Tag Archives: risk management

COVID-19: What have we learnt from Solvency II reports from UK life insurers?

In March, the European Insurance and Occupational Pensions Authority (EIOPA) published its recommendations on the implications of COVID-19 for supervisory reporting and financial disclosure. EIOPA recommended that insurers consider the pandemic as a “major development” and publish appropriate information in their Solvency and Financial Condition Reports (SFCRs) on the effect of COVID-19 on their business.

However, EIOPA did not prescribe the possible format or extent of such disclosure. As a result, different approaches were taken by insurers to meet the disclosure requirements. They ranged from having dedicated sections for the impact of COVID-19 to having a few lines giving a brief description of the potential impact at much higher levels.

In this paper, Milliman’s Paul Fulcher, Sihong Zhu, and Samuel Burgess review the SFCRs recently published by major life insurers in the United Kingdom to examine the disclosures made on the impact of COVID-19 and what can be learnt about the impact the epidemic has had.

Overview of Solvency II’s Prudent Person Principle

In May, the Prudential Regulation Authority (PRA) published Supervisory Statement (SS) 1/20 on its latest expectations of the application of the Solvency II (SII) Prudent Person Principle (PPP) rules to insurers’ investment strategy, risk management and governance.

The SII PPP requires insurers to conduct investment activities in an appropriate manner, and to only invest in asset risks which they can properly identify, measure, monitor, control and report, and which are in the best interest of policyholders. The importance of this has been highlighted by the increased trend towards investment in less liquid and more complex assets as well as recent economic volatility.

This paper by Milliman’s Paul Fulcher and Sihong Zhu summarises the key PPP expectations from the updated text in the SS and their potential implications for insurers.

Milliman wins three InsuranceERM Americas Awards for its insurtech products and risk consulting services

Milliman is pleased to announce that the firm has won three 2020 InsuranceERM Americas Awards for its insurtech products and risk consulting services. The goal of the IERM Americas Awards is to highlight enterprise risk management leaders in the Americas.

In the technology category, Milliman’s Nodal™ was named “Analytics Solution of the Year” while Milliman’s Arius Enterprise® won “Cloud Technology of the Year.” Awards in these categories recognize insurtech solutions that enable strategic decision-making and provide risk insights that can improve efficiency and operations for (re)insurers. For instance Nodal, Milliman’s predictive modelling platform for early claim intervention, uses machine learning to comb through unstructured data and identify high-risk claims, and has helped clients reduce claims severity by 15% and overall losses by 41%. Meanwhile, Milliman’s Arius, one of the industry’s most comprehensive reserve analysis solutions, has saved clients hundreds of hours per year while simultaneously improving analyses and governance over data and processes.

Milliman was also recognized with a 2020 InsuranceERM Americas Award for its risk consulting services, with three members of the firm’s Chicago Life ERM practice taking home “Risk Team of the Year.” Anthony Dardis, Ariel Weis, and Chloe Lau have, combined, over 60 years’ experience on both the assets and liabilities sides of life insurance, and are well-known for their benchmarking capabilities and “practical-first” approach to risk management.

“Transformation in the insurance industry begins by leveraging new technologies in conjunction with the latest data and expert analysis, three areas in which Milliman excels,” says Milliman President and CEO Steve White. “Managing complex risks requires both the best expertise and the most innovative tools, so we feel gratified to have won IERM Americas Awards for both our risk consulting and technology solutions.”

For more information on Milliman’s insurtech products, including Nodal and Arius, click here. For more information on Milliman’s enterprise risk management solutions, click here.

Captives must reassess risk exposures due to COVID-19

The COVID-19 pandemic has forced risk managers to reassess the way they manage their exposures. In this risk environment, what implications exist for the captive insurance industry? According to Milliman consultant Mike Meehan, it is important for captives formed before 2020 to assess the potential effect of COVID-19 in the event they are unprepared to deal with claims arising from the virus. He explains more in his article “Adapting risk strategies to cope with COVID-19.”

Critical Point takes a look into the costs and risks associated with black lung disease

A recent Centers for Disease Control and Prevention (CDC) report indicates that the rate of black lung disease is going up. Black lung disease is also known as coal workers’ pneumoconiosis, and it’s brought on from inhaling coal dust and working in a coal mine. According to the CDC, black lung cases in miners are the highest they’ve been since recordkeeping began in the early 1970s.

In this episode of Critical Point, Milliman’s Christine Fleming and Travis Grulkowski discuss what these statistics mean for companies and insurers looking to manage this risk for their employees.

To listen to other episodes of Critical Point, click here.

Climate change risk and COVID-19

Short-term relief

One of the few unexpected, if short-term, impacts of the current COVID-19 crisis is a reduction in carbon emissions. The rapid shutdown of economies and transport across many countries throughout the globe has resulted in an unexpected drop in fossil fuel use and resulting emissions. A study by Carbon Brief, estimates that China’s carbon emissions dropped by around 25% over a four-week period at the beginning of the year. Meanwhile, in Europe, figures from Sia Partners cited by the Financial Times (subscription needed) indicate that daily carbon dioxide emissions have reduced by 58% across the EU since the introduction of so-called coronavirus “lockdowns”.

The extent to which these reductions will have a lasting impact on emission volumes depends upon the extent to which manufacturing and production could speed up to make up for periods of lost output, and the extent to which there is a demand for a speeding up of production. If world economies enter a period of recession, reduced wages and economic damage as a result of the lockdown period could result in reduced demand for goods and services for a period after the easing of measures.

Opportunities for the future?

Much also depends upon the actions of governments after the pandemic. Economic stimulus packages which focus on fossil fuel-intensive industries could result in high emission volumes, outweighing the benefit of the short-term reduction. There is also the possibility that governments continue to be consumed by efforts to focus on recovery from the pandemic at the expense of climate change initiatives which were beginning to gain traction.

On the other hand, the article by Carbon Brief points out that targeting clean energy and energy-efficient investments could be a positive solution to marry the need to encourage economic growth with government spending and continue to work on climate change targets. The sectors in which and the type of spending governments engage in could therefore be important in determining the extent to which progress on climate change is damaged by priorities created by the current crisis.

Adaptation

The coronavirus pandemic certainly demonstrates the ability of societies and government to rapidly adapt to monumental changes in lifestyle and behaviours in times of crisis. As discussed in an FT article, “How coronavirus stalled climate change momentum”, values are starting to shift, with the possibility that some behavioural changes could last long after coronavirus. Some changes in behaviour which have arisen through necessity could have longer-term beneficial impacts; for example, increased use and acceptability of virtual meetings could help contribute to longer-term reductions in air and other forms of travel, should fewer face-to-face meetings and conferences take place. Such acceleration of digitalisation across workplaces and socialisation will certainly have benefits from a climate change perspective, although admittedly from a wider risk view will bring new (primarily cyber related) risks.

Risk management

With COVID-19 likely dominating the current and ongoing agendas of risk managers, risks such as climate change may become lower priority in the short term. However, lessons can be learnt from the current crisis which might well be relevant to management of other risks such as climate change.

As an example, the current crisis highlights the importance of health systems in determining the severity of the outcome. As highlighted in a World Economic Forum article, “A first lesson we are drawing from the COVID-19 pandemic and how it relates to climate change is that well-resourced, equitable health systems with a strong and supported health workforce are essential to protect us from health security threats, including climate change.” Although an external factor, the strength and operational resilience of health systems could be a key determinant of the extent to which life insurers suffer increased mortality rates as the physical risks of climate change begin to crystallise. The importance of understanding interrelated external factors, which determine the severity, timing and nature of the onset of risks such as climate change, is therefore an important benefit to firms approaching management of these risks.

Finally, we should not ignore the possibility of a significant climate event that rapidly and unexpectedly raises global temperatures and destabilises weather patterns; in such circumstance there will almost certainly be no short-term or even medium-term remedy. This might be considerably more unlikely than the onset of a global pandemic such as COVID-19, but nonetheless the possibility should not be ignored. Indeed, today’s crisis and the unprecedented mitigating responses from governments have demonstrated to firms the need to be agile in their decision making. Properly thought through plans are key to enable firms to adapt or transition their operating models at short notice, whilst the length of the lockdown also suggests firms need to bear in mind that operational stress scenarios can last much longer than typical business continuity plans (BCPs) allow for.