Telecoms firms entering profitable segment of insurance market. What’s interesting here is that Vodacom have obtained a licence to sell insurance and MTN apparently already has a licence. With all the regulatory change (SAM, TCF, POPI et al) going on in the insurance market it requires view of significant volumes and profits to warrant the complexity and costs of a new licence.
Nigerian GAAP, soon to be replaced by IFRS at least in the financial services sector, requires IBNR liabilities to be set equal to 10% of the Outstanding Claims Reserve. This is a terrible estimate of IBNR and there really are other, also very simple, better measures available.
As an aside, the use of IFRS balance sheet figures for regulatory reporting is also an unusual idea. There is no particular reason to believe that a shareholder financial reporting basis is appropriate as a regulatory measure. It can be, with specific capital rules perhaps, but it’s not automatically so.
Why the 10% of OCR rule for IBNR liabilities is so bad:
So what’s better? Well aside from the range of standard but fairly complex techniques (including Ultimate Loss methods, Basic Chain Ladder, Bornhuetter-Fergusson, Average Cost Per Claim and a whole range of stochastic methods) there are better simpler measures.
A starting point, although also very far from ideal, is the current (soon to be changed) South African statutory requirement of 7% of net written premiums. It also isn’t sensitive to different delay patterns and will give poor results if net written premium is growing or shrinking rapidly.
Really, the ideal simplification requires a little more complexity, but as a reward for this effort is a far more robust, more accurate measure that behaves sensibly in a far wider set of scenarios.
For each line of business for each delay year, we use a specified percentage of gross earned premium for the gross IBNR. Reinsurers’ share can be calculated similarly. The information relating to earned premium per line of business going back several years should be trivial to obtain and ensures we get a sensible pattern taking into account the growth in the business, the mix of business as well as change in mix of business. The method works well for start-up, mature or declining books.
The fundamental drawback of not reflecting a particular insurer’s patterns remains, but aside from using actual delay data this is about as good as one can hope for.
Frankly, why more regulators don’t prescribe this method is a mystery. The information is available, it’s trivial to calculate and verify and the results are robust.
I’m flying to Lagos for a few days to work with a couple of Nigerian insurers.
The Nigerian financial services market is already significant and growing, but insurance is still quite small. Risk and capital management are embryonic and there are simply too few actuaries in the market to push practices beyond the 1970s.
Net Premium Valuations with only very crude allowances for expenses and not separate reinsurance balances are the norm. With Profits business management is a little Wild West with few protections in place for policyholders.
Let’s see how the trip goes.
The Consumer Protection Act (CPA) protects consumers from abuse by enforcing fair practices, improved disclosure and added minimum warranties etc,
It’s a good piece of legislation, even if at times some aspects of it may result in greater costs than benefits.
TimesLive has a story about the alleged noncompliance of medical schemes with the CPA.
Some of the issues may have merit, but this struck me as particularly troubling:
According to the act, it is unfair when a consumer is discriminated against on the grounds of age.
Our constitution explicitly allows discrimination on actuarially sound rating factors that have both a statistical and causal link. This is how insurance is South Africa still uses underwriting to select homogenous groups of risks and to limit anti-selection by policyholders. If widespread anti-selection were to occur, then life insurance would not be viable.
Medical Schemes in South Africa have only very limited underwriting options in order to provide as many citizens as possible with fair health coverage. “Late joiners” are charged a premium since they haven’t contributed to the societal risk pool since they were most healthy and therefore haven’t paid “their fair share”. This has to do with a specifically identified risk rather than general discrimination based on age. These restrictions are important to maintain the solvency and viability of medical schemes.
Some schemes prevent women who fall pregnant within nine months of joining the scheme from claiming for the pregnancy even though they pay full premiums
This point is more tricky, but it does again reflect a misunderstanding. “Full premiums” on an actuarial sound basis have probably not been paid, since the fair premium for a member who joins just to get pregnancy benefits and hasn’t contributed at other times would be much higher than the premium that is charged. This one is a little more grey and while I feel the rules are entirely fair, they may not be viewed that way by a particular judge on a particular day.
Some schemes require that members give three months’ notice when terminating their membership, whereas the act deems 20 business days to be reasonable
This might reflect the desire to not have members leave a scheme immediately after having utilized the maximum benefit available to them before joining another scheme. I don’t know how much of this behavior would ever happen, so this might also ultimately be changed.
Many schemes don’t enforce the allowed waiting periods for members joining. If some of these other changes were to be made, I would expect these provisions would be more regularly used. Of course, that is another of the problems cited with medical schemes arising from the CPA.
All in all, we may see some changes, but by and large these comments reflect a lack of appreciation for the actuarial realities of managing a health scheme with community rating.
The Value of New Business written by an insurers is a good measure of the value created through sales activity over a certain period. It’s not the easiest number to interpret in terms of profitability though.
New Business Margin, which is the Value of New Business (VNB) as a percentage of the Present Value of New Business Premiums (PVNBP) is a common measure of profitability of that news business.
But it’s a flawed measure, especially when it comes to comparing product lines and insurers or even to understand the change in profitability from one period to the next. It uses and unequal yardstick to measure business.
New Business Margin on Revenue (NBMR) provides a significantly improved measure of profitability that can be used to compare margins across products, across insurers and across time. Further, it leads easily to a component analysis of the margin, adding additional insights to shareholders, brokers and regulators.
If you haven’t read my introductory post on New Business Margin on Revenue, it would be worthwhile doing so now – this post is going to illustrate the sort of results it provides in a practical, numerical example.
Example 1 considers how NBMR clarifies distortions from a change in mix of business.
Example 2 shows how more complex dynamics can be understood through a component analysis of NBMR. The spreadsheet showing the underlying calcs is attached at the end of this post. Continue reading
Embedded Values (EVs) are widely used to measure value for life insurers. In the context of long-term contracts such as individual life, it reflects the value embedded in prudent regulatory provisions (or “actuarial reserves”).
For short-term business (group risk, health insurance, health administration, general insurance etc.) it is something different since these lines don’t have long-term prudent provisions. In these cases it reflects the present value of future profits expected to be earned out of the existing business.
The inclusion of these short term types of business within EV is widespread. It seemingly increases consistency between different types of contracts since we are considering the long-term expected profitability in all cases. More on this apparent consistency in a moment.
EV is not a complete economic measure of the value of an insurer, since it ignores future profits arising from future new business. This is by design. An Appraisal Value incorporates the Value of Future New Business (VFNB) as well, although there is always subjectivity over how many years of future new business should be included. (More on this in a separate post.)
The idea of “existing business” and “future new business” is clear in the individual life context. It’s existing business if you have a contract, and future new business if not. Premium increases and slight benefit modifications can usually be accommodated within the existing contract and so should ideally be included in the Value of In Force (VIF) based on the expected probabilities of these changes. Continue reading
I’m in Bahrain for a few days kicking off an ERM implementation project. 35 degrees at 7am in Doha on the way there…
Bahrain has a population of around 1.2 million but has a well developed insurance sector. Economies of scale limit domestic growth and regional expansion faces tough competition and increased complexity. Will be interesting to see more.