Tag Archives: Ireland

New developments in the computation of mortality rates: An actuary’s bread and butter

The computation of mortality rates has traditionally been the bread and butter of actuaries. The first mathematicians to venture into the actuarial field most likely spent their days analysing mortality rates and conducting life valuations. Nowadays, the work of actuaries is much more varied—which is a welcome development for most—but are we sometimes neglecting this core skill?

Milliman researchers in Paris certainly aren’t and their new research, hot off the press, published on 22 February 2017, represents a significant development in mortality and longevity risk modelling. It is vital reading for anyone working in this sphere.

My colleagues have developed a robust statistical methodology to correct the implicit inaccuracies of national mortality tables which are used widely in sophisticated mortality and longevity risk modelling. The results are striking.

Here I take a closer look at the relevance of these national mortality tables, the problems with them, and the corrections available in order to enhance mortality and longevity risk models. I will touch on the key technical points behind these developments from an Irish/UK perspective, leaving the rigorous mathematical explanations to the underlying research publications—the 2017 publication can be found here and the 2016 publication can be found here.

The use of national mortality tables
In Ireland and the UK, to set basic mortality assumptions in our pricing and reserving work, we tend to use insured lives mortality tables, such as the Continuous Mortality Investigation (CMI) tables. However, national mortality tables based on the population as a whole are also used extensively in mortality and longevity risk modelling, where a greater quantity of data is required.

National mortality tables are used to calibrate stochastic mortality models, to derive mortality improvement assumptions, in sophisticated mortality risk management models, in Solvency II internal models, in pricing mortality/longevity securitisations, and in bulk annuity transactions.

Bulk annuity transactions are popular in the UK market, with a number of large deals executed during 2016, including the ICI Pension Fund’s two buy-in deals completed in the wake of Brexit, totalling £1.7 billion. Legal & General completed a £2.5 billion buyout agreement with the TRW Pension Scheme in 2014.

Longevity hedging (in particular, use of longevity swaps) is also an attractive approach to the de-risking of pension schemes, and would equally require the use of national mortality tables. Transactions range from the large-scale £5 billion Aviva longevity swap in 2014 to the recent, more modest, £300 million longevity swap completed between Zurich and SCOR in January 2017.

While the use of internal models to calculate mortality and longevity risk capital requirements under Solvency II is not prevalent in the Irish market, which is due to the size of companies and the amount of risk retained, it is likely that reinsurers are looking at such models. In the UK, larger companies may opt to use internal models if they are retaining large exposures.

Indeed, national mortality tables also typically inform mortality improvement assumptions for all companies, as the analysis of improvements requires large volumes of data. Therefore, even companies that do not use sophisticated mortality and longevity risk modelling techniques are implicitly impacted by the new developments in relation to the construction of national mortality tables.

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Solvency II Directors’ Certifications

The Central Bank of Ireland has published a guideline and a set of frequently asked questions for insurance and reinsurance undertakings on Solvency II Directors’ Certifications. In this briefing note, Milliman’s Aisling Barrett and Ciarain Kelly explain what certifications are required from directors of insurance and reinsurance undertakings under Solvency II and how Milliman can help give comfort to directors in preparing to sign these declarations.

Taking the temperature on Solvency II Pillar 3: A Milliman client survey

The early months of 2016 were busy ones for Solvency II reporting, so the summer allowed the industry to finally come up for air. Following the submission of the first Solvency II reporting (Day 1 and first quarter 2016 templates) in May 2016, we took the opportunity to conduct a survey across the Irish insurance industry on Pillar 3 reporting. Thirty-seven companies took part, representing a broad cross-section of insurers in both the domestic and cross-border markets. It had a heavy focus on companies writing life business.

The survey looks at the experience of companies to date, the key challenges faced by (re)insurers, and the level of work required to meet the first annual reporting requirements in May 2017.

Experience to date: Ireland
Perhaps not surprisingly, the two templates that caused the most difficulty for companies in the survey were S.06.02 (detailed list of assets) and S.06.03 (asset look-through).

All companies were required to complete template S.06.02 based on their asset holdings at the end of the first quarter 2016. This template requires detailed information on each asset held and proved to be one of the most challenging and time-consuming aspects of the quarterly templates. The silver lining for companies is that we would expect the workload required to complete S.06.02 to lessen once processes and procedures have been bedded down.

The asset look-through template (S.06.03) is one of the more contentious and challenging aspects of the Solvency II reporting requirements. Only companies with a high or medium-high rating under the PRISM impact rating system of the Central Bank of Ireland (CBI) are required to prepare the look-through template for quarterly reporting during 2016. Companies with low or medium-low PRISM rating will have to prepare the look-through template for the first time in respect of 31 December 2016.

Looking ahead, 46% of survey respondents stated that they do not expect to fully meet the look-through requirements at year-end 2016 (56% among unit-linked companies). That is, companies do not expect to be in a position to provide a 100% look-through of all collective investment funds.

Love it or hate it, the asset look-through template is likely to keep many financial reporting teams busy in the coming months. The CBI has engaged directly with PRISM impact companies rated high and medium-high, and has set out its expectations regarding future reporting periods.

Looking ahead to annual reporting
While the first reporting deadlines in May 2016 represented a significant milestone, annual reporting in respect of year-end 2016 will be an even bigger hurdle for many companies. In May 2017, companies will be required to submit the first set of annual Quantitative Reporting Templates (QRTs), in addition to the first set of narrative reports—the public Solvency and Financial Condition Report (SFCR) and the Regulatory Supervisory Report (RSR). The first quarter 2017 reporting deadline also falls in May next year, so plenty of coffee and midnight oil may be required.

For the annual QRTs, companies identified the asset templates (including the asset look-through) and the reinsurance templates as the areas requiring most work.

The workload involved in preparing the SFCR and RSR reports for the first time should not be underestimated. Approximately 50% of respondents have not yet started drafting the SFCR and RSR. We received a very wide range of estimates for the length of these reports.

Elsewhere in the Pillar 3 world
Looking ahead to the first submission of annual templates, the CBI recently announced that it will host a test cycle for the annual Solvency II and annual NST returns from 5 to 21 December. Depending on your viewpoint, this represents an early Christmas present or a death knell to your festive season.

Where possible, companies should be looking to conduct a dry run of the annual templates in advance of a busy year-end period next year. This test phase presents a timely opportunity for companies to complete their dry runs.

Furthermore, the CBI recently consulted on the proposed external audit of the SFCR and associated annual QRTs with the aim of determining its final policy position by the end of September 2016. The final audit requirements will go to press shortly, and companies will need to allow for external audit as part of their 2017 plans also.

To read more about the Milliman Solvency II Pillar 3 Survey, please see our briefing note here.

Assessing the appropriateness of the Standard Formula

Under the Central Bank of Ireland’s Guidelines on Preparing for Solvency II, all insurance and reinsurance undertakings are required to prepare a Forward-Looking Assessment of Own Risks (FLAOR) in 2014 and 2015. Those companies rated as high or medium-high impact under the Central Bank’s Probability Risk and and Impact SysteM (PRISM) rating system, which are not in either the preapplication or application process for an internal model, are required from 2015 onward to perform an assessment of whether their risk profiles significantly deviate from the assumptions underlying the standard formula Solvency Capital Requirement (SCR). This requirement will apply to all companies from 2016 onward.

Milliman’s Andrew Kay and I conducted a survey analysis of 27 companies in Ireland to gain perspective on the appropriateness of the standard formula for the risk profile of these companies in their 2015 FLAORs. To read the entire analysis, click here.

Milliman Solvency II Readiness Assessment Tool first industry survey: Ireland, life assurance

Milliman developed the Solvency II Readiness Assessment Tool to help companies prepare and plan for Solvency II. The tool is designed for life and nonlife direct writing and reinsurance companies. It enables companies to rate themselves using a range of detailed questions covering the full scope of Solvency II. A score of 5 identifies areas that are 100% ready, whereas a score of 1 identifies areas where no progress has been made.

Thirteen life companies based in Ireland shared their current levels of preparedness. In this briefing, Milliman’s Andrew Kay and Mike Claffey have consolidated the results to give an overall idea of the issues facing companies.