Faculty of Actuaries Students’ Society
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Transcript of Faculty of Actuaries Students’ Society
Faculty of Actuaries Students’ Society
Current Topics 2009 – 2010Life InsuranceRoss Fleming
Agenda
• Changing Times• Industry Update – Sales• Industry Update – RDR• Mortality Projection Model (CMI_2009)• Corporate Activity• Solvency II• IFRS 4 – Phase II
Changing Times
2009 2010 2011 2012 2013
Solvency II regime begins (Oct 12/Jan 13)?
Walker Review (July 09)
Mortality Projection Model (Nov 09)
TAS R (Apr 10)
TAS D (July 10)
TAS M (Jan 11)
IFRS 4 – Phase II regime begins (2013)?
MCEV (Jan 11)?
Personal Accounts (Jan 12)
Latest RDR Papers (Mar 10)
CP on SII Tax (June 10)
Industry UpdateSales
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1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 2007 2008 2009
APE £m
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New Business Sales 1994 - 2009
Bonds
Individual Pensions
Group Pensions
Offshore Products
Protection
Pension Annuities
Graph shows over last 2-3 years:• Continued fall in SP Bonds – changes to CGT rules• Falls in SP Offshore Products – waning investor confidence• Falls in SP & AP individual pensions – poor market conditions
Source: ABI
Industry UpdateRetail Distribution Review
Throughout the review, FSA focused on achieving specific outcomes:
• Engaging consumers and delivering more clarity on products & services
• A market which addresses consumer needs and wants
• High standards of professionalism to promote confidence
• Introduce remuneration arrangements which promote competition to benefit consumer
• Firms are viable and deliver on longer term commitments
• Regulatory framework that can support the delivery of these aspirations
RDR – Recent papersIn March this year, the FSA released:• Policy Statement 10/6
– Improving clarity for consumers on advice services & addressing potential remuneration bias
• Consultation Paper 10/8 (28 June 2010 deadline)– Sets out rules for pure protection sales by investment advisers (disclosure & authorised)
• Discussion Paper DP10/2 (26 May deadline)– Seeks views on options for changes on how platforms are regulated
2009 2010
CP09/18 (June)
PS09/19 (Nov)
PS10/6, CP10/8 & DP10/2 (March)
CP09/31 (Dec)
RDR – Recent SurveyKey outcomes - snapshot of the perceived impact of RDR on organisations:
– 76% of organisations felt RDR presented an opportunity for their organisation
– 48% thought it would cost over £5m to implement RDR
– 77% have made plans (with 20% underway) to implement RDR
– 76% believe RDR will alter their distribution mix
– 62% believe RDR will change their target customer segments
Source: Recent survey by Winchester White Management Consultants
Mortality Model – CMI_2009• CMI concerns with use of cohort projections • Consultation Papers 38 & 39 – 2009• Live version released in Nov 2009 (CMI_2009)
– Projects annual rates of mortality – assuming current rates of change blend to long-term rate– Single, deterministic mortality projection for each set of inputs– User input – ‘core’ or ‘advanced’ settings– Flexibility for use
• Intended to replace cohort projections but maintain– Strength of projections– Flexibility– Common standard for benchmarking– And introduce separate up-to-date projections for Males/Females
• The model output :– 2-d table of improvement factors / cumulative reduction factors– Heat maps of improvement factors and mortality rates– Sample expectation of life and annuity values
CMI_2009 Impact on Life Expectancy
Company 2008 Base Mortality
2008 Improvement factors 2008 FSA Return
CMI_2009_M [1.00%]
Canada Life 96% PNMA00 MC with 2% floor until age 70 reducing linearly to 0.5% at age 120 (floor only applies from 2007)
23.3 22.9
Legal & General 61% PCMA00 MC with 2% floor until age 90, tapering linearly to zero at age 120 (improvements only apply from 2007)
26.4 26.9
Prudential 76% PNMA00 MC with 2.25% floor until age 90, tapering linearly to zero at age 120
26.4 25.0
Standard Life 88% IML00 Average of MC and LC with 1.5% floor 24.6 23.8
Scottish Widows 74% IML00 MC from 2002 then LC from 2007 with floor of 1.5%
26.3 25.1
Source: FSA Returns
Corporate Activity
• Limited activity in 2009:– Merger between Clerical Medical and Scottish Widows, as a consequence of the LTSB / HBOS merger– Resolution acquired Friends Provident for £1.86bn in August 2009
• Renewed activity in 2010– Prudential signalled intentions for major growth in Asia with proposed purchase of AIA, the Asian
assets of AIG. – Offer around £20-23bn (current market cap of £15bn)– 75% of new group’s assets would be in Asia compared with 35% currently– AIG also sold ALICO its non-US life assurance business to MetLife for $15.5bn in cash and securities
• Longevity swaps and pension buy-ins made up the major deals in 2009 so far in 2010.
• These instruments are currently the preferred method of protecting against longevity risk
Solvency II - Background• Risk-based regulatory requirement across EU
• Aim is to better reflect risks faced by companies & consistency• Incentivise insurers to better manage/measure their risks
• Three pillar approach cutting across the risks (quantitative & qualitative):• Minimum capital requirements• Risk measurement• Management & disclosure
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Solvency II timeline
• The deadline for Solvency II compliance is 31 October 2012
• Proposal that deadline will be moved to 1 January 2013
April 2009
CEIOPS publish draft advice on the internal model
approval process
December 2009
CEIOPS publish technical advice on associated
implementation measures (level 2)
June 2009
Organisations to indicate whether they intend to apply for internal model approval or use the standard formula
April-November 2010
Organisations in first wave to initiate dry-run of their
internal model & QIS 5 to calibrate the calculation of
technical provisions
March 2009
Organisations report to the FSA on their Solvency II
governance arrangements and the senior individual
responsible for Solvency II implementation
2009 2010 2011 2012
Oct 2012/Jan 2013
Organisations to be compliant with Solvency II
April 2012
FSA gives formal view on submissions & organisations in second batch submit results of
dry-run to FSA
July 2011
Publication of Solvency II Level 2 technical policy finalised by the
EU
October 2011
Organisations submit first batch of dry-run results to FSA
January 2011
Organisations in second batch to initiate a dry-run of their
internal model
1 432 5
6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
Solvency II – topics in 2010• QIS 5
– Timetable set Jan 2010, last until Nov 2010– Participation mandatory for all firms intending to apply for internal model under FSA’s pre-
application process
• Development of Internal models– Further work required to develop these in time for pre-application process
• Level III consultation papers– CEIOPS will publish CPs for its Level III advice throughout 2010, including details of Pillar 3
• Resourcing SII projects– Huge change for companies – touches many areas of business– Significant project to implement and difficulties to recruit and develop SII alongside BAU
IFRS 4 – Phase IIBackground
• Phase II deals with the recognition and measurement of insurance contracts using a principle-based approach making use of current market data
• Aligns insurance accounting with general principles in use for all other IFRSs
• Phase II standard envisaged to follow IFRS after a few years but incurred delays.
• FASB & IASB joined forces to develop insurance accounting standard.
• Exposure Draft of new IFRS 4 is expected in May 2010, with final standard in June 2011
• Estimated to come into force in 2013 at earliest.
IFRS 4 Phase IIMeasurement of Liabilities
Latest methodology emerging from FASB/IASB discussions (4 building blocks):
• Unbiased probability-weighted cash flows– Explicit, current estimates of expected cash flows. – Financial market variables consistent with observable prices– Non-market variables should use all available data, weighting more relevant
• Time value of money• Using present value techniiques that reflect time value of money
• Risk adjustment– Still being debated – intended to reflect the insurer’s uncertainty associated with future cash flows.
Defined as amount the insurer requires for bearing uncertainty arising from having to fulfil net obligation arising from insurance contract.
• Residual margin– Eliminates any gain from inception in the measurement of the insurance contract – Many important decisions still outstanding on this
Comparison of IFRS & SII• Timeline
– Timelines of the two regimes are not aligned.
• Objectives / Purpose– IFRS Phase II aims to achieve consistency of accounting and valuation of insurance contracts across
companies and improving investors understanding of profitability and financial position– SII aims to deliver a supervisory system for insurers that is consistent across all member states of EU
• Scope– IFRS Phase II has a transaction based scope – applies to all contracts that meet definition of
insurance, regardless of entity’s legal status.– SII scope is a function of the entity’s regulatory status and covers all assets & liabilities of such
entities within the EU
• Measurement– Both regimes apply market consistent principles. Other similarities / differences occur in:– Estimate of future premiums – Effect of time value of money– Risk margin– Other margins– Participating business