APTI Seminar

APTI Seminar

Insurance Related European Developments

Presented byJim Murphy, Principal

21 April 2011

2 Friday, April 21, 2023

About Milliman

Global independent actuarial and consulting firm

Offices in 54 locations with over 2,500 employees

Dublin office– Became part of Milliman in 2009 (previously Life Strategies)– 28 employees– Mainly work in life & pensions market (domestic and IFSC)– Also work in pensions policy and health areas– Clients include insurance companies, intermediaries, industry bodies, Government and state bodies


Agenda

ECJ Ruling on Gender Directive

PRIPS

Insurance Guarantee Schemes

Summary


Overview of recent events in history

2004 2008 2011

The Old Days … EU Directive 2004/113/EC – the “Gender Directive”

Equal Status Act amended in Ireland to implement EU Directive

1 March 2011 - landmark judgement from ECJ ruling against gender specific insurance rates

The Future …


Gender Directive 2004/113/EC

Designed to eliminate discrimination on the basis of gender

Implications for insurance– Article 5 gave Member States an option to opt out in relation to insurance– Allowing insurers to differentiate premium rates for men and women as long as:

• Use of sex is a determining factor in the assessment of risk based on relevant and accurate actuarial and statistical data

• Relevant data must be compiled and published regularly

– Costs relating to pregnancy and maternity cannot be considered in differentiating premiums.

Broadly speaking gender directive meant business as usual for Irish insurers …until recently


ECJ Ruling 1 March 2011

Belgian consumer association (Test Achats) challenged the validity of the Article 5 opt-out

EU Advocate General issued an opinion on 30 September 2010– Opined in favour of Test Achats

ECJ ruling was issued on 1 March 2011– Ruled in Test Achats favour– But recognised should be some time to transition to unisex rates– Unisex rates should apply from 21 December 2012


Initial Reaction – Equality Groups


Initial Reaction – European Commission

EU Justice Commissioner, Vivian Reding, welcomed the judgement and signalled that she would

“convene a meeting with business leaders from the insurance industry in the coming months to discuss the judgement’s implications”


Initial Reaction – Insurance Industry


Implications

Expected changes in pricing of different lines of business

* General directional changes expected for each line of business – will could be variations within a line of business

Concerns that premiums overall will increase– Due to “uncertainty premium”– Insurers will want to protect themselves against anti-selection/moral hazard

Males Females

Term Assurance/MPA ↓ ↑

Critical Illness ↑ ↓

PHI/Income Protection ↑ ↓

Annuities ↑ ↓

Motor ↓ ↑


Areas of uncertainty

A number of areas of uncertainty arise from the judgement– Industry trying to get clarity– Advice from lawyers– Meeting with EU Commission may not happen until September

Contracts issued prior to 21 December 2010 – emerging view:– Contracts issued prior to 21 December 2007 not affected– Contracts issued between 21 December 2007 and 21 December 2012 can continue to apply gender specific

rates after 21 December 2012 if premiums and benefits are fixed– Contracts issued between 21 December 2007 and 21 December 2012 with reviewable premiums or

benefits may require unisex rates from 21 December 2012

Can companies collect information about gender on application form – emerging view:– Should be acceptable (to understand portfolio mix) provided unisex rates apply

Can insurers price Group business using gender details for scheme members?

(The views expressed above and in the following slides are not definitive and action should not be taken based on these without seeking further specialist advice)


Areas of uncertainty

What is the position with annuities related to occupational pension schemes?– The Directive covers insurance contracts that are “private, voluntary and separate from the employment

relationship”– What does this mean in practice?– Some views expressed that bulk annuity purchases can still be priced using gender specific rates but

individual annuities should be gender neutral

Can insurers ask for information at underwriting or claims stage which could be deemed to represent discrimination?– e.g. information relating to prostate cancer, which is solely relevant for males

Is reinsurance business covered by the ruling?– Reinsurance contracts appear to be out of scope– In practice, insurers are likely to want reinsurers to provide unisex rates

Does the ruling apply to non-EU insurers? – Groupe Consultatif survey from March 2009 highlights differences in implementation across

countries: http://www.gcactuaries.org/documents/survey_gender_dir_implement_mar09.pdf


Other issues

Is this the thin end of the wedge for insurance underwriting?– Draft EU Directive in the pipeline covering age and disability*

=> modelled on Gender Directive

– Test Achats expected to take a legal case regarding age/disability factors in insurance– If insurers are not allowed to rate based on age or health status

=> community rating

– Some form of Risk Equalisation would be required for a voluntary private market to function– Effectively operating a Risk Equalisation scheme is fraught with difficulty

* The term “disability” in this context encompasses health status too

However EU AG’s opinion acknowledges different issues with age versus gender

What is the future for occupational pension schemes– The European Parliament called on the European Commission and Member States on 16 February

to “obligate occupational and other supplementary pension providers to use gender-neutral mortality tables when calculating pension benefits so as to prevent women from being punished for their higher life expectancy”


Agenda


PRIPS


Summary


What is a PRIP?

Multi-choice question

A. A theatrical objectB. An expletive, viz. “you dirty PRIP”C. A type of investment productD. An acronym for Personality Integration Rehabilitation Program


Packaged Retail Investment Products

There are many ways to “access” assets– A unit-linked investment policy– A tracker bond– A structured deposit– A UCIT or other fund– Maybe others

April 2009 – European Commission issued a paper on PRIPs

Proposal to move to a common framework for – disclosure requirements and – sales process of all PRIPs


3L3 set up a task force

April 2009 – November 2009: – CESR, CEBS, CEIOPS (three “Level 3” Committees covering securities, banking and insurance regulators)

consider EC report

Response is a 3L3 task force to study the key issues, report published in October 2010

Three main areas of focus:– Scope: structured deposits included; protection, with-profits out of scope– Disclosure requirements: start with UCITS “Key Investor Information” … typically a 2 page document– Sales process: start with MiFID Level 1


EU Commission Consultation Process

EU issued a consultation paper in November 2010– Consultation process closed in January 2011

Consultation paper sought views under a number of headings relating to scope, pre-contractual disclosure requirements and sales process

Some points of interest:– With profits is not explicitly addressed but would appear to be capture by the proposed definition of PRIPs– The Commission is considering an explicit exception for Pensions business– Feels that Variable Annuities should be in scope– Consideration given to variations in disclosure document for different types of PRIP


Agenda


PRIPS


Summary



EU Commission issued a White Paper in July

Proposed policyholder protection scheme regime for life insurers– Minimum requirements to apply across Europe– Schemes to be set up in each Member State – home state rather than host state basis– Covering both life and non-life policyholders for amounts less than 100%

• Some discussion about limiting coverage to certain types of non-life insurance policies

– Schemes to be funded in advance rather than “after the event”– Commission suggests a fund of 1.2% of premiums to be built up after 10 years– Contribution from each insurer will depend on its risk profile

Whatever the final form, EU Commission is committed to implementing a new regime

Will mean greater costs for consumers but for greater security


Key Issues

Enhance policyholder protection

Increase harmonisation of EU insurance markets

Challenge of moral hazard:– Safety net may encourage customers to choose riskier insurers– Safety net may reduce risk management incentives for insurers– Limits on benefits designed to mitigate the first point– Ex-ante funding designed to mitigate the second point

Ex-ante funding will lead to additional costs


Key Issues

Challenge of dealing equitably with people at the point of insurer insolvency

Potential for the scheme to step in to avert insolvency– Additional challenges in terms of skills and resource

For life insurance, focus on portfolio transfer of risks to another insurer

For non-life – key protections around outstanding claims rather than premiums paid.


Key Responses to Consultation

Broad consensus on Home State principle

Majority in favour of covering life and non-life policies.– Some felt life only should be covered– with one proposing inclusion of motor insurance too

Majority felt natural persons should be covered and legal persons excluded

Majority of total responses favoured ex-ante funding– Although most insurers would prefer ex-post funding

Risk based contributions was consensus view– With most respondents proposing a limit/cap on contributions

Those in favour of ex-ante funding supported a target level of funding– But no insights provided on the target level set out in the Consultation Paper


Agenda


PRIPS


Summary


Summary

ECJ ruling on gender will see changes from late 2012– May be a fire sale in run up to 21 December 2012

Potential restrictions on use of age and health status have much greater implications

PRIPS development will likely take some time yet to come to fruition– Will ultimately mean changes to sales processes and disclosure requirements– Local legislation and codes (e.g. consumer protection code) will need to be updated

EU wide Insurance Guarantee Schemes have been proposed for many years but finally look likely to happen– Will provide safety net for consumers but will come with a cost too

APTI Seminar

Documents

Transcript of APTI Seminar