Financial reporting issues arising from Covid-19

Two people looking at a financial report on a screen

IFoA’s COVID-19 Action Taskforce (ICAT) Financial Reporting Group (FRG) with input from within the COVID-19 workstream, provides initial observations considering the topic of Covid-19 reporting implications for actuaries working on insurance companies/pension plans.

In this blog post, the ICAT FRG workstream discusses the main reporting challenges following the pandemic outbreak and how the impacts could be disclosed.

A follow-up blog will explore the implications for pension plans in more detail.

Financial management effects

Insurers and pension schemes are significant players in the institutional investment space in society, being the main long-term capital providers to the economy. The interconnectedness of the insurance and pension industry to society indicates the need for raised awareness on the impacts of Covid-19, the financial management options and effects on insurers and how these are disclosed.

The potential financial management effects for insurers that should be considered as a result of the pandemic include:

  • Dividend policies;
  • Capital and balance sheet management of the insurance firms;
  • Cash management and generation profile of the in-force business;
  • The timing of other management actions, such as portfolios’ acquisitions/sales and M&A. Specifically, any Part VII transfer arrangements in UK.

Special events for pension plans that should be considered are (incl. the consideration of the impact in the P&L statement):

  • Plan amendments;
  • Settlements or curtailments;
  • Business combinations;
  • Plan mergers and splits;
  • Plan terminations.

Covid-19 implications for input/assumptions and models

Covid-19 means that many best estimates and prudential margin assumptions may require reassessment, which presents a practical challenge for actuaries and could lead to significantly increased workloads. The use of expert judgement and historic (even limited) data will be key.

General considerations

  • Data quality – The quality of underlying valuation/reserve data and data feeding into basis setting will need to be assessed following the Covid-19 outbreak and for Covid-19 specific experience. For experience investigations data, difficulties and backlogs in processing areas may be experienced due to remote working and other operational issues. Issues may also arise in recording changes to policyholder status and/or registering/closing claims.
  • Operational impacts – Consideration of any operational impacts that will impact the underlying data collection and/or assumption setting processes, for example due to people working at home and having difficulties accessing administration systems.
  • Short-term vs Long-term – Consideration of short-term vs long-term impacts will be needed when assessing the relevance of the data.
  • Change in coverage / repricing – The impact of changes in coverage and pricing should be considered, particularly for short term business.  This, combined with any changes in processing, may cause a discontinuity in the current claims development compared to that experienced historically.
  • Materiality of assumptions and data - What are the material assumptions or data for the business being valued and the sensitivity of results to fluctuations in these? Ensure focus of effort and time is placed on these. For those that are material, which are likely to be impacted by Covid-19 and how?
  • Professional standards -  In these uncertain times, it is important to maintain professional standards by ensuring the actuary clearly articulates to the end user any uncertainty surrounding the data and/or expert judgement used when producing output.

Basis setting

One of the biggest uncertainties is how long Covid-19 severe restrictions will last and whether insurers need to treat the change in economic/demographic experience as a one-off or whether the impact of Covid-19 will change long-term assumptions.

  • Experience treatment - The impact on the in-year experience from Covid-19 will normally come through the analysis of change/P&L statement as part of experience variances in the operating earnings line for demographic and non-operating for economic impacts. If Covid-19 is expected to have a longer term impact on business experience this would normally be captured in the non-market/economic assumptions changes in the operating and non-operating lines respectively.
  • Mortality/morbidity rates – are they expected to persist in the long term or be repeated, or should they be considered short-term and not expected to be repeated? This will need to be considered when using experience data to set the basis:
    • The resulting effects of lockdown and the difficulty/discouragement of medical appointments for non-Covid-19 related reasons may result in a spike in mortality/morbidity rates.
    • The Covid-19 related deaths may have resulted in an increase in the mortality/morbidity rate assumption for particular portfolios.
    • The resulting effects of lockdown may have preserved accidental deaths at low levels, with a possible reduction in mortality rates.
    • The impact on the longevity improvement assumption of the experience from Covid 19 will need to be assessed, for example, are these expected to be higher or lower following recent mortality experience.
  • Persistency rates – similarly:
    • The raised awareness for medical/life insurance protection following the Covid-19 pandemic may have increased the persistency rates over a certain period of time;
    • The resulting effects of lockdown and the adverse effects on the economy (redundancies, furlough schemes) may have seen insurance or savings products as a non-essential cost with potential negative effects in persistency rates.
  • Data collection period - consider whether the data collection period should be cut off later than normal to allow for the most recent data for basis setting to capture as much Covid-19 experience as possible. Alternatively, it may not be worth delaying as data will be unreliable and scarce and any adjustments may need to be done using expert judgement.
  • External data - Where data is not available internally, or is scarce, is there any industry data available that can be used to support basis setting? If so, how applicable is this external data for the insured book of policyholders?
  • Knock-on effects not reflected in the data - What are the likely long-term impacts that have not emerged yet? For example, undiagnosed cancer and other illnesses due to health service focus on treating Covid-19 or people not wanting to go to hospital for routine screening or treatments.
  • Short-term provision - Consider the benefits of setting up a short-term provision to cover short-term impacts or uncertain/underdeveloped data into long-term assumptions.

Prudent vs Best Estimate

  • Purpose - Whether assumptions are best estimate or include a prudent margin will depend on local regulatory regime and the use/purpose of the assumptions. The differences between regulatory and statutory reporting should also be considered.
  • Solvency II - For countries who have adopted Solvency II, assumptions need to be best estimate but may require prudent assumptions for some areas such as the Solvency I assumptions for the calculation of the transitional measure on technical provisions.
  • Margin - Should there be an allowance for future pandemics within the best estimate assumptions or will it be part of the capital requirements and/or other additions for prudence?

Governance & Disclosure

  • Time & Effort - Basis setting may take longer, as a significant amount of expert judgement may take longer to determine, and will be more time consuming to take through governance and audit.
  • Disclosure – High quality disclosures will be very important in the current uncertain environment. Reporting and explaining the Covid-19 effects specific to the company/pension plan together with forward-looking information will demonstrate robust and useful disclosures. For example, the Actuarial Function report may need to raise the implications of Covid-19 and the surrounding uncertainty.

 

Disclaimer: The views expressed in this blog are those of invited contributors and not necessarily those of the Institute and Faculty of Actuaries. The Institute and Faculty of Actuaries do not endorse any of the views stated, nor any claims or representations made in this blog and accept no responsibility or liability to any person for loss or damage suffered as a consequence of their placing reliance upon any view, claim or representation made in this blog. The information and expressions of opinion contained in this blog are not intended to be a comprehensive study, nor to provide actuarial advice or advice of any nature and should not be treated as a substitute for specific advice concerning individual situations. On no account may any part of this blog be reproduced without the written permission of the Institute and Faculty of Actuaries.

 

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