Life Insurance Accounting Long term contracts require unique accounting Profit for a life insurer defined as: Premiums + Investment Income – Claims – Expenses – Tax – Increase in policy liabilities Policy liabilities drive the timing of profit release (but not the total profit) Policy liability calculation method – Currently MoS method under IFRS – However, new changes to IFRS have been proposed
What is MoS? Margin on Services (MoS) is a method of calculating policy liabilities – The result is that profits are released in line with “services” provided to the policyholder, e.g. expected claims on a risk portfolio, with no profit released at point of sale MoS acts as a “shock absorber” – The impact of changes to non-economic assumptions (e.g. mortality, morbidity, lapses) are spread through future margins Disadvantage is the results are artificial – Impact of management actions are often deferred and MoS is viewed as an accounting “black box” by analysts
MoS Planned Profit Example Uneven cash-flows with large new business strain Smooth MoS planned profits as all acquisition costs are deferred Example cash-flows for a portfolio of yearly renewable term policies
Proposed Daft Draft Standards The IASB have been working on an IFRS update They issued an Exposure Draft (ED) in July 2010 Three key differences to MoS: – Profit margin is split into two (Explicit Risk & Residual Margins) – The profit margins are “locked” (i.e. no assumption changes are spread through margins) – Not all acquisition costs are deferred (results in a year 1 loss)
ED Planned Profit Example Uneven cash-flows with large new business strain ED method has a loss in year 1 (non-incremental acquisition costs), then smooth planned profit in years 2+ Example cash-flows for a portfolio of yearly renewable term policies
Effect of Assumption changes MoS acts as a “shock absorber” for most assumption changes ED capitalises the impact of all assumption changes Result is that the ED method will result in much more volatile profits
FASB proposal with “composite” margin Joint IASB / FASB meetings in mid-Feb 2011 to consider industry feedback on the ED method – They are now reconsidering the “locking-in” of margins, which would reduce profit volatility Revised Exposure Draft to be published by June 2011 The ED method is subject to change, watch this space!
The method of calculating policy liabilities affects the timing of the profits The current MoS method spreads profit in line with “services” provided and spreads the impact of many assumption changes – BUT it results in an artificial picture of financial performance The proposed ED method “locks- in” the margins – Results in additional profit volatility and exacerbates the artificial nature of life insurance accounting Meetings are underway to reduce the current ED methods volatility
Insurance (Prudential Supervision) Act Enacted in Sept 2010, it gives the RBNZ the following roles as the new regulator of the NZ insurance industry: – To issue licences to NZ insurers – Carry out Prudential Supervision of insurers, including: Solvency requirements Financial strength rating requirements Risk management requirements Appointed Actuary (AA) regime Fit & proper person requirements (for directors & the AA) Financial reporting requirements Statutory fund requirements (life companies only) – To gather information and investigate insurers – Facilitate distress management Appointed Actuary (AA) regime All insurers must have an Appointed Actuary, who then must: – Meet “Fit & proper person” requirements – File Financial Condition Reports (FCRs) with the RBNZ – Responsibilities within the solvency calculations (e.g. projecting solvency for 3 years) – “Whistle-blowing” responsibilities if the insurer could be expected to go into financial difficulties
Why regulate insurers? Regulation can be in response to company failure However, there have been very few insurers fail in NZ and none have been significant Failures include: ACL Insurance (1989) A few mutuals Capital Life (1989) Standard Insurance (1961) Maoriland Life (1951) Plus maybe others if it weren’t for M&A’s… The ACL case was the biggest failure in NZ ($12.5mil life fund). Two major issues leading to its demise: Asset concentration risk (53% of assets was invested in one retirement village) No separate life fund (policyholders ranked alongside unsecured creditors) Both issues would not occur under new regulatory environment. The new Act was not in response to insurer failure, but is designed to bring NZ into line with international best practice
What is solvency? Being solvent is a requirement for all companies Insurers require an additional capital buffer to ensure they remain solvent with a high probability (99.5%) – We call this the “solvency” requirement Life insurers have adopted PS 5.01 “voluntarily” until now The RBNZ will issue solvency standards going forward Solvency is the main part of the new Act that has the ability to affect insurers financially
PS5.01 vs. draft RBNZ solvency Assets Capital (or net assets) Contract Liabilities Other Liabilities Solvency Liabilities Resilience reserve Inadmissible assets Insurance Risk Capital Charge Expense reserve Asset Risk Capital Charge Catastrophe Risk Capital Charge Ineligible capital Asset Risk Capital Charge includes a new version of PS5.01’s Resilience Reserve plus charges for: Reinsurance Recovery Risk Asset Concentration (which previously was within Inadmissible Assets) IFRS Reported Balance Sheet PS5.01 structure New RBNZ structure Not to scale. Relativities between PS5.01 and RBNZ standards will change based on differences discussed below. Compared with NZSA PS 5.01, the draft RBNZ standard has: – New structure with new concepts – More granular product groupings (e.g. level / YRT, short-term DI / long- term DI, differences in expense or commission structures) – Higher prescribed assumptions in some areas (e.g. lapses from +/- 25% to +/- 40%) It is expected that solvency requirements are higher under the initial RBNZ draft. A revised draft is due out in April 2011.
Summary The RBNZ is the new regulator of the NZ insurance industry Actuaries need to be aware of new Prudential Supervision, in particular the responsibilities placed on the Appointed Actuary “Solvency” refers to the capital buffer required to ensure an insurer remains solvent and new solvency standards will be issued by the RBNZ The initial RBNZ draft is very different from PS 5.01, so actuaries need to understand the impacts and practical implications (incl. link with IFRS) A revised draft RBNZ standard is due out in April 2011, make sure you voice any concerns!
Future Pathways Fresh perspectives from actuaries of the future General Insurance Jonathan Nicholls, PwC Jing (Annie) Luo, AMI
Agenda Regulatory Framework – Solvency Standard – Key Issues Developments at ACC – Scheme growth & recent changes – What does the future hold? – Comparison with Australian experience Canterbury Earthquake – Quakes so far – Current Impact – The Future
Recent Stabilisation Increased rigour around claim acceptance Claim monitoring Lower rates for services from providers Legislative amendments Publicity of Scheme sustainability & limits
The Future for ACC Stocktake recommended the Work, Earners’ and Motor Vehicle accounts should be insured privately. Cabinet decision was to move towards competition in the Work account, ACC could still insure. How does the move to competition pan out? What happens when the public concern over sustainability dissipates?
Australian Experience Steep premium increases in 2002 prompted the Ipp Review of the Law of Negligence. Resulting Civil Liability Act 2003 and Injury Scale Values led to a fall in claim frequency & amount. NSW CTP introduced cover for “at fault” drivers in 2006 (for catastrophically injured) and 2009 (all). Large increases in economic loss payments for QLD CTP led to a Review in 2010.
Quakes so far … These are the relatively large magnitude earthquakes / aftershocks listed on the EQC website for claims management: 4 September 2010: 7.1 magnitude 19 October 2010: 5.0 magnitude 14 November 2010: 4.9 magnitude 26 December 2010: 4.9 magnitude 20 January 2011: 5.1 magnitude 04 February 2011: 4.5 magnitude 22 February 2011: 6.3 magnitude
Current Impact The largest single insurance event in New Zealand history Estimated loss of around $6.0 billion for September quake Predicted likely loss of another $10.0 billion for latest February quake The third most costly insurance loss worldwide in 2010 Rank ? in 2011
Current Impact Sharing the cost between the EQC and insurance companies - Premium- Claims
Current Impact Quake response – September Quake: staff resource, underwriting restrictions, policy coverage (temporary accommodation) – February Quake: emergence recovery mode, office relocation, policy coverage (theft) Claims Management – September until 21 February – Future possibilities
The Future Is the February quake still an aftershock of the September quake or another new earthquake? A British expert in engineering risk said insurance policies in many countries did not allow more than one claim for an "act of God" event a year. If damage caused by the aftershock was deemed to be part of the main quake in September then insurance would probably pay out, if the quake is deemed to be independent then coverage may not be guaranteed, Imperial College London fellow Peter Stafford said.
The Future COUNTING THE COSTS: Should the EQC levy still be collected through premiums on house and contents insurance, or would it be fairer to collect it via rates, so all homes are covered, not just those insured? – from Sunday Star Times Insurance and reinsurance premiums were expected to rise in the wake of the quake. Any increase would be determined by the market. – from Insurance Council chief executive, Chris Ryan. Queensland floods, Cyclone Yasi and Canterbury Earthquake – what’s going to happen in the future for the GI market here?
Contact Details Jonathan Nicholls email@example.com Jing (Annie) Luo firstname.lastname@example.org Feel free to contact us with any comments/questions!
Future Pathways Fresh perspectives from actuaries of the future Health Insurance Anagha Pasche, Southern Cross
Overview of presentation NZ health insurance market The role of public health & ACC Types of health insurance products Claims drivers Claims inflation Premium rates Group schemes
What is health insurance? Health insurance covers the costs of many non- urgent healthcare procedures such as orthopaedic surgery and semi-acute healthcare procedures such as the removal of cancers and cardiac surgery From Health Funds Website Health insurance means insurance against a liability to pay fees or charges relating to the provision of a health service Insurance Prudential Supervision Act 2010
NZ health insurance market Health Funds Assocation of New Zealand Inc (HFANZ) Industry body Source of market data 10 members (98% of all inforce health insurance policies) – Accuro Health Insurance – AIA New Zealand – EBS Health Care – Manchester Unity Friendly Society – OnePath Life (NZ) Limited – Police Health Plan Ltd – Southern Cross Healthcare – Sovereign Assurance Company Limited – TOWER Health & Life Ltd – Union Medical Benefits Society Ltd
NZ health insurance market Market statistics at 31 Dec 2010 1.38 million lives covered (approx 32% of population) $961.9 million in Earned Premium $824.2 million in Paid Claims Average annualised growth in claims costs over the last five years has been 8.7% p.a.
The role of public health & ACC NZ health system funded by taxation, ACC levies, health insurance and individual contributions Good public health system but there are constraints The public health system effectively delivers acute (urgent) services However, non-urgent or elective surgery are rationed Health insurers complement the public health system by covering the cost of non-urgent procedures Private market (funding and provision) has emerged due to (perceived) gaps in public coverage Example: private radiotherapy services
The role of public health & ACC ACC “No fault” sole insurer for all work and non-work injuries within New Zealand Role as set out by government www.acc.co.nz – prevent injury – make sure people can get treatment for injury, if it happens – help people get back to everyday life as soon as possible. Cut backs to costs of elective surgery Example: increased scrutiny on shoulder, knee and spinal surgery
Health insurance products There are two main types of health insurance policies: Major Medical Policies: cover elective surgical and specialist care Comprehensive Policies: also cover day to day costs e.g. doctor’s visits & prescriptions Policies can be Shared cover (co-insurance) or Extensive cover (full reimbursement for qualifying procedures) Excess options often available No regulatory mandatory benefits
Health insurance products Trend to move away from comprehensive policies (67% of policies at 31 Dec 2010 were major medical)
Claims drivers Some factors affect claims: Plan type / Benefits Age Gender Smoking status Duration / tenure Socio-economic Regional Claims trends / claims inflation New technologies Changes in utilisation
Claims inflation Some ways insurers try to contain claims inflation Underwriting of pre-existing conditions: most insurers treat in one of three ways: – Exclude condition from insurance cover – Defer coverage of condition for a period of time – Charge a higher premium to cover the condition Benefit design – Policy exclusions – Benefit / Policy limits – New medical technology Claims management – Applying reasonable charges – Contracting with providers
Premiums rates – Plan type / Benefits – Age (Risk rating system or Community rating system or combination) – Gender (some insurers) – Smoking status (some insurers) – Other lifestyle criteria (some insurers) – Amount claimed / Low claims discounts (some insurers) – Charging for children – Payment methods – Group schemes Subject to Human Rights Act
Group schemes in health insurance Employer group schemes accounts for a large proportion of New Zealand business. Groups often have a specialised/subset product range offered to them Group business usually has cheaper premiums and when subsidised may be charged a flat family rate or flat adult/child rate (usually derived from age related rates) More relaxed underwriting for larger employer subsidised groups (expected to exhibit less anti-selection than individuals) Very large schemes may be experience rated
GFC Overview The Economy 2008 – Panicking – Securitisation took hit, private sector almost vanished – Meetings! – Investigations! – Rescue! 2005 – Job market going up – House Price going up – Interest Rate going up – Let the market look after itself 2007 – Some defaults started to appear – Securitisation volume still high – The market will look after itself Regulator 2006 – Job market going up – House Price going up – Interest Rate going up – Let the market look after itself
How did the system collape Rating AgenciesRegulators BanksInvestors
Enterprise Risk Management Source: Harry Panjer RegulatorInvestorRating agencyCEO with Stock options CRO???
Enterprise Risk Management What is ERM? “an organisation (…) assessing, exploiting, financing and monitoring risks from all sources for the purpose of increasing the organisation’s short- and long- term value to its shareholders.” Why ERM? Thorough understanding of risks Pursue higher return for shareholders Provide better information to external stakeholders
ERM Process Risk identification Risk monitoring (reactive) risk management Risk based strategy
ERM Framework Example Risk Appetite How much value are we willing to put at risk with which probability? Risk tolerance Risk Factor 1 Risk Factors Insurance, lapse, interest rate, equity etc Risk tolerance Risk Factor 2 Risk tolerance Risk Factor … Risk tolerance Risk Factor N Framework to manage Risk Tolerances
CERA Designation Global Recognition Technically “approved” Risk management specific
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