Transition to a High Interest Rate Environment: Preparing for Uncertainty

Link: https://www.soa.org/globalassets/assets/Files/Research/Projects/research-2015-rising-interest-rate.pdf

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Excerpt:

Interest rates cycle over long periods of time. The journey tends to be unpredictable, full of
unexpected twists and turns. This project focuses on the impact of interest rate volatility on life
insurance products. As usual, it brought up more questions than it answered. It points out the
importance of stress testing for a specific block of business and the risk of relying on industry
rules of thumb. Understanding the nuances of models could make the difference between safe
navigation of a stressed environment and a default. Proactive and resilient practices should
increase the odds of success.


Hyman Minsky had it right—stability leads to instability. We live in an era where monetary
policies of central banks steer free markets in an effort to soften the business cycle. Rates have
been low for over 20 years in Japan, reshaping the global economy.

The primary goal of this paper is to explore rising interest rates, but that is not possible without
considering that some rates could stabilize at low levels or even decrease. Following this path,
the paper will look at implications of interest rate changes for the life insurance industry, current
stress testing practices, and how a risk manager can proactively prepare for an uncertain future.
A paper published in 2014 focused on why rates could stay low, and some aspects of this paper
are similar (e.g., description of insurance products). This paper also uses a sample model office
to help practitioners look at their own exposures. It includes typical interest-sensitive insurance
products and how they might perform across various scenarios, as well as a survey to establish
current practices for how insurers are testing interest rate risk currently.

Author(s): Max Rudolph, Randy Jorgensen, Karen Rudolph

Publication Date: July 2015

Publication Site: SOA Research Institute

5 insurance use cases for machine learning

Link: https://www.dig-in.com/opinion/5-use-cases-for-machine-learning-in-the-insurance-industry

Excerpt:

4. Fraud detection

Unfortunately, fraud is rampant in the insurance industry. Property and casualty insurance alone loses about $30 billion to fraud every year, and fraud occurs in nearly 10% of all P&C losses. ML can mitigate this issue by identifying potential claim situations early in the process. Flagging early allows insurers to investigate and correctly identify a fraudulent claim. 

5. Claims processing

Claims processing is notoriously arduous and time-consuming. ML technology is a tool to reduce processing costs and time, from the initial claim submission to reviewing coverages. Moreover, ML supports a great customer experience because it allows the insured to check the status of their claim without having to reach out to their broker/adjuster.

Author(s): Lisa Rosenblate

Publication Date: 9 Sept 2022

Publication Site: Digital Insurance

A Framework for Defining a Role for Insurers in “Uninsurable” Risks: Insights from COVID-19

Link: https://content.naic.org/sites/default/files/JIR-ZA-40-10-EL.pdf

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RETHINKING UNINSURABILITY While many have viewed insurability as a binary choice with respect to a risk (i.e., insurable or uninsurable), insurability is more appropriately considered on a continuum, ranging from easy-to-insure, such as automobile or life insurance, to difficult-to-insure, such as pandemic, loss of the electrical grid, and other extreme catastrophic risks.

FRAMEWORK The role of private and public sectors in dealing with risks that are difficult-to-insure should be to develop strategies that enable a greater degree of insurability. To do so, the framework suggests that policymakers consider three fundamental options in dealing with the insurance industry:

Status Quo (SQ) –This option (SQ) contemplates a similar dynamic to that experienced with COVID-19, wherein businesses, nonprofits, and local governments found limited (if any) insurance coverage for their losses and ex post relief programs funded by the government.

Service Provider (SP) – This option (SP) contemplates an administrative, non-risk-bearing role for the insurance industry while the entire cost of claims would be publicly financed.

Service and Risk (SR) –In addition to its role as a service provider as characterized by SP, this option (SR) would expect insurers to commit capital – in an amount that does not threaten their financial viability – to cover a specified layer or other defined element of losses.

Author(s): Howard Kunreuther, Jason Schupp

Publication Date: 2021

Publication Site: NAIC

Beyond Insurance

Link: https://www.youtube.com/watch?v=_Ba5wBGeUBk&t=1s&ab_channel=DominicLee

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Description:

In a groundbreaking TED-style talk, Dominic Lee, ACAS takes the audience on a multisensory journey beyond the boundaries of traditional insurance. He presents a framework for the actuarial profession to step into the future and claim its rightful place as a dominant force in the world of risk: Reimagine, Embrace and Explore.

Author(s): Dominic Lee, ACAS

Publication Date: 6 July 2021

Publication Site: YouTube

A Resilient Future

Link: https://theactuarymagazine.org/a-resilient-future/

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If we consider how risk events unfold in reality, they usually occur through a sequence of interacting factors (see Figure 1). For example: A control does not quite work as intended because the usual supervisor is not available, and coincidentally a staff member has unintended access to a system from which they are able to extract personal information. On any other day, those conditions might have been different and resulted in another outcome. The reality, therefore, is that risks emerge as a result of a complex series of interactions among a large number of factors, and small changes in conditions can lead to significantly different risk outcomes.

Risk events also often involve active participants who learn and adapt their behaviors accordingly. Cyber is a good example—the attacker generally is trying to outthink their adversary and stay one step ahead. All of this means that past performance is not necessarily a reliable predictor of the future. There are too many things that can be subtly different, leading to hugely different outcomes.

Author(s): Neil Cantle

Publication Date: May 2022

Publication Site: SOA

Trends in Life Insurance 2022: How the Industry Has Changed

Link: https://www.soa.org/sections/reinsurance/reinsurance-newsletter/2022/april/rsn-2022-04-gambhir/

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Growing popularity in no-medical-exam life insurance products has had one expected outcome: More life insurance policies with accelerated underwriting options available in the marketplace. For example, Policygenius offered just three accelerated underwriting options in 2020. In 2021, that number more than doubled to seven, and more options will likely be available in 2022.

Additionally, while such policies had historically only been available to applicants who were young and in good health, the competitive market has prompted more widespread availability. Now, applicants across all health classes can get no-medical-exam policies.

While no-medical-exam policies tend to be about the same cost as fully underwritten policies, applicants tend to favor them even when they are more expensive due to the convenience and expedited turnaround time.

Author(s): Nupur Gambhir

Publication Date: April 2022

Publication Site: Reinsurance News, SOA

Warning: Tossing Russian Banks From the International System Could Backfire

Link: https://www.ai-cio.com/news/warning-tossing-russian-banks-from-the-international-system-could-backfire/

Excerpt:

The decision to boot Russian lenders from the global bank messaging system as punishment for its invasion of Ukraine is a very bad idea that could boomerang and hurt the West, Credit Suisse admonishes.

“Exclusions from SWIFT will lead to missed payments and giant overdrafts similar to the missed payments and giant overdrafts that we saw in March 2020,” wrote Credit Suisse strategist Zoltan Pozsar, in a research note.

….

“Exclusions from SWIFT will lead to missed payments everywhere,” Pozsar wrote. Two years ago, “the virus froze the flow of goods and services that led to missed payments.” Aside from the financial panic at the outset of the pandemic, the world ran into a similar problem in 2008, when Lehman Brothers collapsed, he said. 

 Pozsar wrote: “Banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf. History does not repeat itself, but it rhymes.”

Author(s): Larry Light

Publication Date: 28 Feb 2022

Publication Site: ai-CIO

Ten Most Dangerous Risks for Insurers

Link: https://mcusercontent.com/991483cca1a8e7eb050cff8bd/files/7dfc14f1-eaa5-5658-64a3-54f5c5e1955f/1Q2022_SRSE_Dangerous_Risks.pdf

Excerpt:

This year we had record participation with
over 250 insurance professionals taking part.
This is the fifth iteration of this poll and 2022
shows some consistency along with some very
new risks. Inflation, Employee retention and
Ability to hire new employees are three new
risks to the top of this poll, but they should
not be surprises.

….

2. INFLATION
Up very sharply – Previously #52
Prices are rising faster than they have since the
1980s in most of the developed world. Insurers
will be hit with a double whammy as the real
value of invested assets decays and the cost of
doing business and claims costs increases at the
same time.

EMPLOYEE RETENTION
Not on the list previously
The Great Resignation makes the headlines.
COVID seems to have accelerated the timeline
for the inevitable wave of Boomer retirements.
Also concerning are the numbers leaving due to
health care burnout and caregiver
responsibilities. The problem for insurers is
figuring out how to respond to the massive loss
of experience.

Author(s): Actuarial Risk Management

Publication Date: Accessed 8 Mar 2022

Insurance Companies – Heels or Heroes?

Link:https://www.rstreet.org/2022/01/24/insurance-companies-heels-or-heroes/

Excerpt:

The insurance industry is far from the economy’s most-admired sector. A Forbes survey found insurance ranking low in popularity in the public eye. Three main reasons are responsible for insurers’ relatively poor rating. First is the intangible nature of the insurance product. Unlike a car one can drive home from the dealership, or a chocolate bar whose taste can be savored, purchase of an insurance policy does not lead to immediate physical gratification. To be sure, if there is no loss, one may never get a flavor of its value. Second, insurance is associated with life’s tragedies, its most physically, emotionally and financially distressing experiences—a home damaged by a storm, a car totaled, being sued, a death or dread disease, or a crippling workplace accident. Insurance payments can take away the sting with financial recovery, but loss remains painful, especially if one discovers the loss is not 100 percent covered. And third, the insurance industry has become an easy target for critics who regularly vilify it.

…..

Why do we maintain that insurance, R Street’s inaugural research program, is fundamentally exciting? Three reasons.

First, insurance is the economy’s financial first responder. When the wind blows, the earth shakes and large-class action lawsuits are decided in plaintiffs’ favor, the insurance industry pays. 

….

Second, insurers are significant investors in the capital markets. They provide much of the financial muscle to power the economy. Property-casualty insurers hold $1.1 trillion in bonds, and life and health insurers hold another $3.6 trillion. Collectively, insurers hold $4.7 trillion in bonds, 10 percent of the U.S. bond market of $47 trillion.

….

Third, insurance is the grease in the engine of the economy. Without clinical trials insurance, pharmaceutical companies would not take the risk of developing vaccines. Without ocean marine or inland marine insurance, ships would not sail and trucks would not take the risk to carry loads. Airplanes would not fly, people would be afraid to drive, and inventors would not create new products for fear of lawsuits. 

Author(s): Jerry Theodorou

Publication Date: 22 Jan 2022

Publication Site: R Street

New reinsurer “Martello Re” launches with backing of MassMutual, Centerbridge Partners and Brown Brothers Harriman

Link:https://www.massmutual.com/about-us/news-and-press-releases/press-releases/2022/01/new-reinsurer-martello-re-launches-with-backing-of-massmutual-centerbridge-partners-and-brown-brothers-harriman

Excerpt:

Martello Re Limited (“Martello Re”), a licensed Class E Bermuda-based life and annuity reinsurance company with initial equity of $1.65 billion, has been launched with the financial support of Massachusetts Mutual Life Insurance Company (“MassMutual”), Centerbridge Partners, Brown Brothers Harriman, and a pre-eminent group of institutional investors and family offices, including Hudson Structured Capital Management Ltd. (doing its re/insurance business as HSCM Bermuda). Barings and Centerbridge will act as asset managers for Martello Re.

Through a commitment to long-term financial strength, creative solutions, and unique investment capabilities, Martello Re plans to offer a differentiated value proposition to its counterparties. The company will initially focus on providing MassMutual and its subsidiaries with reinsurance capacity on current product offerings, after which it will offer its services selectively to other top insurers in the life and annuity space.

MassMutual and its subsidiaries will initially reinsure approximately $14 billion of general account liabilities to Martello Re and also enter into a flow arrangement to reinsure new business. Both transactions are expected to close in February 2022 and have received regulatory approval.

Publication Date: 12 Jan 2022

Publication Site: MassMutual

To Fight Covid, We Need to Think Less Like Doctors

Link: https://www.nytimes.com/2022/01/14/opinion/covid-america.html

Excerpt:

If we’re trying to prevent Covid surges and end the pandemic, then we need to center the population in our thinking. Health authorities need to get tools like rapid tests and better masks to as many people as possible, especially those who are more likely to spread disease, even if they’re at low risk themselves. People need to be persuaded or incentivized to vaccinate to protect others.

If you are sick, even with severe Covid, you want someone with a doctor’s viewpoint caring for you. America, however, is not a patient. And we’d all be better off, as a society and as individuals, if those in control of our country’s health stopped thinking of it that way.

Author(s): Aaron E. Carroll

Publication Date: 14 Jan 2022

Publication Site: NYT

Influence of the Peltzman effect on the recurrent COVID-19 waves in Europe

Link:https://pmj.bmj.com/content/early/2021/04/28/postgradmedj-2021-140234

Excerpt:

Epidemiologists report there is no precise definition for what is or is not an epidemic wave. ‘Waves’ are a phenomenon of infections that can develop during a pandemic. A wave implies a rising number of sick patients, a characteristic peak of illness and then a dramatic or sustained decline of infections reaching a baseline.1 Previous experiences with the Spanish influenza pandemic (1918) and seasonal influenza epidemics suggest further waves of COVID-19 are inevitable.2 The UK has endured the first two waves of the COVID-19 pandemic with widespread socioeconomic consequences and mortality.3 The WHO regional office for Europe has recently reported that incidence, hospitalisations and deaths in Central Europe, the Balkans and the Baltic states are among the highest globally suggesting a third wave of COVID-19.4 The reason for this third wave in Europe and anticipated further waves in countries with vaccine roll-out including the UK could be due to the Peltzman effect.

The Peltzman effect is named after Sam Peltzman, professor of economics at the University of Chicago Booth School of Business. It describes the concept of ‘Risk Compensation’.5 In this concept, it is argued that highway safety regulations were not reducing highway deaths. ‘Risk compensation’ is a theory that suggests that people typically adjust their behaviour in response to perceived levels of risk. It postulates that people become more careful where they sense greater risk and lesser careful if they feel more protected. Peltzman theorised that though the introduction of safety devices, like seat belts or air bags, reduced the ratio of fatalities to accidents, the rate of accidents was found to have risen enough to offset the decreased fatality rate. He proposed that though people felt safer driving with a seat belt, it probably led to a phenomenon of driving with less attentiveness or higher speed causing an increased risk of run-off-road crashes or similar accidents.

…..

COVID-19 vaccination triggering Peltzman effect—An analysis of Peltzman effect reveals four main factors contributing to risk compensation, all of which appear to be present in the current COVID-19 pandemic. To initiate an increase in risky behaviour, a measurable benefit must be ‘visible’, a criterion that COVID-19 vaccines meet. This is supported by the decreasing number of infections in vaccinated populations.7 Risk compensation is more likely to occur if people have a ‘motivation’ to take on a risky behaviour and if it is within their ‘control’ to do so. With the COVID-19 pandemic these two factors seem to have manifested as ‘pandemic fatigue’ with decreasing adherence to risk reduction strategies of social distancing, face coverings and hand washing in the population. Such behaviours of risk compensation have raised concerns about threat to global public health efforts to control the pandemic.8 The final factor, the overall effectiveness of the intervention, in this case of the COVID-19 vaccine, is being increasingly recognised worldwide.9 This is highly desirable, increasing the likelihood of vaccine-acquired ‘herd immunity’. However, for the Peltzman effect, this high efficacy is likely to reduce adherence to other safety precautions. Vaccination drives in most European countries started in late December 2020, after which the rise of cases was seen. Thus, people’s complacency and a false sense of increased security after vaccination may have been the possible reasons for people to abandon protective and preventive behavioural strategies.

Author(s): Karthikeyan P Iyengar1, http://orcid.org/0000-0003-1701-4970Pranav Ish2, http://orcid.org/0000-0001-7998-2980Rajesh Botchu3, http://orcid.org/0000-0003-4164-7380Vijay Kumar Jain4, http://orcid.org/0000-0002-9577-9533Raju Vaishya5

Publication Date: April 2021

Publication Site: BMJ Journals