Can long-term bonds incentivize climate resilience initiatives?

To begin to address climate risk effectively, governments, insurers, banks and asset managers, infrastructure experts, and technical assistance and research firms need to be enlisted to work together. Addressing climate change adaptation to reduce risk before disasters hit is the best chance to improve the outcomes of climate risk events. 

This is especially true for low-income and small island nations. For many of these nations, resilience efforts are simply out of reach. Insurance may mitigate some of the costs for citizens, but it is of limited benefit in adaptation. The bond markets focus on short durations. And it can be difficult for small countries to obtain even basic infrastructure financing. 

Climate adaptation requires significant financing. Basic asset-liability management says that long-term projects should be matched with long-term investments while mitigating long-term risks—like climate change. Linking insurance directly to long-term climate adaptation bonds can help governments more effectively adapt to and manage the effects of climate change. 

This article by Milliman’s Michael McCord of the MicroInsurance Centre at Milliman and Abhisheik Dhawan of the UN Capital Development Fund says that coming together to address climate change risks should begin before disaster strikes. 

Longevity risk reinsurance

In July 2020, Milliman professionals published the research report “Reinsurance as a capital management tool for life insurers.” This report was written by our consultants Eamon Comerford, Paul Fulcher, Rosemary Maher and myself.

Capital management is an increasingly important topic for insurers as they look to find ways to manage their risks and the related capital requirements and to optimise their solvency balance sheets. Reinsurance is one of the key capital management tools available to insurers. The paper investigates common reinsurance strategies, along with new developments and innovative strategies that could be implemented by companies.

This blog post is the seventh in a series of posts about this research. Each post provides an overview of a certain section of the Milliman report.

Longevity risk reinsurance

For pension funds and pension insurers, longevity risk can be substantial. High capital requirements, reflecting this risk, are a key reason for insurers looking to de-risk longevity exposures. Reinsurance covers and capital market solutions can be used for this. Several of these solutions, including their characteristics, are included in the table in Figure 1.

As argued in earlier posts (“Decision process for reinsurance implementation” and “Evaluating reinsurance strategies“), insurers can choose from among several reinsurance strategies. They all have their own trade-offs and each one’s effectiveness is dependent on a breadth of characteristics and considerations. Choosing which reinsurance strategy to implement is a complex puzzle to solve.

To help solve it, and to come to the right conclusions, it is important to fully understand the mechanics and characteristics of the reinsurance solution used to implement the strategy. In Figures 2 through 5, we give a brief overview of several solutions and their advantages and disadvantages.

Continue reading

Infographic: Evaluating reinsurance strategies

Capital management is an increasingly important topic for insurers looking for ways to manage their risks and related capital requirements while optimising their solvency balance sheets. Reinsurance is one of the key capital management tools available to insurers.

In July 2020, Milliman professionals published a research report entitled ‘Reinsurance as a capital management tool for life insurers.’ The paper investigates common reinsurance strategies, along with new developments and innovative strategies that companies should consider implementing. The report was written by consultants Eamon Comerford, Paul Fulcher, Rik van Beers and Rosemary Maher.

Below is an infographic that highlights the key areas of consideration for evaluating reinsurance strategies.

To read the entire paper, click here. An executive summary is also available.

Milliman updates Claim Variability Benchmarks with valuable industry data for P&C insurers

Milliman announced today that it has released version 2.0 of its Claim Variability BenchmarksTM (CVB), an insurtech solution that helps property and casualty (P&C) insurers increase efficiencies and provides richer analysis in the face of regulatory and economic change such as reserve range and cash flow requirements, Solvency II, and International Financial Reporting Standard (IFRS) 17.

As part of the firm’s family of state-of-the-art actuarial reserve analysis systems, this release of CVB adds new industry benchmarks for claim frequency, severity, and loss development patterns for all major P&C insurance coverages, helping actuaries better model and understand their claim costs. Additional benchmarks are provided to help measure the correlations of experience among various lines of business. The new system also adds both Mack and Merz- Wüthrich distributions to aid insurers working with Solvency II and IFRS 17 reporting.

In addition, the new release provides a free version so that all actuaries can easily evaluate these important benchmarking tools.

Our CVB solution is specifically designed to help our clients, and insurers of all sizes, better understand their data and compare their trends and results to industry benchmarks. This release provides a number of new and  sophisticated calculations, so actuaries can gain more confidence in their estimates and focus on the areas where their substantial expertise can provide the most value to their organizations, especially important in this time of pandemic-based industry disruption.

To learn more about Milliman’s Claim Variability Benchmarks, click here.

Court of Appeal overturns Prudential/Rothesay verdict

On 2 December 2020 the Court of Appeal in England handed down its judgement to uphold the appeal that had been brought in relation to the Part VII transfer of annuity business from The Prudential Assurance Company Limited (Prudential) to Rothesay Life Plc (Rothesay), collectively referred to as “the Appellants.”  

The appeal was brought by the Appellants following the decision of the High Court, delivered by Mr. Justice Snowden on 16 August 2019, to decline to sanction the transfer of approximately £12 billion of nonprofit annuity liabilities from Prudential to Rothesay. The annuities in question had already been 100% reinsured to Rothesay and therefore the purpose of the Part VII transfer was to formalise the transfer of risk that had already taken place.

In his oral remarks when handing down the judgement, the Chancellor of the High Court, the Rt. Hon. Sir Geoffrey Vos, noted the following areas of disagreement with Mr. Justice Snowden’s original judgement:

  • Mr. Justice Snowden’s decision to disregard the conclusions of the Independent Expert in relation to the likelihood of future capital support being required by Prudential and Rothesay. The Court of Appeal took the view that basing conclusions in this area primarily on the Solvency II financial strength of the transferor and the transferee was justified, notwithstanding that the Solvency II capital requirement is based on a one-year time horizon rather than a time horizon consistent with the lifetime of an annuity, given the role of the regulatory regime in protecting future solvency and the speculative nature of any assumptions about the future availability of parental support.
  • Mr. Justice Snowden’s decision to disregard the non-objection to the transfer of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).  The Court of Appeal was mindful of the PRA’s and FCA’s views. 
  • Mr. Justice Snowden’s decision to assign significant weight to the argument by objecting policyholders that they had specifically chosen Prudential based on its age and venerability; the Court of Appeal concluded that the relevant consideration was whether the transfer would have a material adverse effect on policyholders, and that this rested principally on the impact of the transfer on the likelihood that obligations to policyholders would continue to be met.

The decision to uphold the appeal does not mean that the transfer has been sanctioned. The appeal was focused on the question of whether the original judgement in the High Court, delivered by Mr. Justice Snowden, was legally sound based on the information available to the High Court at the time.  The Court of Appeal elected not to consider the question of whether it was appropriate to sanction the transfer based on current circumstances, and therefore the question of whether the transfer should be sanctioned will now be remitted to the High Court for a fresh round of hearings, in effect starting the Part VII transfer process again.

Milliman to expand data science and AI capability in the Benelux

Milliman announced that it has expanded its data science and artificial intelligence (AI) capability by taking on the data science consulting team of Ortec Finance.

The new team, in combination with Milliman’s existing data science competence, will continue to support its current customers with data science consultancy projects in the Benelux to generate value from their structured and unstructured data, and to advise them on their strategic journey to become data-driven. Ortec Finance will concentrate on the use of data science in their software solutions.

“Due to digitization, companies across a wide range of industries see their data volume explode. This, in combination with rapid progress in AI technology, leads to a substantial demand for consulting services in this field. We are at the forefront of the era of AI disruption,” says Raymond van Es, who will serve as Lead Data Science & AI of Milliman in the Benelux.

Peter Franken, Milliman Principal, sees it as an important step in strengthening Milliman’s predictive analytics and modelling capabilities in the Benelux. “Having Raymond and his team joining allows us to accelerate expanding our service offering outside the financial industry as well as our technical capabilities in the area of data science and predictive analytics.”