Industry Overview at 12/2013

Transcription

1 Whassup with the Actuaries? IASA Meeting, Nov. 21, 2014 Glenn Tobleman, Lewis & Ellis, Inc. Michael Goni, Ewbank Group The views expressed in this presentation are those of the presenter and do not purport to represent the position of Lewis & Ellis, Inc. or the American Academy of Actuaries. Lewis & Ellis, Inc. 1 Industry Overview at 12/2013 U.S. Life & Health Industry 924 Licensed insurers $5.8 Trillion in assets U.S. P&C Industry Financial Metrics 2,758 Licensed insurers $2.3 Trillion in assets Lewis & Ellis, Inc. 2 U.S. Life/Health Metrics (Billions) Life Net Income Capital and surplus Lewis & Ellis, Inc. 3 1

2 U.S. Life/Health Historical Yields Net Yield on Invested assets Return on Average Equity 12.79% 13.22% 9.39% 7.94% 5.14% 5.24% 5.10% 4.66% 4.93% 4.88% Lewis & Ellis, Inc. 4 U.S. L/H Premiums (Billions) Life Annuity A&H Total Lewis & Ellis, Inc. 5 U.S. P&C Metrics (Billions) Net Income Net Written Prem Capital and surplus Lewis & Ellis, Inc. 6 2

3 U.S. P&C Combined Ratios P&C Combined Ratio % % % % 96.24% Lewis & Ellis, Inc. 7 U.S. P&C Premiums (Billions) Personal Comm'l A&H, Other Total Lewis & Ellis, Inc. 8 Industry Challenges Life Insurers Continued low interest rate environment Mortality Issues (Obesity, Pandemics, MRSA) Stagnant growth ALM/Spike in interest rates Rate increases (health) P&C Insurers Catastrophic losses TRIA extension? (Workers Comp) Pricing challenges Lewis & Ellis, Inc. 9 3

4 Regulatory Oversight States primarily responsible Dodd Frank Act Federal Insurance Office Mike McRaith, former Commissioner of Illinois Lewis & Ellis, Inc. 10 Federal Insurance Office Monitors all aspects of the insurance industry (except health insurance, some LTC, and crop insurance). Focuses on gaps in reg ln that could contribute to systemic risks Recommends to the FSOC insurance companies for regulation as a SIFI. Determines if state insurance measures are pre empted by international agreements. Collects, analyzes and shares information on insurance industry and companies amongst federal regulators. Coordinates on international issues. Lewis & Ellis, Inc. 11 State Examinations Greater focus on enterprise risk Push to get actuaries before the Board Peripherals PDR s and Deficiency Reserves Lewis & Ellis, Inc. 12 4

5 Life and Annuity Valuation Issues Year-end 2014 Appointed Actuary Topics Principle-based approaches (PBA) Lewis & Ellis, Inc. 13 Year-End 2014 Life Actuarial Topics Cash flow testing in low interest rate environment New York Halloween Letter, California Holiday letter Lewis & Ellis, Inc. 14 Miscellaneous Valuation Topics Own Risk and Solvency Assessment (ORSA) Solvency II and IFRS Valuation Mortality Table Research Lewis & Ellis, Inc. 15 5

6 Own Risk and Solvency Assessment Impacts medium to large insurers in 2015 Response to financial meltdown in 2008 Need to assess risk at the holding company level Lewis & Ellis, Inc. 16 Solvency II and IFRS Solvency II: Slow progress Effective date is now 2016 at the earliest IFRS/GAAP Convergence Pretty much dead, but FASB still talking Lewis & Ellis, Inc. 17 Valuation Mortality Tables Payout Annuity Mortality Table exposed by LATF 2012 IAR, would replace the a2000 table 1/1/2015 Generational mortality table, recognizes future expected mortality improvement 2014 Valuation Basic Tables (2015?) Continued mortality improvement Lewis & Ellis, Inc. 18 6

7 Current System for Life Valuation Factor Based Consumer demand for more complicated products More sophisticated investments being used Inconsistencies in application between insurers, particularly for complex products Lewis & Ellis, Inc. 19 Principle-Based Approaches Primarily driven by perceived statutory reserve redundancies for: Level Premium Term Universal Life with secondary guarantees Variable annuity, base plan and riders Lewis & Ellis, Inc. 20 Principle-Based Approaches Never in the field of human conflict was so much owed by so many to so few. Winston Churchill, August 20, 1940 Never in the field of actuarial endeavors has so much work been caused by so few to complicate the lives of so many. Anonymous actuary, November 16, Lewis & Ellis, Inc. 21 7

8 PBA What has to happen Valuation Manual has to change (done) 42 states must adopt 75% of insurance premium must be covered Lewis & Ellis, Inc. 22 Principle-Based Approaches Prospective only Earliest Effective date 1/1/2016 Possible exemption for smaller insurers (yay!) Lewis & Ellis, Inc. 23 Principle-Based Approaches My personal perspective: PBR makes sense for some, but not all products Complicated and expensive modeling and compilation of experience studies Prospective application will make administration challenging Lewis & Ellis, Inc. 24 8

9 P&C Actuarial Functions Actuarial Opinion (End of February R,E,I,Q,N) Loss and Loss adjustment expense (LAE) reserves Long-duration unearned premium reserves Materiality standards Actuarial Opinion Summary (March 15) Actuarial Report (No later than end of May) Lewis & Ellis, Inc. 25 Actuarial Loss Reserve Estimates Paid loss development Incurred or reported loss development Bornhuetter-Ferguson method Loss ratio Frequency/severity models Lewis & Ellis, Inc. 26 Paid Loss Development Lewis & Ellis, Inc. 27 9

10 Paid Loss Development Lewis & Ellis, Inc. 28 Paid Loss Development + Simple to use, easy to explain + Common for very short tailed lines of business - Very volatile - Does not recognize real differences in case reserves - Changes in settlement speed Lewis & Ellis, Inc. 29 Reported Loss Development Lewis & Ellis, Inc

11 Reported Loss Dev t Lewis & Ellis, Inc. 31 Reported Loss Development Paid + case reserves + Still relatively simple to explain + More stable, less volatile + Fully recognizes reported losses - Changes in case reserve setting, settlement speed - Can still be volatile in early development years Lewis & Ellis, Inc. 32 Loss ratio method Apply expected loss ratio (ELR) to earned premium + Very simple - Where did the ELR come from? - Doesn t recognize actual claims experience Lewis & Ellis, Inc

12 Bornhuetter-Ferguson method Blended approach, Reported(Paid) Loss Development and Loss Ratio method Partial recognition of what has happened Tends to smooth out volatility - Still subject to loss ratio estimate - Still have issues if case reserve changes, settlement Lewis & Ellis, Inc. 34 B-F Method Example Given the following, how many home runs will Nelson Cruz hit this year? He has hit 20 home runs through 40 games There are 160 games in a season Information needed to perform a B-F projection: Preliminary Expected Ultimate Value Factor to Project to Actual Data to Ultimate Actual Data To Date Lewis & Ellis, Inc. 35 B-F Method Example Information for our example : Before the season, how many home runs did we expect him to hit? Preliminary Expected Ultimate Value = 40 To project season total from current statistics, multiply the current statistics by 4 since the season is 1/4 completed. Projection Factor = He has already hit 20 home runs. Actual Home runs To Date = 20 Lewis & Ellis, Inc

13 B-F Method Example B-F Projection: Ultimate Value = (Expected Value*IBNR Factor)+(Inc. to Date) IBNR Factor = (1.000/LDF) = (1.000/4.000) =.75 (In Other Words, 75% of the season is left to be played) Ultimate Value = (40 *.75) + 20 = 50 Lewis & Ellis, Inc. 37 Actuarial Loss Reserve Estimates P&C lines of business Auto physical damage, health insurance Homeowners Auto Liability General liability, Workers Compensation Excess workers comp Lewis & Ellis, Inc. 38 Line of Business Considerations Low frequency / high severity lines Reinsurance consideration Changes in Mix, states, deductibles Lewis & Ellis, Inc

14 P&C Valuation Issues Premium Deficiency Reserve Demonstration Continued push for meaningful ranges Support for loss ratio assumptions Present to Board Lewis & Ellis, Inc. 40 P&C Premium Deficiency Reserve Unearned Premium Reserve Runoff. Be aware of: High loss ratio High Maintenance expense ratios Low interest rates earned (discount) Aggregation issues Lewis & Ellis, Inc