actuarial bloopers and other interesting challenges……

John Wylie CEO, ING Life Taiwan

Actuarial Bloopers and other interesting challenges……

ING Life Taiwan – Market Research 2

Synopsis

Actuaries are intelligent but do they have common sense? This presentation talks about some “actuarial bloopers”. It asks the question: “Who was to blame?” Was it the Actuary? The CEO perhaps. The Board must surely take some responsibility. Right? Where was the regulator? Risks are created or inherited? How do we better prevent creation of outrageous risks? How do we manage the inherited ones? And what about the rest of the company? Do they manage risks?

This presentation makes reference to mistakes in Poland, USA, Europe, Australia and uses mistakes made in Taiwan as detailed examples. Actuaries in most countries have made big risk mistakes. Some have cost several hundred million dollars! Management of big risks is explored from a non-technical, practical perspective.


The Presenter – John Wylie

• John - an actuary (Macquarie 1970, FIA 1974); worked in most areas of life insurance; worked in funds management, financial planning; was director of non-life co, bank, pension fund; with ING since 1992 – GM Life, Australia, 1992-97; CEO, Poland, 97-00; MD Australia, 00-03; Regional GM, Hong Kong, 03-06; CEO, Taiwan, 06-?? Biggest challenges: singing before 2200 as Elvis in Seoul w Alex Du; and in Beijing before 2700 w Fei-Fei. General Management is easy!


Blooper no 1: Europe: Annuities: Mortality

• Pension schemes in Europe generous• Lifetime (indexed) annuities common• Annuities often insured.• Too little allowance for mortality improvement• Cost: probably EUR Billions

• Problem: How do you balance being prudent, being too conservative, being fair to customers, being market driven; being too aggressive?


Blooper no 2: USA: Disability Policies: Claims

• USA wrote large volumes of guaranteed premium, guaranteed benefit disability policies in 1980s and early 1990s.

• All but one co made losses.• Increasing claims incidence:

• portfolio aged• mortality improved • recession in 1990s• fraud increased

• Cost? Billions $$$$ ???

• How do you avoid these problems? How is it good for customers?• Are HIH and FAI relevant here?


Blooper no 3: Poland: Endowment: Interest

• 1997 5 year bond rate 23%pa• Long term endowment guarantee 5%pa.• In Spain rates plummeted• In Poland blooper limited by reducing guarantee to 3.5%• By 2000 rates down to 13%pa for 10 year bonds• 2006 rates were 4%pa.

• Cost? Probably not too great because of early action.

• What are the interest rate issues for long term guaranteed policies?


Blooper no 4: Australia: Guarantees: Mismatch

• 1980s – investment policies issued• Capital plus declared interest guaranteed.• Assets invested in bonds, shares and real estate.• 1987 crash – assets fell but liabilities remained• Liabilities short; assets long

• Cost? City Mutual (est. 1878) absorbed by MLC.

• How could the policies have been issued AND the companies protected?


Blooper no 5: GM, Ford et al: Pensions

• Actuaries have advised on pension funds for decades• Fund deficits in some cases $$billions. • How has this been allowed to happen? • What is the role and responsibility of the actuary?• What is the responsibility of SEC? And NYSE?• What about the auditors?

• Note: Alaska suing Mercers for $1.8bn for part of pension deficit.


Blooper no 6: High interest guarantees

• Japan, Korea, China, Taiwan• Whole life with guarantees (way) above current interest rate levels

• Japan solution: government allowed reduction in guarantees.• Korea: high margin business allowed for a period of years.• China: government bailouts• Taiwan: ?

• Cost to industry? Many billions $$$• How valuable is actuarial advice?• What are the issues for the companies, for the policyholders, for the

government and the community in the “Japan solution”, the Korea solution”, the “China solution”? What other solutions could there be?


Taiwan: High Lifetime Guarantees

• Interest rates falling in late 1990s. Around 6-7%• Whole life guaranteed rates 6.5%, 8%, 10%

• How did this happen?

• What are the two key problems?


How do you manage these problems?

• P&L management• Reduce the yield gap

• Invest more in shares• Invest more in real estate• Invest in foreign bonds and do not hedge the currency risk

• Balance sheet management• Reduce the risk

• Invest in foreign bonds for duration and hedge back to TWD• Inverse floaters (pay more interest when rates fall and less when rise)• Strips or zero coupon bonds• Swaps to convert floating rate mortgages

to fixed.• Reinsurance• Claims management• Active conversion programmes

How big the problem is

depends on your point of view


Where does everyone stand?

• Local companies managing P&L• Equities investments• Real estate• Foreign investments unhedged• High volumes of profitable but higher risk new business.

• ING managing risk• Long bonds (at low local rates)• Foreign bonds fully hedged• Other investments to lengthen duration

• Regulator?• Concerned about both.


Solvency II and IFRS

• European cos have to move toward S2 and use IFRS• US companies moving toward these• Taiwan regulator has announced move to S2 and IFRS.

• Current Taiwan accounting is similar to US GAAP

• What are the likely consequences of moving to S2 and IFRS?


Local/US GAAP Accounting Issue

Earnings Gap per $100 annual premium (20 year pay)

0100

200300

400500

600

1 11 21 31 41Year

Earni

ngs g

ap ne

t of s

urren

ders

(NT$

mln)

II.Policy Rate6.5%; EarningRate 4%;Surrender Rate10%III.Policy Rate6.5%; EarningRate 3%;Surrender Rate3%I. Policy Rate 8%;Earning Rate 4%;Surrender Rate3%


Current Industry Losses and Equity

ProfitableCos

Lossmaking Cos

ProfitableCos

Loss makingCos

ProfitableCos

Lossmaking Cos

ProfitableCos

Lossmaking Cos

ProfitableCos

Lossmaking Cos

No. of Companies 18 11 13 16 12 16 21 7 12 15

Net Income (Profit or Loss)Amount Unit: NT$ mln 52,478 (12,496) 37,850 (11,890) 36,522 (19,435) 51,598 (4,129) 23,017 (23,151)

Owner's Equity / Reserves(Free Assets / Policy Reserves) 8.51% 0.30% 5.29% 1.36% 5.72% 2.18% 5.49% 4.16% 5.96% 2.48%

Loss/Owners' Equity(Loss / Free Assets) - (7.20) - (0.99) - (1.02) - (0.59) - (0.94)

YearGroup

Item

20022006 2005 2004 2003


S2 = New Understanding of Risk

• With understanding comes capital requirement

• How much?

Taiwan RBC =100Minimum =200Safe =250Market base ~ 300EU Min =400EU Minimum “safe”=600

[Please note – very rough guesses]

How predictable

is business?


Taiwan and Health Insurance

• Many countries – not just Taiwan• 1990s and early 2000s guaranteed premiums and benefits• Limited premium term generally 20 years – lifetime benefits

• What are the risks?

• Increasing morbidity• Fraud• Poor NHS claims management• Interest rates• Culture of paying all claims

Is health care affordable?


Where will the additional capital come from?

• Foreign acquisitions and injections?• Bank injections and acquisitions?• Profitable business margins• Government

• Everyone must understand the problem first.• What are other possible solutions other than more capital?

Can you correct the problem?


Risk Profile under EC

整體風險模型(Overall Risk Profile)

市場風險(Market Risk)

保險風險(Insurance Risk)

作業風險(Operational Risk)

流動性風險(Liquidity Risk)

信用風險(Credit Risk)

利率(Interest Rate)有價證券(Equities)不動產(Real Estate)…

預設溢價對象(Default Spreads Counterparty)…

資產 - 負債風險(Asset-Liability Risk)避險工具(Hedging Programs)…

死亡率(Mortality)失效(Lapses)準備金(Reserves)…

保單銷售(Distributions)系統(Systems)人員(People)…

必備的經濟資本 = 在一個設定的風險容忍程度內準備足夠的資本以涵蓋潛在的損失Required Economic Capital = sufficient surplus capital to cover potential losses at a given risk tolerance level.

Actuarial RM


Risk in the rest of the business

• Operational risk• IT risk• FEC risk• Compliance risk• Reputation risk• HR risk• Regulatory risk

• Who manages these?

Risk can occur everywhere.


E&Y’s Risk Management Model


ING’s 3 Lines of Defence

Adopting Three Lines of Defence Model

1st Line of Defence 2nd Line of Defence 3rd Line of Defence

Corporate Audit Services

Credit Risk Management

Market Risk Management

Insurance Risk Management

Operational Risk Management

Legal & Compliance External Auditor

Regulator

Business Lines

Managem

entcontrol activities

ING’s Governance Framework

Control & Finance

Information Risk Management


Change Management

• Clear understanding of corporate direction and goals• Clear roles and responsibility• Key is clarity and understanding• Simple and frequent communication• Good project management• Alignment of interests through remuneration and goals• Encourage and reward cross function teamwork to break silos.• Create an environment in which everyone can excel• Ensure everyone has fun!

SIMPLE COMMUNICATION

1

2

3


• 3 simple corporate goals• 3 individual goals• Excludes things out of management control• Alignment with strategy and priorities• Alignment with communication• Weighted by input possibilities

Bonuses


What can be achieved? ING Life Taiwan

• New premium growth 2002-2007 in TWD

• Total premium 2002-2007 in TWD

• VNB 2002-2007 in TWD

• Operational expenses 2002-2007 in TWD


ING Life Taiwan: And communication is working

WPC results

One of the biggest risks is always people

risk.

“Effective risk management is a key differentiator of ING”

F= 84%; U= 2%

“Value-based, results driven leadership at ING is encouraged and developed at all levels.”

F=78%; U=4%

“ING’s goals are clear and aligned at all levels” F=80%; U=6%“I can see a clear link between my work and ING’s objectives”

F=83%; U=3%

“ING is making the changes necessary to compete effectively”

F= 86%; U= 3%

“ING’s costs are managed to maximise value creation at all levels”

F= 74%; U= 6%


The Ultimate in Protection?


Summary : Managing Business Risks

• Think – about downside when designing products• Be cautious about giving long term guarantees• Really understand risk problems –use your head more than your

computer!• Manage both sides of balance sheet• Use every avenue available• Set priorities – and all agree them• Set targets• “Risk Management is everyone’s responsibility” – culture.

• If a major problem arises (or is inherited or acquired) think carefully about how to overcome the problem – sell it, reinsure it, manage the assets, manage the liabilities, grow out of it……


Questions??????

Sometimes risk management

requires simple lateral thinking

Never think you are important!

When someone tells you there is no risk –

be suspicious


Thank you!If you want a job in Asia please contact ING!

Charlene Stenton Dozey

[email protected]

If you want a job in Taiwan contact me;

John Wylie, [email protected] or

Stacy Liu, [email protected]


-60.0%-50.0%-40.0%-30.0%-20.0%-10.0%

0.0%10.0%20.0%

Margin (before Dividends & FIT)Margin excluding Investment Income

USA: Disability Policies: Claims


Poland - Interest Rates - Corporate sector, zloty loans

0.00

5.00

10.00

15.00

20.00

25.00

30.00

12/1/1

9964/1

/1997

8/1/19

9712/

1/1997

4/1/19

988/1

/1998

12/1/1

9984/1

/1999

8/1/19

9912/

1/1999

4/1/20

008/1

/2000

12/1/2

0004/1

/2001

8/1/20

0112/

1/2001

4/1/20

028/1

/2002

12/1/2

0024/1

/2003

8/1/20

0312/

1/2003

4/1/20

048/1

/2004

12/1/2

0044/1

/2005

8/1/20

0512/

1/2005

4/1/20

068/1

/2006

12/1/2

006

Time

%

Corporate sector, zloty loans


• Headiness re Pension Deficit


Taiwan 10Y Govt Bond Yield

0.001.002.003.004.005.006.007.008.009.00

Time

%

10Y Govt Bond Yield


APE

02,5005,0007,500

10,00012,50015,00017,50020,00022,500

2002 2003 2004 2005 2006 2007

Year

TWD

(mln)

APE incl. SPCE


Gross Premium (incl. Reinsurance)

010,00020,00030,00040,00050,00060,00070,00080,00090,000

100,000110,000120,000130,000140,000150,000

2002 2003 2004 2005 2006 2007

Year

TWD

(mln

)


VNB

0

1,000

2,000

3,000

4,0005,000

6,000

7,000

8,000

9,000

2002 2003 2004 2005 2006 2007

Year

TWD

(mln

)


Operating Expenses

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,00011,000

2002 2003 2004 2005 2006 2007

Year

TWD

(mln

)


6. Reduceexpense ratios

VNB growth

Increase TSR

TSR = f { }VNB, EVEC

EV growth

Expense reduction

1. Understand our customers

3. Increase agent

retention

2. Increase agent

productivity

4. Developstrategic

bancassurancerelationships

Managing business risk in all we do:• Ops/IT, Finance, Marketing, Product Development• Compliance, ORM, SOX, CAS

5


Change

• Change is not optional• Pro-active or Re-active?• We need to undergo certain changes …• … ahead of the changing environment …

… to gain competitive advantage

We can control change …… or change will control us


Alignment

• Everyone knows and understands –• Vision• Strategy• MTP

• Everyone is headed in the same direction, and there are no “anchors”

actuarial bloopers and other interesting challenges……

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