AASB 17 - What will happen when the rubber hits the road?
AASB 17 has been final now for nearly a year and whilst there continues to be an element of debate regarding interpretation the focus is firmly on implementation with many companies having their opening balance sheet on 1 January 2022.
This session will cover life, general and health insurers. We’ll share with you the nature of the various ongoing focus groups which are seeking to bed down some of the remaining elements of interpretation. We’ll also share with you the learnings from some of the companies who recently participated in APRA's QIS.
Over 12% of the Actuaries Institute members are based in Asia and many Australian actuaries are holding senior and leadership positions in the Asian markets. China, India, Indonesia and Japan are now listed among the top 10 markets with greatest insurance potential, these are the main drivers for the world’s economic growth over the next decade.
Andy Yang, the Chairperson of the Asia Sub-committee will share his insights and key updates from Asia including,
- Demographics of Australian actuaries in Asia
- Highlight where the growth areas of growth and employment
- Should we focus on new growth areas / competitive advantages
- What we are doing to reach out to existing members, future member and Actuarial student at universities
Critical Illness in Asia: Success Factors, Challenges & Future Direction
Critical illness products (more commonly known in Australia as Trauma) have been driving protection insurance growth in Asia in the past decade, especially in China, Hong Kong SAR, Korea and Singapore. Along with rapid product innovation and solid new business growth, it has brought on new challenges for actuaries in pricing, valuation and risk management. This presentation will introduce the typical critical illness product features and overview of recent product innovation trends; and explore its success factors in Asia and reasons why it has not extended to Australia. Due to the long-term coverage period and guaranteed premiums, insurers are facing increasing challenges in managing critical illness business:
- Uncertain cancer and cardiovascular disease trends in the context of rapid changes in lifestyle and health risk factors, consumer awareness and medical advancements.
- Increasingly complex product design and extensive coverage of diseases
- Behavioral issues by policyholder and distribution channel
- Additionally in aftermath of Covid-19: Low interest rate environment and border restrictions How can actuaries rise to the challenge today, and looking ahead, how can we shape an ideal critical illness product that is sustainable in the long run, meets customer needs and continue to serve as one of the bedrock products for the insurance industry in Asia?
Life and Health in Asia – Pricing Trends and Data Science Approaches
Louis Lee, Nathan Thomas
Life and Health insurers in Asia are a mixture of diverse multinational insurers, local insurers, and regional players. Increasingly, insurers are branching out from their core products and propositions, into complimentary products which their customers need. For example, Life insurers in Asia have been moving more and more into medical reimbursement products either as a lead generation products, or upselling product to their Life customers. Conversely, traditional Health insurers have been branching out to sell critical illness products and longer term products. Lastly, there are countries where General Insurers who are selling both medical reimbursement products, and short-to-medium term critical illness products. The combination of product sets blurs the lines of licensing (noting that all of the products offered fall within the relevant regulations), but more importantly, shows that the insurers are looking at the end needs of the consumers. Given this, pricing strategy becomes a crucial part of an insurer's customer strategy. Further more, there are each country has its own unique market features in terms of products, channels, government schemes, tax incentives which affects the nature of the benefit design, and therefore the pricing of the products. The topics of interest to be explored in the panel discussion include:
- Overview of market landscape in Asian countries such as Japan, Korea, China, Hong Kong, Singapore, Taiwan
- Pricing approaches using Medical reimbursement products for Life insurers
- Pricing differential between digital channels and traditional channels (agents, brokers, banks)
- Pricing differential between different demographic and geographies in insurance markets where they are global centres of policy issuance (eg. Hong Kong, Singapore)
- Pricing considerations for Group products vs individual products
- Pricing considerations of benefit features for policyholders who may utilize the benefits beyond the country of policy issuance
- What the Australian market can take away from pricing and product innovation in Asia
- Roles for Australian actuaries looking to work in Asia
What does COVID-19 mean for motor insurance in Asia - looking back and going forward
Dr Weihao Choo, Dennis Tay
COVID-19 has once again put the spotlight on the highly competitive motor insurance market in Asia. With government lockdowns and reduced traffic happening to varying degrees, road accidents and traffic congestion typical of many Asian cities have reduced drastically. At the same time, the ensuing economic slowdown has led to a significant drop in vehicle production and sales.
Not surprisingly, Covid-19 had a rare, significant impact on motor portfolios across Asia. Claim frequency reduced dramatically, offering a respite for portfolios suffering from years of inadequate profitability. Claim reporting and development patterns also changed, reflecting not only the slowdown of (manual) claims processes, but also the reduced willingness of customers to lodge (cosmetic) claims. Lastly motor premium growth has reduced against expectations for many insurers.
Covid-19 has also highlighted a number of fundamental issues in many motor insurance markets in Asia. Aside from much needed technological advancements, questions have been raised around the ability to monitor and quickly steer motor portfolios, and the over-reliance on vehicle sales and related distribution channels.
Insurers have reacted in a variety of ways to respond to the effects of Covid-19. As motor insurance is the backbone of most insurance portfolios, many actions taken by insurers have been to counter the growth challenges. These actions have ranged from straightforward premium reductions, to hastened technological advancements. Arguably, these actions do not always address underlying issues in the most appropriate or sustainable way.
Our presentation delves into the following areas:
• Impact of Covid-19 on motor insurance in Asia, based on figures and market observations
• Fundamental issues and challenges with many motor insurance markets in Asia
• Range of actions taken by insurers based on their business priorities and capabilities
• Challenges of deriving an “actuarial premium” in the new era of evolving risk exposures
• Recommended actuarial approaches which sustainably deal with future trends and changes
Adapting and Fine-Tuning Pre-Trained Language Models for Insurance Use Cases
Text is everywhere. Almost every process in a company involves manual reading and understanding of text. Leveraging Artificial Intelligence (AI) and Natural Language Processing (NLP) provides the potential to revolutionize industries, including insurance, where estimates suggest less than 1% of the data is analyzed and processed. However, while state-of-the-art language models, such as BERT (Bidirectional Encoder Representations from Transformers) have achieved incredible results in many language comprehension tasks, many have failed to translate into successfully solving insurance business problems. This paper is split into two parts. Firstly, it outlines the assumptions and mechanics behind current pre- trained transformer-based language models. Important practitioners should know what text is used for their development to provide a grasp of the dangers and pitfalls from using these models out of the box. The second part outlines an investigation into fine-tuning BERT to insurance-specific tasks, such as claims classification and complaint monitoring, and provides a general reproducible approach for BERT fine-tuning for other insurance use cases.
Building a Blockchain in a Spreadsheet and Critically Evaluating Blockchain Opportunities
Blockchain technology is still generating massive interest in businesses and society alike, despite the fact that some estimates show as many as 92% of blockchain projects fail (forbes.com). This high failure rate hasn't stopped many big names investing heavily into the technology; JP Morgan Chase recently spun out a new business to house its efforts (cnbc.com), the US Navy is investing millions of R&D dollars (nasdaq.com), and AXA has launched a travel insurance product on a blockchain to the public (axa.com).
However, in general, blockchain technology is not well understood and it can be difficult to separate the true commercial opportunity from the hype and buzzwords. While many high profile technologists like Twitter co-founder Jack Dorsey promote the technology to much fanfare (forbes.com), Australia's Digital Transformation Agency, the Federal group tasked with improving government services online, delivered a more tempered view about its commercial value compared to current technologies (zdnet.com):
"Blockchain is an interesting technology that would well worth being observed but without standardisation and a lot of work to come -- for every use of blockchain you would consider today, there is a better technology -- alternate databases, secure connections, standardised API engagement,"
In this concurrent session we will demystify the technology by building a simple blockchain in a spreadsheet. This straightforward demonstration will illustrate how blockchains function and allow us see through their often-magical aura. We'll use our new-found understanding to build a framework to critically evaluate blockchain opportunities, and apply this framework to some real-world projects to see if they stand up to the hype.
The Discriminating (Pricing) Actuary
Fei Huang, Edward (Jed) Frees
The insurance industry is built on risk classification, grouping insureds into homogeneous classes. Through actions such as underwriting, pricing and so forth, it differentiates, or discriminates, among insureds. Actuaries have responsibility for pricing insurance risk transfers and are intimately involved in other aspects of company actions and so have a keen interest in whether or not discrimination is appropriate from both company and societal viewpoints.
This paper reviews social and economic principles that can be used to assess the appropriateness of insurance discrimination. Discrimination issues vary by the line of insurance business and by the country and legal jurisdiction. This paper examines social and economic principles from the vantage of a specific line of business and jurisdiction; these vantage points provide insights into principles.
To sharpen understanding of the social and economic principles, this paper also describes discrimination considerations for prohibitions based on diagnosis of COVID-19, the pandemic that swept the globe in 2020. Insurance discrimination issues have been an important topic for the insurance industry for decades and is evolving in part due to insurers’ extensive use of Big Data, that is, the increasing capacity and computational abilities of computers, availability of new and innovative sources of data, and advanced algorithms that can detect patterns in insurance activities that were previously unknown.
On the one hand, the fundamental issues of insurance discrimination have not changed with Big Data; one can think of credit-based insurance scoring and price optimization as simply forerunners of this movement. On the other hand, issues regarding privacy and use of algorithmic proxies take on increased importance as insurers’ extensive use of data and computational abilities evolve. Keywords: Actuarial fairness; disparate impact; proxy discrimination; unisex classification; credit-based insurance scores; price optimization; genetic testing; big data; COVID-19.
The Hidden Risks of Data Science and Machine Learning
The explosion of interest in Artificial Intelligence (AI) and Machine Learning (ML) continues to identify answers to some of society’s most pressing challenges. We have all heard of the benefits of AI, and we are now beginning to see some of its professionalism issues receive increased awareness. Nevertheless, the fourth industrial revolution has the potential to create environmental, societal and ethical risks that dwarf those previous technological generations have had to contemplate. While developing autonomous vehicles with the promise of a more sustainable greenhouse future, each time some market-leading ML models are training, they require the equivalent carbon footprint of driving to the moon and back. Where we hear of automation reinventing entire industries – we forget how often the datasets are collected, collated, and codified by a slew of poorly paid workers. This paper digs deeper and provides a discussion of these less discussed risks arising from the use of AI and ML, and what actuaries should consider when adopting and commenting on the introduction and use of such models in financial institutions. Model accuracy is not sufficient for the public interest, instead, Actuaries should be aware of their overall social implications of their models to make their own decision – what cost are we ready to pay.
Multi-State Health Transition Modelling Using Neural Networks
Katja Hanewald, Qiai Wang, Xiaojun Wang
The article proposes a new model that combines a neural network with a generalized linear model (GLM) to estimate and predict health transition intensities. The model allows for socioeconomic and lifestyle factors to impact the health transition processes, and captures linear and nonlinear relationships. A key innovation is that the model features transfer learning between different transition rates. It autonomously finds the relationships between factors and the links between the transition processes. We apply the model to individual-level data from the Chinese Longitudinal Healthy Longevity Survey from 1998–2018.
The results show that our model performs better in estimation and prediction than standalone GLM and neural network models. We thus provide new estimates of the life expectancies for a range of population subgroups. The model can be easily applied to other datasets, and our results confirm that machine learning techniques are promising tools to model insurance risks. Background: Around the world, people are living longer. With increasing age and longevity, individuals face a higher risk of chronic disease and age-related disability from chronic diseases, cognitive impairment, and functional limitations. As the number of older persons grows along with their longevity, the need for long-term care will significantly increase in both developed and developing countries (United Nations, 2016). Therefore, strategies for how to provide and fund these growing long-term care needs are needed. Insurance and actuarial research can inform the development of such strategies by providing models that predict the chance of individuals becoming disabled and needing long-term care.
Predictive Total Loss: Using AI and Automation to Improve Motor Claims Outcomes in a Responsible Way
Chris Dolman, Hannah Sakai and William You
In this paper, we outline a recent project conducted by IAG to use AI and automation techniques to improve the customer experience for motor total loss claims. We outline three aspects which should be of interest to actuaries undertaking similar AI and/or automation projects: 1. Technical aspects of the data and modelling process 2. Holistic aspects of the project delivery, including effective interdepartmental collaboration and customer delivery 3. Ethical aspects of the project, including customer testing and monitoring We hope that by outlining this project in some detail, we can assist others involved in the delivery of AI solutions in their businesses.
GI Plenary: Recent Developments in Understanding Natural Climate Variability
Tatiana Potemina, Tim Andrews
Natural climate variability (e.g. El Niño–Southern Oscillation (ENSO), Indian Ocean Dipole (IOD), Southern Annular Mode (SAM)) is one of the key drivers for extreme weather events. How these cycles change in a warmed world will have a large bearing on how climate change impacts on Australia, including how the frequency and severity of extreme events change. This presentation explores the latest scientific literature on the main drivers of natural climate variability that impact Australia and discusses their relevance to Australian insurers. These drivers contribute to large variations in insured claims costs, which if not understood can lead to incorrect views being formed about trend. There is a lot of uncertainty, but the expectations are for increased frequency of severe episodes which is likely to mean higher insurance costs on average. Predictability of natural climate variability would benefit insurers in short and long term and could be used for pricing, reinsurance design and budgeting. Our ability to predict ENSO, IOD and SAM cycles beyond 6-12 months are still limited, however, there are promising results in applying machine learning techniques.
A Grand Proposal for Uninsurable Risks
Pandemic. Terrorism. Flood. Cyber. War. Nuclear. The number of standard exclusions on first-party property policies is getting greater. Insurance as a Public Good is weakened every time that happens. Insured parties are confused about what’s covered and what’s not covered (and whether they need to purchase additional peril-specific insurance, often government-supported). Governments inevitably get involved, for better or worse. There is another way: at the level of individual insurer set a cap (either per occurrence or annual aggregate) i.e. what that given individual insurer will pay out, combined, to all insured parties in the event of a catastrophe or event. This would be set in advance, and would probably be a function of capital or gross written premium. Insured parties could then gain the benefit of the broadest possible coverage with the fewest possible exclusions. Their insurance policy approaches ‘true’ all perils coverage. In return they accept that in an extreme / unlikely catastrophe or event they may only receive (say) 60 cents on the dollar. Insurers have known and capped downside, and they can right-size their reinsurance purchases accordingly. Government stays out of the business of insurance.
A Mutual Renaissance
In an environment of drastically increased pricing uncertainty across many lines of business, and a demand for customer focus, the origins of general insurance carry useful lessons and opportunities. Mutual insurers have a structural advantage in the delivery of outcomes for customers.
The Australian GI market is somewhat unique globally in its concentration and composition and noteworthy for its lack of resident general insurance mutuals. With recent regulatory change, an opportunity has emerged to go back to the origins of insurance with a next-generation overlay and create a viable alternative to consumer insurance offerings currently in the market.
This paper looks at the global and Australian context, the recent changes and what that means for local mutuals, as well as the different types of mutuals that can be established (including takaful structures) and their respective strengths and weaknesses. It then explores the deeper aspects of the customer benefits of mutuals and how actuaries’ approaches to product design, pricing, underwriting, capital management and organisational design may look different in a mutual environment.
Deep Fried Bananas: From wholesome to gruesome (and back again?)
This paper looks at the thorny issue of Add-On Insurance sold at car yards, examines and provides insights into the key historical behaviours and outcomes that gave Add-On Insurance its poor reputation, the various regulatory actions and reforms, and asks whether this market can be transformed into one that offers quality products, at reasonable prices, that meet identifiable consumer needs.
Establishing Meaningful Stakeholder Engagement to Ensure Effective Insurance Solutions
Recent reviews, incl the ACCC insurance enquiry and the Royal Commission into natural disaster arrangements, centre on themes of resilience and mitigation. There are calls to action for all the stakeholders – from the government to regulators to local planning authorities, insurers and consumers. Every stakeholder will have a part to play. Insurers have welcomed the focus on mitigation, whilst APRA’s Geoff Summerhayes has called on insurers to do more to recognise and reward mitigation by home and business owners, if insurers’ arguments that lowering risks lowers premiums are to be taken seriously. With 3-year election cycles, how best can stakeholders engage and look far ahead enough to ensure we all do our part to build resilience and mitigate risk, and ensure effective insurance can be provided for those who need it most? What role do actuaries have in promulgating meaningful engagement by all parties?
Evolution of Cyber Risks and Insurance
Win-Li Toh, Ross Simmonds, Michael Neary
Insurance cover for cyber risks has been evolving as technology develops and businesses become more reliant on technology. As well as an increase in demand for coverage, the underlying risks are also constantly changing. This constant change requires insurers to continually assess their products both from a coverage and rating perspective. This presentation will look at how pricing for cyber insurance has developed over time, as well as looking at potential future developments for both rating and underwriting that insurers may be considering to ensure that they stay ahead of the curve in a constantly changing world.
Framework for Determining Marketable Price of Retail Insurance
In pricing of retail insurance products there are many steps involved from initial analysis of data to arriving at final premiums – with different stakeholders involved along the process. Typically, the initial part of the process is quite scientific when data is used to identify opportunities for change, however, as the process moves towards the final ‘marketable’ price, the decision making becomes less scientific and more reliant on judgment of distribution and marketing experts. This paper attempts to bring the end-to-end process of pricing retail insurance products within a structured framework to guide sound decision making during a pricing exercise combining both technical processes as well as expert judgment to arrive at the marketable price. The underlying hypothesis in this paper is that three parts of product development process – product, pricing and distribution strategy – are intrinsically linked to each other. Any change in one will influence outcomes of the other parts. It is therefore, not possible to consider pricing in isolation of product design and distribution when trying to determine marketable prices. A framework is proposed to deal with these in a structured manner.
Impact of Climate Change and Exposure to Natural Perils on Property prices
Kevin Gomes, Ramona Meyricke, Tim Lawless, Pierre Wishart
A number of studies have been undertaken within Australia on increasing natural perils risks attributable to climate change. This paper will seek to explore the link between increasing exposure to natural peril risks and property prices in Australia. There have been a number of studies undertaken in the United States in recent years which may be relevant from a methodological perspective: - Disaster on the Horizon: The Price Effect of Sea Level Rise (2018 Journal of Financial Economics) found US homes exposed to sea level rise have sold for approximately 7% less than observably equivalent unexposed properties equidistant from the beach. - A 2018 report by First Street Foundation found that housing values in New York, New Jersey and Connecticut dropped USD6.7 billion from 2005 to 2017 due to flooding related to sea level rise Whilst the above US studies were primarily focussed on sea level rise and flood risk, we will seek to include a wider range of natural perils within our study, including bushfire risk. The link between natural peril risks and property prices (if found to exist) will have implications for government, banks and insurers.
Neural Networks in Reserving: How and Why are they Worth Considering?
Muhammed Al-Mudafer, Benjamin Avanzi, Greg Taylor, Bernard Wong
The application of Machine Learning and AI techniques in insurance continues to accelerate. These techniques have shown potential as valuable tools in a number of areas of actuarial work, including Loss Reserving, where in recent years there have been a number of proposals regarding how techniques such as Neural Networks can be used to improve the prediction accuracy of Outstanding Claims. However, with the complexity of Machine Learning and AI techniques comes a myriad of challenges which need addressing. For example, while these models are typically very accurate in terms of finding central estimates, there is in general very little work focusing on the distribution of such estimates, which is vital in Actuarial practice including in Loss Reserving. Furthermore, there is often reluctance towards using Machine Learning models in practice, partly due to their lack of interpretability and difficulty in incorporating actuarial judgement. In this talk we use a framework which allows us to address the above problems. Specifically, we introduce to Loss Reserving a Neural Network design called the Mixture Density Network (MDN). Importantly, this not only inherits the accuracy of neural networks but is also able to provide a (statistical) distribution of outcomes. We will show that the MDN outperforms the benchmark GLM approach in the prediction of the mean, volatility, and tail quantiles of outstanding claims in a wide range of scenarios of varying complexity and specifications.
Revisiting the Methodology of Actuarial Science
Craig Turnbull, Dimitri Semenovich
Craig Turnbull, the actuary and author of A History of British Actuarial Thought, will present his recent research on the methodology of actuarial science. The presentation will survey some topics in the philosophy of science and consider what insights they can offer when they are applied to fields of actuarial science. This analysis will highlight the natural epistemic limits to the modelling of phenomena of actuarial interest, and the corresponding need for professional skill and judgement that this creates. Interestingly, this perspective serves as a caution against indiscriminate positivistic actuarial use of models and suggests some areas where positivist approach could be gainfully deployed instead.
Transforming the Reserving Process
Matthew Webster, Michael Ramsay
Regardless of the sophistication of the loss reserving models underpinning them, a general insurer’s regular reserving process is among the most complex that actuaries are involved in. For many insurers, this process has become more unwieldy over time, typically through a combination of organic growth, M&A, shifts in the regulatory environment, loss of expert knowledge and portfolio changes. Overlaying this complexity are recent and emerging demands, such as more granular MI and regulatory reporting, rapid changes in the broader environment (e.g. COVID19) and higher standards of governance. With ever-present resource constraints, it becomes clear that legacy reserving processes are increasingly unfit for purpose. This talk explores how reserving transformation can tackle these challenges. In particular, we consider what the ideal future state for actuarial reserving processes looks like; the data underpinning it, its auditability and trade-offs between flexibility and standardisation, and the role of the reserving actuary.
Wide-Ranging Regulatory Reforms for insurers in the Fast Lane
Brendan Fehon, Kalaiya Bhrajna
Whilst the COVID-19 extensions may have provided insurers with some breathing space to focus on operational impacts of the pandemic, the pace of incoming regulatory changes is now well and truly in the fast lane. Furthermore, the implications of the regulatory changes are complex and extensive. Many of the reforms are applicable in 2021 and some extend into 2022. These changes range from the implementation of the Design and Distribution Obligations, to the revised Regulatory Guide 271 Internal dispute resolution (RG 271) in relation to complaints, and to the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, which includes removing the exemption to claims handling as a financial service and prohibitions to hawking. This presentation will look at the overall impacts of some of the key reforms. It will review considerations that organisations, and the actuarial profession in particular, will need to be consider as part of their implementation program and some of the challenges of the reforms. Further, the presentation will consider the details of claims handling as the sixth financial service. This includes licensing requirements, timelines, operational impacts, disclosure impacts, and potential pricing and valuation considerations.
AASB17 Risk Adjustment
The new accounting standard for insurance contracts (AASB 17) has been finalised and will go into force from 1 January 2023. Under the standard, a new concept is introduced – the risk adjustment.
The Risk Adjustment purpose and application is in many ways similar to the risk margin applied by actuaries in Australia for prudential and reporting purposes. However, slight differences in the way it is defined, how it is calculated, and what it covers means that there will be differences to the risk margin.
This session will focus on the risk adjustment for private health insurers, but may also have relevance for general insurers.
The presentation will discuss:
- How the risk adjustment differs from a risk margin for prudential purposes and the AASB 1023 margin
- Implications of the potential interaction of the Risk Adjustment definition and the Private Health Insurance capital framework.
- Present a simple framework for converting pricing targets from the PHI capital framework into Risk Adjustments for the onerous contracts test and Liability for Incurred Claims.
- Discuss other techniques for estimating the risk adjustment such as cost of capital approaches.
Lack of affordability in Private Health Insurance - myth or reality?
It is often mentioned that private health insurance in Australia is increasingly unaffordable. But how true is this statement and what does the data say? Is it possible to define or measure “affordability”? Can we test for evidence that private health insurance premiums in 2021 are indeed materially less affordable than (say) ten years ago? As the industry focuses on encouraging greater participation by younger people, how has ageing and other drivers impacted on affordability over the years? Is there a level of premium that we should target?
Mental Health and COVID
Anna Cohen, Kirsten Armstrong, NSW Health
The COVID-19 pandemic and associated lock-downs will potentially affect mental health both now and into the future. This presentation uses publicly available data at both State and national level to explore how different groups have accessed mental health services, including crisis lines, primary and community care services as well as emergency departments and hospitals.
Mental Health in PHI
Nicholas Stolk, Andrew Matthews, Jasmine Spann
The challenges raised by mental health conditions in the insurance sector are complex and multi-faceted, and this is no less true in private health insurance (PHI). In 2017/18 $9.9 billion or $400 per person was spent on mental healthcare services in Australia, while more than 1 in 6 Australians received a mental health related prescription (AIHW). While PHI makes up only a part of this total expenditure, recent legislative changes including measures designed to improve patient access to mental health services are raising questions for insurers as to how best meet the needs of their customers in a financially sustainable manner. This paper is intended to build on the Institute’s Mental Health Green Paper from 2017 by taking a closer look at the intersection of mental healthcare and the private health insurance industry. In setting out the key themes facing the industry we surveyed more than 10 insurers and industry participants with a view to:
- Understanding the industry’s current practices, including identifying which initiatives have worked and which haven’t;
- Hearing ideas about where the industry would like to be and what barriers (if any) need to be overcome; and
- Exploring opportunities to help the PHI industry make a meaningful contribution to its members’ (and Australia’s overall) mental health in a financially sustainable, and clinically appropriate way. Why is this important for actuaries? Mental ill-health is not a rare occurrence felt only by a few; it is a widespread phenomenon that as a society we are still grappling with how to best help. Health insurance and healthcare funding generally has an important role to play in managing and mitigating poor mental health but sits in a complex web of funders, service providers, imperfect financial incentives and limited reporting of outcomes. Actuaries and insurers have a role to play in surfacing the facts but can only do so successfully with a thorough understanding of the complexities and points of view of other stakeholders.
PHI AASB17 Issues - update from the AASB TRG
Antony Claughton and Marion Smith
The final version of the new standard covering accounting for insurance contracts (IFRS 17) has now been released. There are many elements of the standard where application to the Australian industry will require judgement calls on the interpretation and implementation. This is particularly the case for the Australian Private Health Insurance (PHI) industry, where the unique nature of the Australian legislative framework means that PHI policies have no end-date, legislated reinsurance like structures, community rating, restrictions on price increases and significant government involvement.
The Australian Accounting Standards Board (AASB) is working with Australian industry on the implementation of the Australian version of the standard (AASB 17). Actuaries and accountants are assisting in this process. Starting in 2020 and aiming to finalise in 2021, a group of actuaries and accountants have formed the PHI Focus group. This liaison group is working on publishing papers focusing on the key areas of judgement and interpretation of AASB 17 for the PHI industry.
This presentation will summarise the papers written to date and the issues they focus on, and discuss the status of ongoing discussions and the issues they purport to. This will allow all PHI actuaries to gain guidance on how to deal with these issues.
The session would be presented by two members of the PHI Focus group, an actuary (Antony Claughton) and an accountant (Marion Smith).
INVESTMENT AND WEALTH MANAGEMENT
Investment and Wealth Management Plenary - Markets Panel: Where next?
Douglas Isles, Colin Grenfell, David Lau, Henry Lau, Linda Cunningham, Dom Giuliano
Starting with insights on long term returns, and checking the pulse of the options markets, this session will move into a discussion with market practitioners about how they are seeing the current issues in markets including historically low interest rates, asset bubbles, the economic recovery from COVID-19, and the shifting of power between the US and China. Market views will be the speakers’ own opinions, but a vibrant discussion and lively Q&A will provide helpful perspective for conference attendees who have an interest in asset markets, without it necessarily being their core role. The bios of additional panelists will be provided nearer the time.
Closing the Gaps in Financial Literacy
The purpose of this presentation is to detail key gaps in financial literacy, their drivers, impacts of accessibility and affordability of good financial advice, and from an actuary’s perspective, to propose solutions that might lead to good wealth distribution practices that will close these gaps. We have performed both a qualitative and quantitative analysis of financial literacy by means of assessing existing methods of provision of financial advice and performing our own investigation into gaps that exist across key demographics. These demographics have been split across income, age, and geographical location.
Our methodologies include assessing a wide array of existing research into this topic in addition to conducting our own targeted research in co-operation with a number of financial advisers. We’ve identified the key literacy gaps that exist across each of these demographics, potential causes of these gaps, and have proposed solutions to help close each of these gaps and improve financial literacy levels for those who have the strongest needs.
Will ‘Your Future’ Really be Super for Customer Outcomes?
Customer Outcomes Working Group – Tony Diep, Philip Chu, Vivian Yu
The Customer Outcomes Working Group has examined the impact of proposed Account Stapling and the Annual Performance Test (introduced under the Your Future Your Super legislation) on customer outcomes.
Our session focuses on the good, the bad and the potentially devastating outcomes to customers were some of the unintended consequences of this legislation not addressed. We will propose alternatives that will improve customer outcomes
Grasping at the invisible – Bayesian models for estimating latent economic variables
Actuaries have long used official statistics and market data such as the unemployment rate or the traded price of bonds to set assumptions. However, correct interpretation of these quantities often depends on elements that cannot be directly observed.
- Short-term interest rates are expansionary or contractionary depending on the ‘neutral’ interest rate, which is generally not observed.
- The severity of unemployment is usually measured relative to the non-accelerating rate of unemployment (NAIRU).
- Interest rate expectations contribute to the longer-term risk-free yield curve, but other factors such as term premia affect prices, which are not directly observed
Such quantities are increasingly of interest to actuaries – for instance IFRS 17 allows more judgement about the composition of the yield curve. The challenge in estimating these is heightened by the fact that quantities such as the neutral interest rate evolve over time. Despite actuaries being pioneers in early work on credibility theory, Bayesian approaches have largely given way to frequentist approaches. This is to our loss, since such methods have advanced substantially over the past couple of decades and they are well-suited to problems with latent variables or noise around underlying ‘true’ values. The paper gives an introduction to modern Bayesian model-fitting using the stan package and then builds and applies models to estimate the latent economic variables listed above. Findings in the paper will be supported by corresponding code so results can be reproduced. By having public models that can be routinely updated, these models will fill a gap in the Australian market, where regular estimates are not routinely available.
Managing Investment Volatility: Crashes, Covid-19 and Leverage Constraints
Michael Sherris, Bao Doan, Jonathan Reeves
The current low interest rate environment and equity market volatility, that have been accentuated due to the COVID-19 pandemic, are a challenge for insurers and pension funds. Although equity investments offer the potential for higher expected returns, the increased volatility of these investments must be taken into account. Targeting a constant volatility for a broad market equity portfolio has become increasingly important for investment management in this market environment. Insurers can benefit significantly from targeted constant volatility portfolios for equity funds as can pension funds with balanced and target date funds with declining glide paths of reduced equity exposure as the target-date approaches.
These target volatility strategies need to consider portfolio constraints on the degree of leverage for them to be relevant to insurers and pension funds. We consider these strategies with a range of leverage constraints from conservative levels, as seen commonly in pension funds and insurance companies, to more aggressive levels often associated with alternative investments. The outperformance of targeted constant market volatility portfolios is driven from the well-known negative relationship between equity market returns and conditional volatility. This relationship is primarily explained by the volatility feedback effect where higher (lower) volatility results in a stock market price fall (rise) as the required rate of return on the stock market increases (decreases). We focus on the US market. Results for equity portfolios firstly demonstrate the outperformance of constant volatility portfolios and secondly that the return per unit of risk is relatively constant with respect to the leverage constraints. In addition, we also extend the target volatility analysis to traditional balanced portfolios, with a 65:35 split between equity and bonds. Of particular importance to pension funds and insurance companies, is that we demonstrate leverage constraints which do not inhibit the performance of the targeted volatility portfolios. We also show that the highest levels of return per unit of risk are in targeted volatility balanced portfolios.
Applications to target-date funds over an extended range of investment life are also studied. Three glide paths of declining equity exposure are examined; aggressive, moderate and conservative along with three leverage constraints; conservative, moderate and aggressive. Outperformance is also found in constant volatility target-date portfolios with both conservative and aggressive leverage constraints, where more aggressive leverage leads to higher average investment outcomes with higher variability. 2 Lastly, the outperformance of targeted volatility portfolios, both equity and balanced, over the COVID-19 pandemic is demonstrated. During the stock market crash from 19 February 2020 to 23 March 2020 the CRSP value-weighted index, including dividends, fell 34.28 percent. Whereas, the targeted volatility portfolio, that targets constant average CRSP index volatility, fell 20.76 percent. Over this same time period, the balanced and targeted volatility balanced portfolios, fell 23.52 percent and 14.13 percent, respectfully. The minimization of portfolio drawdown from targeting volatility, resulted in continued outperformance of these portfolios during the subsequent months where markets recovered. Accurate targeting of equity market volatility requires forecasts to be made of market return volatility, preferably at the daily level. We use an outlier corrected GARCH(1,1) model estimated on daily returns. Outliers are corrected through winsorizing extreme returns before model estimation, as it is well known that Bollerslev's (1986) GARCH model has biased parameter estimates and forecasts when outliers are present.
These volatility forecasts are utilized to make adjustments to market exposure so that a constant market volatility is targeted. Higher volatility forecasts result in reduced market exposure, while lower volatility forecasts result in increased market exposure. Daily assessments are made on whether portfolio adjustments are required. These adjustments are made through the use of stock index futures contracts overlays, which results in very small portfolio transaction costs.
Optimal Use of Housing Wealth in Retirement
Tin Long Ho, Hazel Bateman, Katja Hanewald
Australian households hold a large part of their wealth in the form of housing. There are several ways to spend down housing wealth, including downsizing, the Pension Loans Scheme to top up the Age Pension, as well as commercial reverse mortgages and home reversion schemes. However, despite the availability of these different options, the final report of the Retirement Income Review (The Australian Government the Treasury, 2020) found that retired households underutilise their housing wealth. We investigate the optimal use of housing wealth in Australia, given the available options and accounting for current Australian tax, superannuation, and Age Pension means test rules. We use scenario analysis to determine optimal housing wealth strategies for Australian older households with different wealth portfolios. We expect that the insights from our project can help households, policymakers, and financial services providers to improve the role of housing wealth in retirement financial planning. Background: Australia has a three-pillar retirement income system. Housing assets are the largest component of the third pillar. In its final report Retirement Income Review panel noted that retirees are overinvested in the housing market, but homeowners fail to fully utilise their housing assets to support their living standard in retirement (The Australian Government the Treasury, 2020). This underutilisation distorts debates about the adequacy of superannuation and has the potential to increase the financial burden of the Age Pension on the Australian government. Previous research has analysed factors that impact retirees’ decision to use reverse mortgages to fund retirement (e.g., Hanewald et al., 2020; Bateman et al., 2020; Jefferson et al., 2017; Ong et al., 2015) as well as downsizing choices (Whelan et al., 2019). These studies have focused on retirees’ economic circumstances, personal characteristics, and behavioural factors. One important factor that is less well studied is the complicated interaction between tax, Age Pension means tests and superannuation rules and how these rules prevent retirees from making 2 optimal decisions regarding the use of their housing wealth1. Our research will fill this gap in the literature. Methodology: We consider the following strategies for the use of housing wealth to increase retirement income: 1) downsizing the residential home; 2) using the Pension Loans Scheme; 3) using commercial reverse mortgages; 4) using home reversion. We model the impact of different systems that interact with the retirement income system, including the tax system, means tests and superannuation rules. Using data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey, we generate five typical wealth portfolios of Australian retiree households and use scenario analysis to identify optimal strategies for Australian retirees to utilise their housing wealth. We use the expected utility framework to measure the financial wellbeing with a pre-defined housing strategy and taking into account stochastic mortality, investment returns and house prices, to determine optimal housing strategies for retiree households with different wealth portfolios. Our model reflects all key tax and pension rules, including the Age Pension means tests and the superannuation downsizer contribution.
Contributions: We use state-of-the-art economic and actuarial modelling to identify optimal strategies for the use of housing wealth by Australian retiree households with different wealth portfolios. We provide results that will help Australian households to make better retirement financial planning decisions. Our findings will also allow policymakers to assess the effectiveness of different systems that impact the retirement financial planning of retirees. As mentioned above, we will make all research results freely available to assist further research and applications in this area.
Using Property to Create Retirement Incomes
Residential real estate is an old and a substantial asset class so it should be efficiently managed. The diverse and emotional nature of this asset coupled with strong taxation influences may have impeded the development of more efficient approaches. There is an opportunity to remedy this now. Residential real estate offers occupancy rights and ownership as a package. This leaves investors having to manage occupancy (or outsource at a cost of around 7% of gross revenue – around $4bn pa?) and cover running costs. Occupiers are usually unable to make desired renovations and could be spending 5% of their gross rental each time that they move. So why can’t we imagine long term occupancy rights going to the occupiers with the responsible to cover all costs and a simple payment to the investor? The agreements still need to provide peaceful occupancy and asset value protections but there would be much less short term noise to manage. Why now? Creating a simpler investment should be easier in a time of low returns. Retirees, in particular, could see little competition to a long term real income backed by a very secure asset. At the same time, occupiers might appreciate a lower capital hurdle when seeking to secure a long term home.
LEADERSHIP AND PROFESSIONALISM
Leadership and Professionalism Plenary: Was the misconduct identified in the Banking Royal Commission cause by directors who didn't understand the complexity of the businesses they directed
Barry Rafe, Ian Laughlin, Louise Davidson, Diana Eilert, Trevor Matthews, Graham Willis, Peter Yates
On 8 May 2018 the Financial Review reported that a number of directors of AMP were stepping down because they no longer had the support of the institutional shareholders. The resignations were directly attributable to the fallout from the banking Royal Commission which revealed that the behaviour of financial services organisation often did not meet community standards and expectations. In some cases, such as the AMP there appeared to be conduct that broke the law.
The board is responsible for the actions and success of the corporation and hence the composition of the board would appear to be relevant to the corporation’s success. Ideally, directors are selected for board positions based on their technical and behavioural competencies. Boards often develop a skills matrix that sets out the broad set of competencies needed for the corporation to meet its aims. The expectation is that directors are appointed to fill or bolster various competencies required. In addition, the Corporations Act requires that all directors be financial literate i.e. they need to understand the financial drivers of the organisations they direct.
The questions to be asked in this session are:
- Was the misconduct revealed by the banking Royal Commission caused by directors who did not understand the businesses they directed?
- Who should be on the boards of complex financial services businesses
- How do complex financial services businesses manage the need for diversity of skills on the board with the need for directors to understand the complexity of the businesses they direct.
Code Guidance Group Case Study Session/s
David Minty, William Liu, Anita Mansbridge, Jeff Humphreys
It has been one year since the new Code of Conduct was introduced. One of the key considerations of the Code is how it may influence the future behaviour of our Members. This interactive session will deliver an engaging case study that illustrates a practical application of the Code in a professional context. Members will have the opportunity to discuss sensible applications and interpretations of the Code, the practical difficulties one may face when applying the Code, and solutions one may elect to implement in similar scenarios.
This session could be applied as a model for a professional development activity that Members could run in actuarial workplaces.
Identity in Actuarial Careers
I recently carried out research that considered influences on identity in the Actuarial profession. This was for submission as a thesis as part of the requirements for the Master of Cultural Studies at the University of Sydney. The thesis included fieldwork that was carried out in two parts, an electronic survey of 5000 members of the actuarial profession by the Actuaries Institute followed by an in-person interview with 46 participants who volunteered via the electronic survey. The thesis is about forms of social identity and their relationship with professional identity. Although there are many types of social identity (see below), for the purposes of this work I chose to concentrate on gender and ethnicity. As these are visible markers of identity it may be assumed that that professionals will have been in situations where their careers have been influenced because of these two factors.
Firstly, this thesis seeks to explore whether members have experiences that indicate whether their professional identity has afforded them some form of ‘protection’ from any societal barriers to their career progression, as in the workplace there are often long-standing barriers to career enhancement imposed by society’s view of gender, ethnicity, sexuality, religion etc. Secondly, the research sought to investigate the career progression experience of those from an Asian background, as it appears that although they are not fully represented in senior roles. This is particularly acute for the intersection of gender and ethnicity. The experience of Asian females in this study may highlight some specific issues and challenges. The professional exam pathway and early career employment options have been built on an Anglo model and assumes that English is the first language and provides little adaptation or assistance for those from overseas. This may not provide a sense of belonging or assistance with navigating the Australian business environment.
The lack of full representation of women at senior level in business, and particular in STEM (science, technology, engineering, maths) occupations, has been extensively researched and the challenges that women face in male dominated professions widely documented. In the Actuarial profession the percentage of females has been gradually increasing over the past 20 years, and at entry level numbers are towards parity. Currently around 33% of Fellows of the Australian Institute are female, which compares favourably to participants in other STEM occupations: Engineering (17.2%) IT (18%) and Physical sciences (53.6%) (Source: https://www.catalyst.org/research/) Previous research from the UK Institute of Actuaries (Kaveh, 2017) has noted that a higher number female than male students stop studying exams or move away from an actuarial career in the first 10 years post University. Thirdly, therefore, the research sought to test this particular observation and also to gain an understanding of how women feel about the meritocracy of the actuarial profession.
Modernising a Qualification Pathway
Alissa Holz, Mike Callan
In 2018, Council approved a revamp and rebrand of the Part II and Part III subjects. A new education structure was developed that strengthened the Actuary program (formerly Part II) and introduced many changes to the Fellowship program (formerly Part III). The new subjects will have practically replaced the old subjects by the end of 2021. The framework for developing and delivering the subjects is based on a set of five principles that provide clarity on the required education standards of the subjects. This presentation will walk through these principles and explain how they have affected the development of the subjects. In particular, we will examine the approach taken to meet the key output of increasing pass rates yet maintaining standards.
Life Plenary: Disability Insurance Task Force. The hard part: making it happen
Hoa Bui, Ian Laughlin
In 2020, the DI taskforce was formed by the Actuaries Institute with the aim of tackling the significant issues experienced by the Disability insurance market in Australia. The task force chose to focus on individual disability income insurance initially because of the severity of problems in that product. The task force published a consultation paper and supporting documents in September 2020, and received significant interest and feedback from a wide range of stakeholders including but not limited to regulators, rating houses, insurers, consumer advocacy groups, the FSC, ALUCA , ANZIIF and the medical profession. More recently, there has been significant discussion and debate with stakeholders on the way forward. At the time of writing, the task force is considering all of the feedback and plans to hold webinars in response. It will then issue final papers by March 2021.
A Practical Guide to Pricing for Uncertainty in Disability Income Insurance
Provisional recommendation 11.3 of the Actuaries Institute’s Disability Taskforce noted that ‘pricing for uncertainty’ in relation to Individual Disability Income Insurance (IDII) needs to improve. Further, pricing for uncertainty is a key element of the proposed Sustainability Guide for life insurers, developed in response to ongoing significant losses incurred on this line of business. There are several sources of uncertainty in pricing new IDII products in 2021 and beyond, specifically in the context of significant changes to benefit terms and conditions and limited relevant available historical data. Competitor activity after the new generation of IDII products are launched may also place pressure on pricing disciplines, highlighting the importance of developing pricing frameworks beyond high-level principles. This session will discuss the key practical considerations for life insurers as they seek to put ‘pricing for uncertainty’ into practice for IDII business. This includes: 1. Discussion of a high-level framework to allow for uncertainty in pricing. This includes: a. Identification of key sources of uncertainty in pricing for new IDII products, b. Potential learnings from how adjacent industries and overseas life insurers allow for uncertainty, and c. Potential steps and considerations that life insurers could consider, including references to relevant data sources. 2. Potential approaches in communicating uncertainty to key stakeholders.
Behavioural Science Impacts for Australian Life Insurers
Behavioural science teaches us that different products require different persuasion techniques. Matt Battersby VP, Chief Behavioural Scientist RGA will provide examples of successful approaches in life and health insurance as well as share insights from other relevant industries. Matt will give insight into how behavioural science is being used in life insurance with particular consideration to the impacts of behavioural science to income protection claims and the effects on return to work outcomes.
Butterfly Effects of COVID-19
Siu Yin Liu, Sara Goldberg
This presentation will discuss some of the latest developments from Covid-19 pandemic and the implication for life insurance business. Topics will include - Observations on geographic differences in insured behaviours and claims patterns – and the difficulties the industry has had in projecting infection and fatality rates - Update on vaccine dissemination and outlook on subpopulations - COVID-19 impact on economics: lookback at 2020 and outlook, unemployment rates and COVID-19’s link with disability - Impact on mortality & longevity for 2021, 2022+: what we know of long COVID and indicators of the health of the surviving population, and impact on general population versus underwritten lives.
Claims Management and what Actuaries should know
Alisha Jones FIAA, Jacqui Goldfinch, Matt Battersby
The industry continues to struggle with affordability and deteriorating experience. With an eye to the future, Alisha & Jacqui will share their insights into the challenges faced in managing claims across the industry, with a focus on policy terms, foundational claims issues and the need for a holistic business approach to claims practices. Matt will then share his insights as RGA’s Chief Behavioural Scientist into how behavioural science is being used in the claims space to provide enhanced assessments and customer outcomes.
Customer Centric Product Development: Global insights and Design Distribution obligations
Wilfred Tung, Michael Richardson
Customer centric thinking has never been more important. As we move into the world of design and distribution obligations with the focus on appropriate products for select target markets we need to develop agile thinking around our offerings. This discussion will focus on how the latest product development innovations across Asia uniquely engage with customers and provide them with valuable assurance and what does this mean in an Australian context. Wilfred Tung is Regional Head of Pricing – Research and Development with 17 years in the industry he has overseen significant product innovation across the Asian business or RGA. Michael Richardson is Technical Product Consultant at RGA Australia with over 35 years in the industry he has seen the up and downs of the Australian market and has powerful insight into the challenges we face. Together they are passionate about customer outcomes and the societal benefits of a robust and innovative insurance industry
Data Driven Framework to Tackle Regulatory Compliance: An IDII case study
Victor Caballero, Pallav Bajracharya
Our presentation considers the myriad of regulatory and sustainability challenges currently facing life insurers. By using IDII issuers as a case study, our presentation examines the key overlaps between sustainability measures and regulatory compliance. We propose a data-driven framework as a guide for insurers to address both the sustainability measures and regulatory compliance requirements pertinent to IDII and we demonstrate the potential flow-on effect on business performance and customer outcomes.
The regulatory reform agenda has presented IDII issuers with a myriad of challenges at a time that life insurers find themselves grappling with significant structural challenges and highly uncertain economic and health conditions: whereas APRA has now released its raft of IDII sustainability measures, ASIC has now set hard deadlines on the new DDO and Claims Handling & Settling regime for the industry. The Covid-19 matter continues to drive the economic agenda and seems likely to persist throughout 2021, driving further uncertainty. At the core of the challenge lies a significant number of common themes:
- The design of products to meet the best interests of customers and sustainability outcomes for life insurers;
- The establishment of sustainable target markets and consideration of health factors (in particular mental health);
- A greater focus on the governance of distribution efforts across all channels;
- The imperative for the continual monitoring of compliance and requisite actions.
Collectively, these common themes illustrate the nexus between sustainability and compliance and the opportunity for insurers to leverage data as a unifying force with which to address pressing challenges. Indeed, the data imperative comes at a time that investment in analytics, automation and augmentation is no longer a nice to have but rather a regulatory necessity (as evidenced by APRA’s IDII expectations, DDO requirements and other compliance obligations such as complaints, anti-discrimination and so on). Accordingly, we propose a novel data-driven framework as a guide for insurers to address both the sustainability measures and regulatory compliance requirements pertinent to IDII and we demonstrate the potential flow-on effect on business performance and customer outcomes.
Liesje Jansen Van Rensburg, Sarah Hogekamp
The Life Code of Practice requires insurers to update their defined medical events at least every 3 years. This presentation will discuss
- Best practice for defining a trauma condition.
- Lessons learnt from weaker Trauma definitions around the world
- A comparison, and explanation, of standardised definitions in different markets
Further the presentation will look at providing updates on some emerging issues which may affect how you define your trauma condition. This includes
- Update on liquid biopsy and other advanced cancer detection and screening
- Heart attack changes including changes to the latest universal definition and MINOCA, a new type of heart attack
Direct Life Insurance
Adrian Kerins, Benita Pienaar, David Shuvalov, Shahzad Karamally
Direct life insurance has been seen for many years by the life insurance industry as the means through which the industry could evolve from a traditional intermediated market, where customer needs were met almost exclusively through either group insurance (super & employer) or IFAs, to one where customers engaged directly, understood their insurance needs, had the ability to adapt their cover as their own needs evolved and advances in technology could be leveraged to simplify the whole customer journey and experience.
Don't Panic! Fair Reserving Amidst the Chaos!
Matthew Wood, Colette Reid
It can be challenging for actuaries to reserve fairly; a task now made much harder amidst the chaos of the COVID-19 pandemic on top of regulatory scrutiny and disruption (e.g. PYS, PMIF, sustainability and suitability focus). In particular, reserving appropriately for the Incurred But Not Reported (IBNR) claims for TPD and the Disabled Lives Reserve (DLR) for long term income protection business, can lead many valuation and Appointed actuaries to fly into a panic! This presentation will help you to relax! In it, we will discuss some analysis we have done exploring both IBNR and DLR reserving techniques for Group Risk portfolios, to demonstrate that it really does not need to be that stressful.
Excess Mortality in 2020
Karen Cutter, Jennifer Lang, Richard Lyon
In June 2020, the Australian Bureau of Statistics (ABS) published its first analysis of provisional monthly mortality statistics, covering weekly doctor-certified deaths in the first three months of 2020, compared with the five previous years. Subsequent reports were produced broadly once a month, with the latest one (December) updating the analysis to 27 October.
The authors have produced a series of small papers adjusting the ABS reports for better comparability and discussing the implications of the revealed mortality experience. For example, we identified the relevance of spikes in deaths from pneumonia, diabetes and stroke at the same time as the first wave of Covid-19 in Australia.
This paper will be a deeper dive into Australian mortality in 2020 and will also draw comparisons with experience overseas, such as the UK and the US, to the extent that reliable data is available.
The paper will explore the implications of the observed differences.
Financial impacts under AASB 17 - Practical scenarios explained easily
Alex Aeberli, Brendan Counsell, Ramanuj
Given the complexity of applying a principle based accounting standard such as AASB 17 Insurance Contracts and the effect and impact of accounting policy choices made by (re)insurers on the sets of financial statements, it is crucial for (re)insurers to assess and understand the likely financial impact of various relevant practical scenarios when applying AASB 17 17. This presentation aims to highlight the potential impact on emerging profits and financial statement disclosures of a set of likely scenarios that a (re)insurer might want to consider as part of the financial impact analysis. Synopsis: AASB 17 is generally perceived as a more complex accounting standard than current accounting standards for (re)insurance companies. AASB 17 requires (re)insurers to produce financial statements with more granular disclosure requirements than have been required before.
The complexity and interdependency of the set of requirements introduced by AASB 17 left many ongoing implementation projects struggling to understand key financial implications of a range of accounting policy choices to be made as there is arguably no straightforward way to understand how a specific accounting policy choice may impact financial reporting outcomes under AASB 17 and may also drive the overall AASB 17 solution design process. This presentation walks through a number of practical scenarios that the majority of (re)insurer will have to deal with and will demonstrate how the financial numbers under AASB 17 evolve and change from scenario to scenario. Scenarios presented include the treatment of experience variances under AASB 17, assumption changes under AAB 17, and one off shocks under AASB 17, to name a few.
How Big Data and Machine Learning are Changing Life Insurance Today
Marc Sofer as the Head of Data and Strategic Analytics RGA is at the cutting edge of what is happening on the ground in life insurance in regards to big data and machine learning. He will share what is happening across the globe and what this may mean for Australian companies. Marc will look at new applications for underwriting and risk selection as well as customer engagement.
Impact of COVID-19 Defence Measures
Iris Deng, Michelle Dong, Helena Hayes, Abbey Huang, Richard Lyon and Colin Yellowlees
Different countries and sub-national regions have adopted different responses to the threat posed by Covid-19. There are strong differences of opinion about these choices and their impacts, including those on health and the economy.
Even if this question can ever be settled, it is likely to take some time, partly because the virus is still rampant and partly because of the inevitable time lags involved. However, it is worth attempting to sketch an objective picture based on available data from different countries.
This paper will be the result of research on two fronts. First, data will be gathered for about 20 countries, in relation to the economy, Covid-19 and a consolidated measure of government responses. This data will be used to plot broad relativities between countries. If it is possible to do so, there will be deeper dives on a subset of these countries.
Secondly, the team will search for existing published academic research addressing this topic. The aim will be to synthesise this research and make it accessible. If there are clear common themes and messages, these will be drawn out and compared/contrasted with what the data suggests..
PYSP/PMIF - Implications on TPD Notifications
Phin Wern Ting, John Walters
In the past few years, the Australian group life insurance industry has seen multiple market and regulatory events that have boosted awareness among members. The most recent legislation changes were Protecting Your Super Package (PYSP) effective 1 July 2019 and Putting Members’ Interests First (PMIF) effective 1 April 2020. With the PYSP communications being rolled out starting from around April 2019 onwards, multiple funds in the industry have observed an increase in TPD claims notifications in Q2 and Q3 of 2019. Depending on fund, the increase in awareness has brought about a mix of higher reporting at early durations as well as at longer durations. For the increased reporting at early durations, actuaries would need to decide if the higher reporting is an increase in ultimate claims costs, or if it is speeding up in reporting of claims that would have been notified at a later point in the future, or a mix of both. On the other hand, for claims that were reported at longer durations, actuaries would need to decide if the lengthening of average delay represents a permanent shift for the portfolio.
Using Artificial Intelligence to Improve Mental Health
Matt Noyce, Dr Brendan Loo Gee
Life insurers currently have limited tools to understand people’s mental ill-health and its impact on their lives. Insurers could support their customers and reduce income protection, TPD and death claims using innovative approaches to prevent mental ill-health or suicide. We explore the development of early warning systems that allow insurers to identify individuals or groups of people at risk of mental health deterioration. Using Artificial Intelligence (AI) technologies, our work explores smart prediction models to help insurers better design products for their customers and improve the validation of mental illness claims.
What is Discrimination In Premium Rates?
The Discrimination Act allows insurers to discriminate on a range of set criteria such as age, where they have actuarial or other statistical data to justify the discrimination. We know that premium rate curves do not follow claims curves. At what point does pricing become discrimination?
Will the world still need life-insurers in 5 years?
Matt Noyce, Peter Godbolt, Joseph Chan
There is extreme under-insurance in Australia due in part to greater regulation across all life insurance segments, including the group risk, advice and direct channels. When combined with people’s disengagement with life insurance both inside and outside superannuation, many people who need cover are not able to access it easily. Whilst fewer Australians have default life insurance cover in superannuation, advancements in medical science and genetic testing mean that underwritten life insurance will become ever more exclusive. In this session we explore an extreme version of the future, where the traditional model of life insurance distribution, risk assessment and pricing is transformed using decentralised finance, blockchain technology and smartphone apps. We dream of a more inclusive future where there is easier access to life insurance and the ‘protection gap’ is a thing of the past.
Will ‘Your Future’ really be super for customer outcomes?
Customer Outcomes Working Group
The Customer Outcomes Working Group has examined the impact of proposed Account Stapling and the Annual Performance Test (introduced under the Your Future Your Super legislation) on customer outcomes.
Our session focuses on the good, the bad and the potentially devastating outcomes to customers were some of the unintended consequences of this legislation not addressed. We will propose alternatives that will improve customer outcomes.
Target Capital Practice Guide Session
Stephen Goh, Ashutosh Bhalerao (Target Capital Working Group)
The Actuaries Institute currently has a 2016 Target Capital Information Note which is being converted into a Target Capital Practice Guide.
Some of the changes being proposed cover the following additional areas as well as an overall review of the note:
- Practical considerations in managing capital and falling below target capital levels.
- Managing capital in stressed scenarios e.g. COVID-19
- Stress and scenario testing
- Involving other stakeholders in capital discussions i.e. Board, CFO, CRO etc
- Meeting the requirements of ISAP 6 – International Actuarial Standard in Enterprise Risk Management and IAIS Insurance Core Principles
The purpose of the session will be to go through the changes being proposed by the Target Capital Working Group and get any initial feedback on these.
Deep Reinforcement Learning for Variable Annuities Hedging
Michael Sherris, Xiao Xu, Jonathan Ziveyi, Jennifer Alonso-Garcia
The paper gives insight into the variable annuity with guaranteed minimum benefits (VA+GMBs) hedging from the perspective of deep reinforcement learning. With the artificial intelligence (AI) revolution, the model-free reinforcement learning approach has allowed the computer seeking to maximise the reward without knowing the pre-specified functions or dynamics. Deep learning has been applied to solve the classical problems in finance, such as portfolio management and time series forecast. The research connects the model-based VA+GMBs valuations to the fascinating AI world. By considering a risk measure of conditional value at risk (CVaR) at 95%, the effectiveness of comprehensive VA+GMBs hedging is compared by applying the deep reinforcement learning method and the traditional model-based delta hedging scenarios, including no-hedge, statichedge and semi-static-hedge. The deep hedging approach is performed by implementing a fourlayered recurrent neural network (RNN) with long short-term memory (LSTM) units to optimise the convex risk measure, 95% CVaR.
The deep hedging algorithm is able to find a strategy with better risk measures than the model Delta within seconds for VAs. Further, the deep hedging approach is applied to hedge a portfolio of variable annuity contracts and obtained comparable conditional value at risk (CVaR) in various equity model assumptions. The resulting 99.5% value at risk (VaR) measures for equity models with jumps and stochastic volatilities are significantly higher than the Black-Scholes model. Because 99.5% VaR is the suggested measure in calculating the solvency capital requirements in the Solvency II framework, using VaR as the metric may underestimate the required capital in a more volatile market. The equity model assumption still plays an important part in the model-free deep learning environment.
Future Proofing the ERM Framework
Tim Gorst, Elizabeth Baker
The current global pandemic has provided a dramatic reminder of the importance of a strong and effective ERM framework. The application of such a framework will successfully prepare a business for such unforeseen shocks and then carry it through safely to the other side. This presentation will reflect on the ERM related learnings from the current global pandemic, its reminder of the importance of non-financial risk management and how it will reshape both the form and application of the typical pre-COVID ERM framework. Building on the insights delivered by Baker, Gorst and Lim at the 2020 Actuaries Virtual Summit, the presentation will expand on the importance of strategic risk management, dynamic non-financial risk measurement, clarity of communication and the need for the first Line to be equipped to proactively deal with uncertainty as and when the unexpected arises.
Super Plenary: Gender Inequality in the Retirement Savings Gap
David Knox, Michael Rice, Richard Dunn
Over the last decade, there has been a body of research into the gap between the average male and female retirement balances. The Report of the Retirement Income Review looked at gender differences and confirmed the gap, which is a function of differences in working life (since superannuation contributions are linked to wages). The relative income in retirement by gender is further impacted by women retiring earlier and living longer. However, the Age Pension significantly reduces the gap in average retirement incomes. Nonetheless, Australia has been criticised for its high poverty levels amongst elderly single renters (the majority being female) and for not addressing the emerging gap for working Australians.
This Paper looks at the retirement savings gender gap in the light of the findings of the Retirement income Review and it also assesses where Australia stands internationally in terms of supporting female retirement incomes. Some options to address the issue will also be discussed. The authors have undertaken past work into female retirement inadequacy and will examine whether progress is being made.
Annual Outcomes Assessments – What did trustees tell their members?
Catherine Nance, Mark Samuels
All superannuation fund trustees are required to comply with the requirements of the SIS Act member outcomes covenants that were passed in April 2019 and the new APRA Superannuation Prudential Standard SPS 515: strategic planning and member outcomes effective from 1 January 2020. One of the major requirements is for trustees to perform an Annual Outcomes Assessment (AOA) on each of their products as at 30 June each year. Many trustees accepted APRA’s guidance and performed a trial AOA as at 30 June 2019, but the first legislated assessments are due as at 30 June 2020. For the AOA trustees need to make a determination on whether their products are meeting members best interests in Q1 2021 and a summary of the assessment and determination need to be published on the funds’ websites within 28 days from when the determination was made. These summaries are expected to be available for all members by the end of Q1 2021. The presentation will be an analysis of the summaries published online by each of the trustees and what determinations they have made. The analysis will focus on:
- the differing level detail and the content itself;
- how the summaries have been presented; and
- the determinations made the trustees. A particular interest we have is on the determinations. Due to the Stage 1 MySuper AOA being prescribed by APRA there will be trustees who have underperformed their peers and will need to explain this underperformance on the fund webpage. How they do so without concerning members will be of interest.
Designing and Comparing Retirement Solutions in the Best Interest of Members
A combination of regulatory, demographic and environmental factors means solving for retirement is a priority for Trustees, particularly with a focus on member retention and fund sustainability. Trustees need a fit for purpose offer to meet their retiring members’ needs. To do this efficiently, they require scale and quality outcomes across all members. This session will consider outcomes of recent research conducted by Challenger looking at the hurdles for a Trustee to effectively endorse a retirement solution to members.
In particular, it will focus on the framework developed to assess retirement solutions across different members cohorts, and the member value proposition within those cohorts. We contrast and compare member outcomes for investing in an account-based pension (ABP) alone compare to a retirement solution that incorporates a lifetime income stream. Including a discussion of some of the challenges faced when making such comparisons. Currently, members are usually (and often only) given the option to use an ABP together with the Age Pension (for those who are eligible) to meet their needs in retirement. Retirement is complex but Trustees have an opportunity to develop and offer retirement solutions that address the risks faced by retirees without the need for complete, personal financial advice. While the Trustee has limited knowledge of the member’s circumstances, the Trustee can design an offer a retirement likely to be in the best interest of the cohort of members. This provides a basis for the trustee endorse such a solution for members.
The framework does not replace personal advice; the aim is to improve retirement outcomes for those retirees who do not obtain financial advice; are unable (or do not wish) to make a decision about retirement products; or are looking for guidance from the trustee in respect to how to utilise their superannuation for retirement. There are many factors that go into the design and selection of a retirement solution; just one of which is the financial modelling. We will illustrate how the Framework can provide the Trustee with evidence to support the endorsement of a retirement solution for member cohorts. The framework has three components being average member outcomes, sensitivity testing and trade-off analysis. This is designed to identify a solution where the average and most members are better off, to provide comfort that the outcome is robust in light of assumptions made. It is also necessary to identify ‘opt out’ characteristics and to understand the experience of members within a cohort, to ensure averages have not hidden outcomes that would be unacceptable to the Trustee.
To assist the audience in understanding these concepts we will present the modelling results from our research that illustrate the use of the framework to identify cohorts where a retirement solution that incorporates a lifetime income stream is likely to provide outcomes comparable to or better than an ABP-only solution for a broad range of retirees.
Long-term Risk Metric for Superannuation
Estelle Liu, Ian Fryer, David Carruthers, Rein van Rooyen, Young Tan
It is important for superannuation members to understand the risk of a particular investment option or portfolio they are investing in. As a result, in addition to disclosing the investment performance, it is also important to disclose the risk of such investment. The main risk metric currently disclosed to members is the Standard Risk Measure (SRM) which only focuses on a short-term period of 1 year. Given superannuation is a long-term investment, we are proposing the introduction of a Long-Term Risk Metric (LTRM) that could potentially be used alongside the SRM. It would show the risk of not meeting a certain long-term performance objective which reflects the risk of a member not efficiently meeting their retirement income goals.
The working group presented the LTRM concept and a strawman design outlining the key considerations at the last Actuaries Summit. Subsequent discussions with APRA, ASIC and Treasury have continued to show that there is support for the development of such long-term risk metric. The working group has taken the feedbacks received so far from our presentations to the industry and discussions with the regulators and progressed with further development that aims to address the key concerns raised. This presentation will provide a revised set of recommendations of the LTRM and outline the key concerns raised and our proposed solutions to address those concerns. The aim of the working group is to develop a LTRM that can be widely accepted by the industry and used as the additional main metric for consumer disclosure purpose.
Portfolio Choice for Retirement Savings: The impact of market volatility during the COVID-19 pandemic
This paper studies how DC plan members respond to market volatility by making active investment decisions during the COVID-19 pandemic period. Using administrative data of 21,500 members from a large DC plan in Australia, we analyse the investment option switching behaviours made by members from February to April 2020, during which time equity markets dropped at an unprecedented rate. We find switching behaviour increased significantly and started to be dominated by defensive switches from late February when equity markets started to fall. Around 77% of the switches were defensive in nature, most commonly from a default investment option to cash. We also find that members who are nearing or in retirement, have higher balances or have actively chosen their investment options were more likely to make a switch.
Members with greater access to financial advice were less likely to switch their investment options. Using another sample from an online survey undertaken by the same DC plan members, we find that both risk attitudes and the risk level of members’ investment portfolio do not explain the decision to switch itself, though risk attitudes have predictive power over which direction a member will switch to. Our findings shed light on the importance of guidance and advice in reassuring members and helping them stay the course during periods of market stress, particularly for pre-retirees and retired members who have reasonable balances and are more engaged.
QSuper Lifetime pension
Brnic Van Wyk
QSuper has developed a new innovative income stream it is planning to launch in March 2021. It is an experience-based lifetime income stream that fits within new government regulations designed to encourage the development of retirement income products. Final Board approval for launch is scheduled for the meeting in December 2020, after the deadline for submissions for the Virtual Summit. QSuper is in discussions with Sunsuper regarding a possible merger, which may also affect the go-live date, depending on potential merger decisions. This synopsis is brief, with the purpose to be considered as a genuine placeholder for a presentation at the Summit, given current submission deadlines. In the unlikely event that the product is not launched prior to the actual Summit, I (QSuper) may well still be in a position to present the “proposed” product. However, every expectation is that the product will be live in the market before the Summit in 2021, which will also allow for initial reflection on reactions and take-up rates, in addition to the obvious design and development component of a presentation. Unfortunately it is not possible to make a formal and final proposal at this stage, but I trust this application will be met with enthusiasm! Feel free to reach out to me directly if you wish to discuss this in greater detail before making your decision.
Superannuation Actuaries Non-Traditional Career Pathways
Vivian Dang, Melanie Dunn, Tim Gorst, Estelle Liu, Darren Stevens, Shang Wu
This presentation will explore career pathways for actuaries working in superannuation, outside of the traditional Defined Benefit roles. It will cover:
- Range of different roles or career paths available
- Considerations on how to apply actuarial thinking in other superannuation areas
- Value of actuarial background
Super Funds Investing in a Time of Climate Change
Jillian Reid, Naomi Edwards and Graham Sinden
Climate change is driving the need to transition to a zero-emissions economy. The ‘race to zero’ is on as investor and corporate awareness of and commitments to transition targets are on the rise. Attention is also turning to resilience and adaptation requirements. This session will review the shifting investor environment for super funds, including regulatory and member expectations, and how super funds are responding to the risks they face, the opportunities available, and the need to achieve net zero targets, resilience and still deliver on investment objectives.
Super Stapling and the Impacts to Default Insurance for Members
Brendan Fehon, Beth Stroheldt
On the 6th of October, the Federal Government in the 2020-21 Budget announced the “Super Stapling” reform as part of the “Your Future, Your Super” package. The reform is intended improve member retirement income by reducing fees from multiple superannuation accounts, and minimising the impact of low investment returns through the defaulting of members into poor performing funds. While the focus of the reforms is within the superannuation funds themselves, it is expected that these reforms will impact group insurance, exacerbated by existing disclosure and member engagement challenges. This presentation will look at how the Super Stapling changes may impact the superannuation funds and their insurers.