ACTUARIAL POST FOR THE MODERN ACTUARY OCTOBER 2020
BI INSURANCE A TESTING TIME
TAIT’S MODERN PENSIONS | PENSION PILLAR | RETIREMENT PUZZLE page 1
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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
www.actuarialpost.co.uk @actuarialpost @APjobs Head Office 13 Vale Rise Tonbridge Kent, TN9 1TB 01732 359488
EDITOR’S NOTE We have been inundated with nominations for our Actuarial Post Awards 2020 but it’s not too late for you to nominate someone in any of the categories that are open. Nominations close on Friday 30th October, so you still have plenty of time. Also, look out for October 16th when we launch our Stars of the Future nominations Our cover story, from Kareline Daguer from PwC looks at Business Interruption and the court ruling and how it will test the industry. Pranay Jain from enterprise Bot looks at how Covid19 has changed the face of Customer Service. With our regular stable of authors bringing you a range of subjects across the board we are sure you will enjoy this month’s packed issue and we look forward to welcoming you back next month.
Jennifer Redwood
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CONTENTS 10
16
6
Movers & Shakers
8
City Dealings
9
Business Interruption
10
Trustees Be Aware
12
Tait’s Modern Pension
14
AI & Customer Experience
16
Pension Pillar
18
Support Required
20
Retirement Puzzle
22
Inner Workings
24
Lights, Camera, Actuary
26
Information Exchange
28
26
28
News
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NEWS OCTOBER State Pension Age changes to 66 for everyone Canada Life and Aegon comment on the change to the State Pension Age to 66 for everyone Steven Cameron, Pensions Director at Aegon comments: “In the private pension space, pension freedoms have proved hugely popular in allowing people to take more control over when
they start drawing their defined contribution pension, currently from as early as age 55 increasing to 57 in 2028. But this is not reflected in the state pension where as of today (6 October) the minimum access age is 66 for all, and will increase further to age 67 in 2028. The higher the state pension age is, the
IFoA Longevity Bulletin considers pharmacological progress Pharmacology has been one of the greatest contributors to the longevity improvements of the 20th century. The latest Longevity Bulletin from the Institute and Faculty of Actuaries, ‘The pharmacology issue’, asserts that the pharmacological revolution of the last 100 years has brought untold benefit, improving quality of life as well as extending it. But importantly, the bulletin also looks at some of the unintended issues that have emerged from these pharmacological READ MORE
more difficult it will be for those in stressful or manual occupations to keep working until state pension age. On top of this, the fall out of the COVID-19 pandemic may see an increasing number of those in their early 60s losing employment and struggling to find a new role. READ MORE
Rishi Sunak appears to confirm pension triple lock to stay Steven Cameron, Pensions Director at Aegon, comments following Rishi Sunak’s interview with LBC radio today, where the Chancellor appears to confirm the state pension triple lock will stay
Insurance contributions.
Steven Cameron, Pensions Director at Aegon said: “Chancellor Rishi Sunak appears to have confirmed today that the state pension triple lock will stay in place for now. If his comments are being interpreted correctly, it will be welcome news for state pensioners, although those of working age may have concerns over the cost of this, as today’s state pensions are paid for out of today’s workers’ National
READ MORE
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“There have been concerns that the furlough scheme could lead to a sharp fall in earnings this year followed by an equally sharp rise next.
NEWS How Covid is changing claims trends and risk exposures The Covid-19 pandemic is one of the largest economic loss events in history for companies and insurers alike. However, it’s not only the magnitude of the impact which is unprecedented. Claims trends and risk exposures are likely to evolve in both the mid- and long-term as a result of the pandemic. With the reduction in economic activity during lockdown phases, traditional property and liability claims have been subdued, most notably in the aviation and cargo sector, but also in many other industries with fewer accidents at work, on the roads and in public spaces, according to a new report Covid-19 – Changing Claims Patterns from Allianz Global Corporate & Specialty (AGCS). READ MORE
Amazon gears up to enter motor insurance market Insurers around the world have endured an extremely tough 2020 due to the significant fallout from COVID-19, and they appear to face another unwelcome threat in the form of Amazon selling car and motorcycle insurance, says GlobalData, a leading data and analytics company. Ben Carey-Evans, Insurance Analyst at GlobalData, comments: “The tech giant is launching it in India, but has an enormous global reach, and could eventually make it a strong competitor for incumbents around the world. Motor insurance has been one of very few product lines relatively unaffected by COVID-19 so far, with claims largely declining,
due to people traveling less. However, insurers will not welcome the extra competition as vehicle sales are expected to decline in the wake of the pandemic, as consumers continue to work from home.” Amazon’s entry into the insurance market will help shift consumer expectations about buying insurance products from nontraditional players. Large global tech companies such as Google, Amazon, and Facebook have enormous customer bases that they can leverage when selling insurance. However, consumers are still hesitant to purchase insurance from them. GlobalData’s 2019 UK READ MORE
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PPF annual report shows it has withstood market shocks The Pension Protection Fund (PPF) has reported robust financial performance in 2019/20, in its Annual Report and Accounts. Investments return 5.2 per cent – the same as in 2018/19 – despite market turbulence caused by the Covid-19 pandemic, and assets grew from £32.1bn to £36.1bn. PPF reserves decreased at the end of the year to £5.1bn at 31 March 2020, reflecting the impact of markets’ reaction to the pandemic on the PPF’s return-seeking assets. Lisa McCrory, Chief Finance Officer, said “Our strategy is built to withstand periodic market shocks. Our long-term, low-risk investment approach and our hedging programme performed as intended, READ MORE
MOVERS & SHAKERS The latest moves and appointments from the actuarial marketplace Mazars appoints senior Actuary Dorian Hicks as Partner
Coverys appoint Actuary Xiaohan Fang as underwriter
Sara Protheroe awarded OBE in Queens Birthday Honour List
Mazars has appointed Dorian Hicks as Partner and lead of the general insurance actuarial team, based in its London office.
The Pension Protection Fund (PPF) is proud to announce that Sara Protheroe has been named in the Queen’s Birthday Honours List.
Dorian has over 20 years’ actuarial experience, across both general insurance and in the London market. Leading the general insurance actuarial team at Mazars, Dorian will further strengthen the firm’s established position as an insurance specialist. Alongside strong audit experience, Dorian will provide knowledge and expertise on reserving, mergers and acquisitions, finance and actuarial transformation, S166, risk & capital management, and actuarial finance insights.
Sara, who was recently appointed to the PPF Board and is the Chief Customer Officer, has been appointed an Officer of the Order of the British Empire (OBE) for services to pensioners.
Michael Tripp, Partner and Head of Insurance at Mazars, said: “In a time of disruption and transformation across the market, sharp minds and talent will make all the difference to our clients. These changes are helping Mazars grow and for that reason we are thrilled to welcome Dorian to... READ MORE
PTL hire experienced actuary as fourth new Client Director
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.
She was a key part of the team that established the Fund more than 15 years ago while working at the Department for Work and Pensions. Sara leads the scheme and member services team where she plays a key role in setting the customer strategy, is responsible for the smooth... READ MORE
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 READ MORE
PTL have announced the fourth new client director to join its team this year, with the appointment of Louisa Harrold. Richard Butcher, Managing Director at PTL, commented: “The challenges posed by the COVID-19 pandemic have further underscored
how important experienced, committed and talented professionals are to any organisation. At PTL we have always invested heavily in our team, understanding that they are absolutely vital not only to the excellent service we provide our clients but also to the ongoing success and
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objectives of the company as a whole. “In addition to her extensive pensions and investment experience, Louisa brings valuable insight into the challenges facing employers, gained during her time spent READ MORE
CITY DEALINGS Keeping up to date on acquisitions, mergers and the dealings of companies in the city
Swiss Re and Daimler launch new company Movinx Swiss Re and Daimler Insurance Services have entered into a strategic partnership for automotive and mobility insurance and launched a new company called Movinx. Both shareholders of the 50/50 joint venture will leverage their complementary expertise to establish a new business model. The aim is to develop fully digital automotive and mobility insurance products that both fulfill changing customer needs and offer best-in-class service quality. Movinx has received all necessary competition clearances.
Pravina Ladva, Swiss Re’s Digital Transformation Officer, said: “We believe that partnering with Daimler Insurance Services and establishing Movinx will take us to the next level in innovating mobility insurance. Our joint long-term ambition is to unlock an ecosystem interplay where insurance supports the introduction of new technologies such as advanced driving assistance systems and autonomous cars as well as new business models in the mobility area.”
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AXA Partners announces new travel deal with Puffin Insurance POLICE MUTUAL BECOMES PART OF ROYAL LONDON READ MORE
A new travel insurance partnership has been announced by AXA Partners UK & Ireland and Puffin Insurance. Through the course of this new, long-term partnership, AXA Partners will be underwriting Puffin’s travel insurance policies, as well as its add-on cover for winter sports and gadgets.
Sky appoint Buck for services for their DC pension plan Buck have announced that it has been appointed to manage two defined contribution (DC) pension plans for Sky. The larger Sky Pension Plan has around 43,000 active and deferred members. The smaller Republic of Ireland plan has around 1,000 members.
Both companies share a similar value for developing quality products that ensure customers have the appropriate level of cover for their needs, and cited this as the key driver for the partnership win. It comes following a difficult time for...
Sky was looking for a trusted and enthusiastic partner with a complementary company culture, one who could provide best-inclass expertise for its plans. Buck was appointed to the role after a successful tender process, which highlighted the firm’s technological...
READ MORE
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SOLVENCY II & BEYOND
BUSINESS INTERRUPTION INSURANCE: A TESTING TIME FOR THE INDUSTRY The touchpaper has officially been lit after the be ‘on cover’ after all. This also resulted in some Business Interruption Test case judgment was wordings where, depending on the business on handed down in mid September. cover and the circumstances of the policyholder, the policy might or might not pay. This raises In summary, the High Court ruled in favour of the technical complexity of moving forward policyholders on many clauses- but with some promptly for insurers. Insurers very well may significant nuances in favour of insurers- after a decide to appeal. In fact, ‘consequential hearings’ test case was launched by the Financial Conduct to decide which elements of the judgment could Authority to resolve contractual uncertainty potentially be challenged were scheduled for 2 in non-damage business interruption policy October. wordings. Shortly after the initial ruling the FCA issued The Court generally ruled in favour of claimants a firm, ‘Dear CEO’ letter stating that they also whose policies include‘disease’, ‘hybrid’ and‘trend’ expect all insurers to take a pragmatic, transparent wordings. Therefore the ruling has a significant and consistent approach to their interactions impact on around 370,000 policyholders covered with policyholders over any remaining evidence directly or indirectly by the 21 wordings that that applies to individual claims, rather than any were subject to the judgment. pending issue creating additional barriers or Although the Court ruled in favour of policyholders delays to paying valid claims. We are entering on many of the issues under scrutiny, the nuances a period where insurers will need to make to the judgment meant many claims might not significant decisions, with the regulator expecting page 10
claims and complaints to be handled fairly and in What next and how does it all work in practice? accordance with all rules and regulations. Insurers affected are now carefully reviewing the 162-page judgment, considering (a) how Market reaction the findings apply to their policy wordings; and Firms are acutely aware of the need to avoid (b) what additional considerations will need to the risk of creating expectation gaps with be made for valid claims to be established and policyholders. For example, the nuances of proved in light of any nuances the judgment has interpretation referred to earlier will mean highlighted. Insurers are also considering how careful analysis is required to identify those to manage the operational challenge of dealing policies where the Court has found in favour of with these claims promptly and fairly as soon as insurers and where claims will not be paid out. possible to ensure a fair outcome for customers. Firms outside the eight insurers on the case will need to map their own policy wordings to the 21 Many firms are grappling with the dilemma of wordings subject to this judgment. This process whether to wait until the results of an appeal are might require a degree of interpretation and known to process these claims. Firms might need to be pragmatic on how they go about this issue. additional legal uncertainty. It would be reasonable to handle the claims as Possibly even more pressing is the fact that soon as possible but withhold payment until the current local lockdowns might result in policies results of an appeal are known only where the coming ‘on cover’ where before they were not. claim is subject to a wording that will be subject Therefore, a significant and widespread second to appeal. What is clear is that the longer the wave of the pandemic could have unforeseen wait, the greater the risk of reputational damage. effects on these exposures for many insurers. As Some law firms are raising the possibility of a result, the legal proceedings are not just about policyholders claiming for damage due to delays the 370,000 claims identified so far, it might also in payment and raising questions on the fairness mean some policyholders deciding to file a claim of continuing to delay payment where a High based on the results of the judgment, or more Court judgment has been obtained. claims due to a second wave. It is also unclear for those that made policy wording changes recently For firms with non-damage BI policies that are whether under the judgment any exclusions affected by the judgment and in particular where the High Court found in favour of policyholders, would be effective. this issue will continue to have an impact for Longer term, consensus among clients centred on many months to come. Throughout this process a need for accelerating contract standardisation firms need to ensure there is robust governance and digitisation. It is clear that inconsistency around decision making and project management. in underwriting controls and policy wordings Although the touchpaper has been lit, insurers affects many products and lines of business and need to be wise to ensure this does not become this truth is being laid bare by the current crisis. an inferno of their own making.
by Kareline Daguer, Financial Services Director, PwC page 11
TRUSTEES NEED TO BE AWARE OF POTENTIAL BUYOUT TAX EFFECTS ON SCHEME MEMBERS
Trustees need to be aware of potential buyout tax effects on scheme members Defined benefit pension trustees need to be mindful of an interpretation of tax law which could see members hit by unexpected tax charges on buyout of a pension scheme with an insurance company. Until fairly recently, buying out benefits was a well-trodden path involving a reasonably straightforward process which it was believed did not adversely affect members’ tax status. However, hm revenue & customs (hmrc) now takes the view that the full buyout of a defined benefit scheme can in fact result in some members losing their fixed protection. A variety of different protections were introduced in recent years as the lifetime allowance was reduced, in order to protect those whose pensions had already, or were likely to, exceed the lifetime allowance at the time. Fixed protection gives those who benefit from it a lifetime allowance which is substantially higher than the current standard lifetime allowance - fixed protection was set at
£1.8 Million in 2012, £1.5 Million in 2014 and £1.25 Million in 2016. This provides a significant benefit in terms of taxation for members, but comes subject to certain conditions. These valuable protections can be lost in certain situations, such as where there’s any benefit accrual, or where a transfer which is not a “permitted transfer” is made. Hmrc has now taken the view that a buyout may not be a permitted transfer for a pensioner member, which could therefore cause the member to lose fixed protection. Deferred members and other forms of protection are not affected in the same way. The original purpose of introducing fixed protection for members was to protect savers who had accumulated more than the reduced lifetime allowance from unexpected tax charges. Regulations specifically provide that enhanced protection, and fixed protection for deferred pensioners is not lost on a buyout. The position of pensioners with fixed protection appears to be an anomaly as it is difficult to think of any sensible justification for the law to treat them differently to other members on a buyout.
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Moving to buy out a defined benefit pension is typically regarded as being a good thing for members, across the pensions industry as a whole. Aiming for buyout is a medium to long term strategy for many schemes. Trustees and employers are therefore understandably keen to continue to progress buyouts where possible, but without triggering negative tax consequences for their members with fixed protection. Despite industry lobbying of hmrc to address this anomalous situation, a change in the law to prevent such tax liabilities arising seems unlikely to be implemented any time soon. As a result, trustees, employers and insurers are now exploring alternative ways to ensure that buyout activity can continue unimpeded by tax risk. One proposed solution involves a two-stage process, rather than the previous one stage conversion of buy in to buy out. Essentially, this workaround involves the affected individual policies being issued to the trustees, before then being transferred to members. Other options being considered may include buying out benefits for members other than those affected by this issue, while continuing to operate the scheme for pensioner members with fixed protection. In any event, clear communication with affected members will be key.
Fortunately, the number of defined benefit scheme members who may be affected by this issue should be relatively limited. In order to be affected, members have to: 1. Have fixed protection (and not have used all that fixed protection); 2. Have benefits which are already in payment in the scheme being bought out; and 3. Have benefits not yet in payment in another scheme. Trustees are likely to want to take steps to identify all members who could be affected by this issue. Although we think of members with fixed protection as being members with higher benefits, of course pensioners with a small benefit in one scheme may have significant undrawn pensions in another. Members who are not pensioners at the start of the buyout process but who take their pension before buyout could also be caught, which means that trustees will have to spread the net even more widely to identify all members at risk. Given the complexity of the law in this area, and the ambiguity surrounding the relevant issues, trustees should seek professional advice as to how to proceed. Dealing with this issue could cause delays in the buy out process, which should be factored into planning and timelines at an early stage where buyouts are being considered.
by Vikki Massarano, Partner, Arc Pensions Law page 13
TAIT’S
MODERN
PENSIONS
Spend, spend, spend
Moving to a flat rate of tax relief has also gained more popularity based on both simplification and When an individual decides to scrap their budget the idea that it treats everyone the same regardless it usually means they doubt their ability to stick to of wealth. The question is of course where the rate it, and it looks rather like the Chancellor has found would be set.The Treasury will naturally want to limit himself in much the same position. It is extremely costs and may favour simply limiting relief to the basic hard to predict what is going to happen to the UK rate, however setting it higher than this would give a economy when it is obvious that the Coronavirus has boost to the majority of pension savers and possibly not yet finished with us and we look to be heading incentivise them to save more while at the same time into another, hopefully less severe, round of lockdown. lessening the impact on higher rate taxpayers. What According to the Treasury ‘now is not the time to be is certain though, is that if it happens tax relief of 40% outlining long-term plans’, but it is also a recognition and above will be a thing of the past. that more spending will be required to support UK But what if benefits change? workers and the businesses that employ them. As the Treasury is not known for giving money away without A frequent excuse, I mean reason, given for not the prospect of balancing payments, the cancellation saving into a pension is the constant changes to the of the Autumn Budget makes future tax increases rules which successive governments have brought rather more likely than less. There should be no sigh in. Simplification was supposed to put a stop to this of relief from the pension industry, or from savers, we but the ‘low hanging fruit’ pension tax relief proved should instead be concentrating on getting the most to be too much of a temptation with changes to from current tax legislation before it is changed. The both contribution and benefit limits. The former only bit of good news is that we now have slightly is bad enough, but people can at least change their longer to plan. contributory behaviour following a budget. If their money is already invested and the benefit rules The argument for making pension change, they are more or less stuck with it. contributions is stronger than ever One of the top concerns expressed by clients ahead If we accept the argument that tax changes are of nearly every budget is that tax-free cash might be likely, and that they are only going to go up, then cut, leading some to ask if they should withdraw their putting money aside now makes sense. Clearly for funds before they actually need them. This is clearly some people this will be impossible as their earnings still a possibility however there are 2 mitigating decrease or disappear, however there is growing factors to take into account: evidence of more fortunate workers who are able to continue to operate from home and are in fact 1. Tax-free cash is one of the most popular and spending less on travel and the office lunches. These understood pension benefits and any changes would savings could easily be diverted into a pension and be very noticeable. attract both tax relief and tax-efficient growth on their money. Based on fairly widespread rumours 2. If the Government were to change the benefit ahead of the cancelled budget this may be the last rules they would almost certainly include some chance for additional and higher rate tax-payers to protection for existing funds. This has been done each time the LTA was lowered, in recognition of the benefit from marginal rate relief. fact that previous contributions were made with the Why now expectation that benefits would be in line with the rules applicable at the time. The two most likely scenarios for pension tax relief going forward would seem to be a reduction in the Summary Annual Allowance (AA) or a move to a flat rate of tax relief. Both of these moves would reduce the amounts The cancellation of the Autumn Budget does not claimed back from the Treasury and would have the make tax cuts less likely it merely puts them off. This additional advantage of being politically acceptable to provides an opportunity for higher and additional middle Britain who are likely to see it as a ‘tax on the rate taxpayers to invest in a pension and benefit from marginal rate tax relief. rich’. There is certainly scope to reduce the AA to levels which are deemed affordable by anyone not fortunate enough to be in an active final salary scheme or to have ‘spare’ income of over £3,000 a month. Even more positively, a reduction in the AA could be used as a simplification tool, with the lower limit being offset by a removal of all the headaches and anomalies generated by the Lifetime Allowance (LTA) and AA taper.
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by Fiona Tait Technical Director Intelligent Pensions
AI & CUSTOMER EXPERIENCE: HOW COVID-19 HAS TRANSOFRMED CUSTOMER SERVICE
Artificial Intelligence and Customer Experience: How COVID-19 has transformed Customer Service The COVID-19 pandemic has prompted significant growth in the use of artificial intelligence in customer service - an area that was already well on its way to becoming a norm, writes Pranay Jain, co-founder of Enterprise Bot
are likely to face similar problems based on automated clustering and prediction, to reduce the volume of inbound calls • When an agent is in conversation it can provide the agent with response suggestions in terms of both content and tone to help improve customer experience. These changes don’t mean that AI will replace customer support agents. Still, we’re moving into a new paradigm of the knowledge worker, where the agent can focus on bigger issues and is assisted by “smart knowledge” provided by the AI while also directly resolving the repetitive queries that take up so much of a customer service agent’s time.
Do you remember the times of calling up an airline, a bank, or your insurance company only to sit on hold for upward of an hour as you slowly moved up the ladder of priority, repeatedly told by a robotic, pre-recorded voice that “your call is important to us, please stay on the line?” AI in machine learning is slowly changing this experience. With further improvements in AI we will continue to see a better and more customer-centric future While we have certainly moved away from with faster resolution times. the over-hyped idea that AI would solve every customer experience problem, there is certainly a Small and medium enterprises (SMEs) have much clearer understanding of what it can do: generally shied away from AI assistance in customer • Solve 60% of the queries coming into a contact support, in part because of a fear that setting up centre, most of which are repetitive but those systems is too complicated and expensive. extremely expensive and time-consuming. Until recently, a reliable and useful AI system would • Using big data to highlight issues in service and cost anywhere from $150,000-$300,000, making helping the company improve its offering. it prohibitive for most SMEs. There now exists • Proactively notify customers of issues who “pre-trained” models, that allow for businesses
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to quickly deploy an effective AI customer service assistant. Companies can now utilise powerful AI by simply selecting the skills they want to train it with from a menu. This is why there has been such a visible uptick in conversational AI becoming a larger part of all enterprises, big and small. COVID-19 Accelerates Change COVID-19 has created challenges for all industries, but insurance has been hit particularly hard. Customer support has seen incredibly high demand, with anxious customers presenting complex queries alongside cost pressures that have forced companies to make staff reductions. This has made service wait times even longer, with some companies stopping all phone communication and only operating through email to allow time to deal with the surge in activity. In reality, in times of high customer anxiety this is counterproductive. AI has proven essential in helping overwhelmed companies. COVID-19 has prompted an acceleration in the adoption of AI in customer service, allowing organisations to provide relevant information to their customers quickly, 24/7, without hurting the bottom line. Fueling Change in Customer Service Strategy In the past, customer service strategy was focused entirely on a human approach of devoting efforts towards peak times as well as the retraining of resources. With the rise of AI, customer agents have developed greater specialisation and can handle the most complicated issues, while AI deals with repetitive problems. Customer service strategy has also taken further notice of the need
to get a more in-depth, easier integration into the IT landscape as it becomes clear that AI alone is not enough and a holistic approach is the best way to ensure success. This has significantly increased cross-department communication and strategy to ensure that all parts of the business work together to provide a better customer experience. Data Privacy and Security With AI One key consideration is data privacy and security when dealing with conversational AI. There have been several high-profile hacks. Notably, Ticketmaster’s conversational AI was hacked, and millions of people had their credit card information stolen. It’s critical that all data must be encrypted and the highest level of security ensured to keep the entire ecosystem safe. This is made more complicated by GDPR, which has strict requirements around what data can be used to train the AI system as well as long that data can be retained. It’s essential for enterprises to understand and build the right policies to ensure they work with AI in a GDPR-compliant and secure way. Further, it’s important to understand the biases in AI models and ensure that data is well filtered and audited. The Future is AI AI continues to improve and has proven to be a vital help to providing the quality customer experience that clients expect. It’s not just for the big corporations anymore, it’s readily accessible for SMEs who want to provide top-quality customer service with quick response rates.
by Pranay Jay, CEO & Co-Founder, Enterprise Bot page 17
PENSION
INVESTING FOR THE LOW
by Dale Critchley Policy Manager Aviva The last couple of weeks have seen me return to the office for a few days a week. Seeing colleagues face to face, even just sitting in the office, was welcome change from working from home. The measures that Aviva have implemented to ensure the office is Covid secure are reassuring to everyone who’s elected to come back to the office, and after couple of weeks a new routine was starting to emerge. And then the rules changed. I have no burning need to go into the office, so under the new rules, I’m writing this from home. Working from home has been one of the biggest changes brought about by the Coronavirus crisis, one which has seen station platforms that would normally be teeming with activity, empty. Offices are eerily devoid of workers, and outlets in city centres closed for lack of footfall. A direct impact on pension scheme investments has come with the suspension of
many property funds. As future demand for commercial property became less certain so the buildings that make up property funds, and the funds themselves, proved difficult to value accurately, triggering a suspension designed to protect savers. In the short term a potential extension of working from home will do little to bring certainty to this asset class or boost the value of companies reliant on commuters. In the medium term the FCA is consulting on whether those holding assets in some property funds will need to give 90 to 180 days’ notice of withdrawals. To allow fund managers to manage liquidity better. While the speed at which the UK’s white collar workforce adopted working from home couldn’t be predicted, perhaps the eventual position could. The enabler, as we have seen, has been the growth in technology which allows teams to work remotely, and the availability of fast domestic broadband. But in the absence of a pandemic, targets to control climate change may well have proved to be an agent of change.
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N PILLAR
W-CARBON REVOLUTION
The impact that schemes have on climate change is something that the Pensions Minister sees as a top priority. A clause within the Pension Schemes Bill requires schemes to take into account the risks and opportunities that will be presented as the world economy transitions from one based on carbon to one aligned with the Paris Agreement. The DWP are also consulting on a requirement that schemes report on the impact their investments have on the climate, in line with the Taskforce on Climate-related Financial Disclosures (TCFD) proposals. The scale of the task of transitioning to net zero is enormous and will require wholesale changes to the world economy. To put things in perspective, global lockdown saw this year’s energy-based emissions fall by between 4% and 7%. To achieve net zero there needs to be a 90% reduction from current levels. Governments are getting on board - European Commission President Ursula von der
Leyen confirmed last week that the EU would back a proposed 55% reduction in emissions, compared to 1990 levels, by 2030, on the way to net zero by 2050. 30% of EU’s Covid 19 recovery budget is earmarked for climate measures. Joe Biden has promised to spend $2trn over four years on low carbon infrastucture and energy, should he win the US election. All of this will create opportunities, but there are also threats. Lockdown saw ExxonMobil fall out of the Dow Jones Industrial Average for the first time since 1928. The changes required to economies to achieve net zero will be seismic in comparison to lockdown. Companies will need to re-invent themselves for a new world economy if they want to succeed, and trustees need to be looking at how they align their scheme’s investments strategy to take advantage of a low-carbon revolution. Not to just meet a legislative imperative, but to protect the futures of their members.
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SUPPORT REQUIRED: WHY EMPLOYERS MUST STEP IN TO HELP WORKERS WITH LONG-TERM SAVINGS
by Mark Pemberthy Head of DC & Wealth Buck The COVID-19 pandemic has derailed the retirement plans of millions of people in Britain, with increased financial difficulties causing them to dip into their long-term savings, pension pots, or stop pension contributions altogether. While this can help to cover costs in the shortterm, disrupting long-term savings can have serious financial consequences for individuals later in life. Employers have a role to play in encouraging workers to protect their pensions, as well as build financial resilience.
contributions, as well as dip into their pension pot, has still been alarming.
Contribution crisis
More worryingly, however, has been the increase in older workers dipping into their pension savings to cover essential costs during the pandemic. This has largely been driven by people aged 55 and over choosing to access to up to 25% of their pension savings tax-free as a financial solution to short term financial pressures. In doing so, they are risking longterm financial consequences.
The recession brought on by the COVID-19 pandemic has caused financial stress for many, so people are understandably looking for ways to cover any financial losses caused by being put on furlough or having their pay cut. However, the rate at which savers have been choosing to end or reduce pension
Recent research found that one in ten UK workers have paused pension contributions, with 37% of those who had paused citing the reason being to use the money for essential spending. Royal London research showed that millennials were most likely to have paused or stopped pension contributions, with two in five millennials doing so during lockdown.
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Dangerous game The current life expectancy for people aged 55 is between 84 and 87, meaning a saver who uses 25% of their pension pot in the early part of their retirement may struggle to cover costs in later life. As a result, they may live a less comfortable standard of living than planned or continue working past 67 in order to replenish their savings. Additionally, they may have to make riskier pension investments to create better returns, something that is less than desirable in later life, at a time when most people will want to protect what they have accumulated rather than risk further losses to try to make the money back that has been taken out. While younger workers might consider themselves to have ample time for building their pension later in life, the sooner they start seriously saving into their pension pot, the bigger the reward they will see down the line. That’s why it’s vital for people of all ages to carry on contributing in order to accumulate a sufficient pension pot to meet their financial needs in retirement. The worst-case scenario in both these situations for workers who don’t save enough in their pension pot is that they end up running out of funds altogether and rely on their state pension, a position that no one wants to find themselves in.Yet, with over half of workers not knowing the current size of their pension pot, and 21% of British workers having no pension savings, it’s likely many workers will be facing a less desirable retirement. Here to help Financial education can reduce the risk of people making rash decisions and help people balance competing financial priorities. Financial education, coupled with voluntary benefits programmes, can help workers find ways to reduce spending on things such as bills and memberships, rather than reducing how much they save or stopping saving altogether.
Additionally, pensions education can help staff realise the importance of investing for their future, something that many UK workers aren’t aware of. Just a fifth of UK women know their pension savings are invested in the stock market, two in five men know where their retirement savings are held, while less than a third of workers know how company pensions are invested. Helping workers demystify pensions can go a long way to increasing engagement and encouraging higher levels of saving. However, it’s important for employers to recognise that during the current climate, some people will have no choice but to adjust or stop how much they saving or prioritise liquid savings over long-term savings because the pressures on household finances. No amount of education will be able to change that immediately. As such, employers can build longer-term resilience by offering short-term savings tools alongside pension schemes and share schemes. These give workers an accessible savings pot to fall back on in economic difficulty, as well as help plan for other short and medium term financial priorities. Staying vigilant Ultimately, employers must remain aware of the financial difficulties many workers will be experiencing and make sure current provisions - including education and saving schemes - are adapted to persuade workers not to disrupt their long-term finances. With 10% of the UK working population either stopping or pausing contributions during the pandemic and more not having a full understanding of pensions, it is essential employers design their reward packages to help staff both immediately and in the longer term. The long-term impact for these workers who have paused or stopped contributions could be seismic, with less money to enjoy in retirement, or even completely running out of funds. It’s crucial they start saving again as soon as they can..
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RETIREMENT PUZZLE
HOW TO REBALANCE A PORTFOLIO
by Alex White, Head of ALM Research, Redington
If, as an investor, you have a set of objectives and constraints, and a strategic asset allocation (SAA) designed to meet them, then you will almost certainly need to rebalance. It could be as simple as only rebalancing when risk limits were breached, and the SAA could use ranges - but at some level, the portfolio will need to be rebalanced. To be clear upfront, this is discussing rebalancing between asset classes rather than between individual stocks. As an aside though, eventually all bonds mature or default, and all companies go bust, so the case for rebalancing is that much stronger between individual holdings. In a Black-Scholes world, this is very easy - you’d rebalance every instant and have a perfectly aligned SAA.
In the real world, it’s trickier for a few reasons: • Transaction costs exist • Some assets are illiquid • Some portfolios are very large, and can only trade a limited amount at any given time • The governance required for frequent trading can be very high • Assets typically display momentum characteristics over sub-1y periods, so rebalancing more frequently is likely to be detrimental to returns To test this, we considered equity, treasury and credit indices, looking at excess returns in USD (as the US offers the richest data set, with over 40 years’ data). As example portfolios, we consider 60-40 equity-treasury, 60-40 equity-credit, and 4030-30 equity-treasury-credit. We also ran simulation analysis with similar results. We assume 5bps
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transaction costs across the board, though these do not meaningfully impact the returns.
tenors- for triennial rebalancing this would be nearly 50bps).
Firstly, the differences are not enormous. However, we find annual rebalancing leads to higher returns than monthly rebalancing, because of this trend behaviour. It’s worth allowing a little drift in the portfolio to avoid being structurally short a wellevidenced risk premium.
The second problem could be harder to navigate, and very large clients may not be able to rebalance annually, or may need to break the trade up and stagger it.
However, there are two disadvantages to rebalancing annually: There is some sensitivity to choice of rebalancing date and trade sizes are larger The first point is largely mitigated through time, but over shorter horizons can be painful. At its extreme, rebalancing a 60-40 portfolio in August or February would have made a roughly 6% difference to the portfolio over the GFC. That is an extreme case, and this effect can be favourable or detrimental. This risk effectively diversifies away through time, but it could be very unpleasant in the short-term. Even over the long term, we can see that choice of a lucky or unlucky rebalancing date accounts for around 1015bps pa of return (and this is exacerbated at longer
However, there is one other solution. It does require significant governance for no material pickup in returns, so it is only likely to be advantageous to investors with allocations large enough that trade size is a real problem. In this instance, regular partial rebalancing may have a slight advantage. Rather than rebalancing annually, this structure rebalances 1/12th of the total amount every month (results are very similar for Ÿ every quarter). While the returns are very similar to annual rebalancing, the timing risk is mitigated, and the trades are, on average, only 6% as large. For most investors that won’t make a difference, but for multi-billion-pound allocations with significant investment risk it may be a slight improvement.
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INNER WORKINGS DELAY IS NOT AN OPTION by Tom Murray Head of Product Strategy LifePlus Solution, Majesco It’s clear at this stage that the disruption from Covid19 is not a temporary glitch and, whatever happens now, the post pandemic world will not be the same as it was prior to this global pandemic; the impact of the pandemic has been far-reaching enough to permanently change the way we live. Those businesses that were just hunkering down to weather the storm must realise that they need a new strategy for their business, one that is designed to maximize the opportunities that will arise from this new customer environment. Given that the primary effect of the pandemic has been to change how we live our lives and the degree of social contact we have, it is inevitable that interaction between businesses and consumers will be altered in a fundamental way. The increase in online shopping has ruptured one of the fundamentals about consumer behavior; now the focus of all businesses has to be less on the footfall in the area of their premises and more on the digital footprints across their website. If a business can’t reach its customers digitally and deal with all aspects of the interaction online, it is going to miss out on the opportunities that arise from the new breed of home-based consumers. For life and pension providers, this is a major challenge. Most their business is still derived from a face-to-face environment, where advisers in homes or workplaces assess the customer’s needs and make recommendations for financial products to meet those needs. The meetings tend to be quite long, as the strategy is to build a deep relationship with the customer that enables the financial adviser to work with the customer across his or her lifetime, and to recommend new strategies as the client’s circumstances change. This is not an easy business approach to replicate over the Internet. Many people find it difficult to sit in front of a computer and enter a lot of information; it’s far easier to sit and answer questions from an individual than it is to go through screens entering data.
is harder to demonstrate the value of the products and judge the individual’s reaction to the recommendations than it is in a face to face meeting. This can make it much harder to close the deal. Technology leaders and Fintechs have been exploring the digital route for some time but now it is clear that a digital first strategy is not a luxury but a requirement for all players in the life and pensions industry. The world is not going back to a time when direct contact was the primary means of communication with potential clients. Those life and pension providers that aren’t revisiting their strategies now are denying the obvious. Re-imagining all customer interactions from a digital standpoint, including how to engage with new and potential customers must become the dominating transformative project for all providers. It’s not enough just to have a portal for those customers who want to interact online; what’s needed is a strategy to refocus the entire company on a digital approach as the standard means of customer interaction. All business processes need to be supported by new systems and platforms that can deliver a truly digital environment for the provider’s customer base. Beyond that, the post-pandemic environment requires re-thinking the whole digital engagement process, partnering with companies offering related services and becoming part of a complete eco-system of financial and linked services that can attract and retain customers. The long-term effect of the pandemic has been to ensure that technology’s role in our day to day lives has accelerated dramatically. Humans are social creatures and cutting down on physical social interaction means moving it online for large segments of the population.
By the time Covid 19 has been beaten back, this will be the new normal. As the public grow used to the efficiencies that a digital services provide, they will not want to return to the old ways. Any company that is not Yet without that amount of customer information, how currently obsessing about how to engage digitally with can they be advised correctly about their finances or both its customers and potential new customers is going encouraged to purchase new products. Even the phone be in a difficult position; the old world it is waiting to pageto 24 doesn’t substitute well for face to face interaction as it get back to will never reappear.
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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 actuarial technology providers. As the world, including the Lloyd’s and London Market, look to use AI techniques, and automated modelling in our data-rich world, both self-starters and larger corporations have turned their gaze and interest to using technology and modelling to automate systems, generate prices and break boundaries. These providers to the insurance markets, know what both underwriters and brokers need, and how the actuaries within them can benefit from the tools and software they can provide. 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 Amrit Santhirasenan Co-founder and CEO of Hyperexponential (HX).
How does your actuarial training and background assist in your day-to-day role now?
What is your current role, and how did you end up in it? I’m the Co-founder and CEO of hyperexponential (hx) – an analytical technology company that is building the next generation of pricing and datadriven decision-making software for the specialty and commercial (re)insurance market. What is the defining moment of your career to date? This is an easy one - quitting my very comfortable and well-regarded job as the Head of Pricing and Analytics at one of the largest managing agents at Lloyd’s to set up a technology start-up selling very modern technology to very traditional insurers!
There is massive value in being able to understand and model the dynamics of a business’s finances, and understand financial risk – a start-up is an inherently very high risk, high reward venture, and having a handle on how to contain and balance such risks has helped me ensure hx is well-positioned to reap the rewards. 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?
In your opinion, what prepared you best to take on your current role? While nothing can prepare you for the whirlwind that follows founding a tech start-up, I have built a lot of teams from scratch in my career. When I was 25, Catlin took a chance on me and sent me to Toronto to set up the actuarial function for their Canadian Hub – one of their six underwriting centres. My manager at the time likened it to being a Chief Actuary of a $100m Syndicate – the combination of new role, people, home and continent was definitely a baptism of fire! It was brilliant though and gave me the taste for taking a step into the unknown. What is the biggest challenge you face in your role within this market? The sales cycle (time from first handshake to signed deal) can be extremely long – most insurers are not used to working with cutting-edge tech and modern software delivery practices. However, the times are changing and there is a massive gulf between the most progressive insurers (many of whom we are glad to have as clients) and the bulk of the market!
I started my career in November 2005. Advice-wise, my formula is extremely simple: find something you love doing, work extremely hard and be focused on your goals as well as what you’re putting in. If you’re smart and hard-working enough to make it through the exams, there’s not much professionally you can’t achieve. And most importantly, don’t waste time on things that aren’t making you happier, smarter, or a better person – sort those out and success follows. If it’s not working, learn from it and change it! If you had your time again, what would you do, career-wise? See above – I’ve very very few regrets in my career. Maybe I should have started hx earlier, but that’s ancient history in start-up time… Please share your favourite piece of trivia with our readers! I spent one of my university summers in the south of France, where I was arrested for a crime I didn’t commit. (I was released without charge!)
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INFORMATION EXCHANGE SHARING DATA SUPPORTS FAIRER TREATMENT OF CUSTOMERS It’s been 14 years since The Treating Customers Fairly (TCF) initiative was introduced. Back then the Financial Conduct Authority (FCA) was the FSA, motor insurance certificates were still sent out by post and aggregators were the new kids on the insurance block. A lot has happened in 14 years, not least significant advances in data and analytics to help the insurance sector understand risk more clearly. The view insurance providers had of their customers back in 2006 was limited by the lack of and sources of shared industry-specific data. Now, insurance providers can leverage a wide range of data attributes correlated to loss costs and cancellation rates to help meet each of the six consumer outcomes the FCA suggests firms ‘strive to achieve to ensure fair treatment of their customers’ . Products used by the motor market can now factor for an individual’s insurance history, rather than just how good they are at paying their financial commitments. But more than this, through data the industry has the opportunity to reposition itself as risk mitigators, helping make consumers whole in the event of a claim and serving them on a much more individually tailored basis. In a world changed by the COVID-19 pandemic, Treating Customers Fairly has taken on new meaning and having a clear view of the individual’s risk at each stage of the customer journey – from quote to claim – will be key to how insurance providers meet
their changing needs and expectations. ‘Outcome 1: Consumers can be confident they are dealing with firms where the fair treatment of customers is central to the corporate culture.’ This means knowing your customer, being transparent, and responsive to the customer’s needs. Utilising market-wide data on policy history rather than relying solely on the information the customer provides at point of quote, providers can deliver more accurate quotes and offer relevant additional products. For example, a new applicant has who never cancelled a motor policy in the past could be offered a discount at quote. It also helps smooth the claims journey and reduces the likelihood of claims being declined due to the policy being built upon inaccurate information. ‘Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.’ Being offered an irrelevant insurance product, or an inaccurately low initial quote only to potentially have it changed at bind, can have an irreversible impact on a consumer’s ability to trust that insurance provider. Employing accurate customer segmentation is key. This is made possible through data analysis and interrogation, coupled with the application of data enrichment at application and point of quote, pulling on market-wide contributed policy history data to provide accurate, individually tailored quotes. ‘Outcome 3: Consumers are provided with clear
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information and are kept appropriately informed before, during and after the point of sale.’ Once again, this comes back to knowing the customer. Merger and acquisition activity in the market has meant individuals can appear in disparate customer databases within the same insurance group. They might be listed at different addresses or even have different names due to life events or input errors. It is therefore imperative insurance providers take advantage of linking and matching technology leveraging policy history data to help find the common threads, to bring those disparate records together in a single customer view. An insurance provider that knows the details of a customer’s wider insurance requirements, renewal dates and up-to-date contact information is much more able to carry out effective communication at all stages of the customer journey, and in-turn cross sell relevant products and the right time in the customer lifecycle. ‘Outcome 4: Where consumers receive advice, the advice is suitable and takes account of their circumstances.’ Customers generally only provide the information explicitly requested and may not appreciate the impact other details may have on the policy and premium they are currently seeking. It is far easier to provide right-first-time quotes when an insurance provider has access to a 360-degree view of the customer, policies held with other insurers, previous mid-term cancellations, gaps in cover, claims and any connected addresses or policyholders. ‘Outcome 5: Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.’ Nothing can tarnish a customer-insurer relationship quite like a repudiated claim. And this is especially true when the claim is declined due to the customer providing inaccurate or incomplete information
at point of quote and the customer either being underinsured or the policy either being invalid as a result. It is vital that the risk is fully understood at point of quote, prior to policy inception, so that the policy provides the appropriate level of cover for the customer’s specific needs, and the price accurately reflects that customer’s individual level of risk. Contributed data from across the market can fill gaps in insurer knowledge, verify information provided, and highlight discrepancies which can then be investigated to discover whether this was mistyping, innocent human error or fraudulent behaviour. ‘Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.’ When a company knows its customers in detail, it has an instant and complete picture of them, their policies, the history and requirements. In motor this should apply to named drivers as much as the main proposer. This means insurance providers are better able to efficiently support their customers in a claim or managing a complaint. In addition, when a customer switches, the new insurance provider has access to their full insurance policy history data, gathered from across the market, helping improve the ability to deliver right-first time quotes, every time. All in all, market-contributed policy history data and soon claims history data, combined with an increasing number of publically available data attributes correlated to insurance loss, can deliver a better understanding and a fairer service to consumers. The more data an insurance provider has on a customer, the better-placed they are to offer appropriate cover and premiums for the risk.
i. https://www.biba.org.uk/press-releases/electronic-motor-insurance-certificates-would-be-quicker-easier-and-greener/ ii. https://www.fca.org.uk/firms/fair-treatment-customers
by Martyn Mathews, Snr Director of Personal Lines Insurance, LexisNexis Risk Solutions page 29
search & selection Model Development Actuary
Head of Pricing
General Insurance £120,000 Per Annum London
General Insurance Up to £140,000 Per Annum London
Fantastic opportunity for a pricing actuary to join a growing pricing team in a model development role. You will be leading on model development across the whole of the business in an over arching position working across all classes of business. The position is heavily strategic and demands someone with gravitas and the ability to really challenge the business and their current thinking. .
Newly established MGA seeks a Head of Pricing to join its growing team. With excellent business acumen, communication skills and modelling prowess, the successful candidate will be an integral part of the management team, and underwriting decisions. In addition they will be expected to get involved at ground level to establish pricing models, and build a team.
REF: ZB 001476 CC
REF: ZB 001512 ZB
Actuarial Systems and Data Lead
Capital Actuary
General Insurance £70-100,000 + Bonus + Benefits London
General Insurance £40-90,000 + Bonus + Benefits London
Newly created role with a leading London insurer seeking a motivated candidate to take the lead in drafting and spearheading their data transformation project. Open to those from an actuarial or data & analytics background, with the successful candidate expected to have experience building pricing models and working with a pricing platform. Technical literacy in either . Oracle/SQL/SAS/Python/R required.
Highly reputable Lloyd’s and London market company is looking for a student/qualified actuary to take on a broad role covering the end to end capital process. You will have non-life actuarial experience, preferably within capital modelling. You will be joining a talented team with plenty of opportunity for personal development and interaction with the wider business.
REF: ZB 001513 JC
REF: ZB 001339 HT
Corporate Actuary
Senior Pricing Analyst
General Insurance £120,000 Per Annum + Excellent Package London
General Insurance £45,000 + Benefits + Bonus London or Horsham
Fantastic opportunity for a qualified actuary to join an Insurance/Reinsurance company in a Corporate role. This role will have responsibility for the IFRS 17 processes, manage the quarterly reserving and TP’s and have regular interaction with the Chief Actuary and the underwriters. Working across Specialty Lines, this hire will be contributing to the Business .Planning processes.
Personal Lines insurer requires a Senior Pricing Analyst who has strong analytical, communication and relationship management skills, with a sharp focus on delivering business results. They need someone to come in and conduct analyses and form recommendations to contribute to business decision-making and change activities.
REF: ZB 001502 MM
REF: ZB 001515 OG
www.bolton-associates.co.uk page 30 +44 (0)207 250 4718 Bolton Associates, 5 St. John’s Lane, London, EC1M 4BH
