UHNW | GILLERAN - Actuarial

  • Actuarial Consulting
  • Pension Consulting
  • Risk & Capital Management Consulting
  • Solvency II Issues
  • Regulatory & Compliance Consulting
  • Investment Audit Consulting
  • Structured Products Consulting & Complaints Handling
  • Banking Industry Complaints Handling
  • Insurance Industry Complaints Handling
  • Compliance Auditing for Pensions & Investments

Solvency II

  •  Representatives of the European insurance industry have written to the European Commissioner for the Internal Market and Services, Michel Barnier, calling for what are described as the overly conservative and prescriptive elements contained in the draft implementing measures for Solvency II to be urgently addressed. In the letter, the insurance collective stresses its full support for the principles set out in the Solvency II Framework Directive and its willingness to engage constructively with the Commission and the European Insurance and Occupational Pensions Authority (EIOPA) to solve outstanding issues. The letter argues that Solvency II will have failed to achieve its underlying principles if these problems are not addressed. Such a failure would hamper insurers' ability to offer policyholders appropriate long-term protection at a fair price (in the shape of pension or long-term care products), penalise the diversified growth of insurance companies (at odds with the EU Single Market Strategy), introduce a complex, inconsistent and volatile prudential framework that would neither guarantee financial stability nor policyholders' protection & shorten insurers' investment time horizon.
  • The CEA says it is also currently analysing different proposals for ways to address issues related to asset/liability valuation mismatches, which affect products with long-term guarantees.
  • On non-life insurance, the CEA has put forward a series of solutions related to the current structure for catastrophe risk, which produces a capital level that does not appropriately reflect the underlying risk of each type of man-made or natural catastrophe.
  • The European insurance and reinsurance federation has slammed the timeframe for adoption of Omnibus II saying that "prolonged political negotiations" will impact the implementation of the directive. Omnibus II is a new directive proposed by the European Commission that makes significant changes to the Solvency II directive including the postponement of Solvency II implementation to 1 January 2013. The CEA says its members have concerns that delaying the adoption of Omnibus II could have a knock-on effect on policyholders who may face uncertainties in their rights and obligations upon implementation of Solvency II.
  • Only 46% of insurers are confident the industry will meet Solvency II deadline, down from 63% in 2010, according to a new Economist Intelligence Unit report.
  • Almost two-thirds of the insurance CIOs don’t see their organizations pursuing unique or differentiated business strategies in their industry. In other words: Everybody is doing the same. This is a potential threat for the insurance industry.  

Pension De-Risking - Managing Uncertain Longevity Risk

  • Longevity risk is being recognised as a major threat to UK pension funds and the companies who sponsor them. Many funds are now considering de-risking their liabilities over time.
  • Aubrey de Grey, author, theoretician and chief science officer for the SENS Foundation, believes it is very likely that the first person to live until 1,000 has already been born. He suggests there is at least a 50% chance of developing the technologies to enable this to happen within the next 25 years.
  • This may be seen as an extreme view, however what we do know is that over the past few decades, life expectancy has continued to rise. Estimates vary, but life expectancy broadly appears to be increasing at a rate ranging from 1-5 months every year, depending on age group and geographical location. While the impact that this has on pension liabilities varies according to interest rate levels and the specific demographics of each pension plan, as a rule of thumb, 10% mortality improvement adds one year to life expectancy, and one year of life expectancy adds 4% to the required value of a pension fund’s reserves.
  • A pension fund is exposed to three sources of longevity-related risk.
  • The first source of longevity risk is trend risk and it comes from the expected decline in future mortality rates. For more than a century, mortality rates have decreased for all ages, both male and female. The rate of decline over any one decade, however, has not been stable. It is therefore difficult to estimate what the decline in mortality rates over the next decades will be.
  • The second source is experience assessment error or level risk and is related to the difference in mortality rates between the overall population and the pension fund-specific population. The risk here is that the fund comprises certain groups of the population that experience higher or lower mortality.
  • The third source comes from random fluctuations. Even if the mortality rate of an individual is accurately estimated according to the model, this person may outlive their predicted mortality range, purely due to chance.
  • A LONGEVITY SWAP is the exchange of a variable stream of cash flows for a fixed stream of cash flows, and it provides protection against longevity improving more than is presently being assumed. However, this protection comes at a price.
  • There are two main types of longevity swaps: index- and indemnity-based swaps.
  • Index-based swaps tie the swap payment to a specific country or segment mortality index, while an indemnity swap covers the actual plan experience.
  • The effectiveness of an index swap depends on the pension plan’s performance relative to the chosen index. An index swap introduces an element of basis risk, as the basis of the plan necessarily differs from that of the index.
  • Indemnity swaps introduce no basis risk as they indemnify the plan for actual experience. While an index swap may seem like a simple solution, it requires a complex strategy to create an adequate hedge for the fund (and even then it will not provide a complete hedge).
  • The pricing of indemnity-based swaps and index-based swaps in the market presently appear to be similar. The reason for this is that for a fully diversified pool of lives (such as an insurer’s portfolio) it doesn’t make a significant difference how the risk is assumed. However, from the pension plan’s perspective, an indemnity swap is more valuable as it matches existing volatility better. So, in general, it is more beneficial for a pension fund to carry out an indemnity swap because it covers all risks, including basis risk, for a similar price to an index-based swap.
  • Although, in theory, index swaps should be more liquid and trade at a lower price than indemnity swaps, currently the market for longevity swaps does not exist and prices are similar. In addition, if liquidity is seen as the ability to exit the transaction, this possibility can easily be structured into an indemnity swap. Indemnity swaps provide better protection and, although not tradable, they are reversible.


  • Solvency II-style capital requirements for UK pensions schemes may be put in place by the European Commission before the end of the decade.
  • A regulatory regime closely based on the three pillars of Solvency II requirements may be extended to pension schemes across Europe by as early as 2016 or 2019 at the latest.
  • The new solvency requirements will be contained in an updated pensions directive.
  • An extension of pillar 2 and pillar 3 of Solvency II – measuring qualitative risks and disclosure risks – may apply to UK pension schemes.


  • The High Court has dismissed a judicial review launched by the British Bankers’ Association (BBA) against the FSA and Financial Ombudsman Service (FOS) over the handling of payment protection insurance (PPI) claims.
  • The BBA had sought to force the FSA and FOS to reverse their position on the handling of PPI complaints.

Structured Products

  • There are fears that a recent decision by the FSCS to accept claims from investors in Lehman-backed capital-at-risk structured products could open a £40m floodgate.
  • The FSCS has already paid out £25.8 million to investors who were told their capital was secure, but investors in ‘capital at risk’ products have now begun to win claims.
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