Category Archives: Insurance

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.

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.

How will a work-from-home economy disrupt the insurance industry?

Corporate America has transitioned to remote work during the COVID-19 pandemic because of social distancing requirements. Forced to work from home, many employees have found that they enjoy their home offices and are saving money on gas, parking, and mass transit costs. Likewise, employers have the potential to save money on commercial real estate expenses. The past few months have shown that a remote workforce is feasible without sacrificing productivity.

In the insurance industry, many coverages are based on the assumption that work will be performed in a centralized in-person location. The pandemic has highlighted that many employment practices were outdated before this crisis and the changes now underway will have a profound impact on workplace insurance.

In this article, Milliman actuary John Klodnicki explains that the insurance industry must adapt in order to function in a post-pandemic world and navigate the “new normal” of a work-from-home economy.

Record-setting wildfires put homeowners insurance in jeopardy

As the 2020 wildfire season again exceeds historical norms, insurers and policymakers must turn their attention from the literal fires to the figurative one: the threat—and increasing likelihood—that this escalating wildfire risk will result in a homeowners insurance crisis in the state of California.

For homeowners, insurance is often the last line of defense against losing everything to wildfire. However, for many, this crucial financial backstop is rapidly becoming harder to obtain as insurers reduce their portfolios due to billions in losses and regulatory restrictions on reflecting the true cost of risk in the premiums charged. This withdrawal is creating an untenable situation for many Californians and efforts to address it are becoming an urgent priority for policy makers.

In this article, Milliman professionals explain in more detail the state of home insurance in California and the regulatory efforts to address the issues thus far.

Regulatory considerations 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 consultants Paul Fulcher, Rik van Beers, 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 fourth in a series of posts about this research. Each one gives an overview of a section of the Milliman report.

Regulatory considerations

Demonstrating that a reinsurance deal is genuinely used as a risk-mitigating technique as part of a firm’s overall risk strategy is key for regulatory approval. Engaging with regulators early in the process is important, especially when considering reinsurance contracts that are highly bespoke in nature. Demonstrating enhanced policyholder protection is also paramount for most regulators.

The main criteria for accepting reinsurance transactions that a regulator will expect to see are:

  • A clear business rationale for implementing a reinsurance deal.
  • A strong understanding of the risks that are being transferred, the risks that remain and any new risks that emerge as part of the transfer, particularly counterparty risk. It is not necessary to have reinsured every component of the risk, but a clear understanding of what is and is not transferred is imperative. Furthermore, a genuine transfer of risk is expected to take place rather than arbitraging regulations to reduce capital requirements.
  • A low level of basis risk and a clear understanding of this basis risk.
  • Clear analysis and consideration of different possible outcomes, including scenarios where the reinsurance may not be effective.
  • A financially strong (and preferably large) counterparty and stringent security in the arrangement, particularly using collateral or other risk-mitigating measures. The reinsurer’s jurisdiction may also be relevant to the regulator.
  • Regulators are sometimes keen to see that assets transferred as part of a reinsurance transaction are held in local custodian accounts. This is very relevant for insurers that are considering entering into deals with reinsurers that operate outside of their jurisdictions.
  • Recapture plans in case of reinsurer financial distress or default.

The above criteria are typically important considerations for most insurers as part of their internal governance and risk management in any case. Early engagement with regulators is often the best way to achieve a positive outcome in terms of getting regulatory buy-in for a material new reinsurance arrangement.

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.