Tag Archives: life insurance

Evolving FRM strategies still valuable to life insurers

In this A.M. Best interview, Milliman consultant Kamilla Svajgl offers perspective on financial risk management (FRM) strategies currently used by the life insurance sector. She also discusses how companies with sophisticated FRM strategies in place prior to the global financial crises withstood its effects.

Indonesia Life Insurance Newsletter, July 2017

The Life Insurance Association of Indonesia reported continued growth of the life Indonesia industry for 2016 and over the first quarter of 2017. In 2016, the industry recorded a total premium income of IDR 167.04 trillion, a 29.8% growth year-on-year compared with 2015. For the first three months of 2017, the total premium income for life insurance increased by 28.15% year-on-year to IDR 35.19 trillion as compared with the first three months of 2016. Milliman’s Richard Holloway, Halim Gunawan, and David Kong offer more perspective in the latest Indonesia Life Insurance Newsletter.

Annual Milliman survey reveals a staged approach in implementing recent regulatory changes for UL/IUL products

Results from participants in Milliman’s annual comprehensive study of universal life (UL) and indexed universal life (IUL) issues indicate a staggered approach in implementing recent regulatory changes. Principle-based reserves (PBR) may be implemented as early as January 1, 2017, and 27 survey participants reported they expect to implement PBR for all of their UL/IUL products spread over the three-year phase-in period allowed. Resource issues, time needed, financial impact/cost/benefits, clarification and finalization of PBR and Internal Revenue Service (IRS) regulations, and PBR implementation of other products first were cited as factors impacting the rationale for implementation plans.

Similarly, the earliest effective date for the use of the 2017 Commissioner’s Standard Ordinary (CSO) mortality table was January 1, 2017. The 2017 CSO is the new valuation mortality table to be used in the determination of the Commissioner’s Reserve Valuation Method (CRVM), net premium reserves, tax reserves, nonforfeiture values, etc. Twenty-two survey participants reported that they would implement this table for all of their UL/IUL products spread over the three-year phase-in period allowed. Ten participants reported implementation of the 2017 CSO would be product-dependent; implementation will be immediate for some products and over the three-year phase-in period for others.

“It’s not surprising that these regulatory changes are not being implemented immediately, given the complexity of the regulations, the potential impact on pricing and the bottom line, and the strain on resources, especially for smaller carriers,” says Sue Saip, consultant in Milliman’s Chicago office.

The 10th annual Milliman study, “Universal Life and Indexed Universal Life Issues,” focuses on current topics relative to universal life with secondary guarantees (ULSG), cash accumulation UL, current assumption UL, and the corresponding indexed UL (IUL) versions. Thirty-two carriers of universal life and indexed universal life products participated in this annual survey.

In addition to PBR and the 2017 CSO information, the survey also indicates that the use of new underwriting approaches is gradually gaining popularity. Scoring models are being used by 11 survey participants to underwrite their UL/IUL policies. Eight of the 11 use these models for fully underwritten policies, one uses them for simplified issue policies, and the final two use them for both fully underwritten and simplified issue business. Eight participants reported using scoring models with automated rules. The types of scoring models used include lab scoring models, credit scoring models, and scoring models relative to motor vehicle records. The survey also revealed that 10 of the 32 participants utilize fluid-less underwriting programs at face amounts where they previously would require fluids.

The study includes detailed information on product and actuarial issues, such as sales, profit measures, target surplus, reserves, risk management, underwriting, product design, compensation, pricing, and illustrations.

The “Universal Life and Indexed Universal Life Issues – Detailed Report” is available for purchase here or by calling Gina Ritchie at (312) 499-5605.

Proposed changes to U.S. GAAP: An impact analysis of proposed targeted improvements

The Financial Accounting Standards Board (FASB) has proposed significant changes to accounting standards for long duration insurance contracts to address several stakeholder concerns. In this report, Milliman consultants discuss the impact of the FASB’s proposed changes on earnings and equity for several illustrative product types. They also examine the industry’s preparedness to adopt the new guidance.

Central Bank of Ireland review of Solvency II life insurance pricing and reserving assumptions

In February 2017, the Central Bank of Ireland published letters on its website relating to its review of the consistency of Solvency II life insurance pricing and reserving assumptions. This briefing note by Milliman’s Aisling Barrett and Sinéad Clarke summarises the contents of these letters. The authors also reference the contents of the December 2016 industry letter on the standard formula Solvency Capital Requirement.

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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