Eames has been working closely with senior actuarial professionals in Asia to get their perspective on the 2020 market, the future of the actuarial industry and how to get the most out of your career. We have put together a series of interviews with key actuaries from different cities and interesting insight into the market across the region.
You have spent a number of years working across the region. How have you felt the insurance and actuarial industry change over the past 5 years?
The spread of technology and climate-related risks have caused fundamental changes in recent years across society-at-large, and as a consequence, in the insurance industry as well. Most of the trends are global in nature and some have had a more significant impact across APAC than others.
Probably the most fundamental development has been in newly emerging risks. Cyber perils and weather-related losses are the most glaring examples. Both have been around for a while but took on prominence of their own in the last few years.
Cyber, a few years ago was a little understood class of risk and mostly ignored with the recognition that it exists within most insurers’ portfolios in one way or the other. However, the exponential growth in most individuals’ digital footprint has led to larger risk followed by growth in sophistication and scale of the cyber-attacks. In the last five years, billions of users found their personal information compromised due to attacks on Yahoo!, Equifax and Starwood hotels. Beazley recently published a report highlighting that their total payments for ransomware attacks doubled in 2020 compared to 2019. Insurers and reinsurers are being forced to grapple with the risk, developing better understanding and using conscious underwriting and strict exclusionary language.
Climate has also seen a shift, with unpredictable weather patterns emerging. The word ‘record’ needs to be thrown around here a bit because a lot were broken in 2020. Atlantic hurricane season was the most active on record; record wildfires raged across both the U.S and Australia; here in the Pacific, S. Korea got hit by record number of typhoons; and the Philippines experienced two out of the ten costliest typhoons in recorded history in 2020. Not to mention the excessive rainfall in China, Pakistan, and India. I also added the work derecho to my vocabulary. Interestingly, this has meant that secondary perils like thunderstorms and wildfires have caused significantly more insured damage than anyone anticipated – over USD 50 billion by Swiss Re Institute’s estimate.
And no mention of ‘new risks’ can be complete these days without mentioning infectious disease. I shall not go into details, as much is still developing, but If Covid-19 were to be defined as an insured event (and different courts are deciding that as we speak), the conservative estimates would make it the costliest in history.
What this means for insurers and actuaries is that historical data – that we so love and cherish – may not be available to us. We have to better understand the new risks, which means engaging with experts from outside the insurance industry, and determine at any point how much capital we are willing to put at risk against these new perils.
Going beyond the nature of emerging risks, accounting and regulatory changes continue to keep the industry on its toes, whether it is the constant evolution of risk-based capital regimes or the introduction of IFRS17.
Technology is also changing product development, pricing, distribution, and management. Wearables have become a game-changer for Life and Health insurance, not just in terms of pricing, but also in terms of engagement with customers. Companies are looking not just to provide health insurance, but to create healthy-lifestyle ecosystems. Over on the non-life side, sensors are being used to develop parametric flood and hail products, drones and satellites are helping assess losses, blockchain-based solutions are tracking freight and ships at sea, telematics for Motor insurance is becoming cheaper to implement by using smart phones, and insurtech start-ups are challenging conventional distribution models as well as product offerings.
Also, very significantly, the industry has been coming together to reduce frictional costs by agreeing and (gradually) implementing electronic messaging standards. New blockchain-based reinsurance contracts have also been launched by B3i using Acord standards.
It baffles the mind that all this and more has happened, or at least significantly accelerated, in the last few years!
However, in all the conversation about the new, we miss talking about some fundamental things that remain unchanged, and a few of those definitely warrant a mention.
Traditional business remains robust with Motor and Property as the dominant classes of business on the non-life side. And for all the hype created by start-ups, the dominant insurance companies largely remain the ones we have been familiar with for years. Scale still matters, and so far, the existing (re)insurers are doing a reasonable job of responding to the evolving needs.
From the perspective of my current role, I feel capital – among most Asian insurers – remains primarily a regulatory concern, rather than a strategic one. This translates to reinsurance purchasing being driven by price, and in comparison to prior year’s spending, more than anything else.
And finally, looking at inclusiveness, I feel progress has been very slow towards better gender balance in senior management and board roles, particularly in the non-life insurance industry in Asia.
Some of these things need to change sooner rather than later.
Following on, where do you see it heading over the next 5 years?
Next five years are looking particularly exciting!
Much of what I mentioned in response to the last question is set to continue. Risk will evolve, and use of technology to tackle it will become more widespread. Technology adoption during the current pandemic will undoubtedly accelerate the change.
What I am most excited about – and something that has the potential to shift the existing insurance landscape completely – is the introduction of autonomous vehicles on public roads. While the technology has been in development for many years now, with Zoox just launching their first robotaxi, we are closer than ever to seeing driverless vehicles on the roads en masse.
Motor insurance – currently accounting for over 60% of global premium – will need to evolve from owner-based, to manufacturer-based; driver’s liability to product liability. Product and part warranties will need to be written, particularly for batteries. Will we have a large new class of travel insurance providing coverage per taxi trip?
Some of these changes are already in motion, but I expect will reach critical mass in the coming few years. Other similar areas of change include products for the sharing economy and the gig economy. We see insurtech start-ups looking to service these segments, some of which will grow into significant companies. We are already seeing car manufacturers and ride-hailing companies foraying into insurance, and the trend will continue.
For the actuaries involved, whether you are looking to develop the product, or determine how much capital to allocate to the new experimental classes of business, it will be key to understand the products and the underlying technology as much as possible. Data will be available, but not from the traditional sources. Instead of claims data, which won’t exist early on, we may have access to data from the various sensors or phone apps. We will need to determine how best to analyse it.
Disappointingly, the insurance protection gap continues to widen. Even in developed countries, insured losses for major catastrophes can typically be less than half of the total economic losses. In developing economies, that number tends to be much lower – in certain cases, close to zero. Virtual banks, mobile payment platforms, and other technological advancements promise a better future. However, success in this area is highly uncertain.
One change I am particularly looking forward to seeing in APAC, is more use of alternative capital. While a number of the investment-fund-backed reinsurers have become more active in writing business in Asia, there is very little concerted effort by local insurers to diversify sources of capital.
A few things are coming together now that I feel will push the insurers in the region towards better utilization of alternative capital. For starters, asset managers are getting more comfortable taking on insurance risk from different classes as well as different geographies. In addition, Singapore is vying to establish itself as a regional centre of excellence for issuance of insurance-linked securities (‘ILS’), and Hong Kong is now hot on its heels with relevant regulation in the pipeline. The hardening reinsurance market will play its part as well, with certain coverage more difficult to find than previously possible.
The coming years will force more insurers to look at capital strategically, leading to more utilization of captives as well as improved access to capital markets via ILS.
What is the most vital aspect for organisations to take into consideration when discussing insurance capital?
Insurance is the only business that deals exclusively in uncertainty and risk. We are therefore capital intensive, as there is a need to meet policyholder obligations even with the occurrence of improbable losses. To that end, capital needs to tie in with a business plan for the company and the uncertainty around it.
Where a company is now, where it is headed, and challenges it may (or may not) anticipate facing along the way, should drive how much capital is needed. It should also drive the conversation around sources of capital and capital flexibility. How much of the risk is retained by shareholders vs debtholders, and what is passed on to reinsurers as well as to broader capital markets via special purpose vehicles.
Of course, capital is not free, so the relative cost comes into play. Risk versus return, cost of capital, and investment potential on reserves need to be considered, particularly in today’s low-interest rate environment.
A good example of proactive capital management came from QBE last April as the uncertainty spread around the effect of the pandemic. They took swift action on both sides of the Balance Sheet. Potential liabilities were managed via reinsurance (purchased additional cat cover to reduce peak peril impact in North America), and asset-side was boosted at the same time using new equity issuance and share purchase plan.
How do you see technological functions improving and will these be beneficial or hinder Actuarial teams moving forward?
When I was in university, my professor spoke of a time when each cell of a mortality table had to be manually calculated and it would take weeks to fill out one table. We were lucky to have spreadsheets where we set up a formula in one cell and then dragged it across to fill the rest – the whole thing was complete in a matter of minutes.
Now, for those of us used to Excel, a similar change is happening with newer tools facilitating even further automation of tasks. Change remains a constant and actuaries are not the only ones impacted by improvements in technology. The most successful people in any profession will be those with the ability to understand the big picture and adapt to change.
Technology adoption also means new products can be created that were previously unthinkable (new types of sensors for parametric triggers, drones for loss assessment, driverless vehicles, etc.). Cyber, as a growing class of risk. All this change creates opportunity for anyone willing to step out of their comfort zone and attempt new things.
Actuaries work with data to find patterns. There will be more of a need for that than ever before. We just need to make sure we are using the latest toolkit, and understand the bigger picture so we can keep creating value.
There is also something to be said here about communication. The ability to articulate one’s views and explain rationale for decisions is more important than ever. Sometimes we can hide behind ‘actuarial judgment’ leaving our audience confused. There will be little room for that.
How did you feel working in a consultancy has impacted your career?
I can only think of positive things that consulting experience has added to my career. While I appreciate that a long stint in consulting is not for everyone, there are a few reasons why I would suggest at least trying it.
Consulting environment really helps you prioritize work that can be monetised. When time sheets are managed in 15-minute increments and you can see direct impact of work on fee, it makes you brutally honest about how you spend your time.
Working on different projects allows you – particularly in the early part of your career – to broaden the understanding of the industry and issues facing the clients. There is an expectation from clients that their consultant will have a view on new and emerging issues, which always keeps you on your toes as well.
Lastly, some of the important things I gained whose value I only realised after I had left consulting: the ability to sell your skill-set, negotiate money for your expertise, and win clients through high quality of work rather than a low price. These are rare traits.
Having worked with USA teams and worked in the USA yourself, what is the biggest difference between the two areas you have found within insurance?
Asia, on the other hand, is a mix of dozens of different regulatory regimes and accounting requirements, with low penetration. In a regional role, when I work with different clients, I need to make sure I’m aware of the particular accounting, capital and regulatory aspects of the specific country of the insurer.
I have to generalize a bit as it is not possible to cover “Asia” in broad statements, but tail of the business is generally short, and growth has been high over the last two decades. This has allowed insurers in the region to write business based on cash-flow while competing aggressively on price.
As an actuary, a key implication of the above differences is the level of specialization that one can expect to attain. I worked with a consultant in the U.S. whose book of business was primarily reserving work for Worker’s Compensation insurance for coal miners in the state of Pennsylvania. There was nobody better in the particular area of specialization. When I moved to Asia, I realized such specialisation was likely no longer on the cards.
For junior actuarial professionals looking to grow in their career, what is the most important lesson you have learnt that you can pass on?
Always put your hand up for interesting work.
If you have a choice between more money and work that intrigues you, opt for the latter. If you are uncertain about your ability to do well in a new environment, compared to something you are comfortable with, leave the comfort zone.You will enjoy your work more, and add years to your career.