For life insurers in the United Kingdom (UK), the risk margin is one of the most controversial aspects of the Solvency II regime which came into force in 2016.

The risk margin is the difference between the technical provisions and the best estimate liabilities. The technical provisions are intended to be market-consistent, and so are defined as the amount required to be paid to transfer the business to another undertaking. In practice, the technical provisions cannot be directly calculated, and so the risk margin must be determined using a proxy method; the method chosen for Solvency II is known as the cost-of-capital method.

Following the implementation of Solvency II, the risk margin came under considerable criticism for being too large and too sensitive to interest rate movements. These criticisms are particularly valid for annuity business in the UK – such business is of great significance to the system for retirement provision. A further criticism is that mitigation of the impact of the risk margin has led to an increase in reinsurance of longevity risks, particularly to overseas reinsurers.

This criticism has led to political interest, and the risk margin was a major element of the Treasury Committee inquiry into EU Insurance Regulation.

The working party was set up in response to this criticism. Our brief is to consider both the overall purpose of the risk margin for life insurers and solutions to the current problems, having regard to the possibility of post-Brexit flexibility.

We have concluded that a risk margin in some form is necessary, although its size depends on the level of security desired, and so is primarily a political question.

We have reviewed possible alternatives to the current risk margin, both within the existing cost-of-capital methodology and considering a wide range of alternatives.

We believe that requirements for the risk margin will depend on future circumstances, in particular relating to Brexit, and we have identified a number of possible changes to methodology which should be considered, depending on circumstances.

The (re)insurance industry is faced with a growing risk related to the development of information technology (IT). This growth is creating an increasingly digitally interconnected world with more and more dependence being placed on IT systems to manage processes. This is generating opportunities for new insurance products and coverages to directly address the risks that companies face. However, it is also changing the risk landscape of existing classes of business within non-life insurance where there is inherent risk of loss as a result of IT events that cannot be or have not been excluded in policy wordings or are changing the risk profile of traditional risks. This risk of losses to non-cyber classes of business resulting from cyber as a peril that has not been intentionally included (often by not clearly excluding it) is defined as non-affirmative cyber risk, and the level of understanding of this issue and the cyber peril exposure from non-cyber policies varies across the market. In contract wordings, the market has remained relatively “silent” across most lines of business about potential losses resulting from IT-related events, either by not addressing the potential issue or excluding via exclusions. Some classes of business recognise the exposure by use of write-backs. Depending on the line of business, the approach will vary as to how best to turn any “silent” exposure into a known quantity either by robust exclusionary language, pricing or exposure monitoring. This paper proposes a framework to help insurance companies address the issue of non-affirmative cyber risk across their portfolios. Whilst the framework is not intended to be an all-encompassing solution to the issue, it has been developed to help those tasked with addressing the issue to be able to perform a structured analysis of the issue. Each company’s analysis will need to tailor the basis of the framework to fit their structure and underwriting procedures. Ultimately, the framework should be used to help analysts engage with management on this issue so that the risk is understood, and any risk mitigation actions can be taken if required. In the appendix, we present a worked example to illustrate how companies could implement the framework. The example is entirely fictional, is focused on non-life specialty insurance, and is intended only to help demonstrate one possible way in which to apply the framework.

This abstract relates to the following paper:

Frankland, R., Smith, A. D., Sharpe, J., Bhatia, R., Jarvis, S., Jakhria, P. and Mehta, G. (2019) Calibration of VaR models with overlapping data. British Actuarial Journal, 24, e23. doi: 10.1017/S1357321719000151

This abstract relates to the following paper:

Klumpes, P., Acharyya, M., Kakar, G. & Sturgess, E. (2019) Climate risk reporting practices by UK insurance firms and pension schemes - Abstract of the London Discussion. British Actuarial Journal, 24, e30. doi:10.1017/S1357321719000229.

This paper explores dependencies between operational risks and between operational risks and other risks such as market, credit and insurance risk. The paper starts by setting the regulatory context and then goes into practical aspects of operational risk dependencies. Next, methods of modelling operational risk dependencies are considered with a simulation study exploring the sensitivity of diversification benefits arising from dependency models. The following two sections consider how correlation assumptions may be set, highlighting some generic dependencies between operational risks and with non-operational risks to assist in the assessment of dependencies and correlation assumptions. Supplementary appendices provide further detail on generic dependencies as well as a case study of how business models can lead to operational risks interacting with other risks. Finally, the paper finishes with a literature review of operational risk dependency papers including correlation studies and benchmark reports.

Rules of thumb (RoTs) are proposed as a means of promoting higher levels of Defined Contribution (DC) pension saving and to help stimulate debate about the high and uncertain cost of pension provision, leading to the development of solutions. The Lifetime Pension Contribution (LPC) tells young people what pension contribution is required over a full working life to achieve a decent retirement income, calculated as 23% of average UK earnings. Another RoT is that each 1% of earnings provides a pension of 1.5% of earnings. Other RoTs show how costs vary by retirement age and if the saverʼs retirement planning is on track. The current high cost of pensions is partly due to low interest rates and the inefficiencies of the DC market, with inadequate bulk purchasing power and risk sharing. RoTs might help encourage higher employer contributions, either through automatic enrolment or on a voluntary basis.

This abstract relates to the following paper:

Cartagena, S., Gosrani, V., Grewal, J. & Pikinska, J. (2019) Silent cyber assessment framework - Abstract of the London Discussion. British Actuarial Journal.

This abstract relates to the following paper:

Pelkiewicz, A., Ahmed, S., Fulcher, P., Johnson, K., Reynolds, S., Schneider, R. & Scott, A. (2020) A review of the risk margin – Solvency II and beyond report by the Risk Margin Working Party - Abstract of the London Discussion. British Actuarial Journal, 25, E1. doi:10.1017/S135732172000001X.

This abstract relates to the following papers: Spender, A., Bullen, C., Altmann-Richer, L., Cripps, J., Duffy, R., Falkous, C., Farrell, M., Horn, T. and Wigzell, J. Wearables and the Internet of things: considerations for the life and health insurance industry. British Actuarial Journal, 24. doi: 10.1017/S1357321719000072.

Smoking was one of the biggest preventable killers of the 20th century, and it continues to cause the death of millions across the globe. The rapid growth of the e-cigarette market in the last 10 years and the claims that it is a safer form of smoking, and can help with smoking cessation, have led to questions being raised on their possible impact to society, the health of the population and the insurance industry. Recent media attention around the possible health implications of e-cigarette use has also ensured that this topic remains in the public eye. The e-cigarette working party was initiated by the Institute and Faculty of Actuaries’ Health and Care Research Sub-Committee in July 2016, with the primary objective of understanding the impact of e-cigarettes on life and health insurance. In this paper, we have looked at all areas of e-cigarette usage and how it relates to insurance in the UK market. In particular, we have covered the potential risks and benefits of switching to e-cigarettes, the results of studies that have been published, the potential impact on underwriting and claims processes and the potential impact on pricing (based on what modelling is possible with the data available). Research in this area is still in its infancy and data are not yet mature, which makes predicting the long-term impact of e-cigarette smoking extremely challenging, for example, there are no studies that directly measure the mortality or morbidity impact of long-term e-cigarette use and so we have had to consider studies that consider more immediate health impacts or look more simply at the constituents of the output of an e-cigarette and compare them to that of a cigarette. The data issue is further compounded by the findings of studies and the advice of national health authorities often being conflicting. For example, while National Health Service England has publicly stated that it supports the growth of e-cigarette usage as an aid to reduce traditional smoking behaviour, the US Food and Drug Administration has been much more vocal in highlighting the perceived dangers of this new form of smoking. Users’ behaviour also adds complexity, as dual use (using both e-cigarettes and cigarettes) is seen in a high percentage of users and relapse rates back to cigarette smoking are currently unknown. Having talked to a number of experts in the field, we have discovered that there is certainly not a common view on risk. We have heard from experts who have significant concerns but also to experts who do believe that e-cigarettes are far safer than tobacco. We have purposefully considered conflicting evidence and have consulted with various parties so we can present differing points of view, thereby ensuring a balanced, unbiased and fair picture of our findings is presented. The evidence we have reviewed does suggest that e-cigarettes are a safer alternative to traditional smoking, but not as safe as non-smoking. There are no large, peer-reviewed, long-term studies yet available to understand the true impact of a switch to e-cigarette use, so currently we are unable to say where on the risk spectrum between cigarette smoking and life-time non-smoking it lies. We do not yet understand if the benefits seen in the studies completed so far will reduce the risk in the long term or whether other health risks will come to light following more prolonged use and study. This, coupled with concerns with the high proportion of dual use of cigarettes and e-cigarettes, relapse rates and the recent growth in medical problems linked with e-cigarette use, means that we need to wait for experience to emerge fully before firm conclusions can be drawn. Although we have presented a view, it is vitally important that our industry continues to monitor developments in this area and fully considers what next steps and future actions may be required to ensure our position reflects the potential benefits and risks that e-cigarette use may bring. We feel that the time is right for a body such as the IFoA to analyse the feasibility of collecting the necessary data through the Continuous Mortality Investigation that would allow us to better analyse the experience that is emerging.

Insurance industry practitioners have deep knowledge of their industry, but there is a lack of a simple-to-understand, practical blueprint on applying distributed ledger technology solutions, including blockchain. This paper provides a practical guide for actuaries, risk professionals, insurance companies and their Boards on blockchain, including an education piece to provide an understanding of the technology. Examples of real-world applications and use cases in insurance are provided to illustrate the capability of the technology. The current risks and challenges in adopting the technology are also considered. Finally, a checklist of issues to consider in adopting a blockchain solution for insurance business problems is provided.

This paper is motivated by The Pensions Regulator (TPR)’s review of its Code of Practice on funding for defined benefit schemes and aims to suggest how trustees and regulators should monitor the extent to which scheme assets are adequate to cover liabilities. It concludes that current practice is inadequate and needs to change.

A review is carried out of papers on not only this subject but also (to collect ideas rather than automatically apply them to pensions solvency valuations) pensions and insurance accounting and regulation.

Current practice is “scheme-specific funding” which permits discretion on choice of discount rates and other assumptions; the paper is concerned that this can lead to bias, and that trends in a scheme’s solvency can be obscured by changing assumptions. This also leads to the funding ratio communicated to scheme members having little meaning.

The paper suggests that regulators should require a valuation that is based on sound principles, objective, fair, neutral, transparent and feasible. A prescribed methodology would replace discretion.

It concludes that the benefits to be valued are those arising on discontinuance of the scheme, without allowing for future salary-related benefit increases, which are felt to no longer be a constructive obligation of employers.

The valuation should, it is suggested, use market values of assets, which is largely current practice.

Liabilities should reflect the trustees fulfilling their liabilities, rather than transferring them to an insurer (which may introduce artificialities).

The discount rate should follow the “matching” approach, being a market-consistent risk-free rate: this is consistent with several papers to the profession in recent years. It avoids the problems of the “budgeting” approach, where the discount rate is based on the expected return on assets – this can be used to help set contribution levels but is not suitable for determining the value of liabilities, which depends on salary, service, longevity, etc and (very largely) not on the assets held. In principle, the liability value can be adjusted for illiquidity. Credit risk of the employer should not be allowed for.

Liabilities should reflect the (probability-weighted) expected value of future cash flows and should not be increased by prudent margins or risk margins (which would lead to a non-neutral figure). Risk disclosures are needed to understand and manage risks.

The resulting funding ratio is a consistent measure, to be disclosed to members, which can be used to manage the scheme, and by regulators as the basis for requiring action. Scheme-specific management using data such as the employer covenant means that immediate action to ensure 100% solvency on the proposed basis would not necessarily be appropriate.

The author encourages the profession to advise TPR on the above lines.

Effective management of uncertainty can lead to better, more informed decisions. However, many decision makers and their advisers do not always face up to uncertainty, in part because there is little constructive guidance or tools available to help. This paper outlines six Uncertainty Principles to manage uncertainty.

• Face up to uncertainty

• Deconstruct the problem

• Don’t be fooled (un/intentional biases)

• Models can be helpful, but also dangerous

• Think about adaptability and resilience

• Bring people with you

Climate change is one of the biggest challenges facing the world. Scientific research points out that it is predominately driven by human activity. There are three different types of risks that arise from this change. These have been broadly grouped into physical, transition and liability risks. These risks can impact general insurers to different degrees, depending on their business areas and investment strategies. These may pose different strategic, investment, market, operational and reputational risks. This paper provides General Insurance Practitioners with an overview of different aspects of insurance operations that may be affected by climate change. It highlights the impact of these risks on pricing and underwriting, reserving, reinsurance, catastrophe modelling, investment, risk management and capital management processes.

This abstract relates to the following paper: Daniels, N., Cosma, C., Llewellyn, A., Banks, D., Morris, H., Copeland, J., & Djarlijeva, E. (2020). E-cigarettes: No smoke without fire? British Actuarial Journal, 25, E12. doi:10.1017/S1357321720000112.