Enhancing ERM frameworks based on learned lessons from COVID-19 pandemic

COVID-19 has illuminated the wide-ranging impact that emerging risks can have on insurers across the globe. It has focussed attention on a grey area that exists in recognising when an emerging risk has fully “emerged” and how it should be treated. It would seem logical that once an emerging risk is realised, its subsequent monitoring and management should fall under a pre-existing risk management framework.

In this briefing note, Milliman professionals discuss how traditional emerging risk management frameworks may not fully capture the complexity of an emerging risk event, and reflect on some lessons that can be learned from the COVID-19 pandemic.

Milliman launches AccuRate Fleet at InsureTech Connect 2020, introducing new telematics-based risk score for commercial auto insurers, MGAs, and start-ups

Milliman today announced a new innovation in the insurtech space: AccuRate Fleet, a telematics-based risk score created with Azuga, Inc. to help improve commercial auto insurer profitability.

Milliman teamed up with Azuga, a leading provider of connected vehicle and fleet technology, to study how fleet driving behavior coupled with actual accident data can lead to predictive models for commercial auto insurers. Using 1.5 billion miles of Azuga commercial auto driving data and 5,700 accident reports, Milliman modeled the indicators of crash frequency and created a risk index to help insurers, MGAs, and start-ups in the commercial auto space price risk better.

“Commercial auto insurers have faced years of worsening combined ratios, and with this product we strongly feel that we can guide insurers to assess and price risk more accurately,” said Peggy Brinkmann, a principal at Milliman and co-developer of AccuRate Fleet. “There’s an opportunity here for those in the commercial auto space to use existing and widely accepted technology and optimize their risk pools quickly.”

“Commercial auto has become an increasingly challenging market for building a profitable customer base and insurers can’t simply keep raising rates,” said Ananth Rani, co-founder and CEO of Azuga. “Azuga Fleet telematics has demonstrated significant reductions in accident frequency and severity at scale. The AccuRate Fleet score from Milliman further cements our leadership in delivering results both to the insured fleets and now the insurance carriers.”

To read more about AccuRate Fleet, click here.

To subscribe to Milliman’s InsurTech updates, contact us here.

Real insurance for fantasy sports

As of 2018, fantasy sports was considered to be a $13.9 billion market worldwide, forecasted to grow to $33.2 billion by 2025. In the United States, fantasy football alone is a $7 billion market.

About 70% of fantasy sports participants are competing in leagues that charge fees, with players spending an average of $653 on them. That’s not a huge figure, but there are leagues where the entry fees can be more than $100,000.

The increase in popularity of fantasy sports, along with the potential for a lost season due to a key injury, led to the creation of fantasy sports insurance in 2009. The first products were offered by Intermarket Insurance Agency with the backing of Lloyd’s of London. The latest information available showed that over $15,000 in losses was paid for the 2012 NFL season.

Milliman’s Jamie Shooks discusses how the risks in fantasy sports insurance align with the general traits of an insurable risk in the article “Fantasy sports insurance: Is it an insurable risk?

How has a holistic risk management solution helped Ethiopian farmers face climate events?

Ethiopia is a country prone to many climate risks, which particularly affect its majority rural population. To manage these agriculture-related climate risks, Ethiopian farmers respond by spending their savings, selling valuable assets at heavy discounts, and reducing consumption.

Until recently, insurers barely had any footprint in rural areas with smallholder farmers. In fact, 2014 data shows that less than 2% of Ethiopians were covered by any type of formal microinsurance product. Because insurance is an ex-post tool and not all risks are insurable, a holistic approach to dealing with climate risks is needed to help vulnerable communities become more resilient.

In this article, Milliman’s Mariah Mateo Sarpong and Mebrahtu Brhan Gebre present an example of a holistic risk management solution that the MicroInsurance Centre at Milliman developed for smallholder farmers in northern Ethiopia. The product illustrates Milliman’s Climate Resilience Initiative’s holistic approach to enhancing climate resilience in low-income communities.

It’s a three-peat; Milliman named actuarial firm of the year again

Milliman has received two 2020 U.S. Captive Review Awards. These awards recognize and reward providers of captive insurance products and services, who have outperformed their competitors and demonstrated the highest levels of excellence.

As an organization, Milliman received an award in the Actuarial Firm of the Year category. The award recognizes the firm that has demonstrated the highest level of service meeting clients’ needs over the past year. Milliman has received this recognition for three consecutive years.

Individually, consultant Joel Chansky received an award for Outstanding Contribution of the Year. The award is given to a captive professional that has made significant contributions to enhance the industry.

To see all the award winners, click here.

Collateral management for 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 fifth in a series of posts about this research. Each one gives an overview of a section of the Milliman report.

Collateral

Many reinsurance transactions are collateral-backed to mitigate against counterparty default risk in respect of the reinsurer. The amount of collateral required to back a reinsurance transaction will depend on the type of reinsurance and the reinsurer’s creditworthiness. There are several different types of collateral which may be used to back reinsurance transactions, including:

  • Letters of credit
  • Funds withheld
  • Trust arrangements
  • Cash or other securities
  • Other assets, such as those that directly back the liabilities
  • Other third-party sureties

The Solvency II regulations outline various requirements that must be met for collateral arrangements to be recognised in the Solvency Capital Requirement (SCR) calculation. Some of the key requirements are that the:

  • Insurer should have access to the collateral assets in a timely manner in the event of default
  • Collateral should provide protection by being of sufficient credit quality and stable in value
  • Value of the collateral should not be materially dependent on the credit quality of the counterparty.

Collateral invested in fixed income assets can, for instance, be highly correlated with the credit risk of the counterparty. If this is the case, the collateral placed will not effectively mitigate the counterparty default risk. These requirements can be quite onerous in practice, further emphasising the need for careful consideration as part of the treaty negotiations and design.

Insurers should set strict limits and investment guidelines on the collateral account when financial investments are involved. Also, insurers should understand how any remaining uncollateralised exposure can move over time and under different possible scenarios.

It is often desirable by insurers and/or by regulators that collateralised assets do not leave the jurisdiction in which the insurer is domiciled. This is typically possible through the use of custodians operating in the insurer’s home territory.

Collateral management is a very important component of a reinsurance arrangement and is sometimes the most critical part, particularly for asset-intensive reinsurance such as a full risk reinsurance cover. Not only is collateral management an important part of obtaining regulatory approval, it is also important to maintain the effectiveness of the risk transfer because collateral can be used to reduce counterparty risk without restricting the balance sheet optimisation mechanism of the reinsurance cover.

Milliman research paper

The full research paper can be found on Milliman’s website here, where you can also find an executive summary version that notes some of the key highlights of the research and acts as a guide to the full paper.