Future Pathways Fresh perspectives from actuaries of the future

Auckland, 15 March 2011Wellington, 16 March 2011

Future Pathways Fresh perspectives from actuaries of the future

Life InsuranceBen Coulter, SovereignAdam Swanson, Melville Jessup Weaver

Agenda

• Life insurance accounting (IFRS)– Current Margin on Services Method– Proposed Exposure Draft Method– Recent Developments

• Prudential regulation & solvency– The Insurance (Prudential Supervision) Act– Reasons for regulation– Proposed changes to solvency standards

Life insurance accounting (IFRS)

Life Insurance Accounting• Long term contracts require unique accounting

• Profit for a life insurer defined as:

Premiums + Investment Income– Claims – Expenses – Tax– Increase in policy liabilities

• Policy liabilities drive the timing of profit release (but not the total profit)

• Policy liability calculation method– Currently MoS method under IFRS– However, new changes to IFRS have been proposed

Margin on Services Method

What is MoS?

• Margin on Services (MoS) is a method of calculating policy liabilities– The result is that profits are released in line with “services” provided to

the policyholder, e.g. expected claims on a risk portfolio, with no profit released at point of sale

• MoS acts as a “shock absorber”– The impact of changes to non-economic assumptions (e.g. mortality,

morbidity, lapses) are spread through future margins

• Disadvantage is the results are artificial– Impact of management actions are often deferred and MoS is viewed as

an accounting “black box” by analysts

MoS Planned Profit Example

1 2 3 4 5 6 7 8 9 10

Millions

Net cashflow

MoS planned profit

• Uneven cash-flows with large new business strain

• Smooth MoS planned profits as all acquisition costs are deferred

Example cash-flows for a portfolio of yearly renewable term policies

Exposure Draft Method

Proposed Daft Draft Standards

• The IASB have been working on an IFRS update

• They issued an Exposure Draft (ED) in July 2010

• Three key differences to MoS:– Profit margin is split into two (Explicit Risk & Residual Margins)– The profit margins are “locked” (i.e. no assumption changes are spread

through margins)– Not all acquisition costs are deferred (results in a year 1 loss)

ED Planned Profit Example

• Uneven cash-flows with large new business strain

• ED method has a loss in year 1 (non-incremental acquisition costs), then smooth planned profit in years 2+

Example cash-flows for a portfolio of yearly renewable term policies

1 2 3 4 5 6 7 8 9 10

Millions

Net cashflow

New IFRS planned profit

Effect of Assumption changes

• MoS acts as a “shock absorber” for most assumption changes• ED capitalises the impact of all assumption changes• Result is that the ED method will result in much more volatile profits

IFRS Planned Profit Volatility - Current (MoS) vs New (ED)With mortality assumption change in year 2, discount rate change in year 4 and

lapse assumption change in year 6

-200

-100

0

100

200

300

400

500

1 2 3 4 5 6 7 8 9 10

Th

ou

sa

nd

s

Year

Current MoS planned profit

New ED planned profit

Recent Developments

Recent Developments

• FASB proposal with “composite” margin

• Joint IASB / FASB meetings in mid-Feb 2011 to consider industry feedback on the ED method– They are now reconsidering the “locking-in” of margins, which would reduce

profit volatility

• Revised Exposure Draft to be published by June 2011

The ED method is subject to change, watch this space!

Summary

Summary• The method of calculating policy liabilities affects the timing of the profits

• The current MoS method spreads profit in line with “services” provided and spreads the impact of many assumption changes– BUT it results in an artificial picture of financial performance

• The proposed ED method “locks-in” the margins– Results in additional profit

volatility and exacerbates the artificial nature of life insurance accounting

• Meetings are underway to reduce the current ED methods volatility

Prudential regulation and Solvency

Insurance (Prudential Supervision) Act

• Enacted in Sept 2010, it gives the RBNZ the following roles as the new regulator of the NZ insurance industry:

– To issue licences to NZ insurers– Carry out Prudential Supervision of insurers, including:

• Solvency requirements• Financial strength rating requirements• Risk management requirements• Appointed Actuary (AA) regime• Fit & proper person requirements (for directors & the AA)• Financial reporting requirements• Statutory fund requirements (life companies only)

– To gather information and investigate insurers– Facilitate distress management

Appointed Actuary (AA) regime

• All insurers must have an Appointed Actuary, who then must:

– Meet “Fit & proper person” requirements

– File Financial Condition Reports (FCRs) with the RBNZ

– Responsibilities within the solvency calculations (e.g. projecting solvency for 3 years)

– “Whistle-blowing” responsibilities if the insurer could be expected to go into financial difficulties

Why regulate insurers?• Regulation can be in response to company failure• However, there have been very few insurers fail in NZ and

none have been significant• Failures include:

• ACL Insurance (1989)• A few mutuals• Capital Life (1989)• Standard Insurance (1961)• Maoriland Life (1951)

• Plus maybe others if it weren’t for M&A’s…

The ACL case was the biggest failure in NZ ($12.5mil life fund).

Two major issues leading to its demise:

• Asset concentration risk (53% of assets was invested in one retirement village)

• No separate life fund (policyholders ranked alongside unsecured creditors)

Both issues would not occur under new regulatory environment.The new Act was not in response to insurer failure, but is designed to

bring NZ into line with international best practice

What is solvency?• Being solvent is a requirement for all companies• Insurers require an additional capital buffer to ensure they

remain solvent with a high probability (99.5%)– We call this the “solvency” requirement

• Life insurers have adopted PS 5.01 “voluntarily” until now

• The RBNZ will issue solvency standards going forward

• Solvency is the main part of the new Act that has the ability to affect insurers financially

PS5.01 vs. draft RBNZ solvency

Assets

Capital(or net assets)

Contract Liabilities

Other Liabilities Other Liabilities

Solvency Liabilities

Resilience reserve

Inadmissible assets

Insurance Risk Capital Charge

Expense reserve

Asset Risk Capital Charge

Catastrophe Risk Capital Charge

Ineligiblecapital

Asset Risk Capital Charge includes a new version of PS5.01’s Resilience Reserve plus charges for:

Reinsurance Recovery RiskAsset Concentration (which previously was within Inadmissible Assets)

IFRS Reported Balance Sheet PS5.01 structure

New RBNZ structure

Not to scale. Relativities between PS5.01 and RBNZ standards will

change based on differences discussed below.

• Compared with NZSA PS 5.01, the draft RBNZ standard has:

– New structure with new concepts

– More granular product groupings (e.g. level / YRT, short-term DI / long-term DI, differences in expense or commission structures)

– Higher prescribed assumptions in some areas (e.g. lapses from +/- 25% to +/- 40%)

It is expected that solvency requirements are higher under the initial RBNZ draft. A revised draft is due out in April 2011.

Summary• The RBNZ is the new regulator of the NZ insurance industry

• Actuaries need to be aware of new Prudential Supervision, in particular the responsibilities placed on the Appointed Actuary

• “Solvency” refers to the capital buffer required to ensure an insurer remains solvent and new solvency standards will be issued by the RBNZ

• The initial RBNZ draft is very different from PS 5.01, so actuaries need to understand the impacts and practical implications (incl. link with IFRS)

• A revised draft RBNZ standard is due out in April 2011, make sure you voice any concerns!

Questions?

Future PathwaysFresh perspectives from actuaries of the future

General InsuranceJonathan Nicholls, PwCJing (Annie) Luo, AMI

Agenda• Regulatory Framework

– Solvency Standard– Key Issues

• Developments at ACC– Scheme growth & recent changes– What does the future hold?– Comparison with Australian experience

• Canterbury Earthquake– Quakes so far– Current Impact– The Future

Regulatory Framework

Solvency Standard

VS

(Ratio)

Actual

Solvency

Capital

Minimum

Solvency

Capital

Prudential Adjustments

NZ GAAP

Balance Sheet

Risk ChargeFactors

Business Metrics

VS

(Ratio)

Actual

Solvency

Capital

Minimum

Solvency

Capital

Prudential Adjustments

NZ GAAP

Balance Sheet

Risk ChargeFactors

Business Metrics

Key Issues

• Adding value through the FCR• Disclosure of Solvency Ratio, with

comparison to RBNZ guideline• Transition programme to full compliance• “Whistleblower” responsibilities

Developments at ACC

ACC – OSC Liability growth

Scheme Growth

Recent Stabilisation

• Increased rigour around claim acceptance• Claim monitoring• Lower rates for services from providers• Legislative amendments

Publicity of Scheme sustainability & limits

The Future for ACC

• Stocktake recommended the Work, Earners’ and Motor Vehicle accounts should be insured privately.

• Cabinet decision was to move towards competition in the Work account, ACC could still insure.

How does the move to competition pan out? What happens when the public concern over

sustainability dissipates?

Australian Experience

• Steep premium increases in 2002 prompted the Ipp Review of the Law of Negligence.

• Resulting Civil Liability Act 2003 and Injury Scale Values led to a fall in claim frequency & amount.

• NSW CTP introduced cover for “at fault” drivers in 2006 (for catastrophically injured) and 2009 (all).

• Large increases in economic loss payments for QLD CTP led to a Review in 2010.

ACC – a political football

Canterbury Earthquake

Quakes so far …

These are the relatively large magnitude earthquakes / aftershocks listed on the EQC website for claims management:

• 4 September 2010: 7.1 magnitude• 19 October 2010: 5.0 magnitude• 14 November 2010: 4.9 magnitude• 26 December 2010: 4.9 magnitude• 20 January 2011: 5.1 magnitude• 04 February 2011: 4.5 magnitude• 22 February 2011: 6.3 magnitude

Current Impact

• The largest single insurance event in New Zealand history

• Estimated loss of around $6.0 billion for September quake

• Predicted likely loss of another $10.0 billion for latest February quake

• The third most costly insurance loss worldwide in 2010

• Rank ? in 2011

Current Impact

• Sharing the cost between the EQC and insurance companies - Premium - Claims

Current Impact

• Quake response– September Quake: staff resource, underwriting restrictions,

policy coverage (temporary accommodation)– February Quake: emergence recovery mode, office relocation,

policy coverage (theft)

• Claims Management– September until 21 February– Future possibilities

The Future

• Is the February quake still an aftershock of the September quake or another new earthquake?

• A British expert in engineering risk said insurance policies in many countries did not allow more than one claim for an "act of God" event a year.

• If damage caused by the aftershock was deemed to be part of the main quake in September then insurance would probably pay out, if the quake is deemed to be independent then coverage may not be guaranteed, Imperial College London fellow Peter Stafford said.

The Future

• COUNTING THE COSTS: Should the EQC levy still be collected through premiums on house and contents insurance, or would it be fairer to collect it via rates, so all homes are covered, not just those insured? – from Sunday Star Times

• Insurance and reinsurance premiums were expected to rise in the wake of the quake. Any increase would be determined by the market. – from Insurance Council chief executive, Chris Ryan.

• Queensland floods, Cyclone Yasi and Canterbury Earthquake – what’s going to happen in the future for the GI market here?

Any questions?

Contact Details

Jonathan Nichollsjonathan.p.nicholls@nz.pwc.com

Jing (Annie) Luoannie.luo@ami.co.nz

Feel free to contact us with any comments/questions!

Future Pathways Fresh perspectives from actuaries of the future

Health InsuranceAnagha Pasche, Southern Cross

Overview of presentation

• NZ health insurance market• The role of public health & ACC• Types of health insurance products• Claims drivers• Claims inflation• Premium rates• Group schemes

What is health insurance?

• Health insurance covers the costs of many non-urgent healthcare procedures such as orthopaedic surgery and semi-acute healthcare procedures such as the removal of cancers and cardiac surgeryFrom Health Funds

Website

• Health insurance means insurance against a liability to pay fees or charges relating to the provision of a health serviceInsurance Prudential Supervision Act 2010

NZ health insurance market• Health Funds Assocation of New Zealand Inc (HFANZ)• Industry body• Source of market data • 10 members (98% of all inforce health insurance policies)

– Accuro Health Insurance– AIA New Zealand– EBS Health Care – Manchester Unity Friendly Society– OnePath Life (NZ) Limited – Police Health Plan Ltd – Southern Cross Healthcare – Sovereign Assurance Company Limited– TOWER Health & Life Ltd– Union Medical Benefits Society Ltd

NZ health insurance market

Market statistics at 31 Dec 2010• 1.38 million lives covered (approx 32% of

population)• $961.9 million in Earned Premium• $824.2 million in Paid Claims• Average annualised growth in claims costs

over the last five years has been 8.7% p.a.

The role of public health & ACC

• NZ health system funded by taxation, ACC levies, health insurance and individual contributions

• Good public health system but there are constraints• The public health system effectively delivers acute

(urgent) services• However, non-urgent or elective surgery are rationed• Health insurers complement the public health system by

covering the cost of non-urgent procedures• Private market (funding and provision) has emerged due

to (perceived) gaps in public coverage• Example: private radiotherapy services

The role of public health & ACC• ACC “No fault” sole insurer for all work and non-work

injuries within New Zealand• Role as set out by government www.acc.co.nz

– prevent injury – make sure people can get treatment for injury, if it

happens – help people get back to everyday life as soon as

possible.• Cut backs to costs of elective surgery• Example: increased scrutiny on shoulder, knee and spinal

surgery

Health insurance productsThere are two main types of health insurance policies:• Major Medical Policies: cover elective surgical and specialist

care• Comprehensive Policies: also cover day to day costs e.g.

doctor’s visits & prescriptions

Policies can be• Shared cover (co-insurance) or • Extensive cover (full reimbursement for qualifying procedures)• Excess options often available

No regulatory mandatory benefits

Health insurance productsTrend to move away from comprehensive policies (67% of policies at 31 Dec 2010 were major medical)

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

Jun-

98

Dec-9

8

Jun-

99

Dec-9

9

Jun-

00

Dec-0

0

Jun-

01

Dec-0

1

Jun-

02

Dec-0

2

Jun-

03

Dec-0

3

Jun-

04

Dec-0

4

Jun-

05

Dec-0

5

Jun-

06

Dec-0

6

Jun-

07

Dec-0

7

Jun-

08

Dec-0

8

Jun-

09

Dec-0

9

Jun-

10

Dec-1

0

Inforce count

Major Medical

Comprehensive

Total

Claims driversSome factors affect claims:• Plan type / Benefits• Age• Gender• Smoking status• Duration / tenure• Socio-economic• Regional

Claims trends / claims inflationNew technologiesChanges in utilisation

Claims inflationSome ways insurers try to contain claims inflation• Underwriting of pre-existing conditions: most insurers treat in

one of three ways:– Exclude condition from insurance cover– Defer coverage of condition for a period of time– Charge a higher premium to cover the condition

• Benefit design– Policy exclusions– Benefit / Policy limits– New medical technology

• Claims management– Applying reasonable charges– Contracting with providers

Premiums rates

– Plan type / Benefits– Age (Risk rating system or Community rating system or

combination)– Gender (some insurers)– Smoking status (some insurers)– Other lifestyle criteria (some insurers)– Amount claimed / Low claims discounts (some insurers)– Charging for children– Payment methods– Group schemes

Subject to Human Rights Act

Group schemes in health insurance

• Employer group schemes accounts for a large proportion of New Zealand business.

• Groups often have a specialised/subset product range offered to them

• Group business usually has cheaper premiums and when subsidised may be charged a flat family rate or flat adult/child rate (usually derived from age related rates)

• More relaxed underwriting for larger employer subsidised groups (expected to exhibit less anti-selection than individuals)

• Very large schemes may be experience rated

Thank you!

Future Pathways Fresh perspectives from actuaries of the future

Risk ManagementKlaas Stijnen, DeloitteJames Xu, AMP

Risk and Actuaries Life, Health, General……

Risk Actuaries?

Life HealthGeneral Risk

What is RiskRisk is……

• Accident?

• Potential of loss?

• Opportunity?

• Lost money to share market during the GFC?

US House Price

1998

1999

…

2005

2006

2007

GFC Overview

The Economy

2008

– Panicking– Securitisation took hit,

private sector almost vanished

– Meetings!– Investigations!– Rescue!

2005

– Job market going up– House Price going up– Interest Rate going up

– Let the market look after itself

2007

– Some defaults started to appear

– Securitisation volume still high

– The market will look after itselfRegulator

2006

– Job market going up– House Price going up– Interest Rate going up

– Let the market look after itself

How did the system collapeRating Agencies Regulators

Banks Investors

Enterprise Risk Management

Source: Harry Panjer

Regulator InvestorRating agency CEO with Stock options

CRO???

Enterprise Risk Management• What is ERM?

“an organisation (…) assessing, exploiting, financing and monitoring risks from all sources for the purpose of increasing the organisation’s short- and long-term value to its shareholders.”

• Why ERM? Thorough understanding of risks

Pursue higher return for shareholders

Provide better information to external stakeholders

ERM Process

Risk identification

Risk monitoring

(reactive) risk management

Risk based strategy

ERM Framework Example

Risk AppetiteHow much value are we willing to put at risk with which probability?

Risk toleranceRisk Factor 1

Risk FactorsInsurance, lapse, interest rate, equity etc

Risk toleranceRisk Factor 2

Risk toleranceRisk Factor …

Risk toleranceRisk Factor N

Framework to manage Risk Tolerances

CERA Designation Global Recognition

Technically “approved”

Risk management specific

Discussion?