Review of 2013: The year of regulatory uncertainty, hot topics, new services and more…

Everyone has their own different words to describe 2013, but one word that nobody should be using is ‘boring’. So much has happened this year to make 2013 an interesting year, from key changes to the UK regulator and progress in Solvency II, to our launch of new services and the strong development of pricing tools in the wake of gender neutral pricing requirements.

The year of regulatory uncertainty

On 01 April 2013 the Financial Services Authority (FSA) was retired and replaced by the shiny new Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). Our blog ‘Goodbye FSA, Hello PRA and FCA’ explained the changes, the objectives of the new regulators and the impact on insurers. This was our most successful blog of 2013, and it generated over 2,700 of the total views to our blog in 2013!

We revisited this topic in November to see how the market has adjusted to the two new regulators. In particular, we looked at the conflicts of interests arising from having two regulators with differing objectives, the impact of insurers being regulated by a bank and the role of actuaries within the regulatory regime.

Prior to its replacement, the FSA created the Skilled Persons Panel that must be used by firms required to appoint a Skilled Person and Barnett Waddingham was appointed on 01 April 2013 to the Skilled Person Panel in the area of Prudential – Insurance.

The industry has speculated that use of skilled person reports has been increasing, especially since the unit linked thematic review, which resulted in many of the firms requiring a skilled persons report. In December we reviewed the number of skilled person reviews conducted between April and June this year in order to identify whether the number of skilled person reviews are on the increase. Our conclusion is that there is not currently enough evidence to say that there is an increase. I suspect that over time there will be and we will update you with the July to September stats in early 2014.

No blog on 2013 would ever be considered complete if it did not mention Solvency II. For years Solvency II has been a thorn to insurers; treated as a swear word and only mentioned if it could not be avoided! Boards of many insurers were quite fed up with Solvency II; they had invested time and money in developing new models, systems and functions in preparation for Solvency II, whilst the official implementation was stalled by what had become a very political debate.

The mood began to change at the end of March when EIOPA published a consultation on the guidelines for interim measures. The guidelines set out four areas that EIOPA expected National regulators to be working with their firms in starting to get systems and processes in place. Admittedly, we were still sceptical during the summer months, whether Solvency II was ever really going to happen. This changed in mid-November when it was announced that the European trilogue parties had reached a provisional agreement on the Omnibus II directive.

The key issue of debate for the trilogue was how to treat contracts with long term guarantees such as annuities. The provisional agreement that the trilogue parties have come to involves less onerous rules as set out by EIOPA in their LTGA but comes with increased governance and disclosure requirements. This provisional agreement is subject to a final vote in February 2014. The vote itself had been rescheduled five times. Previous delays were due to the parties being unable to come to an agreement on the directive itself, so hopefully the vote will go ahead this time!

The year of hot topics

2013 has seen new topics such as cyber insurance brought to the attention of the insurance world, as well as an increased focus on certain existing areas such as flood insurance and claims arising from noise induced hearing loss. The glorious weather over the recent Christmas period left thousands of homes flooded and without access to gas and electricity; we are sure that Flood Re will be near the top of insurer’s agenda for areas to address in 2014.
The end of 2012 saw the end of gender specific pricing. This has been a large issue for insurers and has led to the development of other tools for use in pricing. One example is the rise in the use of telematics data for use of pricing motor insurance contracts. Telematics devices gather huge volumes of data and a key challenge for insurers is in deciding what data to use and identifying what the best rating factors in the data are.

Telematics is just one example of the growth of BIG DATA. The growth in the sheer volume of data available for all firms (not only insurers) to analyse and utilise will mean that big data should be on Board agendas across all relevant firms. This is an area that we are very interested in and excited about and will no doubt produce future blogs on the topic.

The growth in the number of court awarded PPOs and their long term implications mean that these are an important hot topic for general insurers. In early 2013 we hosted an event to investigate possible solutions to deal with PPOs, and this resulted in us developing ‘SAM’; a tool that stochastically models PPO liabilities and helps the users to understand the characteristics of their PPOs and how they can deal with them. The number of PPOs continues to rise and with Solvency II around the corner, we think that there are some innovative PPO solutions on the horizon.

The year of new services

Over the last twelve months, we have launched two new services for our clients.

The first is the financial strength reviews of bulk annuity providers for trustees as part of decision making process of whether to buy out pension liabilities and who with. Our reviews provide trustees with information on the regulatory regime and information on specific insurers.
We also launched an Insurance credit rating services. Cameron Heath wrote the first of a series of blogs on ‘Opening the ratings black box’.

Feedback and other activity

During 2013 we hosted a number of round table discussion dinners on diverse subjects ranging from the future of the IP market to PPOs. We plan to host more of this next year and are happy to receive suggestions on topics that you would like to discuss.

We also conducted a number of surveys, including on risk management and one on internal model validation best practices.

Not all of our activities have been insurance related. We have also spent some time on applying actuarial techniques to more ‘fun’ subjects such as predicting the number of runs in the Ashes, predicting who will get promoted in the championship league and conducting a risk analysis on Christmas.

And finally, we would like to wish everyone a Happy New Year and a give special thank you to all our existing clients and new clients in 2013. We look forward to 2014 as well as the challenges that it will bring. Look out for our blog on our New Year’s resolutions!