Consolidation of Indian life insurance industry – to be or not to be?

With a strong macro-economic outlook for the Indian economy, the young population, the large emerging middle class with high savings potential, and the low penetration of life insurance business, the longer term outlook for the Indian life insurance industry continues to be positive. In addition to the Life Insurance Corporation of India, there are 23 private sector life insurers operating in the market. The sector has grown significantly over the years, achieving new business APE CAGR of approximately 13% from FY 2001-2002 to FY 2018-2019. Milliman’s Sanket Kawatkar and Heerak Basu provide more perspective in the latest Asia e-Alert.

IFRS 17 Preparedness Survey 2018 – UK and EU highlights

At the end of 2018, Milliman conducted a global survey to measure the preparedness of insurers and reinsurers for the new International Financial Reporting Standard 17 (IFRS 17). The survey aimed to gauge the progress that firms have made in translating the standard into business as usual (BAU) processes and to compare the progress made in different markets. This report by Milliman’s Laura Hobern, William Smith, and Jennifer Strickland focuses on the UK and European markets and summarises the responses received from 36 companies across the EU, drawing comparisons to the preparedness of firms globally where notable.

Six hard realities of the LDTI timeline (infographic)

The timeline dictated by the Financial Accounting Standards Board (FASB) Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI) has a go-live date of January 2021, a fast-approaching deadline. With this in mind, insurers need to address these six hard realities to make sure they are ready to meet the new requirements:

  1. Methodology. Many companies are initially focusing on accounting policy, but too often in isolation. A desired approach may not be possible due to auditor concerns, data limitations, or LDTI vendor capabilities, among other constraints. Policy decision-makers cannot make decisions in isolation. Also, there is not enough time to fully evaluate all of the issues. Do the work to pick the right battles as to where you spend the time.
  2. Data. New data requirements mean that information technology (IT) needs to help. Get them involved early and often. Transition methodology options (e.g., full retrospective, historical transition date for modified retrospective, etc.) likely will be dictated in part by data availability. Ongoing valuation requires new data feeds as well. Start early with IT, get what you can ASAP, set the plan to get the rest, and develop a crisp view of how it will come together
  3. Calculations. With most companies using vendor systems, a huge dependency has been created. If your vendor has not already delivered LDTI functionality, contingency plans need to be developed. Using a vendor solution to provide only the LDTI calculations, process, and reporting, and then relying on existing systems for cash flow projections, may be an option. Waiting and hoping is not.
  4. Operations. Operational aspects of LDTI can’t wait for accounting policy to be finalized. Also remember there are multiple workflows that need to be addressed—transition processes, point-in-time valuations, roll-forwards and disclosures, unlocking processes, etc. Then you need to control it all. This work can’t wait for every decision to be made. Get an end-to-end project going now to hopefully find the operational issues early.  Accept that the project won’t deliver the final answer. But it is much better than no answer.
  5. Governance. Factors are gone. Models and assumptions are in. If you haven’t established model governance before—it’s needed now. Assumption development processes also are required. If you use a closed system, don’t be complacent and think vendor-maintained code removes this burden—it doesn’t. It will look different, but the requirement is still there. In a big way. Establish the governance processes ASAP and start living with and using them even as LDTI models are still being developed.
  6. Resources. Even for the companies best prepared for LDTI, this is a big job. Few have the staff and the expertise to tackle LDTI and keep business-as-usual processes going as well. Remember there are limited resources among the consulting community and they are getting stretched across LDTI and International Financial Reporting Standard (IFRS) 17 projects, all of which are competing for many of the same skills. So again, choose your partner(s), start early, and secure the support you will need to be successful. Don’t assume the support you want will be there at some point in the future—secure it now.

What does it mean?

Limited time means that compromises are a given. Implementation will too often be strictly compliance-focused rather than strategic. Companies will need to be selective in where they spend their time evaluating methodology options. Multiple work streams will all need to move forward without perfect vision into the final state. Companies will need to make decisions without full information. High costs for controls and compliance, and suboptimal financial outcomes, are very real concerns.

Avoiding these pitfalls will require early action on multiple fronts and high levels of collaboration across internal and external partners.  Insurers will need to be comfortable moving forward without perfect vision into the end state.  Expert project management along with significant diligence and coordination amongst all parties will be required to deliver the LDTI final answer. A deferral of the implementation date by the FASB would offer an opportunity for clients to mitigate or address many of the negative impacts noted above—and there are many in the industry hoping for that opportunity—but until then, insurers need to live with the hard realities of the current LDTI timeline.

Data science, actuaries and codes of conduct: Actuarial bodies highlight the importance of codes of conduct in data science activity

In a recent note, published in advance of the European parliamentary elections and the formation of the new European Commission, the Actuarial Association of Europe (AAE) set out key areas in which actuaries can make a significant difference in tackling regulatory, consumer protection, and economic issues. As might be expected, the AAE highlighted, as core competencies of actuaries, Solvency II, International Financial Reporting Standard (IFRS) 17, international capital standards, packaged retail and insurance-based investment products (PRIIPs) and management of demographic risks. Together with helping stakeholders to understand the impact of environmental, social, and governance (ESG) considerations on insurance and pension provision, these are areas in which actuaries have much to contribute.

Of particular interest though was the fact that the AAE also highlighted predictive analytics as an area in which actuaries can make a positive contribution. Instead of focussing on actuarial skill sets in model building, calibration and communication, though, the AAE instead focussed attention on actuaries’ codes of conduct. These codes of conduct, the AAE points out, oblige actuaries to treat data with care. In general, other practitioners in the field of data science do not have professional codes of conduct according to the AAE, leading to a lack of boundaries around the use of data. This can lead to a lack of trust amongst the general public. Inappropriate use of new technologies will produce new risks, leading to a need to regulate the use of data. Any such regulation though, the AAE argues, needs to be balanced so as not to suppress innovation.

This coincides quite nicely with the publication by the European Insurance and Occupational Pensions Authority (EIOPA) of the report ‘Big Data Analytics in Motor and Health Insurance: A Thematic Review’ on 8 May. In its report, EIOPA hints at the potential introduction of governance requirements relating to the use of certain tools and techniques used in data science, and the possible expansion of the role of the actuarial function in this regard. Specifically, though, EIOPA mentions that it plans to discuss with industry and other stakeholders ‘the issue of ethics and fairness‘ when it comes to the use of data science in insurance. This will, no doubt, help to shine a spotlight on this important issue over the coming years.

The AAE is not alone in pointing to the value of actuaries’ codes of conduct in relation to actuarial involvement in data science. In its 2018 paper, ‘Big Data and the Role of the Actuary,’ the Big Data Task Force of the American Academy of Actuaries pointed out that ‘actuaries have professional obligations to uphold the reputation of the actuarial profession and fulfil the profession’s responsibility to the public in the emerging area of Big Data.’ As the general application of data science techniques to insurers is still at a relatively early stage, it is often necessary for actuaries to apply professional judgement in determining how to apply codes of professional conduct to their work.

The Big Data Task Force points to the ‘look in the mirror test,’ encouraging actuaries to consider their qualifications and experience in determining whether or not they can fulfil the obligations of their code of professional conduct when using data science, before concluding that ‘as the evolution of Big Data continues in the areas of practice in which actuaries provide services, the professionalism and technical expertise provided by actuaries are essential elements upon which the public and regulators can place reliance. The professionalism requirements of actuaries provide guidance for the proper application and disclosure of Big Data assumptions and methodologies. They require actuaries to adhere to the high standards of conduct, practice, and qualification of the actuarial profession, thereby supporting the actuarial profession in fulfilling its responsibility to the public.’

Against a backdrop of the ever-increasing application of the techniques of data science, actuaries appear to have an ideal opportunity to highlight the benefits of the professionalism frameworks which come with being an actuary, and to ensure that other stakeholders (insurance providers, regulators and consumers alike) can share in those benefits. Improved standards of ethical responsibility and professionalism can only lead to better outcomes for everyone.

What do South Africa’s latest insurance developments mean for its industry?

In this article, Milliman consultant David Kirk provides a round-up of recent news in the South African insurance industry. This update includes an update on International Financial Reporting Standard (IFRS) 17 developments, how cyber risk is affecting insurers and various regulatory updates, as well as considerations of the balance sheet and capital treatment of cryptocurrencies.

Granular flood data may lead to more insurance options

In this AM Best interview, Milliman’s John Rollins discusses the evolution of the private flood insurance market and the challenges to writing private flood insurance.  He says that historically the federal government has supplied most of the flood insurance in the United States. But with the private flood insurance market opening up, there is a significant market opportunity for insurers. Roughly 40 million people in the United States need flood insurance, but only about 5 million to 6 million actually buy it. Rollins also talks about the technology involved in writing private flood insurance and how this has changed over the years.

To learn more about the challenges U.S. insurers may face in the private flood insurance market, read John’s article “Wading into the private insurance market.”