ACTUARIAL POST FOR THE MODERN ACTUARY JULY 2020
INSURANCE IN A CONNECTED WORLD
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Innovative Firm
WIDER FIELDS FLEXIBLE LOCATION
STAR6251
SPECIALTY LINES RESERVING Growing Insurer
NON-LIFE LONDON
STAR6272
Part-Qualified / Qualified
Specialty Insurer
NON-LIFE LONDON
STAR6264
Analyse the results of sporting events to provide recommendations for trading models. You will be working on a model to predict the optimal ‘back’ and ‘lay’ volumes traded on multiple exchanges.
Our rapidly-growing client requires a reserving expert to manage a dedicated team. You will work closely with the pricing team, and have strong ResQ and Excel skills.
Seeking a candidate with strong communication skills and Lloyd’s reserving experience to review reserving output, embed a new reserving engine and lead a broad range of projects.
CRISIS MANAGEMENT PRICING
COMMERCIAL LINES PRICING
RESERVING ON THE SOUTH COAST
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Lloyd’s Syndicate
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STAR6268
Major Insurer
NON-LIFE SOUTH EAST
STAR6262
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Global Insurer
NON-LIFE SOUTH COAST / LONDON
STAR6247
Develop and maintain pricing models, work with underwriting to price risks, and help to create new products for the Crisis Management team of this Lloyd's syndicate. Excellent teamworking skills will be required.
Seeking a Senior Pricing Analyst to lead the development and delivery of technical pricing across a suite of products, identifying and validating data requirements, defining methodologies, and building models.
Take responsibility for a large portfolio of business lines, managing the quarterly reserving exercises, contributing to the Solvency II reporting, and supporting other business functions, as required.
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Lloyds Syndicate
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LIFE LONDON
STAR6263
Be a key member of the Risk Management team, managing the validation of the Internal Model. You will have strong skills in Excel, and either Remetrica or Tyche, and the ability to interpret data and articulate your findings clearly.
Take up this opportunity to join a thriving London Market organisation as a Pricing Analyst. Pricing or reserving experience is required, whilst London Market and SQL experience would be advantageous.
Take the lead on pricing matters in this newlycreated, strategic role, working closely with the senior leadership team. You will be given autonomy to drive advancement and sophistication in the way the firm approaches pricing.
EXPERIENCE ANALYST
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MOVE TO LIFE
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Leading Reinsurer
LIFE LONDON
STAR6237
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STAR6254
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LIFE SCOTLAND
STAR6261
Join a leading reinsurance organisation, carrying out experience analysis work, improving the tools and processes used, and demonstrating the impact of underwriting rules on pricing.
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STAR6256
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STAR6258
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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 With pubs reopening and the 2 metre distancing rule being reduced to 1 metre a lot of commentators were saying this may be the beginning of the end of the virus, however, hot on the heels of opening time bell being sounded came the news that a number of pubs had to shut because of positive COVID19 cases being recorded, so perhaps the champagne needs to be kept on ice a little while longer. As lockdown eases Ewen Tweedie and Colin Cummings from PwC look at how life insurers can address increased customer demand for protection. Staying on topic Dale Critchley from Aviva looks at his role of supply teacher to his children and applies it to Home schooling to retirement provision in one easy lesson. Making the Connection is how Jeffrey Skelton from LexisNexis starts examining connected insurance and how the insurance industry needs to keep evolving. On the pensions front Fiona Tait from Intelligent Pensions tackles the most complained about pension product of all, SIPPS. These and many more intriguing articles are waiting inside this month’s edition of the magazine. I trust you will enjoy them and I look forward to welcoming you all back again 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
13
News
6
Movers & Shakers
8
City Dealings
9
Making The Connection
10
Telematics With Vision
12
Tait’s Modern Pension
14
Pension Pillar
17
Solvency II
18
Inner Workings
20
Lights, Camera, Actuary
22
Retirement Puzzle
24
14
22
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NEWS JULY Comment on House of Lords amendments to Pension Bill Kate Smith, head of pensions at Aegon, comments on the House of Lords amendments to the Pension Schemes Bill 2020. The House of Lords agreed the following amendments: • To prevent financial transactions taking place on dashboards to prevent scams, and
• Blocking commercial dashboards until the MaPS dashboard has been operating for a year. The purpose of pension dashboards is to let savers see all their pensions online in one place. This will be a valuable way of savers keeping track of their pensions. But once they have found their
Government reveals plans on small scheme consolidation n a little noticed sentence in last week’s consultation paper on the charge cap for automatic enrolment, the government has indicated that it plans to move forward with plans to press small pension schemes to consolidate. The comment is made in a paper about the charge cap for DC schemes, but once the principle is accepted it could also apply to DB schemes according to LCP partner Steve Webb. In paragraph 39 of its consultation on the charge cap, DWP wrote (bold added): READ MORE
pensions, savers may wish to start consolidating these into modern schemes which tend to have not only lower charges, but also better engagement tools to help them plan for retirement. “Pension scams are on the rise, and this is a risk... READ MORE
TPR updates Corporate Plan to address COVID challenges Protecting savers and driving up standards in workplace pensions remains at the heart of The Pensions Regulator’s new Corporate Plan The plan for 2020-21 sets out TPR’s priorities for the year ahead and has been adjusted to reflect the realities of how the pensions landscape has changed because of the pandemic. However, it also demonstrates TPR’s ongoing commitment to tightening its regulatory grip
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through its clear, quick, and tough approach and highlights the importance of working with key government and regulatory partners. TPR’s Chief Executive Charles Counsell said: “These are unprecedented times and TPR has responded swiftly and decisively to support savers and those who run pension schemes. READ MORE
NEWS Global insurance industry to recover strongly from COVID19 The insurance industry is set to overcome this year’s COVID-19induced global economic recession, the latest Swiss Re Institute’s sigma says. The sharpest economic contraction since the 1930s will lead to a slump in demand for insurance in 2020, more so for life products, with global premiums expected to contract by 6%, than for non-life covers (-0.1%). However, total premium volumes will return to pre-crisis levels in 2021 already, alongside more protracted recovery in the global economy. There will be sector divergence, with nonlife premium volumes above pre-crisis levels, and life below. The emerging economies, led by China, will underpin the insurance market comeback. READ MORE
IFRS 17 Standard clears final hurdle
The International Accounting Standards Board (IASB) has announced that the final insurance contracts standard IFRS 17 (2020) will be released on Thursday 25 June 2020. The culmination of almost 23 years of discussion, IFRS 17 will take effect with annual reporting cycles beginning on or after 1 January 2023. IFRS 17 (2020) reflects the results of an in-depth consultation process of the Standard proposed in the Exposure Draft Amendments to IFRS 17, published by the IASB in June 2019 in response to feedback on IFRS 17, as originally issued in 2017. In response to those consultations between the IASB, the insurance industry, regulators and accounting bodies, significant changes were made to that Exposure
Draft: • The extension of the effective date to 1 January 2023 from 1 January 2022 proposed in the Exposure Draft. • The ability of insurers to recognise gains on the initial recognition of reinsurance contracts held, which cover onerous underlying contracts. • The clarification of the treatment of the contractual service margin (CSM) attributable to investment-return service and investmentrelated service. • The expansion of the risk mitigation option to include reinsurance contracts held where they are used in a manner similar to that of financial instruments. Ralph Ovsec, Senior Director, Insurance Consulting and Technology,
READ MORE
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Zurich and BLM launch industry guide to help fight EOW fraud Property claims experts at Zurich UK and insurance risk and commercial law firm, BLM have collaborated to create a best practice guide for the insurance industry advising fellow professionals how to detect and fight fraud related to escape of water (EOW) claims. Launched today, the guide outlines the scale of the problem using the ABI data available, stating that its members pay out approximately £2.5m every day on EOW claims. It was, therefore, designed to highlight the key fraud indicators that those in the industry should consider when dealing with reported EOW damage to enable early detection of fraudulent claims. These include questions that loss adjusters and insurers can be asking and factors that they READ MORE
MOVERS & SHAKERS The latest moves and appointments from the actuarial marketplace Dalriada Trustees appoint actuary David Fogarty as Director
Tan Suee Chieh becomes IFoA President
Dalriada Trustees has announced the appointment of David Fogarty as Director in the London office. David joins Dalriada from Mercer where, over a 30 year career with the firm, he held a number of senior roles including leading the combined actuarial and investment business in the UK from 2017 to 2019 and the European Financial Strategy Group from 2009 to 2017. David will act as a professional trustee for Dalriada focusing on scheme boards where there is a specific requirement for a professional trustee with risk management and/or investment expertise while supporting the wider team on investment and risk management issues. Dalriada has grown its team of professional trustees across the UK by 12 in the last year, as the demand for experienced and knowledgeable trustees on boards grows. The firm expects to make further professional READ MORE
K3 Advisory hire Thomas Crawshaw as Snr Actuarial Consultant
Nikhil Rathi appointed as new Chief Executive of the FCA HM Treasury have today announced(link is external) the appointment of Nikhil Rathi as the new permanent Chief Executive of the Financial Conduct Authority (FCA).
The Institute and Faculty of Actuaries (IFoA) is delighted to announce that Tan Suee Chieh FIA has begun his presidential term, taking over from John Taylor FFA. Suee Chieh has been part of the Presidential team for the past year, in the position of Presidentelect. Louise Pryor FIA joins the team as the next President-elect. Tan Suee Chieh, IFoA President, said: “The global Covid-19 crisis has prompted new ways of doing things both in our professional and personal lives. We now have a unique opportunity to shape the future, instead of simply responding to it.
Nikhil is currently the Chief Executive of London Stock Exchange plc. From September 2009 to April 2014, he was Director, Financial Services Group at HM Treasury. In this role, he led the Treasury’s work on the UK’s EU and international financial services interests. Nikhil is expected to take up the role in the Autumn. Chair of the FCA, Charles Randell, said: I warmly welcome Nikhil to the FCA. I look forward to working with READ MORE
READ MORE
K3 Advisory has appointed Thomas Crawshaw as a Senior Actuarial Consultant. Adam Davis, Managing Director at K3 Advisory, commented: “Our unique approach to smaller schemes
has resonated with the market and we are seeing increasing demand for our services, despite the coronavirus challenges. As we grow, we will continue to hire the very best people to not only maintain but to further enhance the
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services we provide. “ Davis continued: “Thomas is a welcome addition to the team, bringing with him significant depth of knowledge with over 15 years of experience advising READ MORE
CITY DEALINGS Keeping up to date on acquisitions, mergers and the dealings of companies in the city
Redington advises General Healthcare Pension on buy in deal After seeing its funding level drop to less than 70% during the 2008 financial crisis, the Trustee of the General Healthcare Group Pension & Life Assurance Plan has now secured a £150million insurance contract with Aviva to cover all 700 of its defined benefit members. The deal took place on 16 March, during the height of the COVID-19 market turmoil. Despite this the transaction completed smoothly, well ahead of schedule and with scheme assets expected to cover all subsequent wind-up costs.
Rita Powell, Founder of Inside Pensions & Chair of Trustees of the GHG Pension Plan, said: “We knew we needed a radical change in approach to overcome our difficulties, but as a small scheme with minimal resource we had to think differently to find the right solution. By focusing carefully on what really mattered and working closely with the sponsor and our investment and governance experts, the Trustee was able to come up with a long-term funding plan that worked for all parties.”
READ MORE
COVID19 may be watershed for climate resilience investment SHELL WRITE DOWN QUESTIONS INVESTING IN FOSSIL FUELS READ MORE
COVID-19 provokes turning point, as industry leaders drive action to invest in climate resilient infrastructure Finance and infrastructure investment experts use London Climate Action Week to stress the need for robust climate risk data and analytics, incentives and collaboration. With US$90 trillion in infrastructure investment needed globally over the next decade to achieve global growth expectations, success will not be possible without a systemic shift in the way projects are financed to build resilience to climate change, warned a group of industry leaders yesterday READ MORE
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Structured products are an accident waiting to happen Structured products are an accident waiting to happen for many retirees, with the inflexible terms and conditions of many such products likely to have been tested by the selloff earlier this year to leave investors exposed to losses, according to 7IM. Many structured products have terms whereby they can absorb some level of losses before the end investor starts to lose money. The scale of the falls seen in 2020 - when markets shed as much as a third of their value – means there is a real chance that many products will now be “underwater” says Matthew Yeates, Senior Investment Manager READ MORE
INFORMATION EXCHANGE
MAKING THE CONNECTION Connection can mean many things and right now – certainly connection with families and friends has never felt more important. The global pandemic has created new ways of working and driven new consumer behaviours that insurance providers need to understand. Connection to the right data insights at the right time will help form that response. Underwriting accuracy relies on making connections with data, joining the dots to better understand the risk. The volume of data available to the insurance market is growing exponentially, in-turn reducing the distance between the dots. When you consider the data from connected cars, homes, offices, personal devices – the data gaps may disappear altogether offering great potential for a new era in insurance. The mass adoption of smart devices means that a future in which an insurance application can be completed in less than a minute or a claim settled in the same time is not that far away. Data is the backbone to this capability. It comes down to extracting data that is meaningful and actionable then using that data throughout the customer journey to reduce complexity and bring simplicity. Seamless connections to one of the most powerful and growing hubs of insurance specific data is democratising how the market accesses and uses data. Home grown data In the UK, industry contributed data has created significant efficiencies in motor underwriting –
NCDs can be validated in real-time – speeding the delivery of quotes and reducing the onus on the customer to provide proof. The motor market is just starting to use policy history data and quote behaviour to help determine risks related to gaps in cover, cancellations as well as understanding named driver risk and can assess consumers more fairly based on their insurance policy history not just their credit or claims history. The next phase in this process is to bring in deeper, more granular claims data contributed by the market. This is starting in home, followed by motor and commercial property. Bringing in greater insights about claims – the circumstances, the settlement figure – will add a further layer of granularity when assessing risk. Cross fertilisation As the data insights grow, the lines will become more blurred between home, personal motor and commercial. If you understand the flood risk for a property and the crime level, applying that intelligence to underwriting a motor policy for the same individual makes perfect sense. By the same token, real-time data on flood events offers the opportunity to mitigate the risk for both the property and the vehicle. The next stage will be to bring the level of data enrichment we’re seeing at point of quote to transform the claims process and help improve the sector’s resilience to fraud.
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Consumer needs are changing
with insurance companies which will be crucial in enabling consumers to access insurance based on their cars’ connectivity and ADAS features.
Cross-pollination also means a more cohesive view of the customer can be achieved and this will put insurance providers in a far stronger position to support their changing needs, particularly in response to the global pandemic. Most customers tend to buy insurance hoping they will never use it. If insurance providers have a greater understanding of their customers, the opportunity to segment and provide tailored services becomes possible, moving away from price driven decisions. Insurance becomes protection every day rather than just when disaster strikes. The flow of data from connected products and assets really adds to that exciting potential as it gives insurance providers an opportunity to understand changing risks throughout the lifetime of the policy. The Internet of things and connectivity is taking the understanding of risk to new levels. Insurance providers in the not too distant future may soon be able to determine the risk related to the vehicle, the property, the mobile phone based on both static and dynamic data, and combine that with data on the individual. Using those insights throughout the customer journey will help ensure the customer has the right cover for the risk at the right price and that they are supported during the lifetime of the policy. Most importantly, they may have a greater understanding and appreciation of what they are buying. Vehicle centric insights That process is already well advanced in motor. We’re now starting to see the framework being created for connected cars to communicate directly
But right now by linking data on the ADAS features the vehicle was born with to real life insurance claims, we may be able understand what features have the most impact on reducing collisions. This creates a great opportunity to educate and reward consumers for the safety features in their vehicle as well as how well they drive in that vehicle. Connected homes Connectivity in our homes and buildings also holds the opportunity to change the market dramatically, but here change is happening at a slower pace. While reports suggest the pandemic caused a spike in investment in home technology1 and video gaming2, smart home gadgets are still relatively expensive, and the reason for purchase is more to do with convenience or a previous escape of water claim than for a discount. However, in the next few years insurance providers may take further steps to encourage adoption to help understand the impact of smart home tech on risk and also push towards a path of claims prevention. Consent to connect There is little doubt that the demand for insights from data is only going to grow and data on and from assets will be a big part of this. Data can do a whole lot more than help price risk – it can help the market deliver the protection consumers want. As such, consumer consent must be a key focus for the sector and its data partners as part and parcel of the process of building products and services around connected data.
1. https://uk.pcmag.com/how-to-work-from-home/125624/covid-19-creates-soaring-demand-for-pcs-but-the-surge-isnt-expected-to-last 2. https://www.bbc.co.uk/news/business-52555277
by Jeffrey Skelton, MD, LexisNexis Risk Solutions page 11
TELEMATICS WITH 2020 VISION
by Mike Brockman, CEO, ThingCo There is a growing consensus that our travel habits could be changing for good. While many remain working from home, as the lockdown in the UK has eased - car use is being positively encouraged for those that need to travel to work. After almost two months of severe travel restrictions and a dearth of claims, the motor insurance market will see an uptick in losses as more people hit the road for work and/or leisure. Consumers will look for real, tangible value
certainly want different, more flexible types of motor insurance covers that offer real, tangible value. Some will question why they should have to pay an annual motor insurance premium when the car is not in use most of the time. Others may have increased their car use in preference to using public transport due to the perceived higher health risk and/ or the increased convenience of the car and want to feel safer and rewarded for driving well.
Only a couple of insurers took the very unusual step of refunding customers during the lockdown, based on the low claims volumes experienced. This goodwill gesture was welcomed but probably did little to help the market’s reputation.
Add to this mix, the disruption to the car market with production temporarily halted, car showrooms closed during lockdown and new car sales at record lows. The UK car parc may therefore increase in age which means the latest advances in ADAS and other high tech safety features will be slower to reach drivers.
Consumers have long memories and with predictions of unemployment levels not seen since the 1980s, many will come out of this chapter in world history wanting a sense of normality but also wanting businesses to be more flexible to their needs. They will almost
That might be good news in one way as it could alleviate some of the higher claims costs associated with technologically advanced cars but the obvious downside is we may see more people hurt than might otherwise have been the case, leading to higher personal injury costs.
Telematics – but not as we know it Telematics offers the industry an opportunity to better serve consumer needs, reduce road casualties, lower claims cost and provide fairer premiums. But not telematics as we know it today. The industry has found it difficult to make telematics work economically across all sectors, since essentially the technology has been given away free and the risk benefit to outweigh the cost is difficult to achieve. However, technology has developed fast and now offers insurers a way to make their telematics propositions simple, transparent and engaging, to provide consumers with tangible added-value. Machine learning, AI, video, intelligent voice – even solar power can all work together to offer greater efficiencies and a better customer experience based on real-time driving data. We no longer need to build and host huge data platforms when cloud platforms enable scalable data management.
Getting asset value from telematics
insurer you are already offering more and bringing costs down.
creating a safe but miles-based product for the customer.
By exploiting these advances in technology, insurers can get asset value from telematics i.e. extract greater economic value from the technology than its cost. That means using the data to mitigate risk, manage claims effectively and lower costs.
Consumers have been buying dashcams in their droves so there’s clearly an opportunity to provide a device that actually gives them benefits over and above cheaper insurance.
Bringing these elements together in one package not only makes it more interesting, it allows insurers to demonstrate how they are making the data work for the customer – they can talk about the collision response, the claims process, offer incentives for safer driving.
It starts with making the data collection device itself desirable so that consumers value it in its own right. Low cost, smart and discreet self-fit solar-powered devices are just starting to be tested by the market to help solve the two main challenges insurance providers have always faced – the first, getting high quality data from the car to deliver behaviour-based insurance the second, getting customer interest and trust in the proposition. If the device looks sleek and techy like other connected consumer products, does what it promises (accurate data, collision detection, voice support, smart FNOL, engagement) to make driving safer and claims less of a pain for the customer and the
Using solar powered devices means there is no direct connection to the car, so it is easy to fit. This all helps to position the device itself as a real premium product providing many in-car benefits for both consumer and insurer. Telematics must deliver in lower claims But ultimately, telematics has to deliver in lower claims loss ratios. Consumers need to be incentivised to drive safely and the data should be used to drive the FNOL process to help cut fraud, speed claims handling and deliver a great customer journey. Intelligent Voice can also transform the FNOL process, providing immediate support when it’s most needed. All this means insurance risk can greatly be reduced real-time
It’s all about making consumers feel empowered. Technology is changing; consumer needs and attitudes are changing – they need flexibility; better value, better service, better engagement. The pandemic has made us all think more deeply about what is important and insurers must take this opportunity to change the way that they think about telematics. With the ability to help manage risk, improve the claims journey, provide fairer premiums, the next generation of telematics could turn the motor insurance grudge purchase into something consumers really start to value.
TAIT’S
MODERN
PENSIONS
SIPPs – why bother? Self-Invested Personal Pensions (SIPPs) are the most complained-about pension product in the UK, representing 44% of the total number of pension complaints received by the Financial Ombudsman Service (FOS) in 2019/201 .This is in fact still a vanishingly small proportion, 0.5%, of the total number of complaints received by FOS but the uphold rate is one of the highest in financial services. Given this fact and their high-risk reputation is it still worth having a SIPP, or could they be replaced by one of the more modern communal solutions at a reduced cost and with lower risk? What’s gone wrong SIPPs give rise to complaints for a number of reasons, but there are 2 key factors that make them particularly susceptible to unsuitable advice: 1. They, together with personal pensions (the third most complained about form of pension), are the most common destination for defined benefit transfers. 2. They allow access to high-risk and unregulated investments which may be inappropriately marketed. Arguably neither of these issues is relevant to the SIPP wrapper itself – legislation has been notoriously contradictory regarding where responsibility lies between the various parties involved – but there is no denying that both result from the wide scope and flexibility of options available under a SIPP. The more choice people are given the greater the chance that they will make, or be led to, the wrong one. It is however this very flexibility that makes them so useful as part of a retirement plan. What are they good for There are 3 key groups of individuals who are most likely to have a SIPP. Client Type The Self-Investor
The Self-Employed
People approaching or in retirement
Probable Equirements The ability to invest into an individual portfolio of selected assets within a tax-efficient environment, or the chance to invest in commercial premises. Access to a non-workplace arrangement, the ability to save different amounts as and when profits allow, and to cease payments when they don’t. The ability to take advantage of pension freedoms and withdraw varying income or capital sums as and when required and delay annuity purchase until the most favourable moment.
Possible Alternative The only pension arrangement which offers a comparable investment range is the Small SelfAdministered Scheme (SSAS). Self-employed individuals can join a mastertrust and benefit from the lower charges and default investment strategies. Supporters of Collective Defined Contribution (CDC) arrangements argue that they are ideal for allowing flexibility of income at a lower cost and with reduced individual client risk.
Individuality There is in fact nothing much that a SIPP can offer that could not be achieved using another less risky vehicle, what makes them different is their individuality. Not everyone needs a bespoke suit, but they do fit better, especially if you are a less than standard size or shape. SIPPs were initially marketed at self-investors, who saw themselves as astute businesspeople capable of playing the market to their advantage or were looking to finance the purchase of specific shares or business property.This in fact limited their appeal since at the time contribution limits were much more generous under a SSAS and these would be preferred by those who could use them. This difference no longer exists however self-investors still form a relatively small part of the SIPP market. 1. Source: FOS Annual complaints data 2019/20
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The true advantage of a wide investment range is not investing in specific assets but the ability to create a balanced portfolio of assets which are capable of meeting individual objectives within acceptable risk parameters. This is particularly valuable when the aim of the plan begins to switch from capital accumulation to income production. A SIPP could be a suitable vehicle for any catchup contributions, particularly if these monies need to ‘work hard’ to achieve the required rates of return. It may also be useful to consolidate smaller pension pots into a single arrangement to create greater focus on the eventual goals. Pension freedoms SIPPs really come into their own for people who want access to their benefits. Both mastertrusts and CDC schemes are capable of offering flexible income solutions but relatively few do so. This may be because they are still relatively new to the market, but it is also more difficult for larger pension arrangements to accommodate individuality. During the accumulation phase this is less of an issue as everyone is just looking to build up as much money as they can; in decumulation it is trickier as withdrawals could be required at any time and in any amount and both the administration and investment strategy has to be capable of supporting this. It may be that in time the newcomers become much better at offering decumulation options but for the present the SIPP still reigns supreme.
by Fiona Tait Technical Director Intelligent Pensions
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PENSION PILLAR HOME SCHOOLING TO RETIREMENT PROVISION IN ONE EASY LESSON
by Dale Critchley Policy Manager Aviva the tax and NICs relief employees enjoy means that we don’t have to pay an income tax bill today on an employer pension contribution we won’t receive for many years.
ike many parents I’ve been a supply teacher to my children over the past few weeks, mainly drafted in to help with maths - it’s amazing what you forget! This week was all about fractions and percentages so when the Department of Work and Pensions published data of workplace pension saving trends it was an ideal opportunity to apply some of that arithmetic. The headlines show the huge success of automatic enrolment (AE) in increasing pension participation rates. 19.2 million workers are now saving in a workplace pension, 88% of those eligible to be automatically enrolled. But the report reveals a lot more about the UK’s workplace pension landscape than just participation rates. The total being saved into the UK’s workplace pensions was £98.4 bn in 2019, of which £26.2bn was from employee pension contributions and £9.6 bn from tax relief. Assuming this is just the relief on employee contributions, this tells me that the average rate of tax relief is 26.8%. The proportion of relief going to higher rate tax-payers in workplace pensions must be roughly one third, with two thirds going to basic rate tax payers. The figures don’t tell me anything about the tax relief on the £62.6bn of employer pension contributions however. In the UK’s “exempt, exempt, taxed” system of taxation for pension contributions, investment growth and income in retirement, there’s no income tax or national insurance paid on employer pension contributions until retirement. This is where the majority of the £53bn of tax relief shown in HMRCs table PEN 6 actually sits. Relief on employer contributions is split between employees (32% for basic rate tax-payers, 42% for higher rate tax payers) and employers (13.8% for all tax payers). NICs relief incentivises employers to provide for income in retirement, as opposed to providing income today, but
The report also reveals a significant variation in the amount saved between public and private sector. The 4.8 million workers in public sector pensions enjoyed average contributions of around £8,400 per year. The average for the 14.4million in private sector schemes was around £4,000 per year. The gap between those employees on AE minimum contributions and those in more generous pension schemes is revealed by the fact that AE minimum contributions due rose by 60% between 2018 and 2019, but total private sector pension contributions increased by only 12%, and contributions to all schemes by only 3%. This points to around 24% of contributions in the private sector now coming from AE minimum pension schemes, although the proportion of members is likely to be greater. The challenge for AE clearly isn’t participation rates, but that contributions in the private sector aren’t where they need to be, and all stakeholders have a role to play in securing a solution. Providers and trustees need to engage employees with the idea of giving up pay today for a better tomorrow. Many employers have shown the way by maintaining high quality pension schemes and diverting pay into employer contributions. Government too has an important role, through the provision of tax relief, to ensure that the most generous pension schemes remain affordable to members. While the current focus is on immediate challenges, we need to ensure we don’t lose sight of the need for long term planning if we’re to ensure that those being home schooled today are going to be able to enjoy retirement in the future.
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SOLVENCY II & BEYOND
LIFE INSURANCE PRODUCTS AND PRICING: LESSONS FROM LOCKDOWN
As UK life insurers begin their gradual move out of lockdown, it is worth reflecting on how the COVID-19 pandemic is reshaping customer demands. The crisis has seen a shift in customer sentiment toward insurance and has highlighted areas insurers may need to focus on. The opportunity
Many people now have more time on their hands than ever before; no longer commuting to work and spending more time at home over the weekends, some are ready to invest that time in reviewing their financial resilience. Areas to prioritise
Multi-faceted solutions are needed to tackle the As the lockdown eases, life insurers can look to issues highlighted by the crisis.Therefore staying maximise on the opportunity that has emerged - close to customers by tailoring and targeting products to meet their needs will be essential. increased customer demand for protection. We’ve observed a significant increase in the number of searches for life insurance products relative to last year - showing a growing interest in protection products. COVID-19 has clearly increased public awareness of insurance products and highlighted the value they can bring in times of crisis.
Some insurers are creating new customer journeys to access the underserved population, making genuine efforts to start closing the protection gap. The current spike in interest for protection should be used as a springboard to make a further sustained step change in life protection insurance coverage.
As the focus on health also increases, demand for solutions that offer additional benefits around fitness and wellbeing, in addition to protection, is also rising.
This, as has always been the case, can be achieved by continuing to challenge ourselves as an industry to focus on developing the “right” products (that meet customer needs) and by
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accessing customers in their preferred approach. Increased customer engagement provides product and pricing teams with information to tailor and target products more effectively.While traditional insurers have limited interactions with customers, innovative InsurTechs have through the use of technologies, such as wearables, shown that it is possible to boost the number of touchpoints to more than a hundred a year.
Balance agility with accuracy in pricing and product design
The impact of the pandemic has underlined the value of speed and agility in pricing and product design to meet evolving customer demands. Examples include the provision of in-demand ancillary benefits such as virtual GPs and online exercise classes. In the digitally advanced Asian market, we’ve also seen how it is possible to Strengthening long-term customer move from product conception to launch in less relationships by proactively reviewing than 24 hours. While this exacting timeline might be harder to achieve in the UK, getting to market policies could still be a lot faster. Insurers have responded well as policyholders and regulators looked to them to do the right While these quick responses achieve the goal of thing. Responses to the Financial Conduct increased engagement and sales, an increase in Authority’s (FCA) guidelines included targeted customer awareness and usage of these add-on payment holidays, short term reductions in cover, services will ultimately drive up costs. Insurers and rebates on health policies to compensate for may need to consider how to account for this in future pricing. the curbs on non-essential procedures. These measures have helped to retain Taking the next steps policyholders over the short term, but as customers emerge from the lockdown insurers Crises have historically acted as catalysts for long-lasting behaviour change. The life insurance need to consider their future relationship. industry has an opportunity to grow as a result Demonstrating product value to customers, of the increased awareness, by customers, of the who are now likely to be carefully reviewing need for protection and their renewed focus on their current positions will be critical in ensuring health. The industry needs to ensure that it is retention over the long term. Propensity to lapse smart when taking advantage of this opportunity: at this stage should be closely analysed and could it talks relentlessly about listening to customers be combated by proactive policy reviews where and investing in the right capabilities while keeping needed, or by refining communications informed sight of profitability, however, these lofty words often remain just that: words. By addressing these by behavioural analytics. goals through their deep technical capabilities, such as pricing, insurers have a real opportunity to make this become reality.
by Ewen Tweedle, Actuarial Manager and Colin Cummings, Actuarial Partner at PwC page 19
INNER WORKINGS
FLEXIBLE PLATFORMS ARE ESSENTIAL FOR LIFE & PENSIONS PROVIDERS
As the economy starts to kick back in after the shutdown, the key question on many minds is which parts of the economy will resume as normal and which will resume in a different way. Certainly, much of the economy that deals with face-to-face transactions are having to make major changes to their business processes in order to be able to operate safely. The prime area for all businesses to assess is any areas that involve direct, face-toface interaction between the customer, or prospective customer, and the organisation. In the case of the life and pension industry, this is primarily the interaction between the customers and sales agents, whether they be direct sellers or independent brokers. But moving from a person-to-person approach to a completely direct to consumer approach is a major shift and would abandon a huge section of the market who still need advice from financial professionals in order to manage their financial affairs. This is a key area for a market in which products are still primarily sold and not bought.
For simpler products, the move to direct to consumer sales was already well underway and this will be accelerated by the new environment post the lockdown. However, these simple insurance products are only the tip of the iceberg for the financial sector. Most people would benefit from more complex protection and investment products, but suitability is something that needs a higher level of expertise in financial products than most people possess. Robo-advisers are the ideal solution for those looking for financial advice, but who do not necessarily want to meet up with an adviser. Also, given the cost of advice, they are a key factor in being able to expand the market for complex products beyond those who can afford face-to-face advice, which is highly expensive. This requires a platform which enables the provision of advice linked to straight through processing that allows for the policy purchase or alteration to be completed without human intervention. There remains the question of those who want advice from a professional but don’t want to meet up for the long sessions that are generally
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involved in completing a holistic financial review and a full financial plan. Life and pension providers need to put in place a flexible platform – one that allows direct to consumer sales but also provides a robo-adviser that can give consumers access to fully regulated financial advice with human interaction. However, there is also a half-way house where the robo-adviser can be used by the agent to manage remote sales, giving the consumer the intimacy of dealing with a person whilst allowing the system to make the recommendations and monitor the sales process to ensure it is fully compliant with the regulations.
The platform should also be intuitive to use, allowing consumers to manage their own financial affairs. This will also enable it to be used by a distributed workforce, so that services can easily be maintained in the event of a new total or localised lockdown.
What the life and pension providers need, therefore, is a flexible platform that supports both Business to Consumer (B2C) transactions as well as Business to Business to Consumer (B2B2C) transactions. This will enable the life and pension provider to not only support their current distribution processes but will enable them to exploit the growing market of those who want financial products but cannot afford the advice processes. A broad platform which encompasses all this and is part of a broad ecosystem will allow the
creation of products and services that will meet the needs of the market post-lockdown. This will have to support the rapid development of products and services and the support of new distribution channels that are acceptable in this new socially distanced environment.
The new environment calls for major flexibility from life and pension providers. The nature of their product set, their distribution channels and the demands from the marketplace means that they need to be able to respond quickly and flexibly as the new normal evolves. Their system needs to empower this speed and dynamic approach, not hinder it. Platforms that empower and enable the company to create new products and services whilst still maintaining access to their legacy systems, with their vast trove of information, will be essential for companies looking to thrive in this uncertain future. It’s time for life and pension providers to assess their capabilities and ensure that they have the infrastructure to succeed.
by Tom Murray Head of Product Strategy LifePlus Solution, Majesco page 21
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 Simon Pollack, Managing Director, MGA Business, Legal & General.
What is your current role, and how did you end up in it?
What is the biggest challenge you face in your role within this market?
Legal & General underwrites £150m of delegated authority business across two MGAs, and I have a small team which covers all aspects of this. What I like is the full P&L accountability for results – it’s much more than just the numbers though naturally (as an actuary) we build it off a very quantitative backbone.
Making profits in a delegated underwriting scenario which is notorious for misaligned interests and losing money.
Prior to L&G selling its nonlife business to Allianz, I had responsibility for all underwriting and pricing and MGA business was a part of this. The sale separated the MGA business and my team and I chose to stay with this rather than the core UK direct retail side which is now integrating with LV.
Strong basic quantitative analysis – not necessarily based on clever or sophisticated models, but accurate and timely – is the basis of all negotiated outcomes I push for. You can’t argue with the numbers!
How does your actuarial training and background assist in your day-to-day role now?
What is the defining moment of your career to date? It’s hard to say, as a career is defined by role moves, people you’ve worked with and learned from, and experiences you’ve sought or been thrown into! The most important single move was probably when I was 23: I decided to move from an actuarial consultancy on the outskirts of London to a role physically within the London market. This was the springboard for several specialty (re)insurance and Lloyd’s roles that gave me a really broad background across actuarial disciplines and lines of business. In fact, the first decade of my career consisted of about 3 job moves that in retrospect were the perfect options for me to build the base for everything that followed. Don’t underestimate how important that foundation is, and don’t get too comfortable too soon! In your opinion, what prepared you best to take on your current role? Never being afraid of a ballsy position, whether it was a recommendation on writing a deal or whether it was a new modelling approach to inform such decisions. Not all worked perfectly, but it gave me a lot of confidence to judge the uncertainties in decision making.
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 in 1993, aged 21. There’s a tendency for actuaries to think of themselves as advocates for rather than owners of decisions. This leads to a reputation for equivocation. Be brave and try to own your work and stand behind it. If the data needs to be accurate for your conclusion to stand, go in and get comfortable with the data rather than stand behind a bunch of caveats. If you had your time again, what would you do, career-wise? I’ve been lucky with one or two people who have informally become mentors over my career. Knowing that now, if I had my time again I would have been more active in seeking out the people I wanted to work with and learn from. Please share your favourite piece of trivia with our readers! Blue is the last colour named in the development of almost all languages around the world. Because the ancients didn’t have a word for blue, there was a respected theory in Victorian times that there was widespread colour-blindness in ancient Greece.
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RETIREMENT PUZZLE IS NOW THE RIGHT TIME TO BUY LONG-DATED CORPORATE BONDS?
by Alex White, Head of ALM Research, Redington When Bruce Hornsby sang that “some things will never change”, he was probably not referring to bond prices. We’ve seen markets change dramatically, and whatever else comes out of the Covid pandemic, it has served as a reminder of how difficult it is to predict the future. At the time of writing we’re somewhat in the middle of it, with no particularly clear exit plan. However and whenever the economy re-emerges from its cocoon, it seems likely there’ll be some meaningful changes. So what does this mean for investors? One area to consider is long-dated fixed income. Long-dated, investment grade fixed income instruments are a natural investment for any investor with long-term liabilities. If an investor has a sufficiently long horizon that they can handle the volatility, they can benefit. These bonds provide interest rate protection, and do so with a material pickup in spreads over government bonds which, over the long-term, has generally compensated investors for losses due to defaults. And in turbulent times, there’s a case for picking simpler assets. With spreads wide, and with government programs to buy high grade debt, in many ways now is a great time to buy long dated bonds and lock in the higher spreads.
So why wouldn’t you? One reason is there may be better opportunities elsewhere. High yield has outperformed over the long-term, but is also is much shorter-dated so has typically been less volatile than “safer” but longerdated investment grade credit. High yield is also trading at much wider spreads. We can do some rough calculations to compare the two. Within the chart below which covers a two-year time horizon, we have used approximate default loss assumptions of 3% and 30bps per annum, based on long-term historical averages, alongside simple second-order estimates and assumed duration declines at half a year per year. We have considered shocks equal to a 2 standard deviation (annual) move up or down, and a return to the long-term average levels (5.5% and 1.8%). Income (return if spreads remain the same)
Gain if spreads tighten by 2 annual SDs
Loss if spreads widen by 2 annual SDs
Gain if spreads return to long-run average
High Yield
9%
26%
-8%
15%
Long-Dated IG
4%
23%
15%
11%
Data taken from the ICE BAML indices (H0A0 and C9A0 for US high yield and US 10y+ IG)
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You can see that the shocks are somewhat arbitrary. What we can take from them though is that: • the extra income from high yield provides a potent buffer, and • the lower duration helps offset the higher spread risk We can also see the effect of duration in recent moves. From 31st December 2019 to 11 May 2020, in excess terms high yield losses were lower than long-dated investment grade, despite spreads widening nearly 300bps further in high yield.
So there may be better opportunities. There’s also a more philosophical reason - long-dated, high grade bonds are, in a sense, a bet that things will stay the same. We expect very large companies to still be around in a few years’ time, and that they will be able to pay their debts. Credit investing, at its core, means taking tail risk. Investors earn a small return in most circumstances but risk large losses if the world changes dramatically (for example, if an industry becomes obsolete). Whether the changes caused by Covid-19 are enough to change the calculus, there’s a reasonable case that the world is changing more and faster than normal. If that’s a concern, equities or shorter-dated credit (such as TALF-backed ABS) might be more suitable investments than long-dated investment grade. As is often the case with similar decisions, there are good reasons to buy long-dated corporate bonds, and good reasons not to. So while the best option will vary from investor to investor, we come back to the truism that a diversified portfolio is likely to be a better bet than a concentrated one. That’s one thing that will never change.
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search & selection Data Scientist
Reserving Analyst/Actuary
General Insurance £90,000 Per Annum London
General Insurance £Market Rates 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. .
Exciting opportunity to join a highly regarded Lloyd’s insurer in a reserving role to cover all lines of business. Ideally, you will have 3+ years of London Market/Lloyds reserving experience. Experience from a consultancy is advantageous and those from personal lines will be considered. Strong communication skills are imperative accompanied with excellent analytical skills.
REF: ZB 001454 JC
REF: ZB 001450 MM
Head of Capital
Pricing Actuarial Analyst
General Insurance £Market Rates London
General Insurance £60,000 Per Annum City of London
Exciting opportunity for a capital actuary to step into a head of capital role for a new managing agency. You will report into the Chief Actuary and will be responsible for the full-suite of capital work with the support of an analyst. Ideally you will have Tyche experience or the desire to learn this. Experience of Lloyd’s submissions would be preferred but not essential. .
Lloyd’s syndicate is looking for a pricing actuarial analyst to join their expanding team. They are looking for someone with a minimum of 2 years Lloyd’s/London market pricing experience. This leading organisation highly values their actuarial team and exceptional communication skills are necessary as will be working closely alongside underwriters. Candidates must be taking IFoA exams.
REF: ZB 001373 CC
REF: ZB 001445 HT
Chief Pricing Actuary
Follow Syndicate Opportunities
General Insurance £180,000 Per Annum City of London
General Insurance £Market Rates City & Surround
Property, Casualty & Specialty start-up seeks a qualified actuary (through exam or experience) to join this fledgling team, working with underwriters to set up initial pricing models. You will have exceptional commercial and communication skills and become very much part of the business. Excellent long-term opportunities, and to build a small dynamic team. .
Bolton Associates is working with new follow syndicates to establish their actuarial and analytics functions. Candidates who have an appetite for start-up opportunities, who are nearly or newly qualified should get in touch. Skillsets including pricing, analytics and capital modelling will be considered.
REF: ZB 001305 ZB
REF: ZB 001412 ZB
www.bolton-associates.co.uk page 26 +44 (0)207 250 4718 Bolton Associates, 5 St. John’s Lane, London, EC1M 4BH