Research

 Active working parties

Benchmarking stochastic models – ongoing (established 2007)

Chair: Ralph Frankland

Other members: Enrico Biffis, Seth Eshun, Paul Fulcher, John Hibbert; Andy Holtham, Oliver Lockwood, Parit Jakhria, Alex McNeil, Andrew Smith, Elliot Varnell and Tim Wilkins.

Aims and objectives

• To gain a better and wider understanding of the various methodologies that could be used for developing benchmark figures, including the advantages and disadvantages of each
• To develop robust values for a variety of tables. Scope for the Working party to give consideration to the process for justifying the use of an internal model. This would take account of the requirements of Solvency II, as well as of BAS, and any other relevant mandatory requirements.

Outcomes to date

• Institute and Faculty Sessional Paper 2008/2009, on Modelling Extreme Market Events, a link to which is available here.
• Presentation to FIERM Conference 2008 on Fixed Interest Investments
• Presentation to Life Convention 2008
• Presented at Highlights of Life in London and Edinburgh 2009
• Presentation to CILA, May 2009
• Presentation to Risk and Investment Conference 2009
• Presentation to Global Financial Crisis Group Seminar, June 2009
• Presentations to Regional Societies
• Presentation to Life Convention 2009
• Presentation to Momentum Conference 2009
• Presentation at Open Forum The financial crisis: was it a one in two hundred year, or a one in ten year event? March 2009

Expected outcome

• Presentation at the 2010 Life Conference

Consumer Information in Financial Planning

Chair: Alan Ritchie

Other Members:  Joshua Corrigan, Sandra Graham, Andrew Hague, Alan Higham, Jenny Holt  and Tony Stevens

Outcomes to date: Transforming consumer information (published October 2011)

Counterparty risks (established 2009)

Chair: James Tuley

Other members: Alexis Iglaue, Andrew Chamberlain, Rajeev Shah, Dee Wilson

Terms of reference

• Consider the appropriate allowance that a solo entity should make for risks arising from its membership of a wider financial group, including risks arising from intra-group transactions.
• Consider how such allowance should fall between the setting of technical provisions and capital assessment.
• Provide assistance to AFHs on appropriate approaches to setting such allowances in the current Pillar 1 regime, in the current Pillar II regime and in the future Solvency II regime both in technical provisions and in internal models of the required capital.

Background

• The issue of allowance for risks arising for exposure to fellow group entities is already present in both Pillar 1 reserving and Pillar II capital assessment. The loss of the group support regime under Solvency II, and the better understanding of group wide diversification, means one might expect further actions by groups to achieve such diversification in their solo entities. One might expect wider use of various intra-group transactions to optimise the diversification credit groups achieve and to cater for the co-location of capital and risk . This heightens the need for the profession to explore current issues and any extension of these issues likely in the near term from Solvency II. To be of most use to AFHs the WP should be capable of producing a draft Information and Advisory Note as well as a discussion of the issues, and possibly a survey of current practice. The WP may also wish to offer a draft response from the profession to emerging CEIOPS CPs that address group issues.

Expected outcome

• Presentation at Life Conference 2010

Gender Directive

Chair: Dave Grimshaw

Other members:

Objectives:

The aim of the working party will be to consider the impact of a ban on the use of gender, in particular:

• on future prices and sales volumes of key UK life insurance products, and
• on existing portfolios, including any back-dating implied by the verdict.

Expected outcomes:

• Open Forums in Edinburgh (30 March) and London (12 April)
• CILA 2011
• Life Conference 2011

Life Office Taxation Working Party

Chair: Paul Turnbull

Other members: Trevor Fannin, Steve Jones, Matthew Little, Andrew Rendell, Matthew Taylor

Aims and objectives

• To keep the profession informed of developments in the field of Life Office Taxation
• To keep abreast o new developments
• To analyse their impact
• To inform the profession as appropriate
• As a subsidiary objective, to consider the impact of some of the more complex aspects of UK life office taxation on actuarial work.

Outcomes to date

• See the Working Party’s web page for current issues and document library.

Policyholders'  behaviour in extreme conditions (established 2009)

Chair: Clayton Balkind

Other members: Oliver Lockwood, Ilan Leas, Rajeev Shah, Rachael Todd, Yasmeen Husain

Background

It has always been understood that actuarial models need to incorporate the future actions of both management and policyholders into the methodologies and assumptions used.  This would typically be done through the choice of longer term, static (implicit and explicit) assumptions.

Actuarial modelling techniques have improved significantly in recent years, and as stochastic valuation techniques have become more commonplace it has been necessary to develop more sophisticated and dynamic approaches.  Significant advances have already been made in the modelling of management actions – such as investment strategies and bonus policies – and linking these to the governance of the company.  By contrast the modelling of policyholder behaviours – such as the decision to surrender or take up an option – remains simplistic.

However this is an area that is expected to receive considerable attention over the next few years.  For example, in Europe the Solvency II framework includes specific considerations for the treatment of policyholder behaviour in internal models.  This in turn creates incentives for insurers to improve their models to improve competitiveness and capital efficiency.  The recent financial upheaval in the markets has also increased the focus on policyholder behaviour under adverse conditions.

Objectives

The aim of the working party will be to consider issues around the measuring and modelling of policyholder behaviour.  At a high level these objectives include:

• Short term:
  • Understanding current market practices and approaches within the industry.
• Medium term:
  • Analysing the regulatory and other requirements to understand the minimum criteria that data and models must meet.
  • Comparing these minima to current practice to highlight areas where improvements and professional guidance are needed.
• Longer term:
  • Setting out clearly a series of recommendations and observations describing best practice and a roadmap by which this standard can be achieved.

Amongst the specific questions that the working party will address are:

• To investigate any evidence for policyholder behaviour changing in adverse market conditions in the UK as well as overseas;
• To highlight calculations of liabilities and capital requirements that rely on assumptions about policyholder behaviour (in stress tests and stochastic calculations of liabilities);
• To highlight practical difficulties in modelling these and suggest potential approaches that might be reasonable; and
• To identify management information that companies should collect in order to improve their assumptions going forward.

Approach

The working party will carry out its work in three stages to mirror its short, medium and longer term objectives.

Stage 1 will involve a survey of the current practices within the UK life insurance industry to understand how policyholder behaviour is currently treated in valuation and ICA models.  This will be used to develop a benchmark of current market practice against which regulatory and other requirements can then be compared.  The survey will target all Actuarial Function Holders and will preferable take the form of an e-survey.

Detailed planning for Stages 2 and 3 will be carried out on completion of the survey.

Expected outcomes

• The working party will produce summary reports of its findings at the end of each stage.  It is intended that these reports will made available to members of the Profession through one of the regular communication channels used by the Life Practice Executive Committee such as e-mail alerts, publication on the website, presentation at CILA / Life convention or through the publication of a paper.
• Any specific regulatory recommendations would be made in a formal report that would be passed upwards in the Profession through the Life PEC for scrutiny and, once agreed, passed to the FSA and other interested parties.
• Presentation at Life Conference 2010

Risk Appetite

Chair: Tim Stedman

Other Members:

Expected outcomes: tba

Scottish Solvency and Capital Management Research Group (Ongoing)
(formerly called Faculty Research Group on Solvency II)

Chair: Mike Ashcroft

Other members: Michael Aitchison, Anne Baxter, Carole Dick, Peng Jin, Susan Morgan, Callum Stuart, Richard Taylor

Aims and objectives

• This Group will look at some of the consequences to life insurers of the introduction of the Solvency II regime.

Outcomes to date

• Presentation to Life Convention, 2008,
• Survey on Solvency II and capital management 2009
• Presentation to Life Conference 2009
• Paper to SIAS in Autumn 2009, available here

Use of derivatives in life assurance (Ongoing)

Chair: Martin Muir

Other members: Jim Cadman, Andrew Chase, Paul Coleman, Scott Eason, Gary Finkelstein, Paul Fulcher, Chris Harvey, Richard Pereira, Albert Shamash, Tim Wilkins.

Aims and objectives

• To consider how life assurance companies are using, or might like to use, derivatives and establishing whether their use is unduly constrained.  Including credit crunch and counterparty issues in research.

Outcomes to date

• Presentation to Life Convention 2000.
• Presentation to Life Convention 2003, a link to which is available here.
• SIAS Paper 2004, a link to which is available here.
• Working Party Report January 2006, a link to which is available here. 
• Article in The Actuary, November 2008 a link to which is available here.

With-profits estates (established 2009)

Chair: Dick Rae

Aims and objective

To review and record modern with-profit asset management strategies, in particular:

• how policyholders’ expectations are met in terms of asset share investment strategy
• the alternative strategies available to manage the cost of financial guarantees
• set out the considerations which impact on the choice of strategy and affect its implementation

Expected outcome

• Presentations to CILA and Life Conference 2010.

 

Completed working parties

Actuarial processes and controls

Chair: Richard Care

Other members: Richard Budden, Matt Cocke, David Ford, Tim Hartley, John Heenan, Dave Hobbs, Anthony Lee, Mark McCarthy, Sanjeev Pujari, Dominic Veney, Nick Watkins

Outcomes:

• Presentation to Life Convention 2007 – link to presentation is available here.
• Report of Working Party which is available here. 

Bulk purchase annuities (monoline insurance)

Chair: Mike Hawes

Other members: Ed Collinge, Jan-Hendrik Erasmus, Paul Fulcher Roger Houlihan, Chinu Patel, Joynur Rahman, Nick Sinclair, Jacqueline Siu, Paul Teggin, Sunny Yang

Aims and objectives

• To review market developments to date in BPA market
• To review rules or treatment of BPA business and diversification benefits under Pillar I, Pillar II, Solvency II and rating agency models and an economic capital approach
• Modelling the treatment and implications using a simple model of a BPA book of business
• Assessment of pension scheme attitudes to the market by discussion/interviews with senior pension consultants that advise on this area
• Conclusions based on the above.

Outcome

• Presentations at CILA and the Life Conference 2009.

Life ICA Working Party  

Chair: Trevor Jones

 Other members: Tewdar Ansell, David Bird, Bryan Blunt, Andy Cope, Rob Green, Greg Pinell, Ed Rayfield, Darren Thorne.

 Outcomes: 

•  Presentation to Life Convention, 2008.  Link to presentation is available here.

IFRS developments and the impact on financial reporting for insurers

Chair: Kamran Foroughi

Other members: Chris Barnard, Raymond Bennett, Edward Conway, Steve Corfield, James Harrison, Gary Hibbett, Irina Kendix, Marylene Lanari-Boisclair, Chris O'Brien, and Jeremy Straker 

Outcomes:

• Presented Hot topic session at Life Conference 2010
• Presented Sessional Event in London April 2011
• Presented Sessional Event in Edinburgh May 2011

Management actions in the context of realistic balance sheets

Chair: Martin Pike

Other members: Tim Bunch; Adrian Fuller; Jonathan Pears; Ben Rowe; Matthew Lee; Gavin Coates; Iain Baker. 

Outcomes:

• Presentation to Life Convention 2006, a link to which is here. 
• Presentation to Current Issues in Life Assurance, 23 May, 2007 a link to which is here.

 Management of annuity business (established 2009)

 Chair: Peter Telford

 Other members: Bridget Browne, Ed Collinge, Paul Fulcher, Ben Johnson, Wendy Little, Joseph Lu, Jeremy Nurse, Derek Smith, and Feifei Zhang

 Aims and objectives

 The primary focus of the paper will be non-profit annuities although it will include markers for product differences, such as different underwriting or investment strategies and profit sharing.

• Annuity products will be broken down between in depth analysis (UK market, fixed annuities, enhanced annuities, WPA and possibly UL annuities) and a catalogue approach (Non-UK, Variable Annuities, Temporary Annuities and Immediate Needs)
• WPA should be covered as they are UK specific and will not otherwise get professional attention. Note that there will be difference in treatment depending on the fund that the annuities are held in, e.g. own WPA fund or in the larger company with profits fund.
• Significant development in the Variable Annuity market implies that they should be covered to some degree: unaccredited Variable Annuities market size of £1bn in 2008, more than double 2007. The management of Variable Annuities is a significant extra portion of work and full coverage is outside the scope; however pertinent comments about differences for the product should be included, and this will also apply to other non traditional annuities and markets.
• Unit Linked Annuities will be covered if there is a different management for the longevity risk. However this requires an initial exploration; if total research required is disproportionate to the small size of the unit linked annuity market then a list of suggestions for future research will be given.
• Products will be split by individual and bulk annuities, to ensure that there is no duplication of the BPA working party study, whose work will be closely monitored (and vice-versa)
• As a general principle the paper will be a compendium rather than breaking extensive new ground, although we will aim to put forward some new insights and issues. 

Outcome  

• Sessional meetings at Faculty and Institute in March 2010

Reassurance of mortality and morbidity in the UK market

Chair: Paul Murray

Other members: Andy Chan, Andrew Gilchrist, Christopher Hancorn, Jamie Leitch, Joanne Wells, John Williamson.

Outcomes:

• Presentation to Life Convention 2008, a link to which is here