Data science is a term given to the broad array of activities used to gain insight and extract value from existing data sources, including techniques such as data analytics, predictive analytics, machine learning, data mining and artificial intelligence. The use of data science techniques enables the extraction of value from increasingly diverse sources of data.
The cost of storing data has been falling exponentially for decades, and many companies have started storing lots of potentially valuable internal data. Computing speeds have been increasing exponentially for decades, and data analysis software has been steadily improving, making it feasible for companies to analyse and gain insight from these larger data sets.
In this briefing note, Milliman’s Donal McGinley, Bridget MacDonnell and Eamon Comerford provide a high-level overview of how insurers can make better use of internal data to gain insight and drive competitive advantage.
The European Insurance and Occupational Pensions Authority (EIOPA) aims to facilitate insurtech innovation in a way that ensures a level playing field and does not lead to deregulation. The agency recently published a report providing an overview of the European Union’s insurtech industry. The report also explores licencing requirements and the principle of proportionality related to insurtech innovation. Milliman consultants Bridget MacDonnell and Dominik Sznajder offer some perspective in this briefing note.
Solvency II came into force on 1 January 2016. The agreed Pillar 1 quantitative requirements set a market-consistent valuation framework for the valuation of assets and liabilities, as well as sufficient holdings of capital to withstand a combination of so-called ‘1-in-200-year’ Standard Formula (SF) stresses. There is no doubt these fundamental principles are set in stone but nonetheless there have been ongoing changes to the detailed rules since their introduction. This was planned from the outset with certain powers given to the European Insurance and Occupational Pensions Authority (EIOPA) to review methodology and assumptions over time, as well as a specific milestone for the European Commission (EC) to review elements of the Standard Formula in 2018, followed by a more holistic review of the entire rulebook by 2021.
Any changes are intended to reflect developments in the insurance sector and the wider environment. These changes could have significant impacts on individual companies and firms may need to reassess their capital management strategies.
This report by Milliman’s Karl Murray, Eamonn Phelan, and Bridget MacDonnell revisits the rules in specifying the risk-free rate term structure, which forms a fundamental part of the calculation of Technical Provisions (TPs). In particular, they analyse changes to the Ultimate Forward Rate (UFR).
EIOPA’s consultation paper on the formal integration of sustainability risks into both Solvency II and the Insurance Distribution Directive (IDD) details a number of proposed changes to regulation which may lead to challenges for insurers. The consultation closed to responses on 30 January 2019 and technical advice to the European Commission is expected by the end of April.
Of particular interest are the following three changes which have been proposed to the Solvency II Delegated Regulation:
1. The risk management function would explicitly be required to have a role in identifying and assessing sustainability risks.
2. The actuarial function opinion on the underwriting policy would need to address sustainability risks.
3. Sustainability risks would be integrated into the requirements governing investments under the ‘prudent person principle.’
This latest consultation is part of the wider package of measures on sustainable finance which the European Commission adopted in May 2018. EIOPA has also issued a call for evidence to collect information from insurers regarding the integration of sustainability risks in the assessment of assets and liabilities. EIOPA will prepare its draft opinion to the European Commission on sustainability within Solvency II for consultation during the second half of 2019.
The Commission’s request for advice from EIOPA includes various wider Solvency II aspects. For example, the opinion should also highlight where the calibration of the standard parameters in the market risk module of the standard formula do not sufficiently account for sustainability factors, with particular regard to the climate risk that insurers are exposed to via their investments and how it should be addressed.
What is meant by sustainability risk?
While there is no universal definition of sustainability risk for insurers, we see this risk as having two key aspects:
1. It is the specific risk (mainly to non-life insurers) of additional claims brought about by increased incidence of environmental events or natural disasters.
2. It is the more general risk associated with having business models and/or investments that fall outside of the definition of ‘sustainable,’ and that are therefore threatened by events, market forces and new regulation that arise as a result of a general shift towards sustainable investments and business models.
Sustainable investments can be defined as investments in an economic activity that contribute to an environmental, social or governance (ESG) objective1. Sustainability risks stem from these ESG factors and could affect both the investments and the liabilities of insurers.
Chief economist Peter Praet of the European Central Bank (ECB) made some remarks that received a lot of attention earlier this month at the 31st International Congress of Actuaries (ICA) held in Berlin. Praet outlined the ECB’s response to different phases during the steady decline of short- and long-term interest rates and added that low interest rates create challenges for many business models of insurance companies. Praet revealed ahead of a policy meeting later in the month that discussions in this meeting would be key in determining when to end ECB’s bond-buying program.
Praet made these statements during a session at the ICA on the future of the low interest rate environment. Milliman’s Ken Mungan, in that same session, moderated a panel on the macroeconomic aspects and impacts on the insurance sector, which included Praet, Stephen O’Hearn, global insurance leader for PricewaterhouseCoopers, and Klaus Wiener, chief economist of the German Insurance Association.
Masaaki Yoshimura of Milliman’s Tokyo office, who is president of the International Association of Actuaries, opened and closed the event. Over 100 countries were represented and there was a record number of attendees, with just under 3,000 participants, including more than 50 Milliman consultants.
The event covered a variety of content encompassing all areas of actuarial work, and there were a number of perspectives about that work—including from insurance actuaries, regulators, consultants, and academics. This year, there was a strong focus on potential changes to the industry due to technology and the risks this could introduce to companies and to policyholders. Actuaries were encouraged to think carefully about these emerging risks.
Milliman was well represented, with eight consultants speaking on various topics relevant to the global attendees.
Milliman speakers and their topics were:
• Alexandre Boumezoued. “Individual Claims Reserving: Opportunity as a Challenge.”
• Zachary Brown. “Improving Actuarial Communication.”
• Joanne Buckle and Chris Bristow (Institute and Faculty of Actuaries). “Life Long Learning in the IFoA.”
• Joanne Buckle and Didier Serre. “Alternative Payment Models for High Cost Creative Therapies.”
• Naoufal El Bekri. “Mortality Tables Update Through Multi-Population Models: Application to Longevity Risk Transfer and Shock Computation.”
• Tigran Kalberer. “Architecture of Internal Models.”
• Allen Klein. “Long-Term Drivers of Future Mortality.”
• Allen Klein. “Underwriting Around the World: An Update.”
• Noriyuki Kogo. “Predicting Incidences of Acute Myocardial Infarctions: Are Big Data and Machine Learning Algorithms Useful for Predictive Models?”
• Bridget MacDonnell. “Recovery and Resolution Plans in Banking and Insurance.”
• Pat Renzi. “New Developments in Insurance IT.”
Have you ever wondered what options would be available to your company should it get into financial difficulty? Does your company have a ‘plan B’ and how practical and realistic is it? These are questions (re)insurance companies may soon need to answer. Recovery and Resolution Plans (RRPs) have already been introduced in the banking industry. In this blog I outline a few insights the insurance industry can learn from the recovery and resolution planning process which the banking industry has already commenced. (Re)insurance companies may find this useful particularly in light of the European Insurance and Occupational Pensions Authority (EIOPA) opinion issued last month recommending a harmonised recovery and resolution framework for all insurers across the EU.
Based on the feedback from the banking industry, it would appear that there is more to recovery and resolution planning than meets the eye. In the banking industry, recovery plans, for example, are intended to be living documents which demonstrate that the recovery strategies presented can be implemented in reality—and that is not an easy task.
The following diagram illustrates the embeddedness of recovery plans within banks as well as some of the key considerations which I will expand upon in this blog.
Recovery plans can span hundreds of pages as the practicalities of recovery strategies are explored in great detail in order to have a plan of action in place that is realistic, achievable and capable of being put into action straight away. Regulators expect a short timeframe for implementation of a recovery plan, with the recovery strategies presented typically required to be fully executable within a 12-month period. In addition, it is expected that the recovery strategies take account of the particular scenarios the company may find itself in. For example, the recovery strategies may vary depending on whether an idiosyncratic or a systemic risk has materialised, given that the options a company could take when it alone is in financial difficulty compared to when many companies are in the same boat may well be different.