ACTUARIAL POST FOR THE MODERN ACTUARY AUGUST 2020
IS THE PANDEMIC THE END OF BOX TICKING?
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Actuarial Post Team EDITOR Jennifer Redwood jennifer@actuarialpost.co.uk SUB EDITOR Jennifer Stone article@actuarialpost.co.uk ADVERTISING MANAGER Alan Burns alan@actuarialpost.co.uk
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EDITOR’S NOTE August is traditionally the month when many of us head for foreign shores for a well deserved holiday but with the pandemic showing no signs of abating, may local lockdowns attest to this, fewer seem to be leaving on a jet plane this year. At least a number of insurance companies have started to include Covid19 cover in travel insurance policies, so for those of our readers who are travelling, check the small print. In this month’s magazine we have Kareline Daguer from PwC asking has the pandemic put an end to ticking boxes and a wait and see approach to regulation. Richard Hartigan from Hiscox is standing on principle over IFRS17. We also include amongst others Tom Murray looks slightly ahead to September and the first batch of 18 year olds with maturing child trust funds. Neill Slane examines how using data enrichment can help understand the true overall risk of a policy So if you are going abroad or on staycation this month we hope you enjoy this month’s edition of the magazine and we look forward to welcoming you back next month.
Jennifer Redwood Legal Notice All rights reserved. No part of this publication may be reproduced or transmitted without the prior permission of the publisher in writing. Whilst every care has been taken to ensure the accuracy, Actuarial Post cannot accept responsibility for loss of business to those referred to in this magazine as a result of errors.
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CONTENTS 10
8
6
Movers & Shakers
8
City Dealings
9
Is It The End of Box Ticking?
10
Tait’s Modern Pension
12
IFRS 17
14
Pension Pillar
17
Inner Workings
18
Retirement Puzzle
20
Lights, Camera, Actuary
22
Information Exchange
24
14
22
News
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NEWS AUGUST Covid19 impact on life expectancy to cut pension liabilities XPS forecasts that the long-term impact of COVID-19 on life expectancy could cause a reduction in liabilities by as much as 5% across the Defined Benefit universe, according to its newly launched COVID-19 Impact Analytics. This new service is the third and final element in
XPS’ COVID-19 response which provides pension schemes with a holistic view of the pandemic, including: 1. The impact of the virus on different population groups via the XPS COVID-19 Tracker, which consolidates publicly available data on the pandemic in one place.
Barnett Waddingham response to 95k cap consultation issued Following several delays, HMT released a response to the much debated £95k cap consultation yesterday. With around 600 responses to the consultation which closed in July 2019, perhaps the delay was inevitable. However, Melanie Durrant, Principal at Barnett Waddingham, thinks it is fair to say the response doesn’t give a huge amount away and we still do not know when to expect any draft regulations, just at a “later date”.
2. The impact of the virus at an individual scheme level via the Scheme Vulnerability Analysis, which takes into consideration factors such as where members live and prior health conditions. XPS’ COVID-19 Impact Analytics combines the findings of the COVID-19 READ MORE
FCA insight into Intergenerational effects of Covid19 Please find commentary from Steven Cameron, Pensions Director at Aegon, on the FCA’s analysis of the pandemic’s effects on the nation’s financial lives: “The economic fallout from the Coronavirus is being felt across all generations, but the latest analysis from the FCA highlights the financial dynamics faced by Baby Boomers, Generation X, Millennials and Generation Z. The varying wealth profiles and financial challenge s, tips the balance of intergenerational fairness as we see a widening of the gap between generations.
READ MORE
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“It’s essential that Government policies address the needs of each generation and help deliver better balance between them. This is particularly important in areas such as pensions, social care and housing, where the financial services industry has a key role to play in supporting individuals with their financial planning. READ MORE
NEWS Claims caused by respiratory problems double that of 2019 The percentage of life insurance claims caused by respiratory conditions (16%) are double the number in 2019 (7%). Aegon reports that 95% of individual critical illness (CI) claims were paid in the first half of 2020, a slight increase in the level of CI claims that were paid for the whole of 2019 (94%). The percentage of life claims paid remained the same as that reported for the total claims in 2019 at 96%. Aegon also reports the top three causes for a life insurance claim are cancer (37%), cardio (19%) and respiratory (16%) conditions. While these are the same three main causes for claims as in 2019, the percentage of claims due to respiratory conditions (which READ MORE
1 in 3 want Covid19 vaccine before returning to workplace
With lockdown measures easing and office spaces starting to open again, new research released by Canada Life reveals that 35% of those who have been working from home during lockdown want a vaccine or an antibody test before returning to the physical workplace. Although four in ten (41%) are feeling positive about getting back into the office, 28% are concerned about it increasing to 36% among women. And almost a fifth (17%) think that despite the official Government alert level dropping to three, it will be several years before working practices return to normal - or they won’t ever go back to how they were preCOVID-19. Of those who have been working from home,
the other measures they’d like to see implemented include routine temperature checks (18%), regular Coronavirus testing in the office (21%) and physical changes like socially distanced desks (22%). However, they would also like the option to work from home when they want to (31%), while a quarter (23%) want to be given the choice as to whether they return at all to the physical work environment. Despite the fact that women are most looking forward to being out of the house again (26% vs 18% of men), female workers are generally more concerned about returning to the office than their male counterparts: READ MORE
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PLSA open input on support on confusing pension freedoms Nearly three quarters (71%) of savers in defined contribution (DC) funds want support when deciding how to access their pension, including some wanting to be guided by their pension scheme to a ready-made retirement income option, according to research by the Pensions and Lifetime Savings Association (PLSA). The 2015 Pension Freedoms gave savers greater choice about how to access their retirement savings. But a significant body of evidence shows the confusing range of options is potentially leading to poor decisionmaking and poorer retirements. Too often the complexity results in people ‘choosing not to choose’ or taking a decision that may not be in their best interests. This can have significant READ MORE
MOVERS & SHAKERS The latest moves and appointments from the actuarial marketplace Coverys appoint Actuary Xiaohan Fang as underwriter
Willis Re appoint co head of Specialty Casualty
Coverys Managing Agency Limited, the Lloyd’s managing agent of Syndicates 1975 and 1991, today announced the appointment Xiaohan Fang as an underwriter for Syndicate 1975. Xiaohan brings over a decade of actuarial and pricing experience to the role and will primarily focus on underwriting North American medical professional liability business. Prior to joining Coverys, he most recently served as senior pricing actuary at Renaissance Re. He also held the role of divisional actuary at Liberty Specialty Markets where he specialised in providing major account pricing for professional lines and medical malpractice. Xiaohan is a fellow of the Casualty Actuarial Society, a member of the American Academy of Actuaries, and the Chair of the CAS Investment Committee. In recent months, Coverys has made READ MORE
Aon announces UK Chairman for Global and Specialty
Willis Re have announced the appointment of James Moss as cohead of Willis Re Specialty’s Casualty practice. In his role, Moss will work in tandem with Chirag Shah to lead Willis Re Specialty’s Casualty strategy in London. Moss brings 30 years of experience to Willis Re. He joins from Lockton Re, where he was a partner and head of International P&C reinsurance. Before joining Lockton in 2012, Moss was a senior vice president in Guy Carpenter’s London market Casualty team and began his career at R K Carvill & Co. Ltd. He is based in London and will report to Andy READ MORE
Aon plc announces the appointment of Andrew Tunnicliffe as UK Chairman, Global & Specialty, part of its Commercial Risk Solutions, Health Solutions and Affinity business. He will take up the new role on 27 July.
Hymans Robertson appoints David Walker as CIO Hymans Robertson has appointed David Walker to the role of Chief Investment Officer (CIO), taking over from Andy Green. David has worked at Hymans Robertson for the last 19 years. Over that time, he has advised many private and LGPS funds across the whole range of investment services and was responsible for developing our strategic investment services and for public sector clients. He has also been part of the Research Oversight Group and is Head of our LGPS Investment services. Commenting on his new appointment, David Walker, Chief Investment Officer comments says: “I am thrilled to be taking on this role at such an exciting time for our READ MORE
Andrew has over 30-years of experience in the insurance and risk management industry, covering a range of industry sectors and segments. In his last role with Aon, Andrew was UK CEO of
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Commercial Risk Solutions, Health Solutions and Affinity. Prior to that, he was Chief Operating Officer for Commercial Risk Solutions, Health Solutions and Affinity in EMEA, and before that, CEO of READ MORE
CITY DEALINGS Keeping up to date on acquisitions, mergers and the dealings of companies in the city
Mercer advises UBS Pension in billion pound longevity hedge Mercer acts as the lead commercial and investment adviser to the Trustee of the UBS (UK) Pension and Life Assurance Scheme (the “Scheme”) as the scheme enters into £1.4 billion longevity hedge. The swap covers roughly £1.4 billion of its defined benefit (DB) pensioner liabilities and was arranged with Zurich Assurance Ltd (“Zurich”) as the insurer and The Canada Life Assurance Company (“Canada Life Reinsurance”) as the reinsurer. Allen & Overy LLP provided the legal transactional counsel. The longevity swap, which covers the majority of the Scheme’s DB pensioners, will protect the Scheme against the risk of the covered members READ MORE
AAM COMPLETES REBRAND OF KAMES CAPITAL READ MORE
Suthan Rajagopalan, Partner at Mercer and lead adviser to the Trustee, said: “Longevity risk management has been on the Trustee’s agenda for several years, and we are proud to have advised on this alongside broader strategic de-risking. This transaction was the result of a thorough review of the Scheme’s longevity risk exposures and the options, initially including bulk annuities, for reducing these, complementing the Trustee’s ongoing derisking programme and investment strategy.”
Swiss Re announces successful completion of ReAssure sale
L and G in 100m bulk annuity deal with Countrywide Farmers
Swiss Re have announced the completion of the sale of its subsidiary ReAssure Group plc to Phoenix Group Holdings plc following the receipt of all required regulatory and antitrust approvals. The sale has bolstered Swiss Re’s capital position, which remains very strong despite significant claims and reserves related to the COVID-19 crisis, totalling USD 2.5 billion before tax in the first half of 2020.
Legal & General announces that it has agreed a £100 million bulk annuity transaction with the Trustee of the Countrywide Farmers Retirement Benefits Scheme securing the benefits of 360 deferred members and 712 retirees.
Swiss Re maintains its industryleading capital position, with the Group SST ratio above the target level of 220% as of 1 July 2020, . READ MORE
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The Scheme entered Pension Protection Fund (PPF) assessment in March 2018 following the insolvency of Countrywide Farmers Plc. In November 2019 the Scheme exited PPF assessment as it had sufficient assets to fund the PPF’s levels of compensation. This transaction has enabled the READ MORE
SOLVENCY II & BEYOND
BOX-TICKING- HAS THE PANDEMIC CONSIGNED IT TO THE SCRAPHEAP?
If there is something this pandemic has shown it is that planning for severe, or high-risk scenarios is an activity to take seriously rather than as a tick box exercise. Even more importantly, this should be followed by acting upon the insights obtained from the exercise.
take tangible actions towards formalising their approach to climate related financial risks.
One year on, on 1st of July 2020 the PRA issued a Dear CEO letter outlining its new revised expectations. Firms are expected to have a fully embedded approach to managing climate related The prospect of a pandemic has been at the top financial risks by the end of 2021. of health risk lists in all developed countries for The letter was published to coincide with the many years now. However, in most countries PPE publication of the Climate Financial Risk Forum was not stocked up in significant quantities, nor (CFRF) Guide - this industry forum is co-chaired were there plans to establish a rapid testing and by the PRA and the FCA and its objective is to tracing programme or a holistic understanding share best practice. of the knock on consequences on the economy. I believe the PRA is right in building up a sense What can we learn from that? of urgency into preparations since such pressure I personally am very keen to see the links between might spur firms into action and help achieve the pandemic preparation, analysis and what firms desired outcomes. But I think firms need to think are currently doing to manage and mitigate the even bigger and really own this challenge. It’s not financial risks related to climate change. just a regulatory issue- there is a genuine risk that there is an impact on the whole of society Climate change has become a buzzword in recent at some point. years but how much meaningful preparation has it really driven? Last year the Prudential Regulation In its Dear CEO letter the PRA highlights four Authority published Supervisory Statement 3/19 key areas of focus: governance, risk management, marking a first concrete step in asking firms to scenario analysis and disclosures. Although the page 10
four areas are important I believe scenario analysis should be the central cog in the climate change risk wheel. Identifying and developing the most relevant scenarios that impact each firm will allow management to feed the insights gained into its strategy and decision making. This is expected to be an iterative process and examples of good practice may include: choosing a range of scenarios that cover shorter and longer term horizons; using core scenarios to shape strategy whilst using tail scenarios to inform the limits to risk appetite and help draw up necessary mitigation strategies; and using reverse stress tests to help understand whether climate related causes may cause the firm to fail in certain scenarios. This is where the importance of the exercise becomes obvious, not just to make sure that the firm is doing what the regulator expects but to ensure it will be prepared when some of these scenarios start becoming a reality. Developing an integrated approach to scenario analysis in the next 18 months requires significant technical expertise and use of tools, in order to embed it in this timeframe will require firms to start making a more concerted effort today. As demonstrated by this pandemic, a wait and see approach, ticking boxes and looking at the issue with the objective to keep the regulators happy could be a very costly mistake. The impact of climate change and the transition to a low carbon economy might end up being more or less severe but one thing is certain: preparing for it by developing the knowledge and expertise needed will mean we will all be better off in the long run, we should embrace the challenge.
by Kareline Daguer, Partner, PwC page 11
TAIT’S
MODERN
PENSIONS
Tax relief for low earners HM Treasury (HMT) have at last grasped the ‘net pay’ nettle with a 40-page consultation, however like all things pension-related it seems that for every solution there’s a tangled train of consequences which make it anything but simple to resolve. The problem We are all clear that the current situation is unfair. Contributions from defined benefit (DB) schemes are collected on a net pay basis, contributions to personal pensions are made with Relief at Source (RAS) but the trustees of defined contribution (DC) workplace pensions can choose to have either. The result, for a small but politically key group, is quite simply that some people get more money than others as the result of a decision over which they have no control. HMT’s paper points out, quite correctly, that for the majority of members it makes no difference whether the scheme chooses to operate the default RAS solution or the administratively easier net pay option. 83% of UK taxpayers pay only basic rate tax and have no skin in the game beyond a wish to see fair play. Higher and additional rate taxpayers are also unaffected and probably just want to keep quiet in case of any wider changes to tax relief. The problem is that the 1.5m low earners in net pay schemes get precisely the tax relief they are entitled to whereas the 1.3m in RAS schemes, arguably, get more than they should because the scheme is entitled to claim basic rate relief even though the member hasn’t actually paid it. 4 solutions The consultation paper outlines 4 possible solutions: 1. Top up contributions from those in net pay schemes to match the tax relief given to those in RAS arrangements. 2. Apply a tax penalty to RAS members at the end of the tax year to offset any basic rate tax relief which the member is not entitled to. 3. Requiring employers to operate a separate scheme for low earners 4. Requiring all workplace schemes to operate on a RAS basis.
to be unsurmountable it seems likely they would require considerable persuasion to follow this route. More justifiable is the objection that net pay members would have to wait several months for the bonus while RAS members obtain the same amount up front. Tax penalty While HMT are not normally reluctant to levy additional taxes, it seems in this case that the work required outweighs the advantage of additional revenue. HMRC would have to undertake a significant reconciliation process each year, which would be complicated by the fact that many low earners have multiple employments. HMT also, somewhat virtuously, points out that this method “would mean taking money from some of those on lower incomes who are saving for retirement” who are not just the underpaid but also the chronically underpensioned. Separate schemes for low earners The idea is that employers would be required to run 2 separate pensions schemes and be willing and able to switch members between them as and when their earnings exceed, or fall below, the Personal Allowance. The advantage to government is that no new legislation would be required but the burden on employers would be considerable. Requiring all schemes to operate RAS This would appear to be HMT’s favoured solution and it does have the considerable advantage of consistency. This whole issue has arisen because workplace schemes have a choice which DB schemes and personal pensions do not and this is the only solution which would resolve all of the current inequalities of rate and timing. Unfortunately, it seems that RAS is less popular with employers than net pay, the latter of which requires less paperwork and ensures that members receive the correct marginal rate of tax relief in one go without multiple adjustments later on. Following the devolution of tax powers this is particularly helpful for employers with workers living across the Scottish (and potentially Welsh) borders. It also seems highly unlikely that final salary schemes would be able to switch to a RAS basis, creating one more inequality to the DB-DC playing field. In summary
Net pay bonus This is the so-called ‘P800 solution’ favoured by the Pensions and Lifetime Savings Association (PLSA) whereby the bonus would be claimed at the end of the tax year in the same way as any overpayment of tax. This method has the advantage that the bonuses would be based on up-to-date Real Time Information (RTI) and should be accurate. HMT have however pointed out a number of practical difficulties, most of which noticeably apply to their own systems. Although none of them seem
If anything, this paper seems to underline the fact that there are no easy answers. Any solution will require significant changes to systems and processes, it will be interesting to see whether HMRC will be prepared to take on the hard graft or whether employers will once again have to bear the burden.
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by Fiona Tait Technical Director Intelligent Pensions
IFRS 17 AND CSM AMORTISATION: STANDING ON PRINCIPLE
by Richard Hartigan, Actuary, Hiscox
The IASB (through the Transition Resource Group (TRG), and TRG staff) has developed an Insurer Stands Ready doctrine in connection with Coverage Units (CU) for IFRS 17, i.e. that the very existence of the insurer standing ready to pay claims is the ‘service’ being provided to the insured, and therefore the Contractual Service Margin (CSM) must be amortised on a linear basis. CSM represents unearned profit. The Insurer Stands Ready doctrine works for business that earns linearly. Extending the Insurer Stands Ready doctrine to business that earns non-linearly violates the very principles underpinning IFRS 17.
Example: 1 year policy attaching 1 January, covering the US wind peril only. Tornadoes occur all year round and hurricanes in Q3, so the earning pattern is Q1 10%, Q2 10%, Q3 70%, Q4 10%. Strict interpretation of IFRS 17 leads to 50% of the CSM being amortised in the first 6 months (when only 20% of the premium has been earned). It is important to note that the original development of the CU is thus: “coverage units were introduced to achieve an appropriate allocation of the contractual service margin of a group that contains contracts of different sizes.” (Para 22(a) of TRG staff paper AP3, May 2018). It appears possible that the CU was developed for one purpose (possibly with
Life business in mind, and probably for a valid purpose) and then re-purposed for a completely invalid purpose unsuited to non-Life business. Read Para 25-30, and especially Para 29 (ibid): “The staff also acknowledge the calls from TRG members for a principle-based approach—it is not possible to set detailed requirements that will apply appropriately to the wide variety of products.” In advocating for (or accepting) a principle-based approach the TRG noted: • “IFRS 17 does not specify a particular method or methods to determine the quantity of benefits. Different methods may achieve the objective of reflecting the services provided in each period, depending on facts and circumstances.” (Para
35(g) of TRG Minutes, 2 May 2018) • [as one possible method, adhering to IFRS 17 principles] “methods based on expected cash flows. However, methods that result in no allocation of the contractual service margin to periods in which the entity is standing ready to meet valid claims do not meet the objective.” (Para 35(h)(v), ibid) The soundest path is to completely reject amortising CSM on a linear basis. An insurer may then adopt the method in the second dotpoint above, which is (as if by magic) on an earned basis in All But Name: linguistic gymnastics worthy of Sir Humphrey Appleby. One hopes auditors will be sympathetic to a purely principle-based approach.
Intimately connected to the above is the notion that the Risk Adjustment (RA) for Liability for Remaining Coverage (LRC) and the CSM are somehow completely different things, the former to be amortised with the Present Value of Future Cash Flows (PVFCF) (i.e. on an earned basis) and the latter to be amortised on a linear basis. The way I think about the RA and the CSM is different: in economic terms the RA is the ‘normal’ return (in a Return on Capital (RoC) sense) and the CSM is the ‘super-normal’ return (in a RoC sense). That is, the RA and the CSM are the same thing, split apart solely for the purpose of testing for loss-making (onerous) business.
Once one starts thinking in the above way then amortising CSM on a linear basis (for business that earns nonlinearly) obviously becomes a nonsense: the service the insurer is providing is obviously the (expected) payment of claims and if that is non-linear then it must be measured thus. As a post-script, it also becomes evident that amortising CSM on a linear basis significantly increases the likelihood that LRC outcomes differ materially when comparing the General Measurement Model (GMM) approach and the Premium Allocation Approach (PAA), thus impeding efforts to prove PAA eligibility for business that is not automatically PAA eligible.
PENSION
TOO MUCH OF A
by Dale Critchley Policy Manager Aviva In a previous role I needed to obtain a project management qualification. While it was useful for my job, it confirmed to me what most of us know already: that much in life is about compromise. This seems to be the case with Pension Dashboards. On 6th July, the Pension Dashboards Programme (PDP) launched a call for input on data standards, and introduced a dedicated website where the working papers and updates on the programme’s progress can be found. The priority for the PDP is to deliver a dashboard with the widest possible coverage in terms of the number of customers and pension schemes that can be included. Consumer testing with pension scheme members has shown little tolerance for missing pensions, meaning the first task is to reunite the typical person approaching retirement with an average of 11 different schemes. The need to reunite people with their pensions is unequivocal, and a key deliverable for early iterations of the dashboards. Success will rely on the accuracy of scheme data, but also the sophistication of the logic
matching the personal data, sent to the scheme by the “pension finder”, with scheme data. This is something that individual pension schemes will be responsible for. If the matching logic can’t identify that “Ben” and “Benjamin”, or even “Road” and “Rd.” are a match there’s a risk that people won’t find all of their pensions. Once pensions are traced, a key aim of the Dashboard programme is to combine information from different types of scheme into one cohesive and easily understandable view of what an individual might receive as retirement income. Given the complexity of the UK pensions landscape this is no easy challenge, and the data standard proposals reflect the tension between the need to keep things achievable, within a reasonable timescale, across the widest number of schemes, and the experience of the end user. The proposal is that schemes will provide the estimated retirement income from the member’s latest annual benefit statement. While this may provide a reasonable figure in many cases, we can all think of scenarios where providing last year’s statement could give a
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N PILLAR
A COMPROMISE
wildly inaccurate picture of what we now know to be true. The most obvious is where someone has left the scheme since the last statement, so future accrual assumed in the statement simply won’t happen. Other scenarios such as a transfer out or in, a pay rise, a significant contribution increase or decrease, taking part of your benefits, or a significant market movement, could all mean last year’s statement doesn’t provide a dependable view of prospective income in retirement. And does this mean a new joiner won’t see their value on the dashboard for up to a year?
retirement income at different dates and with different assumptions. The challenge for dashboards is greater, they need to deal with the full range of UK pensions, but modern provider provision may drive consumer expectations. The use of last year’s benefit statement might be valid where real time solutions can’t be delivered. If the pension scheme administrator/ trustee is aware that an SMPI could be misleading for a customer, being able to show a nil return might be better than something that could undermine confidence in the numbers provided.
Using the annual benefit statement should provide some consistency around projected benefits, although money purchase pension schemes may use different rates of return for even the same asset class, meaning that a higher projection won’t necessarily mean the scheme is delivering better value. As a provider of modern pension schemes our customers are used to accessing apps that provide the real time position of their pension benefits, with the ability to model their
But where real time data can be provided, regulators should perhaps think about mandating that requirement. Over time the number of schemes that can’t provide accurate data will decline, and we can move forward with the kind of interactive dashboard experience people need to help them plan for the future. If we start with too much of a compromise, the consumer’s experience, and the dashboard’s utility, could be lacking from the outset.
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INNER WORKINGS
OPPORTUNITY KNOCKS
This September will mark the arrival on the scene of a new generation born with a silver spoon in their mouths, or at least silverplated. Those who have for years advocated that encourage saving and investing early will create a new wealthier generation are about to witness the emergence of the first batch of 18-year-olds with maturing child trust funds. This is particularly significant as a large amount of these will not come from traditionally wealthy backgrounds and are not part of the standard trust fund set. However, thanks to a government initiative, a large number will reach adulthood in possession of a significant asset before they even start their working lives.
The concept of inculcating habits in the young is an old one. Give me the boy for the first seven years and I will give you the man is a maxim of the Jesuit order, widely attributed to their founder Ignatius Loyola but also by some to Aristotle. The idea that the formative years establish the type of person that a child will become is widespread and its essential truth is widely acknowledged as being true.
Given the early start to the investment process that is automatically given to those who have been part of the child trust fund scheme, this process should have inculcated a good savings habit early in the child’s life. The opportunity is now there to build on this to cement good savings habits throughout the child’s life by The then Chancellor Gordon Brown setup the persuading the majority of those with maturing child trust fund scheme with the idea of creating funds to keep going with their investment a situation where “every child has assets and approach. wealth and that no child is left behind”. With the government providing an initial deposit and For those who have gone from school straight a booster at the age of 7, the idea was to ensure to work, the auto-enrolment process is also a basic level of investment and allow others nudging them towards wealth accumulation such as parent, godparents, grandparent, to top and thinking about their long-term finances. up the amount and therefore speed its growth. This is creating a golden opportunity for that generation to plan early for their long-term The equity of the system was boosted by giving financial security. twice as much to those from disadvantaged backgrounds. The key will be to make it easy for them to page 18
continue their savings, in order to build on this very solid foundation and produce a new generation who are automatically inclined to look after their financial health – a group who see monitoring their affairs as something they would do as assiduously as they would monitor their looks and who would go to a financial adviser as readily as they would go to a gym. In order to achieve this, we have to remember that this generation, Gen Z, are digital natives. This means that any solution must be a primarily digital path, first and foremost. Companies wishing to engage with these young people need to be able to interact with them in the way that is familiar to them. Digital portals, smart apps and real-time information are essential to engage them and enable them to see what they have already accumulated. It’s also key to provide them with the tools to see what the future possibilities are if they continue to let their investments grow and what options they have to build them even further. For those that have moved into the workforce, these are essential tools if we are to ensure that
the good habits of childhood are not dissipated in the excitement of getting access to what will be, for many of them, their first independently owned financial asset. CTFs were initiated before the cloud-era and therefore much of the existing data is residing on traditional systems. Making it easy for the policy owners to transfer these to new products on modern cloud-based platforms, platforms which can deliver the type of online control that Generation Z demands, is an essential part of any strategy for holding on to these investments and letting them grow. Providers who haven’t got the capability to provide the digital experience that these youngsters demand will face the prospect of losing their customers, either because they wish to spend the money immediately or because they want to move it to a financial provider more on their own wavelength. Those without these capabilities need to look immediately at how they can provide the type of digital ecosystem needed. There is a lot of investment at stake for those who are bold enough to see the opportunity.
by Tom Murray Head of Product Strategy LifePlus Solution, Majesco page 19
RETIREMENT PUZZLE WHY VALUE PROBABLY ISN’T DEAD
by Alex White, Head of ALM Research, Redington Value investors have not had the easiest time over the last couple of decades. Take the Fama-French factor as an example, which is down 54% from its 2006 peak, and is in a 13-year drawdown with no obvious way out. Unsurprisingly, this has led to a number of legitimate (albeit largely ex-post) arguments that, perhaps, the world has changed and the factor isn’t relevant anymore. Common arguments are the growth of tech and a ”winner-takes-all” monopoly environment.
Perhaps surprisingly, fewer arguments seem to have been raised against other struggling premia, such as EM (a simple long MSCI EM, short MSCI World strategy would be down 48% from 2010, and down further on a beta-adjusted basis), or commodities (excess returns down 71% since 2008). This may be because those premia are more intuitive. However, it’s difficult to see why value - at least sector -neutralised value - would never work. While the likes of Amazon, Apple and Microsoft have clear business models, the economy would not work if all companies were set up like, say, Uber. Individual companies can thrive from growth in their
page 20
multiples, but at an aggregate level it’s hard to avoid the conclusion that the value in equities is driven by creation. More prosaically, we can’t all be start-ups, and some companies have to make money. If all $60bn firms posted $3bn losses each quarter, something would have to give. At that extreme point, profitable companies should outperform loss-makers. Of course, we may be a long way away from that, and value may still fall further. One difficulty is that, if value does still work, even if it’s weaker than before, then the spreads in valuations are much wider because it’s underperformed. That is, cheap companies have underperformed expensive companies and are now cheaper, while more expensive companies are now even more so. Over the very long-term value has performed, with a 3.2% log return, 12% volatility, and a p-value of 0.9% of having a positive mean return. However, it’s possible that the world has changed. AQR are hardly neutral observers, but have put out some excellent pieces addressing some of the specific arguments against value. Rather than duplicating that, I’ll approach this from a slightly different angle. The primary driver for a lot of these theories is value’s underperformance. This is valid, as new evidence should change your opinions. However, it falls victim to the Texas sharpshooter fallacy. If I fire a rifle at a target and hit the bullseye 3 times in a row, that’s impressive; if I fire a machine gun and 3 of the many bullets hit the bullseye, that’s less impressive. Similarly, with plenty of risk premia available, what is the probability of getting underperformance like this? To answer, we simulate a number of uncorrelated risk premia with 12% volatility (in line with the value premium), and assume a modest but worthwhile 0.2 Sharpe. The first table below shows the probability of at least one asset losing at least x% over n years, assuming 10 risk premia. The second shows the chance of losing at least 50% over 15 years for different numbers of risk premia. Even if you only believe in 5 risk premia across all markets, it’s still not that unlikely. Crucially too, this is picking a random time period or fixed length, not the worst period of the worst length from a longer history, so there’s more bias in the history even against these figures.
5
10
15
20
0%
98%
95%
91%
87%
-10%
89%
86%
82%
77%
-20%
65%
68%
67%
63%
-30%
33%
45%
47%
45%
-40%
11%
22%
27%
28%
-50%
2%
8%
11%
14%
Loss\Years
Number of Premia Probability of a 50% loss over 15 years
5 6%
10 11%
20 21%
35 35%
50 45%
The key point is, even if all your risk premia are intrinsically valid, some of them will fail, and some are likely to fail badly over a prolonged period. The explanation for value’s underperformance may simply be noise - that risk premia sometimes underperform. As long as you have a balanced, diversified portfolio, some strategies will struggle. The price of a robust portfolio is that at any point, some parts of it will be underperforming.
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search & selection
LIGHTS, CAMERA, ACTUARY!
Bolton Associates’ focus is specifically in the non-life actuarial space; the largest dedicated GI actuarial specialist in the market. Working throughout the insurance market, the consultants at Bolton Associates offer an exceptional service, managing the process with the utmost tact and respect for all parties. We are passionate about our market, taking great interest in the insurance world as a whole, keeping up with trends and changes, and maintaining our everexpanding network. We are good at what we do, because we enjoy what we do.
The next focus for Bolton Associates’ Spotlight page, is an interview with a leading actuary within one of the market’s MGAs. As the Lloyd’s and London Market has evolved, more and more new entrants are turning to the Managing General Agent set-up option. Many of these new businesses are sitting under umbrella MGAs, who have a number of individual underwriting teams, and assist with providing capacity. These MGAs understand the value of analytics and actuarial input, and for the next few months Zoe Bolton will be talking to the senior actuaries in these firms, getting a brief insight into their career paths and visions for the future. This month Zoe talks to Chris Tang, Chief Actuary in Mulberry Risk
What is your current role, and how did you end up in it? I’m currently the chief actuary in Mulberry Risk. My responsibilities cover all deliverables that we provide to clients, which can vary from high-level strategic reviews to the nitty-gritty of revamping algorithms. Mulberry Risk was founded by my previous manager back in Marsh and when the opportunity came calling (in a pub naturally), I decided to join the start-up life that would allow me to shape unique product offerings to a market that has at times been plagued by legacy inertia. What is the defining moment of your career to date? Probably when I was spread-betting into the early hours after a certain event and realised that I need more physical exercise. That and the subsequent realisation that I can apply my actuarial skills well in wider areas. On a more serious note, I would say my experience in Marsh has played an important role. Not only did it introduced me to the more commercial elements of the market that would serve me well later on, but also the network around the City and their interactions with various bits of the industry. In your opinion, what prepared you best to take on your current role? Taking on board opinions, criticism, and iterating is the quickest way to improve. There are many characters in the market, both in and out of the actuarial field, that have unique insights into their domain of expertise. Factoring in and acting upon each comment along the way tend to accumulate in a big way. What is the biggest challenge you face in your role within this market? Time! Currently we are finding many clients that are receptive to our ideas and ethos on their books of
business. Balancing my schedule amongst deliverables, developmental work, and building up a young team can be fairly hectic. How does your actuarial training and background assist in your day-to-day role now? The training provides a solid base of various technical skills that allow actuaries to interrogate and reason with the data observed/ available. However, I see the real value stems from building upon those skills and being able to answer the inevitable follow-up questions of “so what?”. The actuarial knowledge may help one to avoid pitfalls and get you halfway, but it will still need the commercial know-how to finish the journey for our clients. When did you first join the Institute & Faculty of Actuaries, and what advice would you give to those students looking to emulate your career path? I joined just under a decade ago in 2010. In terms of advice, whilst it’s nice to finish and have the exams out of the way, there is always something new to learn as technology evolves. Get involved in as many projects as possible, take risks in voicing opinions, and above all learn from mistakes and failures. If you had your time again, what would you do, career-wise? Probably try and learn skiing at a young age and be a semi-pro later on whilst working as a quant-hedge fund programmer in a chalet somewhere in the Swiss Alps drinking mulled-wine for breakfast. Please share your favourite piece of trivia with our readers! Steve Jobs once agreed to autograph a piece of Apple keyboard only after he ripped out the keys that he deemed unnecessary using his car keys, declaring in the process that he’s “changing the world, one keyboard at a time”.
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INFORMATION EXCHANGE
HIDDEN IN PLAIN SIGHT
Hidden in plain sight: Using data enrichment to understand the true overall risk of a policy With a hardening insurance market, it is more important than ever that insurance providers gain a total view of an individual’s risk at point of quote. Not just based on their own data but the market’s experience of that individual. And not just the proposer but also other individuals named on the policy. Every individual on a policy affects its risk profile, and so knowing as much as you can about each policyholder, allows for accurate pricing at point of quote. Verifying true identities has historically been time consuming and difficult but a combination of data sources which bring together different information and insights, can give a clearer view of an individual’s risk. A person’s claims history, along with public data and customer-hosted private data can highlight areas of exposure or the need to adjust prices to meet the true risk that has been identified. Developing this fuller picture also helps protect customers from the risk of underinsurance – a problem that often only comes to light at claim. This level of data enrichment is already happening in motor. Through significant advances in understanding private motor risk and the breadth of data now available at point of quote, motor insurance providers are uncovering risks on named drivers, by looking at prior cancellations, gaps in
cover, and NCD entitlement that would otherwise go unseen. The logical next step is to take many of the principles being applied in motor to the home insurance market. Home insurance market could face a ‘perfect storm’ With fraudulent claims in household insurance increasing by 52% last year , household finances under pressure and predictions of a drop in gross written premiums for the home insurance market due to the COVID-19 pandemic, the insurance sector needs to mitigate against what could be a ‘perfect storm’. The ‘fraudster’ and the ‘chancer’ who deliberately change material facts to lower their insurance quotes are not going to stop – after all insurance is often seen as a grudge purchase. Therefore the ability to correctly validate identity and risk is crucial to ensuring customers are priced fairly and accurately and insurance providers are able to create a balanced and profitable portfolio. A consumer study we conducted last year underlines the greater depth of understanding data could bring to household insurance risk assessment. 66% feel it’s acceptable to manipulate quote information The study found that 66% of UK homeowners and renters feel it is ‘somewhat’ or ‘completely’
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acceptable to manipulate information given to price comparison websites to obtain a lower quote. This was particularly prominent amongst those who have filed a claim in the past and seen their premium increase. The study also found 59% of UK homeowners shop around time their policy is up for renewal to get the best value for money. Risk beyond the proposer As with motor policies, many home insurance policies are taken out with a joint policy holder – for example, of the 2 million quotes that we receive through the LexisNexis® Informed Quotes platform each day, 60% of the personal lines quotes include either a named driver or a joint policy holder. It therefore makes sense to apply risk assessment processes to both parties on the policy, much in the same way the market is now able to understand named driver risks. Address history for assessing household risk For home insurance, address information holds far more predictive power than the market may appreciate. From our research we have identified quite significant differences to loss costs, relative to total book based on the number of previous addresses a policy holder or holders has had. • No previous addresses show a 27% increase for a single policyholder and 16% for joint policyholders
• Single policyholders with a history of four addresses, show a 20% increase and 16% for joint policyholders • For both single and & joint policyholders with one previous address, the change in loss cost relative to total book decreased by 12% These findings are not too dissimilar from the risk we have seen related to changes in cars based on analysis of policy history data. While switching cars is easier than switching address, recent analysis shows the more often people switch vehicles the more likely they are to cancel. Home claims Marketwide home claims data is the big next step in understanding the true risk in the household insurance market. The timing for this development in contributory data is ripe and seed contributors are already on board. It is these sorts of insights that will allow insurance providers to understand their customers and the risk they are underwriting to a much more granular level than has previously been possible. Building a complete view of the customer across all their insurance requirements, rather than a siloed view, based on just one policy will allow insurance providers to meet intensifying customer expectations and get a 360 degree of the risk of that customer to their business.
1. https://www.cifas.org.uk/newsroom/household-motor-insurance 2. https://www.insurancetimes.co.uk/news/home-insurance-market-set-to-contract-by-14-as-a-result-of-covid-19/1433681.article 3. LexisNexis Risk Solutions UK Home Insurance Study- Data collected June – July 2019.Core Sample: 3,083 Residential Homeowners in the UK +446 boost - Recent claims filers (filed claim in past 5 years.) Data of 1,576 Homeowners and 1,507 Renters 4. LexisNexis Risk Solutions research
by Neill Slane, Snr Manager, Home Insurance, LexisNexis Risk Solutions page 25
search & selection Data Scientist
Pricing Actuaries
General Insurance £90,000 Per Annum London
General Insurance £Market Rates City of London
Growing Insurtech company is seeking a skilled Data Scientist who has experience working with underwriting and actuarial teams and welcomes candidates from a Pricing background. Your responsibilities will concentrate on creating innovative machine-learning solutions, generating advanced analytics, and contributing to the firm’s direction. Proficiency in R or Python is necessary. .
We are working with several Lloyd’s Reinsurance brokers and Carriers who continue to expand their analytics offering. Pricing candidates who are close to qualifying and up to a couple of years post qualification experience should get in touch. Opportunities range from large global organisations to smaller, niche broking houses. Long-term career growth exists.
REF: ZB 001454 JC
REF: ZB 001468 ZB/CS
Reserving Actuary
Commercial Motor Pricing Manager
General Insurance Up to £90,000 Per Annum London
General Insurance £100,000 Per Annum Greater London
International (re)insurer seeks newly qualified Reserving Actuary with preferably London Market experience. Supporting the Head of Capital & Reserving, the candidate should have an understanding of Solvency II (in particular Solvency II Technical Provisions) and Lloyd’s, coupled with strong communication and experience of man-management. ResQ, Advanced Excel, VBA Access desirable. .
Personal Lines Insurer requires experienced Motor Pricing Manager. You will be delivering pricing for all Commercial Motor products in support of day-to-day trading performance targets and the pricing strategy. Strong understanding of Motor Insurance Market and Radar software experience required.
REF: ZB 001450 SC
REF: ZB 001474 OG
Marine Pricing Actuary
Nearly/Newly Pricing Actuary
General Insurance £120,000 Per Annum London
General Insurance $130,000 SGD Singapore
Exciting opportunity for a qualified Pricing Actuary to join a leading insurer in the Marine team. This hire will report into Head of Specialty, work closely with the underwriting team and have 2 direct reports. London Market Marine Pricing experience is a must and excellent communication skills are required. This is a real opportunity to develop within this senior role . and work closely with the business.
Reputable broker is looking for a newly qualified student to join their expanding team. They are looking for someone with a minimum of 5 years London market pricing experience and reinsurance experience is advantageous. This leading organisation highly values their actuarial team and exceptional communication skills are necessary as you will be working closely alongside underwriters and brokers.
REF: ZB 001475 MM
REF: ZB 001477 MM
www.bolton-associates.co.uk page 26 +44 (0)207 250 4718 Bolton Associates, 5 St. John’s Lane, London, EC1M 4BH