The Beatles and Solvency II: COME TOGETHER

By Mely Lerman, October 7th, 2010

It is almost a sacrilege to put The Beatles and Solvency II in the same blog and I know many actuaries would think that John was referring to them in the phrase “He say "One and one and one is three"” but then COME TOGETHER could be a good slogan for the CEOs trying to organize the forces to deal with the directive.

Solvency II brings together business, finance, economics, probability, mathematics, statistics and IT. It is cross disciplinary and as such demands cooperation between all the organization management resources. But, insurance companies, like any other big corporation must divide the work into divisions and departments in order to do their job. There is a big gap inside the industry. The diverse disciplines develop their own culture and their ways to solve problems.
Actuaries of two different companies – or even – of two different countries have more concepts in common than with the accountant that occupies the adjoining room.
The different departments work together and every balance sheet is a proof of that. But the directive requires a degree of collaboration not known till now.

The directive demands active involvement and participation in the governance system from the management. ORSA is an assessment process that demands a joint effort in order to get to strategic decisions.
Other problems lead to the IT. More specifically, they lead to the data quality issue. The data cannot be accurate if the models data doesn’t match the data on the financial statements and the statistical reports. It is very common to the actuaries to create their own databases to feed their needs. According to the directive this cannot continue and there is an understanding in the market that in order to achieve consistency the whole organization must share the same data warehouse.

In the next months and years we are going to see the management staff of the insurance companies coming together. The accountants speaking the double entry language, the investment that recognizes only the cash they can invest, the actuaries, the risk managers and the IT will seat down and define the new language. It will not be easy; bridging the cultural gaps is a big challenge.
Solvency II will drive the management resources inside the company into a perpetual collaboration that, with time, will intensify the partnership and the relationship inside the company.

To relax from the burden we can always enjoy some Beatles.

10,000 actuaries!

By Mely Lerman, July 5, 2010

According to Mike Fitzgerald in the Celent Blog there are 10,000 actuarial students in India right now.
I remember a time when the whole World thought they were smarter than India. It was not long ago I met the first Tata TCS guy and it took me seconds to understand the paradigm changed.
It is not only their potential, the quantity and the low cost: In a time Europe (and, for that matter, also my home country Israel) are sleeping and not really preparing themselves to Solvency II, somebody in India is thinking.
10,000 actuaries!
Such outburst cannot come out of nowhere. Somebody in India really thought, calculated, planned, prepared, published and brought ten thousand students to specialize in actuarial studies.
The result will be, of course, massive outsourcing of the actuarial work to India. The actuarial work will extent to software and probably risk management tasks.
In Mike Fitzgerald words: “There are barriers to this transition. Tradition and inertia will slow adoption. It may take seven to ten years, but the cost advantages and a need to redirect company talent will eventually result in a shift the norm to a multi-source, onshore / offshore actuarial model.”

The Funny Thing in Life Insurance - 2. If everything was simple anyone could do it

By Mely Lerman, November 7, 2009

After my first blog on the funny differences on Life Insurance I received a response stating that actuaries just do their jobs, marketing complicates things.
Now, I really don't know (and don't want to know) if there is someone to blame. I don't think those funny differences are really something bad.
But I agree: Market people can make things difficult. I have been working with really imaginative marketing people. They could invent a plan like "you can receive a discount of 5% in the premium or (if you have teen agers) a mountain bike or (if your employer agrees) you can have disability insurance for free for two years or... and if...".
But actuaries are also fantastic innovators. In a mathematical way, they can conceive surreal insurance plans.
One of my favorite stories occurred in Israel at the start of the eighties. In Israel, at this time, the industry was monolithic, Life Insurance companies sold the same products, marketing was in its childhood and actuaries dominated the scene. The inflation was very high and in 1984 arrived at its peak of 450 %. It was not really a problem because the premium, sum assured and savings were linked to the consumer price index.
But, then, the banks started to sell savings with some risk insurance attached. It was not big, the amounts were not great, but it was a menace. And the newspapers started publishing articles of professors stating that it is better to put the money in savings in the banks and buy collective risks than to buy life insurance. They also published tables stating that the banks made more money for the insured than the Insurance companies.
Insurance companies started to explain that they did not take into account the "two indexes".
The “two indexes” - They even tried to explain it but, of course, nobody understood.
Till now the story is simple but, from now on things get complex: what is the "two indexes"?
Before I continue, a warning: go easy! It is confusing and if you don’t understand, don't worry - I don't understand it either and I programmed it in the computer!
Let's assume two plans – one on the bank and a hypothetical life insurance plan pure savings that you can surrender any time you want.
Let's also assume that the index for January is 1000 (the January index is published on February 15th), for February 1100, for March 1200 and so on a hundred points every month.

If I deposit 5000 shekel in the bank on March 25th and withdraw it from the bank in May 1st I’ll receive the same 5000 shekel (it is "March" money). Only in June I would receive an inflation correction. (Known index on first of June against the March index).
On the side of Insurance companies, they need to collect the premium, so they need to send the insured a bill with the amount to be collected. The bill I paid on March 25th (same date as the bank deposit) was calculated according to the index of January published on February 15th and the known index on March 1st (date they printed the bill).
Let's say, I paid 5000 shekel like in the bank. If I ask for the money on May 1st the surrender value will be 5000 * 1200 / 1000 (index known on first of May against the index known on the first of March).

Each withdraw of Life Insurance would receive two indexes more than in the bank. In 1984 there was two months that the difference was 40%!
Complex? Yes!
They tried to explain it to the people, the so called "masses".
Of course nobody could understand so a committee of actuaries invented the "factor of the two indexes".
From 1983 they reduced the life insurance tariff and started to collect the premium with simulation of the inflation, meaning:
The March premium will be multiplied by the factor of the known index of March 1st divided by the known index of January 1st. So, it will not be 5000 anymore it will be more or less 6000 shekels.
Confused? It gets worse. Just let actuarial thinking flow over you…

In my company at the time we used to buy the employees Life Insurance policies and the premium was calculated as 18.333% of the salary. We recruited a new employee – Shuky -and my partner told Danny (the broker) to issue him a policy. His salary was 10000 shekel so the premium was supposed to be 1833. When the bill arrived the premium was 2291. My partner came to me to verify the sum and I explained to him: "that's the factor". What factor? I told him the whole story I tried to tell you guys. But then he said: I am supposed to pay 18.333% of the salary, not 22.91%. The authorities will not recognize this sum as tax exempted.
Then I told him to tell Danny to remake the policy, this time with the two indexes included on the 18.333%. Danny came back with a new policy, with the bill of 1833 shekels and everything was OK till we handed the policy to Shuky (the employee) and he said: Hey, my salary is 10000 and it is written here that the salary is 8000!! ( Salary = premium/ (factor two indexes * 18.333)).
Our luck was that Shuky was part of the team that programmed the new factor to some insurance companies and he could understand the explanation.
In other words, actuaries (at least some of them) can make things difficult.
Again: I am not complaining. On the contrary, I make my living out of those things. If everything was simple anyone could do it.

Split

We decided to split LEAD2000's blog into LEAD2000, a generic blog and LEAD2000 Life Insurance that is dedicated to issues of Life Insurance and Pensions (or Annuities).

The Funny Thing in Life Insurance 1- The Mayonnaise, Yuck

By Mely Lerman, October 31, 2009
In Holland instead of ketchup they put mayonnaise on the french fries, in France they have PERP, in Israel they have Adif and in Brazil they have lottery...
The funny thing in Life Insurance and Pensios are the little differences. Vincent in Pulp Fiction should be an insurance broker: according to him the funniest thing about Europe is the little differences. (see the whole excerpt at the end of this blog). It is exciting to learn the little differences in the different retirement and life insurance plans. It crosses countries and companies in the same countries. Even in those days of globalization, even in face of the efforts for standartization of the Europen Union from one side and the OECD from another, every Life Insurance company is a whole culture in itself.
The basis for everything is one: the actuarial mathematics. What actuaries and regulators do with this is another thing.
There are some products that gain popularity all over th World - the American IRA, Universal Life, the Chilean Pension Model, Unit Link and other.
However, most of the time companies are lauching completely different products almost every day and even the similar products receive a local color.
In Europe, for example, there is a real need for some standard in life insurance and pensions in order to facilitate the mobility of workers from one country to the other. But if somebody compares the employers savings of England to the one in Greece it will be very difficult to find something in common. In Brussels they are trying to put some order on things but, in fact, every country develops its own products completely with no synchronization with the others. The PERP in France (2005) has absolutely no similar product in Europe. The same is possible to say about the Riester pension in Germany.

In those blogs - The Little Differences in Life Insurance - I am going to describe some of those little differences that I know. I would be grateful if anybody out there wants to contribute.
I have no intent to criticize, nor to analyse the social implications or any other second intentions.
Like Vincent I just thing those little differences are funny.

Brazilian Bancassurance Incredible Numbers

By Mely Lerman, October 23, 2009

Even a superficial glimpse at the Brazilian insurance market will expose the incredible development of the sector – the volumes are increasingly growing at unbelievable rates. The insurance market grew 17% in 2007, 18% in 2008 and despite the world crisis the expected growth in 2009 is 15%. 

The volume of Life Insurance premium is today more than 10 times the volume in 2000. Based on the numbers of Swiss Re I draw a comparison graph between the premium volumes of Brazil (in red and the US (in blue). The index of both is 100 for 1999.

The US volume for 2008 is still 25 times the Brazilian but is even so there is something impressive on the Brazilian market development. The main reason is, of course, the growth of the whole Brazilian economy and the improvement of the purchasing power of the poor.

But there is another reason for this development: bancassurance.

Bancassurance in Brazil succeeded to bring insurance to places and people that never saw a broker in their lives. The atmosphere was favorable: there was no regulations limitation to cross ownership between banks and insurance companies and the banks possess a great number of low income customers and proved to be excellent channels for insurance.

Recently the Brazilian Magazine EXAME published an interesting reportage about the competitive bancassurance market in Brazil. There was a lot of interesting numbers in the article - some of them left me really astonished:

• Insurance is the responsible for 34 % of the invoicing volumes of Bradesco (one of the largest private banks in Brazil)
• According to the American Bank Insurance Market Research Group (BIMRG), 80% of the profit of the Brazilian banks came from their insurance companies
• The share of bancassurance in the market share is 55 % (lower than Italy, Spain and France but greater than any other American country – Columbia is 15% and the US is 2 %)
• The administration cost for bancassurance is 16% of the premium and 19 % for the others