Smoothing pay-outs on with-profits policies

Approaches to smoothing vary significantly across the industry, and it is quite common for different smoothing strategies to be applied to different funds within the same firm. Milliman consultants Jennifer Strickland, Russell Osman, and Jennifer van der Ree recently conducted a survey of the different methodologies applied across a broad sample of UK with-profits funds.  This paper presents the results of the survey and looks at the smoothing costs that could arise under some of the most common approaches.

Home sharing creates new business line for insurers

Home-sharing companies like Airbnb, VRBO, and TripAdvisor Rentals have become popular lodging options for vacationers and business travelers. Homeowners who rent their living spaces on these websites can generate income. However, renting a home or apartment presents many risks for them too. While some home-sharing companies offer insurance, others do not. This may provide carriers an opportunity to structure unique forms of insurance to cover hosts during rental stays. In this article, Milliman’s Dana Ryan discusses the types of insurance policies home-sharing companies provide hosts and how insurance companies can benefit from this new line of business.

Severity of recent wildfires may affect dynamics of the California homeowners’ insurance market

As recovery and investigative crews continue to comb through the wreckage of California’s Camp Fire and homeowners set their sights on moving forward, public attention has turned to the insurance implications of such a destructive few years of wildfires in the state.

November’s Camp Fire in northern California has already topped the Tubbs Fire of 2017 as the most destructive wildfire in California history. And in July, the Mendocino Complex Fire burned through more land than any other wildfire in state history, at 459,123 acres.

Calendar year 2017 was an unprecedented time for wildfires in California. According to Milliman’s estimates, losses incurred by insurance companies in the 2017 wildfire season could rival the combined losses of the entire 39-year period that preceded it.

Despite the high level of wildfire destruction in the state over the past two years, it is not clear what Californians should expect in the future. Without question, though, the recent wildfire destruction has had a devastating effect on individuals and businesses across the state, and has also had a major impact on property insurers. Due to an extraordinary outbreak of major wildfires in the fourth quarter of 2017, insurers suffered wildfire losses of $12 billion in calendar year 2017—the largest amount of losses on record since the 1991 Oakland Hills Firestorm, which would have cost $2.8 billion in 2017 dollars.

If the recent pattern of California’s escalated wildfire severity persists, there could be significant implications for insurers’ willingness to adequately cover the wildfire losses in the state as well as for homeowners’ ability to find and afford coverage.

In this article, Milliman’s Cody Webb and Eric Xu examine some of the fundamentals of wildfire risk, including the effect on insurers, homeowners, and the overall implications for the property insurance market in California.

Politics influence insurance regulation in Florida

Florida is known for its unique level of hurricane exposure, with the majority of its residents making their homes in over 30 counties collectively containing more than 1,000 miles of coastline. After a decade-long and unprecedented lucky streak, the state has now been affected by three major hurricanes in three straight years. Less well-known are some quirky aspects of its political structure that directly influence not only property and flood insurance regulation, but also Florida’s one-of-a-kind government presence within the market.

The public servants who interact most frequently with U.S. insurers are state insurance commissioners. These chief regulators are usually either directly elected or appointed by the state’s governor. But Florida has a “Cabinet” system of government. There are four statewide elected officials—the governor, the chief financial officer, attorney general, and agriculture commissioner—who sit as the Financial Services Commission (FSC), which appoints or removes the commissioner of the Office of Insurance Regulation (OIR), as well as approves all administrative regulations or “rules.” Insurers operating in Florida are often advised to monitor the activities of the FSC as a whole and the viewpoints of each member.

The state also has a mandatory government-run property catastrophe reinsurance program, the Florida Hurricane Catastrophe Fund, and a body that regulates the use of catastrophe models in rate filings, the Florida Commission on the Hurricane Loss Projection Methodology.

To learn more about insurance governance and its challenges in Florida, one of the world’s riskiest catastrophe zones, read the article “Political winds in a peak hurricane state” by Milliman actuary John Rollins.

Investment strategy considerations under Solvency II

The introduction of Solvency II has led many insurers to reevaluate a range of strategic questions. One such consideration for insurers is whether their existing investment strategies remain optimal, or even appropriate, under Solvency II.

Investment strategies can change for a variety of reasons. The change from Solvency I to Solvency II is a sufficient change in the regulatory environment to have material knock-on implications for investment strategy. The key drivers of this are probably threefold:

1. Changes in the liability valuation basis under Solvency II have resulted in a change to the liability profile.
2. Relaxing of asset restrictions that were in place under Solvency I but are replaced by the Prudent Person Principle under Solvency II.
3. Capital requirements are now different under Solvency II.

In addition to these key drivers, there are many factors that can influence investment strategy. For example, market conditions have changed and risk appetite may have changed.

Milliman consultants Kevin Manning and Eamon Comerford carried out an analysis of the potential return for a range of assets compared with their Solvency II Standard Formula Solvency Capital Requirement. They explore how closely these capital requirements aligned with the risks underlying those assets. Kevin and Eamon also considered a number of alternative assets that may be interesting to insurers, as well as different risk mitigation options.

To read more about investment strategy under Solvency II, read the report “Investment strategy under Solvency II”.

EIOPA’s opinion on the impact of Brexit on the solvency position of (re)insurers

EIOPA has published an opinion paper focusing on the impact of Brexit on the solvency position of EU (re)insurers. It focuses on the scenario where the UK leaves the EU and is classified as a third country. The paper lists a number of issues which could affect the solvency position of EU undertakings if this particular scenario occurs, and it calls on National Supervisory Authorities to ensure that undertakings under their supervision are prepared for this scenario. This briefing note by Ellen Matthews and Donal McGinley summarises the main points in the EIOPA paper.