Future Pathways. Fresh perspectives from actuaries of the future. Auckland, 15 March 2011 Wellington, 16 March 2011. Future Pathways. Life Insurance Ben Coulter, Sovereign Adam Swanson, Melville Jessup Weaver. Fresh perspectives from actuaries of the future. Agenda.
Future Pathways Fresh perspectives from actuaries of the future Auckland, 15 March 2011 Wellington, 16 March 2011
Future Pathways Life Insurance Ben Coulter, Sovereign Adam Swanson, Melville Jessup Weaver Fresh perspectives from actuaries of the future
Agenda Life insurance accounting (IFRS) Current Margin on Services Method Proposed Exposure Draft Method Recent Developments Prudential regulation & solvency The Insurance (Prudential Supervision) Act Reasons for regulation Proposed changes to solvency standards
Life Insurance Accounting 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
What is MoS? Margin on Services (MoS) is a method of calculating policy liabilities The result is that profits are released in line with “services” provided to the policyholder, e.g. expected claims on a risk portfolio, with no profit released at point of sale MoS acts as a “shock absorber” The impact of changes to non-economic assumptions (e.g. mortality, morbidity, lapses) are spread through future margins Disadvantage is the results are artificial Impact of management actions are often deferred and MoS is viewed as an accounting “black box” by analysts
MoS Planned Profit Example Example cash-flows for a portfolio of yearly renewable term policies • Uneven cash-flows with large new business strain • Smooth MoS planned profits as all acquisition costs are deferred
Proposed Daft Draft Standards The IASB have been working on an IFRS update They issued an Exposure Draft (ED) in July 2010 Three key differences to MoS: Profit margin is split into two (Explicit Risk & Residual Margins) The profit margins are “locked” (i.e. no assumption changes are spread through margins) Not all acquisition costs are deferred (results in a year 1 loss)
ED Planned Profit Example Example cash-flows for a portfolio of yearly renewable term policies • 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+
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
Recent Developments FASB proposal with “composite” margin Joint IASB / FASB meetings in mid-Feb 2011 to consider industry feedback on the ED method They are now reconsidering the “locking-in” of margins, which would reduce profit volatility Revised Exposure Draft to be published by June 2011 The ED method is subject to change, watch this space!
Summary 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
Insurance (Prudential Supervision) Act • 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 • 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
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
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
Assets Capital (or net assets) Catastrophe Risk Capital Charge Expense reserve Ineligible capital Inadmissible assets Asset Risk Capital Charge Resilience reserve • Asset Risk Capital Charge includes a new version of PS5.01’s Resilience Reserve plus charges for: • Reinsurance Recovery Risk • Asset Concentration (which previously was within Inadmissible Assets) Solvency Liabilities Insurance Risk Capital Charge Compared with NZSA PS 5.01, the draft RBNZ standard has: New structure with new concepts PS5.01 vs. draft RBNZ solvency Contract Liabilities Not to scale. Relativities between PS5.01 and RBNZ standards will change based on differences discussed below. Other Liabilities Other Liabilities IFRS Reported Balance Sheet PS5.01 structure New RBNZ structure • 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.
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!
Future Pathways Fresh perspectives from actuaries of the future General Insurance Jonathan Nicholls, PwC Jing (Annie) Luo, AMI
Agenda • Regulatory Framework • Solvency Standard • Key Issues • Developments at ACC • Scheme growth & recent changes • What does the future hold? • Comparison with Australian experience • Canterbury Earthquake • Quakes so far • Current Impact • The Future
Key Issues Adding value through the FCR Disclosure of Solvency Ratio, with comparison to RBNZ guideline Transition programme to full compliance “Whistleblower” responsibilities
Recent Stabilisation Increased rigour around claim acceptance Claim monitoring Lower rates for services from providers Legislative amendments Publicity of Scheme sustainability & limits
The Future for ACC • Stocktake recommended the Work, Earners’ and Motor Vehicle accounts should be insured privately. • Cabinet decision was to move towards competition in the Work account, ACC could still insure. • How does the move to competition pan out? • What happens when the public concern over sustainability dissipates?
Australian Experience Steep premium increases in 2002 prompted the Ipp Review of the Law of Negligence. Resulting Civil Liability Act 2003 and Injury Scale Values led to a fall in claim frequency & amount. NSW CTP introduced cover for “at fault” drivers in 2006 (for catastrophically injured) and 2009 (all). Large increases in economic loss payments for QLD CTP led to a Review in 2010.
Quakes so far … These are the relatively large magnitude earthquakes / aftershocks listed on the EQC website for claims management: 4 September 2010: 7.1 magnitude 19 October 2010: 5.0 magnitude 14 November 2010: 4.9 magnitude 26 December 2010: 4.9 magnitude 20 January 2011: 5.1 magnitude 04 February 2011: 4.5 magnitude 22 February 2011: 6.3 magnitude
Current Impact The largest single insurance event in New Zealand history Estimated loss of around $6.0 billion for September quake Predicted likely loss of another $10.0 billion for latest February quake The third most costly insurance loss worldwide in 2010 Rank ? in 2011
Current Impact • Sharing the cost between the EQC and insurance companies - Premium - Claims
Current Impact • Quake response • September Quake: staff resource, underwriting restrictions, policy coverage (temporary accommodation) • February Quake: emergence recovery mode, office relocation, policy coverage (theft) • Claims Management • September until 21 February • Future possibilities
The Future Is the February quake still an aftershock of the September quake or another new earthquake? A British expert in engineering risk said insurance policies in many countries did not allow more than one claim for an "act of God" event a year. If damage caused by the aftershock was deemed to be part of the main quake in September then insurance would probably pay out, if the quake is deemed to be independent then coverage may not be guaranteed, Imperial College London fellow Peter Stafford said.
The Future COUNTING THE COSTS: Should the EQC levy still be collected through premiums on house and contents insurance, or would it be fairer to collect it via rates, so all homes are covered, not just those insured? – from Sunday Star Times Insurance and reinsurance premiums were expected to rise in the wake of the quake. Any increase would be determined by the market. – from Insurance Council chief executive, Chris Ryan. Queensland floods, Cyclone Yasi and Canterbury Earthquake – what’s going to happen in the future for the GI market here?
Contact Details Jonathan Nicholls firstname.lastname@example.org Jing (Annie) Luo email@example.com Feel free to contact us with any comments/questions!
Future Pathways Fresh perspectives from actuaries of the future Health Insurance Anagha Pasche, Southern Cross
Overview of presentation NZ health insurance market The role of public health & ACC Types of health insurance products Claims drivers Claims inflation Premium rates Group schemes
What is health insurance? Health insurance covers the costs of many non-urgent healthcare procedures such as orthopaedic surgery and semi-acute healthcare procedures such as the removal of cancers and cardiac surgeryFromHealth 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
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