Indonesia Life Insurance Newsletter, July 2017

The Life Insurance Association of Indonesia reported continued growth of the life Indonesia industry for 2016 and over the first quarter of 2017. In 2016, the industry recorded a total premium income of IDR 167.04 trillion, a 29.8% growth year-on-year compared with 2015. For the first three months of 2017, the total premium income for life insurance increased by 28.15% year-on-year to IDR 35.19 trillion as compared with the first three months of 2016. Milliman’s Richard Holloway, Halim Gunawan, and David Kong offer more perspective in the latest Indonesia Life Insurance Newsletter.

EIOPA issues opinion on relocations from the UK

On 11 July 2017, the European Insurance and Occupational Pensions Authority (EIOPA) issued principles on the supervisory approach to relocations from the United Kingdom.

The opinion published by EIOPA sets out principles to foster supervisory convergence in Europe and to ensure consistency in the authorisation process. These principles and strong statements from EIOPA have been published to a backdrop of claims that differing standards are being applied by regulators in member states, particularly in relation to matters such as head-count, retention of risk and corporate substance.

Some of the key points from the opinion are:

– EIOPA calls on all supervisors to have a sound authorisation process, and to increase resourcing if required to deal with the level of extra applications.
– No automatic recognition of existing authorisations should be granted.
– An appropriate level of corporate substance should be required of authorisations and companies should not display characteristics of an empty shell. The supervisors are instructed to scrutinise any transfer of risk carefully and require a minimum retention of risk from the authorised undertaking. An indicative minimum retention figure of 10% is mentioned.
– Outsourcing arrangements should not impair the governance and risk management of the company, and ultimate responsibility remains with the Board of Directors, irrespective of any outsourcing in place.
– EIOPA advises supervisory authorities to monitor companies post-authorisation and to conduct specific reviews in the first few years following authorisation to ensure consistency with the initial business model.

The full opinion and principles can be found on the EIOPA website here.

For more information on selecting locations and the authorisation process see our recent briefing note here.

InsurTech considerations for the P&C industry

InsurTech seeks to improve upon traditional insurance processes by making use of technology like artificial intelligence (AI), mobile applications, and cloud computing. In this article, Milliman’s Tom Ryan takes a look at the InsurTech environment within the property and casualty (P&C) industry. The following excerpt highlights the dynamics stirring up interest in the industry.

The current interest in InsurTech is driven by a perfect alignment of four key elements, the “big Ts”—technology, talent, treasure, and a tempting target.

• Technology: Many of the ideas behind InsurTech startups are not new. It’s just that they were not feasible previously because of shortcomings in technology—even for the technology available as recently as four to five years ago. The improvements in faster, cheaper, smarter computing power, greater storage capability, and large blocks of external but “usable” big data have allowed many seasoned ideas to come to fruition.

• Talent: Many of the entrepreneurs behind today’s InsurTech initiatives migrated to insurance from other industries where they successfully implemented technological innovation. As these other industries get more crowded and mature, innovators are bringing their playbooks to more wide open spaces—the insurance industry. Visit the websites or read the backstories of many InsurTech startups and you will likely find references to prior successes in FinTech or at least a Stanford or MIT pedigree.

• Treasure: At the end of 2016, policyholder surplus in the U.S. property and casualty (P&C) industry stood near record highs of $700 billion. According to the Insurance Information Institute, the industry now has $1 of surplus for every 77 cents of net written premium, close to the strongest claim-paying status in its history. While this is good news from an insurer solvency perspective, the abundance of surplus relative to premium is driving a sustained soft market with low return on equity. Many insurers are responding to these conditions by merging with or acquiring competitors, buying stock back, or raising distributed dividends. It has proved difficult to put any excess capital to work directly in company operations. This had led several insurers to invest in internal technology and digital innovation initiatives as well as starting their own corporate venture capital funds to invest in InsurTech startups. More and more of the investors in InsurTech ventures are the investment arms of legacy insurers and reinsurers. Because of the lack of attractive standard alternatives, these investments may be the best options.

• Tempting target: The insurance industry is huge, with over a trillion dollars of net premiums written annually—over $500 billion in the P&C industry alone. Couple the size of the industry with a reputation for risk aversion and conservatism, and you have a tempting target for innovators, disruptors, and entrepreneurs.

Milliman analysis shows uncertain future for embedded value reporting in European insurance market

Milliman has announced the availability of a new report detailing embedded value (EV) results for 19 major insurance companies in Europe. The report examines trends among the companies reporting EVs as of year-end 2016, comparing practices adopted and discussing reporting issues following the implementation of Solvency II in Europe and the move toward the global adoption of International Financial Reporting Standards (IFRS).

“The future of embedded value reporting in Europe remains uncertain—although there has been increased alignment between EV and Solvency II reporting, we have continued to witness a gradual reduction in the number of firms reporting on an EV basis,” said Philip Simpson, a principal and consulting actuary in Milliman’s London office. “And with Solvency II disclosures via the SFCR lacking information around new business or analysis of change, for example, there is potentially a void appearing in the level of granularity of financial information reported.”

The release of the final IFRS 17 standard in May 2017 could signal an alternative reference point for Market Consistent Embedded Value (MCEV). And with substantial disclosure requirements involved, this may allow a sufficient amount of information to be obtained about the profitability of the business. However, the preparation of accounts under IFRS 17 gives rise to a different interpretation and timing of profit and loss compared with an EV basis, which will need to be considered. Ultimately time will tell whether companies use Solvency II or IFRS 17 as the reference point for MCEV.

Key insights from the European report include:

• There has been an ongoing, though moderate, reduction in firms reporting on an embedded value basis in 2016 compared with 2015.
• An amendment to the European Insurance CFO Forum Market Consistent Embedded Value Principles© (the MCEV Principles) was issued in May 2016, which permits the use of the projection methods and assumptions for market-consistent solvency regimes (e.g., Solvency II) in EV reporting. In light of this, during 2016 companies continued to change their approaches, with a continued trend to align EV and Solvency II reporting.
• The CFO Forum members (that disclosed their embedded values at the end of 2016) reported a combined embedded value of GBP 263 billion (EUR 308 billion) at the end of 2016 compared with GBP 246 billion (EUR 288 billion) at the end of 2015. Experience amongst the companies studied was mixed, with around half of companies experiencing an increase in embedded value compared with 2015.
• Overall, results for new business were fairly positive for the majority of companies in the report. The total value of new business (VNB) written by the current CFO Forum members (that disclosed their values of new business at the end of 2016) was GBP 11.3 billion (EUR 13.3 billion) in 2016, compared like-for-like with GBP 10.1 billion (EUR 11.9 billion) in 2015.

To download the report, click here.

Riding the data: How a transportation company used data science to improve decision-making processes

How can a company leverage customer data and turn it into actionable information? This was the challenge one transportation provider faced when its modeling system began underperforming after the company implemented it to predict revenue and passenger traffic. In this article, Milliman consultant Antoine Ly discusses how the firm created a machine-learning model that helps the company analyze various aspects of its ridership, leading to more informed financial decisions.

Here is an excerpt:

Working from a mock-up drafted by the client, the [Milliman] team reproduced the dashboard to the client’s specifications, but it is now supported by newly developed software as well as the client’s data warehouse. The dashboard allows the client’s management team to quire different aspects of passenger usage to gain insight into traffic flows and revenue. Colour-coded symbols, which when clicked on, give managers a concise picture of a train’s revenue and traffic. Managers can also quire the system based on selected features for both past usage and anticipated ridership, and are now able to make more informed decisions about pricing, the need for discounts or adjustments to marketing campaigns.

Because the model can adapt to new situations, deviations from the average error are confined to a much more narrow range. This means managers can have more confidence in the model’s predictive value and increases their ability to manage revenue.

Solvency II: Recalculation of the Transitional Measure on Technical Provisions

For many firms, year-end 2017 will be the first time that they need to recalculate the Transitional Measure on Technical Provisions (TMTP relief), although some firms have already applied and received approval for a recalculation following material changes in their risk profiles.

Milliman consultants have experience in recalculating the TMTP relief for a number of clients, performing independent reviews of recalculated TMTP relief, and have provided assistance with the development and review of firms’ recalculation policies.

This update by Milliman’s Oliver GillespieEmma Hutchinson, Marie-Lise Tassoni, and Stuart Reynolds summarises findings from these exercises, along with our own views on different potential approaches to recalculating the TMTP relief and associated key issues and challenges.