Category Archives: Research

New developments in the computation of mortality rates: An actuary’s bread and butter

The computation of mortality rates has traditionally been the bread and butter of actuaries. The first mathematicians to venture into the actuarial field most likely spent their days analysing mortality rates and conducting life valuations. Nowadays, the work of actuaries is much more varied—which is a welcome development for most—but are we sometimes neglecting this core skill?

Milliman researchers in Paris certainly aren’t and their new research, hot off the press, published on 22 February 2017, represents a significant development in mortality and longevity risk modelling. It is vital reading for anyone working in this sphere.

My colleagues have developed a robust statistical methodology to correct the implicit inaccuracies of national mortality tables which are used widely in sophisticated mortality and longevity risk modelling. The results are striking.

Here I take a closer look at the relevance of these national mortality tables, the problems with them, and the corrections available in order to enhance mortality and longevity risk models. I will touch on the key technical points behind these developments from an Irish/UK perspective, leaving the rigorous mathematical explanations to the underlying research publications—the 2017 publication can be found here and the 2016 publication can be found here.

The use of national mortality tables
In Ireland and the UK, to set basic mortality assumptions in our pricing and reserving work, we tend to use insured lives mortality tables, such as the Continuous Mortality Investigation (CMI) tables. However, national mortality tables based on the population as a whole are also used extensively in mortality and longevity risk modelling, where a greater quantity of data is required.

National mortality tables are used to calibrate stochastic mortality models, to derive mortality improvement assumptions, in sophisticated mortality risk management models, in Solvency II internal models, in pricing mortality/longevity securitisations, and in bulk annuity transactions.

Bulk annuity transactions are popular in the UK market, with a number of large deals executed during 2016, including the ICI Pension Fund’s two buy-in deals completed in the wake of Brexit, totalling £1.7 billion. Legal & General completed a £2.5 billion buyout agreement with the TRW Pension Scheme in 2014.

Longevity hedging (in particular, use of longevity swaps) is also an attractive approach to the de-risking of pension schemes, and would equally require the use of national mortality tables. Transactions range from the large-scale £5 billion Aviva longevity swap in 2014 to the recent, more modest, £300 million longevity swap completed between Zurich and SCOR in January 2017.

While the use of internal models to calculate mortality and longevity risk capital requirements under Solvency II is not prevalent in the Irish market, which is due to the size of companies and the amount of risk retained, it is likely that reinsurers are looking at such models. In the UK, larger companies may opt to use internal models if they are retaining large exposures.

Indeed, national mortality tables also typically inform mortality improvement assumptions for all companies, as the analysis of improvements requires large volumes of data. Therefore, even companies that do not use sophisticated mortality and longevity risk modelling techniques are implicitly impacted by the new developments in relation to the construction of national mortality tables.

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A harmonized EIOPA Recovery and Resolution Framework discussion paper

king-eoinOn December 2, the European Insurance and Occupational Pensions Authority (EIOPA) issued a discussion paper on “Potential Harmonisation of Recovery and Resolution Frameworks for Insurers.” The paper sets out a number of considerations for the development of a harmonized European framework in the recovery and resolution planning space. It is open to comments from stakeholders until February 28, 2017.

Recovery and resolution planning is a very topical subject at present and there are numerous examples of requirements for financial services companies and regulatory authorities to develop recovery and resolution plans and frameworks. For example, larger financial institutions that are classified as globally systemically important financial institutions (G-SIFIs) and globally systemically important insurers (G-SIIs) are required to undertake recovery and resolution planning under the Financial Stability Board’s “Key Attributes of Effective Resolution Regimes for Financial Institutions” and similar requirements adopted by the International Association of Insurance Supervisors. This is also an area of focus for European regulators. In Ireland, for example, Sylvia Cronin, Director of Insurance Supervision at the Central Bank, noted at the European Insurance Forum in March that recovery and resolution for insurers is an area of particular interest for the Central Bank.

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Top 15 U.S. articles and reports for 2016

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In 2016, Milliman consultants wrote articles and worked on studies covering a range of practices and areas. Healthcare was a hot topic again this year, and topics included value-based payments, risk adjustment, and the Medicaid managed care rule. Other articles—about student loan debt and daily fantasy sports—were also popular. Here’s a preview of the top 15 U.S. articles and reports for the year.

15. Financial analysis of ACA health plan issuers, By Daniel J. Perlman and David M. Liner

14. Are you ready for the new world of value-based reimbursement?, By Marla Pantano

13. Encounter data standards: Implications for state Medicaid agencies and managed care entities from final Medicaid managed care rule, By Jeremy Cunningham, Maureen Tressel Lewis, and Paul R. Houchens

12. The elusive nature of private exchanges, By Mike Gaal

11. Money market update for 2016: The rule that you should be aware of, By Jeffrey T. Marzinsky

For a summary and link to all of the articles, click here.

Top 15 global articles and reports for 2016

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Milliman’s most viewed articles worldwide in 2016 covered topics including pensions, student loans, value-based payments—and Pokemon Go. There were also pieces on Solvency II, encounter data standards, and managed care regulations. Here is a preview of the top 15 global articles and reports for the year.

15. Financial analysis of ACA health plan issuers, By Daniel J. Perlman and David M. Liner

14. Telemedicine and the long-tail problem in healthcare, By Jeremy Kush and Susan Philip

13. Public Pension Funding Study, By Rebecca A. Sielman

12. Life insurance risks: Observations on Solvency II and the modeling of capital needs, By Stephen H. Conwill

11. Encounter data standards: Implications for state Medicaid agencies and managed care entities from final Medicaid managed care rule, By Jeremy Cunningham, Maureen Tressel Lewis, and Paul R. Houchens

For a summary and link to all of the articles, click here.

An invitation to 20/20 Beyond the Numbers: EV in Asia

Join Milliman consultants for a deeper dive beyond the numbers in an exclusive webinar on the implications of the recently published study, Embedded Values in Asia 2015. The webinar will include a 20-minute presentation led by Milliman Principal and Consulting Actuary Paul Sinnott, followed by a brief Q&A session.

Date: Wednesday, 7 December
Time: 12 noon Hong Kong time

To confirm your participation please RSVP here before 28 November. Registered participants will receive a link to the webinar and local/toll-free numbers for most countries in the Asia-Pacific region a few days prior to the webinar.

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 that 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.

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