Papers

AIA and Vitality have has partnered with Quantium, a globally recognised leader in the development of data-driven insights, to create an algorithm that calculates the risk of developing depression, based on our customers’ circumstances and choices.

This could be used to:

• Understand what changes in behaviour or circumstances would make the most difference to depression risk, and therefore help prioritise investment and policy into improving mental health
• Incentivise behaviour that supports mental wellbeing.

This work has involved undertaking the world’s largest and richest study of the link between depression, demographics, health, lifestyle and circumstance through:

• Over 1000 features created and investigated spanning activity, sleep, health status and wellbeing indicators
• 500 million health claim lines over 10 years
• 1 billion biometric readings collected through AIA Vitality, Discovery

The algorithm developed has identified that lifestyle choices represent around a quarter of the depression impact, which can be incentivised for improvement. This can be used to develop programs through AIA Vitality to better engage members and improve their mental wellbeing.

Extrapolating these findings, we estimate that if the Australian population who have less than average lifestyles were able to shift to average behaviours for exercise, sleep and diet were able to live their healthiest lives (potentially incentivised by programs such as AIA Vitality), the national depression incidence rate could reduce from 6% to 4.7%, which is 300,000 fewer depression incidences, leading to 4.7 million working days recovered and saving the Australian economy around $3 billion per annum.

AIA Australia intends to use the algorithm to enhance the AIA Vitality program, to further help customers know their mental health and to incentivise improvements in behaviour around sleep, exercise and diet to support improved mental health outcomes.
  

Risks exhibit attributes that can be ordered into two main categories: volatility, and ‘black swans’. Volatility refers to the periods when they display ‘random walk’ stochastic behaviours or when they behave as if the underlying process is stationary. This characteristic of risk is a well-documented assumption in common paradigms within quantitative risk management and receives widespread use in established and evolving risk management methodology research and practice. These properties are, furthermore, straightforwardly accommodated in models used for corporate governance; capital adequacy calculations destined for board and board committees’ oversight, executive and C-Suite stewardship as well as three or five lines of defence delineations. They are, ultimately, used to frame methods of regulatory supervision. The second dimension of risk, memorably coined ‘black swans’, refers to the unforeseen, unexpected predilection of risk to generate extreme consequences that are not only severely disruptive, but very costly. This behaviour contradicts the claims of explanatory power for those traditional risk management tools and frameworks applied to risk when it appears to obey a stochastic process, has “reversion to the mean” and allows distributions to be fitted to the underlying data. In the context of this perspective KPMG was requested by the World Business Council for Sustainable Development (WBCSD) to “Identify the risks and their mitigants towards not being able to feed a projected population of nine billion people” 

The global risk landscape continues to change – constantly and at pace. Disruption, driven by environmental, social, governance (ESG) and technological risks, means business must respond and adapt to ensure long-term success, strategic resilience and value preservation. 

Monitoring and managing ESG related risks and opportunities is integral to business resilience in an economy that sees more frequent and severe impacts than ever before. Companies that do not manage their ESG-related risks miss out on opportunities and can suffer detrimental impacts. However, ESG-related risks can be difficult to identify, quantify and prioritize. It requires a deep understanding of the business operating environment and leadership that acknowledges and accepts the evolving external landscape. On a technical level, the process must move beyond traditional impact versus likelihood analysis to consider the interconnectivity and speed of onset of these risks. The food and agricultural sector in particular faces a multitude of risks and resource restraints in a rapidly evolving natural and social environment. More than ever, companies in this sector must demonstrate how they will continue to operate within the resource-scarce limits of the planet whilst meeting the needs and demands of feeding 9+ billion people. Because of these challenges, the World Business Council for Sustainable Development (WBCSD) engaged KPMG, through its process known as Dynamic Risk Assessment

Long-term cash flows, generated mainly by infrastructure and buildings, are an adequate source for pension payments to an ageing population. The interposition of short-term finance, with putative liquidity and performance guarantees, is a source of instability and unnecessary cost to providers and users of finance. For the retirement schemes that provide finance, sponsors and pensioners are currently exposed to significant investment risks because assets need to be sold at unpredictable prices to fund consumption. Their volatile investments are also costly to manage. Users of finance face risks in that their repayment obligations are not matched to their cash flows, and they face ongoing costs in managing the mismatch. In the middle, banks attempt to transform short-term deposits into long-term loans but are inevitably vulnerable to increased withdrawals.

Appropriately structured indexed annuity bonds – perhaps using alternative inflation and longevity linkages – would reduce overall risk for both investors and borrowers. Hypothecating cash flows to investors would also mean that the managers of organizations in both public and private sectors would lose access to tempting free cash flows and give investors more input into the funding of significant new projects. The institutional changes necessary for the extensive use of these instruments presents a challenge and opportunity to those in the finance sector and to researchers.

Many of the ideas in the paper are not new to actuaries, and they will readily grasp the value of those that are. The idea of duration matching in many ways represents a paradigm that is foreign to academics and practitioners with a finance and banking focus. It is suggested that the actuarial paradigm has much to offer but that it will require a significant effort to make space within the dominant paradigm.
  

All Your Data Are Belong To Us – Trends in Data Ownership
Chris Dolman, Hugh Miller

“Data is the new oil” – use of data is central to modern business success and it is no surprise that all four non-state companies to achieve trillion-dollar valuations are technology companies that rely heavily on data. But how can data be accessed? Who owns data? What control do you have over your data? What happens when people do not have enough data assets, like credit or banking history, to access services that increasingly require it? This paper will consider trends in data ownership and some of the implications of these trends.

First, it will look at the implications of the current Australian Privacy Principals. Although they give significant rights to individuals, the degree to which companies are able to comply and the legal interpretation of what constitutes personal data highlight ongoing challenges. Full compliance typically requires sophisticated data management systems and constant vigilance. We look at personal examples of data requests made under the APPs. We will also discuss practices companies are using to comply with privacy rules, including transforming personal data to detailed ‘non-personal’ data.

Second, we explore trends in data portability including recent open banking rules. The intended operation of the rules is to give people greater ability to access, use and redirect data about themselves that is currently held by institutions. This is predicted to enhance competition and innovation. However, when applied as a broader theme across many sectors, there could be significant side effects, particularly around product access for those who are digitally disadvantaged. Balancing the benefits with the side effects will be a significant challenge as these systems mature.

Finally, we discuss recent developments on the data regulation front and the implications for further developments that may significantly affect how companies collect and use data.
 

Discrimination has been a newsworthy topic in recent years, and at times insurance has been in the spotlight. Following the 2019 report of the Victorian Equal Opportunity and Human Rights Commission into travel insurance (“Fair Minded Cover”), the Actuaries Institute formed the ADWG, to consider guidance or educational material for actuaries around this topic.

In this session, members of the working group will give an overview of the topic and associated material now available for members. This will include:

• A summary of the various state and federal discrimination acts
• An outline of the insurance specific provisions within that legislation
• High level guidance for actuaries, particularly for those in product development, underwriting and pricing, in complying with this legislation and the insurance provisions
• Considerations for actuaries involved in the development of broader decision-making algorithms, where discrimination may occur
• Links to material produced by the working group, for member consumption

This session is intended to give actuaries a good starting point in how to consider discrimination within their work, and to publicise the material which the working group will make available prior to the Summit.
  

Should I use this rating factor? Philosophical approach to an Old Question
Chris Dolman, Seth Lazar, Dimitri Semenovich, Tiberio Caetano

A common question asked of insurance professionals is whether a rating factor ought to be permitted for price setting. One then often falls back on a set of heuristics, for example, is the factor commonly used in the market, does it predict well, would people generally expect it to be used, or is it visible to customers. However, the underlying principles of such intuitions are not necessarily appreciated or understood.

In this paper, we draw on contemporary ideas in procedural and distributive justice to decompose the classical notion of risk into several components that in turn allow development of semiformal criteria by which rating factors may be evaluated. We hope that this new set of conceptual tools will allow practitioners to reason about ethical questions surrounding pricing systems with greater clarity.
  

What makes a forecast “good”? How can we determine if an alternative is “better”? This is a common question asked in domains requiring regular predictions. In this paper we explore forecast verification concepts first developed in meteorology, such as Brier decomposition, and relate them to traditional actuarial forecasting tasks of pricing, reserving and capital modelling.

We use then use these observations to motivate a new metric - called resolution in Brier’s system - for monitoring the predictive power of pricing systems. This may sit alongside traditional monitoring concepts such-as the overall rate adequacy or expected portfolio profit, and may be computed simply from observed data, free from models and other external assumptions.

The topic is intended to appeal to life insurance and superannuation practitioners who are wrestling with how Australia’s DC superannuation system might deliver “income for life” to retirees. 

The paper/presentation will comprise three main elements:

a) Outline a range of divergent views/conclusions from researchers and practitioners globally  to illustrate some of the challenges in designing effective consumer solutions for lifetime  income streams in a defined‐contribution system – purpose will be to use examples to illustrate the breadth of thinking across various key pension markets and to reference related papers to serve as a broader, non‐exhaustive reading list for those interested in reading further.

b) Showcase a selection of interesting lifetime income stream products from key pension markets ‐ some existing on‐sale products and some in concept stage.

c) Provide a reinsurer’s perspective on how the global reinsurance market’s appetite for longevity risk could impact Australian product design/pricing? Topics to cover will include:

• The evolution of the current reinsurance market for longevity risk
•  Reinsurance capacity for longevity risk and its potential implications for Australia
• Current risk appetite challenges posed by potential Australian product designs

d) Reinsurance vs capital market vs “pooled self‐insurance” solutions – depending on the  resultant depth and breadth of content covered in (a) – (c) above, the paper might also look to include a “taster” on this topic as a thought‐prompter for readers/audience. It is not intended that this topic would be a dominant feature of the paper/presentation.  
 

Is Retail Lump Sum Business Sustainable?
Jamie Sach, Giri Varatharajan, HP Thniah, Luke Liu, Pallav Bajracharya, Ray Bennett

The problems and lack of sustainability of individual disability insurance are well known - but are they are only problems in the retail insurance market?

To answer this question Product Sustainability Working Group was formed and they presented their draft report to the Life Sub-Committee of the Actuaries Institute in October 2019.  The finalised report was made available to members in June.

The presentation will highlight the key ideas from the paper: 

• Problems that exist today with the current retail lump sum offerings (with parallels to issues raised as part of APRA’s IDII thematic review).
• Solutions to these problems (generally within the current regulatory framework).
• Potential longer term consequences for the industry of adopting some of these solutions.

While tontines are rarely seen (or sold) in the current environment, there has been an increasing amount of innovative research in the last decade which is leading to a rebirth of modern tontine-thinking. Misconceptions however persist.

In this paper, we are bringing together the historical context and modern tontine-thinking by providing a review of historical tontines and recent academic/practitioner research.  We then distil the key elements of tontine thinking, before highlighting and discussing product design features and characteristics that could be suitable for the Australian superannuation market, which is principally of defined contribution nature during the accumulation phase and dominated by account-based pension products in the retirement phase.  For example, features could include tontines with member investment choice or flat drawdown rates (subject to mortality volatility). 

The paper will conclude by taking a deep dive into one particular design with modelling results and discussion on implications for superannuation members and service providers.