Only five out of 20 European firms currently possess an official plan listing the actions management will take in certain economic scenarios, according to the survey by actuarial consultancy Milliman. This is despite such plans being a requirement for European insurers under the Solvency II directive.
Ed Morgan, managing director of Milliman's operations in Italy and Central Eastern Europe, says not having well-documented management actions is a governance issue, as well as being an issue for modelling and financial reporting.
Management actions are those actions that can be taken at the discretion of the firm in response to changing economic conditions. These include actions taken to change a firm's overall investment strategy, to alter the crediting rate on participating life policies, to raise or lower caps on index-linked variable annuities, and to vary charges on reviewable insurance products.
Under the Solvency II framework insurers will be expected to produce a comprehensive future management action plan, approved by the administrative, management, or supervisory body. Firms using a partial or full internal model to generate their Solvency Capital Requirement (SCR) are also encouraged to account for management actions in their models, although this is not mandatory.
Other aspects of management actions that firms should analyse include accounting for the time it takes to implement an action, the expenses involved, and whether or not they contradict legal obligations to policyholders, added the spokesperson.
Tom Wilson, chief risk officer at Allianz in Munich, says insurers need to come to terms with Solvency II requirements on management actions. "What a business person would consider to be a reasonable and relevant amount of documentation and validation work will typically fall far short of what a regulatory examiner is going to require under Solvency II", he says.
Wilson also advocates greater integration of management action modelling outputs with product design. "Even more important than getting the modelling correct, I would suggest that actually taking the insights of these modelling exercises to the product development team and building in the management actions that apparently have a low value to customers but a high value in terms of cost of production, that's critical", he adds.
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