Simple Ideas for a Complex Retirement: A Blueprint for an Improved Retirement Income System
For at least a decade, there have been countless articles, presentations, commissions and even a Financial System Inquiry pointing out the problems with the current state of Australia’s retirement income system. The issues relating to longevity protection, financial planning, generational inequity and fiscal policy appear to be well understood by academics and practitioners alike, yet here we in 2019 without a clear way forward. Recent consultations show that consensus is hard to achieve within the industry and flaws in ideas are easier to find than viable solutions. Also, there appears to be a default position across the industry that more innovation is required when it comes to retirement income products. This is generally thought to mean opening up the gates to a wide array of drawdown products in an attempt to provide retirees with features they do not currently have access to. However, perhaps innovation can be achieved by taking a contrarian view and constricting rather than expanding possible retirement product sets. By taking such an approach, super trustees providing drawdown solutions may successfully move from a dictating to a facilitating role, as financial literacy is improved and retirees are empowered to make well-informed decisions.
Data Scandals – Lessons for Actuaries and Risk Managers
Chris Dolman, Aaron Cutter, Nick Cowdery, Gavin Pearce
We use a selection of case studies of several recent PR disasters relating to data and analytics in individual customer decision processes to explore the often-overlooked concept of a data ethics breach. Based on these real-world case studies, we provide high level risk management guidance for actuaries, data scientists and risk managers involved in the rapidly evolving world of data analytics and personalisation, who wish to address this risk in the course of their work.
Greed: An Interdisciplinary mind-map
Greed is condemned as a source of corruption and excessive risk taking, especially in the finance sector. It is socially destructive when it leads to crimes or theft and violence, and economically destructive when it leads to overcharging or creates externalities that burden others. Religious, legal and economic institutions – such as ethical codes, laws against exploitation, and competitive markets – have developed to constrain greed’s development and ameliorate its consequences, but rent seeking and regulatory capture on the one hand and complacency on the other create ongoing risks of corruption. Those acting out greed, whether or not they were instrumental in creating corruption, are likely to rationalise their personal or group benefits and resist efforts at institutional reform. Research and policy reform can be misled by such efforts, particularly when cloaked in plausible rationalisations that are strongly argued by vested interests. This article explores the causes and nature of greed, and identifies some of the rationalizations by which is defended. It then considers the parallels and different functions of the institutions that can stand as bulwarks against greed.
Algorithmic Fairness: Some Practical Considerations for Actuaries
Chris Dolman, Dimitri Semenovich
In this paper we review recent work on fairness of decision making algorithms and highlight some important relationships between recent proposals from the computer science literature and traditional concepts such as actuarial fairness. We also explore some practicalities and implications of the use of fairness constructs within real world pricing systems to provide guidance for members who wish to adopt these ideas in their work.
Spend your Decennial Age: A Rule of Thumb for Retirement
John De Ravin, Estelle Liu, Rein van Rooyen, Paul Scully and Shang Wu
In Australia, the majority of people retire with lump sum benefits from defined contribution superannuation schemes, and elect to take their benefits either in the form of Account-Based Pensions (ABPs) or lump sums. Determining the appropriate drawdown from assets in retirement is a complicated and important problem faced by many older Australians. That complexity and importance mean that preparation of comprehensive, independent advice covering retirement drawdown is critical for the majority who do not necessarily have the financial literacy to navigate the decisions themselves. Advice is often expensive and therefore not a feasible option for everyone.
This paper addresses the needs of retirees who are entitled to full or part pension, and who usually do not commission comprehensive, independent advice on drawdowns, but rely on other inputs, such as the ABP minimum withdrawal rates covering pension assets in the superannuation system.
The purposes of this paper are to develop some ABP drawdown rules and to investigate how alternative drawdown rules affect pensioner welfare as determined by using a utility metric, taking into account the lifetime interactions with the Age Pension means tests for different asset balances. We use the legislated ABP minimum drawdown rates as a starting point and explore some previously published drawdown rules. Then, using the results of dynamic programming calculations that produce optimum drawdown rates by age and asset balance, we develop new drawdown rules, including a simple rule of thumb, that yield improved total lifetime utility of consumption for retirees.
Safe as Houses?
This – unreviewed – paper builds on previous work that I have done in the field of house prices and their drivers. In particular, I have produced a macro price deflator and shown how this explains much of the historical movement in median house prices.
In this paper, I update my deflator and its application to house prices, as well as revising and extending the datasets that I use.
Deflated house prices demonstrate two clear potential price bubbles since 1970, one national and one limited to a few cities. On this basis, neither the 2017 peak nor the subsequent fall is particularly worthy of comment on a national basis – although, again, this is perhaps not the case for all cities.
I have extended my analysis to include apartments since 2002 – i.e., for the period covered by the ABS.
My paper and presentation form the starting point for discussion of matters including:
- How appropriate is my deflator and how reasonable are my conclusions?
- What explains the short-term movements relative to the deflator?
- What explains relativities between apartment and house price movements?
- Where are we headed now, and why?
Largely, these questions are not answered in my paper. They are for discussion at my session at the Summit.
And we also need to discuss the most important question of all: what (if any) actions are required to achieve or maintain housing affordability in Australia?
The True Value of Private Health Insurance for Customers
Adam Stolz & Hadyn Bernau
The focus on customer and customer value has never been more important for financial services with the recent Royal Commission, and specifically for Private Health Insurance given the record and increasing size of premiums relative to household budgets, and current political pressure on yearly premium increases.
In this context, the paper will promote discussion on what is the true value of private health insurance for customers – focused on hospital cover – and how this compares to perceived value on average, and for different types of customers.
To assess perceived value, we use the hospital cover participation rate – customers’ actual purchasing decisions - as well as customer research. We have developed a model of the factors that influence the participation rate, and reviewed the research. We aim to better understand the drivers of customer perceived value, including wealth, income, age, premiums, benefits, peace of mind, health attitudes and Government policy.
We have assessed true value using reported data on PHI premiums, benefits, out-of-pockets, treatment waiting times, and other factors.
We then look at whether there could be any difference between the “true value” for customers and their current perceptions of value. In other words, are customers undervaluing any aspect of their hospital cover?
Value for some customers is low - is it time to act? And what could be some of the potential solutions to create better outcomes?
A Data Analytics Paradigm for the Construction, Selection, and Evaluation of Mortality Models
Dilan SriDaran, michael Sherris, Andres M. Villegas, Jonathan Ziveyi
Humanity has made, and continues to make, significant progress in averting and delaying death, which has severe implications for the financial sector through increased longevity costs. The main risk, however, is not increasing longevity per se, but rather the inherent uncertainty of future mortality rates, which has brought to the fore the critical importance of mortality forecasting for practicing actuaries. Consequently, numerous discrete-time mortality models have been proposed, with the most popular and commonly-referenced models in the academic literature belonging to a generalised age-period-cohort framework.
These models decompose observed historical mortality rates across the dimensions of age, period, and cohort (or year-of-birth), which can then be extrapolated to forecast future outcomes. Recently, a large number of models have been proposed within this framework, many of which are over-parameterised and produce spurious forecasts, particularly over long horizons and for noisy data sets.
In this paper we exploit data analytics techniques to provide a comprehensive toolbox to construct, select, and evaluate these generalised age-period-cohort (GAPC) mortality models, which we make readily available to practitioners through open source R code (R Core Team 2018). This builds on our previous experience with the R package StMoMo (Villegas, Millossovich, and Kaishev 2018) which implements GAPC models. To devise this robust toolbox, we leverage two key statistical learning tools – cross validation and regularisation – to draw as much insight as possible from limited mortality data sets.
We first propose a cross validation framework that places an emphasis on out-of-sample performance for model selection. This framework is flexible and can easily be tailored to determine the features of mortality models that are desired for practitioners’ varying applications, which may include period or cohort-based forecasting. With this, we are better able to answer questions regarding the effects of population size and structure, age, and forecasting basis and horizon on the preferred model selection.
We also present a regularisation approach to construct bespoke mortality models by automatically selecting the most appropriate parametric forms to best describe and forecast particular data sets, using a trade-off between complexity and parsimony. We illustrate this using empirical data from the Human Mortality Database and simulated data sets.
Measuring Insurance Risk in PHI – Principles for the Capital Standards Review
The Institute’s PHI Capital Standards Working Group will share the results of their work in developing principles for assessing insurance risk and insurance concentration risk as part of APRA’s consultation on the Private Health Insurance Capital Standards. The presentation will reflect on historical adverse events in Australia’s PHI market, as well as, lessons learnt from the regulatory treatment of health insurance risk in markets overseas.
Health, Defence and Immigration: The impact of health coverage arrangements for military, overseas visitors and students on private health insurance
The Australian Government provides or mandates compulsory private health cover for current and certain former military service personnel (and their families), temporary residents and foreign students. Examining the historical and current impact of these arrangements on the resident private health insurance market is crucial to understanding changes in private health insurance demographics, claims costs and premiums.
This paper is being presented soon after the 2019 Federal election. While health, defence, immigration and education are all good subjects for political debate, the title of this paper reflects the additional ‘hidden insured’ groups of veterans (and their families), some temporary residents and foreign students who are covered for private hospital services separate to usual private health insurance arrangements.
I presented an Actuaries Institute Insights session “War and Peace (and Health Insurance): The impact of Veterans health care on Private Health Insurance” in October 2017. This paper includes and expands on the analysis presented in that session.
Optimising the Superannuation Guarantee
Michael Rice and Nathan Bonarius
The Productivity Commission have recently recommended an independent public inquiry into the role of compulsory superannuation in the broader retirement incomes system, including the net impact of compulsory super on private and public savings, public finances, distributional impacts across the population and over time, interaction between superannuation and other sources of retirement income.
This paper would bring together high level principles for the purpose of super with actuarial modelling of the impacts for individuals and Government finances to determine appropriate values for an ideal level of SG to meet different policy goals.
The paper will utilise Rice Warner's sophisticated Retirement Outcomes model developed in conjunction with ISA to provide the most comprehensive modelling of this issue to date. Covering distributional impacts and impacts on Government tax concessions and the Age Pension within a holistic framework.