Category Archives: Insurance

Price optimisation for personal lines insurance in Ireland

Price optimisation is a powerful and often controversial technique that blends traditional risk cost modelling and an understanding of behavioural considerations such as price sensitivity to predict the “optimal” combination of premiums charged and expected profit. In this article, Milliman’s Eoin Ó Baoighill and Anita Subramani discuss price optimisation and its use for personal lines insurance in Ireland.

How alternative capital is shaping the global reinsurance industry

The infusion of alternative capital into catastrophe reinsurance has reshaped the market and continues to ripple through the industry as it expands to include new structures and cover new perils. The influx of alternative capital (along with relatively low catastrophe activity) has driven down catastrophe reinsurance prices to historically low levels, which has caused reinsurers to try to diversify into other lines of business. Their move into other lines has led to lower prices overall, prompted underwriters to modify terms and conditions in order to compete, and incentivized reinsurers to pursue mergers and acquisitions (M&A) activity to achieve scale and diversification.  Actuary Karl Goring provides some perspective in this Milliman Insight paper.

Can traditional insurers keep up with the InsurTech transformation?

Technology is changing the way businesses evaluate risks, transforming customer interactions, and overhauling the purchase process. As traditional insurers strive to overcome legacy systems and practices, how are they successfully keeping pace with new InsurTech entrants? In the Milliman Impact article “Setting the pace: InsurTech transformation,” Neil Cantle, Russell Osman, and Pat Renzi offer their perspectives on the challenges that traditional insurers must navigate.


Infographic: What a private flood insurance market could look like in Florida

In the aftermath of Hurricanes Harvey and Irma there’s been increased public attention to both government-sponsored flood insurance (the National Flood Insurance Program, offered through FEMA) and the potential rise of a private flood insurance market. In Florida, a recent analysis by the Associated Press found that of the state’s 38 coastal counties, only 42% of homes are covered by flood insurance. The same analysis found that of the roughly 2.5 million homes in Special Flood Hazard Areas, Florida’s overall flood insurance rate for hazard-zone homes is just 41%.

Flood risk continues to be one of the most difficult perils to price for the homeowners industry. More than any other catastrophic peril, flood risk varies over short distances; critical factors that contribute to flood risk include elevation, relative elevation, distance to coast, and distance to river. This spring, Milliman, along with risk modeling firm KatRisk, sought to independently model the feasibility of a private flood insurance market in Florida, Texas, and Louisiana. The infographic below provides some of our findings for all single-family homes in the state of Florida:

CRT transactions offer diversification options

The market for credit risk transfer (CRT) transactions continues to grow and diversify, providing institutional investors with valuable options to consider as part of their investment portfolios. In this article, Milliman’s Jonathan Glowacki and Rehan Siddique, explain CRT bonds and provide a risk profile for them. The authors also discuss how CRT bonds offer investors diversification to corporate bonds, comparing the two securities.

Here is an excerpt from the article:

Institutional investors are large investors in the corporate bond space. CRT bonds could offer diversification to corporate bonds. The table in Figure 4 compares corporate bonds with CRT bonds:

Spreading the underlying exposures for CRT bonds across many geographic areas allows for a diversification of exposures (i.e., thousands of individual borrowers) as compared with corporate bonds, which is a single entity. In addition, for a portfolio of 1,000 corporate bonds, an investor might expect 50 to default, for a default rate of 5%. With CRT bonds, you may have an expected default rate of 5% weighted across all economic scenarios, but in most of the scenarios you would experience a 0% default rate.

In terms of performance, as of February 2017, most of CRT bonds have shown positive movement in their credit ratings since issuance with none showing an unfavorable movement.

The table in Figure 6 provides a comparison of the average initial spread with corporate option-adjusted spread (OAS) over the last five years as of May 31, 2017. We can see that, historically, CRT bonds tend to have higher comparable spreads than corporate bonds. As the market for CRT bonds continues to grow and interest rates continue to rise in the short term, we can expect similar trends in spread.

PRIIPs Level 3 Q&A update

By 1 January 2018 insurers, banks, asset managers and other investment firms offering packaged retail investment and insurance-based products (PRIIPs) must make a key information document (KID) available for all products offered to customers. On 18 August 2017 the European supervisory authorities (ESAs)—made up of the European Insurance and Occupational Pensions Authority (EIOPA), the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA)—published an updated questions and answers (Q&A) document on the PRIIPs KID. The first batch of Q&As was published in July.

The ESAs’ publication is aimed at clarifying aspects of the Regulatory Technical Standards (RTS) or ‘Level 2’ rules covering the specific form and content of KIDs. The latest questions addressed by the ESAs include queries on the following:

• Categorisation of a retail investor
• Market risk assessment
• Credit risk assessment
• Summary Risk Indicator (SRI)
• Presentation of costs

The combined set of Q&As, covering the first and second batch of queries, can be found here.

In addition to the latest Q&A document, the ESAs also published a useful flow diagram or decision tree showing how to perform the various calculations for the SRI and performance scenarios. This is a graphical view of the requirements set out in the RTS and a useful summary of the basic calculations. The flow diagram can be found here.

The ESAs stated they will continue to assess whether further guidance is needed based on additional questions received.

Please contact us if you have any questions or comments on PRIIPs. We would be happy to meet with you to discuss ways in which we can help you achieve a successful PRIIPs implementation including gap analysis, KID production, checking overall compliance with the PRIIPs requirements and review of KID elements, including narratives and numerical disclosure tables, etc.