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Claims analysis, inflation and discounting (part 2)

This is part 2 of a 3 part series. Part 1 is here.

Non-life claims reserves are regularly not discounted, for bad reasons and good. This part of the series looks at the related issue of inflation in claims reserving. (You’ll have to wait for part 3 for me to talk about the analysis that prompted this lengthy series.)

In many markets, inflation is low and stable. Until a decade ago, talk of inflation wouldn’t have raised much in the way of deflation either. That’s still sufficiently unusual to put to one side.

Low, stable inflation means that past claims development patterns are mostly about, in approximate descending order of importance (naturally depending on class and peril) Continue reading “Claims analysis, inflation and discounting (part 2)”

Claims analysis, inflation and discounting (part 1)

I’ve had the privilege to straddle life insurance and non-life insurance (P&C, general, short term insurance, take your pick of terms) in my career.  On balance, I think having significant exposure to both has increased my knowledge in each rather than lessened the depth of my knowledge in either.  I’ve been able to transport concepts and take learnings from one side to the other.

A recent example relates to the common non-life practice of not discounting claims reserves.  Solvency II, SAM and IFRS17 moves to require discounting aside, it is still more a common GAAP approach to not discount than to discount claims reserves.

Discounting or fiddling with inflation has some obvious implications for analysing actual vs expected analysis, reserve run offs, and reserve adequacy analysis. That some non-life reserving actuaries trip over because it’s more natural in the life space.

But, first, why are non-life reserves so often not discounted? There are several reasons typically given: Continue reading “Claims analysis, inflation and discounting (part 1)”

Who owns Defined Benefit holes?

In 2014, John Oliphant was fired from the Government Employees’ Pension Fund (GEPF) where he was principal executive officer.  There were allegations, some details not disputed, that had Mr Oliphant accused of exceeding his powers and not following due process which amounted to, at the maximum, some hundreds of thousands of Rands.

That outcome, with those modest numbers, especially with the murk that surrounded the allegations, contrasts markedly with the hundreds of millions of Rands known to be deeply mired in scandal at the moment without consequence.

The GEPF and the Public Investment Corporation (the PIC, which investments money on behalf of many state entities) are proximate with huge amounts of money. It could be expected to be an attractive target for those with sticky fingers and connections. So when stories emerge of PIC directing GEPF investments towards SOEs or other private investments for merits other than the investment returns for the fund, nobody is surprised but plenty are concerned.

Most of the stories in the press on this matter are misinformed.  The claims that pensioners’ money is at risk are misleading at best. One exception is the Daily Maverick article by Dirk De Vos. In this article, De Vos explains why tax payers rather than (only) government pensioners will bear the burden of failed investments for the GEPF. Continue reading “Who owns Defined Benefit holes?”

The worst insurance policy in the world

Aviva in France is still dealing with having written the worst insurance policy in the world. From the sounds of things, they weren’t alone in this foible. It’s also hard to say as an outsider what the right or reasonable resolution to their current problem is, but here is the policy that they wrote.

  • Buy a policy
  • Choose what funds you want to invest in
  • Unit prices calculated each Friday
  • Allow policyholders to switch funds on old prices until the next week
  • Hope like hell policyholders don’t switch out of poorly performing funds into well performing funds with perfect information based on backwards, stale prices.

Inconceivable – and since I don’t know more than I read on this blog post, maybe the reality and liability is really quite different.

See the FT on the man who could sink Aiva

Book Review: Bitcon – The Naked Truth About Bitcoin

Jeffrey Robinson, the author of the well known book “Laundrymen” that I’m now reading, has written an engaging story about The Satoshi Faithful (as he calls them) supporters of Bitcoin and where their Faith is leading them stray.

The book is called BitCon: The Naked Truth About Bitcoin and it doesn’t pull punches in deriding the would-be currency. If you don’t know anything about Bitcoins, it may skip over some of the introductions necessary to hold your own in conversation. This isn’t a primer on Bitcoins or crypto-currencies, but it also doesn’t spend chapters on involved technical details so you won’t be completely lost.

I described the book as “engaging”. For me, already very sceptical of the long-term chances of success for Bitcoin and specifically  critical of its suitability as real “currency”, it had me nodding in agreement with many sections. Frankly, I don’t know how persuasive it would be to a fervent supporter (not that much anything would be).

I did enjoy the insights into some of the personalities behind Bitcoin and the histories of different supporters and how this has changed over the short time Bitcoins have been around. I learnt more about the Dark Web than I knew before, gaining a new appreciation for how dark the underbelly of the web and Bitcoins are.

Robinson ignored what I think is a key limitation on Bitcoin. Supporters claim its value derives in large part from the limited supply, but without any intrinsic value, other crypto-currencies are near-perfect substitutes. I’ve blogged about this before and was looking forward to seeing another take on it.

I enjoyed the book, reading through it fairly quickly and without wanting to switch to something else, suggesting Robinson hit the target with length and balance of information vs entertainment.

Go grab a copy from Amazon – BitCon: The Naked Truth About Bitcoin.

European deflation risks not deflating

The UK Telegraph (and other sources) are highlighting the rising panic about Euro area deflation. For those Austrian / hard money / gold standard / bitcoin / generally poorly informed amongst you, it’s not that deflation is itself a problem, but that it creates scenarios of debt spirals increasing the real value of debt obligations and decreases demand and economic growth through increasing the real cost of labour through downwards sticky prices (most especially wages).

European five year inflation expectations

European five year inflation expectations

It really does seem that UK / US policies are, more slowly than necessary, coming right and the economies are slowly shrugging off the GFC and are moving forwards.  The rest of Europe is not.