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Questions and answers from April 3 COVID-19 Town Hall now available

This article originally appeared on the CIA COVID-19 Hub.

The first COVID-19 Town Hall on April 3 titled “How is COVID-19 impacting the work of actuaries?” was well attended in both languages and we received many questions, several of which we could not answer given the limited time on hand.

Below is the round up of questions that were left unanswered during the April 3 Town Hall, with responses from the panelists. The webcast recording is also available.

Will the CIA be making a recommendation to insurers on COVID-19-related losses and claims?

The CIA will not be making a recommendation on this issue; this is an area of expertise for the Insurance Bureau of Canada.

Will the CIA support research and development pertaining to artificial intelligence models and prediction analyses on the development and impacts of COVID-19?

The Research Council (REC) has put out a call to researchers interested in analysing and reporting on the different impacts COVID-19 will have on insurance. The REC has also reached out to various Canadian insurers to gauge their interest in sharing data to help analyse the effect of COVID-19 on mortality (including cause of death) and morbidity risks, both in the short term and longer term. In addition, an industry task force has been created, which includes members of the Committee on Predictive Modelling, to examine how to optimize the value of the population data available as well as data that could be provided by insurers.

Will some insurers be using a pandemic exclusion based on claims correlation?

We suggest referring to the specific section found in insurance contracts addressing all exclusions. Furthermore, many insurers are addressing their coverage of COVID-19 related claims on their website.

In view of the crisis and the deferral of IFRS 17, can we expect reductions in the CALM valuation margins prescribed by the CIA? For example: 30% margin at the worst time on the level of ordinary investments.

We do not expect to propose reductions in the prescribed margins at this point.

In the short term, does the CIA plan on reviewing certain policies, standards or guidelines? For example, in the area of pension plans, early application of the new section 3500 would be very useful. Will certain standards with future effective dates (e.g. transfer values) be pushed back?

The Actuarial Standards Board, an independent body, recently announced that the effective date for the new transfer standards has been pushed back to the end of 2020. These new standards were carefully reviewed by the ASB. In all likelihood, with the recent increase in bond credit spreads, transfer values under the proposed standards would have been smaller than with the current standards in place, which would have been desirable for a number of plan sponsors and administrators. On the other hand, the new standards call for adjustments in pension plan administrative systems, and due to the crisis and administrators’ other priorities, this is not the time to proceed with these changes.

Question for pension plan experts: Do you think that in view of this crisis, clients will be having more discussions about risk management, in particular the option of transferring risk to an insurance company?

Effective management of risk is essential, and the current crisis brings home the importance of good risk management. It is our responsibility to assist plan administrators in this task, and in the past, we have shown our clients the value added we offer. We know how to do this while acting in the public interest. We need to take the time to learn what lessons this crisis has for good risk management. And we need to discuss these lessons with our clients and regulatory bodies with an eye to any necessary changes.

The way I see it, the interest rate rise stems from the credit spread increase. Do you share this view and if so, should we be more worried about the default risk?

Yes, the increase in interest rates was due to the increase in credit spread between Corporate Bonds and Government of Canada Bonds. Although credit spreads are typically a measure of the additional risk investors and lenders see between Corporate and Government of Canada bonds, it will be up to experts in this field to decide on the causes of this increase; in particular on the increase in default risk, the normal interplay of supply and demand, and the influence of capital movements between countries. These differences are very volatile, and you have to wait a bit before making a judgment. Having said that, the increase in credit spreads, at the time of our call, was sudden and significant [although not as large as during the 2008 crisis]. It has since diminished which confirms that, upon reflection, investors/lenders see some additional risk but less than they originally thought, for the time being.

It is up to us as actuaries to help our clients in managing their risk, so that they can choose the right compromise between the additional return of an asset class vis-à-vis the additional risk and assess whether the additional return on corporate bonds compensates for it.

The Quebec government was to introduce legislation allowing target benefit plans. Can we expect a major delay (as long as a year or more, perhaps) in the tabling of this bill? The timing of implementing these plans is an important issue, and it is hard to imagine implementing them in the months following the crisis.

The Quebec Finance Minister announced plans to table a bill this spring to introduce a regulatory framework for target benefit plans. According to the announcement, Retraite Québec has developed such a framework following consultations. This is not a new issue. Such plans already exist in Quebec for certain industries, and certain new collective agreements provide for such plans. But as we all know, the crisis has disrupted the government’s priorities. We must wait and see if the Minister still intends to introduce this legislation in the spring for consultations. The Institute will participate in these consultations, guided by our previous positions on this type of plan. This bill would be a good fit for the target benefit plans that have been established via collective bargaining. As for the others, they will have an additional option at their disposal.

Are there any pending CIA papers or studies on COVID-19 mortality, morbidity, duration, demographics etc.? What about other actuarial organizations?

As valuable background reading, we recommend reviewing the CIA Research Paper Considerations for the Development of a Pandemic Scenario, published after recent outbreaks of Swine Influenza and Avian Influenza.

Specifically related to COVID-19, the CIA has put out a call to researchers interested in analysing and reporting on the different impacts COVID-19 will have and an insurance industry task force has been created, which includes members of the predictive modelling committee, to examine how to optimize the value of the population data available as well as data that could be provided by insurers.

CIA members are working cooperatively with other actuarial organizations to share knowledge and insights on issues related to COVID-19. The Society of Actuaries publishes updates as Research Briefs (i.e., Society of Actuaries Research Brief: Impact of COVID-19).

Interested in your thoughts on what the offset impact will be from social distancing, increased hand washing, stay-at-home? Do you think we will see a decline in mortality rates from vehicle accidents, influenza against increased mortality from COVID-19?

At this point in time, it is difficult to estimate the full impact of COVID-19 and the approaches being used to combat the spread of the disease, but actuaries have a key role to play in analyzing and interpreting the developments. The CIA has put out a call to researchers interested in analysing and reporting on the different impacts COVID-19 will have on insurance. Also, The CIA Research Council has reached out to various Canadian insurers to gauge their interest in sharing data to help analyse the effect of COVID-19 on mortality and cause of death, both in the short term and longer term.

Are efforts like Solvency II supposed to consider pandemics?

Yes, Solvency II has a provision for pandemic risk. A 2013 article from the IFoA notes “the European Union’s Solvency II standard formula, the solvency capital requirement (SCR) for life catastrophe risk is 1.5 per mille times the total death capital at risk based on a 200-year return period pandemic scenario.”

What is the relationship between the Base Scenario and the Worst Case Scenario under COVID-19 for FCT?

The Standards of Practice require the FCT investigation to be current. The base scenario would reflect recent events such as the economic effects and any additional claim activity already observed. Any adjustments made to the base scenario would typically also impact the adverse scenarios. Potentially, going concern and solvency scenarios could be developed by making the assumptions on COVID-19 used in the base scenario more adverse.

As an example, the actuary could model known assumptions or results (e.g., drop in equity market, reduction in interest rate, improvement in P&C personal line claims experience, reduction in premium volume, etc.) as much as possible under the base scenario, and further develop three scenarios for assumptions that are likely to be impacted by COVID-19 but are still to emerge, effectively creating three base scenarios. Which one of these base scenarios to use for going concern and solvency scenario testing would depend on the company. The “best estimate” base scenario could be used for general testing, and then run the three worst results on the worst of the three base scenarios.

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