This is particularly relevant given the ambition of some InsurTech players to hyper select risks or price on many more factors than are traditionally used in order to gain a competitive advantage. Tapadar and Thomas don’t argue that it will be individual insurers’ interests to allow adverse selection, but if these companies are successful it may then have implications for policy makers.
Ah models, my old friends. You’re always wrong, but sometimes helpful. Often dangerous too.
A recent article in The Actuary magazine addressed whether “de-risking in members’ best interests?” I say “recent” even though it’s from August because I am a little behind on my The Actuary reading.
In the article, the authors demonstrate that by modelling the impact of covenant risk, optimal investment portfolios for Defined Benefit (DB) pensions actually have more risky assets than if this covenant risk is ignored.
The covenant they refer to is the obligation of the sponsor to make good deficits within the pension fund. Covenant risk then is the risk that the sponsor is unable (typically through its own insolvency) to make good on this promise.
On the surface it should seem counterintuitive that by modelling an additional risk to pensioners, the answer is to invest in riskier assets, thus increasing risk.
The explanation proffered by the authors is that the higher expected returns from riskier assets allow the fund to potentially build up surplus, thus reducing the risks of covenant failure.
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.
Bancassurance, says the oracle or finance definitions online (aka Investopedia) is :
…is an arrangement in which a bank and an insurance company form a partnership so that the insurance company can sell its products to the bank’s client base. This partnership arrangement can be profitable for both companies. Banks can earn additional revenue by selling the insurance products, while insurance companies are able to expand their customer bases without having to expand their sales forces or pay commissions to insurance agents or brokers.
Bancassurance has been a major part of European and Asian insurance markets and, for a time, was presumed to be the future of insurance distribution in most countries around the world.
If you haven’t heard about CRISPR and CAS9, you won’t understand why I say it seems likely that my children will be the last in my line that are “pure natural” descendants. My grandchildren will almost certainly be genetically altered in some direct way due to the explosion of genetic manipulation possibilities just beginning to open up.
Insurers have long worried about the costs and ethics of genetic testing. The time to start considering the impact of annuitant mortality is probably already in the past. The possible improvements in life expectancy are, according to some, literally unbounded. I don’t quite go that far yet, but the possibilities are provocative.
In another post, I’ll discuss my concerns around antibiotic resistance, and other risks to mortality, but for now, do yourself a favour and watch this crash course in the possibilities of cheap genetic editing.
The Brookings Financial and Digital Inclusion Project measures South Africa one place behind Kenya in terms of financial inclusion.
I’m still working my way through the full report, but Kenya’s score is a significant jump above South Africa and the closely contested positions below it. Is Kenya genuinely making such inroads or is this a function of the measures used?