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The topic of our event "The Smart Soirée 2013" was "Actuaries of the future - beyond numbers“. This session took place on 14 November 2013 at KPMG, Zurich, and attracted over 90 participants.
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KPMG‘s iCircle
The Smart Soirée 2013
Actuaries of the future – beyond numbers
Auditorium, KPMG AG
Zurich, 14 November 2013
1 © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Agenda
Welcome Hieronymus T. Dormann, Sector Head Insurance, KPMG AG Thomas Schneider, Head Quantitative Finance Group, KPMG AG
Begin of the presentations
SST update: Learnings from Internal Model Reviews and Future Challenges Michael Schmutz, Quantitative Risk Management Insurance, FINMA
IFRS 4, phase II: Recent Developments Thomas Schneider, Head Quantitative Finance Group, KPMG AG
Big Data and Predictive Models in Insurance: More than just buzzwords William Southwell, Head Non-Life Actuarial, KPMG AG
Drinks, food and networking
17:30
19:30
Learnings from internal model reviews and future challenges
Michael Schmutz The Smart Soirée 2013
14 November 2013
The contents of this presentation represent my own view and do not necessarily correspond to the official view of FINMA.
Decisions Taken – as of the end of August 2013
2
0
50
100
150
200
250
Cat. 2 Cat. 3 Cat. 4 Cat. 5 Total
Modules Decision taken
Solo entities liable to SST
59.0 %
88.6 %
88.9 % 65.2 %
80.0 %
0
20
40
60
80
100
Cat. 2 Cat. 3 Cat. 4 Cat. 5 Total
Modules Decision taken
Reinsurers liable to SST
40.0 %
60.9 % 91.7 %
70.0 %
0
20
40
60
80
Cat. 2 Cat. 3 Cat. 4 Cat. 5 Total
Modules Decision taken
P&C liable to SST
100 % 100 % 88.9 % 61.5 %
0
10
20
30
40
50
Cat. 2 Cat. 3 Cat. 4 Cat. 5 Total
Modules Decision taken
Life insurers liable to SST 92.3 %
100 %
93.1 %
66.7 %
89.4 % 67.8 %
0
50
100
150
200
250
Solo Groups Total
Modules Decision taken
Solo entities and groups liable to SST
80.0 %
83.7 %
80.7 %
Decisions Taken – as of the end of October 2013
3
accepted; 6; 9%
conditionally accepted; 35; 54%
rejected; 24; 37%
Company view
Some selected (trivial) observations and a related fundamental question
4
The environment / the objects to be modeled are complex and are changing rather rapidly.
By making modeling decisions we always pay a price!
Fundamental question: Should a model have a clear economical meaning?
Source: Swiss National Bank
1y 3y
5y 10y
20y 30y
1y 4y
7y 10y
25y
100 %
80 %
60 %
40 %
20 %
Option Maturity
Swap Tenor EUR impl. Swaption vol
Source: Bloomberg
Does consistency matter?
5
Essentially the following and similar slides have been presented several times:
Example: Valuation and risk quantification
6
Lessons learned: Tradeoffs in modelling can lead to serious dissents under quants
7
“Too simple”
Considerable calibration errors
optionalities in the liabilities not captured
model working for only a too restricted range of
interest rates / volatilities / …
“Just right”
But right for what?
optimization
w.r.t. a module
vs. w.r.t. the model
Extremely difficult / impossible to reach a stable (and honest)
calibration
“pseudo adequacy” / calibration to noisy data
Economic scenario generators as black boxes
/ not sufficiently transparent
“Too complex / not clear enough”
Further lessons learned
8
Modeling and quantification of risks is a distinctive area of quantitative specialists but the output is a judicial product.
Time constraints: Companies want to be informed as early as possible and decisions should not surprise them.
The dynamic of today’s economic environment is reflected in a highly volatile market. It is increasingly questioned whether or not a principle-based and market
consistent solvency system is the best approach? (Personal point of view: No reasonable alternatives are known)
Increasing political pressure: A major challenge is the creation of an equal playing field in the light of the Solvency II timetable changes.
etc.
Future challenges 1/2
9
Request to apply an (internal)
model
Preliminary checks
Validation
Decision
Periodical review of
internal models Model change process
• Decision of the company
• At the instance of FINMA
Challenge 2: Treatment of applications for model variations: only weeks or days after first authorization, or even weeks after the application for using an internal model.
Challenge 1: Find a good balance concerning the tradeoffs between scientific correctness vs. pragmatism vs. juridical feasibility.
Modelling challenges 2/2
10
Long-term interest rates
(there is some work in progress, e.g. by El Karoui, Mard, Hillairet)
Applicable and stable calibration methods
(suitable regularization of ill-posed problems, better understanding of model-independent arbitrage opportunities / active areas of research in math. finance)
Efficient and sufficiently accurate valuation methods after one year.
Suitable valuation of non-liquidly traded assets and liabilities
(theory of “two prices”, sublinear pricing rules etc. / very hot areas of current research)
etc.
What we should avoid: To go back…
11
12
Eidgenössische Finanzmarktaufsicht FINMA Einsteinstrasse 2 CH-3003 Bern [email protected] www.finma.ch
14 © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Agenda
Welcome Hieronymus T. Dormann, Sector Head Insurance, KPMG AG Thomas Schneider, Head Quantitative Finance Group, KPMG AG
Begin of the presentations
SST update: Learnings from Internal Model Reviews and Future Challenges Michael Schmutz, Quantitative Risk Management Insurance, FINMA
IFRS 4, phase II: Recent Developments Thomas Schneider, Head Quantitative Finance Group, KPMG AG
Big Data and Predictive Models in Insurance: More than just buzzwords William Southwell, Head Non-Life Actuarial, KPMG AG
Drinks, food and networking
17:30
19:30
IFRS 4 Phase II
14 November 2013
Thomas Schneider, KPMG AG
16 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Agenda
Overview
■ A brief history of time
■ Key objectives
Building Block Approach
■ Building blocks 1 - 4
■ Examples
■ Presentation
Summary, Comparison and Impact
■ Focus areas ED
■ Comparison with Solvency II
■ Expected Impacts and Practical Implications
Overview
18 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
A brief history of time (1/2)
■ Initiation of IFRS 4, phase I with the idea to implement a common global insurance accounting framework.
■ The IASB (International Accounting Standards Board) was constituted and took over the project.
2001
2004
2007
2010
1997
■ Exposure Draft published.
■ The second phase of the insurance project was launched.
■ The IASB introduced IFRS 4 Insurance Contracts, phase I, an interim standard that represented the first phase of the insurance project.
■ Sought to minimise the amount of change required to current accounting practices (to avoid changes that might be reversed).
19 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
A brief history of time (2/2)
20 June 2013: Re-exposure draft published.
25 October 2013: Comment period ended.
1 January 2017 Earliest possible effective date. (IASB states it expects 1 Jan 2017 as earliest possible mandatory effective date)
31 December 2017 Earliest annual period in which proposals could apply. (Restatement of comparatives required, i.e. opening balance sheet 1 Jan 2017)
It will take at least 20 years from the launch
of the project until implementation!
today
20 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Key objectives
1. Improve the transparency of the effects of insurance contracts on an entity’s financial position and performance.
2. Reduce diversity in the accounting treatments of insurance contracts.
3. Ensure that the entity measures insurance contracts using a current value approach that incorporates all of the available information in a way that is consistent with observable market information.
4. Ensure that the approach to measuring insurance contracts provides information that is relevant to the users the financial statements.
The key objectives of the IFRS 4 proposals are to:
Building Block Approach
22 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Overview The measurement model – Building Block Approach (BBA)
Explicit, unbiased and probability-weighted current estimates of future cash flows. 1.
Discounted at current rates to reflect the time value of money. 2.
Risk adjustment to adjust for the effects of uncertainty about the amount and timing of future cash flows. 3.
Contractual Service Margin (formerly called Residual Margin). To remove any profit at inception. Released over coverage period. 4.
23 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Proposed measurement models Fundamentals
Level of measurement
Margins
An insurer would measure the present value of the fulfilment cash flows excluding the risk adjustment at the portfolio level of aggregation for insurance contracts.
No level of measurement prescribed for the risk adjustment.
Unit of account used to determine the contractual service margin should be at portfolio level. Unit of account used to release not prescribed but consistent with the objective of release.
Portfolio
Contracts that are subject to similar risks and priced similarly relative to the risk taken on and managed together as a single pool.
24 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Proposed measurement models Building block 1 – Cash flows
Estimates of cash flows would include all cash inflows and outflows related directly to the fulfilment of the portfolio of contracts. These would:
■ be explicit (i.e. separate from estimates of discount rates that adjust for the time value of money and the risk adjustment)
■ incorporate, in an unbiased way, all available information that relates to the cash flows of the contract
■ include only cash flows arising from existing contracts within the contracts’ boundaries.
Acquisition costs to be included should be all the direct costs that the insurer will incur in acquiring the contracts in the portfolio.
Estimates of cash flows would be updated each reporting period and measured at a portfolio level.
25 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Example bottom-up and top-down approach
Either a top-down or a bottom-up approach may be used to determine an appropriate discount rate. ■ In theory, both
approaches should result in the same discount rate, however in practice, differences are expected.
■ The top-down approach may result in a higher rate, as illustrated.
Market risk premium expected losses (1%)
Market risk premium for unexpected losses (.5%)
Difference between top-down and bottom up approach (.25%)
Liquidity premium (.5%)
Risk-free rate 3%
Top-down approach: 3.75%
Bottom-up approach: 3.50%
Financial instrument yield of 5.25% (based on actual assets held or a reference portfolio)
Proposed measurement models Building block 2 – Time value of money
■ No specific method prescribed.
■ Regardless of the approach used, the discount rate should be consistent with the characteristics of the insurance contract liability, e.g. timing, currency and liquidity.
26 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Key attributes
■ The use of OCI to present the effect of discount rate changes would be required (rather than permitted)
■ To recognise the effect of changes in cash flow assumptions in profit or loss using the ‘locked-in’ rate
Proposed measurement models Building block 2 – Use of OCI to present changes in discount rates
Present in OCI Present in profit or loss
Cumulative OCI Difference between liability discounted at the current rate and the liability discounted at the (locked-in) rate at inception
Current period OCI Equals interest expense at current rate less interest expense at ‘locked-in’ rate
Changes in interest sensitive cash flow assumptions (e.g. minimum interest guarantees)*
Interest expense at ‘locked-in’ rate
* Unless offset against an unlocked contractual service margin
27 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Proposed measurement models Building block 3 – Risk adjustment
Risk Adjustment: “The compensation the insurer requires for bearing the uncertainty about the amount and timing of the cash flows that arise as the entity fulfils the insurance contract.”
■ The measurement of an insurance contract should contain an explicit risk adjustment.
■ IASB has not prescribed a unit of account for measurement of the risk adjustment.
■ The IASB would not limit the range of available techniques and related inputs to the risk adjustment.
■ Re-measured each reporting period and changes are recognised in profit or loss.
28 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Proposed measurement models Building block 3 – Risk adjustment
29 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
* defined as the expected present value of the future cash outflows less cash inflows plus risk adjustment
Proposed measurement models Building block 4 – Contractual service margin
Contractual Service Margin
■ Represents the unearned profit and is a “shock absorber”
■ Removes day-one gains: Arises when the present value of the fulfilment cash flows is less than zero*
■ If the present value of fulfilment cash flows is positive, recognise a loss in profit or loss at inception
■ Prospectively adjusted for changes in the estimates of cash flows relating to future coverage or other future services; cannot become negative in subsequent measurement (unlocking)
■ Systematic release over coverage period based on the pattern of transfer of services provided
■ Interest accretion using discount rate at inception (i.e. the ‘locked-in’ rate from inception)
■ Classified as part of the insurance liability
30 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Proposed measurement models Example 1 – Contractual margin approach (IASB model)
An entity issues insurance contracts that form a single portfolio and coverage begins when contracts are issued. The impacts at initial recognition, and on payment of the first premium and incremental acquisition costs would be as follows:
31 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
What happens if the actual cash flows are
different to the expected cash flows?
Proposed measurement models Example 2
32 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Proposed measurement models Example 2 (1/3)
33 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Proposed measurement models Example 2 – Analysis (2/3)
Fact: Claims incurred in Year 2 are different from the expected claims, and actual cash outflows for that year equal 150.
Analysis: At the end of Year 2, the entity revises the estimated cash flows for Year 3. As a result, the expected cash flows are as follows:
The changes in estimates of cash flows at the end of Year 2 would be accounted for as follows:
■ the decrease of 50 in the expected future cash flows for Year 3 would increase the contractual service margin; and
■ the decrease of 50 between actual cash flows for Year 2 and previous estimates – i.e. the experience adjustment – would be recognised in profit or loss of Year 2
Yr 1 Yr 2 Yr 3 Expected cash outflows at initial recognition 200 200 200
Revised actual/estimated cash outflows estimated at the end of Year 2 and Year 3 150 150
34 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Proposed measurement models Example 2 – Contractual Service Margin (3/3)
The reconciliation of the contractual service margin would be as follows:
The net amounts recognised in profit or loss would be as follows:
Initial recognition Yr 1 Yr 2 Yr 3
Opening balance 300 200 150
Recognised in profit or loss (100) (100) (150)
Decrease in estimate of future cash flows added to margin - 50 -
Closing balance 300 200 150 -
Total Yr 1 Yr 2 Yr 3
Change in contractual service margin 350 100 100 150 reflecting the transfer of services
Experience adjustments 50 - 50 -
Profit/ (loss) 450 100 150 150
35 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
zero
Expected cash outflows
Risk adjustment
Discounting
Contractual service margin
Expected cash inflows
Presentation of changes in profit or loss and OCI:
Initial recognition:
Building block 1 Building block 2 Building block 3 Building block 4
Changes in risk adjustment: profit or loss
Changes in cash flows unrelated to services: profit or loss
Changes in cash flows related to past and current services:
profit or loss
Release of margin: profit or loss
Offset changes related to future
services
Unwind of locked-in discount rate: profit or loss
Changes in discount rate:
OCI
Changes in cash flows related to future services: Offset against the margin *
Recognised in profit or loss if no
contractual service margin
(*) Recognised in profit or loss if no contractual service margin
Proposed measurement models Presentation of the statement of profit or loss and OCI
Summary, Comparison & Impact
37 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Content of the new ED at a glance Key Changes to 2010 proposals
Areas with significant changes Areas with significant clarifications
■ Scope – financial guarantees ■ Separating components of an insurance contract ■ Recognition ■ Contract boundaries ■ Acquisition costs ■ Contractual service margin ■ Participating contracts – the “mirroring” exception ■ Simplified premium-allocation approach (PAA) ■ Reinsurance ■ Presentation of the statement of profit or loss and
OCI ■ Effective date and transition
■ Level of measurement
■ Costs included in measurement
■ Discount rate
■ Risk adjustment
■ Disclosures
38 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Comparing the proposal with Solvency II
IFRS Phase II versus Solvency II
Market value of assets
Assets
Expected present value of future cash flows
Risk margin
CSM
Equity
IFRS 4 phase II
Market consistent value for
hedgeable risks
Best estimate for non-
hedgeable risks
Risk margin
MCR
SCR
Surplus
Solvency II
Liabilities
39 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Anticipated Variance
Objectives
Scope
Coverage
Discount rate
Diversification
Risk adjustment (IFRS) & Risk margin (Solvency II)
CSM
Cash flows
Contract boundary
Acquisition costs
Other expenses
Expected to be significantly different
Expected to reasonably different
Differences expected to be immaterial or non-existent
Key
Comparing the proposal with Solvency II
40 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
How will the proposals affect the industry?
Data and systems
Operational performance
Product design and pricing and
asset- liability management
People and processes
Possible volatility in equity and
profit or loss
Capital management
41 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
6%
71%
3%
20%
0% 0%
10%
20%
30%
40%
50%
60%
70%
80%
Haven't given this any consideration
Aware of changes but not started to consider the
implications
Started to think through project management implications
Started to think through
numerical impacts
Started to think through
systems implications
Where are firms in their thinking?
Whilst firms are aware of the changes, very few firms surveyed have started to understand the project management, numerical and systems implications of the proposals
Source: KPMG Technical Practices Survey 2013
42 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Feedback from the industry
Hot Topics
Contractual Service Margin
(CSM)
Discount rates
Presentation Interaction with IFRS 9
Clarity of proposals
Acquisition costs Mirroring “Confidence level” disclosure
Loss of volume information for key metrics Investment components excluded from
revenue
Unlocking Subsequent measurement for favourable changes Level of measurement
Determination of discount rate Changes recognised in OCI
Alignment of effective dates Redesignation of financial assets
Feedback :
Very complex High administrative efforts Accounting mismatches remain Does it really reflect the business?
Questions?
44 © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Agenda
Welcome Hieronymus T. Dormann, Sector Head Insurance, KPMG AG Thomas Schneider, Head Quantitative Finance Group, KPMG AG
Begin of the presentations
SST update: Learnings from Internal Model Reviews and Future Challenges Michael Schmutz, Quantitative Risk Management Insurance, FINMA
IFRS 4, phase II: Recent Developments Thomas Schneider, Head Quantitative Finance Group, KPMG AG
Big Data and Predictive Models in Insurance: More than just buzzwords William Southwell, Head Non-Life Actuarial, KPMG AG
Drinks, food and networking
17:30
19:30
Big data and predictive models – More than just buzz words
14 November 2013
William Southwell, KPMG AG
© 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
46
America‘s Cup
1850 2013
© 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
47
So what‘s this all about?
Big Data
Predictive Models
Uses
© 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
48
Big Data
Volume
Velocity
Variety
© 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
49
Predictive Models
High
Low
Reporting what happened?
Analysis why did it happen?
Monitoring what’s
happening now?
Prediction what might happen?
Com
plex
ity
Business Value High
Management Information
Query, reporting, & search tools
OLAP and visualization tools Drill down
Dashboards, Scorecards, KPIs
Predictive models
CHAID Analysis Classification and regression trees
Anova
Cluster Analysis Distribution
Analysis
Bootstrap
SEPATH
Power analysis
Time series/ forecasting
Generalised linear models (GLM)
Generalised regression models
Linear regression
Machine Learning/ Neural Networks
Text mining
© 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Drivers
Big Data
Predictive Models
Users
Consumer Focus Sales
Marketing 360º view of customer
Engagement Interactions
Product Focus Underwriting
Features Product research
T&Cs Costs
© 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Use in Insurance
Management
Underwriting Claims Management Marketing HR Distribution Actuarial/Risk
Management
■ Risk Selection
■ Pricing ■ Telematics ■ Mortality ■ Price
elasticity ■ Price
optimisation
■ Fraud prevention
■ Faster claims processing
■ Claim classification
■ Customer Segmentation
■ Lapse/ Conversion
■ Lifetime value ■ Cross-sell/
Up-sell ■ Prospect
identification ■ Website
optimisation ■ Campaign
selection ■ Social Media ■ Sentiment
analysis
■ Performancemeasurement
■ Channel optimisation
■ Agent renumeration
■ Talent identification
■ Resignation risk
■ Candidate selection
■ Reserving ■ Audit ■ Risk
identification ■ Compliance
BIG DATA
■ Strategic Decision Making
© 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Underwriting Case Study (1/5): Personal Lines Premium Rating
Discounts
Risk Premium
Claims Model Expense Model
Final Premium
Loadings
PRODUCT FOCUS CUSTOMER FOCUS
0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6
Prob
abilit
y of r
enew
al
Price change
Tenure= 1st renewal Tenure = 2nd renewal Tenure = 3rd renewal
0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2
Prob
abili
ty o
f con
vers
ion
Ratio of quote to market quote
Female Male
Conversion model
Retention model
© 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Underwriting Case Study (2/5): Mortality/ Underwritten Life
Age
Sex
Birth Year
Marital Status
Post Code Demo-
graphics
Annuity Size
Smoker?
Occupation
Type of retirement
Impaired life
Qx = Mortality
© 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Underwriting Case Study (3/5): Telematics
■ Attract favorable risks ■ Pricing Accuracy ■ Fight fraudulent claims ■ Reduce claim costs ■ Lower premiums ■ Differentiate brand ■ More engaged customers ■ Reduce theft ■ Environmentally Friendly promotion
Insurer
■ Lower premiums ■ Only pay for what use ■ Value added services:
– Emergency call out – Parking assistance – Stolen vehicle recovery – Vehicle diagnostics – Location services e.g. nearest petrol
station – Road safety information – Traffic information – Driving feedback
Consumer
© 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Marketing Case Study (4/5): Direct Marketing
© 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Social Media Data Telematics Data
Policy Data Claims Data
Claims Management Case Study (5/5): Fraud Detection
© 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Tackling Big Data and Predictive Models
Management
Risk Management
Claims
HR Marketing
Underwriting
Big Data
Communicate what’s possible to management
Identify business challenges which can be addressed with
Predictive Models
Identify data which needs to be collected and develop
required technology
Build models and embed into processes
© 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Who does all this?
ACTUARY: Making Financial
Sense of the future
© 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Summary
60 © 2012 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Agenda
Welcome Hieronymus T. Dormann, Sector Head Insurance, KPMG AG Thomas Schneider, Head Quantitative Finance Group, KPMG AG
Begin of the presentations
SST update: Learnings from Internal Model Reviews and Future Challenges Michael Schmutz, Quantitative Risk Management Insurance, FINMA
IFRS 4, phase II: Recent Developments Thomas Schneider, Head Quantitative Finance Group, KPMG AG
Big Data and Predictive Models in Insurance: More than just buzzwords William Southwell, Head Non-Life Actuarial, KPMG AG
Drinks, food and networking
17:30
19:30
Contact details
Hieronymus T. Dormann Partner
Sector Head Insurance
KPMG AG Badenerstrasse 172
8026 Zurich
Phone +41 58 249 35 03 Mobile +41 79 438 30 03
IFRS 4 Phase II
Contact details
Thomas Schneider Partner
Head Quantitative Finance Group
KPMG AG Badenerstrasse 172
8026 Zurich
Phone +41 58 249 54 50 Mobile +41 79 785 31 57 [email protected]
Patricia Bielmann Partner
IFRS Financial Services
KPMG AG Badenerstrasse 172
8026 Zurich
Phone +41 58 249 41 88 Fax +41 58 249 48 64
Big data and predictive models
Contact details
William Southwell Senior Manager
Head Non-life Actuarial Services
KPMG AG Badenerstrasse 172
8026 Zurich
Phone +41 58 249 62 94 Mobile +41 79 176 90 96
Disclaimer:
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.