SFCR: An initial picture

This blog is part of the Pillar 3 Reporting series. For more blogs in this series click here.

Following the first annual reporting deadline under Solvency II for most companies on 20 May, there is now a wealth of information available through companies’ Solvency and Financial Condition Reports (SFCRs).

We are currently analysing the contents of the Irish SFCRs, both quantitative and qualitative, and will be publishing more detailed analyses in the coming weeks.
However, as a taster, we’ve looked at solvency coverage across life and non-life insurers in Ireland. While this initial analysis does not include every company, the sample includes 46 companies with aggregate Own Funds of €26.4 billion, including all the major players.

The good news is that the Irish insurance industry is in a healthy position in terms of solvency coverage. Only one company has an SCR coverage ratio below 100% at end 2016 and it has since received a capital injection to remove the shortfall.

The graph below shows the relationship between Own Funds and SCR coverage ratio for companies. This shows that the majority of companies (66%) have a coverage ratio between 100% and 200%, including those with Eligible Own Funds in excess of €1 billion. The weighted average solvency coverage ratio is 167% (178% for life and 154% for non-life).

Our later analysis will also include a pan-European focus on the public disclosures. However, we’ll have to wait a little longer for this analysis as the group reporting deadline is 1 July. This includes the publications of single SFCRs where Groups have opted to include all their subsidiaries within a single public disclosure document. We understand that some of the large Groups in the UK have gone down this route.

Paid family leave proposal leaves states with funding issues to consider

President Donald Trump’s 2018 budget proposal includes a paid family leave insurance program for workers in the United States. Under the president’s proposal, states would be allowed to design the paid leave program for their own jurisdictions as long as the benefits meet minimum standards. This means that some states may have a lot to consider when preparing for a new insurance program, such as funding methods, administration, and specific benefit design features. The article “Paid family leave in the United States” by Paul Correia offers some perspective.

Captive actuaries are as indispensable as your traffic app

One of the primary rewards from operating a captive is the ability to place more emphasis on the risk management process, in order to stabilize annual budgets, reduce long-term costs, and utilize capital more effectively. To accomplish these goals, captives rely on experienced service providers to manage almost all of their operations.

An actuary is one of these indispensable service providers. Simply put, actuaries can quantify the level of risk, which allows the company to better manage it. And actuaries provide value throughout a captive’s life cycle, from formation to dissolution (if applicable). Risk factors change all the time, so having an actuary review your experience regularly is crucial to avoiding problems.

Speaking of avoiding problems, we all love the functionality of the Waze traffic app, which steers us from one location to another in the most efficient manner possible. At its core, this traffic app helps you figure out what path to take to avoid unexpected delays, thereby reducing stress levels. Anyone who has traveled I-95 in Connecticut knows this value first-hand.

Actuaries essentially function like a Waze app for captives. They largely provide a means to keep captives on the right path by avoiding surprises and reducing potential for management stress.

Initially, actuaries are engaged in feasibility processes to help ensure a company knows what to expect as it sets out on its journey to create a captive. Where necessary, actuaries utilize data from the local environment (the industry) to supplement the company’s own experience. The main deliverable of the feasibility study is a five-year pro forma financial model, which includes a projected income statement and balance sheet of a new captive’s financial business plan. Actuaries provide these projections on both an expected loss outcome basis and an adverse loss scenario basis; this is because it is crucial to understand the potential risks involved, not just what to expect on average. Both the captive business owner and regulator are key stakeholders for whom the feasibility study reduces stress levels right from the outset.

Once the journey begins (the captive is formed), actuaries perform ongoing loss reserving and loss forecasting (budgeting). As the captive’s losses emerge, the actuary has to gauge how much weight to place on an individual insured’s experience versus that of the industry when estimating ultimate losses. This is a delicate balance amidst the “noise” of random variations in losses. In the end, actuaries hold the keys to how fast the captive can travel from a loss recognition standpoint.

Periodically, at least every three years, the actuary should update the pro forma model, adjusting to the conditions of the road map that was created. This provides a continuous means of reasonableness testing of underlying assumptions, including loss ratios, loss development patterns, loss payment (discount) factors, expenses, investment income, taxes, etc.

All of this effort ultimately supports a smooth ride—the issuance of fairly stated financial statements with adequate funding of loss reserves. The actuary’s road map and process needs to be transparent enough to allow another actuary to essentially reproduce the analysis (even though no two actuaries would use all of the same assumptions or necessarily take the same route to the destination). During the process, the captive’s actuary needs to engage in dialogue with the audit firm’s actuary to ensure audit sign-off is secured; this helps to arrive at your final destination from a financial reporting standpoint.

As actuaries, we certainly wish our models could be as straightforward as the Waze traffic app. Even though we face complex questions, our processes and expertise have proven to be successful in navigating the risky terrain of running a captive insurance company. In Connecticut, our tourism branding is “Still Revolutionary.” In today’s ever advancing age of big data and analytics, using actuaries to help captives take calculated risks to justify the potential rewards noted above is still a state-of-the-art approach. And the Hartford, Connecticut area has the highest number of actuaries per capita in the United States. Talk about an opportunity. So you may want to consider the Waze-like advantages of using an actuary to help you navigate a new route to establishing a captive in Connecticut.

This blog post was first published by the Connecticut Captive Insurance Association.

Would a patient compensation system decrease or increase MPL costs?

Over the past several years, legislation introducing a patient compensation system (PCS) has been proposed in several states. Proponents claim a PCS would eliminate the stigma associated with medical professional liability (MPL) claims for healthcare providers. Without the stigma, they believe physicians would not defend themselves as often, resulting in lower legal defense costs than the current tort system produces.

However, some do not agree that the stigma would be less under the PCS system. Additionally, several factors present under current PCS proposals indicate that there will be more reported and indemnified claims, leading to higher MPL costs. In this article, Milliman consultants Susan Forray and Eric Wunder discuss aspects of some states’ PCS proposals that MPL carriers and healthcare providers need to consider.

The future of (individual) reserving

In most cases, the current reserving practice consists of using methods based on claim development triangles for point estimate projections and capital requirement calculations. Taking advantage of the information embedded in individual claims data is a promising alternative to address the need for more accurate models within the reserving practice. This white paper by Milliman’s Laurent Devineau, Fabrice Taillieu, and Alexandre Boumezoued examines the innovative opportunities offered by alternative individual reserving models and the main challenges with their implementation.

Personal lines coverage evolves with exposure data tracking

Increasingly, individuals are having their driving habits and living environments monitored electronically. A recent Insurance Journal article cited Milliman’s Sheri Scott discussing how exposure data tracking is shaping new underwriting practices for personal lines coverage like auto insurance.

Here’s an excerpt from the article:

Exposure tracking and the advent of autonomous vehicles are shifting personal auto insurance risk exposure from dependence on driver skills, estimated distances driven and garage location to the precise determination of vehicle locations, driving habits, driving distances and traffic conditions, all determined through the collection of trip data gathered in real time.

Yet even these underwriting considerations will soon be supplemented, if not supplanted, by the loss experience of automated vehicles and their manufacturers.

This transformation will not be without risks of its own, Scott said. In particular, she cited disruption of networked communications as a hazard, especially as vehicle occupants become dependent on automated control and less practiced at taking control of a vehicle.

“If some kind of communication goes down, there could be a very serious occurrence,” she said.