Business today moves at lightning pace, and this rapid pace of change is leading to an evolution in risk management. In a recent article in The Times of London, “Why your risk team needs to become your insight function,” Milliman consultant Neil Cantle writes that traditional forms of risk management are quickly becoming too slow to anticipate or enable meaningful reaction. More and more, writes Cantle, companies are embedding new technology and automation into their risk management processes, and risk teams are evolving to help businesses embed risk-thinking into their daily activities. The full article can be accessed via the link above. For more information on Milliman’s work in enterprise risk management, click here.
Milliman announced today that it has been selected by the Federal Emergency Management Agency (FEMA) to provide actuarial consulting services as part of a program to redesign flood insurance products across the NFIP. At the forefront of innovation in flood risk, Milliman will provide state-of-the-art tools, technology, and analysis to FEMA in order to design a new rating plan for NFIP policies nationwide.
The NFIP is vital to protecting U.S. communities from flood loss, and has been offering flood insurance to homeowners, renters, and businesses since 1968. In the almost five decades since the program was created, technological advancements have greatly changed the methods for modeling and rating flood risk. With its choice of Milliman, FEMA can take advantage of innovative new rating techniques that will allow the agency to better understand and price flood risk on a granular level nationwide.
“The NFIP has a wealth of knowledge and experience with the flood peril, and their resources combined with our innovative technology will allow them to design a flood insurance solution for the 21st century,” says Nancy Watkins, a Milliman principal and project lead. “Our goal is to help modernize the NFIP’s insurance product, reflect industry best practices, and improve policyholder experience through increased transparency and a better understanding of risk.”
Watkins has published and presented frequently on flood risk, including briefing Congress, and was recently awarded the American Academy of Actuaries’ 2017 Outstanding Volunteerism Award for her work as a member of the Flood Insurance Work Group. To learn more about Milliman’s flood expertise, click here.
Claims related to construction defects are usually reported years after a home is completed. As new housing continues to grow, it’s probable that the number of construction defect claims will also grow in the near future. That scenario should impel home builders, contractors, and insurers to assess their potential construction defect losses in advance.
In his article “Analyzing construction defects: Practical considerations,” Milliman’s Jamie Shooks details the following items stakeholders should consider when estimating the total costs of construction defects:
• Type of insured: Subcontractor versus general contractor or developer
• Additional insured versus named insured
• Wrap and non-wrap policies
• Attached versus detached housing
• Community/home type
• Alternative fee arrangements
• Frequency and severity by report lag
• Evolving litigation
• Report year versus accident year analysis
• Use of predictive analytics
On 10 October 2017, the new Dutch government Rutte III of the VVD, CDA, D66 and ChristenUnie presented their Coalition Agreement. In ‘Confidence in the future, Government Agreement 2017-2021,’ the government provides an overview of the intended objectives including expected budget.
Two proposals regarding the corporate tax will affect the solvency position of insurers under Solvency II. The first proposal is related to decreasing the corporate tax rate from 25% to 21%. The percentage decreases are in the table below:
||Corporate tax rate
Decreasing the corporate tax rate will have a decreasing effect on the level of Loss Absorbing Capacity of Deferred Tax (LAC DT), resulting in a higher Solvency Capital Requirement (SCR). In addition, the eligible own funds backing the SCR may decrease should an insurer have a Deferred Tax Asset (DTA) on the balance sheet.
The second proposal is related to mitigating the carryforward of taxable losses with future taxable profits. Currently, loss in corporate tax rules can be recovered by profit last year (carryback) and nine years into the future (carryforward). In the Coalition Agreement, the carryforward will be limited to six years. The government expects the first saving to be in 2028. The intended effective date of this rule is currently unknown. Given the first saving in 2028, our expectation is that the rule will commence between 2019 and 2022.
The second measure impacts the level of LAC DT as well. This is due to the opportunity of recovering tax receivables from the loss (SCR) as a result of the 1-in-200-year simultaneous shock with tax liabilities from future profits. Profits between the seventh and ninth years cannot be taken into account.
The same counts for the recovery of a DTA with tax liabilities from future profits. This will be more complicated.
Insurers need to realise these new corporate tax regulations when defining their capital policies and when managing stakeholder expectations on the level of the Solvency II ratio.
In the wake of Hurricanes Harvey, Irma, and Maria, the property and casualty insurance and reinsurance markets are positioned to step in and provide perhaps the largest series of storm-related payouts in history. And for the first time, certain financial investors will contribute to insurance payouts as well, as providers of alternative capital to the reinsurance markets. For many participants in the alternative capital market—or equivalently, the insurance-linked securities market—2017 will represent the first major test of their risk selections and operational capabilities. Milliman consultant Aaron Koch offers perspective in this article.
Political risk insurance can protect businesses in locations and against perils that conventional insurance policies do not cover. Issues related to increasing globalisation, political and economic instability and protectionism have made it an important line of insurance for companies seeking to safeguard their business interests abroad.
In the article “Political risk insurance: A primer,” Milliman actuaries Derek Newton and Laura Hobern discuss what types of events this insurance covers and pricing considerations. The authors also discuss the reasons its demand has increased considerably. Below is an excerpt from the article.
Political risk insurance is commercial insurance aimed to protect businesses and business ventures in locations and against perils that other conventional insurance policies would not cover. There is no standard political risk product. Instead, these policies tend to comprise cover against a variable bundle of perils that can include:
Cover can be long term or short term, depending on the event being covered. For example, cover for trade risk might last for only 30 days, but cover for a major infrastructure development might be in place for several years. In fact, contracts that are five to seven years long are normal, though very few insurers will provide cover for longer than a 10-year period. The policies, however, may not last the full term. Coverage is often one-off, especially if it is project-based.
This translates to plenty of new business in the market with a relatively high acquisition cost, but very little renewal business.
Political risk insurance is not new, but it is not yet a fully mature market. The private market started in the 1970s, and business is written primarily through the major financial centres (i.e., London, New York, Singapore and Paris). There are state players, too, such as the Overseas Private Investment Corporation (OPIC) in the United States. This government agency has been helping American business invest in emerging markets since 1971.
Increasing globalisation and the increasing willingness of commercial enterprises to operate outside their national boundaries are driving demand for political risk cover. So, too, are the rise of nationalism and political populism in addition to continuing political instability in various parts of the world. All of these factors are increasing the awareness of commercial enterprises regarding the risks they are running when operating abroad and thus increasing their appetite for cover.