Future Pathways
Fresh perspectives from actuaries of the future
Auckland, 15 March 2011
Wellington, 16 March 2011
Future Pathways
Fresh perspectives from actuaries of the future
Life Insurance
Ben Coulter, Sovereign
Adam Swanson, Melville Jessup Weaver
Agenda
• Life insurance accounting (IFRS)
– Current Margin on Services Method
– Proposed Exposure Draft Method
– Recent Developments
• Prudential regulation & solvency
– The Insurance (Prudential Supervision) Act
– Reasons for regulation
– Proposed changes to solvency standards
Life insurance accounting (IFRS)
Life Insurance Accounting
• Long term contracts require unique accounting
• Profit for a life insurer defined as:
Premiums + Investment Income
– Claims – Expenses – Tax
– Increase in policy liabilities
• Policy liabilities drive the timing of profit release (but not
the total profit)
• Policy liability calculation method
– Currently MoS method under IFRS
– However, new changes to IFRS have been proposed
Margin on Services Method
What is MoS?
• Margin on Services (MoS) is a method of calculating policy
liabilities
– The result is that profits are released in line with “services” provided to
the policyholder, e.g. expected claims on a risk portfolio, with no profit
released at point of sale
• MoS acts as a “shock absorber”
– The impact of changes to non-economic assumptions (e.g. mortality,
morbidity, lapses) are spread through future margins
• Disadvantage is the results are artificial
– Impact of management actions are often deferred and MoS is viewed as
an accounting “black box” by analysts
MoS Planned Profit Example
Example cash-flows for a portfolio of yearly renewable term policies
n
Millio
1
2
3
4
5
6
7
8
9
Net cashflow
MoS planned profit
• Uneven cash-flows with large new business strain
• Smooth MoS planned profits as all acquisition costs are deferred
10
s
Exposure Draft Method
Proposed Daft Draft Standards
•
The IASB have been working on an IFRS update
•
They issued an Exposure Draft (ED) in July 2010
•
Three key differences to MoS:
–
–
–
Profit margin is split into two (Explicit Risk & Residual Margins)
The profit margins are “locked” (i.e. no assumption changes are spread
through margins)
Not all acquisition costs are deferred (results in a year 1 loss)
ED Planned Profit Example
Example cash-flows for a portfolio of yearly renewable term policies
n
Millio
1
2
3
4
5
6
7
8
9
Net cashflow
New IFRS planned profit
• Uneven cash-flows with large new business strain
• ED method has a loss in year 1 (non-incremental acquisition costs),
then smooth planned profit in years 2+
10
s
Effect of Assumption changes
IFRS Planned Profit Volatility - Current (MoS) vs New (ED)
Thousands
With mortality assumption change in year 2, discount rate change in year 4 and
lapse assumption change in year 6
500
Current MoS planned profit
400
New ED planned profit
300
200
100
0
1
2
3
4
6
5
7
8
9
10
-100
-200
Year
• MoS acts as a “shock absorber” for most assumption changes
• ED capitalises the impact of all assumption changes
• Result is that the ED method will result in much more volatile profits
Recent Developments
Recent Developments
• FASB proposal with “composite” margin
• Joint IASB / FASB meetings in mid-Feb 2011 to consider
industry feedback on the ED method
– They are now reconsidering the “locking-in” of margins, which would reduce
profit volatility
• Revised Exposure Draft to be published by June 2011
The ED method is subject to change, watch this space!
Summary
Summary
• The method of calculating policy liabilities affects the timing of the profits
• The current MoS method spreads profit in line with “services” provided
and spreads the impact of many assumption changes
– BUT it results in an artificial picture of financial performance
• The proposed ED method “locksin” the margins
– Results in additional profit
volatility and exacerbates the
artificial nature of life insurance
accounting
• Meetings are underway to reduce
the current ED methods volatility
Prudential regulation and Solvency
Insurance (Prudential Supervision) Act
••
All insurers
must2010,
haveitan
Enacted
in Sept
gives the RBNZ the following roles
Appointed
Actuary, who
then
as
the new regulator
of the
NZ insurance industry:
– must:
To issue licences to NZ insurers
–
–
–
–
–
–
–
Carry out Prudential Supervision of insurers, including:
• Meet
Solvency
“Fit &requirements
proper person” requirements
•
Financial strength rating requirements
• FileRisk
management
requirements
Financial
Condition
Reports (FCRs)
Appointed
Actuary
(AA)
regime
• with the RBNZ
•
Fit & proper person requirements (for directors & the AA)
• Responsibilities
Financial reporting
requirements
within
the solvency
• calculations
Statutory fund
(life companies
(e.g.requirements
projecting solvency
for 3 only)
years)
To
gather information and investigate insurers
Facilitate distress management
“Whistle-blowing” responsibilities if the
insurer could be expected to go into
financial difficulties
Why regulate insurers?
• Regulation can be in response to company failure
• However, there have been very few insurers fail in NZ and
none have been significant
• Failures include:
The ACL case was the biggest failure in NZ
•
•
•
•
•
ACL Insurance (1989)
A few mutuals
Capital Life (1989)
Standard Insurance (1961)
Maoriland Life (1951)
($12.5mil life fund).
Two major issues leading to its demise:
• Asset concentration risk (53% of assets
was invested in one retirement village)
• No separate life fund (policyholders
• Plus maybe others if it weren’t
for M&A’s…
ranked alongside unsecured creditors)
Both issues would not occur under new
environment.
The new Act was not in responseregulatory
to insurer
failure, but is designed to
bring NZ into line with international best practice
What is solvency?
• Being solvent is a requirement for all companies
• Insurers require an additional capital buffer to ensure they
remain solvent with a high probability (99.5%)
– We call this the “solvency” requirement
• Life insurers have adopted PS 5.01
“voluntarily” until now
• The RBNZ will issue solvency standards
going forward
• Solvency is the main part of the new Act
that has the ability to affect insurers
financially
PS5.01 vs. draft RBNZ solvency
Expense reserve
Catastrophe Risk
Capital Charge
• Compared with NZSA PS 5.01, the draft RBNZ standard has:
Capital
(or net assets)
Inadmissible
assets
Assets
Resilience
reserve
Ineligible
capital
Asset Risk Capital
Charge
– New structure with new concepts
Solvency
Liabilities
Insurance Risk
Capital Charge
Asset Risk Capital Charge
includes a new version of
PS5.01’s Resilience Reserve
plus charges for:
Reinsurance
Recovery Risk
Asset
Concentration
(which previously
was within
Inadmissible Assets)
– More granular product groupings (e.g. level / YRT, short-term DI / longterm DI, differences in expense or commission structures)
– Higher prescribed
assumptions in some areas (e.g. lapses from +/- 25%
Contract
Liabilities
to +/- 40%)
Not to scale. Relativities between
PS5.01 and RBNZ standards will
change based on differences
discussed below.
It is expected that solvency requirements are higher under the
initialIFRS
RBNZ
draft. A revised
draftNewisRBNZ
due out in April 2011.
Reported Balance Sheet
PS5.01
Other Liabilities
Other Liabilities
structure
structure
Summary
• The RBNZ is the new regulator of the NZ insurance industry
• Actuaries need to be aware of new Prudential Supervision, in particular
the responsibilities placed on the Appointed Actuary
• “Solvency” refers to the capital buffer required to ensure an insurer
remains solvent and new solvency standards will be issued by the RBNZ
• The initial RBNZ draft is very different from PS 5.01, so actuaries need to
understand the impacts and practical implications (incl. link with IFRS)
• A revised draft RBNZ standard is due out in April 2011, make sure you
voice any concerns!
Questions?
Future Pathways
Fresh perspectives from actuaries of the future
General Insurance
Jonathan Nicholls, PwC
Jing (Annie) Luo, AMI
Agenda
• Regulatory Framework
– Solvency Standard
– Key Issues
• Developments at ACC
– Scheme growth & recent changes
– What does the future hold?
– Comparison with Australian experience
• Canterbury Earthquake
– Quakes so far
– Current Impact
– The Future
Regulatory Framework
Solvency Standard
Actual
Solvency
Capital
VS
Minimum
Solvency
(Ratio)
Capital
Prudential
Adjustments
Risk Charge
Factors
NZ GAAP
Balance Sheet
Business Metrics
Key Issues
• Adding value through the FCR
• Disclosure of Solvency Ratio, with
comparison to RBNZ guideline
• Transition programme to full compliance
• “Whistleblower” responsibilities
Developments at ACC
ACC – OSC Liability growth
Scheme Growth
Recent Stabilisation
•
•
•
•
Increased rigour around claim acceptance
Claim monitoring
Lower rates for services from providers
Legislative amendments
 Publicity of Scheme sustainability & limits
The Future for ACC
• Stocktake recommended the Work, Earners’ and
Motor Vehicle accounts should be insured privately.
• Cabinet decision was to move towards competition
in the Work account, ACC could still insure.
 How does the move to competition pan out?
 What happens when the public concern over
sustainability dissipates?
Australian Experience
• Steep premium increases in 2002 prompted the Ipp
Review of the Law of Negligence.
• Resulting Civil Liability Act 2003 and Injury Scale
Values led to a fall in claim frequency & amount.
• NSW CTP introduced cover for “at fault” drivers in
2006 (for catastrophically injured) and 2009 (all).
• Large increases in economic loss payments for QLD
CTP led to a Review in 2010.
ACC – a political football
Canterbury Earthquake
Quakes so far …
These are the relatively large magnitude earthquakes /
aftershocks listed on the EQC website for claims
management:
•
•
•
•
•
•
•
4 September 2010: 7.1 magnitude
19 October 2010: 5.0 magnitude
14 November 2010: 4.9 magnitude
26 December 2010: 4.9 magnitude
20 January 2011: 5.1 magnitude
04 February 2011: 4.5 magnitude
22 February 2011: 6.3 magnitude
Current Impact
• The largest single insurance event in New Zealand
history
• Estimated loss of around $6.0 billion for September
quake
• Predicted likely loss of another $10.0 billion for
latest February quake
• The third most costly insurance loss worldwide in
2010
• Rank ? in 2011
Current Impact
• Sharing the cost between the EQC and insurance
companies
- Premium
- Claims
Current Impact
• Quake response
– September Quake: staff resource, underwriting restrictions,
policy coverage (temporary accommodation)
– February Quake: emergence recovery mode, office relocation,
policy coverage (theft)
• Claims Management
– September until 21 February
– Future possibilities
The Future
• Is the February quake still an aftershock of the September quake
or another new earthquake?
• A British expert in engineering risk said insurance policies in many
countries did not allow more than one claim for an "act of God"
event a year.
• If damage caused by the aftershock was deemed to be part of the
main quake in September then insurance would probably pay out,
if the quake is deemed to be independent then coverage may not
be guaranteed, Imperial College London fellow Peter Stafford said.
The Future
• COUNTING THE COSTS: Should the EQC levy still be collected
through premiums on house and contents insurance, or would it
be fairer to collect it via rates, so all homes are covered, not just
those insured? – from Sunday Star Times
• Insurance and reinsurance premiums were expected to rise in the
wake of the quake. Any increase would be determined by the
market. – from Insurance Council chief executive, Chris Ryan.
• Queensland floods, Cyclone Yasi and Canterbury Earthquake –
what’s going to happen in the future for the GI market here?
Any questions?
Contact Details
Jonathan Nicholls
jonathan.p.nicholls@nz.pwc.com
Jing (Annie) Luo
annie.luo@ami.co.nz
Feel free to contact us with any comments/questions!
Future Pathways
Fresh perspectives from actuaries of the future
Health Insurance
Anagha Pasche, Southern Cross
Overview of presentation
•
•
•
•
•
•
•
NZ health insurance market
The role of public health & ACC
Types of health insurance products
Claims drivers
Claims inflation
Premium rates
Group schemes
What is health insurance?
• Health insurance covers the costs of many nonurgent healthcare procedures such as orthopaedic
surgery and semi-acute healthcare procedures such
as the removal of cancers and cardiac surgery
From Health Funds
Website
• Health insurance means insurance against a liability
to pay fees or charges relating to the provision of a
health service
Insurance Prudential Supervision Act 2010
NZ health insurance market
•
•
•
•
Health Funds Assocation of New Zealand Inc (HFANZ)
Industry body
Source of market data
10 members (98% of all inforce health insurance policies)
–
–
–
–
–
–
–
–
–
–
Accuro Health Insurance
AIA New Zealand
EBS Health Care
Manchester Unity Friendly Society
OnePath Life (NZ) Limited
Police Health Plan Ltd
Southern Cross Healthcare
Sovereign Assurance Company Limited
TOWER Health & Life Ltd
Union Medical Benefits Society Ltd
NZ health insurance market
Market statistics at 31 Dec 2010
• 1.38 million lives covered (approx 32% of
population)
• $961.9 million in Earned Premium
• $824.2 million in Paid Claims
• Average annualised growth in claims costs
over the last five years has been 8.7% p.a.
The role of public health & ACC
• NZ health system funded by taxation, ACC levies, health
insurance and individual contributions
• Good public health system but there are constraints
• The public health system effectively delivers acute
(urgent) services
• However, non-urgent or elective surgery are rationed
• Health insurers complement the public health system by
covering the cost of non-urgent procedures
• Private market (funding and provision) has emerged due
to (perceived) gaps in public coverage
• Example: private radiotherapy services
The role of public health & ACC
• ACC “No fault” sole insurer for all work and non-work
injuries within New Zealand
• Role as set out by government www.acc.co.nz
– prevent injury
– make sure people can get treatment for injury, if it
happens
– help people get back to everyday life as soon as
possible.
• Cut backs to costs of elective surgery
• Example: increased scrutiny on shoulder, knee and spinal
surgery
Health insurance products
There are two main types of health insurance policies:
• Major Medical Policies: cover elective surgical and specialist
care
• Comprehensive Policies: also cover day to day costs e.g.
doctor’s visits & prescriptions
Policies can be
• Shared cover (co-insurance) or
• Extensive cover (full reimbursement for qualifying
procedures)
• Excess options often available
No regulatory mandatory benefits
Health insurance products
Trend to move away from comprehensive policies (67% of
policies at 31 Dec 2010 were major medical)
1,600,000
1,400,000
1,200,000
1,000,000
Major Medical
Comprehensive
800,000
Total
600,000
400,000
200,000
D
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-
Inforce count
Claims drivers
Some factors affect claims:
• Plan type / Benefits
• Age
• Gender
• Smoking status
• Duration / tenure
• Socio-economic
• Regional
Claims trends / claims inflation
New technologies
Changes in utilisation
Claims inflation
Some ways insurers try to contain claims inflation
• Underwriting of pre-existing conditions: most insurers treat in
one of three ways:
– Exclude condition from insurance cover
– Defer coverage of condition for a period of time
– Charge a higher premium to cover the condition
• Benefit design
– Policy exclusions
– Benefit / Policy limits
– New medical technology
• Claims management
– Applying reasonable charges
– Contracting with providers
Premiums rates
– Plan type / Benefits
– Age (Risk rating system or Community rating system or
combination)
– Gender (some insurers)
– Smoking status (some insurers)
– Other lifestyle criteria (some insurers)
– Amount claimed / Low claims discounts (some insurers)
– Charging for children
– Payment methods
– Group schemes
Subject to Human Rights Act
Group schemes in health insurance
• Employer group schemes accounts for a large proportion of
New Zealand business.
• Groups often have a specialised/subset product range offered
to them
• Group business usually has cheaper premiums and when
subsidised may be charged a flat family rate or flat adult/child
rate (usually derived from age related rates)
• More relaxed underwriting for larger employer subsidised
groups (expected to exhibit less anti-selection than
individuals)
• Very large schemes may be experience rated
Thank you!
Future Pathways
Fresh perspectives from actuaries of the future
Risk Management
Klaas Stijnen, Deloitte
James Xu, AMP
Risk and Actuaries
Life, Health, General……
Risk Actuaries?
Life
General
Health
Risk
What is Risk
Risk is……
• Accident?
• Potential of loss?
• Opportunity?
• Lost money to share market during the GFC?
US House Price
2007
2006
2005
…
1999
1998
GFC Overview
2005
The Economy
Regulator
2006
2007
– Job market going up
– House Price going up
– Interest Rate going up
– Job market going up – Some defaults started
to appear
– House Price going up
– Interest Rate going up – Securitisation volume
still high
– Let the market look
after itself
– Let the market look
after itself
– The market will look
after itself
2008
– Panicking
– Securitisation took hit,
private sector almost
vanished
– Meetings!
– Investigations!
– Rescue!
How did the system collape
Rating Agencies
Banks
Regulators
Investors
Enterprise Risk Management
CRO???
Regulator
Source: Harry Panjer
Rating agency Investor
CEO with Stock options
Enterprise Risk Management
• What is ERM?
“an organisation (…) assessing, exploiting, financing and monitoring risks from
all sources for the purpose of increasing the organisation’s short- and longterm value to its shareholders.”
• Why ERM?
 Thorough understanding of risks
 Pursue higher return for shareholders
 Provide better information to external stakeholders
ERM Process
Risk
identification
Risk
monitoring
Risk based
strategy
(reactive) risk
management
ERM Framework Example
Risk Appetite
How much value are we willing to put at risk with which probability?
Risk Factors
Insurance, lapse, interest rate, equity etc
Risk tolerance
Risk tolerance
Risk tolerance
Risk tolerance
Risk Factor 1
Risk Factor 2
Risk Factor …
Risk Factor N
Framework to manage Risk Tolerances
CERA Designation
 Global Recognition
Technically “approved”
 Risk management specific
Discussion?