert and flexible, rather than stuck in a rut reporting the same old indicators each week. In this way companies become resilient to changing circumstances rather than paranoid about risk. In a world where the best of intentions can still lead to risk, such resilience is essential.
The performance dashboard below illustrates how organizational knowledge and data can be combined to provide a real-time dynamic view of business performance.
Agile Risk Management is a risk analysis solution developed by Milliman, Telos Solutions, and Systemic Consult.
The Summer 2015 edition of Milliman’s Issues in Brief features articles about risk culture, the roles of actuaries under Solvency II, and the ways the insurance industry can deliver solutions to future retirees in the United Kingdom.
The inclusion of safety bonus systems within owner- and contractor-controlled insurance policies (wrap-up programs) may reduce workers’ compensation claims. In her article “Safety first,” published by Best’s Review, Milliman consultant Emily Allen explains how safety bonus systems function.
How might a bonus system plan work? Let’s take one example. If an owner or general contractor wants to reduce slip-and-fall claims, a per-claim, slip-and-fall allocation of, say, $10,000 would be applied to the subcontractor’s claim experience target (or expected claim level). If the subcontractor’s claim experience target was forecast at the program’s outset to be 10 claims but its actual claim experience turned out to be only six, the subcontractor would be paid 40% of the total available bonus.
The distributed bonus could be paid simply as cash or could be used to buy updated safety equipment, participate in training, research new safety materials, or any of dozens of other initiatives to improve safety. The bonus system would also allow for considerable flexibility in the establishment of the claim experience target and the method of distribution of the bonus based on an owner or general contractor’s relationship with individual subcontractors. The subcontractors’ adoption of bonus supported safety measures can translate into claim costs savings, not just in the following year but year after year, as safety continues to improve.
Using traditional actuarial methods, the claim experience expectation can be tailored to each subcontractor based on its individual historical loss experience. Developing a reasonable claim expectation—levels on which the subcontractor can improve but that do not guarantee a safety bonus—is critical to the success of a bonus program.
Many companies embrace risk management to strengthen their business processes during times of crisis. Successful companies also look at the upside of risk and identify opportunities by evaluating risks versus rewards. In this episode of Milliman Risk Talks, Mark Stephens and Vikas Shah discuss the value of dynamic risk and opportunity management. They also provide perspective on how these assessments can facilitate capital optimization.
To watch our Milliman Risk Talks series, click here.
For more information on the topic of risk and opportunity management, register for our on-demand webinar here (available until June 30, 2015).
Individual investors at or near retirement may have to reconsider their risk tolerances because of a low interest rate environment and increased longevity. This IO&C article quotes Milliman’s Wade Matterson discussing an alternative portfolio risk management approach featuring an insurance scheme.
Here’s an excerpt:
According to Matterson, building insurance into retail investment products can be achieved with minimal cost using derivatives “in some form or another”.
“These strategies are not unfamiliar at the institutional level but retail investors may not have had much exposure to them,” he said.
Matterson said the products essentially aim to keep investors exposed to at least some market growth while putting a floor on downside risks.
“The reality is there is an insurance cost associated with getting protection,” he said. “And that cost might see investment returns lag as the market rises – it’s an opportunity cost – that will be somewhat proportional to how far markets are up.”
Milliman today published research on regulatory reform in the United Arab Emirates (UAE). The regulations, issued earlier this year by the Insurance Authority (IA), include a transition period of up to three years, but insurers are advised to begin transitioning immediately.
With the new guidelines, the IA has certainly raised the bar for insurance regulations in the region. We expect significant change for both conventional insurers and for Takaful companies as the new regulatory framework is enacted in the coming months and years.
Companies face a number of key changes:
• A higher level of supervision by the IA
• A need for major improvement in risk management practices, including in the framework for enterprise risk management (ERM)
• A requirement to work closely with actuaries on solvency, reserving, investments, and financial forms
For more on the framework, download this paper. You can also download the following presentations prepared earlier this year:
A well-designed allocation structure can help hospitals lower self-insurance costs by distributing costs at a departmental or employee level more effectively. This article, authored by Milliman consultant Richard Frese, highlights some features that hospitals should consider when designing and implementing an allocation structure.
When implementing an allocation, it is first necessary to achieve buy-in from members or departments and to define the goals. Allocations often apportion expected future insurance costs, historical unpaid claim liabilities, and tail liabilities (claims that have occurred but have not yet been reported). The finance managers should establish the goals of the allocation process to ensure program needs are met.
These goals should include ensuring that the allocation system encompasses five key features:
• A loss-control incentive that encourages safety among members
• Stability, with no significant fluctuation in annual contributions and liabilities
• Equity, as reflected in the fair treatment of all members (which does not mean that they all pay the same amount or rate)
• Intelligibility, ensuring the allocation is easily understood and readily accepted by members
• Ease of administration, allowing managers to carry out the allocation without difficulty….
Designing a Basic Structure
Allocations commonly are built on exposure, losses, or a blend of the two. Exposure often is defined as “bed equivalents” for professional liability and as payroll for workers’ compensation. Proper weights (i.e., conversion factors) translate – for example – occupied beds, outpatient surgeries, emergency department visits, and physicians into bed – equivalents. Different risk classes in payroll, such as nurses and clerical workers, also should be adjusted for. An allocation based purely on exposure is easily administered and may help keep the allocation amounts smoother over time.
An allocation using losses will encourage members to minimize losses, but may be more of a challenge to administer and design for several reasons.
Adaero is a stochastic modeling software platform that walks users through the financial model building process. It helps organizations develop financial models quickly and efficiently.
The platform automatically builds financial models as users answer questions about their model needs and provide risk assessment and financial data. The software platform assembles risk register models, risk-adjusted capital expenditure models, and integrated financial statement models.
Adaero allows users to iterate multiple risk scenarios and stress test financials with different sets of assumptions. Adaero incorporates risk inventories by industry and has a model risk management process embedded into each file. Because Adaero is Excel-based, the file format, icons, and menus are simple and intuitive for the user.