The Actuary - May 2021

MAY 2021 theactuary.com

The magazine of the Institute and Faculty of Actuaries

How COVID-19 galvanised actuarial mindsets

INTERVIEW

PENSIONS

ENVIRONMENT

Cassandra Coburn on healthy longevity and healthy diets

Are pooled annuity funds the future of retirement income?

Why actuaries should pay attention to biodiversity risk

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Contents May 2021

37 Features

34 Environment: Playing our part With COP26 on the agenda, Louise Pryor and Sandy Trust explain the difference actuaries can make

13 Interview: Cassandra Coburn Longevity means little without good health, says the editor-in-chief of The Lancet Healthy Longevity

36 Environment: Event horizons Wendy Walford considers the timings of physical and transitional risks

16 Life: A year like no other Cobus Daneel and Jon Palin reflect on the 2o2o CMI Mortality Projections

13 Up Front 4 Editorial The way actuarial work was carried out during COVID-19 may have given us a glimpse of the profession’s future, says Dan Georgescu 5 President’s comment Tan Suee Chieh on rethinking our current economic paradigm 5 CEO’s comment The IFoA is determined to contribute positively when it comes to climate and diversity, says Stephen Mann 6 IFoA news The latest IFoA news and events

19 Health: A need for speed Agility and accuracy can go hand in hand, say Matthew Edwards and Stuart McDonald 22 Risk: Falling out of favour Brandon Horwitz looks at the decline of retail product guarantees in the UK 24 Microinsurance: Captive audience Could cell captives boost coverage?

Wangeci Mathenge explains 26 General insurance: Home truths Raj Saundh, Alex Davis and Alex Mockridge assess the lie of the land in equity release mortgages 30 Pensions: Staying the course Pooled annuity funds could solve retirement income issues, say Thomas Bernhardt and Catherine Donnelly 32 Health: Lessons from down under Thomas Kenny on social care funding methods in England and Australia

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37 Environment: Act natural Actuaries can make a contribution to the fight against biodiversity loss, say Aled Jones and Lucy Saye 40 Microinsurance: Small but mighty Annette Houtekamer and Carlos Boelsterli share how small, agile insurers can have a positive impact

At The Back 42 People/society news The latest news, updates and events 44 Student Charlie McAnea on the importance of exam technique 45 Puzzles 46 Inside story Alexandra Miles on gaining confidence and her dream of flying RAF jets

Additional content including daily news can be found at www.theactuary.com Weekly newsletter: for all the latest actuarial news, features and opinion direct to your inbox, sign up at bit.ly/1MN3bXK MAY 2021 | THE ACTUARY | 3

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PUBLISHER Redactive Publishing Ltd Level 5, 78 Chamber Street, London, E1 8BL +44 (0)20 7880 6200 PUBLISHING DIRECTOR Anthony Moran MANAGING EDITOR Sharon Maguire +44 (0)20 7880 6246 sharon.maguire@redactive.co.uk SUB-EDITOR Kate Bennett NEWS REPORTER Christopher Seekings +44 (0)20 7324 2743 christopher.seekings @redactive.co.uk

EDITOR Dan Georgescu editor@theactuary.com F E AT U R E S E D I T O R S Stephen Hyams: Pensions and Investments Rajeshwarie VS: General Insurance Thanuja Krishnaratna: Life Travis Elsum: Environment and Sustainability Ruolin Wang: Sustainability, Reinsurance and Data Science Blessing Mbukude: Life Yiannis Parizas: General Insurance and Data Science Fiona Neylon: General Insurance PEOPLE/SOCIETY NEWS EDITOR social@theactuary.com Sharon Maguire sharon.maguire@redactive.co.uk

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E membership@actuaries.org.uk Delivery queries: contact Rachel Young E rachel.young@redactive.co.uk Published by the Institute and Faculty of Actuaries (IFoA) The editor and the IFoA are not responsible for the opinions put forward in The Actuary. No part of this publication may be reproduced, stored or transmitted in any form, or by any means, without prior written permission of the copyright owners.

While every effort is made to ensure the accuracy of the content, the publisher and its contributors accept no responsibility for any material contained herein. © Institute and Faculty of Actuaries, May 2021 All rights reserved ISSN 0960-457X

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Swift but steady In Aesop’s fable ‘The Tortoise and the Hare’, the hare’s natural running speed is undone by his character flaws, while the perseverant tortoise wins the race through dedication and hard work.

This month we celebrate the work of the COVID-19 Actuaries Response Group (ARG), a collective formed at short notice in March 2020 to highlight the dangers posed by the emergence of a novel virus, and which over time has transformed into a leading authority for information about the latest research related to COVID-19, summarised in short weekly bulletins. The working model that evolved allowed the group to react at speed to events, demonstrating that actuaries can provide timely as well as sound analysis, publicly challenging fallacies and misinformed narratives.

ARG’s work has been widely praised, and Matthew Edwards and Stuart McDonald give us a summary of some of its most memorable bulletins on p19. Despite its fast reactions, the group has managed to steer clear of pitfalls, successfully combining the positive attributes of both the traditional actuarial tortoise and the nimbler hare – possibly providing us with a blueprint for the actuary of the future.

Other highlights include an article from Cobus Daneel and Jon Palin on the challenges of producing the latest CMI mortality projections model when faced with the exceptional nature of mortality in 2020 (p16). Thomas Bernhardt and Catherine Donnelly describe their research, funded by the Actuarial Research Centre, on the relative merits of pooled annuity funds and how they could be an attractive alternative to lifetime annuities and income drawdown in providing a retirement income for life (p30).

Finally, the latest in our series of In-depth articles is from Raj Saundh, Alex Davis and Alex Mockridge, who consider what is next for the equity release mortgage market (p26).

I hope you enjoy the issue.

DAN GEORGESCU EDITOR editor@theactuary.com

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TA N S U E E C H I E H

STEPHEN MANN

A new paradigm

Long-term thinking

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n our strategy debates, we discussed the importance of adopting a multi-disciplinary approach to problemsolving, in order to tackle the complex and systemic issues facing the profession and wider society. The IFoA’s Vision, Skillsets, Mindsets, Domains strategy, our desire to rekindle thought leadership, and our public interest role are coalescing. During recent engagement with the Treasury, we called for a wider conversation about the financial sector’s purpose.

Insurance products and pension schemes operate within our regulatory paradigms and frameworks. In our public interest and policy role, the IFoA not only provides feedback on regulatory issues, but also addresses problems embedded within the culture and narrative on which regulatory philosophy is based.

The 2008 financial crisis, COVID-19, numerous financial and accounting scandals and sustainability challenges show the shortcomings of our system, which rests on two flawed beliefs. The first is that markets know best, and maximisation of share price is a proxy for value creation – no longer credible. The second is that financial economics and Basel 3 type risk models can model reality, and are sufficient for managing systemic risks. Clearly, existing risk models cannot capture radical uncertainty and systemic risks.

The current paradigm also defines the roles of corporations and professions. Within corporations, there are too many conflicts of interest, and too much benchmarking and pursuit of growth.

This renders them unfit for society’s sustainability needs. There has also been a decline in ethical standards within professions.

Society must move away from self-interest and towards collective interest. We need to embrace longer-term and holistic thinking, recognising the importance of shared purpose, narrative, reciprocity and mutuality. This is not just about actuarial science.

It touches on political philosophy, culture, ethics, evolutionary psychology, anthropology, and the history of science and maths.

There is a revolution in economic thinking TAN SUEE CHIEH that aims to create a more sustainable world, is the president of and avoid the tragedy of the commons and the Institute and the tragedy of the horizon. The IFoA must Faculty of be part of this conversation.

Actuaries www.theactuary.com

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limate change is in the consciousness of most organisations globally, and is an increasingly important factor in business decision-making; in some areas, it is a responsibility and a duty.

The need to think about our footprint, both now and for future generations, has become urgent.

The IFoA has developed several significant activities to address these long-term issues, including the evolution of the Learning Change Programme and the delivery of a new sustainability credential. We have teamed up with external agencies to promote the actuarial role in tackling climate change, and have established actuarial expertise and insight on sustainable topics. This will help shape the future of the profession by encouraging and facilitating members to speak up about climate change and what it means for the professsion.

I am delighted to have been invited to contribute, personally, to the City of London Corporation’s independent taskforce for improving socio-economic diversity at senior levels in the UK’s financial and professional services. This work has been commissioned by the Treasury and the Department for Business, Energy and Industrial Strategy. My role is within one of the workstreams chaired by Andy Haldane, currently chief economist at the Bank of England. It will include senior leaders from a range of subsectors, regions and business sizes, as well as diverse personal characteristics. This will enable the taskforce to maximise change within the sector.

The IFoA fully appreciates the need for urgent, co-ordinated senior leadership to drive meaningful change and boost the productivity and global competitiveness of UK financial services. Actuaries contribute unique skills and a long-term perspective to the understanding and management of risks across society and over time. However, the statistics are stark, with financial and professional services largely STEPHEN MANN recruiting within its own pool, and is the chief executive those coming from ‘outside’ finding of the Institute and it harder to make the progress their Faculty of talents deserve. We are all poorer for it.

Actuaries AUTUMN MAY 2021 2017 | THE ACTUARY | 5

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Upfront News

IFOA

Council Elections open 20 May Elections open on 20 May for vacant positions on Council. If you are a Fellow or Associate of the IFoA you are eligible to vote to decide the next cohort of Council members that will represent your constituency.

The IFoA is a member-focused organisation and Council is the voice of our members; representation is key, so we encourage you to use this opportunity to have your say.

You will receive an email from Civica Elections Services with information on how to submit your vote and a link to the elections website, where you can read the nominees’ statements and make your decision.

The elections will be open until 12pm on Tuesday 22 June, and the results will be announced at the AGM on Thursday 24 June.

For more information, please visit the IFoA’s website.

A DJ U D I C AT I O N PA N E L

IMAGES: WWW.FREEPIK.COM / ISTOCK

Mr Rohit Siqueira FIA On 11 December 2020 the Adjudication Panel considered an allegation of misconduct against Mr Rohit Siqueira FIA (the respondent). It was alleged that that while appointed as the scheme actuary to a retirement benefits plan (the scheme): in the triennial actuarial valuations as at April 2015 and at April 2018, the value he placed on the scheme’s shareholding in employer related investments (ERIs) was significantly over-valued, causing the contributions deemed payable to the scheme to fund its substantial deficit to be understated. His actions were alleged to be in breach of the principles of competence and care and compliance in the Actuaries’ Code (the Code) and constituted misconduct in terms of Rule 4.2 of the Disciplinary and Capacity for Membership Schemes of the IFoA (effective 1 February 2018).

It was also alleged that the actuarial valuation basis used in the actuarial valuation as at 6 April 2018 was too low and at the weaker end of a range of reasonability, and weaker than that used in the FRS102 assessment of the

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liabilities of the principal employer.

This allegedly being in breach of principles 1, 3 and the reliability objective as set out in TAS 100: Principles for Technical Actuarial Work (effective 1 July 2017). This was not found to be capable of proof and therefore there was no associated prima facie case of misconduct.

However, the panel did find evidence to support the primary allegation relating to the scheme’s shareholding in ERIs and the alleged breaches of the Code. The panel determined that the facts in relation to the primary allegation disclosed a prima facie case of misconduct.

In considering sanction the panel took into account all relevant information, including the respondent’s insight, remorse and remedial action and that there was no evidence of harm. It was satisfied that the appropriate and proportionate sanction in this case was a reprimand.

A full copy of the published determination can be found at bit.ly/3adykm5

IN BRIEF...

IFoA eLibrary: new ebook resources IFoA members can now read Risk.net’s published resources online on PCs and laptops by logging in to the Actuarial Knowledge Hub at discovery.actuaries. org.uk. After login, find Risk.net on the Hub page, then ‘Institute and Faculty of Actuaries’ on its institutional sign-in and follow links to chapters of some 70 risk books and nine risk journals.

Contact libraries@actuaries.org.uk with any enquiries

MRSC Universe of Longevity Catalysts – your input needed The IFoA’s Mortality Research Steering Committee is producing a model to provide a method of deriving UK population mortality improvement assumptions by looking at data showing deaths by cause, and then considering how these may change in the future as a result of longevity ‘catalysts’. A paper (bit.ly/2Rsi3Dl) sets out a universe of material catalysts and the causes of death they are likely to impact, and we are now asking the actuarial community to help identify research considering these catalysts and the potential impact on mortality rates.

Please send details of any research you have seen that might help to research@actuaries.org.uk

Annals of Actuarial Science – new issues and Call for Papers The March issue of Annals of Actuarial Science is available at bit.ly/3dklwwk, with free access to IFoA members via the Actuarial Knowledge Hub at bit.ly/3abRWXQ. The July issue will be dedicated to finance data science, with papers from streams on methodology, industry case studies and software.

Contributions are invited for the next special issue, ‘Managing The Risks of Mortality Shocks’, with a call for papers open until 31 July. The issue will appear in 2022, but all papers accepted will be published online as FirstView articles when produced.

The call for papers can be found at bit.ly/3uTFmo5 www.theactuary.com

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Upfront News

DIVERSITY

Sign up to the Actuarial Mentoring Programme 2021 Join a community of more than 20 organisations, including PwC and Bank of England, in our global cross-company mentoring initiative to advance inclusion and diversity for your organisation and within the actuarial sector. Now entering its fourth year, this proven, tried and tested programme provides practical tangible results to retain and accelerate diverse talent in your organisation.

Delivered by diversity specialists at Moving Ahead, and in partnership with the IFoA and sponsorship from Pension Insurance Corporation, we are now inviting organisations to take part.

Rt Hon Baroness Morgan of Cotes, former chair of the Treasury Select Committee, has said: “It’s great to see so many senior champions advocating mentoring and diversity across the actuarial profession. We know there is still too much of a lack of diversity at the top of the financial services sector, including the actuarial profession.

I am sure that the Actuarial Mentoring Programme will play a key part in changing that. I would like to congratulate the IFoA for driving this initiative and Pension Insurance Corporation for their support, which has set an example I hope others in the sector follow.”

Contact abbie.hildrew@moving-ahead.org to learn more.

IFoA Thought Leadership Series Sponsored by Dr Patrick Poon, FIA We continue this ground breaking webinar series led by innovative thought leaders, designed to accelerate debate and discussion for the global actuarial profession. Free to view.

18 May Presidential Speaker Series: Mathematical Futures – Professor Sir Adrian Smith

5 July

Behavioural Science Series: Complex Problems and Second Order Thinking – Anthony Hodgson

4 June Behavioural Science Series: The Growth Mindset – Dr Helen Wright

9 July

Behavioural Science Series: Working Identities – Professor Herminia Ibarra

23 June Behavioural Science Series: Managing Uncertainty – Andrew Smith, Melinda Strudwick and Neil Cantle

16 July Presidential Speaker Series: Cultural Transformation of the Profession – Ronnie Bowie, Paul Thornton, Sally Bridgeland, Tan Suee Chieh and Jane Curtis (chair)

28 June In conversation with Dr Patrick Poon and Behavioural Science Series: Action Inquiry & Transformational Leadership – David Rooke

Visit: www.actuaries.org.uk/IFoA-Thought-Leadership-Series www.theactuary.com

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Upfront News

IFOA

A DJ U D I C AT I O N PA N E L

IFoA consults on new Practising Certificates Scheme Proposals

Mr Ian Sissons FIA

The IFoA has launched a consultation on changes to its Practising Certificates (PC) requirements. The proposals would change the IFoA’s approach to, and process for, determining the suitability of candidates for PCs, including the criteria used in decisions to award PCs. The IFoA’s PC Scheme sets out requirements for IFoA members to obtain a PC before being appointed to particular roles. Those roles are ones that have been identified as key UK regulated actuarial roles, such as chief actuary to an insurance company regulated by the Prudential Regulation Authority, or scheme actuary to a defined benefit pension scheme.

The review of the PC Scheme is the first substantive look at the IFoA’s approach to the requirements and process for PCs since 2010 and responds to feedback received on the operation of the current scheme, including from members and PC holders.

The proposals would involve more emphasis on the PC application stage than on annual renewals, introduction of a competency-based criteria, and enhanced support for members throughout the different stages of the PC process, including the pathway to being a PC holder.

More specifically, the proposals would: Place a greater focus on initial applications, with annual renewals becoming a ‘lighter touch’ process and fuller renewals required every three years Replace the current suitability criteria, which are focused on recent relevant technical experience, with a competencybased criteria, ensuring that all competent members are able to obtain a PC Introduce a wider range of ways to assess competence, including an option for discussions and interviews with applicants Change attestation requirements, either to widen the scope of who can attest to a candidate being ‘fit and proper’ so that it is not just restricted to existing PC holders, or to remove the requirement entirely Introduce requirements for all initial PC applicants to have sat the new UK practice modules within the two years before their 8 | THE ACTUARY | MAY 2021

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PC application is made. More information on the new UK practice modules will be published by the IFoA shortly Place more emphasis on the pathway to becoming a PC holder, including more awareness and support for potential candidates Link the PC Scheme into the new IFoA Reflective Practice Discussions so that those considering applying for a PC are assisted in identifying any gaps in their skills and discuss their development plans Introduce more relevant PC holderspecific continuing professional development (CPD), including sessions, materials and toolkits Improve the application and renewal processes to make them as user-friendly, fair and transparent as possible.

Views are also sought on the additional CPD requirements that apply to PC holders, as well as the potential to link the PC process with the IFoA’s Quality Assurance Scheme accreditation.

Neil Buckley, independent chair of the IFoA’s Regulation Board, said of the review: “The PC Scheme sits at the heart of the IFoA’s role regulating UK actuaries. It is the means by which IFoA members are able to take on key UK actuarial roles, influencing decisions that have significant implications for consumers. It is therefore essential, in the public interest, that the PC Scheme is effective for the consumers that it seeks to protect, as well as being appropriate and proportionate for members. We have identified a number of ways by which we believe the PC Scheme could be improved, including changes that should ould make the process more efficient for members.”

More information on the proposals and on how to respond can be found in the consultation n package, available at bit.ly/3sA16ne. Review the he proposals and share yourr thoughts by 1 July 2021.

On 10 and 17 December 2020 the Adjudication Panel considered an allegation of misconduct against Mr Ian Sissons FIA (the respondent). The respondent held a senior position at Company B. Person A reported directly to the respondent and left the company in 2012. It was alleged that in 2013 the respondent advised Person A’s prospective employer of information that he knew or should have known was incorrect and in breach of the terms of a compromise agreement between Person A and her former employer.

His actions were alleged to cause the prospective employer to not offer the job to Person A. While these allegations were upheld, the associated allegation that his actions in 2013 were dishonest was not. Separate allegations (also 2013), that he caused the prospective employer to provide differing reasons as to why Person A was not offered the job, were not made out.

It was also alleged that in May 2018 the respondent did not advise his employer that he had met with Person A in breach of an indemnity agreement between him and his employer. This was upheld.

Allegations that those actions, noted above as upheld, were in breach of the principles of compliance, integrity and communication in the Actuaries’ Code (version 2.0) and constituted misconduct in terms of Rule 4.2 of the Disciplinary and Capacity for Membership Schemes of the IFoA were found proved by the panel.

In considering sanction, the panel took into account all relevant information and was satisfied that the appropriate and proportionate sanction in this case was a reprimand and £7,500 fine.

A full copy of the published determination can be found at bit.ly/3adykm5 www.theactuary.com

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Upfront News

Reinventing the profession IFoA president Tan Suee Chieh provides an overview of his series of videos and podcasts examining the ways in which the profession is changing

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e live in a time of unprecedented change. Even before the seismic events that unfolded across the world in the wake of the COVID-19 pandemic, it was clear that there was a pressing need for the actuarial profession to evolve and rediscover its sense of purpose.

Upon taking up the role of your president, I outlined what I described as the ‘five pillars of change’ that I believed would come to define the next 12 months and beyond. These pillars comprised a renewed emphasis on thought leadership, a commitment to broadening the reach of the profession with our Visions, Skillsets, Mindsets and Domains agenda, and the cultural transformation of the IFoA, its governance and indeed of the profession itself.

This ambitious and far-reaching programme of change has permeated every aspect of my work in the past year.

As a key element of this activity, I have been personally ‘exploring the change’ through an ongoing series of videos and podcasts under the banner of ‘Reinventing the profession’. Each of these touched upon a different aspect of the five pillars of change, and I was delighted to be joined by some of the most exciting actuarial voices in the industry today.

A vision of the future In the first of this series, I explained why I believe the confluence of technology, professional culture and globalisation means that change is crucial, and indeed inevitable, for the profession if it is to truly achieve its potential.

IMAGE: RUSSEL WONG PHOTOGRAPHY

Skills for tomorrow

helping the world foresee and adapt to these hard-to-predict events was the focus of the third in this series of podcasts and videos, which looked at everything from the pandemic to the emergence of artificial intelligence.

A global profession Finally, we turned to the incredible rise of Asia, both as a rapidly expanding professional community of actuaries and a source of innovation and inspiration for the profession more generally. This conversation showed the opportunities afforded by this global shift for those working in the quintessential actuarial fields of pensions, life and general insurance, and indeed those actuary-entrepreneurs who have used the unique skills and mindset provided by our training to explore new fields.

What comes next?

The impetus to evolve and reinvent can never be fully satisfied. However, by raising our sights to the horizon we can understand the changes that are shaping our professional lives, so that we may better adapt and flourish.

For those of you with a keen interest in ‘what comes next’, and how the profession can and will rise to the challenge of this new era, you can find the entire Reinventing the Profession series at bit.ly/3gx4aOC

Actuaries increasingly work beyond their traditional domains. This is leading to a more diverse and thriving profession, providing greater opportunities for our members worldwide.

However, given the advent of digitisation and advances in technology and artificial intelligence, the future of any profession is no longer fully secure. The domains that actuaries primarily work in are also undergoing fundamental change. It is crucial for our individual and collective success that we understand the skills and approaches that will ensure the profession can adapt and thrive in this new era.

Grey swans Throughout the past 12 months, the profession has proudly risen to the challenge of the pandemic, contributing its unique expertise to the fight against COVID-19. The crucial role that actuaries can play in

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22/04/2021 15:38

A YEAR OF SUCCESS As it nears the end of its first financial year, we take a look at the impact the IFoA Foundation is already making

IMAGE: FREEVECTORMAPS.COM / ISTOCK

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he IFoA Foundation wouldn’t exist without our generous donors and partners, and we wouldn’t have a purpose without the inspiring actuaries who come to us for support from all over the world. As we head into the fourth quarter of the Foundation’s first financial year, we reflect on what we have achieved so far by sharing the stories of visionary actuaries who have shown commitment to our cause and the real-life difference this is making to early-career actuaries who are breaking into the profession.

Bhargaw Buddhdev is a founding patron of the Foundation. He recently explained his motivations for getting involved: “I have proudly used the initials FIA since I qualified. I have really enjoyed my work, which has allowed me to help many clients in relation to their pension provision. I remember the IFoA motto

by Bacon: ‘Every man is a debtor to his profession’, and for many years I have

been an IFoA volunteer, giving my time to different committees. I have now retired and, to express my gratitude, I have gifted a lump sum to the Foundation.

“I share the Foundation’s aim of giving bursaries and grants to those studying the actuarial examinations and others in financial hardship, as well as rewarding excellence.

The Foundation aims to help not just those in the UK (my current home) but also new students from India (my spiritual home) as well as Africa (the continent of my birth and youth). I am delighted to support the IFoA Foundation.”

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Breaking down barriers “The Foundation helped me move a step closer to achieving my dreams and I will forever be grateful for that”

Actuarial students are a key target group for the IFoA Foundation; we recognise the many challenges and barriers faced when entering the profession, particularly by those who are financially disadvantaged. Innocent Dzinoreva told us about the difficulties of being an actuarial student, and the difference that the Foundation’s support is making: “Although studying actuarial science is extremely difficult, I believe the only obstacle between my career and l is funding. I’m in dire need of financial assistance towards my tuition fees. Tertiary education is highly expensive and it’s tough pulling through without assistance or a bursary scheme. My short-term goal is graduating. With the help of the Foundation, this is highly possible. I will thus focus on graduating with flying colours and preparing for the entry-level job.

“In the near future l will finally be able to close poverty doors and open new opportunities to other students in the same situation. I never thought l would progress to my second year of study. The Foundation helped me move a step closer to achieving my dreams and l will forever be grateful for that.

Please keep up the good work of making a better world and creating opportunities.” www.theactuary.com

23/04/2021 10:34

Upfront News

A Changing With programmes launched in the UK, China and South-East Asia, and Africa, and planning under way for activity in India, the Foundation is fulfilling its commitment to increasing access into and inclusion within the profession.

Insurance Industry Download our latest white paper, discussing the complex and dynamic risks faced by insurers today, in light of IFRS 17 and Covid-19 in a world of digital transformation.

Global impact Actuaries such as Bhargaw will enable the Foundation to continue delivering impact on a global scale. For example, through our partnership with the Actuarial Academy of East Africa (AAEA), we are addressing the shortage of actuaries in the region, which has just 10% of the estimated number required. Mukami Njeru, director of the AAEA, said: “We are really pleased to partner with the Foundation to transform the Academy to an e-learning model. We plan to reach students in seven countries and achieve the pool of 700+ qualified actuaries required for the region, improving actuarial education in East Africa and on the continent.”

Dr Patrick Poon, principal philanthropist of the China and South East Scholarship Fund, said: “The China and South-East Asia Fund aims to provide bursaries to actuarial students in the region. I hope this initiative will go some way to make IFoA programmes even more accessible to students in their early careers and enhance the IFoA’s presence in this region.”

Kartina Tahir Thomson, chair of the IFoA Foundation, said: “It has been a tremendous year with real momentum towards our goals, thanks to valued supporters who share our passion for unlocking the power of the profession for positive, transformational change in our global society.”

Our remaining target for this financial year until the end of June is £15,000. If you would like to join those who have already committed their support and get behind our mission of #ActuariesSupportingOthers, please contact the Foundation’s general manager Belinda Dee at gmfoundation@actuaries.org.uk

Download your free copy at rnaanalytics.com/downloads

Contact us for more information email: sales@rnaanalytics.com

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22/04/2021 15:47

INSIDE Age concern

Captive audience

Playing our part

Longer life means little if those extra years are spent in poor health, says Cassandra Coburn

What are cell captives, and could they close the protection gap? Wangeci Mathenge weighs in

Actuaries have a role to play in the journey to net zero, say Louise Pryor and Sandy Trust

A year like no other

Home truths

Event horizons

Cobus Daneel and Jon Palin on creating the 2020 CMI Mortality Projections model

Raj Saundh, Alex Davis and Alex Mockridge discuss the future of equity release mortgages

Wendy Walford considers the emergence of physical and transitional climate risks

A need for speed

Staying the course

Act natural

The COVID-19 Actuaries Response Group has shown a new way of working, say Matthew Edwards and Stuart McDonald

Are pooled annuity funds the answer to retirement income issues? Thomas Bernhardt and Catherine Donnelly investigate

The biodiversity crisis is a risk that actuaries should be aware of – and can intervene in, say Aled Jones and Lucy Saye

Falling out of favour

Lessons from down under

Small but mighty

Brandon Horwitz looks at why guaranteed products have vanished from the UK market

Thomas Kenny compares England and Australia’s differences in social care funding

Annette Houtekamer and Carlos Boelsterli on microinsurance’s advantages in agriculture

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Features Interview

r Cassandra Coburn describes her career journey as a series of fortunate coincidences.

But whether by happenstance or by design, an interest in healthy longevity, a love of writing and a desire to make a difference shine clearly throughout her career history. After obtaining a PhD in genetics from the Institute of Healthy Ageing at University College London, Coburn became a senior editor at The Lancet Oncology and was later promoted to deputy editor.

In 2018, Coburn left The Lancet to write a popular science book, Enough, and work as a freelancer. Just as she was starting to question whether freelancing was her true calling, a perfect opportunity arose for her to utilise her PhD and work in an area of interest. She grabbed it and in 2020 was welcomed back to The Lancet family as the founding editor-in-chief of The Lancet Healthy Longevity.

ORIGINAL PHOTOS: KEVIN OLDING / ILLUSTRATION: SARAH AULD

Healthy longevity The Lancet Healthy Longevity focuses on longevity and healthy ageing research. “People are living longer than ever before, which is worth celebrating,” says Coburn. However, she adds, lifespan is not the only measure of success. “One of the things that we really wanted to explore is: how can we ensure that people have healthy longer lives, as opposed to seeing population health falling off a cliff at some point?”

Healthy life expectancy refers to the average number of years an individual can expect to live in good health. Despite its importance, there is insufficient research, focus and investment in this area. Coburn cites the Ageing: Science, Technology and Healthy Living report (bit.ly/3fc4TEo) published in January 2021 by the House of Lords’ Science and Technology Select Committee, which found that “people are living longer, but many of those extra years are spent in poor health.” The report also identified stark inequalities in healthy longevity, weaknesses in the aged care system, and a general lack of planning and investment.

Coburn thinks that part of the problem is people’s inability to imagine themselves in their old age – a problem that is all too familiar to actuaries. “We see the idea of old age homes and www.theactuary.com

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Cassandra Coburn talks to Travis Elsum about healthy longevity, diet and sustainability, and how they are connected

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Features Interview

poor care and so on as something that happens to other people in other futures,” she says. “That needs to change, because no one wants to live in those places.”

She is, however, optimistic about the role of science and education in improving healthy longevity.

“We can take ownership of our own lives to ensure that we have a large portion of time thriving rather than worrying about our health.”

“The Lancet is first and foremost a clinical group of journals, so the primary readership is clinicians and the ultimate aim is to inform medical practice,” Coburn explains, when asked about the journal’s accessibility. “However, the journal also covers areas that have broader appeal and may be of interest to actuaries, such as discussions on policy and socioeconomic factors.”

Coburn recognises actuaries’ expertise in longevity and their contribution to research. She would like to see more actuarial work in the public domain and greater involvement in multidisciplinary projects. “Perhaps more shouting is needed, because actuaries should be informing policy and driving it forward, particularly in terms of what needs to be provided in future,” she says.

Here she echoes a theme of Tan Suee Chieh’s IFoA presidency – the need for greater thought leadership. Actuaries can make a range of important public contributions, such as highlighting socio-economic inequalities in life expectancy, projecting required investment in the health and care systems, helping policymakers understand implications of ageing projections, and informing the debate on the retirement age.

A diet for the planet Coburn’s book, Enough, is based on the Planetary Health Diet (PHD), which is a research collaboration between The Lancet and the Swedish non-profit group EAT foundation. “I wanted to take the research, which is so important, and make it more accessible,” says Coburn.

Coburn was drawn to the sustainability aspects of the PHD partly due to her love of wildlife – fostered during her nature-filled South African childhood – but also for the link with healthy longevity.

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“None of us are going to have particularly healthy, happy lives if the environment is slowly disintegrating around us,” she points out.

Our food production systems are the single biggest driver of environmental change. “This is not the same thing as climate change.

Food production influences multiple different elements of the world, called planetary boundaries,” says Coburn, referring to the environmental limits defined in 2009 by a research team led by Johan Rockström. “Everyone has heard of one, which is climate change. Unfortunately, that is not the only change we are wreaking on the planet.” Others include biodiversity loss, changes in land use, freshwater use, and nitrogen and phosphorous flows.

Diet is also a major driver of non-communicable diseases, so it is a key element in unlocking improvements in healthy longevity.

Enough seeks to tackle these interconnected challenges. “In the book, www.theactuary.com

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Coburn acknowledges that there are barriers to healthy eating, and suggests that changes in rules, regulations, taxes and subsidies could help shift the balance. However, she also notes that there are misconceptions that healthy eating is unaffordable. “It is not all about quinoa salads with mint and pomegranate. Actually, what I’m talking about is rice and beans.

That’s completely healthy, accessible and delicious.”

“None of us are going to have particularly healthy, happy lives if the environment is slowly disintegrating around us”

I take a planetary boundary and I take a food group and explain how they interact.”

ILLUSTRATIONS: ISTOCK / SARAH AULD

Diet and healthy longevity “Without question, poorer dietary choices are driving poorer life expectancy,” Coburn says. “The danger is abundantly clear.” For example, ultra-processed foods – whose ingredients undergo many processes during their extraction and combination – are linked to a rising incidence of obesity and other non-communicable diseases.

Diet is also a contributor to inequality in healthy longevity between socio-economic groups. Enough describes the concept of ‘food deserts’, which are typically poorer areas where residents have limited access to affordable and nutritious food, meaning it is often cheaper and easier for them to eat badly. www.theactuary.com

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The impact of meat

The PHD recommends we all reduce the amount of meat we eat. “We all eat a lot more meat than we need to,” Coburn points out. “We can significantly cut our consumption and still get the nutrients we need.”

Meat has a disproportionate environmental impact. “Everyone worries about food miles, but transport accounts for just 6% of greenhouse gas emissions associated with food production, whereas meat production accounts for 52%,” Coburn says. “Livestock is also a major driver of land-use change, which in turn drives biodiversity loss and affects other planetary boundaries. To produce 1kg of beef protein, it takes 1,640m2 of land – compared to 20m2 for soybeans, the main constituent of tofu.”

In terms of health effects, Enough explains that the International Agency for Research on Cancer (IARC) has classified processed meat as Category 1 – meaning it is carcinogenic to humans – and red meat as Category 2A (probably carcinogenic). However, Coburn stresses, “it is not that meat per se is that damaging – if you eat a steak, it is not like ingesting poison. It is just that the sheer quantity of meat that we eat now seems to be having negative effects.”

Coburn would love to see adoption of the PHD become widespread, but recognises the immense challenges of population-scale behavioural change and overcoming resistance from groups with vested interests.

She emphasises the importance of assisting, rather than blaming, affected stakeholders such as farmers. Rather, she suggests a gradual and considered approach, recalling a fitting quote from Christina Figueres, former executive secretary of the United Nations Framework Convention on Climate Change: “This is a transition.

Let us be patient and impatient with ourselves.”

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Cobus Daneel and Jon Palin describe the challenges in producing the CMI’s Mortality Projections Model for 2020

A T

O N E K I L R YEA

he exceptional nature of mortality in 2020 is challenging for mortality projections that rely on recent experience to inform future trends. Models may need to be adapted if they are to produce plausible results. To avoid an over-reaction to one year’s data, the CMI has modified its mortality projections model.

Mortality in 2020 COVID-19 led to exceptional mortality experience in 2020.

Figure 1, based on the CMI Mortality Monitor (bit.ly/3scIRnI), compares standardised mortality rates (SMRs) in 2020 to those in corresponding weeks in the previous decade. (An SMR is an average mortality rate for a range of ages, assuming it has a standard age and gender profile; this enables a consistent comparison of mortality rates over time.) As this analysis is based on registered deaths, there are dips around public holidays, when register offices tend to be closed.

Mortality in the first quarter of 2020 was relatively low, as in 2019. The pandemic then led to a severe spike in mortality during the second quarter, before we saw record low mortality in the third quarter. The second wave of the pandemic saw elevated mortality during the winter of 2020-21, but not as high as during the first wave or what the number of deaths ascribed to COVID-19 may have suggested.

Figure 2 shows mortality improvements derived from SMRs, based on the dataset used to calibrate CMI_2020 – the latest annual update of the CMI Mortality Projections Model, published in March 2021. (The working paper for CMI_2020 16 | THE ACTUARY | MAY 2021

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Features Life FIGURE 1: Standardised mortality rates in England and Wales by week number.

3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0%

R E H OT

1 KEY:

2011-2019 range

13 2019

26

38

52

2020

Source: CMI calculations, unisex, for ages 20-100, based on ONS provisional weekly deaths data.

FIGURE 2: Standardised mortality improvements in England and Wales. +8%

+4%

0%

-4%

-8%

-12% 1980 KEY:

1990

Annual crude improvements

2000

2010

2020

Range for 1980-2019

Source: CMI calculations, unisex, for ages 20-100, using the CMI_2020 dataset.

may be found at bit.ly/3saFxJS) These are ‘crude’ improvements, derived from the data without smoothing to separate signal from noise. The 2020 mortality improvement of -12% is well outside the range of improvements for 1981-2019, and our analysis of longer-term data from the Human Mortality Database suggests 2020 had the largest year-on-year increase in mortality since 1929.

How the CMI Model works

IMAGE: GETTY

To ensure relevance for a variety of populations, the CMI Model models mortality improvements. Users can apply projected mortality improvements to a recent mortality table of their choice to derive projected mortality rates. In line with other ‘targeting’ models, the CMI Model interpolates between: ‘Initial’ mortality improvements, applying at the start of the projection period. These are based on recent historical mortality improvements, which are usually considered to be a good guide to short-term future improvements.

‘Long-term’ mortality improvements. As the long-term influences on mortality could be quite different to recent influences, the long-term improvements are not based on historical data. As a matter of policy, the CMI does not give a view on a suitable value for the long-term rate, and users of the CMI Model must form their own view. The model is therefore a framework for mortality assumptions – it does not give a single answer. This is important to bear in mind when setting mortality assumptions in 2021 in particular, as the pandemic may have changed longer-term mortality rates.

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Figure 3 shows crude SMRs for each year since 2000, together with a smooth fitted trend from CMI_2020. We see that, while there is some volatility from year to year, this was relatively modest for 1980 to 2019, with crude rates being MAY 2021 | THE ACTUARY | 17

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Features Life within 3% of the trend during that period. The SMR for 2020 was well outside that range.

FIGURE 3: Crude and fitted standardised mortality rates, 1980-2020.

2.4%

CMI_2020

2.2%

The CMI Model ‘expects’ that the fitted underlying trend would likely be within 3% of the crude SMR, in line with the volatility for previous years shown in Figure 3. In a business-as-usual model, the SMR in 2020 would exert significant upward pressure on the fitted trend, corresponding to a negative initial mortality improvement of about -0.7%. As the initial rate is used as the starting point for future projections, this would in turn lead to a substantial fall in cohort life expectancy.

A business-as-usual version of CMI_2020 would have led to a fall in life expectancy at age 65 of more than 10 months for females and nearly 15 months for males compared to the previous version of the CMI Model, CMI_2019. This is more than what most users would have thought reasonable, given a single year of additional data.

Because of this, we have modified the model to reduce the impact of experience in 2020, following a broadly supported consultation.

We have amended the smoothing process so users can place less weight on data for individual years. Specifically, we place no weight on the data for 2020 in the Core version of CMI_2020. This reflects our view that mortality in 2020 was exceptional and is unlikely to be a good guide to mortality improvements in the coming years.

Other ways to cope with the exceptional mortality in 2020 were also considered, including: Increasing the period smoothing parameter – a parameter in the model that affects how rapidly mortality improvements can change over time.

However, to avoid excessive changes in life expectancy, the parameter would need to be increased to the extent that the model wouldn’t produce a realistic fit over earlier periods and would almost certainly have required further tweaks in later versions of the model.

Adjusting the number of deaths in the dataset to exclude those linked to the pandemic. While this seems reasonable, there could be considerable subjectivity in deciding which measure of pandemic-related deaths to use. And it would be difficult to argue that the resulting dataset represents a valid counterfactual of mortality in the absence of a pandemic.

2.0%

Illustrative results from CMI_2020 Users of the CMI Model are required to form their own view on the long-term rate of mortality improvements, and users can apply the projections of the model to their chosen mortality table. For the purpose of illustration, we have used the S3PMA and S3PFA UK pensioner mortality tables and a long-term rate of 1.5% a year – a commonlyused value, rather than a CMI recommendation.

Figure 4 shows illustrative cohort life expectancies at age 65 on 1 January 2021 from different versions of the CMI Model. It shows that CMI_2020 produces cohort life 18 | THE ACTUARY | MAY 2021

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1.8% 1.6% 1.4% 1.2% 1.0% 1980 KEY:

Crude

1990 Fitted trend

2000

2010

2020

Fitted 3%

Source: CMI calculations, unisex, for ages 20-100, using the CMI_2020 dataset.

FIGURE 4: Illustrative cohort life expectancies at age 65 on 1 January 2021 from different versions of the CMI Model.

26

25

24

23

22

21 2009 KEY:

Male

10

11

12

13

14

15

16

17

18

19

2020

Female

Source: CMI calculations.

expectancies at age 65 that are about four weeks lower for males and one week lower for females than in CMI_2019, when using these illustrative assumptions for both models. The highest life expectancies shown are for CMI_2012, which are nearly 18 months higher than for CMI_2020 for both males and females.

COBUS DANEEL is the chair of the CMI Mortality Using CMI_2020 Projections The CMI Model is a framework that allows users to Committee project life expectancy based on their views. We continue to encourage users of the model to consider adjusting the ‘core’ parameters to reflect their views and their particular population – for example, recognising that in recent years, mortality improvements in England and Wales have been higher for those living in less deprived areas.

Responses to our recent consultation showed that, JON PALIN among CMI Model users, there is broad consensus that is secretary to the CMI Mortality it is reasonable and pragmatic at this time to disregard Projections 2020 when assessing ‘initial’ improvements. However, Committee views may shift in time, and users can modify CMI_2020 to put weight on 2020 data if they wish.

There is also an open question about the longer-term effects of the pandemic and what that may mean for long-term rates. Different actuaries can reasonably have a range of views, and we expect some lively discussions in 2021. www.theactuary.com

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Matthew Edwards and Stuart McDonald look back on the role played by the COVID-19 Actuaries Response Group during the past year

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he COVID-19 Actuaries Response Group (ARG) formed in early March 2020, just as European countries began to enter lockdown. We came together due to a shared concern about the spread of the virus, our sense that there was complacency about the impact it could have, and the fact that neither the profession’s structure of working parties nor its existing committees offered an appropriately quick and flexible solution.

The ‘need for speed’ had two consequences. First, we formed the group by reaching out to people we already knew would have the right skills, including those who could bring medical and epidemiological insight as well as those who could make purely actuarial

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contributions. We could not wait to advertise for a wider range of members, although several more people joined the group during the year, and we also published bulletins by ‘guest authors’ (of whom former IFoA president Chris Daykin was the most prolific).

Secondly, our ‘R’ has stood for ‘response’, not ‘research’. We have tried to bring things out as quickly as the issues have arisen, working out the ‘shape’ of bulletins and who would write them on weekly Zoom calls or via WhatsApp. Speed may risk inaccuracy, but in times of crisis a quick ‘best endeavours’ response is more useful than a long pause. Our internal peer review process has (we think) ensured high-quality outputs and, looking back, we can claim not to have made any obvious

howlers despite this somewhat risky ‘sticking our necks out’ approach.

Our bulletins were sent out as LinkedIn post ‘attachments’ at first. We soon set up our own website (with thanks to Nicola Oliver, who many will know has also been the backbone of our Friday Reports). This let us post direct links on Twitter, improving engagement outside our network.

Since then, the group has published well over 100 short bulletins via its website (bit.ly/3a4vkst), LinkedIn (bit.ly/2QltQ5K) and Twitter (bit.ly/3a74ik9) to help share knowledge and insights on behalf of the actuarial profession. Shortly before our first ‘anniversary’ (in early March) we were also honoured to be given InsuranceERM’s 2021 award for contributions to the industry.

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Reinforming the misinformed

an impact, too: our work has been quoted and referenced at SAGE and at the highest levels of government; our content has been viewed more than eight million times on social media and been widely shared; and numerous articles and quotes have appeared in the national and international media.

“Our ‘R’ has stood for ‘response’, not ‘research’. We have tried to bring things out as quickly as the issues have arisen”

Early bulletins on pandemic models and mortality BULLETIN 1 Is the Imperial College Pandemic Modelling Work ‘Fit for Purpose’? bit.ly/3g5nNxk The first issue we tackled was Imperial College London’s modelling, generally seen as the trigger for the government’s pivot to a lockdown strategy. Although the modelling was criticised by many, with parameters that could not be known with certainty, results were broadly in line with estimations we had done in February. These showed that a plausible outcome of an unchecked pandemic could be around 500,000 UK deaths. It was this frightening thought that had originally brought our group together.

BULLETIN 8 COVID-19 in numbers: 10 times worse than seasonal influenza? bit.ly/3a4oCmc Here we sought to estimate the infection fatality rate (IFR), noting the major difficulties that were involved. At the time, the number of COVID-19 deaths was unclear, and the number of infected people even more so. We expressed results as a multiple of normal seasonal influenza IFR (concluding that COVID-19 was five to 10 times worse), partly reflecting that similar reporting problems also affect influenza numbers.

BULLETIN 10 Are COVID-19 Victims Already ‘on Death Row’? bit.ly/32aBS4l Early on, we noted a worrying tendency to ‘write off’ the victims of COVID-19 as people who were old and (often) obese or diabetic, and therefore presumed to already be ‘on death row’.

We challenged that somewhat callous narrative using a combination of mortality underwriting models and insights from the Intensive Care National Audit and Research Centre. Through this work, we showed how people with managed conditions such as diabetes would generally have several years of life expectancy at high ages, even in the presence of adverse risk factors (such as obesity or smoking).

Our concern clearly struck a chord – the bulletin formed the basis for an interview with the Wall Street Journal (bit.ly/3uOcCx9) and was later the subject of our first appearance on BBC Radio 4’s More or Less.

FIGURE 1: COVID-19 ARG estimate of R in England based on hospital admissions.

1.6

4,800

1.4

4,200

1.2

3,600

1.0

3,000

0.8

2,400

0.6

1,800

0.4

1,200

0.2

600

0.0

0 August

KEY:

September

Admissions – England

October

R estimate – England

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November

December

January

February

March

R=1

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BULLETIN 23 Risk Factors for COVID-19 bit.ly/2OF2aZe As more data emerged, we were able to bring actuarial insight to bear and challenge early fallacies. For instance, given the advanced age of most COVID-19 victims, conditions that are highly correlated with age, such as high blood pressure, had been thought to be risk factors in their own right. As multifactor analyses of COVID-19 mortality emerged, we clarified the underlying dynamics of ‘confounding’ in this bulletin and summarised the early research.

BULLETIN 43 Care homes: Forgotten by us, not by COVID bit.ly/3mF16kI We tackled the care home situation in this bulletin. Perhaps the biggest tragedy – because, with hindsight, it was avoidable – was the mass deaths in care homes. In March 2020, the country’s collective focus was on hospitals. Between March and June, one in seven care home residents died.

The main problems were lack of sufficient protective personal equipment and the early release of patients from hospitals.

Good and bad news last summer BULLETIN 51 Are we getting better at treating COVID-19? bit.ly/3gbntNg In July we noted that mortality of those entering hospital with COVID-19 had halved in the three months since the peak of the first wave. This bulletin explored the possible reasons, notably improvements in treatment. Those improvements were vital in limiting deaths during the second wave.

BULLETIN 63 The second wave bit.ly/3da2ngw We use Twitter to provide regular updates of hospital admissions and deaths, and our

“Our work has been quoted and referenced at SAGE and at the highest levels of government” www.theactuary.com

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Lessons for the future Our working model seems to have been a model that worked. However, it is a child of its time, and we hope such times will be rare – whether they are pandemics, financial crashes or other disasters where we think actuaries can contribute.

Others are thinking of how the structure of the group could be repurposed for other situations. One example would be the Actuaries for Transformational Change group. This is a similarly informal group of actuaries who seek to amplify the voice of the profession. They develop systems-based policy thought-leadership articles that are designed to stimulate debate and new perspectives, rather than present finalised research.

Our final thought is this: the actuarial profession is the actuaries who make it, not the set of governance structures.

Actuaries who want to make a difference can always find ways to do so, and in our age of increasing digitalisation and remote working, that is considerably easier than before.

estimate of R for England. The platform has also been useful for wider dissemination of our bulletins. Our activity on Twitter started to attract more attention in September when we accurately ‘called’ the start of the second wave.

The approach underlying our regular updates, with particular reference to incurred but not reported deaths, was set out in bulletin 63, and our conclusions were discussed in a further appearance on BBC Radio 4’s More or Less (bbc.in/3mDSsmq).

BULLETIN 65 Long COVID bit.ly/3tfMIBV As time passed, we started seeing news about ‘long COVID’ – a condition in which symptoms of COVID-19 persist for longer than 12 weeks. These range from the expected respiratory symptoms to cardiovascular complications, chronic fatigue, muscle and joint pain, and mental health conditions. This was not

unexpected to us: in an earlier bulletin on mortality we noted the likelihood of longer-term complications for survivors, in line with what had been seen in the 2003 SARS pandemic.

Vaccines – the miracle word of 2021 BULLETIN 87 Vaccine Priorities bit.ly/3sapWKt As 2020 progressed, we gradually became accustomed to our work being referenced by politicians and the media. Nonetheless, it was a surprise to hear one of our statistics quoted by Boris Johnson!

In December, we assessed the logic of the newly announced vaccine priority order by considering how many of the deaths to date had been people from each priority group. We found that the nine priority groups comprised 99% of all COVID-19 deaths, and that 88% of the deaths belonged to the first four groups. The 88% statistic was widely cited, including by the chief medical officer Chris Whitty, Secretary of State for Health Matt Hancock, and the prime minister.

BULLETIN 93 How Soon to See the Vaccine’s Benefits? bit.ly/326YL8H With great public interest in how MATTHEW quickly the vaccine EDWARDS roll-out might start is a consulting to affect hospital actuary at Willis Towers Watson admissions and deaths, our second bulletin of 2021 attracted considerable media attention. John Roberts extended our earlier vaccine STUART priorities analysis MCDONALD to model the varying is head of degrees by which the demographic assumptions & roll-out plan would methodology at reduce numbers of Lloyds Banking hospital and ICU Group admissions, and deaths. The Guardian and The Spectator were notable in reproducing the analysis in detail.

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sked what they want from their investments, many consumers simply want a better return than cash, and the guarantee that they won’t lose money. While we are tempted to tell these consumers that they can’t have their cake and eat it, there has long been a category of retail products offering exactly these features.

However, guarantees in retail products in the UK are conspicuous by their absence today – why?

The Great Risk Transfer The UK has an ageing population, and defined contribution pensions (particularly ‘pension drawdown’ products) are becoming increasingly commonplace – especially since the introduction of pension freedoms in 2015. While these products give consumers more flexibility in terms of how and when they access their pensions, they leave customers exposed to investment risk and longevity risk.

Many consumers are also not accessing or receiving financial advice today, especially those who have more modest pension pots.

This means they do not receive help to address the impact of negative investment returns early in retirement on the sustainability of their income (often called ‘sequencing risk’), and the resulting effect on the chance they will outlive their savings.

This illustrates the issue of the Great Risk Transfer (bit.ly/2Q061Rf), the situation where financial risks previously borne by government and institutions are now transferred to individuals.

What are these products?

Guaranteed products typically offer a return of capital guarantee and/or a guaranteed level of income (either fixed, or with a minimum level plus some ‘up-side’ linked to investment returns). The guarantees can be delivered through options or other types of derivatives, or through a dynamic approach to asset allocation (including algorithmic approaches such as constant proportion portfolio insurance, or CPPI).

These products can be delivered to consumers through structured products offered by banks, or in insurance-based investment products (including unit-linked or with-profit style products).

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Brandon Horwitz considers whether guarantees in retail products have a future in the UK Why have these products disappeared?

Changes in the UK distribution market for investment products are a key reason for the absence of these products today. The Retail Distribution Review (RDR), implemented in 2013, banned commission payments from providers on new business, instead requiring advisers to charge explicit fees.

Guaranteed products became less attractive to sell, with advisers focusing on clients with higher net worth, to whom they can sell ongoing advice services.

With-profits – a classic guaranteed product – has been falling in popularity since the early 2000s. Reasons include a number of high-profile scandals (including Equitable Life) and links to misselling of mortgage endowments. Many with-profits providers have also found themselves in a weaker financial position, adding to the challenge of regulators’ continued scrutiny of them.

Structured products have also suffered from reduced confidence since the failure of some providers, such as Lehman Brothers in 2008, as well as the fact that there are now fewer retail distribution channels, with many banks exiting the advice markets after the RDR. The Financial Conduct Authority (FCA) also introduced explicit product development and governance requirements for structured products after failings were identified in thematic work it undertook in 2012 and 2015. These requirements include treating the customer fairly, and requiring

products to have a reasonable prospect of delivering value to customers in the target market.

Fundamentally, all structured products (and guarantees) depend on interest rates, which determine the cost of the capital guarantees involved (ie the price of the ‘zero-coupon bond’ element of the guarantee). With short and long-term interest rates at 30-year lows, the costs of these guarantees have risen substantially – so providing value to customers is increasingly difficult.

What did we find?

Our working party identified four themes which contribute to the fact that these products are out of favour in the UK: Understanding of guaranteed products: Understanding among consumers and advisers varies considerably, especially when it comes to the benefits and opportunity costs of guaranteed products. People also have negative associations with past misselling scandals, and perceptions that these products offer poor value for money.

We also noted that the traditionally ‘backward-looking’ product disclosures may not fairly illustrate the benefits and limitations involved.

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IIMAGE: GETTY

“The costs of these guara antees have risen substantially – so providing value to customers is increasingly difficult” to create and manage these products, as it requires specialist skills covering economic capital and asset/liability management, including expertise with derivatives. This type of work would be well-suited to with-profits actuaries, but relatively few of them work on ‘new’ products (versus legacy business) today – and few, if any, are being trained to develop new products.

Perceived regulatory risks and scrutiny: Guaranteed products are perceived as too risky to develop by many firms, which fear FCA scrutiny or sanction if they ‘get it wrong’. This fear is informed by historical issues such as misselling scandals, provider failure, and poor value for money (including the role of high www.theactuary.com

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commissions in sales before the RDR).

The FCA also now sets high product development standards, which include explicit value-for-money requirements.

Solvency treatment of guarantees: There are significant capital requirements involved in offering guarantees, and Solvency II standard formula firms have limited ways to manage these requirements.

What could help promote a market for these products?

We believe there is an unmet customer need that can be satisfied by these products, and identified four recommendations to help promote a market for them: Education and balanced promotion: Consumers and advisers would benefit from education about the benefits and limitations of guaranteed products. This could include a focus on the ‘in-retirement’ applications of these products to help secure a minimum level of income, which helps address sequencing and longevity risks. We also believe that balanced promotion is required, making it clear to consumers that the benefits of guarantees come at a cost (including quantifying the opportunity cost of returns given up). We think forward-

looking stochastic projections are a useful tool to show this as part of financial planning and value-for-money analysis.

Develop skills and transfer experience: We should train actuaries to develop the skills needed to create and manage guaranteed products. This would involve creating opportunities for experienced actuaries to transfer their knowledge to the next generation. One way of doing this would be to refresh and promote withprofits techniques.

Fair value and regulatory ‘safe harbour’: Fair value to consumers should be a core principle when designing guaranteed products, which should follow the letter and the spirit of FCA product governance regulations. We also believe it is important to engage with the FCA concerning a potential ‘safe harbour’ for products that meet a set of standardised features. This could involve developing an actuarial standard for fair value assessment.

A different standard formula: There could be a case to consider a different standard formula in Solvency II (or any UK-specific solvency framework postBrexit) – a formula that is more reflective of the economics of guarantees. In particular, there could be more allowance given for the ability to closely hedge liabilities with widely available and transparent derivative products.

What next?

We have completed this stage of our work and there is appetite from the Life Board to support further work on this theme, including a look at the role played by annuities in delivering BRANDON guarantees. Please HORWITZ is an get in touch with me independent if you are interested consultant, in this subject or any non-executive subsequent work. director and actuary, Find our paper at bit.ly/3g7GkJc. A recording of our January 2021 is also available for purchase in the IFoA’s Virtual Learning Environment at bit.ly/2QlCgtS

and chair of the Long Term Product Guarantees Working Party

MAY 2021 | THE ACTUARY | 23

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CAPTIVE AUDIENCE Wangeci W angeci M Mathenge athenge eexplains xplains tthe he off ccell cconcept o n ce p t o ell ccaptives, aptives, aand nd hhow ow tthey hey could could boost boost the the cause cause of of microinsurance m icroinsurance iinn K Kenya enya

M

icroinsurance ic cro roin insu in sura su r nc ra ncee iss m meant eant ea nt tto o pr prov provide ovvide ovid ide protection id protec prot pr ottec e ti t on o tto o th thos those hos oe on n llow ow w incomes inc n om o es and and n is is critical crit cr crit itic iccall in in helping h llp he ping in ng households hous ho useh us ehol eh oldss ol manage Kenya’s microinsurance m ma nage rrisks. na i ks is k . Ke K eny nyya’ n a s mi micr c oi cr oins nssurran nce c llandscape ands an nds dsca ccaapee iiss relatively with participation from re ela lati t veelyy yyoung, ti ou oung ung ng,, wi w ith th iincreasing nccre reas asin as ingg pa in part rtic rt iccip icip pat atio io on fr rom insurance Regulation being updated insu in su uraanc ncee comp ccompanies. co omp mpan aniees. an sR egul eg ulat atio at ion io n is i aalso lso ls ob be ein ng up pda date ted te d to o ccomplement ompl om mpl p em emen ent this en ent this th is growth: gro rowt wth: wt h:: recently, reeccen entl t y, tl y, Kenya Ken enya yyaa amended ameend nded ed d its Insurance Microinsurance it ts In Insu s ra su r n ncce Ac Actt so s iitt in iincludes cllud des tthe he M icro ic r in ro nsu sura ranc ra ncee nc Regulations.

This change Kenya Microinsurance Reegu R g laati tion ons. on s. T his ch hi his chan aan ngee eemanated mana ma nate na nate ted ed from from fr om tthe he K enya en yaa M icro ic roin ro insu in sura su r ncce ra Policy Poli Po licy li cy Framework cy Frame raame m wo w rkk Paper, Pap a er er, which w ic wh ich h sets sets out out the the Kenyan Ken nya yan n Insurance Insu Insu In sura ranc ncee nc Regulatory Authority’s R gu Re gula l to la tory ryy A utho ut hori ho rity rity ty’s ’s ((IRA) IIR RA) A) ffuture uttu urre re rregulation gula gu lati la t on ti n aand n ssupervision nd uper up e vi er v si sion on o n off microinsurance products. miccro roin nsu ura r n ncce pr rod o uc ucts ts. s.

The model presents opportunity The captive Th capt ca ptiv pt ive cell iv ceell insurance ins n ur uran a ce an ce m odel od ell p rese re sent se ntss a great nt g ea gr eat op oppo port po rtun rt unit un iy it for fo or Kenyan Keny Ke nyyan nyan a insurers in nssur u errs as as they the heyy pursue purs pu rsue rs ue this thi hiss line line of of business. busi bu sine si ness ne sss.

What is a cell captive, and how do they work?

The Th he co concept onccep ept pt of the the h cell cel e l captive capt ca ptiv pt ivee has iv haas grown grow gr ow wn out out of captive cap ptiivee insurance. byy insu in s raanc su nce. e. A ccell ell ca ell el ccaptive ptiv pt ivve is a vvehicle ehic eh i lee ccreated ic reat re eat ated ed b ‘cell provider’) an iinsurance n ur ns uran ance an c ccompany ce o pa om pany ny ((the thee ‘c th ‘cel elll pr el prov ovid ov der er’) ’) to eextend to xten xt end en d the th he use u e of its us its insurance ins nsur uran ur a ce an c licence lic icen ence en nccee to o aanother noth no th her organisation org rgan a is isat atio at ion io n (the (the ‘cell ‘ceelll owner’). owner wner wn er’). ’)).

Thee ce owner T Th cell lll o w eerr uses wn usees this this licence lic icen ence en ce either eit ithe h r to he to cover co ove verr its i s own it ow wn assets asseets or asse as or to o cover co ovver er the the assets ass sset etts ets off its members or llives or i es o iv itts me m emb mber mb erss or customers. er cus usto t mers to merss. me former Thee fo Th form r er rm er is is called call ca llled a firrst-party st-p st -par -p arty ar arty ty ccell elll an el and d the latter Any profi orr th he la att tter err a tthird-party h rd hi d-p par arty ty ccell. e l.l A el nyy p rofi ro fits o

ACTUARY MAY 244 | THE THE AC ACTUA TUARY TUA RY | MA M AY 22021 0021 211

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Features Microinsurance

losses are accumulated to, or deducted from, the capital provided.

The cell owner can either provide capital for the cell as assessed by the insurance company, or the insurance company can capitalise the cell (partially or fully) and in return receive a fee or share of underwriting profits. The cell owner is essentially ‘renting’ a cell from the cell provider.

Cell captives are used in many jurisdictions worldwide; in Africa the concept is largely confined to South Africa, whose Financial Sector Conduct Authority is seeking to regulate third-party cell captives through a conduct standard. It has not yet gained much traction in Kenya, but some small players have been exploring the role that cell captives may play in their operations, and the IRA is open to dialogue that will create a space to pilot such innovative models.

One advantage of cell captives is that they have lower requirements than are usually needed to start an insurance company.

The cell provider takes over compliance responsibilities with respect to minimum capital, technical skills and reporting. Owners can also benefit from the provider’s expertise.

“Cell captives have lower requirements than those usually needed to start an insurance company”

IIMAGE: GETTY

Cell captives and inclusive insurance The cell captive model could address some of the constraints faced

by Kenya’s inclusive insurance market and bridge the protection gap for little-understood risks, such as microinsurance. Insurers in Kenya find it challenging to create products that are tailored to the needs of the under-served. Third-party cells could be particularly useful to players outside the insurance space that have huge access to the under-served and are interested in providing coverage.

Institutions such as mobile network operators, churches, retailers and other aggregators could serve their client base without having to set up insurance subsidiaries or register as an intermediary. The return on investment for them would be in the form of preference share dividends on profits earned in their cells.

These aggregators have a lot of knowledge about their customers, meaning they could create personas and design products that meet specific customer needs, as well as structure the value chain in a way that meets business needs and provides a seamless customer jjourney. They get autonomy in shaping the complete product offering, and do so without the legacy IT systems and processes that constrain more traditional insurers. This kind of autonomy and share in profits means the aggregators are incentivised to develop innovative, cost-effective products and distribution processes that best fit customers’ needs and circumstances.

An alternative case is for the use of mutual cell captives. These are structured such that the cell is set up jointly by a group of participants who share the same primary and systemic risks and would like to pool the risks and insure through a mutual. This would be attractive for participants who would be too small to set up a cell individually – for example, a group of funeral parlours could come together to provide funeral insurance. www.theactuary.com w

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Risks and regulation There will be challenges in unlocking the cell captive model for the low-income segment of the Kenyan market.

Statutory recognition and regulation of cell captives will be required. Legislation will need to provide legal separation of each cell captive, with each cell having a separate legal personality.

Current legislation for cell captives differs by jurisdiction, but the basic premise is that the assets and liabilities of one cell are legally separate from those of another. If the cell captives do not have legal and separate personalities, the creditor of a cell provider can go after the assets of all cells within the company, and the funds within the cells may be lost if the cell provider is wound up. IRA participation in such legislation will be required to jump-start the use of cell captives in Kenya and ensure both cell owners and cell providers are well protected. Reference to international examples could help with this.

The legal and operational relationships between cell owners and cell providers are usually complex, set out in the shareholders’ agreement and articles of association. Given the complexities, they should vary between different cells. However, most implementation of these agreements shows templates of shareholder agreements with broad scopes that are not tailored to the cell owners’ specific needs. This prevents cell owners that ‘break the mould’ from drafting these documents in a way that maximises their returns.

Cell owners are naturally involved in the day-to-day running of the cell and would need good knowledge of how to do so. Insurance skills will be needed, as well as proper data and systems that can be used to run a cell captive successfully.

Insurance regulation would be required to ensure that each cell captive is financially sound and that there is no cross-subsidisation between cells or to the cell provider. As an example, excess capital within cells would not be included in the total assets of the cell provider, or be used to offset claims in other cells. The cell provider would need to continually assess the cells’ capital levels to ensure its own ongoing solvency. If accumulated capital is more than the required levels, the cell owner can receive the profits. If it is lower than required, the cell owner would need to provide more to re-establish solvency. This is especially key for third-party cells where losses in the cell are first funded by the cell WANGECI owner’s capital. If this capital is insufficient, MATHENGE is a the cell owner is liable to cover the deficit; where they cannot do so, the provider carries product actuary at Inclusivity Solutions the risk and could become insolvent, and is responsible bringing down all the cells. Proper actuarial for developing new investigation will be required to ensure the insurance product assumptions used for each cell take account and pricing concepts that meet Inclusivity of the experience, in order to reduce Solutions’ insolvency risk. distribution partner Realising the value of the cell captive objectives model for more inclusive insurance will require a clear regulatory framework that will support its adoption and implementation in a way that is appropriate to the Kenyan market. In its consideration, the IRA should be guided by the primary objective that the cell captives are to address.

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HOME TRUTHS IMAGE: IKON

Raj Saundh, Alex Davis and Alex Mockridge consider what is next for the equity release mortgage market

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quity release mortgages (ERMs) are an important part of the retirement planning toolkit for both customers and financial advisers. In the UK, this has been accelerated since the 2015 changes in retirement freedoms, and there has never been a greater need for carefully considered retirement planning.

ERMs allow customers to tap into the value of their homes without having to sell and move out. They have been the subject of significant public debate in recent years, with fourfold growth in annual lending between 2015 and 2019 and increased scrutiny around the appropriateness of the regulatory capital levels held for them.

The debate – in particular, the way property risks are measured within ERM portfolios under Solvency II – continues to be an important issue that is very relevant for actuaries, and has already been covered in numerous industry papers. However, a number of wider points warrant discussion, particularly those concerning the change in the market and competitive landscape, recent events such as COVID-19, and wider external pressures.

E

The product Various ERM products have existed in the UK, but the vast majority of today’s market is in the form of lifetime mortgages (LTMs). These can only be sold with appropriate independent advice, and tend to have simple features to help customers understand what they are buying.

LTMs can provide either a single lump sum at outset (around a third of the UK market) or provide access to a loan facility that customers can draw down on as and when they need it. For each amount drawn, the customer effectively takes out a loan against their home. LTMs are largely fixed-interest, and the loan rolls up at this fixed rate until redemption.

On the policyholder’s death or transfer into long-term care, the loan is repaid from the sales proceeds of the home. The products have an embedded no negative equity guarantee (NNEG), so the amount due is limited to the sale proceeds of the underlying property. Like most loans, customers also have the right to repay early; this may be subject to an early repayment charge and waiving of NNEG rights.

The current market landscape

“The demand from pensioners for ERMs is long-term – the over65s account for almost half of the UK’s housing wealth (around £1trn)”

From a funder’s perspective, with some restructuring to meet Solvency II matching adjustment rules, ERMs are one of a growing number of asset classes that provide attractive risk-adjusted yields that can be used to back annuity business. All other things being equal, the larger the matching adjustment, the lower the value of regulatory liabilities that these assets are used to back. The result is that it reduces the cost of capital – hence the price – that insurers can offer to both individual annuitants and the bulk annuity market. The industry expects that vast volumes of bulk annuities will continue to be written: around £40bn per annum on average this decade, according to Hymans Robertson’s Risk Transfer Report 2021. Barring wholesale changes in the matching adjustment framework, demand for LTMs and other ‘illiquid’ asset classes to back annuities is unlikely to abate soon.

Similarly, the demand from pensioners for ERMs is long-term – according to data sourced by the estate agents Savills, the over-65s account for almost half of the UK’s housing wealth (around £1trn). Given that the UK population is ageing, this proportion is likely to increase, and inheritance of this housing stock is unlikely to change this picture substantially. In fact, it’s likely that in many cases, pensioners will inherit from pensioners.

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35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2017

The future and opportunities During the past two years, UK volumes have levelled out at around £4bn lending per year. The past 12 months have, of 28 | THE ACTUARY | MAY 2021

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2020

6.5 6.0 5.5 5.0 4.5 4.0

1

0

n2 Ja

0

ly 2 Ju

9

n2 Ja

ly 1

9 Ju

8

n1 Ja

ly 1 Ju

7

n1 8 Ja

ly 1

7 Ju

6

n1 Ja

ly 1 Ju

ly 1

Source: ERC

n1 6

3.5 5

As lenders compete to earn a larger share of the market, product interest rates have tumbled – in January 2021, the ERC noted that the lowest product rates were at 2.30%.

The arithmetic average rate across the market (as shown in Figure 2) also hit a low of 4.01% (in calculating this average, the ERC is unable to weight by the volumes of customers actually taking out loans at different levels).

In an attempt by providers to capture market share or drive up the product rate, product heterogeneity has increased – arguably driving better customer outcomes.

This has included the emergence of the market for retirement interest-only mortgages, which can act as a bridge between standard mortgages and moving into an LTM in later life.

However, new options are quickly replicated elsewhere, meaning that products remain homogeneous in the long term, and in some senses price is currently king in the ERM market.

2019

FIGURE 2: Average equity release product interest rates – July 2015-January 2021.

Ju

Product options, features, developments and interest rates

2018 Years

Ja

Market data from the industry trade body the Equity Release Council (ERC), published in January 2021 (bit.ly/2QEq6g4), shows that although COVID-19 did block access to customers and property valuations, the volume of equity release lending during 2020 was roughly in line with prior years (2020: £3.89bn, 2019: £3.92bn).

If we consider the number of new plans agreed from 2017 to 2020 (Figure 1), 2020 compares less favourably to 2019, with a 14% decrease. There was a particular dip in new lending activity in Q2 2020, which was a difficult time to get property valuations done. However, we saw a revival in Q3 and Q4, with Q4 2020 activity roughly in line with Q4 2019 levels. It appears that originators have been able to adapt to the new environment, and although there was a modest fall in total lending, we didn’t see providers withdraw from the market.

In addition, before COVID-19 struck, the booming market attracted many parties interested in taking a slice of the pie; indeed, during 2018 and 2019, membership of the ERC almost doubled. We expect to see interest in the market continue as we emerge from COVID-19.

40,000

New plans

ERMs through COVID-19

FIGURE 1: New equity release plans agreed between Q2 and Q4, 2017-2020.

Average product interest rate (%)

Looking further ahead, we expect the need for ERMs to increase as the proportion of pensioners supported by a defined benefit pension falls away and pensioners look for alternative income sources to supplement their defined contribution savings.

Months

course, provided unique challenges due to the COVID-19 pandemic, but where does the market go from here?

Comparing the lowest product rates of 2.30% to the 15-year gilt yield of 0.53% on 31 December 2020 implies a total spread of less than of 1.8%. Comparison with the 1.51% spreads on BBB corporate bonds, a commonly used benchmark to assess attractiveness, at year ending 2020 suggests the economics on ERMs remained attractive, although with significantly compressed margins against prior years. However, we note that this is before any allowance for the costs of the restructuring that is required to meet the matching adjustment rules.

Given the annuity market, investor demand remains high and the reduction in pricing is a sign of a maturing ERM market, which is excellent news for customers. The change in pricing also helps to move ERMs away from being a product of last resort and towards being considered more actively as part of an overall retirement portfolio. The illustrative economics on 31 December 2020 also highlight that companies may soon need to find ways of growing the market and generating market share, other than price.

ERMs largely originate through advisers referring customers into a whole-ofmarket advice process. In addition, some providers in the UK have built tied www.theactuary.com

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In-depth General insurance

networks to help provide a funnel directly into their business. Broadening the distribution out to access more customers appears to be key if the market is to take the next step, and this leads to some fundamental questions: Is the product reaching the people that it can/should be offered to, and if not, why not?

Is the product playing the right role in the range of retirement options?

Is the education in the market good enough for people to understand the role ERMs can play in retirement?

Many think there is room for development in all of the above. If we get this right, the opportunities are clear, due to both the UK’s ageing population (by 2030 there are expected to be three to four million more over-55s in the UK than there are today) and the fact that the transition to pensions freedoms is still very much in its infancy.

Regulatory conditions Following the UK’s departure from the EU, the Treasury released a call for evidence on its review of Solvency II. The treatment of ERMs is one area that warrants consideration, in particular: The requirement to restructure ERM portfolios, typically achieved through securitisations, for use in the matching adjustment given that ERM cashflows are not fixed. This restructuring is costly and limits the use of ERMs to firms with the scale to absorb these costs, as well as introducing complexities and additional risks over and above those of the underlying assets.

The standard formula capital treatment for these securitisations, with penal capital charges (up to 100%), which means that using ERMs for matching adjustment is only really an internal model play.

The difficult regulatory approval process and the knock-on impact that time approvals have on the energy put into, and pace of, market innovation.

By no means do we advocate an inappropriate reduction in capital requirements. ERMs contain some real risks that

“We expect the need for ERMs to increase as pensioners look for an alternative source of income to supplement their defined contribution savings” www.theactuary.com

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are different to many other asset classes, and actuaries have a central role to play in enhancing the way they are measured and managed. For property risk in particular, this includes advances in both projection modelling and the way property prices are kept up to date through desktop and traditional surveying techniques. However, simplifying the operational aspects of the regulatory requirements around ERMs, alongside other asset classes, could allow insurers to focus more on managing risk and meeting customer needs with agility.

Ultimately, it will be interesting to see where the Treasury and the Prudential Regulation Authority (PRA) lands. There is no guarantee that there will be changes to regulation, but this is an excellent opportunity for the PRA and the Treasury to impact the ERM and broader investment landscape for the better.

ESG and climate risk Environmental, social and governance (ESG) considerations are increasingly coming to the fore when insurers and asset managers make investment decisions. Many large companies have committed to net-zero emissions targets by 2050 or earlier, supporting the 2016 Paris Agreement on limiting global temperature rise.

ERMs are exposed to both physical and transition climate risk. Physical risk can be seen in the increasing risk of hazards such as river flooding, surface water RAJ SAUNDH is flooding and sea level rise. Globally, natural disasters chair of the IFoA such as wildfires, storms and drought may also be Equity Release Mortgages considered. Transition risk applies to assets that may be working party and heavily impacted by a rapid transition to reduced carbon a director at EY emissions. The case can be made that the average UK home could be greatly improved in terms of energy efficiency, and a rapid transition towards this could send ripples through the property market.

Investor demand for ‘green assets’ is growing, so where can ERMs fit within an ESG portfolio? The fact that ERMs are loans to individuals, not businesses, makes it more difficult to pinpoint green loan purposes, which may ALEX DAVIS is a include funding environmentally friendly home senior consultant improvements or upgrading to lower-emission modes at Hymans of private transport. Some lenders may be willing to Robertson incentivise or otherwise encourage ERM loans taken out for green purposes, creating a mutually beneficial outcome for borrower, funder and environment. In this space, product innovation is unfolding over time.

Climate change is a huge challenge and opportunity, and ERMs should not be forgotten in this.

Pulling together ERMs play an important role in the UK market today and the product covers a basic need that is not going away.

There are a number of upcoming challenges, and it is important for the market to tackle these head-on.

The biggest opportunities for the market appear to be in creating a smoother path to customers, and in getting the reach, narrative and proposition right. This likely means that the market will need to pull together to deliver this.

ALEX MOCKRIDGE is an actuary at Legal & General

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P

ension freedoms, announced in March 2014, sent a shockwave through the UK pensions and insurance industry.

Retirees no longer had to use their pension savings to buy a life annuity; few have since opted to do so.

Life annuities offer an income guaranteed for life, with no risk for the annuitant. For the alternative of income drawdown, the retiree bears all the risk – one of the largest risks being longevity risk.

Savings must last for an unknown time. They may run out before death, or the retiree may have an unnecessarily penurious retirement by trying to conserve their savings.

Pooled annuity funds provide a solution to this problem by pooling longevity risk between the participants, similarly to a life annuity. Longevity credits, which are the redistribution of the funds of those who have recently died, are paid regularly to all surviving participants.

Pooled annuity funds have two benefits over life annuities and income drawdown: they provide substantially better protection against running out of money in retirement than drawdown; and they can provide a

higher expected income than life annuities, in return for accepting some fluctuations in that income. With no guarantee on the income, a higher return-seeking investment strategy can be followed and much less capital held.

Pooled annuity funds bridge the gap between life annuities and income drawdown, in terms of the level of longevity and investment risk borne by retirees. By adding guarantees to the ‘pure’ pooled annuity fund and using different investment

strategies, the level of longevity and investment risk borne by the fund participants can be adjusted, as shown in Figure 1.

Comparison with drawdown To illustrate the benefit of longevity pooling, suppose each participant has an expected future mortality experience underlying the life table S1PMA. For a 70-year-old with an initial fund of £100,000, assuming zero future investment return, the pooled annuity fund can pay a lifetime income of around £6,500 a year (subject to certain constraints discussed later).

With income drawdown, the £100,000 could pay an income of £6,500 a year for only about 15 years before the savings would be exhausted. In order to extend the duration of

Thomas Bernhardt and Catherine Donnelly describe how pooled annuity funds are an attractive alternative to lifetime annuities and income drawdown in providing a retirement income for life

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IMAGE: GETTY

Size matters Participants in a pooled annuity fund must be willing to accept fluctuations in their income. These fluctuations arise from variations in the number of actual deaths of participants against the expected number (idiosyncratic longevity risk), as well as the risk that the distribution of deaths has been wrongly chosen (systematic longevity risk). These risks are in addition to investment risk.

How much will the income vary? We studied this question in our recent paper ‘Quantifying the trade-off between income stability and the number of members in a pooled annuity fund’ (bit.ly/3lTBrEs). Consider a simple pooled annuity fund comprising a closed group of identical members, each aged 70 and bringing the same amount of money to the fund. We assumed that there was no systemic longevity risk or investment risk.

The members’ future lifetimes are modelled as independent and identically distributed random variables. The variability in the amount of income paid to surviving www.theactuary.com

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FIGURE 1: Risk profile of alternative decumulation products.

Increasing longevity risk

Income drawdown

Pooled annuity fund

Life annuity variants

Increasing investment risk

for 16 years with the 5% below test and 22 years for 10% below. These results use the mortality table S1PMA. For the lighter mortality table S1PFA, the number of years is each increased by approximately one. The income stability improves as the number of participants increases.

In future research we will conduct similar investigations based on more complex examples, taking into account systematic longevity risk, investment risk, open funds and a heterogenous membership.

FIGURE 2: Number of years for which income is stable.

Broader applications

Number of years for which income is stable

the income, it would be necessary to take on investment risk in order to compensate for the absence of longevity credits. Indeed, the older the individual at the outset, the higher the investment risk that must be taken. This is because the longevity credits are proportional to the probability of death, so income drawdown must work harder to give the same expected income as the pooled annuity fund. However, a higher level of investment risk increases the chance that investments could underperform. In turn, a substantial reduction in income drawn may be required to preserve the savings.

In contrast, the pooled annuity fund provides the important longevity protection without the need to take any significant investment risk. This longevity protection is provided in exchange for the loss of some features of income drawdown. Firstly, a member’s fund falls into the pool on the member’s death and is distributed to other pool participants instead of the member’s named beneficiaries. Secondly, the member loses all or most of the flexibility to vary the level of income drawn or control the investment strategy; this is to protect the integrity of the longevity pool against adverse selection.

Pooled annuity funds could be offered in markets other than the retail one. Under the Pension Schemes Act 2021, they could be packaged as a decumulation-only collective defined contribution (CDC) pension plan.

At the heart of any CDC plan is longevity risk pooling, and this is the feature that defines the pooled annuity fund. Although the fund outlined above works only for a homogeneous membership, it can be easily adapted for a heterogeneous group of participants. The broad point is that an implementation THOMAS BERNHARDT is a of the pooled postdoctoral annuity fund, assistant professor whether in the retail in the Faculty of market or as a CDC Mathematics and plan, would use the Statistics at knowledge, skills University of and experience of Michigan actuaries to give people what they want: a sufficient income to last their lifetime.

35 30 25 20 15 10 5 0 0

2000

4000

6000

8000

10000

Initial number of participants Key:

x = 10%

x = 5%

participants reflects purely the variation in number of deaths around the expected number. This variation reduces as the number of members in the group increases.

The account value of each member is credited monthly with investment returns (assumed risk-free and constant) and longevity credits, calculated as an actuarially fair distribution of the total account value of the participants who died in the last month.

If more participants die than expected, the longevity credits will be greater than expected, and vice versa.

Income is deducted monthly from each member’s account and paid to them. The income paid is re-calculated monthly by dividing the member’s account value by a single life annuity factor ax, with x being the member’s age at the calculation date.

Fluctuations in the income occur because of deviations in the longevity credits from their expected value.

The stability of income is measured relative to the first month’s calculated income value. The income is deemed stable over a given period if it lies at most either 5% or 10% below the initial income in 90% of future scenarios throughout the period. The results are shown in Figure 2 and show a remarkable stability of income; with 2,000 participants in a fund, stability is achieved

The research on which this article is based was funded by the IFoA’s Actuarial Research Centre within the research programme ‘Minimising longevity and investment risk while optimising future pension plans’.

CATHERINE DONNELLY is an associate professor in the Department of Actuarial Mathematics and Statistics at Heriot-Watt University

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ngland’s social care system is under-funded and this problem will only be exacerbated by its rapidly ageing population. Australia has similar challenges but has made greater progress in reforming its care funding system in recent years, including via the implementation of a cap on care costs. The IFoA’s Long Term Care Working Party has compared the two social care systems and considered what England might learn from Australia. We have focused on England because there are variations in the social care system within the UK. England’s last major change in social care was the Care Act 2014, which adopted many of the recommendations from the Dilnot Commission’s Fairer Care Funding report, published in June 2011. The expected outcome was a lifetime cap on care costs of £72,000 and a higher means test limit of £118,000, alongside a universal deferred payment scheme. However, in 2016 the government put the implementation on hold and no further progress has been made.

Funding for care Both Australia and England use a mixture of funding for social care.

State care benefits In Australia the state provides a universal basic level of care cost support. Further amounts may be partially funded by the state or co-funded between the state and the user of the services.

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The basic daily fee payable by consumers covers living costs. For those in residential care or home care, this is set at broadly 85% and 17.5% respectively of the single-person state pension (approximately £10,600 and £2,200 per year). There is a means-tested fee for care costs, with a lifetime cap on the amount, and a means-tested contribution towards accommodation costs for those who are in residential care.

In England the state benefits are largely means tested and provided by local authorities under the requirements of the Care Act 2014. The eligibility is based on a care needs assessment performed by the local council, and a financial means test that takes account of income and assets, also performed by the local council.

Current local authority financial constraints mean they only provide funding for those with significant care needs. Social security disability benefits such as attendance allowance, disability living allowance and personal independence payments are available. A contribution from the NHS is available for those who need nursing care in a care home. In certain circumstances, under NHS continuing healthcare, the NHS is responsible for meeting the full cost of care in a care home.

Figure 1 shows a comparison of state spending on care for the over-65 age group. Two things stand out: first, government spending on care needs per person in Australia is more than three times the

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Thomas Kenny compares how long-term social care is funded in England and Australia, and discusses the challenges of achieving a sustainable system

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spending per person in England (based on population aged over 85); and second, AUSTRALIA ENGLAND spending in Australia increased at 7.2% per Demographic trends Population to rise from 25.8m to 34.3m by Population to rise from 56.7m to 61.5m by year during the period 2015-2020, compared 2042 2042 16.4% of population over 65 today 18.4% of population over 65 today to 23.8% with 4.2% per year in England. (increased from 12.4% in 2000), projected by 2042.

Pension provision to increase to 19% by 2042.

2.5% aged over 85 projected to increase to 2.1% aged over 85, projected to increase 4.1% by 2042, a 78% increase in this aged In Australia the maximum state pension to 3% by 2042, a doubling of this aged population. for a single person is £13,749, according to population.

Source: Office for National Statistics (ONS) the country’s Department of Social Services; (2020), mid-projections (2019) Source: Australian Bureau of Statistics (ABS) (2018) medium projections 2017-2066 in the UK, that figure is £9,110. In each case, this represents broadly 30% of average Numbers receiving 1.3 million people received subsidised care. 600,000 receive state-subsidised care. subsidised care for over earnings, according to the Australian 65s (2019/20) Bureau of Statistics and the UK’s Office Government spending on £12bn £8.3bn for National Statistics. Private pension care (2019/20) provision in Australia is generally higher, Private spending on care £2.9bn £10.9bn Source: National Audit Office 2016 with compulsory contribution rates rising Care provision delivery 18% residential care, 82% home care 40% residential care, 60% home care to 10% from July 2021.

Uniformity of delivery Administered nationally by Department of Department of Health and Social Care sets Insurance product solutions Health. Funding is central. policy. Local authorities responsible for delivery and funding from local budgets.

Some product developments in Australia Means testing Both countries apply means testing to care and accommodation costs. Australia has a partially address the cost of long-term care, higher asset limit of £96,060 vs £23,250 in England, above which care and accommodation but there no specific products for this costs are fully payable by the individual. purpose. The equity release market stalled Care cap Yes, an annual and a lifetime cap on care No fees of £15,700 and £37,700 respectively. from 2008-2010 as banks withdrew from the Source: Australia: 8th Report on the Funding and Financing of Aged Care Industry (ACFA, July 2020), England: NHS Digital Adult Social Care market due to the financial crisis. There has Activity and Finance: England 2019-20. been some recent recovery, which may continue due to the low levels of interest rates, and retirees holding FIGURE 1: Government spending on social care for the over-65s (£bn). greater equity in properties.

14 In recent years, no new insurance products have been developed in England that aim to accumulate funds to offset the cost of future 12 long-term care. While there are some lump-sum benefits on term life and critical illness policies, the main products used in funding care 10 are immediate annuities and equity release, providing income and 8 cash respectively at or near the point of need.

TABLE 1: Australia versus England – care funding system summary.

The future

6

4

2

0 2015/16 Key:

Australia

2016/17

2017/18

England

2018/19

2019/20

Long-term care insurance does not currently exist in either Australia or England. The scope for future product development in England is limited pending implementation of the new legislation mentioned above, but we can expect product innovation that aims to enable consumers to remain in their own home for longer.

We can also expect to see more services designed to help people navigate the THOMAS KENNY complicated care system. is pricing and In Australia, a Royal Commission underwriting report on the care sector was published director at Just on 1 March 2021. This is expected to result Group and chair of the Long Term Care in a significant period of transformation, Working Party with the state funding of care increasing.

(Product Research Further changes to the funding system in Group) England are also likely to take place during the next few years, which will hopefully lead to both countries having well-funded and sustainable care systems. These are long-term challenges for policymakers – and ones where the actuarial profession is very well placed to provide help.

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ou’re going to hear a lot about COP26 this year, but what is it? COP stands for Conference of Parties, which is a conference where the world’s countries come together to set out actions against climate change.

The 26th COP will be held in Glasgow in November, having been postponed from 2020.

COP21, held in Paris in 2015, was pivotal.

In an almost unprecedented display of global unity, 197 countries signed the Paris Agreement. The agreement aims to hold the increase in global temperature relative to pre-industrial times to well below 2°C – thought to be the maximum temperature change that our global society might be able to adapt to. The increase so far has been 1°C, so there’s not much room left for manoeuvre. As global warming is driven by emissions of greenhouse gases (GHGs), emission levels must be drastically reduced if we are to have a reasonable chance of achieving this objective. In essence, we have a global carbon budget; if we go over budget, we’ll almost certainly have more climate change than we can manage.

As part of the process, each country agrees to a nationally determined contribution (NDC), which expresses its commitment to decarbonisation. The NDCs recognise that the pace of decarbonisation will vary between countries, but that total worldwide GHG emissions must remain within a global carbon budget for the collective effort to be

“We need to recognise that we wield great power through the decisions we oversee in the global financial system” effective. The first round of NDCs were not enough – it is estimated that they will result in 3.7°C of warming, well over double the implied Paris goal of 1.5°C (the usual interpretation of “well below 2°C”).

Countries will be updating their NDCs at COP26, which is why it’s so important – it’s a chance to get things right. Much has changed since COP21. Public concern around sustainability and climate change are at high levels as the physical impacts of climate change become more visible.

Globally, politicians are committing to net-zero policy objectives to mitigate climate-related physical risks and to accelerate the global energy transition. In the US, the Biden administration is clearly pursuing quite a different climate policy to the Trump administration.

There is significant hope that politicians will collectively agree to more NDCs that are ambitious enough to meet the goals of the Paris Agreement.

In the lead-up to COP26, Louise Pryor and Sandy Trust set out the pivotal role actuaries have to play on the journey to sustainability

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Where does net-zero come from?

One obvious question we could ask about the dual temperature goals of the Paris Agreement is: Does it actually matter if we limit global warming to 2°C or 1.5°C? The answer is: yes.

The Intergovernmental Panel on Climate Change issued a Special Report on 1.5°C of global warming in 2018. In this report, the global scientific community found that the extra half degree of warming would increase climate impacts significantly. For instance, it could be the determining factor in whether coral reefs will continue to exist, and whether Mediterranean regions will become deserts.

The report also set out the decarbonisation

trajectories required to limit global warming to 1.5°C in a set of four scenarios, referred to as P1 to P4. Of these, P3 and P4 are widely thought to lack credibility as they rely on significant levels of carbon capture and storage after 2050, using technology that hasn’t yet been invented.

P1 and P2 both require 50% or 60% reductions in GHG emissions by 2030, with ‘net-zero’ emissions by 2050 – a situation where the Earth system naturally absorbs at least as much GHG as our society emits.

The report has led to ‘net zero’ becoming the rallying cry for climate action this year, with many corporates and financial services firms making net-zero commitments to complement those made by politicians.

Does the IFoA support net zero?

The IFoA issued a climate change statement in January, recognising that the climate is changing due to human activity and calling out climate change as one of the greatest risks facing the world today. The statement suggests that the best value insurance premium society can pay is to reduce our emissions today, in order to avoid the irreversible consequences of unmitigated climate change tomorrow.

To support the net-zero goal, the IFoA commits to advocating for policy frameworks that aim to achieve the objectives of the Paris Agreement, and for the development of effective methods for incentivising GHG reductions. A key course of action for the IFoA and its members is to use our actuarial skillset and influence to help equip the wider global financial services markets, so that they can accelerate into a just and sustainable net-zero transition.

What role can and should actuaries play?

One of the lesser-known aspects of the Paris Agreement is the goal to make finance flows consistent with a pathway towards low GHG emissions and climate-resilient development. While GHG emissions physically drive global temperatures, financial systems play a huge role behind the scenes because every pound that is lent, spent or invested has a realworld impact.

Actuaries are pivotal in the fields of pensions and insurance, and increasingly

in banking, too. These industries directly influence what the future will look like, as they determine what sort of activities are financed and insured. In the UK, for example, approximately a third of total investments are related to pensions. In other words, the decisions we make about how to invest these funds can make a profound difference.

However, this will require a mindset shift for us. We must consider not only the direct financial impacts of our decisions, but also the broader real-world impacts that could have long-term effects on customers, shareholders and wider society.

We must consider the financial system not as separate from the wider Earth system, but as intricately linked to it. Money cannot put right the fundamental changes that climate change might bring after it is too late – but the financial world can help keep it from getting too late.

We will need to adapt our actuarial toolkit so that it embraces new concepts such as systems thinking, sustainability, risk interconnectedness and net zero.

We will also need to evolve our sense of responsibility, recognising that we wield great power through the decisions we oversee in the global financial system – we have the power to make choices today that will have far-reaching and profound LOUISE PRYOR implications for is a sustainability tomorrow. Now actuary and president-elect of is the time for the IFoA us to update our operating manual and incorporate long-term sustainability into the tenets of the profession.

We actuaries SANDY TRUST have an immense leads EY’s opportunity here.

Sustainable Finance Consulting team and We can play a part is deputy chair of the in securing a IFoA’s Sustainability sustainable future, Board ensuring pensioners, policyholders and society at large will have a world worth living in. And we must choose to do so.

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limate change presents a material financial risk, and it will impact actuaries out. thee wo th work rk tthat hatt ac ha actu tuarie iess ca ccarry rryy ou o t.

One off tthe he kkey ey cchallenges hallen ha enge gess in in incorporating climate considerations is the time horizon over which they emerge.

Physicall ris risks i ks While the physical impacts of climate change are expected to emerge outside of the time horizons for business planning, actions needed thee ac th acti tion ons th that at are n eeded to avoid these long-term long lo ng-t - er e m risks risk ri skss need ne to o be b taken tak a en now;; this thiis th hass be h ha been referred refer ferred d to as as the the ‘tragedy ‘tra ‘t rage gedy dy of of the the horizon’.

Unless world decisive hori ho r zo on’ n’. Un Unle less ss tthe he w orld or ld ttakes akes ak es d ecis ec isiv ivee will start action immediately, physical risks wil ill star at to emerge gradually during this century.

While this is too late to impact our assessment of physical risks next year, the choices we make in that year will influence those long-term risks.

Consider the market price of a property, which represents the discounted future expected expe ex pect c ed value that will be derived from asset. more frequent thee as th asse set. t. The The he m oree fr or freq eque uent nt and and severe sev evere weather w we athe h r events associated ass s occia iate ted d with with climate cli lima mate te change will lead to an ch n increase incre reas ase in the future costs involved co d in repairing additional addi diti tion onal al damage or even abandoning the th he asset; this affects today’s value. Today’ss iimpact mpac mp a t will depend not only on the size and timing of these future thes th esse fu futu tu ure ccosts, o ts, but also on the likelihood os that tthese hese he se eevents veent n s will w ll happen. wi hap appe p n. If consensus cons nseensus were w we re to to build buil bu i d that il t att the th he world wor orld ld is is on a severe sev ever eree er warming pathway, impact warm wa rmin rm ingg pa p th thwa hway, y, tthen hen he n the adverse ad may on n tthe he aasset he ssett vvalue ss alue m al ay be ay be recognised reco re c ggn nis ised ed ssooner oone oo nerr potentially and an d po p teent ntia iall llyy suddenly, sudd su dden enly ly,, as investors inv nves e tors es tors refl refl efleect ect likelihood off cl climate-related tthe th he in iincreased ncr crea cr ease sed ed li like ike keli keli liho ih ho ood o clim imattee re r laated d ffuture fu uture tu ure re ccosts. o ts os ts..

Transition risks The likelihood of physical risks can be reduced by taking strong co-ordinated move aaction ac tion ti on to o mo m vee away awa waay from from fr om o m a high-carbon hig igh h-ca carb ca rbon rb on n economy. However, this leads d to transition transi siti t on ti risk. Given the urgency around addressing climate change, we can expect transition risks than physical risks, risk ri skss to eemerge merg me rgee sooner so butt th horizon b bu thee ti time me h oriz or izon on ffor or when they may emerge is also very uncertain.

Transition-related market impacts do not always emerge through the actual implementation of regulations – they may arise consumer aris ar isee fr from om cchanges hang ha nges es iin n co ons nsumer er sentiment, sen entiment nt, increased expectation or jjust ustt fr from om an n in ncr crea eaase s d ex xpeecttattio ion th thatt these regulations place, which thes esee regu g laations will be put in pla lace ce, wh whic ich h can shorten the time horizon. horiz izon n.

For the global economy to transition, concerted joined-up action is needed.

However, current global progress on Paris Agreement commitments falls significantly short of the emissions reductions required by that agreement. This increases the likelihood of systemic costs arising from a failure to mitigate climate change. There is further a fu furt rthe herr risk risk that tha hatt this this outcome out utco come me is is refl re ected suddenly increasing sudd ddenlly by by markets, markets, k increasiing disruption. disrrup di upti tion.

Investments and d ri risk sk e exposure xpos xp osur ure e Investment choic choices ces m made adee to ad toda today d y im impa impact pact ct exposure risks ex xpo posu sure to climate-related ri isks and d also influence their likelihood. Investing in ‘green’ assets might be predicted to produce lower returns retu t rn ns based base ba sed d on nonnon onclimate valuation clim cl im mat atee aware awar aw aree va ar valu luat lu attio i n te ttechniques, chni ch niqu ques es,, bu butt these th hesse inve iinvestments in nve v st s meent ntss are are likely like li kely ly to to outperform ou outp utp tper eerrfo form rm m mitigation in n a sstrong trongg mi miti tiga gati tion ti on eenvironment n iron nv iron ir nme ment nt with with ith it high prices other hi gh h ccarbon a bo ar on pr pric ices ess aand nd o t er measures. th mea easu sure su rees. s.

These directly the off Thes Th esee asse es aassets sseets aalso lso di lso d rect re ctly lyy rreduce educ ed ucee th he ri risk sk o a fa ffailed fail ail ileed ed ttransition rans ra nssit n itio ion to a llow-carbon o -car ow -ccar a bon bon economy. bo econ ec onom nom omy. y.

Conversely, investments in high-carbon technologies may seem attractive today, but they are likely to underperform in a strong mitigation miti mi tiga g tion on scenario. scenari r o. o Furthermore, these investments inve in vesttme ve m nt ntss prolong prol pr ollong on ng support s pp su ppor orrt for fo carboncarb ca rb bon onintensive business models, delaying the transition and increasing the chance that we remain on our current climate pathway – entailing enta en tail ilin ingg associated asso as soci ciat ated ed future fut utur uree adverse adve ad vers rsee financial nancia iall impacts impa im pact ctss and and wider wide wi derr societal soci so ciet etal al costs. cos osts ts..

Incorporating climate risks To understand and manage the risk attached to any form of projection, we need to understand un nde ders rsta tand nd the the climate cli limate te assumptions ass s um umpt ptio ions ns underlying unde un derl rlying ing the thee modelling. mod odel elli el l ng li ng.. The The one o e thing on thin th ingg we cannot do is ignore climate impacts and assume that we can continue on our current path without consequence. Actuaries need to recognise the balance between physical their work.

Future and transitional risks in th heiir work rk.. Fu Futu ture re uncertain; projections are always uncer rta tain in;; we need nee eed d to understand and communicate comm mun unic icat atee the the uncertainty, including how climate cli lima mate te could cou ould d affect the outcomes.

WENDY WALFORD is an actuary working in risk management at L&G and a member of the IFoA Sustainability Board

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Wendy Walford explores the emergence and interaction of climate risks over different time periods, and discusses the implications for actuarial work

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ACT NATURAL Aled Jones and Lucy Saye discuss the link between the economy and the environment, and how biodiversity destruction and loss could impact on the work of actuaries

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iodiversity underpins our economic success in numerous ways. It provides inputs for new medicines and multiple services such as pollination, erosion control, food supply and clean air. The disruption or loss of any of these services represents a significant financial risk. The World Wildlife Fund’s (WWF) Global Futures report, for example, estimates a loss of US$10trn in global GDP between 2011 and 2050 if current biodiversity loss trends continue. Actuaries should consider how these risks could impact their work and advice.

with a negative price tag, so that it pays to exploit the biosphere.

This effect is amplified by governments through perverse subsidies.

Despite its importance, biodiversity presents a challenge for economic assessments – the benefits associated with biodiversity are often not directly attributed to private profit generation, and traditional economic models fail to incorporate benefits that cannot be captured by the market. Furthermore, it is often not possible (or even desirable) to put a price on such benefits. This means we risk underestimating both the benefits to society afforded by biodiversity, and the costs of biodiversity loss.

The link between the economy and the environment

FIGURE 1: The ‘doughnut’ of social and planetary boundaries.

In 2009, a group of scientists led by Johan Rockström identified nine core processes upon which humanity depends and defined the ecological limits for each, calling them ‘planetary boundaries’. Four of these processes – climate change, biodiversity loss, nitrogen and phosphorus cycles, and land use – have been pushed beyond their boundaries by human activity, increasing their risk of collapse.

Kate Raworth’s ‘Doughnut Economics’ model (Figure 1) recognises the link between the economy and the natural environment by incorporating the planetary boundaries as the outer ring of the ‘doughnut’. The inner ring is based on achieving the social components of the UN’s Sustainable Development Goals (SDGs), and the middle represents the space in which humanity can thrive.

This concept that the economy is inextricably linked with and dependent upon biodiversity was also highlighted in the Dasgupta Review (bit.ly/31Sw0wp), published by the Treasury in early 2021, as well as in the article ‘Vanishing Wilderness’ in the March edition of The Actuary (bit.ly/3rpgKBw). Positioning environmental concerns as a trade-off with the economy is a false dichotomy. However, the Dasgupta Review confirmed that many ecosystem services come

Source: Kate Raworth and Christian Guthier. CC-BY-SA 4.0

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An emerging crisis

The link between financial services and the environment The financial services industry holds a unique position within the economy. It is widely recognised that the financial system faces systemic risks from environmental issues such as climate change and biodiversity loss (outside-in risks); however, the financial system itself facilitates business activity that poses risks to the natural environment (inside-out risks). Bank lending, debt financing and investment activity determines capital allocation across economic sectors, and insurance underwriting ensures that economic activity can take place by providing necessary security.

Large, diversified, long-term institutional investors, such as pension funds and life insurers, are unable to avoid systemic risks like climate change and biodiversity loss because they own a representative slice of the market (the universal owner hypothesis).

Put simply, such institutions cannot stock pick their way out of the long-term systemic risks posed by biodiversity loss, as externalities from offending sectors are borne across enough of the market that any diversified portfolio will be exposed to those risks. Universal owners therefore have an incentive to actively facilitate the transition to a sustainable economy while positioning themselves to benefit from any upside opportunities.

There is the added issue of liability risks – losses arising from people or businesses seeking compensation from those they hold responsible for losses they have suffered. It is recognised that in the context of climate change, liability risks may be transferred to insurers from products such as directors’ and officers’ insurance and professional indemnity insurance. Such risks also apply to biodiversity loss. Even if these risks are not collectively underwritten by the insurance industry and remain with the primary sectors, any reduced returns that result when such losses materialise are still borne across the economy as a whole.

With biodiversity loss at a global scale and ongoing pressure on land and ocean systems likely leading to further and significant loss, some impacts are already locked in and substantial future risks are likely. So how should insurers, banks, pension funds and regulators approach biodiversity risks? In ‘Universal Ownership in Practice: A Practical Positive Investment Framework for Asset Owners’ (bit.ly/3dtLMnV), Ellen Quigley discusses the ways in which current responsible investment practices are insufficient to mitigate systemic risks such as biodiversity loss, and a report by Portfolio Earth highlighted how the world’s largest banks lent US$2.6trn in 2019 to sectors identified as primary drivers of biodiversity destruction. None of the banks assessed had comprehensive policies in place to monitor, measure or halt these impacts. Set in the context of a collective failure to meet a single 2020 Aichi Biodiversity Target, this suggests that current practices have not yet translated into real-world positive effects at the scale needed.

Additionally, nature-related risks are characterised by path dependence, optionality or irreversibility, systems effects, feedback loops and radical uncertainty, meaning financial markets are not capable of sufficiently internalising these risks into prices. These characteristics pose challenges for financial modelling and quantitative assessments, and may need to be supplemented with alternative qualitative approaches to inform decisions. Risk management should recognise inside-out risks and systems effects, and prioritise action to actively avoid catastrophic tipping points and build resilience.

Financial regulators and governments should adopt policies that steer the market towards sustainable outcomes. Policies such as incorporating sustainability considerations into central bank asset purchase programmes, or prudential regulation to discourage future financing of harmful activities, could be considered. The private sector can also take this approach – exerting influence through underwriting, pricing, financing and even procurement policies.

A risk for actuaries In its initial position paper, The Importance of Biodiversity Risks, the IFoA Biodiversity Working Party found that biodiversity represents material financial risk through both direct physical losses (for

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example loss of pollination) and transition risks (for example a global move away from palm oil use). The working party is made up of actuaries with expertise across the finance sector, and each found areas where this risk would be present in their advice and work.

It has published four further papers, which include a number of case studies and explore particular aspects of biodiversity loss and its potential impact on actuarial practice.

The concept of natural capital, the focus of the first paper, has been championed by the UK government and various business groups. However, it has also been seen as controversial within some non-governmental organisations. While natural capital can allow for biodiversity monitoring and provides a common language for decision-making, it can lead to unintended consequences – including the potential worsening of biodiversity outcomes.

Defra’s Enabling a Natural Capital Approach (ENCA) guidance provides a list of data items and tools that can be used. Many such approaches now exist or are being developed, and the use of quantified metrics to assess biodiversity impacts and benefits is the subject of the working party’s second paper.

The Dasgupta Review suggests that biodiversity loss increases contact between people and wildlife that carries zoonotic pathogens – leading to spill-over infections, where pathogens are transmitted from animals to human hosts. This is the subject of the working party’s third paper. COVID-19 has emphasised the significant risk that zoonotic pathogens can pose to finance and the global economy.

The working party’s fourth paper focuses on the issue of justice within the context of biodiversity. Shareholders, policyholders, sponsors, scheme members, local and indigenous communities, and nature itself must be considered in any evaluation. The issue of intergenerational fairness also needs to be taken into account. The efforts to quantify nature are subjective, land ownership is often contested, and it may not even be clear who all the stakeholders

impacted by a project might be. Actuaries, who are independent and adopt a concept of fairness, will need to consider as wide a range of stakeholders as possible, embrace uncertainty, and use qualitative measures to ensure the best possible advice can be given.

An opportunity for actuaries By focusing on the economics of biodiversity, the Dasgupta Review highlights a number of factors that will become increasingly important during the next few years and potentially offers an opportunity for actuaries to use their skillset more widely.

The review recommends that natural capital is embedded in national accounting systems, including GDP. Several other recommendations will have a direct impact on actuaries, such as increasing investment into protected areas, including natural capital in government stimulus packages, creating new financial systems to pay for ecosystem services, border adjustment taxes, environmental taxes, increased disclosure, and the creation of a global insurance risk pool for environmental disasters.

The review does have shortcomings, such as its narrow focus on bringing nature into economics. Actuaries have long argued that issues such as climate change require a different approach to management – not just pulling nature into existing economic theory and financial practice (see the Actuaries for Transformational Change as a recent example).

Actuaries are well placed to advocate for the development of effective policy frameworks and methods for managing biodiversity risk. Our central understanding of long-term financial risks, the limitations of models, and the need to balance outcomes between different stakeholder groups, will be vital in helping us ensure biodiversity is better protected in future.

ALED JONES is the director of the Global Sustainability Institute at Anglia Ruskin University

LUCY SAYE is a life and ERM actuary at Aviva and a member of the IFoA’s Sustainability Board

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lobally, 31% of adults – 1.7 billion people – struggle to get by without basic financial services.

Insurance exclusion is highest among low-income groups and in developing countries, including rural households that account for more than 70% of global poverty.

Agriculture is the most common income generator among these groups, and agricultural insurance is key to helping them manage irregular cashflow, invest in opportunities, strengthen resilience and work their way out of poverty. Still, agricultural insurance is out of reach for at least 500 million farmers.

And matters are about to get worse.

Recent evidence from the study ‘Tropical Cyclones and Climate Change Assessment’ (bit.ly/2RbRsKP and bit.ly/2PUztb3) shows that global tropical cyclone storm intensity is expected to increase by 5%, and rain intensity by 15%. There is an upward trend for both economic and insured losses resulting from weather-related catastrophes.

SMALL BUT

MIGHTY Annette Houtekamer and Carlos Boelsterli discuss the role of small inclusive insurers in rolling out agricultural protection to low-income groups

How can insurance help?

In this context, insurers have an opportunity to generate positive societal and economic impacts. In the capital markets, investors have already started seizing opportunities to invest in catastrophe risk via alternative risk transfers, such as catastrophe bonds. Part of the reason insurance has lagged behind is that the administrative costs of obtaining the necessary farm-level information, and conducting farm-level loss adjustment, make this type of insurance prohibitively expensive for insurance companies to offer – and for smallholder farmers to buy.

To counter this, some governments provide subsidies for agricultural insurance.

India and its states subsidise 95% of premiums for its main crop insurance scheme. However, such subsidies are expensive and so tend to have limited scope – in India, the subsidy is only available for specific crops, and excludes inter-cropping practices and vegetables. This means a market-based, long-term and economically sustainable solution is required.

Weather index insurance avoids many of these difficulties, and has been used in the agricultural context for two decades. It can protect low-income farmers (micro-level), their banks’ loan portfolios (meso-level), 40 | THE ACTUARY | MAY 2021

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and the governments of low-income countries that currently act as the only safety net (macro-level). However, it is not yet widely available from insurers, or widely taken up by low-income farmers.

Insurers The price of insurance can be expressed as: Price = Cost of the risk + Risk loading + Administrative and acquisition costs + Risk assessment costs + Costs of ready access to capital.

Large, robust insurance companies may be able to reduce fixed costs through economies of scale – in the same way that for large container ships carrying thousands of steel boxes, the incremental cost of carrying one more box is small. However, in the uncertain, not yet well-charted waters of inclusive insurance, large insurers can lack the agility needed to experiment and adapt to changing conditions.

seeds, savings and loans, as well as the human capital of their families – education, vaccinations and so on. Insurance can fall to the bottom of the list, often regarded as too expensive or not providing value for money.

While microinsurance products can be designed to maximise customer value, such value often remains intangible until disaster strikes. At the start of COVID-19, one of our retail banking distribution partners in El Salvador decided to stop granting new credit loans and placing insurance products. When Storm Amanda hit in June 2020, the number of insureds had gone down to 30% of what it had been a few months earlier. The storm was devastating, and MiCRO’s microinsurance product triggered significant pay-outs in affected areas. The bank reversed its decision and increased insurance placements to the previous levels.

Farmers As explained in Abhijit Banerjee and Esther Duflo’s book Poor Economics, farmers already have to make complex and balanced decisions about livestock, tools and equipment, fertilisers, types of crops and

Agile moves Unlike larger counterparts, small inclusive insurance players are able to manoeuvre in an agile way. They are developers and early adopters of new practices and technologies, www.theactuary.com

22/04/2021 16:09

Features Microinsurance

“Small insurers are developers and early adopters, have short decision processes, and can adapt quickly to changing customer needs”

IBISA provides the technology that enables insurers, food manufacturers and farm suppliers to provide transparent and objective risk assessment, risk prevention and protection.

It offers a digital end-to-end platform that enables index design, policy management

and automated remote loss assessment based on earth observation satellite data.

MiCRO is a speciality reinsurer that is active in Latin America, founded to offer risk transfer solutions against natural disasters, protecting the vulnerable population who do not have

LESSONS SO FAR MiCRO’s journey towards economic sustainability in 2024 has so far offered some valuable lessons: Superior products are the result of iterative improvements to the initial minimum viable product Refined partner selection processes helped to find local partners that share its double bottom line objectives and eagerness to change the status quo Increasing credibility among local regulators, leading to shorter and easier regulatory processes with each new

IMAGE: ISTOCK

Achieving scale

have short decision processes, and can adapt quickly to changing customer needs. They pilot and test technology-enabled solutions, create minimum viable products and expand the boundaries of traditional insurance, while keeping costs at an absolute minimum.

IBISA and MiCRO are examples of such ‘towboats’. Each company was established to minimise basis risks and enhance the insurability and affordability of parametric insurance. They use end-to-end technology to lower the costs of distribution, risk analysis, loss assessments and claim handling; with these cost reductions, the difference between pure risk premiums and gross premiums to be paid by the end customer can be kept small. www.theactuary.com

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access to insurance. Its proprietary calculation platform uses satellite information, weather stations and locally produced Shake Maps for earthquakes in order to detect the occurrence and severity of covered events.

Claim payments are made based on these calculations.

Still, the key to economic sustainability of the smaller microinsurance players is scale.

A common way to achieve scale is through innovative product distribution.

Distribution strategies include embedded insurance (premium paid by distribution channel), bundled insurance (distribution channel adds insurance to their product portfolio), and standalone insurance (sold via insurance agents, call centres and so on).

Another strategy is tactical bundling with existing activities such as smart agriculture, input sales (for example seed, feed and fertiliser), and savings and loans products.

Average premiums from our products can be as low as US$15-60 a year – hardly enough to compensate traditional distribution channels. By bundling with partners that already bring a product or service to the target segment, the cost of microinsurance distribution can be reduced to the time it takes the agent to explain the insurance product, plus any incentive they may receive.

positive reference case, has supported its ambition to expand into a new Latin American country each year.

Until full sustainability is achieved, the funding gap will be supported by consultancies and agencies that share MiCRO’s vision for strengthening the resilience of the most vulnerable. The hope is that once the business case for inclusive agricultural insurance has been proved, and the risk of failure becomes more manageable, big players will follow.

Many well-established organisations already have large customer bases (more than 500,000 farmers) and provide several ANNETTE services. Having HOUTEKAMER direct links to is co-founder of farmers, but IBISA lacking parametric insurance products or tools to manage them, they make obvious allies for microinsurers. An example would be a CARLOS partnership with a BOELSTERLI local co-operative is CEO of MiCRO – the insurance product repays farmers’ loans on the co-operative’s loan portfolio in case of a triggered event.

MAY 2021 | THE ACTUARY | 41

22/04/2021 16:09

At the back Society news

OBITUARY

Hugh Scurfield Hugh Scurfield (1935-2020) was general manager and appointed actuary at Norwich Union (now part of Aviva) where he spent his whole career. He was president of the Institute of Actuaries from 1990 to 1992.

He went to King’s School, Worcester and claimed to have studied maths and rowing at Hertford College, Oxford. He rowed for the country in 1959. Hugh was one of the pioneers of the work of actuaries in general insurance in the 1960s and 1970s. Actuarial practice in this area was well-established in North America, with its own professional body, the Casualty Actuarial Society, but the same was not yet true in the UK. Hugh worked with other actuaries, such as Peter Johnson and

Brian Hey, on making inroads for our profession, particularly in motor insurance in the wake of the notable insolvency of one insurer, Vehicle and General.

In 1974, Hugh and Terry Clarke, who then worked in his team, brought together 34 actuaries in Norwich for a seminar on issues in general insurance, which developed into a regular annual meeting of the General Insurance Study Group, later renamed GIRO (General Insurance Research Organisation).

This paved the way for the insertion of general insurance into the exam syllabus and the expansion of the role of actuaries, both in insurance companies and in Lloyd’s.

Hugh’s time as president saw some of the early steps towards bringing the Faculty and the Institute closer together, with a joint meeting of the two Councils. This culminated

in the development from 1993 of the joint set of exams first set for both Faculty and Institute students the following year. The issues were far more than technical and came down to issues of mutual trust between the two professional bodies. To my eyes, that trust appeared to have been firmly established when I attended the second joint Council meeting, which cemented the arrangements.

Hugh strongly believed in the mutual insurer model and his view that life mutuals run by actuaries tend to have the best results.

In 1990, the European single market and the mutual professional recognitions and unified approach to regulation were still under development, and Hugh spent some of his time as president working to lobby for the UK approach to life insurance regulation and the ability to sell insurance across the continent.

OBITUARY

Stewart Lyon Stewart Lyon (1926-2021), past president of the Institute of Actuaries (19821984) and Fellow of the Society of Antiquaries, was a man with a wide range of interests, serving the profession in many ways and pursuing his passion for Anglo-Saxon coinage, of which he was one of the leading experts.

Stewart Lyon was born in Liverpool and, after education at Liverpool College and Trinity College, Cambridge, worked in an insurance company in Liverpool, qualifying as an actuary in 1954. He then joined the developing pensions department of Legal & General, where he was to spend the bulk of his career. He served the profession as a tutor, on the SIAS (then Students’ Society) committee and in roles on committees of the profession, becoming president in 1982. His pensions experience led him to be nominated as a member of the government’s relatively new Occupational Pensions Board 42 | THE ACTUARY | MAY 2021

42-43 PEOPLE SOCIETY_The Actuary May 2021_The Actuary.indd 42

(the predecessor to today’s regulator), and he served on a government inquiry into Provision for Retirement, established in 1983. He delivered many papers on pensions, including the sessional paper ‘Social Security and Occupational Pension Schemes’ to the Faculty in 1967 and his own Institute presidential address ‘The Outlook for Pensioning’ in October 1982. Widening the field, in 1988 he presented an Institute sessional paper entitled ‘The Financial Management of a With-Profit Long Term Fund – Some Questions of Disclosure’.

He rose to be finance director and chief actuary of Legal & General and was the first president to come from that firm. After retirement, he held several non-executive directorships in the life insurance and regulatory arena.

He was one of very few actuaries to be awarded a Gold Medal by the Institute Council. This was presented to him in 1991 by the then president, the late Hugh Scurfield, in recognition of his pre-eminent work in many areas of the profession. When

he presented the medal, Hugh noted that Stewart had negotiated with Richard Crossman during the Labour government’s development of the state pension system, with an especial focus on private pension scheme ‘contracting out’, as well as serving on the Norman Fowler inquiry, set up by a later Conservative administration to look at reforms. In his famous diaries, Richard Crossman said that Stewart was “in real life as nice and understanding as he is on paper”.

Beyond actuarial matters, Stewart Lyon had a passionate interest in coinage (or numismatics), being the president of the British Numismatic Society from 1966 to 1970. As a coin collector, it was somewhat fitting that he also collected gold medals, and he was awarded the Sanford Saltus Gold Medal in 1974 for scholarly contributions to British numismatics. He delivered many papers on the particular niche that he studied, Anglo-Saxon coinage of the 9th and 10th centuries. Some of his collection has been on public display in the Fitzwilliam Museum, Cambridge. From 1986 to 1993 he www.theactuary.com

22/04/2021 16:10

At the back Society news

HISTORY

Remembering Prince Philip However, he was critical of the form and manner of product information supplied to consumers, and publicly challenged the level of surrender values that with-profit life offices were delivering on lapsing policies.

Hugh had a large family, with four of his own children and four stepchildren. All eight, together with his wife Jill, attended his presidential address, in which he embarked on his theme of a ‘proactive profession’ – the phrase that echoed through his time in office.

After retirement, Hugh continued his passion for the hospice movement, which he strongly supported – even presenting a talk on the subject in 2002 at the Ageing Population conference promoted by the profession in Edinburgh.

WRITTEN BY PETER TOMPKINS, WITH THANKS TO DAVID RAYMONT, IFOA LIBRARIAN

was a member of the Treasure Trove Reviewing Committee, charged with working out the value of discovered treasure for the purpose of compensating the finder.

He also co-wrote Coinage in Tenth Century England (Oxford, 1989) with CE Blunt and BHIH Stewart (Lord Stewartby).

Stewart had a passion for support for the disabled, being a vice chairman of the Disablement Income Group and campaigning for better access to public buildings for disabled people. He and his wife, Elizabeth, a music teacher, were both singers and were involved with the Guildford Philharmonic Choir for many years. Stewart and Elizabeth were good friends with musicians such as the late William Mathias, the composer best known for his religious works. A number of their five children accompanied them in singing at actuarial functions, and Richard has followed his father to become a respected actuary.

WRITTEN BY PETER TOMPKINS, WITH THANKS TO DAVID RAYMONT, IFOA LIBRARIAN.

www.theactuary.com

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As the UK marked the passing of HRH The Prince Philip, the IFoA reflected on the occasion when the Duke of Edinburgh was the guest of honour at the Institute’s 24th Biennial Dinner in November 1979.

At the event, the Duke L-R: Peter Moody, then Institute president 1978-1980; Mrs O’Brien; Gordon Bayley (past Institute president 1974-1976); Prince Philip gave a speech in which he broke the ice by admitting his ignorance of what it is that actuaries actually do, before going on to say he was “deeply impressed by the fact that all those who do claim to know exactly what actuaries do are agreed that without the services and expertise of the members of the profession, the whole insurance and pension fund structure, and probably several other sectors of the economy, would collapse in total chaos.”

He acknowledged the responsibility that actuaries hold, particularly in light of the relatively small numbers of actuaries there were at the time of his speech (Institute membership numbered around 5,500 in 1979), and also paid tribute to their mathematical abilities as “verging on genius”. He went on to express his belief that “silicon chips and microprocessors” would not have an adverse effect on actuarial employment, and that actuaries’ contributions would actually become more valuable as technology improved.

The Institute was proudly operating then, as now, from its Royal Charter of 1884, and it was a great a great honour to have the Duke at this event; we express our condolences to the Royal Family. Read the full speech at bit.ly/3akBlRW WCA

To all actuaries – £500 for your charity Each year the Worshipful Company of Actuaries presents the Phiatus Award to an actuary – not necessarily a WCA member – who has made significant charitable efforts in the previous year or longer, together with a £500 donation to the winner’s selected charity. The presentation is made at a dinner, to which the winner is invited.

If you (or someone you know) is closely involved with a charity and

would like to be considered for this year’s award and the £500 donation, please email details to Ian A Farr, who is a trustee of the Company of Actuaries Charitable Trust Fund.

He can be contacted at ianafarr@gmail.com

BIRTHS Katy (LV) and Glyn Bradley (Mercer) are pleased to announce the birth of their daughters, Alice and Sophie.

Call for your news…

We would be delighted to hear from you. If you have any newsworthy items for these pages, please contact us at: social@theactuary.com MAY 2021 | THE ACTUARY | 43

22/04/2021 16:10

At the back School of thought

Student Playing the game

Go down the right path

Hard work alone is not enough to pass actuarial exams, says Charlie McAnea – you must also master your exam technique

ILLUSTRATION: SIMON SCARSBROOK

A

ctuarial professional exams are very hard – particularly as we take on the unforgiving world of CPs, SPs and SAs. The content of these courses is far from straightforward, but the real challenge lies in the exams, which are unlike anything a budding young actuary will have encountered at school or college.

They pose questions that can leave you scratching your head over where to start, or wondering how a seemingly straightforward question can demand 20 marks – and that is before the often weird and wonderful scenarios present themselves.

You need two things to succeed: hard work and good exam technique. The former is non-negotiable – you must put in the work to give yourself a chance – but will not be enough on its own. The latter is key, but remains a mystery to many students.

Remember: when it comes to exams you need a strategy.

Developing your exam technique requires practice, and lots of it. For any given exam, I used more than 20 past exam papers, giving the papers varying levels of scrutiny.

I answered older ones in my head and checked the answers as I went along. I then completed more recent papers in full, but not under time constraints; and I took the previous couple of years’ papers under full exam conditions.

The most important process was using the mark scheme to understand what examiners wanted, and asking questions of myself from all angles – learning the rules.

44 | THE ACTUARY | MAY 2021

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What did the examiners give marks for and what did they not? Did I make valid points but fail to maximise my marks? If so, how could I have earned any extra marks per point? Did I miss the purpose of the question? Am I repeating mistakes?

The more past exam papers you cover, the clearer the answer becomes to each of these questions, as patterns start to appear. Keep track of the exam techniques you have unearthed using a list or a visual aid – this will give you your most potent weapon.

Even with a good understanding of what examiners are looking for, it is easy to abandon good practices when faced with an awkward question against the clock. Scribble out your visual aid at the beginning of the exam, or prepare one beforehand for online exams, so you have your list of rules at the ready. Refer to it for each question – this will help you focus on implementing the techniques you have learned. Below, I have summarised my own exam technique. This is by no means the only correct way of doing things, and it is vital you develop your own technique in order to fully understand how to use it.

Exam mindset Your goal is not to write a unique answer or think up an advanced solution – it is about hitting as many half marks as possible Learn what scores and what doesn’t – if it scores, write it down; if it doesn’t, you’re wasting time Bullet points – make it easier for the marker to identify your half marks.

What is the question actually asking?

Does your point answer the question being asked?

Look at the command verb and answer appropriately Have you answered a similar question before?

If a question has a series of similar parts, do not repeat yourself. Identify the differences between each part of the question.

Getting started Go back to first principles What would your answer be if the question was only worth one, two or three marks?

What chapter(s) is the solution from?

Maximise your marks Set up the point State the obvious Give a definition Give examples – but as an add-on to your point, not as the point itself Generate more marks per point. Ask yourself: Who? So what? Why? How? And? However?

Draw from personal experience, if relevant Use the details or figures from the question – don’t be scared to restate these Consider practicalities Think of the big picture Think of indirect consequences of the scenario Usual suspects – tax, regulation, risks, etc.

Draft up your playbook and tackle the exams by developing your strategy and technique.

CHARLIE McANEA is a guest student editor www.theactuary.com

22/04/2021 16:11

A MATHS ARE YOU ESTRO? A & LOGIC M hs, logical

at a mind for m If you have yptic clues and other cr e reasoning, to us and w s, send them difficult m ru d n u n co the most will publish very pages. se e th in ntact terested, co If you are in actuary.com e social@th

On the ball Member puzzle 13

Floral arrangement Mensa puzzle 810

Courtesy of the editor, Dan Georgescu

On each row place a word beginning with ‘A’ to fit the clue given.

When completed a type of flower will be read down the shaded column. What is it?

Relating to England A venomous snake A savoury jelly A letter of the alphabet Evidence of being elsewhere My daughter was asked to design a box to store 12 ping pong balls for school.

Each ball is a sphere with a diameter of 3cm, and they must not rattle inside the box.

She decided to make the box as a right triangular prism with an equilateral base and store the balls in four rows of three.

Directed

What is the volume of the box?

A numbers game Mensa puzzle 811 What number should replace the question mark?

5914 6751 4804 3512 231? www.theactuary.com

45 puzzles_The Actuary May 2021_The Actuary.indd 45

Member puzzle 13 answers – The height of the box is 4x3cm=12cm. The base triangle has length (3+3√3)cm and height √3/2 x length, therefore the area of the base is (27/2+9√3) cm2. Finally, the volume is 54(3+2√3)cm3. Mensa puzzle 810 – Orchid. The words are ANGLO, ADDER, ASPIC, AITCH, ALIBI and AIMED. 811 -1. In each group the two outer digits are added to give the second digit and subtracted to give the third digit.

iQ

At the back Puzzles

MAY 2021 | THE ACTUARY | 45

22/04/2021 16:12

At the back Volunteer

Inside story

ALEXANDRA MILES Legal and General Investment Management, DC & Retail Solutions Strategy team

Where are you based?

London.

What volunteer role(s) do you do for the IFoA?

Do you think volunteering has helped you in your day job?

Founder and chair of the LPI Risk Working Party; chair of the Finance and Investment Research sub-committee; member of the Finance and Investment Board, Future Pension Plans steering group, and Skills and Domains committee.

Volunteering has provided me with many opportunities that had not been available through my day job and has broadened my horizons and made me better at the day job.

How long have you been volunteering?

Have there been any memorable moments?

Three years.

Presenting at a sessional and joining the Gallio Club for dinner to celebrate. It was a real moment from founding the working party, to gathering volunteers, to presenting to a hall of colleagues. It’s amazing what you can achieve if you put your mind to it.

What’s involved in your role(s)?

Engaging with volunteers to set up working parties in important areas; providing advisory input to Management Board and the Executive; and liaising with appropriate communities and practice board teams.

What motivates you to volunteer for the IFoA? To progress, challenge and improve the actuarial community for all.

What have you/do you hope to achieve in your volunteer role?

Meet talented colleagues, working together to apply our knowledge to progress our field.

What new skills or knowledge do you think you have developed?

Confidence in my abilities and a drive to expand my comfort zone.

Has this assisted your lifelong learning?

IMAGES: ISTOCK

“It’s amazing what you can achieve if you put your mind to it”

I’ve learnt so much from conversations with other volunteers and have been able to share and challenge views voiced from our collective experiences and knowledge.

46 | THE ACTUARY | MAY 2021

46 inside story_The Actuary May 2021_The Actuary.indd 46

How do you balance your day job and your volunteer role?

“If you want something done, ask a busy person”. My employer is also supportive.

How do you relax away from the office?

I’ve got two young children and am expecting twins, so spending time with my family. They put everything in perspective.

What would you say to others considering a volunteer role?

the simple things, and treat everyone as you would expect to be treated.

What was your earliest dream job?

To fly fast jets with the Royal Air Force.

Unfortunately, my arms are 2.5cm too short!

What word best describes you?

Calm.

Do you prefer a staycation or holiday abroad?

A holiday abroad – we spent three months as a family in a camper van travelling in the US after our second was born.

If you were locked in a famous building for one night...which would it be and why?

The Science Museum – the chance to wander round undisturbed and at leisure.

What would you consider to be the most brilliant moment of your career to date?

Our recently launched retirement study, covering around four million members, started life as a few charts in Excel and has just been commissioned as an annual study.

Don’t think twice. I’ve met so many interesting people and have really benefited.

Building a network away from the day job does wonders for tackling siloed thinking.

Who is your role model – in life or in business?

I wouldn’t say I have a single role model, but I have a few ‘rules’: be thankful for what you have, keep everything in perspective, enjoy

To share your volunteer involvement or find out about volunteering for the IFoA, contact: engagement.team @actuaries.org.uk www.theactuary.com

22/04/2021 16:14

At the back Appointments

KEEPING YOU IN THE LOOP

As a professional, you’ll no doubt want to keep up with the latest industry developments, people and news?

That’s why The Actuary’s weekly email alert brings you a handy round-up of only the most relevant news stories and comment, straight to your inbox every Thursday.

Register for weekly email newsletters at www.theactuary.com Browse www.theactuaryjobs.com and www.theactuaryjobsasia.com the official jobsites of the actuarial profession.

www.theactuaryjobs.com

MAY | THE ACTUARY | 47 The magazine of the Institute and Faculty of 2021 Actuaries

ACT recr May21.indd 47

23/04/2021 11:49

At the back Appointments

The best from The Actuary Jobs To view all of these vacancies and many more please go to www.theactuaryjobs.com

Financial Reporting Actuary - Life Actuarial Homeworking £70,000 - £80,000 per annum + 15% bonus + benefits

Claims Adjuster - Property D&F City of London £35,000 - £40,000 per annum

Actuarial & Investment Career Opportunities Bermuda Excellent salary and bonus in an ultra-low tax environment

Senior Reinsurance Actuarial Analyst London £60,000 - £70,000 + benefits

Senior Manager - Life consultancy Surrey Up to £110,000

Actuarial Manager London Salary to attract top talent and competitive package

48 | THE ACTUARY | MAY 2021

ACT recr May21.indd 48

23/04/2021 11:49

SENIOR RESERVING ACTUARY

CAPITAL MANAGEMENT ACTUARY

London, £100,000 + bonus

London, up to £100,000 + bonus

A leading London Market insurer is looking to bring on a qualified actuary in their Reserving team. Reporting into the Head of Reserving, the role will focus on quarterly reserving, mentoring junior analysts, business planning and working directly with underwriters. The ideal candidate will be qualified or nearly qualified and have prior experience in reserving. This role will work very closely with several teams so a good level of communication is vital.

A large personal and commercial lines insurer is looking to bring on a qualified actuary. The role will provide advice on capital and cash generation across all markets, as well as strategic initiatives such as M&A. You will also play a lead role in capital allocation and forecasting for the group. This is a role with a higher amount of stakeholder interaction across multiple teams. You will have corporate finance experience, preferably in GI, but Life candidates will also be considered. Being a qualified actuary is essential.

Contact: curtis.browning@eamesconsulting.com | 0207 092 3242

Contact: curtis.browning@eamesconsulting.com | 0207 092 3242

RISK ACTUARY - LONDON MARKET London, £85,000 + bonus

LLOYD’S PRICING ACTUARY, London, £85,000

A leading London Market insurer is looking to bring on a newly qualified actuary into their Risk Management team. Reporting into the CRO, the role will focus on a broad range of risk management duties including validation and reporting and will work with several different teams. The ideal candidate will be qualified or nearly qualified. Experience in Risk and/or capital modelling is essential to the role, but this does not have to be in London Market.

A market leading insurer is looking to hire a Pricing Actuary. You will be involved in delivering the development, improvement and recalibration of pricing tools. You will have access to all lines of business and you will be the key point of contact for various pricing so ware platforms. This role would suit a nearly/newly qualified actuary who has a strong Pricing background. The ability to use R, Python or other predictive modelling tools is advantageous. Candidates must have creative problem solving skills.

Contact: curtis.browning@eamesconsulting.com | 0207 092 3242

Contact: hannah.turner@eamesconsulting.com | 0207 092 3249

SENIOR PRICING ANALYST, London, up to £65,000

RISK MANAGEMENT ACTUARY, London, £75,000

A London Market insurer is looking to hire a Senior Pricing Analyst for their Property division. You will have passed at least 7 of the actuarial exams. This role will provide analytical capability in pricing and exposure modelling and you will be involved with detailed product monitoring and segmental reviews, working closely with underwriters to build and develop rating models, and provide input into the business planning process. Candidates must also be able to demonstrate experience in programming (SQL, R or VBA).

A London Market insurer is looking to hire a Risk Management Actuary. You will be involved in both model use and modelling. This will include responsibilities such as developing and updating the internal model, collaborating with ceded reinsurance to assess outwards reinsurance arrangements, and analysing and communicating changes in results. They are keen to speak to nearly/newly qualified capital actuaries who have at least 4 years' of experience. Tyche is preferred but it is not essential.

Contact: hannah.turner@eamesconsulting.com | 0207 092 3249

Contact: hannah.turner@eamesconsulting.com | 0207 092 3249

HEAD OF TECHNICAL PRICING

ACTUARIAL ANALYST, London, up to £55,000

London, £competitive market rate

JAMES RYDON Director

We have been engaged on a senior opportunity with a top-tier global insurer who are looking to bring on a senior individual to lead all technical pricing capabilities across their Commercial Lines book. The ideal candidate will be a leader in either Commercial or Personal Lines, and have previous experience of managing a technical pricing team. This is a high-profile role with a huge remit across the business. As such, an exceptional level of communication and project management is vital.

A leading commercial lines insurer is looking to hire an Actuarial Reserving Analyst. You will be giving support to the Project Actuary and the role involves developing strong relationships with senior professionals so excellent communication and interpersonal skills is essential. The role will involve assisting with the annual report on technical provisions, sorting regulatory requirements and communicating results on IFRS17 and Solvency II. For this role, our client is looking for a part-qualified actuary (2+ years experience), ideally with IFRS17 experience but any background would work.

Contact: curtis.browning@eamesconsulting.com | 0207 092 3242

Contact: rafaela.fakhre@eamesconsulting.com | 0203 846 5909

PRICING MANAGER, London, up to £75,000

ACTUARIAL MANAGER, London, £120,000

A leading Personal Lines insurer is seeking a pricing professional with management experience to take on an exciting role within their Road Pricing team. You will oversee a team of 4, prioritising changing requirements and the development of end-to-end pricing functions. You will work alongside the Head of Pricing, taking on commercial responsibilities and liaising with key stakeholders. The ideal candidate has strong Emblem experience and has managed junior pricing analysts in a formal capacity.

A London Market Run-off Syndicate is looking to hire an Actuarial Manager. The candidate will be giving support to the Chief Actuary. Key responsibilities will include reserving exercises, technical provisions and Solvency II development and M&A. You will get the opportunity to work on a range of different lines of business in a very welcoming and nurturing team. For this role, our client is looking for a qualified actuary with London Market and/or consultancy experience.

Contact: sam.baker@eamesconsulting.com | 0207 092 3230

Contact: rafaela.fakhre@eamesconsulting.com | 0203 846 5909

COMMERCIAL PRICING MANAGER London, up to £75,000 + bonus An exciting Insurtech is seeking a Commercial Pricing Manager to lead its Commercial Fleet portfolio. You will be responsible for case pricing and model development, whilst overseeing a large scale investment and expansion of the portfolio and team. You will additionally manage the international fleet books, with the longer term plan of expanding across Europe. The ideal candidate has commercial lines pricing experience and is looking for a step up in their career. Candidates with personal lines motor will also be considered.

At the back Appointments

CURTIS BROWNING Managing Consultant

RAFAELA FAKHRE Principal Consultant

CAPITAL ACTUARY, London, £85,000 A leading Lloyd's Syndicate is looking to bring on board a Capital Modelling Actuary to undertake a unique role in their growing team. The role will focus on their Syndicate book of business and reports directly to the London Market Capital Manager. You will be responsible for maintaining the Tyche internal model, delivering the technical provisions of Solvency II and reporting for regulatory submission. The ideal candidate is a part to nearly qualified actuary with capital modelling experience, looking to take a step up.

HANNAH TURNER Senior Consultant

Contact: rafaela.fakhre@eamesconsulting.com | 0203 846 5909

Contact: sam.baker@eamesconsulting.com | 0207 092 3230

SAM BAKER

PRICING CONSULTANT, West Midlands, £55,000 + bonus

CAPITAL MODELLING ANALYST, London, £60,000

A West Midlands based insurer is looking to expand its London Market pricing team, and is seeking a technical part qualified actuary. The role will be technically focused, developing the end-to-end pricing solutions for large Corporate Property risks. You will additionally conduct case pricing for unique risks, and look to innovate the stochastic pricing tools. The ideal candidate has commercial or London market pricing experience and is ideally a part qualified actuary.

A leading Lloyd’s Syndicate is looking to hire a part/nearly qualified Actuary. This is a great opportunity to join a highly experienced team that have an excellent reputation. You will have exposure to 3 Syndicate internal capital models and you will be involved in model development, supporting the production of the SCR and parameterisation. We are keen to speak to candidates who ideally have Tyche experience.

Consultant

Contact: hannah.turner@eamesconsulting.com | 0207 092 3249

Contact: sam.baker@eamesconsulting.com | 0207 092 3230

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NON-LIFE LONDON / SCOTLAND

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SENIOR PRICING ACTUARY - BERMUDA Major Global Consultancy

NON-LIFE LONDON

STAR6703

Qualified

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Unique opportunity for a high-calibre actuary with strong technical and consulting skills to build a new non-life practice for a leader in the life market.

Major global consultancy has a fantastic leadership role for a qualified, market-focused non-life actuary to join its team as Director with a capital focus.

Provide reserving, capital, pricing and structuring support for new acquisitions across North America and Bermuda, using your strong stakeholder and project management skills.

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In this highly responsible and visible role, you will use your entrepreneurial spirit to establish and develop a new team of consulting professionals providing actuarial delivery support to clients in the retail GI market.

Leading insurer seeks delivery-focused Head of Technical Pricing where you will be responsible for developing robust technical models and implementing a framework of capability and tools that drives efficiency.

A diverse career development role, performing quarterly reserving and financial reporting and assisting with the internal model assumptions, taking account of the impact of catastrophe modelling and reinsurance on reserving.

INSURTECH - CUTTING-EDGE PRICING

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Join a fast-growing insurer as their first in-house actuary working closely with their data scientists to build pricing capability. Emblem and Radar experience essential. Remote working, flexible hours and unlimited annual leave available.

Our client, a leading global firm, has an exciting opportunity for a qualified actuary with experience in pricing, reporting or capital modelling to take responsibility for reinsurance pricing and analytics.

Seeking a qualified or part-qualified actuary to provide the link between in-force management and reporting on the financial aspects of our client’s portfolio.

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Leading independent consultancy has an exciting vacancy for a Scheme Actuary with a proactive and commercial approach to lead client relationships and advise Trustee Boards.

An exciting opportunity for a Scheme Actuary, with client-facing experience, to be responsible for a portfolio of schemes, preparing and presenting advice to clients, and supporting new business opportunities.

Seeking an investment actuary with defined benefit knowledge, and excellent communication and interpersonal skills, to be responsible for leading technical investment analysis and asset transitions.

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Use your excellent modelling skills to provide cutting-edge investment solutions across life and non-life insurance clients, developing propositions and ensuring effective delivery, within a market-leading team.

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Take this opportunity for a qualified actuary with ALM experience to manage and lead a team in the establishment and delivery of our client’s investment strategy.

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In this key role with an award-winning consultancy, you will design and implement capital market and LDI solutions for pension funds to reduce risk or increase expected return.

Antony Buxton FIA

Louis Manson

JJoanne O’Connor

Irene Paterson FFA Ir

Jan Sparks FIA Ja

MANAGING DIRECTOR

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