The development of an economic capital model requires a decision to be made regarding how to aggregate capital requirements for the individual risk factors while taking into account the effects of diversification. Under the Individual Capital Adequacy Standards framework, UK life insurers have commonly adopted a correlation matrix approach due to its simplicity and ease in communication to the stakeholders involved, adjusting the result, where appropriate, to allow for non-linear interactions. The regulatory requirements of Solvency II have been one of the principal drivers leading to an increased use of more sophisticated aggregation techniques in economic capital models. This paper focusses on a simulation-based approach to the aggregation of capital requirements using copulas and proxy models. It describes the practical challenges in parameterising a copula including how allowance may be made for tail dependence. It also covers the challenges associated with fitting and validating a proxy model. In particular, the paper outlines how insurers could test, communicate and justify the choices made through the use of some examples.

This abstract relates to the following paper: AndroschuckT., GibbsS., KatrakisN., LauJ., OramS., RaddallP., SemchyshynL., StevensonD. and WatersJ. Simulation-based capital models: testing, justifying and communicating choices ‐ Abstract of the Edinburgh Discussion. British Actuarial Journal. doi:10.1017/S1357321717000071

Periodical Payment Orders (PPOs) have challenged actuarial professionals as they rose to prominence as a new means of settling third-party liability claims, consisting of regular payments in the future, usually for a claimant’s lifetime. This paper explores how this new settlement method has brought about new risks to consider for actuarial professionals working in Motor and Casualty insurance, or any other line where a claim for future periodical payments may arise. Life contingencies have entered the space of general insurance in a new way. In addition, actuarial professionals have investment risk to consider, and for PPOs the inflation risk is unusual, significant and not currently fully hedgeable. The paper highlights methods that could be considered for setting important assumptions, including mortality, indexation, investment return and PPO settlement propensity. For reserving actuaries, the paper explains that the nature of the liabilities does not lend itself to triangulation. Cash flow techniques are needed and actual-versus-expected results can be analysed for discount rate unwinding and mortality profit, for example. Scenario testing will be important to understand the sensitivity of the results and to explain them to senior management. Stochastic modelling is considered in the Capital Modelling section, amongst other significant considerations for actuarial practitioners working with PPOs in this field. Pricing is also affected, as PPOs are a proportion of large loss loadings. The paper also touches briefly on reporting requirements. This is to help provide some basic background for actuaries interacting with those undertaking financial reporting.

This abstract relates to the following paper: Information for actuaries valuing Periodical Payment Orders ‐ Abstract of the London Discussion. Information for actuaries valuing Periodical Payment Orders. British Actuarial Journal. doi: 10.1017/S1357321717000101

The hedging practices survey took place towards the end of 2015 in the final few months prior to Solvency II regulations coming into force. At the point of completing the survey we would expect that companies would have largely transitioned their hedging approaches to work in a Solvency II environment. There may be some cases where further changes were planned but not implemented at the point of completing the survey. Further, as familiarity with working under the new regulations increases, approaches are expected to continue to develop over time. The working party hopes that this report is useful in summarising industry attitudes at this point in time and as a comparator in future years. Before launching the survey we did have several conjectures of what we may expect to see in the results. Some proved true, for some it was difficult to glean any strong conclusion from the data, and there were one or two where results countered what we expected to see.