In August, the Federal Housing Finance Administration (FHFA) announced an Adverse Market Refinance Fee of 0.50% applicable to refinance mortgages purchased by Freddie Mac and Fannie Mae (the Enterprises). The intent of the fee is to help buffer the Enterprises’ finance from adverse market conditions and to increase their capital positions as the FHFA prepares to release them from conservatorship.
The way this fee may affect the mortgage market and borrowers is not straightforward. In this article, Milliman’s Nicholas Beihoff, Ryan Lindsay, and Jonathan Glowacki provide clarity on the fee and its potential impact. They demonstrate how the fee will likely have a limited impact on borrowers looking to refinance their mortgages into a lower interest rate.
Tax reform in the United States is influencing the economic benefits previously enjoyed by some captive insurance owners. Two reform items specifically affect captives: the new marginal rate, which was decreased from 35% to 21%, and the change in the benchmark interest rates to be used for discounting loss reserves. In this article, Milliman’s Joel Chansky and Mike Meehan provide analyses demonstrating the effects that these new tax items have on both large and small captive 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.”
Milliman Chairman Ken Mungan is moderating the discussion “Chief Investment Officer Panel – Searching for Yield” at the ReFocus Conference 2017 on Monday, March 6. Panel participants will address the challenges of investing in a low interest rate environment and offer their perspective on strategies that can be employed.
ReFocus 2017 is a global conference for senior-level life insurance and reinsurance executives. It is sponsored by the American Council of Life Insurers and the Society of Actuaries. Milliman is also a sponsor of this year’s conference. ReFocus 2017 is scheduled from March 5-8 at The Cosmopolitan of Las Vegas. To view the entire conference agenda, click here.
Even without the advent of Solvency II and the appeal of internal models to model capital more accurately, it’s likely that the events following the global financial crisis (GFC) would have sharpened up European insurance companies’ risk modeling capabilities.
In Asia, insurance companies are also investing significant resources in developing their own economic capital models. Boards of directors have been charged with the measurement of risk and the need to plan their capital requirements through such things as an Own Risk and Solvency Assessment (ORSA) and an Internal Capital Adequacy Assessment Process (ICAAP) in Singapore and Malaysia, respectively.
Much has already been written about building complex Monte Carlo engines to calculate risk measures. This report by Milliman’s Clement Bonnet and Nigel Knowles addresses a question about the front end of the risk measurement process: How do we project our yield curve?