Category Archives: Insurance

Lapse risk reinsurance

In July 2020, Milliman published the research report “Reinsurance as a capital management tool for life insurers.” This report was written by our consultants Eamon Comerford, Paul Fulcher, Rik van Beers 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 ninth in a series of posts about this research. Each post provides an overview of a certain section of the Milliman report.

Lapse risk reinsurance

One of the largest capital requirements for most life insurers arises in respect of lapse risk, which results from adverse changes in policy surrenders, paid-ups and other discontinuances. For most business, higher-than-expected policy lapses result in the loss of profitable policies, although the converse is sometimes the case, with the risk of loss-making policies remaining in force for longer durations.

The focus of this post is on lapse reinsurance, which can be designed to cover the lapse stresses under Solvency II, where the reinsurer pays out if lapses are higher or lower than expected. Lapse risk reinsurance solutions mainly focus on tail risk transfer and Solvency Capital Requirement (SCR) reduction, rather than full lapse risk transfer. A 100% quota-share reinsurance of a block of business fully transfers lapse risk, in the absence of other risks, if full lapse risk transfer is required.

Lapse reinsurance transactions are written to be “out-of-the-money” at inception, so may be a low-cost way to transfer lapse risk. An insurer considering entering a lapse reinsurance contract will reinsure the biting SCR lapse stress, thus allowing the insurer to hold less capital against the biting lapse risk. This structured reinsurance strategy is most likely to be used by an insurer calculating its Solvency II capital requirements using the Standard Formula (SF). The strategy is most practical where the biting lapse stress requires significantly more capital than the other lapses stress. If any of the other lapse stresses are at a similar level of magnitude, the usefulness of a reinsurance arrangement just covering one type of lapse stress as a capital relief tool is minimal. In this case, it may be necessary to use a lapse reinsurance strategy that covers multiple lapse stresses.

Overview

Lapse risk exists on most portfolios of life insurance business other than business for which lapses are not possible, such as traditional whole-of-life annuities. There are three main types of lapse reinsurance currently in existence, one for each of the three prescribed shocks under the SF, as shown in Figure 1.

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Insurers in Asia report steady embedded value growth amid COVID-19 pandemic

Milliman today released its annual ‘2020 mid-year embedded value results: Asia’ report. This update supplements the ‘2019 embedded value results: Asia’ report released in September 2020, and includes 2020 mid-year embedded value (EV) and value of new business (VNB) results posted by major multinational and domestic life insurers across Asia.

“Most companies in the region recorded steady EV growth in the first half of 2020 despite the economic impact of the COVID-19 pandemic,” said Milliman Principal and Consulting Actuary Paul Sinnott. “The growth in VNB was mixed across Asian markets, with new business sales in some markets severely affected by government restrictions in response to the coronavirus.”

A complimentary copy of the report is available for download here.

A few key insights from the report include:

  • The China and Japan markets led EV growth in the Asia region with most insurers recording double-digit growth in EV.
  • When compared with the first half of 2019, changes in VNB and new business margins in the first half of 2020 were varied. China, which entered and exited lockdown earlier than other Asian markets, was less affected than most VNB, growth-wise. In Hong Kong, the continuing social unrest, restrictions on travel from mainland China, virus-related lockdowns and lower interest rates all contributed to a significant decline in VNB.  
  • All multinationals disclosing results reported a decline in VNB, which they commonly attributed to lower new business sales, unfavourable economic changes and changes to operating assumptions in key markets.
  • The COVID-19 pandemic led to a greater focus on product innovation and digital transformation across the region. Insurers and regulators have taken steps to facilitate digital sales in response to lockdowns and social distancing measures adopted by most governments. This helped insurers in some markets mitigate reductions in sales to an extent.
  • The pandemic has also typically increased demand for protection products across Asia.

For more details, please contact Paul Sinnott in Hong Kong at paul.sinnott@milliman.com.

Mortality and catastrophe risk reinsurance

In July 2020, Milliman published the research report “Reinsurance as a capital management tool for life insurers.” This report was written by our consultants Eamon Comerford, Paul Fulcher, Rik van Beers 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 eighth in a series of posts about this research. Each post provides an overview of a certain section of the Milliman report.

Mortality and catastrophe risk reinsurance

Two common interrelated risks that life insurers can face are mortality risk and catastrophe risk. Mortality risk is the risk of both policyholders dying earlier than expected and more policyholders dying than expected. This risk occurs gradually throughout the duration of the portfolio. If best estimate mortality rates are set too low then, as a result, provisions for mortality covers are insufficient to cover liability payments.

Catastrophe risk is the risk of many policyholders dying or falling sick due to a sudden event, such as a pandemic. The effects of a catastrophe shock are felt more immediately than the effects resulting from a mortality shock. A recent example of this is the COVID-19 pandemic.

Determining mortality risk and catastrophe risk

Setting robust best estimate mortality parameters for an insurer’s portfolio can be subject to a substantial amount of expert judgement, especially in the case of smaller portfolios or where the insurer does not have a lot of experience. Mortality risk can be quite material, as a small variance in the portfolio’s mortality can readily lead to insufficient reserves. This especially holds true if this variance occurs on life covers from individuals with above average sums assured. Estimating catastrophe risk can be challenging. Parameters and models used to determine the catastrophe risk are dependent on the event driving it. In the case of a pandemic, variables such as social distancing, contagiousness, population age structure and lethality are important when calibrating a catastrophe risk model.

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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.

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New U.S.-based insurance restructuring mechanism approved

Oklahoma has now made good on its promise to become the leading domicile for a new U.S.-based insurance restructuring mechanism—the Insurance Business Transfer (IBT). In late November 2019, the Oklahoma Insurance Department approved the IBT application (or IBT Plan) of Providence Washington Insurance Company to transfer policies to Yosemite Insurance Company—both companies are part of Enstar Group.

With Commissioner Mulready’s approval, the IBT Plan was sent to the District Court of Oklahoma County with a request for its approval. Despite court delays resulting from the COVID-19 pandemic, on October 15, 2020, the District Court of Oklahoma issued its order of approval and implementation for the first-ever U.S. IBT, allowing for the novation of insurance policies to an assuming insurer without policyholder consent. Enstar worked diligently to push this “intracompany” business transfer forward and has now set the stage for future transfers in this space.

In this article, Milliman consultant Stephen DiCenso, who served as the Independent Expert on this transaction, discusses the benefits to restructuring mechanisms such as the IBT.