Insurers increasing their appetite for risk when markets climb pose challenges when markets begin to experience corrections. Behavioral finance lessons apply now more than ever as markets continue to climb and risk appetite increases by investors and institutions.
Individuals behave in ways that often run counter to their self-interest—something that sophisticated life insurers would never succumb to. As some companies turn their backs on well-planned risk management strategies to manage product volatility, the question arises whether some life insurers are also acting against their better nature.
Like individual investors who have lost sight of their goals only to return to a prudent investment strategy after a financial crisis, some life insurers, which were exposed to the effects of the 2007-2008 recession, returned to the risk management fold at the bottom of the recession, often redoubling their risk management programs at a hefty price just after the tail event.
In May, the Prudential Regulation Authority (PRA) issued two complementary publications in response to its November 2017 consultation paper CP23/17 ‘Financial management and planning by insurers.’ The policy statement and supervisory statement issue further guidance and feedback based on industry responses to CP23/17, which set out the PRA’s expectations on effective financial management and planning by insurance firms and groups. This paper by Milliman’s Marie-Lise Tassoni and Fred Vosvenieks provides an updated summary of the supervisory statement.
Chief economist Peter Praet of the European Central Bank (ECB) made some remarks that received a lot of attention earlier this month at the 31st International Congress of Actuaries (ICA) held in Berlin. Praet outlined the ECB’s response to different phases during the steady decline of short- and long-term interest rates and added that low interest rates create challenges for many business models of insurance companies. Praet revealed ahead of a policy meeting later in the month that discussions in this meeting would be key in determining when to end ECB’s bond-buying program.
Praet made these statements during a session at the ICA on the future of the low interest rate environment. Milliman’s Ken Mungan, in that same session, moderated a panel on the macroeconomic aspects and impacts on the insurance sector, which included Praet, Stephen O’Hearn, global insurance leader for PricewaterhouseCoopers, and Klaus Wiener, chief economist of the German Insurance Association.
Masaaki Yoshimura of Milliman’s Tokyo office, who is president of the International Association of Actuaries, opened and closed the event. Over 100 countries were represented and there was a record number of attendees, with just under 3,000 participants, including more than 50 Milliman consultants.
The event covered a variety of content encompassing all areas of actuarial work, and there were a number of perspectives about that work—including from insurance actuaries, regulators, consultants, and academics. This year, there was a strong focus on potential changes to the industry due to technology and the risks this could introduce to companies and to policyholders. Actuaries were encouraged to think carefully about these emerging risks.
Milliman was well represented, with eight consultants speaking on various topics relevant to the global attendees.
Milliman speakers and their topics were:
• Alexandre Boumezoued. “Individual Claims Reserving: Opportunity as a Challenge.”
• Zachary Brown. “Improving Actuarial Communication.”
• Joanne Buckle and Chris Bristow (Institute and Faculty of Actuaries). “Life Long Learning in the IFoA.”
• Joanne Buckle and Didier Serre. “Alternative Payment Models for High Cost Creative Therapies.”
• Naoufal El Bekri. “Mortality Tables Update Through Multi-Population Models: Application to Longevity Risk Transfer and Shock Computation.”
• Tigran Kalberer. “Architecture of Internal Models.”
• Allen Klein. “Long-Term Drivers of Future Mortality.”
• Allen Klein. “Underwriting Around the World: An Update.”
• Noriyuki Kogo. “Predicting Incidences of Acute Myocardial Infarctions: Are Big Data and Machine Learning Algorithms Useful for Predictive Models?”
• Bridget MacDonnell. “Recovery and Resolution Plans in Banking and Insurance.”
• Pat Renzi. “New Developments in Insurance IT.”
Milliman’s Adam Schenck has been making the public speaking rounds. In this video Schenck, who is Managing Director, Portfolio Management at Milliman FRM, is interviewed by ETF Trends’ Tom Lydon about risk management strategies that can be built in to Exchange-Traded Funds (ETFs).
Schenck also spoke at the Global Financial Leadership Conference in November as part of a panel on the global market outlook and opportunities for the coming year. Led by CNBC’s Ron Insana, Schenck was joined by Societe Generale Chairman Lorenzo Bini Smaghi and Virtu Financial founder Vincent Viola.
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 provides more perspective.
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.