New Qualifiers’ Reception in the Royal College of Physicians · 2018-10-13 · June 2011 The...

June Newsletter 2011 · 1 · SAI

Professionalism Course for NewQualifiers. The Society hosted a ProfessionalismCourse on the 10th and 11th of March atthe Druid’s Glen Resort in the WicklowMountains. Many of the new qualifiers inthe above photograph attended thiscourse. The course was well attended,with 49 attendees from all areas of theprofession with various backgrounds,which made for interesting and livelydiscussions throughout the 2 days.

Present throughout the course wereYvonne Lynch, the Society’s Director ofProfessional Affairs, Mary Butler, theSociety’s Director of Member Services,Emily O’Gara, the Society’s Manager ofProfessional Affairs and Sarah Kearns, SAIEducation Committee member, who did afantastic job at coordinating the entirecourse.

After arriving at the hotel, registration andintroductions were quickly over and thefirst part of the morning was spentdiscussing the theory and practice ofprofessionalism, in particular the Society’sProfessional Conduct Standards (PCS) andtheir applications. As was also the case forthe remainder of the course, this subjectwas approached in a very interactivemanner involving case studies which werevery well received.

Much of the rest of the day was used forthe discussion of how the PCS applied tospecific areas, with the help of expertsfrom the various fields: Ger Bradley(General Insurance), Martin Haugh(Pensions) and Fergal O’Shea (LifeInsurance), together with an outline of thedevelopments and challenges facing theFinancial Services Industry by EmilyO’Gara. The day was rounded off with a Q and A session with the Society’s Vice

New Qualifiers’ Reception in the Royal College of Physicians

New Qualifiers & Society’s Professionalism Course . . . . . . .Pages 1 & 2

IFRS Insurance Contracts Phase II Exposure Draft . . . . . . . . . . .Page 3

Will the Private Pensions Industry Survive? . . . . . . . . . . . .Pages 4 & 5

Gender Directive . . . . . . . . . . . . . . . .Page 6

The CMI Mortality Projections Model . . . . . . . . . . . . . . .Page 7

Risk Aggregation . . . . . . . . . . . .Pages 8 & 9

An Actuary in Cameroon . . . .Pages 10 & 11

Update from the CommunicationsCommittee . . . . . . . . . . . . . . . . . . . .Page 12

A Student Section on SAI Website . . . . . . . . . . . . . . . . .Page 13

SAI Life Reinsurance Forum . . . . . . . . . . . . . . . . . . .Pages 14 & 15

Irish Industry Submissions for QIS5 . . . . . . . . . . . . . . . . .Pages 16 & 17

SAI Practice Committee Updates. . . .Page 18

Obituaries . . . . . . . . . . . . . . . . . . . . .Page 19

Back Page . . . . . . . . . . . . . . . . . . . . .Page 20

June

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The Society of Actuaries in Ireland

Back Row L to R: Karen Walsh, Finian Raftery, Emma Ryan, Colin Murphy, Donal O’LearyMiddle Row L to R: Aoife Beirne, Cian O’Muircheartaigh, Colm Kelly, Sheila Harney,

Brian O’Connor, Pamela Doran, Kenneth Deane, Aisling KellyFront Row L to R: Ciara Crinion, Brian Curran, Kevin Murphy; SAI President, Niall Alexander, Sheila Harty.

...continued

President, Paul O’Faherty and the expertsmentioned above, who answered anumber of questions from the floor,including several around the currentchallenges facing each of the variousactuarial fields and also the Society’s future direction and influence.

Drinks and a good dinner followed withlively entertainment in the form of a popquiz from the Vice President while in thebackground a certain member of theSociety took every chance possible to“encourage” Society participation for theinnocent newly qualifieds. Celebrationscontinued through the night, and forsome the early morning, with a fewindividuals racking up plenty of practicefor the next X Factor.

All after effects from the night before werequickly banished the next morning with ahearty breakfast and the day kicked offwith a video underlining the importancemanner. Brian Morrissey then provided aninteresting introduction to Solvency II andEnterprise Risk Management (ERM), hottopics that were discussed again and againover the course of the 2 days. A livelydiscussion ensued including how bestactuaries could place themselves in theSolvency II and ERM landscapes and thenew CERA qualification was alsomentioned. The rapidly growing area ofHealth Insurance was next up, where JohnArmstrong emphasized the importance ofthe role an actuary has to play in this areaalong with the challenges they currentlyface.

Before the break for lunch, Elena McIlroyLa Rosa, a recent new qualifier and acurrent active member of the Society,outlined ways in which newly qualifiedscould become involved with the Societyand welcomed suggestions on how newlyqualified members’ interests would be bestmet. Just like at the dinner table theprevious evening, participation was onceagain strongly “encouraged”.

After lunch, Mike Claffey provided detailon the Society itself and outlined themany ways in which fellows could becomeinvolved in the regular panels, discussionsand other events and described thefunctioning of the Society’s DisciplinaryScheme. He also provided an outline ofthe current CPD scheme.

Mike then stayed on to co-ordinate a livelyworkshop, culminating in a series of shortpresentations on some of the pertinentSociety topics, such as the role of CPD inkeeping actuaries relevant, opportunitiesfor actuaries in ERM and from Solvency IIand the future for the Society of Actuaries,which all yielded a number of fresh andinteresting perspectives.

The course finished with the presentationof certificates and left all attendees readyto apply the thoughts and ideas generatedduring the 2 day course to their every dayworking lives. The author is sure that allthe attendees would like to join him inthanking the organisers and speakers forall their effort and time in turning whatcould have been a formality into aninteresting and enjoyable course.

Emmet Leahy

Professionalism Course for New Qualifiers ... continued


On Wednesday 9th March members of theLife Insurance Accounting Sub-Committeegave an interesting and informativepresentation on the recent IFRS Phase IIexposure draft.

The Meeting was opened by Paul O’Faherty,Vice President of the Society of Actuariesin Ireland.

Introduction to the ExposureStandardThe first presenter of the evening wasBrian Morrissey. Brian gave an excellentoverview of the exposure draft.

The IFRS Phase II exposure draft waspublished by the International AccountingStandards Board (IASB ) in July 2010 andproposed a new accounting framework forinsurance contracts. The IASB acceptedcomments on the exposure draft in 2010and are currently working on the finalaccounting standard which is due in June2011. The effective date of this standard isstill to be finalised, however it could be asearly as 1 January 2013.

In parallel to this the Financial AccountingStandards Board (FASB) in the U.S.released a discussion paper with theirproposal on valuing insurance contracts.It is intended that both the IASB and FASBwould set a common standard oninsurance contract accounting, howeverthere are still some key points of differencethat remain between the approachesproposed by the two bodies.

The IFRS exposure draft proposes a newmeasurement for medium to long terminsurance contracts based on a buildingblock approach. Under this proposal, thetotal insurance liability is the sum of thefollowing four building blocks:

• Probability-weighted current estimateof future cashflows of a contract

• Adjustment to allow for the time valueof money

• Risk adjustment – an assessment of theuncertainties of the future cashflows

• Residual margin – initial profit to beamortised over the life of the contract

Brian discussed the details of each of thesecalculations including the discount rateallowed, the permitted techniques forcalculating the risk adjustment and thecashflows included in the residual margincalculation. Some particular points of note

were that the exposure draft allows onlyincremental acquisition costs to beamortised in the residual margin. It alsodoes not permit the residual margin to bere-measured over time in light of changesin economic conditions.

Transitional measures for dealing withexisting business were outlined along withthe disclosure requirements under theproposed new standard.

Feedback from the ConsultationProcess The next speaker was James Archer. Jamessummarised the responses received by theIASB and FASB from insurers, tradeorganisations and accounting firms.Some interesting results from James’spresentation included the following:

• 53% of respondents believed theproposed measurement model wouldincrease the relevance of financialreporting for insurers. Although thislooks quite low, James clarified thatthere was more support given to thisapproach in Europe than the U.S.Respondents in the U.S. believed thatU.S. GAAP was already sufficient.

• 60% of respondents disagreed withthe residual margin amortisation andmost thought this should be adjustedfor changes in non-financialassumptions over time.

• 93% of respondents disagreed withthe proposed transitionalarrangements for existing contracts.

The IASB intend to take the respondents’concerns and opinions into account whensetting the final standard.

Comparison to Solvency IIThe final presenter of the evening wasStephen Hardy. Stephen outlined thesimilarities and differences between theIFRS insurance contract valuationproposed in the exposure draft and theSolvency II valuation as described in QIS5.Some of the key comparisons were asfollows:

• The present value of future cashflowsunder the exposure draft wascompared to the best estimateliabilities in QIS5. Both of thesecalculations use a discounted cashflowapproach but the allowance forexpenses differ and the discount ratesapplied could also potentially bedifferent.

• The risk adjustment under theexposure draft was compared to therisk margin in QIS5. The exposure draftallows various methods of calculationsbut QIS5 allows only the cost of capitaltechnique with defined time horizonsand cost of capital rate.

• The residual margin under theexposure draft does not have acomparable QIS5 calculation. This isthe deferral of gains at inception underIFRS and the corresponding amount isheld in available capital in QIS5.

Although there are similarities betweenthe two valuation approaches, the level ofdifferences is likely to mean thatcompanies will need to invest time andresources into systems and controls forproducing results separately on an IFRSbasis.

The meeting came to a conclusionfollowing recommendations from thespeakers that companies should beginpreparing for IFRS Phase II as soon aspossible. The Society’s Vice Presidentthanked the speakers for their informativepresentations. For further information onthis presentation, including a copy of theslides and a podcast of the presentationare available on the Society’s website.

Donna McEneaney

IFRS Insurance Contracts Phase II Exposure Draft



Tony Gilhawley presented to a largeattendance on the topic ‘Will the privatepensions industry survive?’ on Wednesday23rd March. Given the title of thepresentation some sceptics felt that theanswer might be short but what followedwas a lengthy and informativepresentation. Tony covered various reasonswhich led to the current difficulties in thepension environment and the manychanges it is going through.

State PensionTony opened with a slide from the Wrightreport, a review by the Department ofFinance. He explained how the currentpension conditions are as a result ofchanges over the past decades. The strongeconomic and earnings growth in the lastdecade led to a surge in current publicand private pension liabilities andexpectations. Even with no change to thecurrent State Pension, Tony suggested itwas unaffordable in the short term due tothe rapid increase in the number ofclaimants combined with a requirement to significantly reduce Governmentexpenditure over the next four years.Gross expenditure on State Pensions in2011 will be circa €4.7bn, compared tojust €1.7bn in 2001. The very positivedemographics of recent years will nolonger apply, with an additional 239,000people attaining age 65 by 2021.

The surplus built up by the SocialInsurance Fund (from which theContributory State Pension is paid) wasexhausted by 2010 and now requires asubstantial Exchequer subvention inaddition to employer and employee PRSIcontributions. There are some otheroptions for retrieving the cost suggestedunder the National Pensions Frameworkbut none of these deal with the currentcash flow issue. Tony concluded hisdiscussion of the State Pension byoutlining some immediate options fordealing with the increasing cost of StatePensions such as a reduction in benefitsand tax increases, but felt that a reductionin the State Pension was likely, even if veryunpalatable from a political point of view.

Public Service PensionsPublic Service Pensions are also paid fromcurrent taxes and their cost has alsorapidly escalated in recent years due tobenchmarking increases and increasingnumber of public service retirees. Thereare a wide range of schemes within thepublic service with varying levels ofbenefits. The benefits are paid out of cashflow so benefits have been the main focus

and long term cost was not fullyconsidered. As Tony nicely put it, addedyears were handed out like ‘snuff at awake’. Even with the recent pensions levyand pay cuts, the Exchequer grossexpenditure on public service pensions islikely to increase by 12% over the nextfour years to €3.1bn.

National Pensions Reserve FundThe National Pensions Reserve Fund(NPRF) was established to pre fund part ofthe real increase in the cost of publicpensions, i.e. State and public service,from 2025 onwards.

Notionally 2/3rds of the NPRF wasallocated to meeting future State Pensionsand 1/3rd for public service pensions.

However by using the NPRF to recapitalisethe banks, with a highly uncertain returnon this investment, the NPRF is in effectalready spent and hence the future cost ofpublic pensions will be unsustainablewithout the benefit of the NPRF.

Private PensionsTony outlined the headwinds that theprivate pensions ran into over the last tenyears. In addition to the impact oflongevity, investment, salary inflation andtax, pension arrangements have recentlybeen targeted by the Exchequer as apotential source of increased tax revenuesthrough various restrictions and reductionsin private pension tax reliefs.

Poor investment returns are part of thereason that the number of defined benefitpension schemes failing the fundingstandard has increased so much since2007, in addition to increased longevityand earnings growth.

The consensus managed fund, a typicaldefined contribution default fund, hasshown patchy returns over the last 10years with many contributors experiencingnegative returns if you take into accountthe poor switching decisions that weremade as the market turned. OECDpension returns show Ireland withsignificantly worse pension investmentreturns than all other countries during2008 as Irish schemes were over-exposedto equities, including Irish equities.

One response to defined benefit schemedeficits is the proposed introduction ofSovereign Annuities. Tony suggested thatSovereign Annuities could turn pensionersinto bondholders and may be viewed as alast resort. Another proposal is torestructure defined benefit schemes, for

instance fixing the costs for members andemployers. This would result in a flexiblebenefit but one which may be difficult formembers to understand.

Tony commented that as only 13% of theworkforce are in defined benefit pensionsit’s important that other types of pensionscheme are given more consideration.Given that nearly half the workforce haveno private pension provision, it has beensuggested that auto-enrolment withvoluntary opt out would be implementedby 2014, but this now seems unlikely.

Taxation of Private PensionsA review of the pensions tax system tookplace in 2005 and there have been a lot ofchanges in taxation of private pensionssince. Of the 9 changes recommended inthe 2005 review only 3 were implementedat the time; the cap on retirement fund, acap on lump sums, and the 3% pa (now5% pa) notional distribution from ARF’s.

The 2005 limits on the maximum taxrelieved pension funds and tax free lumpsums were further reduced in Budget2011. It is important that the registeredadministrators of schemes are aware oftheir tax exposure as they now have a‘joint & several’ liability with the memberfor any tax arising where benefits in excessof the limit are provided. They need toensure that the tax is paid or benefitreduced within 3 months otherwise thetax liability increases. Members in thepublic service don’t have the option toreduce their benefit and must pay a taxliability arising on a chargeable excess orlump sum immediately at retirement.

The Fine Gael election manifesto containsa €500m p.a. additional tax revenue itemin respect of further restrictions on privatepension tax reliefs. The Government 4Year Plan suggested a phased reduction inpension tax relief to standard rate by2014; however some sections of thepensions industry are suggesting analternative of a ‘temporary’ 0.5% pa levyto be applied to all pension funds.

The temporary levy is viewed by many asthe lesser of two evils when compared tothe standard rate income tax relief. It isthought that the levy will be more of anissue for defined contribution schemes asit would be difficult to apply tounderfunded defined benefit plans.

SummaryTony concluded that there is an increaseddemand for alternative arrangements forsaving for retirement due to the growing

Will the Private Pensions

number of rules, levies, taxes etc. underthe current private pensions system. Thereis a role for private pensions in future butit is likely to be on a reduced level due tothe Government caps on pension earningsand funding. The levels of current Stateand some public service pensions areunsustainable in any case and likely to bereduced in the future. An important lessonto learn from past mistakes is that, ingiving a promise, we need to bear in mindthe cost so it can be planned for.

DiscussionA number of interesting questions andcomments were raised following thepresentation. The discussion covered thefollowing;

• The possibility of public servicepensions paid through SovereignAnnuitites. Tony advised that this waspolitically unlikely given the Croke Parkagreement in place. It may alsosuggest that default is anticipatedwhich the Government would be keento avoid.

• The likelihood of the implementationof the standard rate of tax relief onpensions. This is built into the four yearplan but the IMF has advised there isroom for manoeuvre, if the funds canbe found from an alternative source. Ifthe standard rate was to come intoeffect it would have a hugely negativeimpact on further private pensionsavings.

• The need for the existence of definedbenefit plans to meet the continuingneed for savings at retirement. There issome potential for defined benefitplans to continue but the problemwith many plans is that the ageingpopulation is coinciding withsignificant underfunding.

The podcast and a copy of the slides areavailable on the Society’s website.

Aoife Singleton

Industry Survive?


Update from the SAI Pensions CommitteeMembers of the Pensions Committeecontinue to meet to discuss currentpension issues. The main recent items fordiscussion have been the ConsultationPaper on Defined Benefit PensionProvision, the impact of the proposed taxchanges on pensions and recent revisionsto ASPs.

Review of Pensions ASPs: • The Minister for Social Protection has

agreed the change in the preretirement discount rate in ASP PEN-2(Retirement Benefit Schemes transfervalues) from 7.5% to 7.25%. Theeffective date of change is 1 June2011.

• Revised versions of ASP PEN-3(Actuarial Funding Certificates andactuarial statements under thePensions Act 1990) and ASP PEN-4(Funding Proposals under the PensionsAct) have completed consultation andhave now also been approved by theMinister. The new versions will beintroduced with effect from 1 July2011.

• A Working Party and Focus Group havebeen established with a view torevising ASP PEN-13 (Conflicts ofInterests) so that it covers broaderconflict issues.

• ASP PEN-12 (Statements of ReasonableProjection - Occupational PensionSchemes and Trust RACs) has beenrevised following the recent ECJ rulingrelating to the Gender Directive. A revised draft is currently out forconsultation with members. The consultation period is due to becompleted by 6 June 2011.

Tax Relief Sub Committee: A sub committee has met several times to consider the issue of the proposedchanges to tax relief on pensioncontributions. The sub committee alsoparticipates in a broader industry widegroup with the same agenda.

Letter to the Minister for SocialProtectionA letter highlighting two key pensionissues for prioritisation was issued to theMinister for Social Protection. The issues inquestion were recent changes to tax reliefand the review of the defined benefitpension system. The letter also requesteda meeting with the Minister to discussthese issues.

Consultation Paper on DefinedBenefit Pension ProvisionThe long awaited Consultation Paper onDefined Benefit Pension Provision has nowbeen issued by the Department. TheSociety is currently preparing a responsewhich will be discussed in detail at theConvention on the 27th May.

CPDPensions Committee is finalising its CPDagenda for the current session. In additionto the Pensions Convention on 27th Maywhich will address the Defined BenefitPension Provision Consultation Paper thereis also a joint meeting with the APLI on16th June. The topic will be SovereignAnnuities.

On Tuesday 15th March 2011, a largecrowd attended a presentation by GerBradley, Dermot Corry and Keith Burns onthe impact of the recent European Courtof Justice (ECJ) ruling with regard to theuse of gender in calculating insurancepremiums.

Ger summarised the background of the EU Gender Directive and the changes thatwill be brought about by the judgment ofthe ECJ. He then discussed the impactthat the ruling could have on GeneralInsurance. Following Ger’s presentationDermot looked at the possible impact ofthe ruling on Life Assurance and Keithfinished with the impact on Pensions.

Impact of the ECJ Ruling –backgroundGer explained that Article 5(2) in the EUGender Directive contains an exemptionfor insurers to the prohibition of usinggender as a rating factor. It permitsdifferences in premiums or benefits wherethe sex of an individual is a determiningfactor in the assessment of risk.

In 2010 a Belgian Consumer Groupchallenged this article on the grounds thatit conflicted with the principle of equaltreatment of men and women under EUlaw. On March 1 2011 the ECJ deliveredthe ruling that different insurancepremiums for men and women did in factconstitute sex discrimination. Given this,from 21st December 2012 it will be nolonger valid to use gender as a ratingfactor.

Ger spoke briefly about the Equal StatusActs 2000 – 2008 (the Acts in Irish lawthat put the EU directives into effect).Collectively these Acts prohibitdiscrimination on certain grounds(including gender) but to date haveallowed an exemption to the insuranceindustry.

Ger finished this section by bringingattention to the definition of indirectdiscrimination in the Acts and explainedthat insurers will need to be careful aboutthis type of discrimination when gendercan no longer be used as a rating factor.

General InsuranceAfter giving a background to the ECJruling Ger looked at the impact onGeneral Insurance.

Current opinion is that the requirement touse gender-neutral pricing will apply onlyto new business and renewals fromDecember 12 2012 i.e. it is unlikely thatgender neutral rates will need to apply toexisting in-force policies at this date.

Implications to consider for generalinsurers include:

• what rates to use for endorsementsthat are applied to existing policiesafter the end of 2012

• possibility of mid-term cancellationsand anti-selection

• pricing will be a particularly difficultarea

Ger pointed out that there is a fine linebetween using a proxy (eg. housewife asan occupation) and indirectdiscrimination.

Ger outlined that the ruling may nowforce insurers to look at other ways inwhich it can better determine the riskfactors and protect itself from downsiderisk. For example, the introduction ofadvanced driver testing or theintroduction of new questions onapplication forms.

Consideration was given to whether agecould be the next factor that is deemed to be discriminatory.

Life AssuranceDermot began with an overview of howpricing generally differs between malesand females for the various types of lifeproducts available.

Dermot considered the impact on newbusiness first. Gender-neutral rates will berequired for new business written fromDecember 21 2012.

Other impacts include the need forprojections in pension quotations to usegender neutral annuity rates. Forunderwriting, insurers will need to ensurethat they do not indirectly discriminatewhen considering other informationprovided (such as height, weight andmedical conditions).

Other possible impacts for new businessare:• possible fire-sale because of cheaper

rates for some customers prior to endof 2012

• rush of new business in 2013 whenrates become cheaper for others

For corporate business it appears thatgender can still be used as a rating factor.

The impact of the ruling on existingbusiness is less clear. There may bedifferent implications for business writtenprior to 2007 (when the EU GenderDirective was implemented in Ireland) andbusiness written between 2007 and theend of 2012.

Particular considerations with regard tothe use of gender-neutral rates for existingbusiness are:

• the monthly benefit charge for existingunit-linked policies

• indexation increases on existingcontracts

• surrender value formulae

Dermot finished by pointing out thatgender is only one factor that insurers useto assess risk. Other countries already usegender neutral pricing and it is somethingthat Irish Insurers will need to get used to.

PensionsKeith began by explaining that theimmediate impact on Pensions from theECJ ruling is primarily as a consumer ofinsurance products i.e. annuities, disabilityand life benefits. There is no immediaterequirement to change factors to be usedin the calculation of commutation factors,transfer values etc.

The main consideration for Pensions is the difference between the use of gender-neutral rates for bulk and individualcontracts. The legal position appears to bethat bulk contracts can continue to userates that differ by gender but individualcontracts will need to use gender-neutralrates.

There is no immediate requirement tochange such things as the Surrender Valuebasis or ASP PEN-12 but the PensionsCommittee will need to bear in mind thatthese may need to be reviewed in thefuture in light of the ECJ ruling.

Q&AA lively Q&A session followed thepresentations. Consideration was given tothe possibility of movement to off-shoreinsurers to avoid gender-neutral rating. Itwas felt that if this became an issue the EUwould find a way to close it down on thebasis that the ECJ ruling is a CommonGood ruling.

Discretionary pricing in motor insurancecame up as an area where insurers willneed to be careful and will need to displaythat the use of discretion is not being usedas a method of getting around gender-neutral pricing.

There was some discussion around theneed for insurers to use new questions tobetter assess risk in the absence of beingable to use gender as a rating factor andthat the avoidance of indirectdiscrimination was very important.

Niamh Nolan

Gender Directive


On Wednesday 30th March 2011, Gordon Sharp and Neil Robjohns delivereda presentation on the latest developmentsin the CMI Projection Model. Gordon wasfirst to speak and provided somebackground and an overview to themodel.

Background & OverviewGordon began by discussing the InterimCohort Projections (ICPs). These werepublished in 2002 (based on data up to1999) and remain the prevalent bases forthe pricing and reserving of pensionbusiness. The reasons for this includeflexibility of use and a perception of‘common currency’.

However, evidence that has emergedsubsequently has undermined the validityof these projections with the result that aCMI Working Party was established in2008 to develop a model that was morerobust, and at the same time retained thedesirable features of the ICPs.

Gordon explained how the Working Partyinitially attempted various stochasticmethods like the P-spline and the Lee-Carter. However, due to variousshortcomings with these methods, themodel ultimately chosen was adeterministic projection, using recentlyobserved mortality improvement rates inthe short term and blending to a longterm convergence rate over time.

Gordon indicated that there was muchdiscussion within the Working Party abouthow to blend mortality improvementsbetween the short term and long term. He went through charts showing historicalrates of improvement observed in differentcountries, as well as graphs showing theconvergence from current improvementrates to a long term rate based ondifferent sets of assumptions.

The new CMI model was introduced inNovember 2009 (based on data up to2008). It was then updated in November2010 to include an extra year’s data. Themodel has both core and advancedversions, with the advanced giving theuser more flexibility over parameterinputs, e.g. speed and pattern ofconvergence.

Details of the ModelNeil was next to speak, going throughtechnical details of observed historicalimprovements, and then focusing on theparameterisation of the new model. Hebegan by charting estimated historicalrates of improvement, using both

population data for England and Wales(from the Office of National Statistics) andassured lives data (from the CMI).

He noted the cohort effect that isobserved in mortality data, and pointedout some interesting features in thepopulation data (e.g., high male mortalityat younger ages due to road deaths, andhigh mortality during certain periods thatwas likely due to AIDS). Neil highlightedthat smaller datasets for assured lives dataaffect credibility and require smoothing.Because of this, the defaults for the modelare based on population data.

Neil then looked at each of the modelparameters in more detail. He reiteratedthat initial rates of improvement areinformed by recent observed experience.For long term rates, there is no defaultvalue set, but possible sources of data tohelp set a value are, for example,national/international data and expertopinion. He also explained howconvergence periods are based onqualitative research, and convergencepath is broadly straight-line.

Model Updates and RobustnessNeil moved on to discuss the differencesbetween the first and updated versions ofthe model. He noted that estimates forrecent improvement rates increased oncethe data for 2009 was incorporated intothe updated version. However, therevisions fell within an expected range,and showed that the methodology givesrelatively stable results.

Neil next talked about the robustness ofthe model, highlighting how there waswide consultation about the model as wellas disclosure of methodology, which waspublished and peer reviewed in bothactuarial and statistical fields. He indicatedthe CMI’s intention for the modelstructure to be updated roughly every 3-5years, so as to strike a balance betweenresponsiveness to new data and stability ofstructure. In addition, there will be limitedannual updates to incorporate eachsuccessive year’s population data.

Neil also talked about parametersensitivity, and explained how changes inparameter values affect mortalityimprovements. He then compared theCMI model to the ICPs and stressed itssuperiority when comparing to observedexperience.

Irish MortalityFinally, Neil discussed observed Irishmortality experience. He pointed out

broad similarities to the England & Walesdata, but also highlighted somedifferences such as a more rapid pace ofcurrent mortality improvement, and howlife expectancy of 65 year olds has evolvedover time between the two populations.

DiscussionA lively Q&A session followed thepresentation, with some interesting pointsraised, such as:

• how long term improvement rateshave consistently exceededexpectations in the past, and may doso in the future, for instance due toadvances in cancer treatments;

• the possibility and practicality oflinking Normal Retirement Age tomortality improvements as predictedby mortality projections;

• the lack of consensus on the existenceof the Cohort Effect outside the Irish &British actuarial professions, and howthis effect may be based purely oninterpretation of data rather than atrue underlying feature of the data.

The podcast and a copy of the slides areavailable on the Society’s website.

Rafay Khan

The CMI Mortality Projections Model


On the 5th April 2011, the Societydemonstrated its continued commitmentto the developing area of Enterprise RiskManagement by organising an eveningpresentation on the topic of RiskAggregation.

The two speakers for the evening wereElliot Varnell, a Principal Advisor withKPMG UK and Curt Burmeister, a Directorof Risk Solutions at Algorithmics Inc.

The meeting was well-attended by Societymembers from across the actuarialprofession, including those from theinsurance industry, consulting andregulatory backgrounds which is perhapsindicative of how important a thoroughunderstanding of risk aggregationtechniques has become in recent years. In particular, the application ofdependency structures to combine riskswithin capital models (aggregation) andthe subsequent use of robust methods toallocate capital requirements back to theirunderlying risk drivers (de-aggregation)are poised to be particularly importantunder Solvency II.

The main aim of the speakers’presentations was to introduce membersin an accessible manner to the:

• Key ideas and theories used in riskaggregation – event causation, risk-drivers, dependency and correlation,non-linearity, positive semi-definiterequirements.

• Various techniques in common use inmodern risk aggregation and capitalallocation – correlation matrices,implicit and explicit copulas, Euler,Triangle & Harrell-Davis allocationmethodologies.

• Practical considerations and challenges– calibration in the absence ofadequate data, incorporating expertjudgement, governance of largecorrelation matrices, finding robustallocation methods, fungibility and taxrestrictions.

Elliot opened the presentation bydescribing some of the key stakeholders inRisk Aggregation and their differing (andsometimes conflicting) interests in theprocess before going on to briefly coverthe most common risks identified by QIS4in the internal modelling of the Europeaninsurance industry.

Modelling Real WorldInteractionsIn the real world, the occurrence of oneevent often leads to an increased/decreasedprobability of other events happening andquickly the modelling of the inter-relationships of a series of causal real-world events becomes very complex.

In response to real-world complexity,companies seek to simplify their modelsand in doing so some information isinvariably lost to a hidden layer. However,the focus of companies is on identifyingthe key risk factors considered to be themost material/quantifiable; known as therisk-driver layer. Any subsequent(dependent) events that are caused by therisk drivers can be captured in a modellinglayer.

Elliot explained how the individual riskdrivers become the fundamental buildingblocks of a model and are modelled bymarginal distributions calibrated fromhistorical data and expert judgement.Similarly, when we consider pairs of riskdrivers, there will be joint (bi-variate)distributions which are calibrated in thesame manner.

CopulasMathematically, joint distributions can bebroken down into their component parts.For example, a bi-variate distribution canbe separated into 2 marginal distributionsand a copula function which representsthe dependency structure between thetwo risk factors.

The advantages and disadvantages of thevarious different types of copula functionsavailable were then discussed:

• Implicit copulas – e.g. Gaussian & t-copulas, most commonly used, moretractable in higher dimensions.

• Explicit copulas – e.g. Gumbel &Clayton copulas, can handle taildependency, challenging in higherdimensions.

• Empirical copulas – copulas derivedfrom an empirical data distribution,hence can be very flexible but nottractable.

Practical AggregationElliot presented a worked risk aggregationexample combining sample capital stress-test results using a 3x3 correlation matrixusing simple matrix algebra. It wasexplained that a Gaussian copula isimplicitly assumed when using such acorrelation-matrix approach and that thecapital requirements are also assumed tovary linearly with each risk type.

The calculated capital requirement in theexample was less than the sum of theindividual requirements which implied adiversification benefit was achieved. Thiswas as expected as the risks were notassumed to be perfectly positivelycorrelated in the correlation matrix (i.e. p< 1).

Some of the practical issues involved inusing a matrix approach were thencovered, such as:

• Difficulties populating large matriceswith unusual risk factors pairings - e.g.lapse risk in Germany versus US equityrisk.

• Maintaining good governance atgroup and business unit level ofcorrelation matrices.

• Ensuring a correlation matrix has theappropriate mathematical properties(i.e. is Positive Semi-Definite).

• Balancing the tractability of copulasagainst the flexibility to handle non-linearity/tail dependency.

Risk Aggregation


EB

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A

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DF

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HiddenLayer

RiskDriverLayer

Modelling Layer

E

A

G

B

D

F H

C

J

I

Elliot added that for more complexdependencies, a copula function istypically more appropriate but for simpledependency, a correlation matrix canoften suffice.

Overview of Aggregation/De-aggregation ProcessElliot concluded the first part of thepresentation by suggesting a usefulprocess diagram for the key steps involvedin an end-to-end aggregation process.

1 Identify the most relevant risk driversfor the business.

2 Fit individual loss-distributions usinghistorical data & expert judgement.

3 Combine to form multi-variatedistributions using dependency(copula) structures.

4 Generate a large number of scenariosfrom these distributions.

5 Calculate the net asset value positionfor each of these scenarios.

6 Order the net asset value scenarios todetermine a capital requirement (e.g.SCR).

7 De-aggregate of SCR to its constituentdrivers using allocation techniques

At this point, Curt took over andcontinued on from the earlier topicscovered by providing greater detail onvarious capital allocation techniques in useby his company’s clients.

The 3 main approaches to capitalallocation covered by Curt included:

1 Quantile attribution method - upperempirical cumulative distributionfunction value (i.e. the 99.5thPercentile).

2 Smoothed value methods – using an L-estimator such as Harrell-Davis (HD),Triangle or Guassian weights.

3 Biting scenario method – use an L-estimator to smooth the risk factorsto create a new scenario.

Case Study: Capital Aggregationand AllocationIn order to introduce these methodsfurther, Curt presented an illustrative casestudy where results from the variousmethods were compared and explained indetail. The case study had the followingfeatures: -

• Reporting hierarchy with four productlines and various aggregation levels

• Aggregation rules applied to Net AssetValue (NAV)

• Attribution rules applied to NAV

• Limits applied to transferable capitalup the hierarchy

• 10,000 Monte Carlo simulations

The sample hierarchy presented by Curtapplied some illustrative numbers to thesemethods but it also considered thepractical issues arising from a real-worldrisk aggregation and allocation exercise bycompanies e.g. capital fungibility rules,caps on profit transfers, percentageownership of subsidiary, taxconsiderations, etc. The fungibilityconsiderations were handled mainlythrough the calculation of a TransferableNet Asset Value (TNAV) by applying theaggregation rules to the NAV from eachscenario.

Curt believed that that one of the keyadvantages of using HD weights tosmooth SCR values or using HD weights to smooth the risk factors for the biting-scenario method was that bothapproaches offered an additive allocationof capital from parent to child nodeswithin a hierarchy; a desirable feature.However, he stated that the biting-scenario method was morecomputationally intensive to perform inpractice.

Curt stated that a lot of the companiesthat his company were working with wereoccupied with implementing one of thesemethods to obtain an additive allocationof capital while also embedding thecapital fungibility requirements of theirbusiness.

This concluded the presentation and athought-provoking Q&A session followedwhich provided ample opportunity for themembers in attendance to quiz both thespeakers further on their practicalexperiences of risk aggregation and capitalallocation.

For those members who were unable toattend and would like to know moreabout this topic, there is a full podcast anda copy of the speakers’ slides available onthe Society’s website.

Ken Deane


What use could an actuary be in a remoteand very underdeveloped part of Africawhere most of the natives are illiterate andare living on less than $1 a day? Theanswer (hopefully) is “not entirelyuseless”!

MagaI went to Maga in the Far North ofCameroon in March 2008 as a VSO(Voluntary Services Overseas) volunteer.My brief was to develop the local councilso that it could take on new developmentresponsibilities devolved from centralgovernment. I found that Maga hadalmost no infrastructure, with no surfacedroads, schools with average class sizes of150 and no desks, medical centres whichwould multiply your ailments were you tobecome ill and very inadequate access tosafe drinking water. Its local council had30 staff, only one of whom had finishedschool and many of whom had not evenfinished primary school. Despite, orperhaps because of these deficiencies Ifound that opportunities to add valueabounded although what still remains tobe done following my return home inMarch 2011 is appreciable. A post entitled“Taking Stock” in my blog (see below)summarises what was achieved.

In my first year in Maga I worked throughthe rainy season from June to Septemberbut I found this to be horrific as floodwaters contained human and animalexcrement, fertilisers, weedkillers, generalwaste and snakes and other unpleasantcreatures. Water-borne diseases such astyphoid and bilharzia proliferated andmalaria-bearing mosquitoes wereeverywhere. There was no electricity forthree weeks out of four and the privilegedfew (including myself) who had pipedwater were without it because the pumpswere electric. In the two years whichfollowed I skipped the rainy season bycoming back to Ireland with its heavenlysummers (I am not being sarcastic – evenin the dry season in Maga the temperaturefrequently goes above 45C and sometimesover 50C). I was very fortunate to do thisin 2010 in particular since the rainy seasonturned out to be the worst for a very longtime. There were widespread floods, cropswere devastated, 5,000 people were lefthomeless and 14 people died in one stormalone. In addition to the water-bornediseases and malaria, there was a seriousoutbreak of cholera.

Project Uisce BeathaIn my time in Maga I had become awarethat many people drank water of very

poor quality, were frequently ill and insome cases died as a result. The onlysource of clean water for most people isfrom a “forage”, a deep enclosed well(over 50 metres in some cases) with amanual pump whose source water is cleanand is not contaminated by flood watersor animals or malicious children. Maga hasless than half the number of foragesneeded to serve its population and thepumps in a large number of them are notworking. Before returning home I initiateda project (Project Uisce Beatha, PUB forshort) to repair the forages and Ipersuaded the local council to take on-going responsibility for repairing thepumps which break down in the future.

Pump Maintenance SchemeThroughout Cameroon efforts to set upstructures for forage maintenance havecentred on village managementcommittees who collect fees for drawingwater which they use to pay for repairs.These have been beset by problems. Evenwhere the management committee doescollect fees and its treasurer does notspend the money on himself, when apump breaks down there frequently is notenough money to pay for repairs. In thecase of serious breakdowns it would take anumber of further years to collect therequired funds and usually where thishappens the forage is abandoned. Thesituation is analogous to health insuranceand I proposed that all the managementcommittees make contributions to acentral fund administered by the councilwhich could then be used to repair theforages where problems arise. To the bestof my knowledge this is the first time thatan insurance type approach has been usedin Cameroon. With a central fundadministered by the council it is also easierto put controls in place to ensure that themoney is not syphoned off for personalgain or that the technician entrusted withrepairs does not make off with the money.

I have had to advise the council on thelevel of monthly contribution needed fromeach management committee to fund thepurchase of replacement parts and labourand other costs of the scheme (I hope thiswas OK in the absence of a practisingcertificate!). One would expect theprobability that a pump will break and thelikely cost of the replacement parts to berelated to the type of pump, its age andperhaps other factors such as depth. I could find no useful historic informationto assess such probabilities and had tomake do with a very crude rating systembased only on type of pump. In order toestimate the cost of repairing the pumps

which are currently broken I commissioneda study of all 149 pumps detailing theirtype, what parts need to be replaced andtheir cost. Reliable information was notavailable on how long ago the pumpsbroke down (most villagers have noconcept of time but will always giveanswers to questions even when theyreally do not know). Based on discussionswith technicians I had to makeassumptions for each type of pump aboutthe average duration since the pumpsbroke down and then use this to estimatethe average cost of replacement parts perannum. I considered recommending thesame rate of contribution for all types ofpump but the variations were such thatthis would lead to instability. In designingthe rules of the scheme I felt it necessaryto align the interests of the managementcommittees and the population served bytheir forage with the interests of thescheme. Somewhat like the practice withsalary protection insurance where falseclaims are reduced if the policyholdersuffers some shortfall on normal salarywhen claiming benefit, in order tomotivate good management of the pumpsI insisted that the management committeesuffer part of the cost when a pump isrepaired. I could think of no way to ensurethe solvency of the common fund otherthan to pitch the contributions on thehigh side and give the fund a good startby separately repairing the pumps that arecurrently defective.

Information on the project to repair thepumps is given in my blog. The cost ofProject Uisce Beatha is €42,000 and Iexpect that it will materially benefit thehealth of over 40,000 people, includingsaving some lives, particularly of childrenwho are the most vulnerable to water-borne diseases and cholera. As manypumps as possible need to be repairedbefore the onset of the next rainy seasonin June. I abandoned my actuarialdiscipline in committing to this projectwithout yet knowing how I will fund it. If anybody is prepared to help me withthis I suggest you read my blog and thencontact me.

Tom Collins

Blog: http://tomasinaifric.blogspot.comEmail: [email protected]: 086 2752000

An Actuary in Cameroon



Tom on his way to the office A "forage" with a foot-operated pump

Tom with his boss, the Mayor of Maga, under the watchful eye of Paul Biya,

President of Cameroon for the past 27 years

Tom with the Mayor of Maga and one of his four wives

It’s all in the communicationPerhaps it is because actuaries havetraditionally had an uneasy relationshipwith communications and/or the timingcoincided with the introduction of thenew CA3 Communications exam but theCommunications Committee was set up inSeptember 2009 by the Society inrecognition of the importance of effectivecommunication with members. Sincecommencement, the Committee has metonce a month in the Society’s offices onPembroke Road taking a 2 month breakduring the summer months. The keypurpose of the CommunicationsCommittee is to:

• Increase the level of engagementof members; and

• Add value to members, throughrelevant and appropriate internalcommunications, forums andnetworking opportunities.

Also included within the scope of theCommittee are:

• Internal communications andengagement with members (includingstyle and format guidelines),

• Cross communications between theSAI Committees,

• Liaising with the PR Committee toensure matters of importance arecommunicated internally before beingmade external,

• Be a sounding board for, liaise withand receive reports/updates from theSAI Website Sub-Committee,

• Be a sounding board for, liaise withand receive reports/updates from theNewsletter Team.

During the last year, a lot of work hasgone into analysing the various ways thatthe Society communicates with itsmembers and into ways that we canimprove on these. To aid us in ourunderstanding of this, the Committeedesigned and issued two online surveys(one for fellows and one for students) inorder to gauge what members think of the Society of Actuaries and how itcommunicates with its members. Therewas a very good response rate to thesurveys (thanks to all those whoparticipated) and results were analysed bythe Committee (results of both surveyswere subsequently published innewsletters). The results from the surveysformed the basis for a significant portionof the work that has been undertaken andis currently underway by the Committee. The following sets out the type of workdone by the Committee and its remit:

• The Society website is probably themost important way that the Societycommunicates with its members. It is avast repository of information formembers. Within the last year, thewebsite has been upgraded andindeed the Society is constantlyimproving it. Part of theCommunications Committee’s task isto ensure that the website is easilynavigable and that members can makethe best use of this valuable resource.With this in mind, we are conducting areview of the website to ensure that itis best in class and one can accessmaterial in as user friendly and intuitiveway as possible. In order to do this weare conducting reviews of similar peerwebsites and we also liaise closely withthe Website Sub-committee to ensurethat our objectives are in line (indeed the chair of the Website Sub-committee sits on theCommunications Committee).

• The Committee has initiated a processto enable it to review many of thestatistics obtainable from the Society’swebsite so as to examine which sitesgenerate the most readership and howthese sites are accessed with the aim ofgetting a better understanding of howpeople use the site and thus leading,we hope, to future improvements andenhancements.

• The Society now provides podcasts ofall its meetings, providing moreflexibility for its members to gain CPD.We also continue to look at otherpotential enhancements weighing uptheir cost versus their effectiveness.

• From analysing the surveys, it becameobvious that members were interestedto hear more about the work of thepractice areas and of what is currentlytopical. In response to this, we askedthe various practice areas to brieflydescribe their work they are doing andprovide an update to members onsame. A practice area committeeupdate was published in the Maynewsletter last year and has nowbecome a regular feature of thenewsletter.

• The newsletter itself is one of the mainways that the Society communicateswith its members. One of the criticismsof the newsletter has been that theretends to be an over reliance on reviewsof Society meetings. In order toaddress this, the Committee intends todiversify away from these reviews and,in particular, to focus on ways to makeour communications more relevantand engaging. One of the proposals isto introduce more opinion pieces and

also interviews with eminent membersof the profession (be careful – wemight come looking for you!).

• The discussion forum on the Societywebsite was identified as a muchunder-used facility of the website. It was one of the first priorities of theCommittee to investigate how thiscould be addressed. There were manyproposals made, from opening up theboards of the individual practicecommittee areas to general viewership,having one username and passwordfor the Society website and thediscussion forum, etc. Unfortunately,most of the proposals have resultedroad blocks for a variety of reasons.Practice areas wish to have a restricted forum in order to sharecommunications which is reasonable inthe context of the sometimes sensitivenature of various communications and,due to multiple IT platforms in usebetween the website and discussionforum, it is not possible to have acommon username and password.However, we continue to look for waysin which we can utilise this feature toits maximum and, in fact, we havefound that it has been very successfulin being a communications hub onSolvency II issues.

• From the results of the student survey,it is clear that students do not use theSociety as much as qualifieds chieflydue to their exam focus where theInstitute and Faculty website willcontinue to be their main source ofexam related material. Nevertheless, itis an objective of the CommunicationsCommittee to engage more with thestudent membership. With this inmind, we have added a student pageto the Society’s website, we willendeavour to have more meetingsgeared towards the needs of studentsand the Society will continue to hoststudent events.

As you can see, there is lots of workunderway to ensure that you continue tobe well informed. If you have any ideasthat you believe would further enhancethe way the Society communicates with itsmembers please put them in an e-mail [email protected].

The members of the CommunicationsCommittee are Ciara Regan (chair),Frances Kehoe, Mary Butler, John Feely,Dave Roberts, Eoghan Burns, Ben Deans,Olan Mooney, Edel O’Connell and MichaelSharpe.

Michael Sharpe

Update from the Communications Committee


Olan Mooney, a member of theSociety’s CommunicationsCommittee, is interviewed onthe development of the Society’swebsite and in particular on thenew Student Section

What has been the response to the re-designed society website?

The response has been hugely positive.The website is one of the most importantresources available to actuaries in Irelandand as such, it’s important that membersare comfortable using it and that itcontains sufficient detail to meet theirprofessional requirements.

We’ve taken the feedback provided to usby members and re-designed the websiteto ensure that it is clear and easy tonavigate. The inclusion of the ProfessionalInterest Areas section means that it is noweasier than ever for members to locateinformation relevant to their particularpractice areas.

What was the motivation for the launchof the student section?

The Society’s website was established withthe intention of servicing the needs of allour members, be they qualified orstudents. However, in our lastCommunications survey, we identified that

the website was only being accessedregularly by about 50% of our studentmembers. The primary reason for this wasthat students felt the website was moreuseful for qualified members of the Societyand didn’t really address their needs.

To redress this, it was decided that thewebsite should be updated to include asection specifically relating to studentmembers.

How do you access the student sectionof the website?

The student section can be accesseddirectly athttps://web.actuaries.ie/studentsAlternatively, you can log on to the Societyof Actuaries Ireland homepage atwww.actuaries.ie. Here, you will see anumber of sections identified across thetop of the page, including one for‘Students’. Clicking on this will also bringyou to the student section homepage.

What is on the new student section?

The student section was designed to beuseful for both those who are interested inpursuing an actuarial career as well asthose currently studying for actuarialexams.

Therefore, the section contains generalinformation relating to becoming anactuary including details of the type of

work actuaries do, actuarial coursesoffered by third level institutions inIreland, the structure of the actuarialexams etc. It also includes informalinterviews with actuaries working invarious areas of the market, providing an insight into their working lives.

For current students, the website provideslinks to relevant sections of the Instituteand Faculty of Actuaries website and theActEd website. It also provides updatesfrom the Student Consultative Forum,details of Student Society events andarticles relating to useful study techniquesand exam preparation.

Who should students contact if theywish to provide feedback on thestudent section of the website?

As always, comments, feedback andsuggestions are welcome so feel free todrop us an email at [email protected].

The Society launches a Student Section on itswebsite www.actuaries.ie


Summer BBQ Thursday 21st July – D2, Harcourt Street

Now that the summer is here, the Student Society has turned its thoughts to the summer BBQ.Enjoy char-grilled food and refreshments together with your actuarial colleagues.

You can look forward to some further surprises on the night. This year, we are inviting recent qualifiers to join us for our BBQ.

Check out the Society website for further details closer to the date.

The 2011 Life Reinsurance Forum held onthe 3rd of March, started off with anupdate on Committee activity anddevelopments in the industry fromChairman Mike Frazer. Among the topicscovered was the standard of Life ReActuarial Reports; the Regulator’s letter toSAI President, Kevin Murphy in early 2010included some comments on Life Reregarding the quantification of uncertaintywhich was often omitted from reports. Ingeneral, it was felt that the 2008 ActuarialReports were not comprehensive enough.The standard of actuarial reports will bereviewed again in light of furtherexperience. Another topic covered was therole of the Signing Actuary for VAcompanies and new VA requirements.Here it was noted that all companies,regardless of whether they are VA writersor not, have to declare if they do or donot write VA business. Other topicscovered were the recent ECJ ruling on theGender Directive, the impact of Sovereigndefault probability on discount rates,changes to the securitisation regimetaxation in this current year, CBI – CP 49 –“Consultation on Impact Metrics for RiskBased Supervision” and theimplementation of the CorporateGovernance Code.

Longevity Risk Management andSolutionsThe Life Reinsurance Forum welcomedguest speaker Gavin Jones, SeniorLongevity Actuary at Swiss Re, to give atalk on longevity risk. Gavin’s wide rangeof experience in the UK, the most activelongevity risk market, was evident fromthe nature and detail of his presentationwhich was extremely well received by theaudience.

Gavin kicked off the presentation bylooking at male life expectancies acrossthe world and Irish male mortalityimprovements specifically. He noted thatthe risk is systematic in nature and is quiteslow moving. As with a lot of actuarialprojections the main risk here is the modelrisk.

Gavin then took the Forum through thelongevity risk market in the UK wherethere is finite capacity for longevity risksand a disproportionate demand to meetthis capacity. There is GBP 1.4trillion in UK corporate pensions liabilities; less than1% of this is insured. According to Gavin,there is insufficient capacity in theinsurance market to absorb the futuredemand for longevity risk transfer from UK pension plans.

A longevity swap consists of the insurercovering the cost for a pension plan iflongevity increases and gaining if theopposite occurs. In a longevity swap theliability risk only is transferred.

There are complexities surrounding thecost of longevity insurance. Usually amargin for prudence is allowed for whichgives rise to what is called the ‘catch-up’premium over and above the insurancepremium for the actual cost. Insurancepremium is driven by the cost of theincremental capital the insurer needs tohold the risk. For an insurer the pricing willreflect diversification benefits from holdingother types of risks e.g. mortality, benefitsfrom business line diversification andperhaps some benefits depending on theinsurer’s consolidation ability.

Gavin then drew the audiences’ attentionto 4 large longevity swap transactions thathad occurred in the UK market. In 3 out ofthe 4 cases, the longevity risks ended upwith the reinsurers through the banks. In the other case, the risk was writtendirectly to a reinsurer. At the moment,capital is available to finance more ofthese transactions; however, the questioneveryone wanted to know was, for howlong?

Longevity Risk Management andSolutions – Panel DiscussionFollowing on from Gavin’s presentation apanel discussion surrounding longevityrisks ensued. This was chaired by CarloElsinghorst from Eureko Re, a member ofthe Life Reinsurance Sub-Committee. Thepanel consisted of Gavin Jones, Swiss Re;Padraic O’Malley, Milliman; KevinO’Regan, Partner Re and Derek Popkes,Canada Life International Re. The following 3 topics were discussed.

1 Are we letting the banks eat our lunch?

The banks, in 3 out of the 4 casespresented by Gavin Jones, are themiddle man between the originalcedant and the reinsurers – thequestion was raised to the panel as tothe extent that the banks gain valuefrom these transactions.

It was discussed that these banks arethe ones that facilitate the transactionsand make the job easier for thereinsurers. However, from thediscussion that followed it seems thatthe rewards from these transactions arenot being divided appropriately.

2 Irish mortality improvement haspeaked.

Gavin Jones made the point that whathas happened in the past is notnecessarily a good indicator of whatwill happen in the future due to thefact that unforeseen external eventssuch as medical improvements and/ordevelopments have a huge effect onmortality improvement and these arenot easily derived from pastexperience.

It was also noted that in other markets,rates of improvement tend to change.They reach peaks at different stagesand can vary widely depending onfactors such as smoker status andoccupation. In the pricing of longevityrisks actuaries tend to include atrending off/slowing down ofimprovements.

3 Ireland is too small for longevity swaps.

With Ireland being a smaller market,this means that the risk of error isgreater due to the fact that ifexperience data is used it is beingtaken from a smaller pool ofexperience.

In Ireland there are 7 or 8 schemeswith approximately 2000 lives,according to a survey carried out lastyear. This scale of market activitywould make such transactions possible.

Gavin Jones noted that in the UK, if ascheme has less than 2000 lives, onestarts to rely on socio-demographicdata. Perhaps Ireland is just breakingthrough to a size where it would bepossible to participate in these types of transactions.

The Central Bank of Ireland onLife ReinsuranceTony Jeffrey from the CBI presented ashort presentation on Life Reinsuranceissues.

Tony thanked everyone for a greatresponse on the QIS 5 submissions andspoke on the timeline to the publication of results. He also spoke about thechanges to the Life Reinsurance TechnicalReserves guidelines that have yet to gothrough a full internal formalised reviewwithin the CBI. His last topic was on theSAO reports and how they should beimproved. The main items that should bedetailed within these is a description ofthe business; details on the assumptions -which ones are key, what the key risks are;experience data – this should put theassumptions into context; a demonstration

SAI Life


of the consideration of all issues in bothASP LA-11 and ASP LA-12 and anassessment of the level of prudence usingappropriate means such as stress testing.Tony also noted that Life Reinsurancestandards have improved.

Solvency II BriefingThe last topic of the forum was a SIIbriefing introduced by James Maher.Various members of the Life ReinsuranceSub-Committee participated in this paneldiscussion.

Omnibus II & Level 3 Pre Consultation –Colin MurrayColin spoke to the group about SII whichwas published on 19th January 2011 andwhose main provisions included theimplementation date of 1/1/2013,transitional measures and the creation ofEIOPA which replaces CEIOPS.

Level 3 guidance was issued in the pre-consultation process in December 2010with draft guidelines issued on manytopics. It was noted that there was a lot ofrepetition in the level 2 guidelines;moreover, the level of detail provided wasless than expected.

Jurisdiction, Corporate Structure andEquivalence – Brian MorriseyBrian spoke about the changes that havebeen happening in the market withregards to groups re-domiciling, creatingsub-holding structures and EU bases. Healso spoke about major trends in globalreinsurance. The problems and solutionsare different for different companies withdifferent geographic footprints.

The overall factors in choosing a locationare capital management/regulation – thereis a risk of increases to the cost of capitalunder SII especially if internal modelapproval is not granted. Also fiscal/taxfactors – Ireland has a low effective taxrate, the use of reinsurance here is anobvious tax planning tool. Finally,Operational Efficiency – some companieshave hubs and centres of excellencelocated where it will be operationally moreefficient to have them and where theeconomic strength of the country is alarge factor.

Pricing for SII Capital – Mike ClaffeyMike spoke at the Forum about currentpractice and where things are changing.With the introduction of internal modelsthe pricing for capital will change.However, internal models requireresources for development, approval etc.The need to use the internal model for

pricing is heightened by the fact that EUcompanies must pass the Use Test to gaininternal model approval. For pricing thereare issues for new treaties and how oneshould rebase capital – across the Group,within the company or assume treatystandalone pricing? There are similar issuesfor the question of diversification and howit should be applied. There are alsotechnical issues with the projection of SCRand rebasing it across the expected life ofa treaty. This can get extremely difficult ifstochastic mortality models are required.

With the introduction of SII there shouldbe opportunities for reinsurers. However,existing regulatory capital arbitrageopportunities may be reduced. Collateralmay become more important which hasimplications on the cost of capital in anuncertain environment.

Mike ended his part of the briefing with abrief update on the recent GenderDirective regarding unisex premiumsacross Europe from which reinsurers areexcluded and some of the problems thatmay arise from this e.g. reserving onunisex tables, requesting genderinformation, the problems forunderwriting, what (if any) are thetransition details and what policies are inscope.

Panel Discussion & Questions from the FloorFollowing on from the presentations fromthe panel there was a lively discussionchaired by James Maher where membersof the audience were able to ask panelmembers questions on their presentations.

For more information the podcast fromthe Forum and the presentation slides canbe found on the Society’s website.

Elena McIlroy de la Rosa

Reinsurance Forum


IntroductionOn Monday 11th April 2011, GrahamCherry (Central Bank or Ireland) gave apresentation on “Irish IndustrySubmissions for QIS5”. The purpose of thepresentation was to give a summary of theresults emanating from Irish QIS5submissions and some comparisons withthe results across Europe.

Graham opened the session by outliningthe primary objectives of QIS5:

• To provide another test of the systembeing developed for Solvency II;

• To achieve a high level of participationfrom both solo undertakings andgroups, with a particular emphasis onsmaller undertakings participating thanhad been the case in previous studies;

• To increase the level of preparedness ofboth industry and supervisors;

• To use the QIS5 results to calibrate theLevel 2 Implementing Measures; and

• To use the QIS5 results to assess theneeds and contents of the Level 3guidance relating to Pillar 1requirements.

The Central Bank of Ireland received 220submissions for QIS5 (which equated to81% of entities that will be subject toSolvency II). This compared favourablywith the participation rate across Europeof 68%. Graham suggested that whilethere were a number of areas thatrequired further clarification/revision, thequality of the submissions received by theCentral Bank of Ireland was relativelygood. The presentation was split into anumber of sections, each of which aredetailed below.

Valuation of Assets and OtherLiabilitiesLimited feedback was received on themethods proposed. This is likely due tosuch methods being similar to what is inuse locally already.

On the issue of deferred taxes, furtherguidance was requested on how thisshould be calculated and what particularrequirements meant.

Technical ProvisionsIn general, there was a reduction in thelevel of technical provisions for both lifeand non-life companies from Solvency I toQIS5. The reduction was larger for non-lifecompanies.

The main reasons for changes in the levelof technical provisions under QIS5 tothose applicable under Solvency I were asfollows (applicability of each is dependenton whether the business is lifedirect/reinsurance, non-lifedirect/reinsurance):

• Best estimate instead of prudent

• Inclusion of a risk margin

• Discounting allowed (for non-lifebusiness)

• Discounting using risk-free ratesinstead of rates that might includesome element of risk premium

• Removal of surrender value floor

• Different set of cashflows included inthe calculations of the provisions dueto contract boundaries under QIS5

Risk Margin: The main comments received in thissection were that the calculation of therisk margin was far too complex. Both inIreland and across Europe it was commonto use one of the simplifications, and thatdue to the complexity of the calculations,simplifications would always be required.Companies also commented thatunavoidable market risk was too difficultto define.

Contract Boundaries: Many companies thought the definition ofcontract boundaries was unclear. An issuefor many companies with unit-linkedbusiness was that a lot of contracts weredeemed to have a zero boundary. Othercomments mentioned a lack ofconsistency in the treatment of someregular and single premium contracts.

The overwhelming view was that the QIS5definition was out of line with IFRS/IASBguidelines and was uneconomic,inconsistent with the risk profile of thecontract and unrealistic. A wide variety ofinterpretations were used across Europe.

Segmentation:For non-life business, several companiesfelt that the segmentation was too broadand that too much business was endingup in the miscellaneous category for non-life business which attracted a higherSCR charge.

Some non-life companies also complainedthat the split of motor business betweenproperty and liability did not matchpractice in the Irish market (which is tohave one contract covering both risks).

Life companies felt that the second level ofsegmentation was too detailed and led tounnecessary complication.

Own FundsIn Ireland, the majority of Own Fundswere deemed to be Tier 1. Across Europe,the proportion of Tier 1 assets was slightlylower. The figure for groups wassubstantially lower reflecting the fact thatmost capital raising is done at a grouplevel.

Many comments were received onExpected Profits in Future Premiums(“EPIFP”). Most companies agreed withthe inclusion of EPIFP in Tier 1, but manyfelt the calculation was too complex andunnecessary if EPIFP is to be included inTier 1.

The majority of companies reported zeroEPIFP. It should also be noted that the sizeof the EPIFP is directly linked to thedefinition of the Contract Boundaries.

Standard Capital Requirement(“SCR”)Most companies saw an increase in theSCR over the Required Minimum SolvencyMargin (“RMSM”) under Solvency I. The increase was generally greater fornon-life companies than for life companies.Graham compared the Irish results to theEEA results and then further broke downthe analysis by life/non-life business.

The composition of the SCR differeddramatically between the Irish submissionsand the EEA submissions. For both life andnon-life companies, the relative size of themarket risk component of the SCR wassignificantly less for Irish companies thantheir EEA peers. It was also notable thatthe relative size of the life and non-lifeunderwriting risk components of the SCRfor the Irish submissions was significantlyhigher than their EEA peers.


The Irish Industry

Many comments were received in relationto the SCR. A selection of these commentsare summarised here. All commentsreceived were submitted to EIOPA.

Market Risk Comments:

• Problems looking through to theunderlying assets for unit funds;

• Further work required to assess basisrisk;

• For unit linked business, it was toocomplicated to do full calculations foreach market risk shock.

Life Underwriting RiskComments:

• Assessing the lapse risk at policy levelwas difficult and not intuitive;

• Mass lapse rates were too high;

• Longevity risk should be an improvingmortality trend rather than a once offimprovement.

Non-Life Underwriting RiskComments:

• CAT Risk Method 1 was considered toocomplex;

• CAT Risk Method 2 was consideredoverly penal;

• Data requirements too onerous;

• Premium and Reserve risk was overcalibrated.

Counterparty DefaultComments:

• Most comments related to thecomplexity of the calculation, inparticular to the calculation of the riskmitigating effect within the Loss GivenDefault;

• Complexity of the formula meant itwas difficult to sense-check and/orexplain results to management;

• Type 2 default rates were too penal.

Minimum Capital Requirement(“MCR”)

The MCR generated few commentsthough some companies did commentthat it was not risk-based. Approximately5% of companies failed to meet the MCR.

Internal ModelsGraham commented that QIS5 occurredearly on in the Internal Models Processgiven that no internal models have beenapproved to date. Because of this it was

difficult to draw meaningful conclusionsabout quantitative results. There were,however, plenty of qualitative comments:

• Models vary in design from each otherand from the format of standardformula. This makes comparisonsdifficult.

• Of the Irish companies which gaveinternal model results, the majorityused a group model and many alreadyuse internal models for a variety ofpurposes (UK ICAS, economic capital,etc.).

• The majority of companies felt thattheir models required furtherrefinement to meet Solvency IIrequirements.

• Expert judgement was widely usedwhen calibrating the models.

• All companies used the 99.5% 1 yearVaR measure.

A wide variety of reasons were cited bycompanies as to why they felt an internalmodel would be more appropriate thanstandard formula for their business. Someof the reasons given were that thestandard formula made no allowance forequity volatility risk or interest ratevolatility risk, or that the internal modelhad significantly more risk factors than thestandard formula.

Overall Financial ImpactMost companies saw an increase in OwnFunds due to lower technical provisions.Offsetting this, most companies saw anincrease in required capital. The overallimpact on companies depended on thebalance between these two items. Morecompanies saw a reduction in surpluscapital under QIS5 than saw an increase,and of those companies that did see anincrease, the majority write life business.When comparing SCR coverage betweenthe Irish and EEA submissions, theproportion of companies with less than75% coverage was significantly higher inIreland compared with the EEA, althoughit was noted that this varied significantlyby country. There was, however, a largedifference in Irish submissions with a muchhigher proportion of non-life companieshaving less than 75% SCR coverage.

The podcast and a copy of the slides forthis presentation are available on theSociety’s website.

Cian O’Muircheartaigh

Submissions for QIS5



The Practice Committees have brieflyoutlined below their main areas of focus atpresent.The minutes of each of the PracticeCommittee meetings are readily availableon the website and provide further morein-depth details of discussions and actionsarising.

Please note that the following is merely abrief summary of the activities of thecommittees:

Enterprise Risk Management(ERM) • The committee is continuing its series

of evening meetings based on the ST9syllabus. Elliot Varnell and CurtBurmeister presented “RiskAggregation” on 5th April.

• Neil Cantle is due to present on“Complexity of Risk” on 27th June.The Institute of Actuaries announcedfunding last year for several enterpriserisk management research projects.Neil will provide an update on oneproject looking at new approaches torisk appetite and emerging risks.

• A working party of the committeepublished a paper “Constructing a RiskAppetite Framework – an Introduction”and an evening meeting with anexpert panel is scheduled to discussvarious aspects and challenges inconstructing a risk appetite. It is hopedthat this event will be of particularinterest to those involved in workingtowards compliance with the specificrisk appetite requirements of therecently published “CorporateGovernance Code for CreditInstitutions and InsuranceUndertakings” of the Central Bank ofIreland.

• The committee is compiling a list ofactuaries with responsibility for riskmanagement within their organisationsand would be interested in hearingfrom any such actuaries.

• The committee is planning tocontribute to a working party on the“Discussion paper on EconomicScenario Generators” published by theCentral Bank of Ireland and wouldappreciate volunteers or views on thesubject.

Finance and InvestmentCommittee• Most recent evening meeting was on

May 17th 2011. The meeting titled“Quantitative Easing – What is it, andwhat are the implications foractuaries?” was presented by ColmFitzgerald.

• Other evening meetings in the pipelineat present include: (i) “Insuranceversus Banks during downturn”, (ii)Risk Management for DC and (iii)Investment Strategies.

• The launch of Finance & InvestmentProfessional Interest Area on theSociety’s website took place in March.

• Gordon Kearney (State Street Ireland)will join the Finance and Investmentcommittee in June.

General Insurance CommitteeThe General Insurance Committee last meton 28th April. At this meeting wediscussed a number of current issues, andour plans for the year. Current issuesunder discussion included1 EU Gender – tracking developments

2 Insurance Compensation Fund –implications for Irish policyholders ofpossible future events

3 Letters from the CBI on uncertaintyand reserve adequacy.

We considered given the emphasis onuncertainty lately, that this may merit ageneral insurance practice note for thenext year-end. We will discuss this furtherat future meetings.

In addition to the above, we aim tomonitor the outputs of the various SIIcommittees, and feedback whereappropriate. We also in particular will actas a feedback mechanism, if appropriate,for gathering views for the next QIS (albeitnot full exercise).

We intend to have a final meeting of theCommittee before the summer break inJune.

International Committee• Groupe Consultatif issues

- Strategic development of Groupecontinues.

- Solvency II implementationcontinues to be main focus.

- Actuarial Standards Project Teamestablished.

- Updated Mutual RecognitionAgreement was signed.

- Chris Daykin, chairman of GroupeConsultatif, met with members ofthe Society in February to providean update on Groupe workings.

- Next meeting of Committees willbe in October in Prague.

• International Actuarial Associationissues

- Council met in Sydney in April.

- Continued work on CERA treaty. 3Associations (SAO (US), IFA(UK)and IAA (Australia)) certified togrant CERA.

Pensions Committee (An update from the Pensions Committeeis provided on Page 5 of this Newsletter).

Solvency II Committee • An evening meeting was held in April

on the results of QIS 5, in conjunctionwith the Central Bank. There are anumber of society meetings in Mayand June with a Solvency II focus,including:

- Solvency II for beginners

- Solvency II internal models

- Pillar III under Solvency II.

• The committee continues to provideinput to the Groupe Consultatitf inadvance of their meetings with EOIPA.

• The committee is represented on theGroupe Consultatif Standards ProjectTeam which is considering thedevelopment of Solvency II relatedactuarial standards. The committeewould welcome views on what topicsmight usefully be covered by actuarialstandards under Solvency II.

• Input to the Society’s three year planhas been provided in the context ofthe role and potential roles foractuaries under Solvency II.

• Rotas have been prepared for thereview of level 3 guidance, pending itspublication.

Note: Minutes of the PracticeCommittees are available on the Society’swebsite:https://www.actuaries.ie/professional-interest (member login is required)

SAI Practice Committee Updates


Gerry O’CarrollGerry O’Carroll died on 4th April. He had courageously fought braintumours for the previous fourteenmonths with the great support offamily and friends. He was only 58and had been retired from full timeworking for less than two years.

Like so many of us at the time, Gerryserved his actuarial apprenticeshipwith Irish Life after completing an

honours degree in mathematics atUCD. I came to know him well whenhe joined R. Watson & Sons in 1980.The Firm was then in its infancy inIreland and he played an integral partin its subsequent growth anddevelopment. He spent the rest of hisfull time actuarial career with theFirm. He qualified as an FIA in 1984and was a partner in the Firm for 23 years.

Gerry’s working/professional life wascharacterised by his extraordinaryenthusiasm for the business in hand,the time he was prepared to devote toprojects and his constant airing ofnew ideas. He was dedicated to hisclients and the Firm yet still foundtime to play a significant supportingrole in a range of professional bodies:

He had sat on the Council of theSociety of Actuaries in Ireland since2004 and was a current member of Council at the time of his death.

He was a member of the Society’sPension Committee for many yearsand chaired its workings in the periodJuly 2006 to June 2009.

He served on the Council of the IrishAssociation of Pension Funds duringthe period 1993 to 2000.

He was an active member of theInstitute of Management Consultantsand Advisers Ireland and served as itsPresident in 2002/2003.

Gerry was so pleased when his firstgrandchild – his son Mark’s child -was born just a few weeks before hedied. He will be sadly missed by hiswife, Jasone, his children, Mark andMelissa, his daughter-in-law, Kerry Jane, and his many friends and colleagues.

Paul Kelly.

Obituaries

Dr. Garret FitzGeraldDr. Garret FitzGerald died on 20thMay 2011. He began his illustriouscareer with Aer Lingus, where he wasresponsible for economic planning,scheduling, rates and fares.

From 1954 onwards, he contributed aweekly column on economic andsocial affairs to the Irish Times.

Between 1958 and 1960, he becameEconomic Consultant to theFederation of Irish Industries andestablished a Committee on IndustrialOrganisation. Between 1961 and

1965, this committee surveyed theIrish industrial sector and initiated arationalisation of industry inpreparation for EU membership.

In 1959, Dr. FitzGerald became aLecturer in Economics in UCD and in1961 he was involved in establishingan Irish economic consultancy firmwhich assisted many firms until theearly 1970s with advice and assistancein relation to EU membership.

In 1965, he entered politics andbecame a front bench member of FineGael and was appointed Minister forForeign Affairs in 1973. In 1977, hewas elected Leader of Fine Gael andbecame Taoiseach in 1983. During histerm as Taoiseach, he negotiated theAnglo-Irish Agreement with MargaretThatcher. In 1987, he stepped downas Leader following Fine Gael’s defeatin the 1987 election and in 1992 hestepped down from Parliamentaltogether.

From 1987, he lectured widelythroughout the world and wasinvolved in several projects, one of

which was Russian economic policyformation (1993-1994). He haspublished many books including hisautobiography “All in a Life” in 1991and in 2002 “Reflections on the IrishState.”

In addition, he was a member ofseveral international and nationalcommittees most notably the TrilateralCommission, established in 1993 tointensify contacts between the US,Japan and Europe.

Dr. FitzGerald was an eminenteconomist with a keen interest inissues within the actuarial profession.He participated in research projectswithin the Society and chaired manySociety seminars. On 15 September2005, he addressed the Society,following which, the then President ofthe Society, Colm Fagan, conferredhim with Honorary Fellowship of theSociety.

On the MoveFellows:Arran Nolan has moved from Sun Life Reinsurance to Berkshire Hathaway

Ronan Mulligan has moved from HSBC Reinsurance to PwC Actuarial and Insurance Management Solutions

Shauna McHugh has moved from Caledonian Life to RSA Insurance

Louise Thomas has moved from AXA Ireland to RSA Insurance

Ian McMurtry has moved from Canada Life to CNP Europe Life

Liam Scally has moved from Chartis Insurance to Travelers Insurance

Andrew Harford has moved from Aviva to Atradius Reinsurance

Ciara Regan has moved from Sun Life Reinsurance to Deloitte & Touche Ireland

Sarah Kearns has moved from Mercer to Friends First

Pedro Ecija Serrano has moved from AXA to Aviva

Students:Geraldine Finucane has moved from Towers Watson to the Central Bank of Ireland

Lisabeth McCoy has moved from Anglo Irish Bank to Irish Life Assurance

Shane Kennedy has moved from Friends First to Aviva (Europe) Life

Eoin Larkin has moved from Mercer to PwC

Society of Actuaries in Ireland102 Pembroke Road, Dublin 4. Telephone: +353 1 660 3064 Fax: +353 1 660 3074 E-mail: [email protected] Web site: www.actuaries.ie

The Society’s AGM - Thursday 9th June 2011

The Annual General Meeting of the Society of Actuaries in Ireland will take place at 6.00pm on Thursday 9th June, in theAlexander Hotel. The AGM will be followed by a meeting on ‘Sovereign Exposures’ presented by the Sovereign ExposuresWorking Party of the Society, chaired by Linda Kerrigan.

SAI Annual Subscription for 1 April 2011 to 31 March 2012

Subscription invoices have been issued to all members and are now due for payment. A surcharge of 10% applies to allsubscriptions from 1 July 2011.

eNews from the Society

The Society now issues monthly eNews bulletins. These bulletins include a recap on any emails sent by the Society to themembership since the last eNews regarding Actuarial Standards of Practice or any significant issues in relation to the Society. All eNews bulletins can be accessed on the website at: https://web.actuaries.ie/enews - member log in required.

SAI 2011 Golf Calendar

Piers Segrave-Daly Matchplay CompetitionThis competition commenced in early May.

3-person Golf ScrambleFriday 24th June – Clontarf Golf Club (entries close on 10th June)

Captain’s DayThursday 18th August – St. Margaret’s Golf Club

Faculty vs Society Annual MatchDate in the autumn to be decided


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