Tag Archives: insurance

If This Then That (IFTTT) product design for InsurTechs

Traditional insurance product design relies on human implementation for agent sales and claims adjusters. If This Then That (IFTTT) product design relies on data to pay a defined benefit based on an objective trigger. IFTTT product design aligns with overall strategy common to many InsurTechs. And InsurTechs are uniquely positioned to improve customer and carrier results with IFTTT products. This presentation by Milliman consultant Steve Walsh provide more perspective.

New Dutch Coalition Agreement addresses changes in corporate tax affecting insurers’ solvency

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:

Year Corporate tax rate
2018 25.0%
2019 24.0%
2020 22.5%
2021 21.0%

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.

Aggregate statistical data published for the Irish insurance industry

On 18 August the Central Bank of Ireland (CBI) published consolidated insurance statistics based on firms’ year-end 2016 positions. This is the first such publication since the introduction of Solvency II and this format will be used for publications in each future year as part of efforts to harmonise disclosure across Europe. This publication replaces the ‘Central Bank Insurance Statistics’ produced in previous years (based on the returns submitted to the CBI under the old solvency regime), more commonly known as the ‘Blue Book.’

Industry balance sheet
The statistics are at an aggregate level only, covering 196 companies based in Ireland (a mix of life and non-life firms, both direct writers and reinsurers) with assets valued at almost €347 billion. It is interesting to note that, while two new authorisations were granted during 2016, 15 authorisations were withdrawn.

The total Own Funds of the Irish industry are just in excess of €39.0 billion. They cover a Solvency Capital Requirement (SCR) of almost €22.7 billion. The resulting solvency cover for the industry is 172%. In comparison the European industry as a whole had coverage of 210% at the end of June 2016.

Of the SCR of €22.7 billion almost two-thirds is calculated using the standard formula. Nine companies use full internal models and another three use partial internal models to calculate the SCR, with these 12 firms accounting for 36% of the total SCR at an industry level. In addition to the calculated SCR, one firm has had a capital add-on imposed by the CBI, totalling almost €94 million at year-end 2016. The CBI does not disclose the name of the company with the capital add-on in this publication.

Applications to the CBI
The statistics also outline various approvals granted by the CBI during 2016. Of the three firms which applied to use the volatility adjustment, only two received approval, adding to the total number of seven firms using the volatility adjustment at year-end 2016. Only one firm submitted an internal model application during the year, which appears to have been unsuccessful. This could suggest that some firms were inadequately prepared when submitting applications to the CBI.

As at year-end 2016 no firms were using the matching adjustment and only one firm was applying the transitional measure on risk-free interest rates. No further submissions for these measures were received during 2016. This could indicate that the long-term guarantee measures are not considered to be very attractive to Irish companies—either in terms of the effort involved in obtaining approval or the benefit gained.

Aggregate data
While the data contains a number of interesting figures, it is the absence of company-specific data that is most noteworthy. The Blue Book previously outlined assets, liabilities and premium volumes at a company level. The new format report does not include any premium data and only provides statistics at an industry level. Of course all this information is publicly available in individual companies’ Solvency and Financial Condition Reports, but requires some time to analyse.

Full details of the year-end 2016 statistics published by the CBI can be found here. Additional Milliman analysis of the year-end 2016 position of the Irish industry can also be found here.

Obstacle course racing presents insurers with unique hurdles

Obstacle course racing (OCR) like events featured on American Ninja Warrior have grown in popularity. As the extreme factor of OCR increases so does the risk for event organizers. These competitions do not have the reliable historical data, consistency of events, and general safety measures seen in traditional footraces, making it difficult for insurers to price OCR’s exposures.

A new article by Michael Henk entitled “Obstacles for insurers of obstacle course racing” explores OCR’s unique risks. It also provides perspective for insurers to consider when pricing premiums in this emerging market.

Here is an excerpt from the article:

Imagine that there is a local half marathon looking for liability insurance to cover its event. An insurance company can use data from past races (either in the same location or spread across a broad geography) to predict expected losses. Because half marathons have been around and been insured for decades, there is enough data for a credible analysis. Because OCR was almost nonexistent until 2010, insurance companies do not have that same degree of industry data. As with any emerging market (such as cyber liability, drone insurance, and self-driving cars), insurers do not know what to expect, and therefore, insurance premiums are priced higher to make up for the unknowns.

Another obstacle in the way of establishing a credible database is that all obstacle course races are not the same. When you decide to run a marathon, you know what to expect: run 26.2 miles. Road races might vary by elements such as terrain, local weather, and elevation changes, but overall, similar risks can be expected across all events. If you run a marathon in Chicago, it is similar to running a marathon in Miami. Likewise, insurers also know what to expect with these traditional races. They can use past data and rely on well-established safety standards to determine the proper level of risk and premiums.

Obstacle courses do not have the same consistency. Running a Tough Mudder race in Minnesota is entirely different from a Spartan race in Florida. The lack of standardization makes it difficult to price insurance policies. For example, if one race has a wall that is 20 feet high and another event has one that is five feet high, they pay the same premium even though the risk of injury from falling is greater with the 20-foot wall. These higher premiums can potentially cause race organizers to pay more for insurance than necessary. The risks associated with one obstacle course can be completely different from the risks of another, but insurance companies will still price them relatively the same as there is not enough historical data to allow for differentiation in the policies.

If the industry developed a consistent and credible database of obstacles, insurers would be able to accurately price each race based on the risk of individual obstacles. In fact, with a database like that, races could even be tailored to fit a specific target “riskiness,” selecting obstacles that result in an organizer-preferred premium amount. The current way of one-size-fits-all is not an efficient use of funds for race organizers.

The article was coauthored by Jenna Hildebrandt, an actuarial science student at the University of Wisconsin – Madison.

Paid family leave proposal leaves states with funding issues to consider

President Donald Trump’s 2018 budget proposal includes a paid family leave insurance program for workers in the United States. Under the president’s proposal, states would be allowed to design the paid leave program for their own jurisdictions as long as the benefits meet minimum standards. This means that some states may have a lot to consider when preparing for a new insurance program, such as funding methods, administration, and specific benefit design features. The article “Paid family leave in the United States” by Paul Correia offers some perspective.

Milliman chairman to moderate panel discussion on investment strategies

Milliman Chairman Ken Mungan is moderating the discussion “Chief Investment Officer Panel – Searching for Yield” at the ReFocus Conference 2017 on Monday, March 6. Panel participants will address the challenges of investing in a low interest rate environment and offer their perspective on strategies that can be employed.

ReFocus 2017 is a global conference for senior-level life insurance and reinsurance executives. It is sponsored by the American Council of Life Insurers and the Society of Actuaries. Milliman is also a sponsor of this year’s conference. ReFocus 2017 is scheduled from March 5-8 at The Cosmopolitan of Las Vegas. To view the entire conference agenda, click here.