nottheaverageactuary

Actuarial news and views from Cape Town and beyond


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Retirement reforms will change the face of retirement strategies

Retirement savings provide for income protection during retirement ages and allows for individuals to sustain their standard of living even after retirement. One key risk facing most insurance firms is that of longevity and increasing life expectancy of the covered population risk; in the case of employer sponsored pension this might put a cost strain on companies as they will pay cover for a longer term whilst for personal provision of retirement by individuals would mean that they run the risk of not having sufficient income to cover their necessary needs as years go by.

 

In order to mitigate such risks, this means retirement should be approached in a strategic manner. Regulatory reforms are at the forefront of protecting the public’s interest and well-being. An area of much interest lately by retirement regulatory reforms is that of provident funds and pensions. A common feature that has been surrounding provident funds is the issue of providing all retirement savings as a lump sum on retirement (http://www.blacksash.org.za/index.php/your-rights/social-insurance/item/you-and-your-rights-pension-and-provident-funds) which tends to be spent on less important expenditures. New retirement reforms aim to regulate this unnecessary spending of individuals by allowing only a maximum of 1/3rd of retirement savings to be taken up as a lump sum and the other 2/3rd of the provident fund to be in line with pension’s income structure of a regular income provision. This regulatory structure will not only ensure poverty levels in the economy is stable and everyone has a minimum income to live by during retirement, but allows employers to better smooth their profits in providing less lump sums to their provident fund employees in the event of unexpected retirement.

 

Source: http://www.fanews.co.za/article/talked-about-features/25/featured-story/1145/retirement-reforms-will-change-the-face-of-retirement-strategies/17790

 

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Life Settlements in South Africa

A Life Settlement is a transaction whereby an insured life sells the rights to their life policy (future proceeds) to a third party in return for a payment now (Typically higher than the Surrender Value, but lower than the Benefit). In the US, these Settlements are used extensively in the investment market as they are seen as uncorrelated to market fluctuations – thus making Life Settlements an excellent tool for diversification and hedging in a portfolio. According to the research thesis below, another major plus is the high expected yields received on these investments (anywhere between 8% and 16%). Regulations in SA currently prohibit the use of Life Settlements despite the many advantages available to an investor. This research thesis below investigates the inclusion of Life Settlements in the South African investment market as well as the possible impacts of Life Settlements on insurance and re-insurance firms. Although the thesis is relatively long, there are particular sections that present strong debate on this issue. Have a skim through. Do you think Life Settlements should be implemented in South Africa?

http://www.africanagenda.com/convention2013registration/papers/02-dd028f390f3748f4bb07db0fc156f200.pdf


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Pricing by name?.. Maserati Granturismo, not only expensive at purchase date..

Seems our proposed rating factors last night were spot on.. Interesting stats on motor insurance loss by model and make.. Useful data/ experience for setting overall prices and/or deciding on rating factors to differentiate prices to customers..

For instance Ferrari 458 Italia 2dr showed 5 times higher collision claims than, surprise surprise, the Smart ForTwo, or Jeep Wrangler! http://www.iihs.org/iihs/topics/insurance-loss-information


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Fairness of the DB fund pecking order – Ireland

As of 2012, there were 990 defined benefit pension schemes in Ireland, serving just under 200 000 members. In 2012 a large number of members of these schemes were told that the schemes would be winding up and that the members would no longer be receiving their promised benefit because the pension scheme was to wind up.

The pension schemes found themselves in a situation where there were insufficient assets to meet the future liabilities and had therefore become insolvent. The schemes had an amount of assets only able to cover a certain percentage of the total liabilities.

This news had little effect on those already receiving their pension because they were entitled to 100% of their promised benefit by law.

The active members of the scheme were the most hard struck by this news because if, for example, the scheme had enough assets to fund 80% of the liabilities but there were 20% of the members already retired and earning their guaranteed benefits, this left the remaining active members with assets in the scheme to cover significantly less than 80% of their promised pension.

In summary, active members were losing a large portion of their promised benefits whilst current pensioners felt no brunt of the scheme’s insolvency.

This issue can be further magnified by observing (another example) that an employee who retired in 2012 could receive full benefits, but his colleague (due to retire in 2013) will only receive 60% of his pension, thus posing a serious threat to his wellbeing in retirement because it has become too late for him to recoup his costs.

This issue raises the question of whether the law regarding the priority of DB pension recipients is fair and/or relevant. Additionally, are DB funds a viable product for the future, after considering improving longevity?

Here are some further readings on the development

http://www.independent.ie/business/personal-finance/pension-windup-storm-28901588.html

http://www.lcpireland.com/news-and-publications/bulletins-and-updates/2013/lcp-radar-update—changes-announced-to-defined-benefit-priority-order/

http://www.rte.ie/news/2013/0709/461395-pension-schemes/


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Let them lapse?

We often view withdrawal experience as a risk and fear the negative impacts it has on insurance. However, there is a large proportion of senior citizens in America lapsing on their life insurance policies and thus creating a great positive effect on the books of life insurance firms.

What is the reason for these withdrawals? Many senior citizens either can no longer afford to pay for the cover or no longer see a need for the cover. They then lapse or surrender their policies without considering the alternatives.

An alternative would be to reduce the value of their policy and thus lower the strain of premiums or get some level of assistance from their family members who are usually the beneficiaries of such a police. They could also wind-up their policy.

Another lucrative alternative in the US is the option of selling the product to a third party, referred to as a Life Settlement. This gives the policyholder the option to sell the policy to another party at a value greater than the surrender value but less than the death benefit.

Although these alternatives exist, there is still a high rate of lapsing. The reason for this being that the senior citizens are not educated about their alternatives. So the question comes in: is it the life insurers responsibility to educate the senior citizens about their options?

From a profit point-of-view, it is not in the interest of a life insurer to educate their policyholders of the options as a lapse or surrender of such a policy will benefit them. In fact some insurers have been known to fire agents for offering these senior citizens the advice and information that would lead them to choose not to surrender their policy. But what about the ethics? Is it not unethical to watch a person lose out even though it benefits you? As insurers with all the knowledge, it seems very unfair and perhaps even borders exploitation.

Is it fair to let them lapse?

More views:

http://www.huffingtonpost.com/wm-scott-page/let-life-insurance-lapse-at-own-risk_b_3239095.html

 

 


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Discontinuance feature – Market Value Adjustments

A Market Value Adjustment (“MVA”) is a common discontinuance feature added on to multi-year guaranteed fixed deferred annuities in the USA. Such an annuity guarantees a specified credited interest rate for a fixed period.

Upon the surrender of a fixed annuity the MVA is applied in addition to any surrender charges. The MVA adjustment will be positive in the case of interest rates being lower at surrender than at purchase and negative in the case of interest rates being higher at surrender than at purchase. When purchasing a fixed annuity with MVA the policyholder is effectively assuming the interest-rate risk. In return, the credited interest rates offered on fixed annuities with MVA are generally slightly higher than that offered on a fixed annuity without MVA.

In a rising interest environment where policyholders might want to take advantage of locking into higher guaranteed credited rates by surrendering their existing fixed annuities, the MVA will provide protection to the insurer who could be losing money when having to sell investments at a discount in order to pay out the surrender value.

Please see the links below for articles on sales of Fixed Annuities with MVA as well as the an explanation of Fixed Annuities with MVA by an insurer selling these contracts:

https://blogs.oracle.com/insurance/entry/market_value_adjusted_annuities

http://amac.us/market-value-adjusted-annuity-contracts/


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Discontinuance of DB funds in South Africa

As discussed in the ActEd notes, sponsored benefit schemes can “wind-up” not due to the insolvency of the sponsor but rather because the sponsor decides to stop financing benefit provision. This was the case for South African DB fund sponsors around the 1980s and 1990s.

Prior to this period, most pension funds were DB funds set up by employers for their employees and the problems that existed with these funds was as follows:

1) From the Employer’s perspective:

The employer is the sponsor of the fund in that its contributions are based on the ‘balance of the cost’ needed to maintain solvency. This means that the employer assumes the risk of increasing future costs due to poor investment returns or high salary increases. In order to remove this risk employers opted to convert to DC funds, by offering members the option of transferring their DB benefits to DC benefits. Because this conversion had to be voluntary employers had to offer members “sweeteners” to move –which typically consisted of a share of the surplus that existed in the DB fund. As not all active members opted to move, and no pensioners were moved to DC funds, the DB fund had to stay open to accommodate them, even though they became closed to new membership. This means that DB funds will be around for a long time still, eg a 35 year old member who decided to remain could retire and die as a pensioner 50 years later.

The dominant retirement fund consultants in the market at the time, Alexander Forbes, were the main drivers in the market for this conversion from DB to DC and benefited a lot from the move.

2) From the Members’ perspective:

DB funds relied on cross-subsidies, from early leavers to long serving members, in order to keep the cost of funding down. Therefore they were not good for early leavers (typically members leaving before 7 years did not get their own contributions plus the employer contributions plus investment returns back) but were very good for long serving members.

Legislation was later changed to provide for minimum benefits for early leavers but this just made DB funds even more expensive as the cross-subsidies were removed. Also, at the time there was no regulation stating that members could elect trustees and so there was very little transparency as well as a belief that these funds were not there to help the members.

In the process of conversion, most funds simply gave members their actuarial reserve values (ARVS) plus an agreed share of the surplus. The share of surplus that was offered depended on how much the employers wanted members to move to the new DC funds and was an issue of contention. An additional issue was that a lot of funds operated investment reserves  – equal to the difference between the market value of assets and the actuarial value of assets used in the valuation. These reserves were normally not transferred across to the DC funds, resulting in a big bonus for the members remaining in the DB fund and for the employer.

This paper provides more information on the process and views of the different parties involved and ultimately concludes that the conversion to DC funds has not been unfair towards members. However, because the calculations of conversion weren’t communicated properly and initial calculations were probably inaccurate, there were complaints by various parties involved that lead to a call for legislation. The author goes on to state that the reputation of the actuarial profession has been damaged to a certain extent due to all the negative publicity involved, and going forward actuaries need to put more thought into issues surrounding fairness before giving advice to trustees.