Systemic impact on insurers and perception of insurance
Lead: Daryl Boxall
Detail: What long term systemic impacts on life insurers are possible from the biometric and market risk discontinuity of 2020? Are there issues around availability of insurance, consumer depend for insurance that need to be systematically viewed.
(Re)insurance companies tend to have wide-ranging stress and scenario testing regimes which consider risks affecting the undertaking and/or group. An area of potential weakness is the consideration of systemic risks*, perhaps because it is difficult for individual (re)insurers to determine appropriate assumptions for the measures the government and other bodies would take in such an event.
*In this context systemic risk is the risk of a major failure of a financial system leading to the collapse or failure of an industry or an entire economy
Life office macro financial and capital management
Detail: See sub-workstream descriptions below:-
Life office macro financial and capital management A (PRA Forberance)
Lead: Paul Fulcher
Detail: Where the PRA has discretion under Solvency II how is the PRA exercising the discretion? Are the measures taken so far useful?
- Where could further discretion be exercised to alleviate the impact of COVID-19 on insurers and to ensure that policyholders are not disadvantaged?
- Are there any potential opportunities that the PRA could take advantage of from the Solvency II review?
- What else could the PRA do in addition post the end of the Brexit transition period?
Life office macro financial and capital management B (Procylicality)
Lead: Paul Fulcher, Tim Stedman
Detail: (Re)insurers have been acutely impacted by COVID-19, experiencing extreme stresses to both the asset and liability side of their balance sheets. While the industry is generally perceived to be highly robust, the interaction between complex and competing priorities (e.g. maintaining risk-based capital, duties to policyholders and shareholders, rating agencies, availability and access of capital) can incentivise pro-cyclical behaviour. As institutions with long-term liabilities, this pro-cyclical behaviour can damage
- Are there any common areas of (re)insurance firms’ regulatory and economic balance sheets that prompt or encourage pro-cyclical behaviour?
- Are there any instruments / practices / changes to regulations that could be recommended to the industry to halt pro-cyclical behaviours.
Life office macro financial and capital management C (Management Actions)
Lead: Paul Fulcher
Detail: COVID-19 has stressed insurance companies in unexpected ways. There is a need for insurers to review the effectiveness of their current management actions in light of COVID-19 and identify any new management actions that COVID-19, and other emergent risks, require.
- How effective in dealing with COVID-19 were our existing management actions?
- Do the management actions in the ORSA need revising in light of COVID-19?
- Do we have the correct processes and management actions in place to identify and manage emergent risks such as COVID-19?
Outputs: Using hindsight to gain foresight
The first wave of Covid-19 and the associated severe stock market impact potentially put life insurers’ solvency under significant strain. We have looked back at what happened in the UK and internationally, with a view to lessons that may be learned from such events for the future, especially in the context of a potential second wave, a further stock market downturn, or any other financial crisis. This blog considers the capital and management actions taken by life insurers, both prior to and during the crisis, as well as those planned for the future.
Life office macro financial and capital management D (Dividends)
Detail: On 2 April 2020 EIOPA issued a statement on dividends distribution and variable remuneration policies in the context of COVID-19. In it, EIOPA urged that, at the current juncture, (re)insurers temporarily suspend all discretionary dividend distributions and share buy backs aimed at remunerating shareholders. This suspension should be reviewed as the financial and economic impact of the COVID-19 starts to become clearer.
EIOPA also urged that this prudent approach is applied by all (re)insurance groups at the consolidated level and also regarding significant intra-group dividend distributions or similar transactions, whenever these may materially influence the solvency or liquidity position of the group or of one of the undertakings involved.
- What are the potential consequences of withholding dividends to: a) (re)insurers?; b) wider society?
- Do these potential consequences change if dividends are withheld for more than one year?
- What steps should be taken if a (re)insurance group needs a dividend distribution from an undertaking, but providing that dividend would materially influence the solvency or liquidity position of the undertaking?
Longer term pandemic modelling for life insurers
Lead: Natalia Mirin
Assumption setting in current uncertainty (H2'20, FY'20)
Lead: Natalia Mirin
Detail: The current pandemic situation has increased the level of uncertainty in the assumptions. Many insurers have assessed immediate impact of COVID-19 on their operations. The 2020 financial year end is fast approaching and a new set of assumptions will need to be set for valuation of life insurance liabilities, testing their resilience to changes and capital assessment. This workstream aims to research and set out considerations the following areas:
- Which YE20 assumptions will be affected by the COVID-19 pandemic?
- What is the impact on mortality, morbidity, other demographic assumptions?
- Do we need to change any economic assumptions?
- What impact of the liabilities, stress and scenario testing, capital assessment would changes in assumptions have?
- How different impact of the COVID-19 pandemic should be translated into changes in assumptions?
- How the increased market volatility, change in consumer behaviour and increased uncertainty impact the assumption setting process?
A group of Life Actuaries, working as part of the IFoA Covid-19 Action Taskforce, are releasing a series of blogs considering various ways that the pandemic has affected Life insurers.
In the first in this series, they consider potential differences in the extent of Covid-19 that may or may not have an impact on the assumption-setting processes in a particular company and its businesses in different countries.
In the second blog in this series, they explain how Covid-19 has created uncertainty and what it is important to think about when setting valuation assumptions for bonus rates.
The Covid-19 pandemic has resulted in significant worldwide business interruption and operational changes. As the virus directly affects risks associated with the life and health of the population, insurers are currently considering whether any changes to the assumptions used for valuation of these risks will be required at this year end.
Lead: Karen Brolly
Detail: The core of the issue is in a broad consideration of operational risk scenarios and appropriate accountability of these. Common sets of operational risk scenarios used by insurers may or may not cover risks that have occurred as a result of COVID-19 pandemic and impacts these risks have brought.
Operational resilience need to be reconsidered given the current experience and potential new additions to operational risks under consideration, their outcomes and mitigating actions identified.
Have insurers considered a broad enough set of operational failure scenarios? Do these really lead to failure or could be mitigated by appropriate actions being put in place? What will exactly fail should scenarios under consideration occur and if there is any possibility to reverse such an impact?
Lead: Tom Kenny
Lead: Tom Kenny
Part VII transfer continuations
Lead: Phil Simpson
Detail: COVID-19 is complicating Part VII transfers and the PRA/FCA are asking for considerable information on its potential consequences.
COVID-19 hits transfers in particular through changes in market risk, operational risk and insurance risk. The ability of insurers to execute the transfer may be materially affected by areas including:
- higher death, and possibly morbidity, claims
- significant decreases in value and quality of investments; and
- suffering operational disruption either directly or through third parties providing services
What consequences of COVID-19 should the Independent Expert consider? and what additional activities do firms undertaking (or planning) a Part VII transfer need to undertake as a consequence of COVID-19?
Sufficiency of extreme interconnected scenarios
Lead: Daryl Boxall
Detail: Modern financial markets are highly globalised and interconnected. At times of stress, this interconnectedness can act to facilitate the spread of an asset class or region specific shock into a generalised global crisis.
As complex multi-asset investors (re)insurers are particularly exposed (in the short term) when equilibrium market conditions break down. Typical examples might be:
- Usually uncorrelated assets behaving in highly correlated ways at times of crisis
- Heavy reliance on market capacity and functionality to trade assets
- Sufficient liquidity to meet collateral calls on derivative positions
How does the interdependency of financial markets influence the progression of a financial crisis? What are the key circuit breakers / accelerators in the financial infrastructure?
What are the key pain points for (re)insurers in a generalised market crisis, and what actions could be take to mitigate these?
External risks - what if the impossible becomes possible?
Detail: Over the last decade we have seen a number of events that would largely be assigned very low probabilities prior to their occurrence. Examples of such events are: very low interest rate environment that lasts for a long time; even further reduction to variety of valuation discount rates; pandemics and their breadth; negative commodity prices; etc.
- What is the process of setting external risks for consideration in insurance companies’ operations?
- How can this be improved to ensure the recent experiences are accounted for and “risk thinking” is broadened for the future?
Interaction between operational and financial risks in a systemic crisis
Detail: (Re)insurers are used to modelling the interaction between operational and financial risks in a relatively stable environment. There is little empirical evidence of how these risks interact in a systemic crisis.
- How are operational and financial risks interacting in the current global pandemic?
- Is this the same or different from how they generally interact n a stable environment?
- Is it how they are likely to interact in any systemic crisis?
Learnings from the Covid-19 Crisis
Detail: The issue is in the ability of insurers to consider a broad number of external events that may affect their businesses and how to ensure that “impossible” is also given appropriate consideration.
The COVID-19 pandemic has created a huge number of unfortunate fatalities across the globe, severely impacted the daily lives of billions of people, and created economic conditions across multiple industries that were previously unthinkable.
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This year's GIRO has been re-designed as a virtual conference to offer members and non-members the opportunity to get up to date content from leading experts in the general insurance field via online webinars. All sessions will be recorded and made available to purchase and re-watch post-event on the IFoA's GI Online Learning Resource area.
This webinar will provide an update on the emerging thinking around future regulation of DB schemes:
The webinar will discuss the challenges and opportunities schemes face in evaluating end game options, choosing a target state and understanding the impact this strategic decision could have on member outcomes long after the “end state” is reached. Adolfo, Kevin and Rhian bring over 60 years of experience in the industry and a variety of perspectives as scheme actuary, covenant adviser, trustee, de-risking adviser and insurer.
Retail banking is going through a period of substantial change as it moves into the digital age. Banks have large amounts of data about their customers and about their risks. Open data application programming interface (APIs) and data science are enabling banks to use their data to offer innovative and sometimes personalised services. Data science is also adding value in risk areas such as fraud detection and cyber security. At the same time, the move to online banking is making it easier for firms including fintechs to enter banking without having to establish branch networks.
Cash-flow driven investing is a game-changer for DB pension funds navigating their end-game. Suitable for sponsors who want to reduce risks on their balance sheets. And for trustees, it shifts the focus to providing greater certainty of returns, managing funding level volatility and ensuring they have enough income to pay cash-flow requirements.
Patrick Kennedy, Partner at Gateley Legal and Founding Director of Entrust (a leading professional pensions trustee company), will be delivering an update on the latest legal developments during the course of 2020. With both a pensions legal perspective and over 25 years of trustee service, Patrick will seek to highlight how the letter of the law has continued to evolve against the backdrop of a difficult and challenging year
The talk will provide an understanding of the priorities and relationships between deficit reduction contributions, in the context of wider scheme funding, and different types of value outflow from the employer based on the working party’s recently published report.
Covid-19 has required an urgent and cross-practice initiative to facilitate the extensive impact this pandemic has across all industries. IFoA members have been keen to contribute in a different way, so we developed the IFoA Covid-19 Action Taskforce [ICAT] to coordinate our effort, with a more efficient governance.
We have over 500 volunteers and countless topics which we have amalgamated into 93 workstreams.