Category Archives: Actuary

IASB names Milliman’s William Hines to Transition Resource Group for IFRS 17

Milliman is pleased to announce that Principal William Hines has been named an observer to the International Accounting Standards Board (IASB) International Financial Reporting Standard (IFRS) 17 Transition Resource Group (TRG). IFRS 17, which was adopted in May, represents a significant change from current accounting practices and is expected to require substantial effort from companies to comply. Hines is one of only three observers and 15 members that make up the TRG; the group was created to help support companies as they transition to the new Standard.

Hines was appointed an observer from the International Actuarial Association (IAA), where he chairs the Insurance Accounting Committee. He has spent the past 15 years actively involved in the insurance project, presenting research to the IASB’s Insurance Working Group, and to IASB members and staff. During the IFRS 17 development process, Hines was part of the American Academy of Actuaries (AAA) IFRS Task Force and Financial Reporting Committee, which provided input to the Board. He has been invited to speak at conferences around the world, and has published extensively on the topic of IFRS accounting for insurance.

William has extensive experience consulting, researching, writing, and presenting on IFRS 17. There are not many people who can say they’re passionate about financial reporting issues for insurers—but William is one such person. I’ve no doubt his expertise will be invaluable to the Transition Resource Group and the firms it supports as we make the significant transition to IFRS 17.

For more information on the appointment, click here.

How can self-insureds benefit from independent actuarial services?

Companies should try to avoid any conflict of interest when subscribing to the principles under the Sarbanes-Oxley Act. When determining if an actuarial firm is independent, a company can ask two questions: Is the actuarial firm a provider of another service to your company? Does the firm present any possible conflicts?

In the article “Why independence matters in actuarial services,” Milliman’s Richard Frese and Tony Bloemer discuss how actuaries in various roles interact with key decision-makers and the business benefits of working with an independent actuary.

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.

Milliman actuary develops CAS training courses

Milliman consultant Mark Shapland and Louise Francis, of Francis Analytics and Actuarial Data Mining, developed two online courses that the Casualty Actuarial Society (CAS) is now offering to its members: Introduction to Statistics & Simulation and Introduction to Modeling Statistics. The courses are an offshoot of the Limited Attendance Seminars on Reserve Variability that Mark and Louise periodically run for the CAS and are part of the CAS’s ongoing efforts to expand its professional education programs for members. For more information, visit the CAS website.

New life insurance textbook analyzes investment products with guarantees

Milliman’s Tigran Kalberer and Annuity Systems’ Kannoo Ravindran have edited a new book, Non-traditional Life Insurance Products with Guarantees. In the book, the best-selling editors have assembled a team of authors from the insurance industry to explore all investment products with guarantees, such as variable annuities, index-linked products, and constant proportion portfolio insurance-based (CPPI) products. The book explores many features of these investment and retirement products from an insurer’s and pension plan sponsor’s perspective.

To learn more about the book, click here.

CAS awards Milliman actuary honorarium

Milliman’s Mark Shapland received an honorarium from the Casualty Actuarial Society’s Monograph Editorial Board (MEB) for his paper on stochastic reserving entitled “Using the ODP bootstrap model: A practitioner’s guide.”

Mark’s paper explores practical issues and solutions for dealing with the limitations of over-dispersed Poisson (ODP) bootstrapping models, including practical considerations for selecting the best assumptions and the best model for individual situations. The paper illustrates the diagnostic tools that an actuary needs to assess whether a model is working well.