Downwards counterfactual analysis

Stress and scenario testing are important risk assessment tools.  They also provide useful ways to prepare in advance for adverse scenarios so that management doesn’t have to create everything from first principles when something similar occurs.

But trying to imagine scenarios, particularly very severe scenarios, isn’t straightforward. We don’t have many examples of very extreme events.

Some insurers will dream up scenarios from scratch. It’s also common to refer to prior events and run the current business through those dark days. The Global Financial Crisis is a favourite – how would our business manage under credit spread spikes, drying up of liquidity, equity fall markets, higher lapses, lower sales, higher retrenchment claims, higher individual and corporate defaults, switches of funds out of equities, early withdrawals and surrenders and increased call centre volumes?

Downwards counterfactual analysis is the: Continue reading “Downwards counterfactual analysis”

Collective nouns for cats

In my ASSA convention presentation on systemic risk last week, I took pains to highlight the difference between real systemic risk and mere catastrophic claim risk or even concentration risk.

In this post I will cover these and other cats, the place of reinsurance including “feelings” and why this is hyper relevant for captives.

To demonstrate how even large general insurance catastrophes typically have no systemic implications for South Africa, I referenced the “2017 fire and storm claims”.

2017 Western and Southern Cape storm and fire claims

The media reported the following on these claims:

“Santam noted that the total insured damage has been estimated at around R3 billion, with economic losses (taking uninsured property into account) at significantly higher levels.

This was by far the worst catastrophe event in South African insurance history, with Santam client claims totalling around R800 million, of which R72 million related to the Cape Town property damage.”

So that all seems very intense. But then the story continues. Continue reading “Collective nouns for cats”

Credit Life Aside: banning sale of credit life alongside lending?

Some markets have banned sale of insurance alongside lending

Another way to deal with the problem of competition in credit life is to simply not permit the sale of insurance at the same time as the loan. This means that more providers will have an opportunity to make the sale since the lender doesn’t have the ability to slip the product in alongside the loan.

Some problems:

  • Overall this will increase acquisition costs as it is extremely cost efficient to distribute along with the loan granting process.
  • The lender is still in the best position to follow up with an outbound sales lead in the days or weeks after the loan has been granted (unless they are prohibited from selling at all, which is another option that can be considered)
  • Lenders may not be prepared to lend without the protection of credit life in place
  • The reality remains that for some lenders, for some loans and for some credit life policies, the product acts as a source of revenue rather than a risk mitigant. Without that extra revenue, the loan might not be viable due to risks and expenses of collecting the installments.

So this approach is not without its own troubles.

Credit Life regulations and reactions (3)

This is a short addition to parts 1 and 2.

The question as to whether the benefit payable under a credit life policy can or should include arrears payments.

The purpose of a credit life policy is to protect the policyholder, the lender, and the policyholder’s estate (not necessarily in that order) against death, disability or retrenchment. This is only effectively achieved if the entire amount owing under the credit agreement is paid off by the policy.

So as a starting point, it would make sense for arrears to be included. All the stakeholders in the arrangement want this.

Back to the legal stuff

What do the credit life regulations say? Continue reading “Credit Life regulations and reactions (3)”

Credit Life regulations and reactions (2)

In part 1 I discussed the implications of basing premiums on initial balance or declining balance for profitability and the threat of substitute policies.

In this post I want to discuss substitute policies again, talk about cover for self-employed persons and definitions of waiting periods.

What is a substitute policy

Substitute policies are one of the few drivers of real potential competition and therefore competitive markets for credit life in South Africa. That’s probably not the definition you were expecting but nevertheless it is true.

With some exceptions, credit life is not sold in a competitive or symmetrical environment and customers have little or no bargaining power.

 

A substitute policy is a policy from another insurer (not connected to the lender) that covers the same or similar benefits and legally must be accepted as a substitute for the cover required by the lender under the terms of the loan.

Historically, the rate of substitute policies was tiny. Often less than 1%. Lenders and their associated insurers weren’t exactly incentivised to make it an easy process. For smaller loans and therefore smaller policies, the incremental acquisition costs can be prohibitive.

Substitute policies are gaining momentum

I am aware of several players specifically targeting existing credit life customers and aiming to switch these customers to their own products.

This has been enabled through:

  • standardising of credit life policies
  • bulking of many different small credit life policies into a larger one that is more cost effective to acquire and administer
  • technology (digital / online especially but also call centres) that can moderate costs
  • the growing awareness of how profitable these policies often are for a standalone insurer, even at the various caps imposed.

Lenders may need to supplement revenue on high risk customers because interest rate caps apply, but the stand alone insurer is focussed on a reasonable underwriting result, not the level necessary to offset costs elsewhere.

What counts as a substitute policy / minimum prescribed benefits

A substitute policy simply needs to cover the minimum benefits from section 3 of the credit life regulations. This covers death, permanent disability, temporary disability and unemployment or loss of income.

These regulations can be difficult to interpret, but ultimately are clear: Continue reading “Credit Life regulations and reactions (2)”

ENID not Blyton

ENID is a term widely used, just generally not in South Africa. For some reason we didn’t import the term along with most of Solvency II.

This has nothing to do with the Famous Five. While it is most common in the general insurance space, it is relevant across the spectrum of risk management and assumption setting.

Events Not In Data or “ENID” is the forgotten cousin of “what to do with outliers in your data”.

Outliers and where to find them

Outliers are observed values substantially different from others in a sample. Some more formal definitions include:

“An outlier is an observation that lies an abnormal distance from other values in a random sample from a population”

“an outlier is an observation point that is distant from other observations”

Not these sort of outliers. Entertaining book though.


How to deal with outliers?

Simple question, complex answer. It depends a great deal on the context.

Ultimately you need to make the judgement call “are these outliers under- or over-represented in the data”. Continue reading “ENID not Blyton”

Credit Life regulations and reactions (1)

Credit Life regulations have been live for long enough now that insurers are starting to feel the impact and the shake-up of amongst industry players is starting to emerge.

There have been plenty of debate around the regulations, in part because of the dramatic financial and operational impact they will have, and partly because of how imperfectly worded they are and the scope for interpretation.

I’ll be posting about this more in the coming days.

Basing the premium on initial or outstanding balance

First, a real anomaly is the ability for insurers  to charge the capped premium rate either on initial loan balance or on the declining outstanding balance.

There are good practical reasons to want to charge a single, known amount to policyholders. It is easier to administer and policyholders have greater clarity on what they are paying. Continue reading “Credit Life regulations and reactions (1)”