The Institute and Faculty of Actuaries (IFoA) has highlighted a further challenge for general insurance pricing - how ongoing lockdowns should be considered within risk rates going forward
The impact of the Covid-19 pandemic on home and motor insurance has principally been one of “risk exposure changes” according to the latest report from the Institute and Faculty of Actuaries (IFoA).
The report, GI pricing thematic review: involvement of actuaries in pricing of UK home and motor insurance, published this week, revealed that these “risk exposure changes” have been driven by fluctuating lockdown measures, for example less cars being on the road, or the occupancy and use of the home.
The report noted:
• Reduced incidence of motor claims, which has led to some insurers offering premium refunds in certain circumstances. There may have been some offsetting from increased claim severity where repair costs were impacted by supply or labour issues during lockdown.
• Insurers allowing extended ‘travel to work’ or voluntary work use of vehicle under existing terms of cover.
• Insurers making allowances for increased business use of home addresses under existing coverage.
The report predicts that the insurance industry could face significant short-term premium pressure where customers expect reduced prices where claims have been significantly reduced.
Determining reserves
The research further alluded to an additional challenge for pricing - how should policyholders’ experience since March 2020 be considered in risk rates going forward, especially in regards to ongoing lockdowns?
A IFoA blog published on 13 January,The Road ahead to Motor Insurance Reserving, considered potential impacts of the pandemic on reserving, however the principles would apply equally to pricing assumptions.
Reserves are liabilities and they reflect an insurer’s financial obligations with respect to the insurance policies it has issued. An insurer’s two major liabilities are loss reserves - what it might pay for future claims - and unearned premium reserves.
The blog stated: “Motor insurers and actuaries face difficulties in determining the appropriate allowance for Covid-19 on pricing and reserving assumptions.
”Actuaries will need to adapt their models and assumptions to changing circumstances and must consider whether changes are temporary or are the ‘new normal’, [for example], reduced road traffic due to the work from home model.
“The changes require actuarial judgement to be applied and communicated clearly in order that boards have the necessary information to take informed decisions. Boards should be made aware of the key assumptions and risks and reasons why the results may materially change from the current review.”
Proposed recommendations
The overall findings from the IFoA report focused on two key elements:
• An increased focus on customer fairness, ensuring standards, guidance and education are appropriately balanced with the commercial and innovation drivers that are important in pricing.
• Ensuring that advances in data science and machine learning modelling are adequately covered by standards, guidance and education.
The IFoA proposed the following recommendations to help achieve these aims:
• The IFoA and the Financial Reporting Council (FRC) should consider areas where additional guidance may help actuaries apply existing standards within a multidisciplinary environment, often with shared responsibility for pricing outcomes with other experts in this field.
• Actuaries working in pricing roles should follow existing professional standards, in particular Technical Actuaries Standards (TAS) 100 and 200 and APS X2 (peer review).
• TAS should be reviewed to recognise significant advances in data science and machine learning techniques, as well as the increased challenges these bring to validation and the communication of outputs.
• Actuaries should engage positively with new FCA regulations in relation to personal lines pricing and product governance, helping to implement the required changes that aim to improve overall consumer outcomes.
• Actuaries should always consider potential conflicts of interest, including recent guidance on the ethical application of data science.
• The IFoA’s pre-qualification education syllabus covering general insurance pricing should be reviewed to ensure there is sufficient coverage of customer fairness in pricing and product design, use of new and emerging data and modelling techniques.
Alan Marshall, IFoA’s review actuary, said: “Our findings support the continued involvement of actuaries in this key area of work alongside specialists from other disciplines and backgrounds.
“It’s important that actuaries continue to harness their skills and influence in a way that acts in the public interest for both their organisations and the consumers to whom they provide insurance cover. This challenge is perhaps one that applies to pricing far more than reserving or capital work.”
No comments yet