the actuary march 2016

8/16/2019 The Actuary March 2016

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The magazine of the Institute and Faculty of Actuaries

MARCH 2016

theactuary.com

Interview:Mike BrockmanActuary turnedbusinessman onusing wider skills

Risk A CERA route tothe constructionindustry

InvestmentOpportunities forincome-generatingassets

OpinionDo life actuarieshave a future?

Opening up opportunitiesfor actuaries in wider elds

FASHIONYOURFUTURE


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Contents

March 2016 THE ACTUARYwww.theactuary.com

MORE CONTENT ONLINEAdditional content can befound at www.theactuary.com

AT THE BACK

32 StudentActuaries managing the risks oftechnocracy? Jessica Elkin reports

33 Books James Male reviews Figures of Death by

P J Sweeting

35 PuzzlesTry the latest cryptic crossword andMensa puzzles

36 People/society news

38 Actuary of the future Bronagh Traynor of Invesco Ireland

ONLINE

CERA: a versatile approach to riskmanagementCintia Cheong talks to Joshua Walters on hispath to qualication

Agony actuary: Twitter awayAdvice on winning entries.Read more at bit.ly/1oDC7PF

FEATURES

14 Interview: Mike BrockmanThe actuary turned businessman shareshis views on telematics and autonomouscars with Gemma Gregson

17 Investment: Lifetime opportunitiesArno Kitts and Olivier Defaux suggestthat lifetime mortgages can be attractiveas income-generating assets

20 Risk: Actuary in a hard hatThe CERA qualication opens new doorsfor Arthur Els as he shares hisexperiences in construction

22 Liquidity: Go with the owCon Keating and James Walton report

on actuaries encountering liquiditymore frequently

25 Risk: Big data, big issuesBig data presents actuarial opportunitiesbut also potential threats, saysBrian Gedalla

28 Technology: Great expectationsGurpreet Johal and Graham Robertsonconsider how reserving might evolve inthe current technological age

UP FRONT

9 IFoA news The latest news, updates and events from

the Institute and Faculty of Actuaries

OPINION4 Editorial Editor Richard Purcell comments on the

many opportunities open to actuaries

5 Letters Actuaries discuss the relevance of

Solvency II, news from Zimbabwe andbehaving irrationally

7 President’s comment Fiona Morrison addresses gender

parity in the profession

8 CEO’s comment Derek Cribb says widening an actuary’s

role to new industries is key to theprofession’s growth

13 SoapboxMarcus Bowser on how life insurerscan emerge from a challenging era

14 “Being part of myclient’s CRO task team

gave me exposure toother professions thatI would not normallyencounter asan actuary”

20

GET THE APPDid you know you can now read The Actuary magazine on anytablet or Android phone? Visit www.theactuary.com/app

MARCH 2016

COVER: GETTY CRAIG ZADUCK

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[email protected]

Editorial

THE ACTUARY March 2016www.theactuary.com

4

We often talk about moving into wider elds, but manyof us nd it’s easier said than done. Either because welack the opportunity, skills, or simply do not sell ourexisting abilities. Opportunities should not be lacking,according to Derek Cribb ( p8 ), who pointsto new research by the IFoA showingthat our expertise is highly valued

by businesses.However, it also agged the needto ‘promote’ ourselves

more, underliningthe importance ofFiona Morrison’spresidential theme.

There is no doubtthat being actuaries gives us a broadrange of skills to leverage, but maybewe do need to ne-tune them if weare to become risk specialists inwider elds. Perhaps more of usshould consider completing theChartered Enterprise Risk Actuary

(CERA) qualication? Like me, you may be surprisedto know that we have just seen our 3,000 th actuary, ChuLee, achieve this accreditation ( p11). There is no doubtCERA is also helping to open doors to new industrieslike construction, as Arthur Els ( p20 ) explains.

When it comes to promoting ourselves, BrianGedella ( p25 ) observes that we should shout about ourprofessional education and standards, believing thissets us apart from other technical experts with whomwe compete. However, Mike Brockman, founder ofInsure the Box, argues that we need to strike the rightbalance, ensuring we don’t focus on ticking boxes at the

expense of innovation( p14 ). He is evidence,

if any were needed,that the core actuarialskill set, together witha dose of personalityand communicationskills, can be a winningcombination. What’sclear is that we all have

a role to play in building our brand, by demonstratingthe value we can add to our employers and widerindustry. Before long, construction actuaries couldbe as commonplace as pensions actuaries.

Richard Purcell

Editor

Building our brandRichard Purcell comments on the manyopportunities open to those actuaries whodemonstrate their value

PublisherRedactive Media Group17-18 Britton Street,London EC1M 5TP+44 (0)20 7880 6200

Publishing directorJoanna Marsh

Editor-in-chief Melody Bartlett+44 (0)20 7880 [email protected]

Managing editorSharon Maguire+44 (0)20 7880 [email protected]

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News reporter

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Print William Gibbons

EditorRichard [email protected]

Features [email protected] Lee , pensions,investment, ERM, banking Garry Smith , life, banking, riskGemma Gregson , GI,reinsurance, environmentStephen Hyams

, pensions,modelling

Sheila Harney , life, regulation

People/society news editorYvonne [email protected]

Student page editor Jessica [email protected]

IFoA editorAlison Jiggins+44 (0)20 7632 [email protected]

Editorial advisory panelPeter Tompkins (chairman),Naomi Burger, Matthew Edwards,Martin Lunnon, Sherdin Omar,Nick Silver, Andrew Smith

InternetThe Actuary:www.theactuary.comInstitute and Faculty of Actuaries:www.actuaries.org.uk

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Published by the Institute and Faculty of Actuaries (IFoA)The editor and the IFoA are not responsible for the opinions put forward inThe Actuary . No part of this publication may be reproduced, stored ortransmitted in any form, or by any means, without prior written permissionof the copyright owners.

While every effort is made to ensure the accuracy of the content, thepublisher and its contributors accept no responsibility for any materialcontained herein.© Institute and Faculty of Actuaries, March 2016

All rights reserved ISSN 0960-457X

Circulation 25,331(July 2013 to June 2014)

“There is no doubt thatbeing actuaries gives usa broad range of skills toleverage, but maybe we doneed to ne-tune them”

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MORE LETTERS ONLINEMore letters are available online atwww.theactuary.com/opinion

The editor welcomes readers’ letters but reserves the right to editthem for publication. Please email [email protected] .The deadline for receiving letters for the April 2016 issue is21 March 2016.

OpinionLetters to the editor

is scrutinising the role played by the key marketparticipants, with some focus on actuarial professionalsand the various unconventional valuation approaches.

The conversion process was mired with a plethora of

challenges for actuaries. First, there was an acute shortageof actuaries, with only two practising in Zimbabwe. Therewas also diffi culty in setting assumptions owing to theinstability of key macro-economic fundamentals, includingprior hyperination, and very few funds to benchmarkaccrued benets at rates commensurate with the underlyingination rate. In some cases, this led to the unintendedtransfer of fund assets from older generations to bothyounger generations and shareholders.

The conversion process has been a steep learning curvefor the actuarial profession, as well as the insuranceindustry at large in Zimbabwe. When the Actuarial Societyof Zimbabwe (ASZ) was re-launched in 2010 to representactuarial interest in Zimbabwe, its tag-line was ‘Doing

things right’. This emphasises the need to rm up onprofessionalism and have a collective approach to confrontthe industry’s problems.David Mureriwa Chief actuary of African Actuarial Consultants and president of the ASZ

17 February

Actuaries: Behaving irrationallyFebruary’s edition of The Actuary featured my book reviewof Misbehaving: The Making of Behavioural Economics byRichard Thaler ( bit.ly/1PKsp6A ). The science of behaviouraleconomics is important for us in our work persuadingpeople to take out insurance, contribute to pensionspolicies or plan for their nancial well-being. But perhapsmore importantly, the book is great fun to read, dealingwith all kinds of anomaly in human interaction.

My favourite conundrum, which I posed to readers, was:“Guess a number from 0 to 100 with the goal of makingyour guess as close as possible to two-thirds of the averageguess of all those participating in the contest.”

I am pleased to say we had a number of respondents. Now,if everyone had responded rationally, they would all haveanswered zero and won the prize. But of course not everyoneanswers rationally. So the right answer to this particularconundrum is usually to choose a number pretty low thataccommodates a few irrational (illogical or normal) people.

Well, in this experiment, it seems there were quite a fewrational respondents, answering zero. But the average was4.6 – a lot less than answers of around 20 from a typicalcross-sections of ‘humans’. So two-thirds of the average is3.1. It means that our canny winner is Ian Rogers, who wasclosest with a guess of 1. No prizes for our winner I’m afraid,other than the recognition of being the canniest of them all.

So what does this small experiment tell us? Well, ithighlights how people do not always behave as rationally aswe might expect, and this is worth bearing in mind whenwe’re designing insurance or pension products. It also showsthat actuaries are not immune to irrational behaviour,though much better than the population as a whole!Peter Tompkins

18 February

News from ZimbabweA commission of inquiry was set up in Zimbabwe in 2015 toinvestigate the process of converting the value of pensionsand life assurance benets following the dollarisation of theZimbabwean economy in 2009. The commission is todetermine if there was any prejudice in the process used forconversion valuations.

Though the commission is yet to conclude on its ndings,it is generally agreed that the whole conversion processcould have been more transparent, through consultativeengagement of the key interested parties. The commission

More comments are postedonline about news stories publishedon www.theactuary.com .

Have yoursay online

Solving problems of the pastKarel Van Hulle ( The Actuary , Jan/Feb, bit.ly/1RbR1FW ) notes thatthe development of Solvency II into its current form took 15 years.Since 2001, global stockmarkets have crashed horribly twice.The post-Lehman meltdown was more than business as usual.It marked the beginning of the end for the current system that wecall neoliberalism but in the UK is better known as Thatcherism.

The macroeconomic principles that anchor the architecture ofmodern neoliberal nance can be summarised in three points:● Fiscal policy is ineffective●

Responses to shocks are reected quickly in a return tofull employment● Ination is solely a function of the money supply.

The ongoing nancial crisis has destroyed these key principles.Monetary policy in the form of quantitative easing has been unableto generate target ination anywhere in the OECD, including the UK.Full employment is a very long way off, seven years post-Lehman.Real unemployment in the US is 10% and even worse in the Eurozone.Monetary policy is currently ineffective. The nancial system is proneto stagnation and current policies have led to another phase of this.

Solvency II is also praised for its market-consistent approach.John Authers of the Financial Times notes three weaknesses ofnancial markets:● They are prone to herding. Markets can follow trends long afterthey should be given up● Emotions dominate over reason● Markets are unable to price tail risk.

Insurance companies following Solvency II today all assume marketpricing is correct. UK equities are propped up by Central Bank actionsand priced on the assumption of growth, while gilts are priced on thebasis of future deation. They can’t both be correct. We are goingthrough a phenomenally destabilising phase of capitalism whereneoliberalism is breaking down, yet there is nothing coherent toreplace it. Market consistency must be treated with care.Perhaps a margin may be in order.

Solvency II was designed for a world that no longer exists.Cathal Rabbitte

17 February


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Life and non-life insurance companies faced with thechallenge of earning a return on their shareholders’ ownfunds are continuing to explore various trends in assetallocation strategies. Just how far they are preparedto go in their search depends on their starting point,with absolute return strategies being a constant andrecurring theme. A number of options around the dialof absolute return (see diagram below) are availableto accommodate the different investment proles ofinsurance investors.

Absolute benetsFor insurers used to holding a mixed portfolio of growth assets benchmarked againstsuitable bond and equity indices, there is a move towards absolute return strategiesthat offer a similar return with greater diversication, lower volatility and variedinvestment strategies whilst managing the downside risks.

Directions of travel for different insurers

Evolving appetite for creditWhere insurers have no comfort beyond credit risk there has been an emergenceof interest to extend their appetite to absolute return bond funds designed to havelower correlation to credit markets. These funds extract additional returns throughthe active management of interest rate, credit and foreign exchange exposure overtime. They aim to deliver a stable ‘cash plus’ return via investment in xed incomemarkets whilst providing the exibility to provide downward protection via thematicoverlays.

Rening liquidity laddersSome insurers have historically kept their own funds in highly liquid, high quality,short dated ‘treasury assets’. The last few years have seen these portfolios acceptlonger dated, lower rated, less liquid assets as a means of maintaining a higher yield.These more cautious insurers continue to rene their liquidity ladders, taking a morediversied exposure to credit risk. Higher quality investment grade credit remains

ADVERTORIAL

Insurers’ search for

added returns: directionsof travelpreferable to high yield and emerging markets, although value can be found in thehigher quality securities of these sectors once capital costs are taken into account.

Hedging out the market beta whilst harvesting style risk

premiaLife companies typically lead the insurers in search for uncorrelated returns as theytend to favour market neutral strategies in recognition of the investment risk (usuallycredit risk) they already carry via their assets held to back their liabilities.

Their greatest interest lies in market neutral strategies designed to hedge out themarket beta whilst harvesting the alpha obtained through active management. Thiscan be achieved through long / short strategies offering fundamental, bottom-upstock selection or the systematic analysis of investment styles to extract the riskpremia associated with active management.

Diversifying benetsAnother set of absolute return investors has emerged in the Diversied Growth Fund(‘DGF’) sector. These funds, that run a mix of traditional asset classes with addeddiversication through alternative assets and other trading strategies, are increasinglyappealing to non-life insurers. These insurers whose balance sheets are dominatedby underwriting risk, are less concerned about optimising to Solvency II capitalrequirements, and are more comfortable accepting a higher level of market risk.

Greater exibility on thehorizonDespite the opportunities afforded by allthese trends, current solvency capitaltreatment for Solvency II remains anoutstanding concern that could inhibitthe large-scale adoption of some ofthese innovative strategies, especiallyfor capital constrained insurers. It ishoped that regulatory guidance willemerge that will enable insurers toallocate an effective level of capital inthose areas where there is currentlyambiguity. Life and non-life insurers canthen take full advantage of the multiple

investment solutions able to help drivereturns in their funds with due regard to

investment risk. ●

Contact:Dick Rae | Director, Sales and Client Relationships+44 (0)20 7011 [email protected] Andrew Douglas | Senior Sales Assistant+44 (0)20 7011 [email protected]

BMO Global Asset Management (EMEA) | Exchange House,Primrose Street | London | EC2A 2NY


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Fiona Morrison is thepresident of the Instituteand Faculty of Actuaries

PresidentComment

I recently read an interesting article in the London Evening Standard newspaper on mycommute home from work. The headline was“Government ‘silent’ on university gendergap”. As a keen advocate of diversity in all itsforms, I was naturally drawn to it.

In the article, the head of UCAS, the UK’sUniversity clearing house for higher education

applications, Mary Curnock Cook, called for“positive action to secure equal educationoutcomes for boys”. According to gures fromUCAS, women outnumber men in 112 out of180 degree subjects. The overall gap has nearlydoubled in eight years, with 66,840 morewomen on degree courses than men.

I was quite taken aback by those statistics,and suspect there is some ‘hollow laughter’from women reading this. However, it did getme thinking. Universities are the natural‘breeding ground’ for the next generation ofbusiness leaders and captains of industry.

I was therefore intrigued to understandwhether the UCAS experience was playing outin the corporate world, and whether we wereseeing more women lling executive directorand non-executive director roles in FTSE 100companies and on boards.

This issue has rightly attracted politicalinterest recently, with the government-backed reports by Lord Mervyn Davies,former chairman and chief executive ofStandard Chartered, which have proposedtargets for the number of women on boards.

In his rst report,Lord Daviesrecommended FTSE100 boards target aminimum of 25%female representationby 2015. In his nalreport, published lastOctober, he said that33% of all board seatsat FTSE 350 companies should be held bywomen by the end of the decade.

Intrigued to understand whether industryhad responded to these targets, I discovered afascinating website, called ‘BoardWatch’, whichtracks appointments of women to UK boards.

Figures published by BoardWatch show thatthe number of women directors at FTSE 100companies is currently 26%, up from 15.6%in 2010. While on the face of it that seems topaint a very positive picture, dig a little deeperand a very different story unravels.

Yes, women holding 26% of directorships is

a huge step in the right direction, and I amsure that those companies have trulybeneted from the diversity it has broughtthem. However, only 9.8% of executivedirector roles in FTSE 100 companies are heldby women. While it is an increase from 5.5%in 2010, this is the bigger issue for businessesto address in reaping the benets of diversity.

It is reassuring to see that there are no ‘allmale’ FTSE 100 boards, but the topic has not

been addressedin the FTSE 250,where 6.8% arestill ‘all male’.

Will industry riseto the challenge?If they are interestedin share prices theywill. According toresearch conducted

by Credit Suisse, companies with some femaleboard representation outperform those withno women on the board in terms of shareprice performance.

Looking closer to home, the FTSE 100statistics are fairly representative of whatwe see here at the IFoA when I look atCouncil, where women comprise 36% ofmembers, and the practice boards, wherebetween 5-10% are women.

Diversity was my predecessor, Nick Salter’s,presidential theme, and is one I have beenkeen to champion during my presidency.

I am heartened by our profession’s response tothis issue. We will shortly be publishing adiversity strategy on our website, alongside adiversity action plan, focusing on real actionsthat will deliver tangible benets for ourprofession and our members.

We will also be hosting an event on14 March at Staple Inn, entitled ‘The elephantin the room’. Helena Morrissey, chiefexecutive of Newton Asset Management andfounder of the 30% Club, along with JeremySpira from Willis Towers Watson and SiobhanMartin from Mercer UK, will lead a paneldiscussion on diversity. Don’t worry if youcan’t physically attend, you will be able towatch it online.

My rationale for focusing on genderdiversity this month was not just theUCAS article, but also that 8 March marks‘International Women’s Day’. This is aglobal day celebrating the social, economic,cultural and political achievements ofwomen, and makes a call to action foraccelerating gender parity.

While the UCAS experience has not as yetltered down into the corporate world, it willbe interesting to see how long it takes beforemore businesses can reap the many benetsof diversity.

In the words of Chuka Umunna, LabourMP and former shadow business secretary:“Yes, the glass ceiling for women now hascracks, but we have yet to smash it.” a

Glass ceilingshowing cracks

Gender parity appears to be on thehorizon. Fiona Morrison takes a closer lookto see whether this is all it’s cracked up to be

“It will be interestingto see how long it takes

before businesses can reapthe benefits of diversity”


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Comment

CEO


8

Derek Cribb is the chiefexecutive of the Institute andFaculty of Actuaries

Is there really a demand for actuarial skillsoutside the traditional businesses? And if thereis, what are the potential barriers to actuariestaking up these opportunities?

There has been a lot of talk within theprofession over recent years about the need tobroaden horizons for actuaries and seek newopportunities in non-traditional areas.

Recognising the diversity of the actuarial skill-set,and promoting it to employers and stakeholders,is something we have been actively championingat the IFoA. But are we on the right track?

To help inform our thinking in this area wecommissioned some research to gain a greaterunderstanding of the demand in non-traditionalareas for the actuarial skill-set. Taking a pool of50 HR directors, from industries ranging fromretail distribution to mining, we undertook a‘mystery shopping’ exercise, where the actuarialskill-set was presented to them without the term‘actuary’ attached to it. The results were asinteresting as they were worrying. While it wasextremely heartening to learn that 47 out of the50 HR directors rated the skill-set as valuable totheir business, and reected what they look forin their senior management appointments, theyalso highlighted key absences. The missingcompetences covered people and leadershipskills, with a lesser issue around industryknowledge. Employers held technical skills,honesty and integrity as hygiene factors, notnecessarily reasons to employ someone.

Once the skill-set was divulged as beingspecic to actuaries, andwe asked if the skills weretransferable and useful tonon-traditional employers,the rating went from awhopping 94% rightdown to 58%!

The survey revealed astrong preconceptionwithin the sample that actuaries are involvedin narrow roles, with the knowledge generallyrestricted to encountering members workingwith company pension schemes. While asignicant minority greeted the revelationpositively, welcoming a better understanding ofactuarial skills, the majority were unsurprised.For me this was the biggest insight from theresearch, and highlights the enormouschallenge that we, as a professional body – andyou as individual actuaries – face if we are to besuccessful in promoting the actuarial skill-setand get actuaries into more diverse elds.

Actuaries face a unique challenge; the roles of

doctors, dentists, lawyers or accountants areeasily dened and their value proposition easilyunderstood by the general public. Actuaries donot have this luxury, our members work in anumber of specialised functions across industry.

How, in the same breath, do you explain theproposition of a life actuary as opposed to one inbanking? Well, perhaps we are making it hard forourselves. We understand what qualied doctorsdo, they look after your health. A specialiseddoctor might be an expert in any number ofelds but is still understood to be a doctor rst.

For me, perhaps theright approach issimilarly to dene theactuary by the rstlevel of qualication,the associate.

By having peopleunderstand that anactuary is a qualied

professional with higher level of modelling,mathematical and broad nancial riskmanagement skills, we can raise understandingmore quickly, without closing out futureopportunities by being perceived as too narrowby wider industry.

It is undeniable that decision makers, such asHR directors in non-traditional industries, donot have a good understanding of what actuariesdo and where they do it – this is often based on apreconceived view. These barriers need to beaddressed, and are being addressed by the IFoA.A good example of this is the work recentlyundertaken by Council with engagement from

the wider membership to develop the ‘actuarialpitch’ – a short and snappy descriptor of whatactuaries do. Seems simple on the surface, butwhen you get down to the words, and a concisemessage, this has proved to be very diffi cult.

To try and gain an understanding directfrom the membership, we developed our#whatactuariesdo campaign. This has been funand insightful and yet only leads to morequestions and elds of interest for us to explore.

My message to all actuaries remains, that ifyou want to move out of the non-traditionalbusiness areas, you need to develop broaderbusiness skills. Actuaries themselves alreadyhave the detailed technical skill-set thatemployers crave. Developing those businessskills will not only help you broaden yourhorizons and opportunities, but will also makeit easier to climb the corporate ladder.

We recognise that we have a role to play here,both in terms of our education syllabus and alsothrough the CPD we offer our members.Looking specically at business skills, we havedeveloped a suite of online Masterclasses.As your professional body we are constantlystriving to innovate, to help you develop theskills you need to succeed.

It is clear to me, and to 50 HR directors, thatthe actuarial skill-set has the potential to provideenormous value to a wide range of businessesand industry sectors. Our future relies onovercoming the perceptions that have developedover time. I ask all our members – be proud to bean actuary. It’s time for the business world tolook at actuaries through a new lens. a

Through theactuariallooking glass

Derek Cribb says dening the actuary’srole to non-traditional industries is key forthe profession to explore new territories

“47 out of the 50

HR directors rated theactuarial skill-set as

valuable to their business”


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OFESSION


News

Upfront

A new resource has beencreated to assist the IFoA’svolunteer chairs. The ‘KeyInformation for Chairs’resource is available on ourwebsite, and in hard copy,and has been created as an

aide memoire to help our chairs to keep to theprinciples set out in the Governance Manualand the Volunteer Induction Pack (VIP).

The IFoA’s current Governance Manualwas approved by Council on 9 October2014, and came into force on 1 July 2015.All volunteers comply with the termsof the IFoA’s Governance Manualand VIP.

You can view the ‘Key Information forChairs’ resource online in the VIP at chapter 8

Key information for IFoA chairs

IFoA welcomes infrastructure investmentboost signalled by creation of commission

In October 2015, the governmentannounced the creation of aNational InfrastructureCommission (NIC), with a remit toprovide an integrated assessmentof the country’s infrastructureneeds for each parliament, in thecontext of a much longer-term (upto 30-year) outlook.

The commission will aimto build political consensuson the country’s long-terminfrastructure needs and providegreater certainty for investors.It is headed by chief executivePhil Graham, formerly secretary

to the Airports Commissionat the UK Department forTransport, and chaired by formerLabour transport secretary Lord

Adonis. The commissionersinclude former deputy primeminister Lord Heseltine and SirJohn Armitt, who chaired theOlympic Delivery Authority.

The IFoA welcomes the newenergy and commitment fromgovernment that the creation ofthe NIC signals. Althoughinfrastructure projects help togenerate economic growth, tougheconomic conditions in recentyears have reduced the availablecapital, as well as the electorate’sappetite for higher taxes or userfees. We hope that the NIC will bea catalyst for an increase in thenumber and credibility ofpublic-private projects.

The European regulatoryenvironment seems to be movingin the same direction: forexample, the European Insuranceand Occupational PensionsAuthority (EIOPA) has reduced

risk charges for qualifyinginfrastructure investments.

The IFoA is actively involvedin the infrastructure debate.

We have already begun to engagewith the NIC to promote thedistinctive contribution we canmake as actuaries in this area.The Risk and Returns inInfrastructure Working Partyproduced a paper in 2015,providing evidence that well-chosen infrastructure cansupport sustainable and sociallyresponsible investment that alsoprovides long-term, ination-linked cashows for pensionfunds and insurers. The group’schairman, Chris Lewin, made awell-received speech at a majorinfrastructure event at thinktankChatham House last autumn.

So what is our distinctivecontribution? Actuariesunderstand how to implement arisk management approach toinfrastructure investment,including scenario analysis ofpossible nancial outcomes that

can give potential investors anexhaustive and balanced view ofthe risks they might face.

The approach known as risk

analysis and management forprojects (RAMP), for example,has been used in the UK’s largestengineering project, Crossrail 2.At the same time, actuaries arealso involved in advisinglong-term institutional investors,so we can offer depth of insightinto the perspectives of bothproject sponsors and investors.

Working with the Risk Board,the IFoA’s policy and publicaffairs team is developing apolicy brieng aimed atparliamentarians, offi cials andregulators, which will esh outthe IFoA’s position oninfrastructure investment andthe scope for actuaries in thisarea. It will also include threedetailed case studies – onrenewable energy, transport andhousing – where we can highlightexamples of actuaries’ innovativethinking on nancing models.

on p31: bit.ly/1PkaGUX . Alternatively,email [email protected] for a hard copy.

The IFoA currently supports over80 working parties, and a second newresource has also been createdto specically assist thesevolunteer chairs.

View the ‘Key Information for WorkingParty Chairs’ resource, created withthe help of Patrick Kelliher, atbit.ly/1WhIvqd

In addition to our volunteer chairs, over3,500 volunteers have given their time, skillsand expertise to volunteer for the IFoA in thepast year alone. So why volunteer? Membershave told us what volunteering means forthem and what they get out of it, highlighting

encouragement from their employer. Readtheir stories and listen to the lm clip onlineat bit.ly/1QoOCVo

In particular, if you are interested in gettinginto wider elds, or work in that area, take alook at the case studies written by JohnYoung and Andrew MacFarlane. More casestudies will be added soon.


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News

“Formalising our commitmentto diversity ensures that it

becomes central to everythingwe do. Our diversity strategyaddresses diversity in ameaningful and appropriateway, enabling us to support ourmembers in their day-to-daywork, while ensuring thesustainability of theprofession,” Nick Salter,immediate past-president.

The IFoA recently launchedthe rst part of its diversitystrategy, formalising its broadercommitment to ensuring equalityand diversity in the profession.The strategy includes acommitment to publish an annualDiversity Action Plan, setting outthe priorities for the coming year.

Gender diversity is identied as

the key priority for 2016/2017.Research carried out by anindependent market researchrm, on behalf of the IFoA,showed that over a third of menbelieve that it is easy for femaleactuaries to climb the careerladder. In contrast, this view wasshared by fewer than 10% ofwomen. Why do men and womenhave such differing views, andwhat can we or should we doabout it?

Helen Crofts, co-chair of the

IFoA’s member-led DiversityAdvisory Group, notes: “It is fairlyclear in the research that has beendone over the past few years thatinvesting in gender diversity,especially at the top levels, paysdividends across the spectrum– companies make betterdecisions, are more creative andfare better in the marketplace.”

In 2015, the Diversity AdvisoryGroup produced a report entitled‘Bringing the Benets of GenderDiversity to All: First Steps’. Theirrecommendations, together withthose from the research, will formthe basis of the action plan for thecoming year.

“The research conducted overthe past year clearly indicates

that members who take a career

break would value more supportfrom the IFoA. Our rst task willbe to work with the executiveteam to think about ways toprovide this support and makethe transition back to workeasier,” says Craig Edmondson,a member of the DiversityAdvisory Group.

To capitalise on thismomentum, the IFoA is hostingan event on 14 March, entitled

‘The Elephant in the Room: the

Diversity Questions You’veAlways Wanted to Ask’.The event will feature a panel

of experts, including HelenaMorrissey, founder of the 30%Club, and Fiona Morrison,IFoA president. Visit the Diversity Advisory

Group webpage for moreinformation: bit.ly/1RlbHNx

To read the full strategy visitbit.ly/1KY4xNY

The UK government plans to renegotiate itsrelationship with the EU and then hold areferendum to stay in, or leave, the EU. The publicdebate is already heating up, with many mediaoutlets commenting, and stakeholders taking viewspublicly. The outcome of both the renegotiation

and the referendum itself may have a signicant effect on many partsof British society, in the short and in the long term.

The IFoA believes that it can help inform the debate on issues thatare relevant and important to the public interest, using the specicactuarial skills its members have. The IFoA’s EU ReferendumWorking Party would like to involve regional actuarial societies inthe debate and discuss their thoughts, questions and concerns atregional meetings.

At these meetings, the IFoA will set the scene, giving you the lateststate of play, plus activities it has planned. This will be followed bydiscussions and question-and-answer sessions. The full schedule ofevents is listed to the right. Members are invited to join one of theupcoming regional group meetings. For updates, please visit bit.ly/1XfptSi To join the debates online, please visit

Insurance and the EU Referendum at bit.ly/1SdhrdlPensions and the EU Referendum at bit.ly/1TacAty

For questions about regional group meetings, please [email protected]

IFoA launches diversity strategy

EU referendum: IFoA engages with regional groupsDate IFoA Regional Group Location Time

27 Jan YAS Leeds 18:00 - 19:0016 Feb FASS Edinburgh 18:00 - 19:00

29 Feb MANX Isle of Man 17:30 - 19:00

01 Mar SIAS London 17:30 - 18:30

16 Mar KSS Stirling Stirling 17:30 - 18:30

17 Mar KSS Edinburgh Edinburgh 08:30 - 10:00

17 Mar GASS Glasgow 17:30 - 19:00

17 Mar Birmingham Birmingham 17:30 - 19:00

21 Mar Bristol Bristol 18:00 - 19:00

5 April National Event Edinburgh 17:00 - 20:00

11 April National Event London 17:00 - 20:00

20 Apr Society of Actuaries, Ireland Dublin TBC

3 May Chinese Actuarial Network UK London 18:00 - 19:00


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11March 2016 THE ACTUARYwww.theactuary.com

EVENTS AND CONFERENCES

CURRENT ISSUES INGENERAL INSURANCE

CIGI 12 April, Londonbit.ly/1Q6vy4c CIGI is a well-establishedone-day seminar thatoffers education,entertainment anddebating forums. Therewill be an excellent anddiverse line-up ofspeakers, each providingtheir insight andknowledge on a range oftopics. The programme is

broad, covering technicaland professional areas,and will be of most value tothose with some

experience in the industry.Although primarily aimedat actuaries, the seminarwill also be of value toanyone with an interest ingeneral insurance.

HEALTH, CARE ANDPROTECTIONCONFERENCE18-20 May,Liverpoolbit.ly/20lAL7w Aimed at all insuranceprofessionals with apassion for harnessinginsurance risk in theirorganisations, thisthree-day conferenceuses a combination of

workshops by individualswho work at the coalfaceand ‘big name’ experts toexplore how changes in

innovation, technology,medical advances(including genetics), thepolitical landscape andother market movementswill affect the future of

insurance riskmanagement in theHealth, Care andProtection markets.

ATRC 20164-5 July, University ofEast Angliabit.ly/1QSwlTeWe are delighted toannounce that the 2016Actuarial Teachers’ andResearchers’ Conference(ATRC) will take place this

summer in Norwich.Further information and acall for presentations willbe issued shortly. In the

meantime, queries shouldbe directed to [email protected]

INTERNATIONALMORTALITY AND

LONGEVITYSYMPOSIUM7-9 September,Surreybit.ly/1Q6vCRrThis three-day conferenceoffers a forum for theexchange of informationon the latest relevantresearch, plus anopportunity to mix andmeet with key players inthe eld. From actuaries tomodellers and

researchers, fromepidemiologists to medicalscientists, professionalsinterested in mortality and

longevity will gathertogether to share theirknowledge andexperiences.

CURRENT ISSUES IN

PENSIONS SEMINARSMarch to Aprilbit.ly/1QStg5tThe Current Issues inPensions seminars(CHIPs) have beendeveloped for actuaries,newly qualied actuariesand non actuaries alike.With six different sessionsplanned, this is greatopportunity to gainvaluable CPD and networkwith others in the

profession. Visit thewebsite to view theupcoming datesand locations.

The CERA Global

Association (CGA) ispleased to announcethat Chu Lee ( right ) hasbecome the 3,000th

person to earn the prestigious CharteredEnterprise Risk Actuary (CERA) credential.

Chu is a member of the Society ofActuaries (SOA) in the US and assistantactuary in the corporate actuarialdepartment of Munich Re (Life).

Ron Hersmis, chairman of the CGA, isdelighted to congratulate Chu Lee on thissignicant achievement and recognise thisimportant step forward for global risk

management. “There is a global demand forskilled enterprise risk managementprofessionals. CERA is one of the mostcomprehensive and rigorous enterprise riskmanagement qualications available.”

Chu said: “I was surprised and honoured tobe the 3,000th CERA. I did not realise somany CERAs existed, nor did I know thatwithin a one-year timeframe the group wouldgrow by another 500 members!

“I have been interested in understandingthe risk related to my work throughoutmy career, and my interest has grownexponentially in my current role in assetliability management at Munich Re. When

the SOA offered enterprise risk managementas part of the Fellow of the Society ofActuaries (FSA) track to attain the CERAqualication, I jumped at the chance. I trulybelieve that the value of the training Ireceived far outweighs the additional workinvolved in attaining the qualication.” To read the full press release, visit

bit.ly/1O102wI For more information on becoming a CERA

or on how employing a CERA can benet yourbusiness, visit www.ceraglobal.org or emailDawn McIntosh, CERA marketing projectleader at [email protected]

28 January saw a key strandof the IFoA digital strategyrealised – the latest iteration

of the Virtual LearningEnvironment (VLE).The latest release of the

VLE allows members to access exclusivecontinuing professional development (CPD)videos and content from our many events,while also providing a platform for onlineexams and professionalism training.

It features a responsive design, allowing forseamless use on smartphones, tablets ordesktop. You can access the VLE throughdirect links to video content on the website orby clicking on the ‘My learning environment’icon under ‘My account’ on the website. The

new CPD functionality allows you to watch avideo and then click the ‘Claim CPD’ buttonto update your CPD record.

User research indicated that, withincreasing time pressures, offering a moreintegrated and easier digital journey for yourCPD requirements was vital. The new VLEdoes just that, while also aligning with ourdigital strategy aims – to better enable ourmembers to nd our content, and to promotehigh-value content for thought leadership,international engagement and learning.

We hope you will enjoy using the newVLE and that it will make it easier to recordyour CPD.

Globally recognised risk managementcredential celebrates 3,000th award

CPD as easy as ABC


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workshops and technical skills workshops, join your peers forthree days of insights, updates and to share forward-thinkingideas and strategies.

The IFoA has invited the Actuarial Approach for FinancialRisks/Enterprise Risk Management (AFIR/ERM) section of theIAA to join the IFoA Pensions, Risk and Investment Conference2016. We are delighted to be able to offer our members theopportunity to engage with members of AFIR/ERM from allover the world.

In May 2016, the IFoA will hold the rst Pensions, Risk andInvestment Conference, joining three large practice area eventsunder one roof with each stream running independently ofeach other. The benets of hosting this unique conference isto offer delegates the opportunity to attend a wide range ofcross practice sessions and topics outside their immediatespecialisms, get involved in knowledge exchange and networkwith those from different areas to discuss mutual interestsand experiences. Offering up to 11.75 hours of CPD learningalongside a variety of current and topical plenary sessions,

Pensions, Risk and InvestmentConference 2016 with AFIR/ERM31 May - 2 June 2016, EICC, Edinburgh

www.actuaries.org.uk

Book yourplace now: bit.ly/23UTE5S

P R

I

Pensions Key pensions topics:

landscape

European pensions

RiskKey risk topics:

for small insurers

looking risks

problem

InvestmentKey investment topics:

regulatory framework

illiquidity

Risk and capital optimisation

investment strategy.

CPD hoursavailable

11.75

AFIR/ERM sessions will include:

Model Validation with Realised p-Values

Equity Investing with Targeted Constant Volatility Exposure.


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SoapboxOpinion

Dr Konstantinos Drakos isassociate professor at AthensUniversity of Economic


Do life insurers have a future? I think so.Equally, it’s clear that their future looks verydifferent to their past. Quite simply, if they’reto survive they will need to dismantle andreassemble their business models. Otherwise, inthe same way that Uber is disrupting the taxi andprivate car hire market globally, someone willcome along and do the job for them.

How did we get here?It’s fair to say that UK life insurers have not hadan easy ride, thanks to an increasinglyunsupportive regulatory and tax environment.Tax changes that removed the incentive to repaya mortgage with an endowment policy were justthe start of a catalogue of changes.

More recently, changes to pensions havedramatically reduced the numbers purchasingannuities. And while the government hasintroduced auto enrolment, substantiallyincreasing the numbers saving into pensions,this has been partially offset by the erosion ofyearly and lifetime saving limits, leaving pensionsavings less attractive for those with largerincomes and pots.

But many of the industry’s problems areself-inicted. The public’s trust in life insurersdropped signicantly after the Equitable Lifecourt case, which shone a light on the complexand obscure nature of with-prots management.Insurers’ reputations took a further knock afterwith-prots and pension mis-selling scandals.

The demand from companies for buy outs oftheir dened benet schemes should be a brightspot, but annuity business is now subject tomuch more stringent regulatory capitalrequirements. As a result, insurers have begun topull back from the annuity market, which canonly lead to higher prices and consequentlyfurther pressure on annuity sales.

Where do we go from here?How will winners emerge from this disruption?Four areas commonly top the CEO’s agenda:● Back book optimisation● Consolidation● Customer centricity● Digital and big data.

CEOs are clearly betting that focusing on thesewill help to ensure their organisations remainrelevant and progressively more successful.

Back book optimisation is often viewed as aproduct area in its own right, with seniorinsurance industry specialists brought in tosqueeze out extra value, whether that be frommore effi cient policy administration,

outsourcing, rethinking investment strategyor applying capital management techniques.More effi cient policy administration, whetherexecuted internally or externally, is to becommended and should lead to an increase inthe earnings associated with the back book.However, most insurers have been active in thisspace for years, meaning that optimisation isincreasingly about investment, particularly forinsurers with large annuity books, and bettercapital management.

The low interest rate environment has leftinsurers, along with every other investor,searching for yield. Yet the illiquid nature ofinsurers’ annuity books allows them to turn toincreasingly illiquid assets, such as lifetimemortgages, commercial mortgages andinfrastructure investments, in an attempt toincrease the performance of the asset side oftheir balance sheet.

Capital management can help to ensure abusiness is managed effi ciently under SolvencyII, including reducing the volatility of thesurplus. Common techniques include: Part VIItransfers combining legal entities; establishingreinsurance captives; notional hedging of unitlinked business; and actions to managetransitional arrangements and the risk margin.

However, many of these actions lead to one offincreases to the free capital and hence, do notlead to a sustainable increase in earnings.Indeed, some bring forward earning recognitionto the detriment of longer-term earnings.

Solvency II favours larger insurers withdiversied balance sheets, rewarding them withlower capital requirements. This provides anincentive to act as a consolidator, while alsooffering an opportunity to apply one insurer’s

expertise in back book optimisation to another.But neither back book optimisation nor

consolidation are likely to secure the future ofthe life insurance industry in the UK. This willrequire rethinking how insurers interact withcustomers to remain relevant and investment inthe use of big data and digital platforms.

Investing to win?Some insurers have already taken the requisitesteps. For some this has meant reinventingthemselves as investment managers, slowlyrunning off, transforming or even divesting theirtraditional insurance businesses. But with thecharges levied being driven ever lower in a racefor volume, effi ciency of management,differentiation through branding and improveddigital access are likely to be key success factors.Those that fall behind are likely to becomefurther consolidation fodder.

Others remain committed to operating as aninsurer with a focus on the protection market,albeit this is unlikely to ever sustain a market ofthe current scale and diversity. Critically, thoseinsurers with strong survival instincts arerecognising the need to excel at costing throughenhanced underwriting, pricing throughoptimising the amount charged, anddifferentiating themselves through their brandand values. This means signicant investment indata analytics accessing ever larger pools ofinformation on customers to both betterunderstand their risks and behaviours.

All of which plays to the strengths of the bigplayers. Could it be that bigger really is better? a

Marcus Bowser is the sales and practice leader forUK life consulting, Willis Towers Watson

Prognosiscritical

Marcus Bowser explains how lifeinsurers can emerge from a challengingera by reinventing their business models

Marcus Bowser is chair of theIFoA Risk Management Boardand sales and practice leaderfor UK life consulting,Willis Towers Watson


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If you have the rightcommunicationskills and have

got the actuarialT-shirt, don’t beafraid to usethose skills inwider industry”


14MANUEL VASQUEZ


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Mike Brockman , actuary turnedbusinessman, shares his views ontelematics, autonomous cars, and theactuarial profession with Gemma Gregson

Mike Brockman is the founder and chief executive of InsureThe Box, a UK telematics insurer whose majorityshareholding was acquired by Aioi Nissay Dowa InsuranceEurope in 2015. A self-confessed rebel, he started the venturein 2009 in the midst of the recession, against the advice ofothers. But with an extensive career in motor insurance andprior experience of setting up companies, if anyone couldmake it happen, he could.

Brockman’s career began in the actuarial department ofPearl Life Insurance in 1979. “I hated it,” he says. “It waseverything I thought actuaries were not.” With a post-graduate university position lined up and a letter ofresignation on his boss’s desk, things could have turned outvery differently. Luckily, Pearl saw his potential and offeredhim the chance to transfer to personal lines motor pricing.“It was a very small unit that did multivariate pricing. I was oneof the rst trainee actuaries to be involved in the pricing ofpersonal lines insurance and I loved it so much that I stayed.”

In 1986, Brockman moved to Bacon & Woodrow, apension-based consultancy, where he helped set up itsgeneral insurance practice. Then in 1993, he embarked on hisrst start-up, co-founding EMB, an actuarial and softwarecompany, which grew and ourished internationally. He alsodid a lot of work on pricing techniques, which resulted inbeing presented with a lifetime achievement award

by the Institute and Faculty of Actuaries (IFoA) in 2008. “I wasvery pleased and honoured to receive it,” he says.“It was centred around my pure actuarial achievementsthroughout my career at EMB and also my inuence withpricing using generalised linear models.”

The award was a tting end to Brockman’s actuarial career,as by that point the seeds of setting up a new company hadbeen sown. “I had already decided that my actuarial careerwas nished and that I was going to move on to somethingquite different. Throughout my career I had advised oneverything, including pricing, capital, reserving and newstart-ups. I became interested in telematics because motorinsurance was getting boring, with customers seeing it as anecessary evil and aggregators dominating the markets.”

Breaking new ground With low prot margins in motor insurance, Brockmanlooked towards telematics as a way to make a prot despiteincreasing the cost of the product. He explains: “I sawtelematics as a way of using technology to maximise customersatisfaction at all aspects of the customer value chain.”Deciding that he couldn’t develop his ideas as a consultant,he set up Insure The Box.

Around that time, his former EMB colleagues decided to sellthe business to Towers Watson, releasing funds to use as seedcapital. With the support of colleagues, and with underwriterssuch as Catlin and Munich Re on board – providingunderwriting expertise and, in Catlin’s case, capital – theproduct was developed and the rst policy sold in June 2010.

Telematics is described by Brockman as “the concept ofmachine-to-machine communication”. In the context ofmotor insurance, a black box is tted to a car and relaysreal-time information to the insurer. While the informationcan be used in underwriting decisions, Brockman is keen topoint out that the benets are more than just nancial.

“We had one driver who crashed his car in a ditch. We wereable to inform the emergency services who were there

within ve minutes, saving this young person’s life.”While there are benets to telematics, for some the

idea of being ‘monitored’ in such a way may seem a steptoo far. When I ask whether this has been a challenge inbringing the product to the market, he replies: “The whole

ethos of being monitored is that there is a benet to gowith it. The benets of technology far outweigh the cost of

The rise of a

[email protected]

On my agenda

maverick


16/52

If, as actuaries, we takeoff our own shackles, thenthe world is our oyster”

perceived data privacy issues.”

Consumers are embracingsimilar technology in theirhomes, with products such asthose allowing energy usage tobe monitored or central heatingand hot water to be controlledremotely, thereby saving energy.Brockman thinks the idea hashuge potential for resourcemanagement.

“If we extrapolate the conceptacross the commercial worldand understand performancein the realms of effi cient use of

commodities, then that couldbe hugely benecial in terms ofreducing the amount of wastein the world.”

With technology at theforefront of the company, wediscuss the impact it has had onour lives and what the worldmay look like in the future.It is hard to imagine life withoutsmartphones and yet they are arecent invention. With websitesseeing an increasing amount oftraffi c from these sources, rmshave to invest in digitalisationto stay competitive.

“In a technological world, systems always have to bereappraised,” says Brockman. “Telematics is ‘super-direct’in the sense that we are dealing with customers all the timethrough channels such as live chat or social media. We alsohave to be ready for the fully-connected car that uses theidea of the ‘internet of things’, where you controlentertainment needs, for example, through smart interactivevoice software.”

The driverless car is another concept that is advancingrapidly. “In my personal view, fully autonomous cars willnever happen,” says Brockman. He explains that althoughanti-collision capabilities are being introduced in certainmakes and models, it will take years for it to work throughall the cars on the road in order to be in a position, forinsurance purposes, where no cars crash.

Even if this does happen, Brockman is sceptical aboutits success. He says: “Think of a world where every car isprogrammed not to crash. It will be the biggest traffi c jamthe world has ever seen!” Nevertheless, he does think thattechnology will change our driving habits and envisagesthat perhaps drone cars will be the reality. But he pointsout that technology is changing so rapidly that it isdiffi cult to predict what the future will look like: “The awis that people think of technology as it is now. Don’t listen

to people who say what the world will be like tomorrow.

One thing for certain is that they will be wrong. We needto be exible in our approach and do something different.”

Risks on the horizonI ask whether regulation such as Solvency II has made itdiffi cult to be different. “I try not to think of regulatoryissues,” he states candidly, but explains: “My guidingprinciple is that if you do what you think is best forcustomers and put their interests before shareholders,run your business in a nancially sound way and alsoare open and honest, then you can’t go far wrongwith regulators.”

With Solvency II presenting an issue for manyactuaries, it is perhaps an unconventional response.

However, Brockman no longer sees himself as an actuary.“I see myself as a businessman with experience in anumber of areas,” he says. “I have to have more exibilityin my mindset than in a strict actuarial role.”

He acknowledges that not all actuaries would like hisjob, but would like to see actuaries developing broaderbusiness skills. “The profession should do more to makeactuaries ‘rounder’. If actuaries keep to a narrow viewand skill set then they will never develop to their ownpotential.” Citing the example of pricing products, heexplains that technical pricing, the forte of actuaries, isonly half the story behind successful pricing. “Actuarieshave to know product design and price things customerswant to buy. That may be uncomfortable sometimes sothen the question becomes one of risk management.”

Brockman would like to see actuaries play a greaterrole in adding value to business. “The claims side is afrustrating area,” he says. “It should be compulsory thatevery actuary signing off reserves should have at least twovisits to the claims department each year.” He suggeststhat the IFoA should run courses on the wider aspects ofbusiness and how actuaries could add value. “Actuariesare interesting people with a unique mathematical ability,but that needs to be turned into something that is a realasset for the business.”

Brockman thinks that the area of ‘big data’ is one thatactuaries could contribute to, but he warns that it needs achange in attitude. “Actuaries need to learn new tricks,but they need the environment to breathe. Theprofession, in my mind, has constrained the ability toinnovate in order to tick all the boxes. While this is fullyjustied in certain circumstances, it mustn’t stop properresearch and innovation in new areas.”

With companies such as Google, Microsoft and Amazondeveloping machine-learning tools that are available tothe public, Brockman is concerned about the threat toactuaries. He says “there are huge risks on the horizon;the profession needs to keep its eyes open and adapt tothe rapidly moving world around it”.

Brockman obviously enjoys his work. Driven bycustomer satisfaction and with a solid background inactuarial techniques, he appears to have found a successfulcombination. He says: “Actuarial skills never leave you,they are just applied in a different way. My advice is that ifyou have the right communication skills and personality,and have got the actuarial T-shirt, then don’t be afraid touse those skills in wider industry. If, as actuaries, we takeoff our own shackles, then the world is our oyster.” a

16

[email protected]

On my agenda


MANUEL VASQUEZ


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17

Lifetime mortgages

Investment

Arno Kitts andOlivier Defaux

suggest that lifetimemortgages can be

attractive for investorslooking for income-

generating assets

In the pursuit of yield, investors are searchingmore widely as government bonds and othertraditional income-generating assets havebecome increasingly expensive and therefore

more risky. For some investors, such as pensionfunds and insurers, investing in lifetimemortgages (LTMs) can offer a combination offactors that long-term investors may ndattractive in the current environment,including high duration, yield, correlation withmortality and, if desired, ination protection bylinking returns to the Consumer Price Index(CPI) or the retail price index (RPI) .

An LTM is a form of mortgage for over-55s,the average borrower being around 70. Themortgage proceeds are used by borrowers tomeet their retirement expenses and/or torenance maturing interest-only mortgagesthat require repayment of the mortgage capital.

Unlike traditional mortgages, they typicallyhave no monthly payment and no term.Interest payments ‘roll-up’ into the mortgagebalance at an agreed interest rate (typically axed rate but it can be linked to consumer orretail price ination or LIBOR or some otherindex), with the loan repayable on theborrower’s death or their move into long-termcare, at which time the home is sold.

Important variants to the lump sum productexist as follows:● Interest served: If borrowers wish, some LTMproducts allow interest payments to be made.At any time, the borrower can cease interest

Lifetimeopportunities

ICON


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18

Lifetime mortgages

Investment

Owing to their longduration, longevitylinkage, low-riskcashows anddiversicationpotential, LTMs

are particularlyappealing forpension schemes”

payments, at which point, the loan switches tothe traditional interest roll up.● Drawdown: Where borrowers regularlyborrow against their home up to a givenamount rather than in one single borrowing.Each drawing rolls up along with the interest.This form represents around 65% of thecurrent market.

Borrowers cannot be evicted before death orlong-term care as they are not required to makemonthly payments, and recourse is solely tothe property, not to the borrower’s estate orbeneciaries. Initial loan-to-values (LTVs) aremuch lower than for standard mortgages,typically around 30%. As the interest rolls upLTVs increase over time.

Lifetime mortgages in acashow matching portfolioWhile any investment in providing LTMnance will be illiquid, it distributescashows over time as borrowers pass away,enter long-term care or repay early due toother ‘life events’ such as divorce or movingto a smaller property.

These mortgages therefore offer investorsa secure and long-dated set of cashows.Owing to the high yield on these assets,pension schemes have an opportunity tomeet their liability cashows at a potentiallysignicantly lower cost than investing in aportfolio of government bonds.

By originating new LTMs, the mortgageportfolio of any investment can be tilted to the

investor’s requirements – for example,ination-linked return exposure, interest rates,LTVs and borrower age – subject to marketresponse. Owing to their long duration,longevity linkage, low-risk cashows anddiversication potential LTMs are particularlyappealing as an investment opportunity forpension schemes. The main investment risksassociated with LTMs are to house prices andlongevity.

Figure 1 (above ) shows the liability cashowprole of an example pension scheme andillustrates how these mortgages can be usedas part of a pension scheme liability cashowmatching strategy. In addition, given theyields that can be achieved, incorporating a10% allocation to lifetime mortgages in thecashow matching prole reduces the cost ofmeeting the liability cashows by 4%.

The market for LTMs is currently small inrelation to the overall mortgage market at £1.6billion in annual ows compared with £209billion for the overall mainstream market.Typically, borrowers have used them tosupplement inadequate pensions or fundlifestyle purchases. However, demand has beengrowing signicantly as LTMs become a keycomponent of retirement planning. They havealso been popular with borrowers with maturinginterest-only loans who have insuffi cient meansto fully repay these, because of a shortfall on anendowment policy. The Financial ConductAuthority (FCA) estimates there are 1.25 millionso-called ‘interest-only prisoner’ borrowers in

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02014 - 2016 2024 - 2026 2034 - 2036 2044 - 2046 2054 - 2056 2064 - 2066

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Figure 1 Cashflow profile of example scheme’s assets and liabilities


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19

the UK, representing around 12% of all mortgageborrowers outstanding.

Figure 2 shows the estimated volumeof interest-only mortgages maturing inthe coming years, either ‘sold as’ such,or having ‘converted’ to interest-only termsat some point.

Mis-selling: perceptionand realityLTMs benet from a lending code of conduct(the Safe Home Income Plan rules managedby the Equity Release Council), as well as theintroduction of mortgage regulation by theFSA in 2004. Among many features designedto protect consumers, this code requiresthe use of a solicitor to meet the borrowerprior to purchase and also that they havein-built provisions regarding transparencyand fairness.

It is important for all involved to ensure thatLTMs are entered into with full knowledge ofthe implications. Instances of complaints withthe Financial Ombudsman Scheme have beenlimited, with no decisions upheld in favour ofthe consumer compared with a lender.In addition, as of February 2015, researchcommissioned by BlackRock indicated noreported decisions by English courtsupholding any mis-selling. They thereforestand out in terms of their low incidence ofcomplaints compared with other consumernancial products, such as current accounts,pensions, insurance and investments.

Why consider LTMs?LTMs can provide long-term investors with anasset class that helps solve a number ofasset-liability challenges. In return foraccepting illiquidity, an investor can receivelong-dated secure cashows, inationprotection and a substantial increase in yieldover government bonds.

Traditionally, the nance for this type ofproduct has been provided by insurancecompanies originating mortgages for theirown portfolios. As such, the product hastraditionally been viewed as relativelyniche, with product features tailored to theconstraints of insurance companies. Throughpartnerships with established residential LTMlenders, asset managers are able to acquire newmortgage loans that meet the cashowcharacteristics required by investors.

An additional advantage for some investorsmay be the social benet these products offer– for example, through helping to nanceretirement or enabling older homeowners tostay in their homes while unlocking storedequity value.

With the ability to capture an illiquiditypremium, pension schemes – particularlythose open to future accrual, such as localgovernment pension schemes – are best placedto take advantage of these opportunities.An investment in LTMs could help to not onlyreduce the cost of providing benets but alsoprovide cashows that can be used to meetliability payments as they fall due. a

OLIVIER DEFAUX ishead of Europeanmortgage strategies atBlackRock

ARNO KITTS is head ofUK institutional clientbusiness at BlackRock

Live linkson ourapp!p

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Figure 2 : Volume of interest-only mortgages maturing in coming years

Source: Experian


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CERA qualification

Risk

Arthur Els shares some of hisexperiences in a major construction

company after taking the CERAqualification and encouragesothers to venture beyondthe financial arena

hatActuaryin a hard

‘airy-fairy’ concepts such as value-at-risk.

This has led to some robust debates duringour presentations to the client’s executivecommittee. Fortunately, not all engineers feelthis way and those high up the corporateladder appreciate that the CERA can play apart in the company’s risk management.

CERA’s roleLarger non-nancial companies have beendoing risk management for many years, butthis has generally been limited to mitigatingrisks based on risk registers. Thus, f rom myobservations, the level of ERM in mostnon-nancial companies is immature relative

to nancial institutions that need to complywith the Basel and Solvency directives.The CERA study materials and examination

equip the actuary with certain ERM skills andtools. It can add real value in the non-nancialarena by incorporating the company’s balancesheet in the risk management process – thecompany is then aware of its nancialrisk-bearing capacity (RBC).

The CERA is also able to quantify many ofthe risks to which the company is alreadyexposed, using the value-at-risk approach.These two sets of values allow the client’srisk committee to check that the companyhas not overextended itself and determinewhat capacity is still available for newprojects. The client is thus able to directlylink future strategy, the strength of itsbalance sheet and current risks.

Many of the members of the client’s boardof directors are non-executive. I haveobserved that the non-executive directorsdraw reassurance from the fact that anindependent and impartial ERM expert, theCERA, is involved in the compilation of riskreports that are presented to them.

Risk appetiteThe RBC exercise determines the amount ofcapital that is available to meet expected andunexpected losses. We currently take this asthe value that a potential debtholder wouldplace on the company, using a derivative ofthe Merton model.

One input is the probability of thecompany defaulting on its debt. Thus thecompany’s credit rating is a major factor,and any changes in credit rating have a verysubstantial impact on the level of the RBC.This is particularly relevant in South Africaat the moment – the sovereign rating ishovering just above junk status, whichimpacts the credit rating of South Africancompanies.

The company needs to decide how muchof the RBC it is willing to place at risk, that isits ‘risk appetite’. For this we re-run the RBCexercise but assuming a credit rating one

The Chartered Enterprise Risk Actuary(CERA) qualication is opening new doors toactuaries. We have traditionally been restrictedto nancial institutions but now have anopportunity to add real value in the non-nancial business arena, which dwarfs thenancial arena. As a CERA I was fortunate to beappointed to the chief risk offi cer’s task team ina major construction rm three years ago.

I have been a pension fund valuator, aswell as a life offi ce statutory actuary, andthought that I had a good idea of what riskinvolves. However, my exposure to theconstruction industry has given me a wholenew perspective.

Consider a construction company that haswon a tender to construct a power plant in aremote area in a foreign country. The price isa xed amount, and guarantees have beengiven regarding the project completion dateand the minimum amount of power that willbe generated.

The list of risks to which the constructioncompany is exposed is mindboggling –

funding, counterparty, geographical, theelements, corruption, labour, culture,politics, and many more. Yet there are manynon-nancial companies whose regularbusiness is to take on this level of risk.

It is not easy for actuaries to enter thenon-nancial business world, since the CERAqualication is still unknown outsideactuarial circles. However, the marketingmaterial provided by the CERA GlobalAssociation is helping to raise our prole.

I have also found helpful the chapter inRobert J Chapman’s book, Simple Tools andTechniques for Enterprise Risk Management ,which gives practical advice on securing aconsulting appointment.

Being part of my client’s CRO task teamgave me exposure to other professions that Iwould not normally encounter as an actuary,including engineers and corporate lawyers.I quickly came to realise that engineers, inparticular, have a different mindset toactuaries. They work in a world of concreteand have little tolerance for, in their view,


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ARTHUR ELS is a senioractuary at ARGEN ActuarialSolutions in Johannesburg

Live linkson ourapp!p

notch lower than the actual credit rating.This has resulted in the risk appetite beingset at about 80% of the RBC. We show thisgure in our reports to the risk committee,but the nal decision lies with the boardof directors.

Value at riskThe value-at-risk (VaR) for a project is thegure that is expected, with 95% condence,to exceed losses arising from the project.

For this exercise the key risk drivers for thecompany need to be identied with theirprobabilities – these are based on historicalinformation adjusted for expected futuredevelopments. The methodology is adaptedas more is understood about the business andfurther information becomes available.

Figure 1 gives an example of a VaR run-off

prole for a project that has 18 months untilcompletion. Note that as the VaR reduces,the company’s capacity to take on more workincreases. Our client closely examines therisk graphs when considering taking on newwork. It is possible, for example, that the VaRfor a potential new project might increase thetotal VaR above the risk appetite, as shown in Figure 2 .

In this case, the client has to considerwhether to: not tender for the project; or delaycommencement until suffi cient capaci tybecomes available; or enter into a jointventure with another company, which willreduce the client’s portion of the VaR.

The inclusion of a CERA in the ERMprocess has resulted in the risk reportbecoming an important tool in the client’sbusiness strategy.

The non-nancial business arena isenormous and actuaries are well placed toadd real value in the risk managementprocess. We must grasp the opportunitythat the CERA qualication has created,and play our part in that arena. a

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Figure 1 Value at risk for a single project compared to risk-bearing capacitySource: Author’s own

Figure 2 Assessing current and future projects against risk-bearing capacitySource: Author’s own


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Liquidity

Investment

Actuaries areencountering liquiditymore often, whether itis to do with essence,risk, institutions,markets or regulation,say Con Keating and

James Walton

ow?

Gowith the

‘Liquidity’ is a confusing topic with manyinterpretations. Actuaries are encounteringthe concept in a number of contexts:● Investment practitioners increasinglyoperate in a world where liquidity appearsdeceptively deep but evaporates overnight● New regulation in both insurance andbanking is generally requiring more liquidassets to be held● Long-term investors in both life andpensions are increasingly searching foradditional yield in less liquid asset classes● Credit risk capital under Solvency II can beaffected by identication of an ‘illiquiditypremium’, through the matching adjustment.

In order to understand these different, butrelated themes, we go back to basics andconsider the denition of liquidity, themeaning of a liquid market, and how currentmarket and regulatory conditions may affectinstitutional investment strategy.

Here we focus on market liquidity and donot describe in detail other aspects ofliquidity management from the rm’sperspective, such as retaining dividends orutilising borrowing facilities.

What is liquidity?Liquidity, as an asset class characteristic, is thedegree of inter-exchangeability of money andthe asset. In other words, having suffi cient

liquidity is about having suffi cient access

to money. There are three main types ofmoney: currency, bank deposits and centralbank reserves.

Liquidity has a costInvestors want liquidity as they value theoption of liquidating an asset for money.With deliberately provocative language, wemight say that liquidity affords investors theluxury of a lack of commitment to theirinvestments. It provides investors theopportunity to participate in marketswithout incurring the costs of research andinformation discovery. The purchase of this

embedded liquidity option has a cost to theholder, through a higher purchase price orlower yields.

In practice, it is convenient to compareprices of less liquid assets to the most liquid,low-risk asset (usually government bonds),as the market price of these low-risk assetsare readily observable. It is common to thenattempt to decompose the price or spreaddifference into compensation for credit riskand ‘illiquidity premia’. Looking through thislens only – particularly when the ‘illiquiditypremia’ is a balancing item in this analysis –can often obscure the mechanism that liquidasset prices are being driven, in part, by theprice of liquidity itself. This is a differentdynamic to the ‘illiquidity premia’ being anecessary compensation for the risks andcosts of investing in an illiquid asset.

A market contextAssets are liquid only to the extent thatmarkets in them are liquid. Liquidity in amarket may be measured by:● Market ‘depth’, or the ability to executelarge transactions without inuencingprices unduly● ‘Tightness’, or the gap between bid andoffer prices● ‘Immediacy’ or the speed with whichtransactions can be executed● ‘Resilience’, or the speed with whichunderlying prices are restored after adisturbance.

Information asymmetries in marketsbetween buyers and sellers – for example, inthe market for secondhand cars or formortgage-backed securities in 2008 –generally give rise to declining trade withprice clearing at the lowest quality asset.Conventions and common knowledge amongmarket participants improve the liquidityof markets.

Market liquidity is improved when there isactive trading that can be facilitated bymarket markers. The withdrawal of marketmakers means liquidity is deceptively


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CON KEATING ishead of research atBrighton Rock

JAMES WALTON isinvestment strategymanager at Legal andGeneral AmericaRetirement

IKON


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Liquidity

Investment

shallow in credit markets. USD stock in

trading books has fallen at least ve-fold,since pre-2007.Larger issue sizes are more liquid, both in

terms of the volume of stock that can betraded and in terms of the fact that activetrading is concentrated in a small number ofthe largest issues. This effect is getting moreextreme as Figure 1 (right ) demonstrates.

This decline in liquidity has not just beenconned to credit. We have seen the Treasury‘Flash Crash’, and equity volatility in August2015 seems to have been far in excess of thatjustied by fundamentals.

Are liquid markets benecial?The benet to society from liquid marketscomes through the facilitation of outside trade,that is, outside the nancial system, notnecessarily from increased activity amonginsiders. A market can be highly liquid, asmeasured by velocity of circulation, withoutthis necessarily giving rise to the benets ofoutside trade.

For example, the FX market in USD isextremely liquid as measured by turnover,with $4.5trn in 2013. The stock of USD,dened as liabilities held by the USD bankingsystem, is a similar gure. Very few of theseFX transactions are driven by considerationof real trade or capital ows; rather, it is tradebetween insiders of the banking system.There is a similar situation with highfrequency trading, which has enhancedinside ows in many markets in recent years.

While some short-term market activitymay facilitate the execution of real economyenhancing outside exchange, excessivevolumes of short-term activity can even be tothe detriment of the outside welfare.

Considerations for actuariesWhile a pension scheme or insurer may becomfortable and have excess liquidity interms of withstanding shocks and meetingliabilities, all other motivations for assetsales should be considered when evaluatingthe economic value they should place onthe liquidity options inherent in theirasset strategy.

The value institutions place on this liquidityoption should reect the additionalcompensation they require when reducing theliquidity of their investment strategies, whichinstitutions are increasingly doing to enhanceyield. At an extreme, a theoretical ‘buy-and-hold’ investor would expect to lose money,relatively speaking, if they bought liquidity

options that they never intended to exercise.Any assessment should include:

● Increased capital required against anilliquid asset that is downgraded andcannot be sold

Figure 1 Corporate bonds ranked by annual tradedvolume in block trades, $bn

Source: TRACE

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00% 20% 60% 40% 80% 100%

2007

2013

● Opportunity cost of holding fewer liquid

assets to take advantage of future marketdislocations and regulatory changes● Costs incurred upon asset sales for anyother reason.

In evaluating the likelihood of forced salesin the future, institutions may examine theextent to which asset cashows matchliability cashows.

Policy and regulationGiven the cost of holding liquidity, it is to beexpected that, left to their own devices,nancial institutions will tend to minimisetheir holdings of liquidity stores andunder-provide for contingent events wheresignicant excess liquidity is required.

The response to the crisis has includeddirect regulation relating to the liquidity ofinstitutions, as well as many other areas thatmay affect liquidity in the nancial system.

Incentives have been created to generallyhold low-credit-risk assets. Central clearingrequirements have placed additionalliquidity requirements on institutions.

The effects of liquidity regulation arestill developing, but most appear to bedetrimental. Minimum liquidity requirementsat the institutional level do not necessarilyimprove liquidity in the system or mitigatethe impact of liquidity shocks alone.Fundamentally, as economist John MaynardKeynes said nearly 80 years ago: “There is nosuch thing as liquidity of investment for thecommunity as a whole.”

In summary, the crisis, and the responseto it, have brought shifts in the liquidityof markets and management withininstitutions. More is not always better;so-called liquid markets may not remain soand are not necessarily benecial to thewider economy. Holding liquid assets has acost that is often not recognised.

In addition to the impact of liquidity oncapital calculations, actuaries are well placedto understand and communicate the themesin this article so that our clients have anappropriate investment strategy and liquiditymanagement framework. This can improveoutcomes for the nancial system and, forexample, by giving institutions thecondence to inv

the actuary march 2016

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