ICAT workstreams overseen by the Life board

Systemic impact on insurers and perception of insurance

Code: Life0

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

Outputs: pending

Life office macro financial and capital management

Code: Life1

Lead: N/A

Detail: See sub-workstream descriptions below:-

Outputs: N/A

Life office macro financial and capital management A (PRA Forberance)

Code: Life1A

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?

Outputs: pending

Life office macro financial and capital management B (Procylicality)

Code: Life1B

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.

Outputs: Countercyclical measures in Solvency II

Solvency II includes a number of elements that were intended to reduce procyclicality and excessive volatility, and to enable insurers to provide long-term guarantees, often referred to as the long-term guarantees measures.

How Solvency II operated during crisis

Life office macro financial and capital management C (Management Actions)

Code: Life1C

Lead: Rosalind Rossouw

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.

How insurance company solvency ratios performed during COVID-19

This paper has been authored by a group of Life actuaries led by Ivy Ye. The group has a focus on Capital Management and is working as part of the IFoA Covid-19 Action Taskforce. Here we are looking at how the solvency ratios had performed thus far since YE19.

Regulatory Actions taken to mitigate the impact of the COVID-19 pandemic – using international insight to gain foresight

This article is co-authored by IFoA Fellow Konrad Farrugia and a group of Life actuaries led by IFoA Fellow Rosalind Rossouw. All contributors are working as part of the IFoA COVID-19 Action Taskforce and have a focus on Capital Management for life insurers.

Solvency II – countercyclical capital requirements and regulatory flexibility

In this blog we focus on lessons that might be learned for the future of Solvency II, which is particularly relevant given the current reviews in both the EU5 and, post Brexit, the UK6 .

Life office macro financial and capital management D (Dividends)

Code: Life1D [being merged with Life1C]

Lead: pending

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?

Outputs: pending

Longer term pandemic modelling for life insurers

Code: Life2

Lead: Natalia Mirin

Detail: pending

Outputs: pending

Assumption setting in current uncertainty (H2'20, FY'20)

Code: Life3

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?

Outputs: Potential differences in impacts of Covid-19 in different regions

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.

Bonus rates for participating products

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.

Impact of Covid-19 on life insurance new business sales

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.

Covid-19’s impact on the charge assumptions for unit-linked business

This blog discusses Covid-19’s impact on considerations for setting assumptions for unit-linked business charges. 

Impact of Covid-19 on margins over and above best estimate assumptions in financial reporting

This blog is discussing considerations when setting margins over and above best estimates assumptions in financial reporting.

COVID-19 – an imperative to review your data strategy

In this article, authors* Alexia Jami and Roy Perlson look at potential additional data considerations due the impact of COVID-19.

Expenses and expense inflation assumptions impact

This blog discusses the potential impact of Covid-19 on expenses and expense inflation valuation assumptions for non-linked life products.

Considerations for setting economic assumptions

In this article, the authors consider potential pandemic impacts on economic assumptions and aim to support actuaries in deciding whether to adjust these assumptions.

Operational risk

Code: Life4

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?

Outputs: pending

Savings products

Code: Life5

Lead: Tom Kenny

Detail: pending

Outputs: pending

Takaful

Code: Life6

Lead: Tom Kenny

Detail: pending

Outputs: pending

Part VII transfer continuations

Code: Life7

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?

Outputs: pending

Sufficiency of extreme interconnected scenarios

Code: Life8

Lead: pending

Detail: pending

Outputs: pending

Market interdependency

Code: Life9

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?

Outputs: pending

External risks - what if the impossible becomes possible?

Code: Life10

Lead: pending

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?

Outputs: pending

Interaction between operational and financial risks in a systemic crisis

Code: Life11

Lead: pending

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?

Outputs: pending

Learnings from the Covid-19 Crisis

Code: Life12

Lead: pending

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.

Outputs: pending