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This page lists the top ten most read articles for this journal based on the number of full text views and downloads recorded on Cambridge Core over the last 90 days. This list is updated on a daily basis.
The IFRS 17 contractual service margin: a life insurance perspective
- W. Yousuf, J. Stansfield, K. Malde, N. Mirin, R. Walton, B. Thorpe, J. Thorpe, C. Iftode, L. Tan, R. Dyble, A. Pelsser, A. Ghosh, W. Qin, T. Berry, C. Er
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- Published online by Cambridge University Press:
- 02 March 2021, e2
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IFRS 17 Insurance Contracts is a new accounting standard currently expected to come into force on 1 January 2023. It supersedes IFRS 4 Insurance Contracts. IFRS 17 establishes key principles that entities must apply in all aspects of the accounting of insurance contracts. In doing so, the Standard aims to increase the usefulness, comparability, transparency and quality of financial statements.
A fundamental concept introduced by IFRS 17 is the contractual service margin (CSM). This represents the unearned profit that an entity expects to earn as it provides services. However, as a principles-based standard, IFRS 17 results in entities having to apply significant judgement when determining the inputs, assumptions and techniques it uses to determine the CSM at each reporting period.
In general, the Standard resolves broad categories of mismatches which arise under IFRS 4. Notable examples include mismatches between assets recorded at current market value and liabilities calculated using fixed discount rates as well as inconsistencies in the timing of profit recognition over the duration of an insurance contract. However, there are requirements of IFRS 17 that may create economic or accounting mismatches of its own. For example, new mismatches could arise between the measurement of underlying contracts and the corresponding reinsurance held. Additionally, mismatches can still arise between the measurement of liabilities and the assets that support the liabilities.
This paper explores the technical, operational and commercial issues that arise across these and other areas focusing on the CSM. As a standard that is still very much in its infancy, and for which wider consensus on topics is yet to be achieved, this paper aims to provide readers with a deeper understanding of the issues and opportunities that accompany it.
From bias to black boxes: understanding and managing the risks of AI – an actuarial perspective
- Valerie du Preez, Shaun Bennet, Matthew Byrne, Aurelién Couloumy, Arijit Das, Jean Dessain, Richard Galbraith, Paul King, Victor Mutanga, Frank Schiller, Stefan Zaaiman, Patrick Moehrke, Lara van Heerden
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- 11 April 2024, e6
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We explore some of the risks related to Artificial Intelligence (AI) from an actuarial perspective based on research from a transregional industry focus group. We aim to define the key gaps and challenges faced when implementing and utilising modern modelling techniques within traditional actuarial tasks from a risk perspective and in the context of professional standards and regulations. We explore best practice guidelines to attempt to define an ideal approach and propose potential next steps to help reach the ideal approach. We aim to focus on the considerations, initially from a traditional actuarial perspective and then, if relevant, consider some implications for non-traditional actuarial work, by way of examples. The examples are not intended to be exhaustive. The group considered potential issues and challenges of using AI, related to the following key themes:
Ethical
○ Bias, fairness, and discrimination
○ Individualisation of risk assessment
○ Public interest
Professional
○ Interpretability and explainability
○ Transparency, reproducibility, and replicability
○ Validation and governance
Lack of relevant skills available
Wider themes
This paper aims to provide observations that could help inform industry and professional guidelines or discussion or to support industry practitioners. It is not intended to replace current regulation, actuarial standards, or guidelines. The paper is aimed at an actuarial and insurance technical audience, specifically those who are utilising or developing AI, and actuarial industry bodies.
A review of the risk margin – Solvency II and beyond
- A. J. Pelkiewicz, S. W. Ahmed, P. Fulcher, K. L. Johnson, S. M. Reynolds, R. J. Schneider, A. J. Scott
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- Published online by Cambridge University Press:
- 01 January 2020, e1
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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 emergence of compound interest
- C. G. Lewin
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- Published online by Cambridge University Press:
- 24 December 2019, e34
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Compound interest was known to ancient civilisations, but as far as we know it was not until medieval times that mathematicians started to analyse it in order to show how invested sums could mount up and how much should be paid for annuities. Starting with Fibonacci in 1202 A.D., techniques were developed which could produce accurate solutions to practical problems but involved a great deal of laborious arithmetic. Compound interest tables could simplify the work but few have come down to us from that period. Soon after 1500, the availability of printed books enabled knowledge of the mathematical techniques to spread, and legal restrictions on charging interest were relaxed. Later that century, two mathematicians, Trenchant and Stevin, published compound interest tables for the first time. In 1613, Witt published more tables and demonstrated how they could be used to solve many practical problems quite easily. Towards the end of the 17th century, interest calculations were combined with age-dependent survival rates to evaluate life annuities, and actuarial science was created.
A cashless society: benefits, risks, and issues ‐ Abstract of the London Discussion
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- 03 December 2018, e28
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This abstract relates to the following paper:
Achord, S., Chan, J., Collier, I., Nardani, S. and Rochemont, S. (2017). A cashless society: benefits, risks, and issues ‐ Abstract of the London Discussion . Institute and Faculty of Actuaries. Available at: http://www.actuaries.org.uk/documents/cashless-society-benefits-risks-and-issues
A review of Solvency II: Has it met its objectives?
- R. A. Rae, A. Barrett, D. Brooks, M. A. Chotai, A. J. Pelkiewicz, C. Wang
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- Published online by Cambridge University Press:
- 24 January 2018, e4
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Solvency II is currently one of the most sophisticated insurance regulatory regimes in the world. It is built around the principles of market consistency and embedding strong risk management and governance within insurance companies. For business with long-term guarantees, the original basis produced outcomes that were unacceptable to the member states. The original design was amended through Omnibus II. The working party has looked back at the outcome of the final regulation and comments on how well Solvency II has fared, principally from a UK perspective, relative to its initial goals of improved consumer protection, harmonisation, effective risk management and financial stability. We review Pillar 1’s market consistent valuation (including the risk margin and transitional measures) as well as the capital requirements (including internal models). We look at the impact this has on asset and liability management, pro-cyclicality and product design. We look at Pillars 2 and 3 in respect of the Own Risk and Solvency Assessment, liquidity and disclosure. Finally, we stand back and look at harmonisation and the implications of Brexit. In summary we conclude that Solvency II represents a huge improvement over Solvency I although it has not fully achieved the goals it aspired to. There are acknowledged shortfalls and imperfections where adjustments to Solvency II are likely. There remain other concerns around pro-cyclicality, and the appropriateness of market consistency is still open to criticism. It is hoped that the paper and the discussion that goes with it provide an insight into where Solvency II has taken European Insurance regulation and the directions in which it could evolve.
SOLVENCY II TECHNICAL PROVISIONS FOR GENERAL INSURERS: By the Institute and Faculty of Actuaries General Insurance Reserving Oversight Committee’s working party on Solvency II technical provisions:
- S. Dreksler, C. Allen, A. Akoh-Arrey, J. A. Courchene, B. Junaid, J. Kirk, W. Lowe, S. O’Dea, J. Piper, M. Shah, G. Shaw, D. Storman, S. Thaper, L. Thomas, M. Wheatley, M. Wilson
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- Published online by Cambridge University Press:
- 06 February 2015, pp. 7-129
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This paper brings together the work of the GI Solvency II Technical Provisions working party. The working party was formed in 2009 for the primary purpose of raising awareness of Solvency II and the impact it would have on the work that reserving actuaries do. Over the years, the working party’s focus has shifted to exploring and promoting discussion of the many practical issues raised by the requirements and to promoting best practice. To this end, we have developed, presented and discussed many of the ideas contained in this paper at events and forums. However, the size of the subject means that at no one event have we managed to cover all of the areas that the reserving actuary needs to be aware of. This paper brings together our thinking in one place for the first time. We hope experienced practitioners will find it thought provoking, and a useful reference tool. For new practitioners, we hope it helps to get you up-to-speed quickly. Good luck!
Wearables and the internet of things: considerations for the life and health insurance industry
- A. Spender, C. Bullen, L. Altmann-Richer, J. Cripps, R. Duffy, C. Falkous, M. Farrell, T. Horn, J. Wigzell, W. Yeap
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- Published online by Cambridge University Press:
- 18 July 2019, e22
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The aim of this research was to look at the emergence of wearable technology and the internet of things (IoT) and their current and potential use in the health and care area. There is a wide and ever-expanding range of wearables, devices, apps, data aggregators and platforms allowing the measurement, tracking and aggregation of a multitude of health and lifestyle measures, information and behaviours. The use and application of such technology and the corresponding richness of data that it can provide bring the health and care insurance market both potential opportunities and challenges. Insurers across a range of fields are already engaging with this type of technology in their proposition designs in areas such as customer engagement, marketing and underwriting. However, it seems like we are just at the start of the journey, on a learning curve to find the optimal practical applications of such technology with many aspects as yet untried, tested or indeed backed up with quantifiable evidence. It is clear though that technology is only part of the solution, on its own it will not engage or change behaviours and insurers will need to consider this in terms of implementation and goals. In the first weeks of forming this working party, it became evident that the potential scope of this technology, the information already out there and the pace of development of it, is almost overwhelming. With many yet-unanswered questions the paper focuses on pulling together in one place relevant information for the consideration of the health and care actuary, and also to open the reader’s eyes to potential future innovations by drawing on use of the technology in other markets and spheres, and the “science fiction–like” new technology that is just around the corner. The paper explores:
an overview of wearables and IoT and available measures,
examples of how this technology is currently being used,
data considerations,
risks and challenges,
future technology developments and
what this may mean for the future of insurance.
Cyber operational risk scenarios for insurance companies
- R. Egan, S. Cartagena, R. Mohamed, V. Gosrani, J. Grewal, M. Acharyya, A. Dee, R. Bajaj, V.-J. Jaeger, D. Katz, P. Meghen, M. Silley, S. Nasser-Probert, J. Pikinska, R. Rubin, K. Ang
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- Published online by Cambridge University Press:
- 19 February 2019, e6
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Cyber Operational Risk: Cyber risk is routinely cited as one of the most important sources of operational risks facing organisations today, in various publications and surveys. Further, in recent years, cyber risk has entered the public conscience through highly publicised events involving affected UK organisations such as TalkTalk, Morrisons and the NHS. Regulators and legislators are increasing their focus on this topic, with General Data Protection Regulation (“GDPR”) a notable example of this. Risk actuaries and other risk management professionals at insurance companies therefore need to have a robust assessment of the potential losses stemming from cyber risk that their organisations may face. They should be able to do this as part of an overall risk management framework and be able to demonstrate this to stakeholders such as regulators and shareholders. Given that cyber risks are still very much new territory for insurers and there is no commonly accepted practice, this paper describes a proposed framework in which to perform such an assessment. As part of this, we leverage two existing frameworks – the Chief Risk Officer (“CRO”) Forum cyber incident taxonomy, and the National Institute of Standards and Technology (“NIST”) framework – to describe the taxonomy of a cyber incident, and the relevant cyber security and risk mitigation items for the incident in question, respectively.Summary of Results: Three detailed scenarios have been investigated by the working party:
∙ Employee leaks data at a general (non-life) insurer: Internal attack through social engineering, causing large compensation costs and regulatory fines, driving a 1 in 200 loss of £210.5m (c. 2% of annual revenue).
∙ Cyber extortion at a life insurer: External attack through social engineering, causing large business interruption and reputational damage, driving a 1 in 200 loss of £179.5m (c. 6% of annual revenue).
∙ Motor insurer telematics device hack: External attack through software vulnerabilities, causing large remediation / device replacement costs, driving a 1 in 200 loss of £70.0m (c. 18% of annual revenue).
∙ While the presented scenarios are deemed material at this point in time, the threat landscape moves fast and could render specific narratives and calibrations obsolete within a short-time frame.
∙ There is a lack of historical data to base certain scenarios on and therefore a high level of subjectivity is used to calibrate them.
∙ No attempt has been made to make an allowance for seasonality of renewals (a cyber event coinciding with peak renewal season could exacerbate cost impacts)
∙ No consideration has been given to the impact of the event on the share price of the company.
∙ Correlation with other risk types has not been explicitly considered.
Overview of climate disclosures
- D. Dey, L. Richards, M. Arora, E. Boyle, R. Bryson, S. Jackman, V. Patel, C. Shirazi
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- Published online by Cambridge University Press:
- 03 January 2024, e13
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Climate change is at the forefront of discussions for many companies. Climate change-related disclosures and reporting are important tools and allow stakeholders to understand climate-related risks a company is facing and help various stakeholders to take informed decisions.
The landscape for climate change-related reporting requirements is ever evolving, with a trend from voluntary to mandatory, with many global disclosure standards and requirements influencing local requirements and other related standards.
This paper explores these ideas further, giving a general background to disclosure requirements, discusses greenwashing, details disclosure organisations including TCFD and the ISSB, and provides details on a country level including green taxonomies.