Risk decisions that define insurers – and why it matters for trustees

For Trustees, understanding how an insurer manages, mitigates and anticipates risk is a key factor when it comes to choosing the right provider. But what does best practice actually look like?

Last week, Rob Mechem, Director of Commercial and Iroshini Leanage, DB Pricing Development Lead Actuary, delivered an insightful Pension Management Institute webinar on Just’s approach: 'An insurer's view on risk - what every trustee should know’.

Here are some of the key takeaways:

Same risks, different lens

For both pension schemes and insurers, risk management is fundamental to their business models and also to their core missions: to guarantee the timely provision of members’ complete benefits for the duration of their entitlement.

For Trustees, this involves periodic risk assessment, often dictated by their own governance cycle - a true valuation may happen every three years. Insurers have risk management embedded into everything they do, driving decision making at every level.

The risk landscape looks different to insurers, not least because regulation and governance differ.

Core risks considered when pricing bulk annuity transactions

Whether an insurer is pricing a BPA transaction, or a scheme is considering its option, the list of risks that need to be considered is lengthy:

1. Longevity

The best known risk: pensioners are living longer overall, even if mortality rates have stagnated somewhat. A difference of two years at age 65 can mean an 8% difference in liabilities. Just’s in-house demographic team help us fine tune our assumptions and associated pricing.

2. Data Risk

Is the scheme data complete and accurate? If they’re not, the liabilities aren’t going to be fully understood and could present longer term problems. Insurers work with a variety of data sources to manage this.

3. Portfolio and asset risk

How will the assets behave over time and how do they match our liabilities? What level of hedging might be required?

4. Credit risk and property risk

Insurers invest in UK credit – but it’s a competitive market, especially with current tight spreads impacting pricing and decision making. Similarly, property asset values can fluctuate.

5. Interest rate and inflation risk

These are unpredictable. What hedging will be needed to manage these risks within the portfolio?

6. Expense risk

The cost of a smaller scheme can be four times as much as a larger scheme on a per member basis, and how these costs will evolve isn’t necessarily predictable. Economies of scale can reduce costs.

7. Legislation risk

Any regulatory change can impact the costs and the risk of a scheme.

And the other considerations...

Non-standard assets, price locks, in specie assets, residual risks and the possibility of a data or cyber attack: our teams undertake due diligence work on all these risks in order to assess and price them appropriately.

The known unknown: when it goes wrong...

That one-in-200 year event, or 0.02% likelihood of an adverse scenario? As insurers, planning for the unforeseen is also part of good risk management. Aside from reinsurance, there are several ways in which we actively plan for a situation in which something goes wrong.

1. Capital positions

Insurers hold capital against adverse events as part of the Solvency Capital Requirement (SCR) under Solvency II. This ensures we can absorb any losses while still meeting policyholder obligations with 99.5% certainty.

2. Internal and external audit

Credit rating agencies provide biannual assessments of insurers’ standing, providing assurance that long-term affordability and good risk management has been achieved and is under regular review.

The importance of a strong framework

The Solvency UK regime is fundamentally about resilience: insurers should be able to price appropriately and manage that risk over a long period of time. This regulatory framework covers quantitative, qualitative and regulatory requirements for insurers.

At Just, our risk management is underpinned by strong governance and highly experienced teams, in-house risk management and audit teams tasked with challenging, investigating and reporting on decisions. Monthly valuations allow us to identify trends across the sector, biannual results reporting and multiple committees reinforce the culture of care, analysis and accountability.

The power of a risk-management focused culture

Robust internal processes and external scrutiny strengthen the framework in which all insurers operate, but what can vary is how risk management is embedded in their culture, processes and shared values. At Just, our goal is to provide a safe, insured income stream for our members and to support them at every stage of their retirement.

Delivering on that goal depends on best-in-class risk management and a thoroughly embedded risk-management culture at every stage of the transition and buy in / buy out process.

Watch the webinar here.