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Future Pathways Fresh perspectives from actuaries of the future
Auckland, 15 March 2011Wellington, 16 March 2011
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Future Pathways Fresh perspectives from actuaries of the future
Life InsuranceBen Coulter, SovereignAdam Swanson, Melville Jessup Weaver
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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
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Life insurance accounting (IFRS)
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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
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Margin on Services Method
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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
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MoS Planned Profit Example
1 2 3 4 5 6 7 8 9 10
Millions
Net cashflow
MoS planned profit
• Uneven cash-flows with large new business strain
• Smooth MoS planned profits as all acquisition costs are deferred
Example cash-flows for a portfolio of yearly renewable term policies
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Exposure Draft Method
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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)
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ED Planned Profit Example
• 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+
Example cash-flows for a portfolio of yearly renewable term policies
1 2 3 4 5 6 7 8 9 10
Millions
Net cashflow
New IFRS planned profit
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Effect of Assumption changes
• 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
IFRS Planned Profit Volatility - Current (MoS) vs New (ED)With mortality assumption change in year 2, discount rate change in year 4 and
lapse assumption change in year 6
-200
-100
0
100
200
300
400
500
1 2 3 4 5 6 7 8 9 10
Th
ou
sa
nd
s
Year
Current MoS planned profit
New ED planned profit
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Recent Developments
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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!
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Summary
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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 “locks-in” 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
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Prudential regulation and Solvency
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Insurance (Prudential Supervision) Act
• Enacted in Sept 2010, it gives the RBNZ the following roles as the new regulator of the NZ insurance industry:
– To issue licences to NZ insurers– Carry out Prudential Supervision of insurers, including:
• Solvency requirements• Financial strength rating requirements• Risk management requirements• Appointed Actuary (AA) regime• Fit & proper person requirements (for directors & the AA)• Financial reporting requirements• Statutory fund requirements (life companies only)
– To gather information and investigate insurers– Facilitate distress management
Appointed Actuary (AA) regime
• All insurers must have an Appointed Actuary, who then must:
– Meet “Fit & proper person” requirements
– File Financial Condition Reports (FCRs) with the RBNZ
– Responsibilities within the solvency calculations (e.g. projecting solvency for 3 years)
– “Whistle-blowing” responsibilities if the insurer could be expected to go into financial difficulties
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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:
• ACL Insurance (1989)• A few mutuals• Capital Life (1989)• Standard Insurance (1961)• Maoriland Life (1951)
• Plus maybe others if it weren’t for M&A’s…
The ACL case was the biggest failure in NZ ($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 ranked alongside unsecured creditors)
Both issues would not occur under new regulatory environment.The new Act was not in response to insurer failure, but is designed to
bring NZ into line with international best practice
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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
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PS5.01 vs. draft RBNZ solvency
Assets
Capital(or net assets)
Contract Liabilities
Other Liabilities Other Liabilities
Solvency Liabilities
Resilience reserve
Inadmissible assets
Insurance Risk Capital Charge
Expense reserve
Asset Risk Capital Charge
Catastrophe Risk Capital Charge
Ineligiblecapital
Asset Risk Capital Charge includes a new version of PS5.01’s Resilience Reserve plus charges for:
Reinsurance Recovery RiskAsset Concentration (which previously was within Inadmissible Assets)
IFRS Reported Balance Sheet PS5.01 structure
New RBNZ structure
Not to scale. Relativities between PS5.01 and RBNZ standards will
change based on differences discussed below.
• Compared with NZSA PS 5.01, the draft RBNZ standard has:
– New structure with new concepts
– More granular product groupings (e.g. level / YRT, short-term DI / long-term DI, differences in expense or commission structures)
– Higher prescribed assumptions in some areas (e.g. lapses from +/- 25% to +/- 40%)
It is expected that solvency requirements are higher under the initial RBNZ draft. A revised draft is due out in April 2011.
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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!
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Questions?
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Future PathwaysFresh perspectives from actuaries of the future
General InsuranceJonathan Nicholls, PwCJing (Annie) Luo, AMI
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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
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Regulatory Framework
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Solvency Standard
VS
(Ratio)
Actual
Solvency
Capital
Minimum
Solvency
Capital
Prudential Adjustments
NZ GAAP
Balance Sheet
Risk ChargeFactors
Business Metrics
VS
(Ratio)
Actual
Solvency
Capital
Minimum
Solvency
Capital
Prudential Adjustments
NZ GAAP
Balance Sheet
Risk ChargeFactors
Business Metrics
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Key Issues
• Adding value through the FCR• Disclosure of Solvency Ratio, with
comparison to RBNZ guideline• Transition programme to full compliance• “Whistleblower” responsibilities
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Developments at ACC
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ACC – OSC Liability growth
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Scheme Growth
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Recent Stabilisation
• Increased rigour around claim acceptance• Claim monitoring• Lower rates for services from providers• Legislative amendments
Publicity of Scheme sustainability & limits
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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?
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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.
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ACC – a political football
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Canterbury Earthquake
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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
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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
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Current Impact
• Sharing the cost between the EQC and insurance companies - Premium - Claims
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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
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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.
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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?
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Any questions?
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Contact Details
Jonathan [email protected]
Jing (Annie) [email protected]
Feel free to contact us with any comments/questions!
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Future Pathways Fresh perspectives from actuaries of the future
Health InsuranceAnagha Pasche, Southern Cross
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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
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What is health insurance?
• Health insurance covers the costs of many non-urgent healthcare procedures such as orthopaedic surgery and semi-acute healthcare procedures such as the removal of cancers and cardiac surgeryFrom Health Funds
Website
• Health insurance means insurance against a liability to pay fees or charges relating to the provision of a health serviceInsurance Prudential Supervision Act 2010
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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
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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.
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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
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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
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Health insurance productsThere 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
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Health insurance productsTrend to move away from comprehensive policies (67% of policies at 31 Dec 2010 were major medical)
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
Jun-
98
Dec-9
8
Jun-
99
Dec-9
9
Jun-
00
Dec-0
0
Jun-
01
Dec-0
1
Jun-
02
Dec-0
2
Jun-
03
Dec-0
3
Jun-
04
Dec-0
4
Jun-
05
Dec-0
5
Jun-
06
Dec-0
6
Jun-
07
Dec-0
7
Jun-
08
Dec-0
8
Jun-
09
Dec-0
9
Jun-
10
Dec-1
0
Inforce count
Major Medical
Comprehensive
Total
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Claims driversSome factors affect claims:• Plan type / Benefits• Age• Gender• Smoking status• Duration / tenure• Socio-economic• Regional
Claims trends / claims inflationNew technologiesChanges in utilisation
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Claims inflationSome 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
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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
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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
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Thank you!
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Future Pathways Fresh perspectives from actuaries of the future
Risk ManagementKlaas Stijnen, DeloitteJames Xu, AMP
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Risk and Actuaries Life, Health, General……
Risk Actuaries?
Life HealthGeneral Risk
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What is RiskRisk is……
• Accident?
• Potential of loss?
• Opportunity?
• Lost money to share market during the GFC?
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US House Price
1998
1999
…
2005
2006
2007
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GFC Overview
The Economy
2008
– Panicking– Securitisation took hit,
private sector almost vanished
– Meetings!– Investigations!– Rescue!
2005
– Job market going up– House Price going up– Interest Rate going up
– Let the market look after itself
2007
– Some defaults started to appear
– Securitisation volume still high
– The market will look after itselfRegulator
2006
– Job market going up– House Price going up– Interest Rate going up
– Let the market look after itself
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How did the system collapeRating Agencies Regulators
Banks Investors
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Enterprise Risk Management
Source: Harry Panjer
Regulator InvestorRating agency CEO with Stock options
CRO???
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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 long-term value to its shareholders.”
• Why ERM? Thorough understanding of risks
Pursue higher return for shareholders
Provide better information to external stakeholders
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ERM Process
Risk identification
Risk monitoring
(reactive) risk management
Risk based strategy
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ERM Framework Example
Risk AppetiteHow much value are we willing to put at risk with which probability?
Risk toleranceRisk Factor 1
Risk FactorsInsurance, lapse, interest rate, equity etc
Risk toleranceRisk Factor 2
Risk toleranceRisk Factor …
Risk toleranceRisk Factor N
Framework to manage Risk Tolerances
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CERA Designation Global Recognition
Technically “approved”
Risk management specific
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Discussion?