Tag Archives: Joanne Buckle

FCA guidance on “Product value and coronavirus”

On 3 June 2020, the Financial Conduct Authority (FCA) operating in the United Kingdom issued guidance on its expectations of insurance firms in relation to product value arising from the COVID-19 pandemic. This guidance applied to all non-investment insurance products, including all general insurance and private medical insurance (PMI) products. The guidance is available here.

What does the guidance say?

The main purpose of the guidance is to “identify any material issues from coronavirus that affect the value of [insurers’] products, and their ability to deliver good customer outcomes.” The FCA defines product value as “what the customer is paying for and the quality of the product or service it is intended they receive.” The measures were placed into effect from the day of the release of the guidance and the FCA stated that it would review the response from insurers after six months. At a minimum, the FCA is expecting insurers to review their products and take appropriate actions.

In this blog post, we have put together some further guidance on how UK non-life insurers can go about reviewing their products.

Key highlights
  • If insurers are unable to provide benefits or pay claims in the usual way, they should seek alternatives to ensure that policyholders are getting product value.
  • If the level of insured events is reduced during the pandemic, then insurers should make suitable adjustments to their policies and premium levels to ensure that the value of the policy to the policyholder is not materially worse.
Analysis: Product review process

Firstly, insurers should review the impact of COVID-19 on their claims experience both during and after lockdown. There are many types of insurance products that will have seen lower levels of claims as a result of the lockdown during the pandemic. Insurers should regularly review loss ratios, as a decrease in loss ratios could indicate that customers are getting less value from their products. However, insurers should not ignore the possibility of a spike in claims post-lockdown, e.g., warranty or breakdown cover insurance policyholders might have been reluctant to have a technician enter their homes during the lockdown period, leading to reduced claims. However, as the lockdown eases, and policyholders become more comfortable with such repairs, there may be a spike in claims. Insurers should also be mindful of cross-subsidies within their portfolios, and of their overall solvency, as some lines of business will likely experience claims levels well in excess of normal levels.

Insurers should also analyse the driving factors behind decreased claims experience. The FCA identifies two main drivers of decreased claims experience:

  • The insurer’s own ability to provide claims benefits is reduced, e.g., the reduced availability of repair services for motor vehicles due to lockdown measures. In this case, insurers should seek alternative ways of providing benefits and paying claims. This issue could also affect insurers in other lines such as:
    • Motor own property damage
    • Extended warranty
    • Household contents
    • Boiler breakdown
  • A genuine decrease in the insured activity below the level expected at underwriting. For example, annual travel insurance policies that are no longer useful to policyholders. In this case, policyholder refunds or decreased premium rates may be the ideal way to ensure product value. When the reduction of risk under the policy is such that there is “little or no utility to consumers,” the FCA’s expectation is that firms carry out a product level assessment of value. Lines affected in this way could include:
    • Travel insurance
    • Motor insurance
    • Public liability
    • Marine and aviation policies linked to passenger travel

At the time of writing, the first major lockdown of the UK is easing, although the risk of further waves of the pandemic and future lockdowns, local, regional or national, remains. Therefore, insurers need to be aware of precedent-setting and managing consumer expectations. These considerations remain equally valid for any future waves of the virus, and insurers should take advantage of their learnings from the first wave of COVID-19 infections to enact responses to decreasing product value in a manner that is rapid and more specific to the nature of the outbreak.

Additionally, due to the virus and the ensuing recession, policyholders could find themselves in financial difficulties, and may miss insurance payments. In this case, firms have been instructed to consider the value of the product to the customer when deciding on a course of action. The FCA has also issued some additional guidance on treating customers fairly in this type of situation, which may be found here.

Case study: Private medical insurance in the UK

In the UK, all nonemergency procedures were postponed as hospitals made preparations to deal with the worst-case scenarios. During this period, loss ratios have lowered significantly, as a material number of operations have been deferred. While insurers have ramped up their telehealth coverage, many policyholders have had treatment delayed and, therefore, have received much more limited value from their products than they would expect. One option for insurers would be to provide some form of a refund to customers during the period where hospital facilities were shut, as has happened in Ireland. A number of larger UK medical insurers have promised a future refund if claims remain low for an extended period. However, early indications are that, not only will the vast majority of the deferred treatments occur, but there is a significant potential for the claims cost to be higher than anticipated, due both to delays in treatment and to increased provider costs resulting from new social-distancing and cleaning guidelines for treatment.

Brief study of UK health insurers’ second SFCRs

This analysis by Milliman consultants compares information provided in Quantitative Reporting Templates (QRTs) and Solvency and Financial Condition Reports (SFCRs) and draws conclusions about the balance sheets and risk exposures of 15 UK private medical insurance and health cash plan providers. The analysis also highlights noteworthy trends between the 2017 and 2018 publications.

What must health insurers consider regarding IFRS 17?

International Financial Reporting Standard (IFRS) 17 Insurance Contracts was issued by the International Accounting Standards Board (IASB) on 18 May 2017 and had an initial effective date of annual periods beginning on or after 1 January 2021. However, IASB in its November 2018 meeting voted to propose a one-year deferral of the effective date for the new insurance contracts standard to 2022. It has also decided to propose extending to 2022 the temporary exemption for insurers to apply the financial instruments standard, IFRS 9, so that both IFRS 9 and IFRS 17 can be applied at the same time. It is intended to provide updated information about the obligations, risks and performance of insurance contracts, to increase transparency in financial information reported by insurance companies to help boost market confidence and to introduce consistent accounting for all insurance contracts based on a current measurement model. It also requires a company to recognise profits as it delivers insurance services (rather than when it receives premiums) and to provide information about insurance contract profits the company expects to recognise in the future.

However, a closer look at IFRS 17 highlights some complexities that come with increased transparency and consistency in reporting. This article by Milliman’s Joanne Buckle and Neha Taneja focuses on some of the complexities and considerations for short-term health insurers.

Analysis of health insurers’ Solvency and Financial Condition Reports in Europe

Under Solvency II, European insurers are required to publish their Solvency and Financial Condition Reports (SFCRs). Two sets of SFCRs have been published, with the first publication for most entities occurring in May 2017 and the second one in May 2018.

The SFCRs contain a significant amount of information including details of the company’s performance over the reporting period, system of governance, risk profile, valuation basis and capital requirements. In addition, the SFCRs include a number of Quantitative Reporting Templates (QRTs) providing details of the company’s financial position under Solvency II.

This analysis by Milliman consultants compares information provided in the QRTs and SFCRs and draws conclusions about the balance sheets and risk exposures of European health insurers. It also highlights substantial trends between the 2017 and 2018 publications.

Milliman actuaries offer perspectives at the 31st International Congress of Actuaries

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.”

Brief study of UK health insurers’ first SFCRs

Solvency and Financial Condition Reports (SFCRs) contain a number of Quantitative Reporting Templates (QRTs). They are an important source of information on a company’s financial position under Solvency II. This report by Milliman’s Joanne Buckle and Didier Serre compares and contrasts the information in selected QRTs of 13 health insurers in the United Kingdom.