Tag Archives: Ed Morgan

Milliman continues global expansion, opening new office in Turkey

Milliman today announced that it is expanding to Istanbul amidst growing demand for Milliman’s consulting services in the region. The Istanbul office will specialize in actuarial and strategic consultancy services for non-life, life and private pension, health, and employee benefits. Halil Kolbaşı, an experienced actuary who has worked both in the Turkish Treasury and with Turkish life and casualty insurers, will head the new office. This will be Milliman’s 14th location in Europe. The firm also has two locations in the Middle East, Dubai and the recently opened Tel Aviv office.

Ed Morgan, Milliman’s managing director for Italy and Central and Eastern Europe (CEE), says, “Turkey is an important, fast-growing, and dynamic economy, and as demand for Milliman’s services in the region expands, we see it as critical to have a strong local team in the market. We are delighted to have Halil Kolbaşı lead our Istanbul practice, which will allow Milliman to offer the very best international expertise and innovative new approaches along with a deep local knowledge of the industry.”

Halil says, “As an actuary in the Turkish market for over 20 years, I’ve been observing that there is a need for dedicated, internationally-reputed actuarial consultancy services in the region. With the implementation of standards like Solvency II and IFRS 17, and new technologies in insurance such as data science, insurtech, artificial intelligence, and machine-learning, high-quality expertise from a global leader like Milliman is becoming more and more important. As part of Milliman, I’m looking forward to supporting insurance companies on their existing business and innovative transformations.”

Measuring new business profitability under Solvency II (S2NBV)

Solvency II represents a radical shift in the way that European insurance regulation works, and the authors of a new Milliman paper believe it will fundamentally change the way European insurers view risk and returns. In this paper, Milliman consultants Ed Morgan and Jeremy Kent introduce a new methodology for measuring new business value and new business profitability in this Solvency II world.

A valuation methodology for insurance M&A transactions

Valuing insurance companies for mergers and acquisitions (M&A) under the Solvency II framework has financial implications of interest to potential investors. According to Milliman’s Ed Morgan and Jeremy Kent, a Solvency II Appraisal Value (S2AV) approach provides a workable methodology for use in M&A transactions that is aligned with how investors generally view target companies. They discuss S2AV in The Actuary article entitled “A valuation methodology for M&A transactions.”

Here’s an excerpt:

The introduction of Solvency II is driving significant changes for the European insurance sector, including insurance mergers and acquisitions (M&A).

In our experience, investors are often interested in projected shareholder cashflows, that is, the expected real-world distributable profits, and wish to discount them at their required rate of return. A number of factors may influence distributable profits, but the most important medium- to long-term drivers are likely to be the required Solvency II capital and the own funds available and eligible to cover it.

Thus buyers and sellers of insurers are usually highly focused on the current and future capital position. Solvency II makes this position harder to determine than under Solvency I, but there is also much more scope for capital synergies and to improve the capital position through management actions.

While, in theory, the net present value of distributable profits could be obtained from a full, long-term projection of the Solvency II balance sheet and SCR, in practice it may be very challenging to get such a projection in a transaction situation. Approximations likely to be available, such as business plan or own risk and solvency assessment (ORSA) projections, may introduce material distortions into any valuation approach.

Our methodology, therefore, decomposes the valuation into given components, which can be determined with a reasonable level of precision, based on information likely to be available. Furthermore, this decomposition can be very useful in understanding the value attributed to activities such as new sales and asset management. This can be a base from which to assess the value that may be added by changing elements of the company’s strategy.

This methodology can be applied equally to life, non-life, and health business.

To learn more about S2AV, read “S2AV: A valuation methodology for insurance companies under Solvency II” by the two consultants.

S2AV: A valuation methodology for insurance companies under Solvency II

In this report, Milliman consultants Jeremy Kent and Ed Morgan discuss some of the challenges in valuing insurance companies under the Solvency II framework. The authors also propose a possible valuation methodology to meet the needs of potential investors with a certain perspective in mergers and acquisitions transactions. While under Solvency II a number of factors may influence distributable profits, the authors believe that the most important drivers, particularly in the medium to long term, will be the required level of Solvency II capital and the own funds available and eligible to cover it.

Lack of management action plans may leave European insurers exposed

This Risk.net article (subscription required) highlights Milliman’s “Dynamic policyholder behavior and management actions survey report.” In the article, Ed Morgan discusses how the absence of management action plans by European insurance firms can lead to shortcomings in governance. Here is an excerpt:

The majority of European insurers are not formally documenting how management teams plan to respond to changing economic conditions and are not modelling the impact of such management behaviour in stress scenarios, a survey has found.

Only five out of 20 European firms currently possess an official plan listing the actions management will take in certain economic scenarios, according to the survey by actuarial consultancy Milliman.

This is despite such plans being a requirement for European insurers under the Solvency II directive.

Ed Morgan, managing director of Milliman’s operations in Italy and Central Eastern Europe, says not having well-documented management actions is a governance issue, as well as being an issue for modelling and financial reporting.

“The absence of management action documents and model functionality can sometimes be because firms haven’t fully appreciated their importance,” says Morgan. “But you could also argue that sometimes management themselves might prefer not to be subject to this high spotlight governance in case it makes it harder to justify the actions they take in real life after the event.”

… The reason why some European firms have to do model management actions, despite regulatory pressure, is unclear, says Morgan.

“One thing may be lack of awareness of how modelling management actions can materially improve results. If you model management actions in an overly simplistic way, then they’re very likely to be suboptimal under various stress scenarios, and likely to overstate required risk capital,” he says.

The way companies are organised may also play a part in how management actions are modelled, says Morgan. For example, the actuaries that are building the model may not be close to the personnel setting investment decisions. “So when it comes to modelling management actions in regards to investment decisions, one set of people have one view on what they’re doing, another set of people are doing the modelling, and potentially a lack of communication and of understanding prevents a proper linkage being made between the two,” Morgan adds.

Dynamic policyholder behaviour, management actions, and life insurance

D Clark - J  Kent - E  MorganMilliman has just published a new report summarizing the results of a recent survey of current practice in the modelling of dynamic policyholder behaviour (DPB) and management actions (MA) for life insurance business.

There are 56 companies represented in the survey, across Europe, the United States, and Japan.

The survey revealed some interesting results. For instance:

• For variable annuities/unit-linked with guarantees, only around 50% of respondents model at least one type of DPB. This increases to 85% for other types of products (what we have termed “traditional” products).
• Of respondents offering guaranteed annuity options (GAOs) on traditional products, only around 16% of respondents were modelling them with dynamic take-up rates.
• Around 60% of companies have monitored DPB experience against that predicted by their models; of these, almost half say their models predicted experience well.
• Most companies in the United States and Europe model assets and liabilities, the interactions between them, and some type of future investment strategies (a form of MA) for certain classes of business. However, future investment strategies modelled are often oversimplistic, for instance being invariant to economic conditions.
• Only a minority of companies hold a formal documented plan for management actions. Most companies also don’t monitor actual management actions against those predicted by their models.
• Actuaries were the most prominent group involved in setting modelled MA rules, followed by investment and risk management professionals. Other professionals were more rarely involved.

DPB and MA are becoming increasingly important aspects of modelling as more focus is placed on stochastic calculations and the tails of distributions. In particular, Solvency II in Europe specifies requirements for both DPB and MA, so we expect significant work will be required of companies in these areas, particularly as they should form a key component of a company’s risk management.

Market turmoil in recent years across various regions highlights the importance of working to understand and model how management may react to such scenarios. However, the survey results show that many companies are failing to model DPB for some key options. Modelling of MA is also underdeveloped in many cases, with some key actions not being modelled at all, or in an oversimplistic way that doesn’t appropriately reflect reality.

DPB and MA predicted by models should also be monitored against actual experience as it emerges, with models being refined over time.

To download a copy of the DPB and MA study, click here. For further information email Jeremy Kent.