ACTUARIAL POST FOR THE MODERN ACTUARY DECEMBER 2020
HAS LOCKDOWN PROMPTED A RESET ON RETIREMENT PLANS?
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EDITOR’S NOTE Depending on which Tier you may be in the old lockdown may well be the same as the new lockdown, with a few exceptions, however, with a vaccine being rolled out in the New Year, maybe this is the beginning of the end of the pandemic’s change to our ‘normal’ way of life. Fingers crossed. Following the lockdown theme our main story from one of main contributors, Dale Critchley, asks has lockdown prompted a reset on retirement plans. Looking ahead, Alex Bertolotti says Insurers are cautiously optimistic but a challenging 2021 could see those who aren’t prepared fall behind. All of our other authors give their unique insights on a wide range of topics across the industry. Week commencing 14th December sees the start of the voting for our Actuarial Post Awards 2020 so please check in at the website for the announcement for when it all goes live. May I take this opportunity to wish you all a very Merry Christmas and a Happy New year and I look forward to welcoming you all back in 2021
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Movers & Shakers
Retirement Plans Reset?
Taitâ&#x20AC;&#x2122;s Modern Pensions
Solvency II & Beyond
Lights, Camera, Actuary
NEWS DECEMBER Busting a few myths on DB funding code We have seen several estimates on the additional costs our new defined benefit (DB) funding code could heap on schemes. We are really pleased with the debate that has been generated but it is fair to say that in (virtual) Brighton, some of what we have seen has taken us by surprise. While some schemes and advisers
seem confident that they already know the impact the new funding code will have on DB schemes, we have yet to firm up the proposals for our second consultation. By David Fairs, The Pensions Regulator’s (TPR) Executive Director of Regulatory Policy, Analysis and Advice
Insurance industry must stop discriminating against people Imagine you were about to make an everyday purchase. Perhaps a pint of beer, a washing machine or some new curtains, and then you found out you had to pay more than the person in front of you in the queue. Not because they had some special discount code or loyalty card, but simply because you’d once been divorced, had recently moved to the country or were a certain age.You’d most likely be outraged but, for some reason, we allow this to happen when we buy insurance. READ MORE
These will be informed by responses to our first consultation, an impact assessment and the final legislative package (Bill and regulations). Having read the 130 or so consultation responses – a record for The Pensions Regulator (TPR) by the way – we are reflecting on READ MORE
McCloud regulations need to be clarified as soon as possible Aon has called for the UK’s Ministry of Housing, Communities and Local Government (MHCLG) to outline the McCloud regulations for the Local Government Pension Scheme (LGPS) in England and Wales, as soon as possible given the significant issues the regulations will pose. At the same time and to avoid further delays, Aon is urging LGPS scheme administrators to move ahead where possible with preparations for the changes.
The McCloud judgment is expected to affect around 1.5 million members of the LGPS and the job of implementing it would, at the best of times, present a significant challenge to administrators. There is a fear that they could easily be overwhelmed by the amount of change facing them over the next couple of READ MORE
NEWS Ahead of FCA deadline insurers must decide on COVID Christmas Grinch as 12m refunds have decorations stolen Insurers have just a few days left to decide or damaged how they need to consider the guidance and where appropriate apply COVID-19 related refunds or discounts on insurance policies before the FCA’s December 3 deadline expires, says BDO LLP, the accountancy and business advisory firm. The FCA has ordered the reviews as the value of many insurance policies to customers has reduced because of the “lockdown” e.g.: • Motor insurance – to what extent should premiums be refunded to make allowance for the fall in vehicle use • Medical insurance some services such as health checks have not been available • Household insurance - boiler servicing or READ MORE
A quarter of Brits (25 per cent) who celebrate Christmas, some 12.2 million people, claim they have had their decorations damaged or stolen at least once before, reveals new research from Churchill Home Insurance. With Christmas vandals causing damage of £133 on average per occurrence, the overall cost of festive decoration damage amounts to a huge £1.6 billion. The decorations most commonly believed to have been stolen are outside Christmas lights (6.8 million, 14 per cent) and outside Christmas decorations like inflatables and festive signs (6.2 million, 12 per cent). Millions also claim to have had their
decorations deliberately damaged, with similar numbers reporting their inside decorations (19 per cent) and outside decorations (18 per cent) have been deliberately damaged by others. It appears not all families share in each other’s festive cheer, as family members who don’t live in the home are known to be the main suspects for stealing and damaging Christmas decorations (20 per cent), followed by strangers (15 per cent), friends (11 per cent) and even neighbours (nine per cent). In addition to millions of Brits’ decorations being stolen or damaged, some people have also experienced others from READ MORE
Pension judgment means 2020 company accounts need adjusting A court judgment handed down on 20th November 2020 on a complex pensions issue could mean hundreds of companies may need to make last-minute adjustments to their accounts for the current year. But, according to LCP partner Phil Cuddeford, there are tips which companies can follow which might help to reduce the number who have to make complex end-year calculations. The judgment relates to the duty on company pension schemes to pay ‘Guaranteed Minimum Pensions’ (GMPs) and in particular to make sure that they are paid in a way that does not fall foul of equalities legislation. An earlier court judgment in 2018 had already found that GMP payments need to be adjusted and READ MORE
MOVERS & SHAKERS The latest moves and appointments from the actuarial marketplace TPR appoint New Chair and four new members to panel The former Financial Regulators Complaints Commissioner, Antony Townsend, is to become the new Chair of The Pensions Regulator’s Determinations Panel (the Panel). Mr Townsend, who joined the Panel in September 2018, will become Chair on 7 April 2021 and will succeed Andrew Long, who has held the post for eight years. Four new members have also been appointed to the Panel, which is responsible for making formal decisions relating to cases where TPR seeks to use certain powers. They are Shrinivas Honap, Anne Fletcher, Megan Forbes and Stephen Mount. All will join on 1 January 2021. TPR chairman Mark Boyle said: “I am delighted that Antony has been appointed to Chair the Determinations Panel, and in doing so will bring a real depth of regulatory skills, knowledge and experience to this important role. READ MORE
Dalriada appoint Tiziana Perrella as a professional trustee
Actuary Laura Hobern joins LCP Insurance Consulting practice
LCP are delighted to announce that Laura Hobern will be joining LCP’s Insurance Consulting practice in December as a Principal. Laura joins from consultancy Milliman where she was a senior actuary. Laura’s role will include both client advisory work and business development. She brings with her in-depth knowledge of IFRS17, having led Milliman’s UK non-life consulting offering as well as experience working with Hiscox, Brit Insurance, Cardif Pinnacle and Swiss Re.
PMI announces new appointments to the Board The Pensions Management Institute (PMI) today announces the appointment of three new nonexecutive directors and an executive director to the PMI Board. Alan Whalley, has been co-opted from the Advisory Council as a Non-Executive Director and appointed Chair of the Board. Alan has previously served on the Board of PMI since 2016. A Fellow of the PMI, Alan has also successfully been re-elected to the PMI’s Council to serve a second term. Alan was first co-opted onto the Advisory Council in 2015. Chris Parrott, has been co-opted from the Advisory Council as a NonExecutive Director. Also a Fellow of the PMI, he has been on the PMI READ MORE
Tom Durkin, Partner and Head of LCP’s Insurance Consulting practice, READ MORE
Dalriada Trustees Limited (Dalriada), one of the largest providers of professional trustee services to pensions schemes in the UK, has today announced the appointment of Tiziana Perrella as a professional trustee.
Tiziana joins Dalriada from Aon where she was a Principal Consultant in its Risk Settlement Group. She has more than 20 years’ experience in providing endgame advice to trustees and sponsors of DB schemes of all sizes.
Tiziana will act as a professional trustee for Dalriada assuming a portfolio of appointments but also supporting other professional trustees in our team in relation to bulk annuities and transfers to consolidators. READ MORE
CITY DEALINGS Keeping up to date on acquisitions, mergers and the dealings of companies in the city
L and G announce multi million buy in deal with Northern Gas Legal & General Assurance Society Limited (“Legal & General”) today announces that it has agreed a £385 million buy-in transaction with the Northern Gas Networks Pension Scheme (“the Scheme”), securing the pension benefits of more than 600 retirees. Northern Gas Networks (NGN) is the gas distributor for the North of England, transporting gas to 2.7 million homes and businesses across the North East, most of Yorkshire and northern Cumbria. READ MORE
Aegon Master Trust rolled out for Thermo Fisher Scientific
LCP PARTNERS INCREASE OWNERSHIP OF THE BUSINESS READ MORE
Aegon has successfully completed the roll out of the Aegon Master Trust for 5,000 Thermo Fisher Scientific UK members. Roll out includes the transfer of around £120m of existing pension assets. Thermo Fisher Scientific, the world leader in serving science, employs more than 75,000 people globally with more than 6, 000 located in the UK. Their Mission is to enable their customers to make the world healthier, cleaner and safer, and they fulfill this mission by pushing science and technology a step beyond where it is today. Aegon was appointed by Thermo READ MORE
Rachel Cutts, Origination & Execution Director, Legal & General commented:
“We are delighted to have completed this transaction, which provides further financial security to the members of the Northern Gas Networks Pension Scheme. This transaction demonstrates that by having a clear objective and flexible timescales, trustees can move quickly and secure their members’ benefits when favourable pricing is available.”
Aviva announce bulk annuity deal with Homestyle Pensions Aviva have announced it has completed a £103million bulk purchase annuity transaction for the Homestyle 2007 Pension Scheme. Aviva will insure the defined benefit pension liabilities of all 1,294 members, removing the investment and longevity risk of these members from the scheme. Members will see no change in the amount of their benefits or the way in which they are paid as a result of the transaction. The process to select an insurer and negotiate terms was led by EY on behalf of Homestyle Pension Company Limited, the sponsoring READ MORE
HAS LOCKDOW A RESET ON RETI
by Dale Critchley Policy Manager Aviva What retirement plans? I hear you ask. Well it’s true, few people have their retirement planned out in detail, even actuaries, but most people have some sort of idea about what they’d like to do in retirement, when they might expect to retire, and how much they would like to have as a retirement income. The results of an in-depth Aviva survey into attitudes to work and life, pre and post the first UK lockdown, have revealed that those plans have been changed by our experiences over the past 8 months. Aviva surveyed 2,000 UK employees working in organisation with over 1,000 employees in February 2020i on a range of attitudes to work, life and retirement, little knowing that wholesale changes were just around the corner. By surveying again in August, we were able to see the impact of living with Coronavirus. Full details are in our report, Embracing the Age of Ambiguity. When it comes to when workers expect to retire, we found that all age groups have pushed their retirement dates back, but younger
workers are particularly pessimistic. Only 28% of employees under the age of 25 see themselves retiring before the age of 65 (vs 43% in February), and 41% of employees under the age of 25 expect to work until at least 70 (vs 33% in February). Even with new target dates in place, there’s been a decline in confidence that people will be able to achieve their aims. So, what is it about lockdown that’s driven the change? People in the private sector are largely saving into defined contribution pensions, where outcomes have always been ambiguous. What we saw when we looked at the data was a decline in confidence, for example in how much people needed to save for retirement, only the over 45s maintained pre-coronavirus confidence levels. We looked at whether this drop in confidence was related to a knock to current finances, but there’s a mixed picture on that. Financially, more people feel better off than worse off post lockdown. Again, confidence has taken a knock
WN PROMPTED IREMENT PLANS?
though, with fewer people feeling they’re capable of withstanding any sudden shocks to their family finances. What I think we’ve seen is that the under-45s in particular are looking at retirement through a new lens. Millions of people have learned what life without going to work looks like. Whether that’s working from home with a different work / life balance, or having time on their hands through furlough. People now have a greater appreciation of what life without work, or what a transition to part time working might look like. Some 84% of people now see themselves as retiring gradually, with more than half of more wealthy employees seeing retirement as a chance to work differently rather that rest up. When it comes to income in retirement, the furlough system pays 80% of earnings, not the traditional 2/3rds retirement rule of thumb or the £759.20 a month state pension. This could be providing a relatable benchmark for future plans.
In many respects, lockdown provided a reality check and introduced clearer insight into our rough retirement plans, maybe calling into question previous arithmetic. If you add into the mix that employees are trying to compute a value 20 to 50 years into the future, against a background of near term uncertainty, and what we’ve perhaps seen is a realisation that we don’t have enough information to produce an updated plan for our new version of retirement. Our natural reaction when concerned about excessive ambiguity is to imagine the worst-case scenario.Younger people tend to be the most pessimistic about their retirement prospects, but they have the least data to build a more realistic view of the future. The good news is that realising what you don’t know is the first step on the road to setting realistic targets. The job of the pensions industry is to provide people with the support, information and tools they need to fill in the gaps and build a future plan based on engagement and best estimates, rather than worry and a worst-case scenario.
Pension Freedoms 5 years of data Pension freedoms and choice caused a dramatic change in consumer behaviour resulting in a cliff-face drop in annuity sales and people exercising the new freedom and choice options when accessing their benefits. The Financial Conduct Authority (FCA) recently delivered their retirement income data for the 6 months to March 2020 which now means we have 5 years of consumer data relating to pension freedoms. So, what does the data tell us? In terms of consumer choice, it has been remarkably consistent. In round numbers: • 55% of people are encashing their pensions in full • 30% are using flexible access drawdown • 10% are buying an annuity, and • 5% are using the unhelpfully titled UFPLS (Unregulated Funds Pension Lump Sum). When pension freedoms were introduced most commentators expected a spike of people cashing in their pension funds to access cash; this was a new opportunity for a windfall that was simply too tempting for some. However, what the FCA data clearly shows is that high levels of full pension encashments have continued and it shows no signs of slowing. While most of these full cash withdrawals are for ‘small pots’, there has been a consistent stream of people with larger pension funds making full cash withdrawals. Approximately 1,500 people every six months cash in a pension with a value over £100k and some significantly higher. This will give rise to a large tax bill and one wonders why they need to access their pension in this way. Worryingly, the Citizens Advice Bureau found that a third of those cashing in a pension over £100k were simply holding the proceeds in their bank account where it is guaranteed to be eroded by inflation over time. Pensions are the most tax efficient and flexible investment you can have. To take money out that isn’t really needed makes no sense at all. Clearly, there are consumer trust issues where pensions are concerned and that distrust extends to the products, the industry and the Government potentially changing the rules. The rate at which people are cashing in their pension signals a big problem further down the line. These people are still spending their new windfall but how long will it last and how many have other pensions and savings to maintain their standard of living? We are likely to see a rapidly growing rate of pensioner poverty which is very concerning.
The Government launched Pension Wise in recognition of the added complexity to help people access free guidance about their pension options. Take up of the Pension Wise service has been slow and promotion of the service sometimes lacking, and it must also be remembered this is a guidance service only so can’t tell someone what to do and doesn’t come with any regulatory protection.
Regulated advice Pension Wise Guidance No advice given
100% cash out
The trends for taking advice or guidance have been reasonably consistent but there are small signs of a general decline in people taking advice/guidance and a more marked decline specifically for UFPLS which has seen those taking advice/guidance falling from 56% in the April 2018 data to just 42% in the March 2020 data. Flexi access drawdown (FAD) is certainly the most complicated of all the pension choices as it requires ongoing management and investment, so it is pleasing to see this ranks the highest for seeking advice and/or guidance. That said, the figures show over a quarter of FAD investors are managing their plan themselves yet many are unlikely to have the skills and experience to be aware of the various risks at play, let alone manage them effectively. Probably the biggest challenge for most FAD investors is taking a sustainable income. A minority of investors are overly-conservative and could drawdown more but the bigger concern is those people drawing down their pension too quickly so that it’s at risk of expiring well before they do. There can be good reasons for taking a higher withdrawal rate, to bridge the period before receiving state pension for example, but the FCA data shows approximately 74% of FAD investors are drawing more than 4% per annum and that does set alarm bells ringing. While it may not be obvious from my commentary, I am a great supporter of pension freedoms and choice, but as an industry we need to educate and help consumers to ensure they don’t spend their pensions too quickly and run the risk that they will not have enough income in later life.
Pension freedoms and choice has had many positive benefits, pensions have become dinner party conversation and people want to talk about their retirement, but there is no doubt it has also increased the complexity.
by Fiona Tait Technical Director Intelligent Pensions
INNER WORKINGS REACHING THE CUSTOMER
by Tom Murray Head of Product Strategy LifePlus Solution, Majesco Distribution is key in the life and pension’s industry. Very few people wake up and feel they need to urgently buy a product for financial protection. In a business where a large proportion of the ‘’product” is sold, not bought, the method of reaching the customer is more important than in those businesses where the customer is driven by need or desire to hunt down the product. That is why life and pension companies put so much time and effort into managing their distribution channels. Traditionally IFA, direct sales agents and bancassurance channels have played a large part in the selling and servicing of life assurance products. Bringing the customer to the realisation that they have a need and helping them to see the advantages of protecting their financial future is difficult. Life and pension products are by their nature complex and the expertise of the advisers working in these channels is key to helping consumers make the right choices for their individual situation. A difficultly now arises due to the change in the nature of consumer interaction with retailers in general due to the Covid pandemic. A large amount of retail that was previously carried out in ‘bricks and mortar’ establishments has now of necessity
moved online. The result is that many of those who would never have seen themselves as internet consumers have now suddenly found themselves in that position. And once they have become used to the convenience of operating digitally, it is likely that many will wish to keep buying in this way after the pandemic is over and life returns to normal. However, the difficulty for insurers is that online shopping is the exact opposite of the style that has heretofore been the approach for life and pension distribution. Online shopping is consumer driven; consumers actively search for the products they want. Clearly, they already have a defined need / want prior to embarking on the search. In the life and pensions sector, given how complex it is to work out further needs, sales have historically been driven by experts helping customers to define their need, before moving on to recommending products to meet those needs. The challenge for life and pension providers and the current financial intermediary channels is to find ways to use the internet to reach customers for this primary needs analysis phase. Practically all insurers have a web presence and engage in direct to consumer (D2C) sales
these days. These sales tend to be for known requirements driven by specific life events. As a result, they work perfectly well for the more commoditised products, such as mortgage protection products, where the need is well-know and clearly defined. The same is true for taxefficient savings products such as Individual Savings Accounts (ISAs), which get a lot of publicity towards the end of each tax year as journalists fill space discussing how individuals should reduce their tax bill by taking advantage of the tax-efficient nature of ISAs and related products. These external events act as catalysts to drive consumers to search out the products and therefore D2C is a perfect distribution vehicle for them. But for a more complex assessment of peopleâ&#x20AC;&#x2122;s needs, they require to have a full assessment carried out on their financial affairs and a robust discussion of their life goals. Heretofore, this generally happened either in an office environment or in the customers home. Given the impossibility of these approaches during the pandemic and the likelihood of it being quite a while before the situation returns completely to normal, the key question is how to create the same result over a digital medium. The challenges are significant, not least in the fact that
most interviews take a number of hours just to assess the needs, even for people in very standard situations. The key to reaching these customers is going to be a marriage of people and technology. Agents can reach out via phone or video-call but they need supporting systems that will facilitate the giving of personal financial advice digitally. Given the amount of information needed for a fact find and needs analysis process, their supporting platform should ideally allow people input their information or as much of it as possible prior to the interview. This also will reduce the time needed for the interview, as although most people have no problem with a 2 hour face to face discussion, that length of interview via phone or conference call is excessive. This combination of technology and people is the ideal mix for the post-pandemic financial world, allowing life and pension providers to reach far wider into the market than they could via a purely website offering and enabling them to provide the personal service levels that can give consumers confidence in the products on offer. The future of distribution in the life and pensions sector is going to be a hybrid one.
RETIREMENT PUZZLE WHEN IS YOUR CREDIT PORTFOLIO AT ITS RISKIEST? As a financial modeller, credit assets are some of the hardest to capture, as their behaviour is so complex. However, between the St Louis FRED database, Shillerâ&#x20AC;&#x2122;s long-term equity and interest rate numbers, and Moodyâ&#x20AC;&#x2122;s default data, we can get a fairly rich history of US Baa spread and default risk, covering two major crashes in 1930 and 2008. This means we can make some claims about how credit seems to behave.
Spread behaviour has been asymmetric Intuitively, wider initial spreads may mean larger subsequent moves. If a spread is wide, it has more room to tighten, each basis point move has a smaller PV effect (by convexity), and it suggest a more nervous market. And at first blush, this holds- the size of absolute annual spread moves has been 50% correlated with the initial spread level.
However, it’s not an even split. If spreads are 300, they can tighten to 100, whereas it’s harder to see spreads tightening from 100 to -100. Most of it that correlation comes from tightenings (69% correlation), while widenings are much less correlated (28% for absolute moves, -21% for log moves). This is significant, but weak, and suggests that: • higher spreads only weakly predict larger widenings (and assuming moves are proportional to initial spread would overstate this effect) • spreads can widen far from low initial spreads Spreads have generally risen before defaults, but overcompensate default losses Cross-referencing against Moody’s data, we can see spreads tend to rise in advance of a spike in defaults – spread levels are 55% correlated with subsequent defaults. So higher spreads have implied higher defaults. However, we can also consider whether the extra spread provides compensation for this. We take a “buy and hold” view and compare the losses from defaults with the spread earned on non-defaulting bonds. We assume a 40% recovery rate, in line with history. The count shows the number of calendar years in each bucket.
A few things to note: • We’ve taken the recovery rate simplistically- in reality, each default costs more when spreads are lower as the recovery is on the notional value, and the initial PV would generally be higher relative to the notional • Carry – defaults has always positive, meaning historical negative returns have come from spread moves (and potentially index changes). • This does only consider defaults over the year. Bonds may be downgraded one year and default the next. This is a serious caveat, as IG investors can easily lose more through downgrades than defaults, and on average, c6% of Baa bonds are downgraded each year. o On a mark-to-market basis, we may well understate this, but on a buy-and-hold basis we can capture this somewhat by comparing multi-year default rates with extrapolated 1y default rates. On a 5 to 10-year horizon, actual Baa defaults are about double extrapolated one year defaults (because bonds often get downgraded first), so, illustratively, we also show the results when doubling the default losses • The spread has overcompensated investors for default risk by more when spreads have been higher
Spreads have mean reverted In the previous chart, we ignored valuation changes from other factors, such as spread moves. This is partly a data constraint (eg we would have to approximate durations), but the previous analysis would be biased if we looked at straight performance. For example, since spreads are below 400, we know that every time spreads have been above 400, they have since tightened. That doesn’t mean they had to at the time. However, we can look for mean reversion. Whether we consider absolute or proportionate moves, we see a steady and material decline in annualized volatility over longer periods- falling by around 50% over 10 years. This doesn’t tell us what, if any, underlying mean they revert to. But it does suggest that if spreads are very wide, they’re more likely to tighten, and if they’re tight they’re more likely to widen.
In conclusion then, higher spreads do imply higher expected defaults, but not by enough to offset the higher spread, even without allowing for spread movements. Spreads mean revert, and offer ample compensation for defaults. Overall, IG credit investors are probably more likely to lose money when spreads are low than when they’re high.
by Alex White Head of ALM Research Redington page 18
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SOLVENCY II & BEYOND
INSURERS REMAIN CAUTIOUSLY OPTIMISTIC
Insurers are cautiously optimistic but a challenging insurance renewal prices into line with new 2021 could see those who aren’t prepared fall customer offers. The potential for a less than smooth economic recovery may also prove to behind test the sector. As we venture towards the end of the year, my colleagues across the sector will no doubt be Meanwhile, insurance brokers are also analysing how they did in what has been, to put it now reporting rising confidence and profit mildly, a tumultuous year. In conjunction with the expectations, and although life insurers are less CBI, we conducted our regular quarterly health positive, they too report that volumes are only check survey with firms and the results provided 2% down on normal, while anticipating significant valuable insights into what the key industry issues increases in business over the next three months. are now and indeed, what they may be in the year In terms of how the industry anticipates their to come. business transforming, life insurers see regulation Firms told us that they are cautiously confident about their prospects in 2021, and this is especially so with general insurers. Having fallen in Q1 and Q2, general insurers’ optimism about business prospects has seen the biggest rise of any financial services segment, according to our survey.
as by far the biggest disruptor, with an additional strong focus on cost reduction. This is ahead of product development and responding to changing customer demands.
Insurance brokers see both changes in regulation and customer preferences as highly disruptive. Across the board insurers place a prominent focus on diversity and inclusion as areas in which I hope that this stark turnaround in sentiment they hope to drive change. They also plan to can pave the way for an acceleration in customercontinue prioritising technology to both enhance led transformation, despite the bumps in the customer experience and maximise efficiency. road ahead. Possible challenges come from the Financial Conduct Authority’s test case on With a potential vaccine in sight, we could see a business interruption claims and its plan to bring recovery in the new year, however, it is likely that page 20
this uptick will be slow. Firms need to ensure that they have sufficiently battened down the hatches and are ready for what could be another challenging year. So, what should they be thinking about?
managing financial risk. By not making the most of digital advances, firms risk falling behind to agile, tech-enabled entrants.
Skills are as important as technology in driving transformation, so upskilling and reskilling should be included in any planning for 2021 and beyond. One of the key ways that insurers could approach this issue is by strengthening diversity and inclusion within the business.This will lead to fresh perspectives and a breadth of experience needed to steer through disruption and change.
People driving change
We know that insurers are facing disruption on multiple fronts, so itâ&#x20AC;&#x2122;s imperative that firms look at how they can manage and maximise shifts in customer preferences and behaviour. The acceleration in digital technologies could also play a key role in helping firms weather the upcoming storms. In fact, to get ahead, firms should consider these drivers and feature them Our survey results provide valuable insights into strongly in any strategic response to disruption. insurersâ&#x20AC;&#x2122; progress on transformation and how Cloud adoption would help insurers gain the theyâ&#x20AC;&#x2122;re looking to steer through these challenging flexibility they need to meet changing customer times. While efficiency and risk management are demands. While advances in artificial intelligence clearly critical, transformation strategies must (AI) and data analytics could also help insurers keep pace with changing customer expectations. improve customer understanding and interaction. That these shifts have been accelerated by the Our results show us that brokers seem to lead impact of COVID-19 cannot be understated the way in terms of recognising the potential role and so it is crucial that firms make the most digital technologies can play. However, most life of available data today, as it can hold the key to and general insurers see the main benefit as just understanding what customers really want.
by Alex Bertolotti, UK Leader of Insurance, PwC page 21
SOLVING THE CUSTOMER DATA MANAGEMENT CONUNDRUM
Insurance providers are experts in understanding statistical data but Customer Data Management is a whole different skill, not helped by merger and acquisition activity over the past few years. Mergers and acquisitions are largely driven by insurance providers looking to grow their portfolios, accelerate business transformation and improve the customer experience . As innovation has become a business imperative, insurtech partnerships and M&A activity are providing routes to gain a competitive edge. Ironically, however, this activity brings reputational risks by sheer virtue of the fact that it often brings a fresh set of customer data to assimilate and integrate within the business. The headache of data integration Integrating data for consistent use across the business is far from easy. Consumer data can end up being stored in multiple silos where it risks becoming outdated, incorrect and inconsistent. It means individuals can appear multiple times across disparate customer databases within the same insurance group with no link being made between the records. To compound the challenge, the customer might be listed at different addresses or even have different representations of their name due to life events or simply because of input errors.
This makes it difficult to know with confidence that Mr J. Jones who has applied for motor insurance today, is the same John J. Jones who had a home insurance policy last year and is the same Jon Jones that had a claim for a commercial van policy three years ago. Aside from the potential lack of clarity this also creates for poor customer service, duplicate or outdated consumer information can lead inaccurate pricing, the risk of fraud, wasted marketing budgets, lost cross-sell and upsell opportunities and unnecessary data storage costs. This can all have a detrimental impact on business profits and growth. Linking and matching disparate customer data Linking and matching customer data to create a single customer view can feel like an impossible task but the data analytics skills and technology now exist to solve this problem. Patented linking and clustering methods can now help insurance providers to link all their data assets together. This means one â&#x20AC;&#x2DC;golden recordâ&#x20AC;&#x2122; can be
created, for one individual, giving insurance providers a consolidated, view based on every contact or policy they have had with that person. This one single record then creates the basis for all future dealings with that customer, allowing accurate data enrichment and helps build up the picture of their risk as more data is accumulated. It’s a process of joining the dots – finding common threads between records to match up disparate data pulling on a wide range of external data sets including public records and insurance policy history data gathered from across the market. Records with commonalities are linked together and are then assigned the same unique identifier. By pulling together data from multiple touch points – quotes, renewals, claims and marketing, insurance providers can build a comprehensive and accurate representation of a customer’s identity, at whatever point they are in their dealings with the brand - customer, claimant, applicant or prospect. It also means they have a consistent methodology for standardisation and matching of customer data across multiple databases. Marketing, customer service, pricing, underwriting, portfolio management and claims can all benefit. By consolidating details about a policyholder, insurance providers can see all points of a relationship with that person and provide more relevant and customised products and services.
A recent White Paper by ResponseTap with input from LexisNexis Risk Solutions underlines the value of this insight when it comes to customer service and ensuring customers are not having to repeat details about themselves unnecessarily. When people were asked why they chose not to buy insurance over the phone in the last 12 months, 42% said: “I don’t like going through the automated IVR system (e.g. press 1 for motor, press 2 for home)” 14% said: “I thought it would be more expensive.” A further 49% said: “I don’t like having to repeat all my details again over the phone.” In the same survey, when consumers were asked whether they would pay more to speak to an insurance specialist on the phone, 40% of respondents said they would, if the experience was as quick and easy as buying online. A similar sentiment was expressed in a recent PwC report “The Future of CX” , which highlights an 18% gap between customer experience and expectation. The study found that people buying car insurance would be prepared to pay a 7% premium increase in return for good customer service. Clearly, access to the full picture of a customer or prospect can help insurance providers understand the lifetime value of the customer, supports more targeted and efficient direct marketing programmes, as well as accurate pricing based on an accurate understanding of the overall risk on the individual and their assets at point of quote.
i. https://www2.deloitte.com/us/en/pages/financial-services/articles/insurance-m-and-a-outlook.html ii. https://bit.ly/3kcaiux iii. https://www.pwc.com/us/en/advisory-services/publications/consumer-intelligence-series/pwc-consumer-intelligenceseries-customer-experience.pdf
by James Burton, Snr Director of Product Management at LexisNexis Risk Solutions, UK & Ireland page 23
search & selection
LIGHTS, CAMERA, ACTUARY!
Bolton Associatesâ&#x20AC;&#x2122; focus is specifically in the non-life actuarial space; the largest dedicated GI actuarial specialist in the market. Working throughout the insurance market, the consultants at Bolton Associates offer an exceptional service, managing the process with the utmost tact and respect for all parties. We are passionate about our market, taking great interest in the insurance world as a whole, keeping up with trends and changes, and maintaining our everexpanding network. We are good at what we do, because we enjoy what we do.
The next focus for Bolton Associates’ Spotlight page, is an interview with a leading actuary within one of the market’s actuarial technology providers. As the world, including the Lloyd’s and London Market, look to use AI techniques, and automated modelling in our data-rich world, both self-starters and larger corporations have turned their gaze and interest to using technology and modelling to automate systems, generate prices and break boundaries. These providers to the insurance markets, know what both underwriters and brokers need, and how the actuaries within them can benefit from the tools and software they can provide. For the next few months Zoe Bolton will be talking to the senior actuaries in these firms, getting a brief insight into their career paths and visions for the future.This month Zoe talks to Shil Patel, UK Managing Director at Dynamo Analytics. What is your current role, and how did you end up in it?
personal perspective, the transition from a largely technical actuarial role to a largely managerial role has been challenging, and our actuarial training doesn’t prepare us for that.
I’m the UK Managing Director at Dynamo Analytics. We provide actuarial services and technology through our Psicle platform.
How does your actuarial training and background assist in your dayto-day role now?
I joined in 2012 as the first employee. I worked through various actuarial consulting roles before taking the position of director of Psicle in 2016 when we launched the software. I’ve recently taken the role to lead the UK whilst being responsible for our IFRS 17 proposition and for growing our international footprint.
It is core to what I do. Our proposition combines technology with highly skilled and pragmatic actuarial experts. I use actuarial skills daily in helping our team to build really great, industrialised actuarial solutions for the companies we work with.
What is the defining moment of your career to date? Pretty easy one! Taking the plunge to follow a colleague from a graduate role at an established consultancy to a start-up he co-founded. This has provided me with so much commercial and business exposure. Our software started to establish a presence in the market around the same time that IFRS 17 and broader actuarial transformation programmes started really taking form. This has given me the opportunity to lead some significant IFRS17 and reserving transformations which has been a real privilege.
I joined the profession in 2010 with Towers Watson. I’ve got a couple of pieces of advice. Firstly, constantly take risks and try to put yourself in situations outside of your comfort zone! Secondly, train yourself to keep working through complex issues when things get tough. Grit and determination will make you someone people really want on their team. If you had your time again, what would you do, career-wise?
In your opinion, what prepared you best to take on your current role? Our culture at Dynamo is to empower everyone within the organisation to be entrepreneurs. We were just a team of 4 when I joined Dynamo, and I was given a lot of autonomy, responsibility and time with senior management whilst I was fairly junior. There have been some tough challenges as a result, however it has provided a really good foundation for my current position. What is the biggest challenge you face in your role within this market? There are a couple of things. From a technology perspective, we’re constantly working to stay at the forefront and ahead of competitors. Managing this, while at the same time balancing the needs of our increasing user base is important. From a
When did you first join the Institute & Faculty of Actuaries, and what advice would you give to those students looking to emulate your career path?
I wouldn’t necessarily change anything from an insurance or actuarial perspective. An alternative career could have mixed modelling or maths with sports. For example, I’d love to work on improving the Duckworth-Lewis-Stern methodology in cricket. I also spent a lot of spare time at university and in my first few years of work building models to optimise my fantasy football teams (but with mixed success!). Please share your favourite piece of trivia with our readers! The Birthday Paradox is pretty widely known but still amazes me; in any group of 23 there is a greater than 50% chance that two people share birthdays. Interestingly this is higher in elite sports where there is a known correlation between performance and birth month. In the 2018 football world cup, the 32 squads in the tournament had 23 pairs of players that shared birthdays.
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