[Misconduct] Fined and Banned For Delaying The Allocation Of Trades

"Between January 2010 and October 2012, Mr Miah exploited weaknesses in the trading systems and controls at Aviva Investors in order to delay the booking and allocation of trades." 
Published : 17/11/2015
Source: fca.org.uk

Guide to Commercial Insurance Pricing - Part 1 - SME Portfolio

OVERVIEW OF COMMERCIAL INSURANCE
1. This post aims to provide an overview of the main features of Commercial insurance and  the roles of portfolio managers and case underwriters in the pricing process.

2. Issues covered would also include the key differences between the Corporate and Small Medium Enterprise segments of Commercial Insurance and the drivers behind the market prices.

Actuarial Valuation for Pension Plans - Part 2 - Cost Methods

1. There are two widely used actuarial cost methods to calculate the Actuarial Accrued Liability (AAL) and Normal Cost (NC).

2.Pre-funded Defined Benefit Plans require a periodic Actuarial Valuation to determine the recommended contribution amount.

3. Actuaries apply a discount rate to future benefit payments in order to calculate a present value or value in today’s dollars.

Note: The higher the discount rate, the lower the present value, and vice versa.

COST METHODS - ENTRY AGE NORMAL (EAN) & PROJECTED UNIT CREDIT (PUC)

1. The AAL is based on projected pay and current service.

2. EAN method defines the normal cost as a level percent of pay from entry age until retirement (Puts more of the liability into the AAL and less into PVFNC)

3. PUC methods dicates the normal cost for each member increases as a percent of pay as the member. (puts less of the liability into the AAL and more into the PVFNC than EAN)

Actuarial Valuation for Pension Plans - Part 1 - Amortization Methods

TYPES OF PENSION PLANS

1. Defined Benefit Plan - Pension plan where a monthly benefit, payable at a certain retirement age, is defined in the plan.  

2. Defined Contribution Plan - Pension plan in which specified contributions are made to each participant’s account.  The contributions and interest earned on the investments serve as the total retirement amount for the retiree.

3. The equation of pension plan financing is  Contributions(C) + Income (I) = Benefits (B) + Expenses (E)

China's Fund Managers Shift to Bonds

CHINA'S BOND MARKET
1.Chinese government has succeeded in getting funding to higher risk sectors by relaxing bond approvals.

2. Regulators began allowing unlisted companies to issue bonds on public exchanges.

3. Chinese bonds' higher yields are appealing given the lack of options in Europe or other developed bond markets.

4. Over 40% of the bonds outstanding mature in less than three years. This is in contrast to elsewhere in the world.

Life Insurance Policy Admin Moving Forward

INSURANCE VALUE CHAIN
1. Insurance operations can be broadly divided into three core elements.

2. They are Front office, Policy Administration & Underwriting, and Claims Processing & Payout


KEY IDEAS
1. Ideas towards driving changes in policy administration and underwriting function are:

2. Switching of business process outsourcing (BPO) for closed-book operations.

3. Enhanced use of business intelligence (BI) and analytics for underwriting.

4. Increasing adoption of self-service for policy servicing.

Understanding Longevity Risks

1. Countries with pensions freedoms that enables pensioners to spend their retirement savings as they wish is a ticking time bomb. 

2. Longevity risk is not “well understood” and it has “significant implications” for retirement income.

3. Pensioners living above their life expectancy will cause a strain in the retirement system resulting in a "time-bomb" 

4. The UK’s IFoA, the American Academy of Actuaries and the Actuaries Institute Australia joined forces to compare retirement income systems in their three countries and highlighted five principles.

[Misconduct] Financial Reinsurance Product Fraud

REINSURANCE FRADULANT ACCOUNTING PRACTICES
1. in 2010,Gen Re agreed to pay $US31.7 million ($35m) to settle charges brought by the US Securities and Exchange Commission for its role in fraudulent accounting practices in 2000 and 2001 at insurers American International Group and Prudential Financial.

[Misconduct] Miselling & Incentives - Good Intentions With Poor Executions

FINED FOR POOR MANAGING OF INCENTIVES
1. Management often have schemes to help boost sales such as recruiting third party as agents/advisors or providing commissions and bonus to staffs.

"The Financial Conduct Authority (FCA) has fined Lloyds TSB Bank plc and Bank of Scotland plc, both part of Lloyds Banking Group (LBG), £28,038,800 for serious failings in their controls over sales incentive schemes. The failings affected branches of Lloyds TSB, Bank of Scotland and Halifax (which is part of Bank of Scotland)."
Source: www.fac.org.uk

2. The news was announced in December 2013 and below are key points pertaining to the SOP and management of incentives and advisors.

[Framework] Tail Risks AKA Blackswans

COVERAGE

1. "An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict."
Source: www.investopedia.com

2. Market tails are fatter or more frequent than people realise with extreme events not as rare as people thought.

3. These events are usually not predicted by computer models or traditional risks assessment exercises (falling near the low likelihood & high impact area).

4. Traditional risks assessment's low likelihood scenarios does not account for blackswans as they are still Unknowns.

Insurance & Banking Innovation

INNOVATION CYCLE
1. Innovation is crucial as it evolves the industry with domino's effects onto other industries as processes becomes easier or faster. 

2. The innovation cycle starts by problem identification, generating ideas to solve the problems and to execute the idea. Below are some of my comments on the innovation cycle.

3 Identify Problem - Is enough market Research being done? Are there distribution channel gaps? Market segment Gaps? 

4. Ideas - Are there enough ideas to solve the Problem?

5. Execution - How fast is the execution to achieve first mover's Advantage?!

6. Below are some current trends that may or may not disrupt the industry follow by examples of innovative products found globally.

[Framework] How COSO Perceives Risks

MISCONCEPTIONS
This post discusses the misconceptions on COSO's key concepts and how modern and traditional risks managers perceive and interpret risks.

The Committee of Sponsoring Organizations of the Treadway Commission(COSO) has established a common internal control model against which companies and organizations may assess their control systems. COSO focuses on critical aspects of organizational governance, business ethics, internal control, enterprise risk management, fraud, and financial reporting.

[Framework] Monitoring Emerging Risks with Swiss Re - Part 8 - Claims and Insurance Operations

This post covers risks from legal action precedents, personal damage compensation, big data, regulatory fragmentation concerns, and contingent reputation risks.

[Framework] Monitoring Emerging Risks with Swiss Re - Part 7 - Financial Markets

This post covers risks from inflation and bond yields, sovereign debts, underfunded infrastructure. 

[Framework] Monitoring Emerging Risks with Swiss Re - Part 6 - Life Insurance

This post covers risks from lifestyle changes, new infectious diseases, drug resistance and future medicine.

[Framework] Monitoring Emerging Risks with Swiss Re - Part 5 - Casulty Insurance 2

This post continues from previous post and covers risks from toxic substances, mobility, DIY Trends, and robotics. 

[Framework] Monitoring Emerging Risks with Swiss Re - Part 4 - Casulty Insurance 1

This post covers risks from endocrine disrupting chemicals, electromagnetic fields, nanotechnology and communication patterns.

[Framework] Monitoring Emerging Risks with Swiss Re - Part 3 - Property Insurance 2

This post continues from previous post and covers risks from nat cat exposures, social unrest and risky harvests.

Monitoring Emerging Risks with Swiss Re - Part 2 - Property Insurance 1

This post covers risk from power blackouts, cyber attacks and supply chain vulnerability.

[Framework] Monitoring Emerging Risks with Swiss Re - Part 1 - Introduction & SONAR

1. The Swiss Re introduced a Systematic Observation of Notions Associated with Risk (SONAR) to help society and the insurance industry adapt to emerging risks.

2. It functions by analysing the shifting risk landscape and examine how certain risks could impact the insurance industry in the future.  Aimed at external stakeholders, the study looks at risks such as prolonged power blackouts, cyber attacks, emerging infectious diseases and the unresolved sovereign debt crisis.

China's WMP Products and Shadow Financing

THE SITUATION
1. Local governments circumvent borrowing restrictions causing accumulation of debts into speculative investments.

2. All this is done via the proliferation of maturity mismatched WMPs (wealth Management Products).

3. Banks on the other hand are able to obscure or partially conceal credit risks info with this method.

4. The central bank forces bad debts to be rolled due to protectionism and nationalism reasons suppresses NPLs figures.

5. A rough picture can be obtained from previous post titled "China's Credit Risk Exposure"

[Misconduct] Largest Retail Fine For Poor Complaints Handling

FINED FOR  POOR COMPLAINTS HANDLING

"The Financial Conduct Authority (FCA) has issued its largest ever retail fine (£117m) to Lloyds Bank Plc, Bank of Scotland Plc and Black Horse Ltd (together Lloyds) for failing to treat their customers fairly when handling Payment Protection Insurance (PPI) complaints between March 2012 and May 2013."

"In March 2012, Lloyds issued guidance instructing complaint handlers that the overriding principle when assessing complaints was that Lloyds’ PPI sales processes were compliant and robust unless told otherwise (the Overriding Principle)"
Source: www.fca.org.uk

ARFP Risks and Concerns

To extend from previous article titled "Asset Management Opportunities in Asia". There are currently 3 investment schemes in the Asia region- CIS, ARFP and Hong Kong-China Mutual Recognition. Each with its own features and  cross-border schemes involves risks and obstacles and all schemes must avoid overlooking areas that may deter investors. Below are a few potential risks and costs of cross border investment funds as well as concerns and uncertainties. 

Asset Management Opportunities in Asia

ASIAN REGION FUNDS PASSPORT
Target Live Launch Period:-  Late 2015/ Early 2016

Participating Pilot Group Countries:- Australia, Korea, New Zealand, Philippines, Singapore and Thailand.

Subsequent potential countries still in discussions:- Hong Kong, China, Indonesia, Japan, Malaysia, Taiwan and Vietnam

[Misconduct] Libor Fixing Scandal - A Study in Greed & Failed Controls

BACKGROUND

Bankers ensure that any un-needed surplus would be deposited by the dealers towards the end of a trading day. They would place this money on overnight deposits with other banks. The benchmark for interest payment on this deposit would be the Libor (or Euribor).

Settlement rate was not determined by what rates were actually in the market. Instead, the British Banker’s Association (BBA) polled banks, asking them what the rates were. The highest and lowest quoted rates were discarded and the rest were averaged, giving the settlement rate. 

The Libor was also used as an "weather report" of what conditions were in the market that day and a rough indicative of the banks' financial condition.  

[Misconduct] Misselling of Structured Notes in Singapore - Part 1 - Background Info

BACKGROUND

This post will provide pertinent details from the Monetary Authority of Singapore's investigation report on the sales and marketing of structured notes linked to Lehman Brothers. The aim of this post is to highlight the importance of complying with regulations and guidelines on product's sale and marketing materials especially during the planning stages which no doubt has a rippling effect.

[Misconduct] Misselling of Structured Notes in Singapore - Part 2 - Key Findings, Impact, Root Causes & Views

KEY FINDING
we will look at the types and number of lapses found by MAS for each FIs. Before we delve further, here is a list of internal approval obtained in the various FIs for the distribution of the Structured Notes. . There are two distinct types of approval structures in any organization being a vertical (require higher authority approval depending on predefined policy) and horizontal (sign-off from stakeholders) with vertical structures usually being the faster route. 

Asset Management Challenges

BACKGROUND

After the financial crisis (Lehman 2008), there were substantial growth and profitability in the industry. This post will discuss the challenges & issues in the asset management industry. Below are some past performance data on AuM (Sourced from Financial Institutions and Insurance Practice Areas & BCG Global Asset Management Database)

Understanding Underwriting Risks

UNDERWRITING RISK
Ask staffs in an insurer what are risks associated with underwriting risks and chances are you will get "the risk factors when evaluating the cases underwritten" as a general statement. Here is an except from BNM's defining underwriting activities.

"Insurance underwriting deals with the principles and practices concerning the acceptance or rejection of risks, fixing of premium rates, terms and conditions, the amount of acceptance, retention and reinsurance."

China's Credit Risk Exposure

CHINA'S  NPL INCREASES TO FIVE-YEAR HIGH

Since FY 11 to FY15 Q1, NPLs in China are on an upward trend with NPL of four largest banks reaching a 5 year high.. Refer graph below for NPL trends. Source: (http://www.financeasia.com)

This post will discuss factors in addition to the increase in China's NPL. The factors are constant rollovers and credit risk carried outside of the banks potentially causing a dominos effect as assets become impaired during an economic slowdowns. Lastly we will look at how prepared the banks are by comparing their portfolio of off-balance sheet assets against their total asset.

[Framework] Managing Tail-Risk Events

BACKGROUND
Tail-risk events are extreme events such as flood, storms and market crashes which can erode an insurer's capital and profitability.Tail-risks are found at the extreme left end of bell curves. Insurers would want to minimize fat tail risks without losing out on right tail growth potentials. 

Relative Loss Ratios Using One Way Method

BACKGROUND

The pricing of a policy are highly dependent on the characteristics of the individual to whom the policy is sold. The characteristics could consist of existing conditions (inherent risks) and claims patterns from the same pool of policy holders.  An individual could consist of characteristics from different pools of data (by age, by location, by gender, etc).

To find the relationship between the various pools of claims history is the traditional way of looking at series of one-way tables to determine relativities by rating factor (either focusing on the relative risk premiums or the relative loss ratios)

Asset Management Portfolio Diversification

BACKGROUND

Here is an article highlighting the need for life insurers to “broaden their horizons” due to low-yield returns in existing investment strategies.

It recommended non-traditional investments and different assets to consider alternatives in infrastructure, real estate-backed loans, asset-backed securities and unsecured assets such as high yield bonds.

This post will outline the few risk and opportunities of the non-traditional assets identified.

Link to article as follow:-

http://www.theactuary.com/news/2015/01/life-insurers-told-non-traditional-assets-critical-to-maintaining-profitability/

Claims Management Practices

BACKGROUND
Here are two articles highlighting practices in the insurance claims process. 

The first article listed the findings by the Financial Conducts Authority (FCA) on the handling of SMEs' insurance claims. Link as follow:

http://www.actuarialpost.co.uk/article/fca-review-insurance-claims-service-and-sme----039s-expectations-7900.htm

The second article reported the concerns by government task forces with the industry practices. Link as follow:

http://www.theactuary.com/news/2015/03/claims-management-companies-are-a-concern-for-insurance-task-force/

Innovation in General Insurance Underwriting

BACKGROUND An article discussing and providing points for insurers to innovate in view of stiff competitions, record capacity levels and reduced premium income. Link to article as follow: http://www.insurancebusinessonline.com.au/news/underwriters-urged-to-innovate-in-order-to-survive-in-major-industry-199226.aspx

The article  highlighted a number of areas where underwriters could offer more flexible coverage or new insurance products, they are: 1. Repackaging of onshore terrorism cover into property programmes. 2. Deletion of cyber exclusions. 3. Increased sub-limits for contingent business interruption (CBI) or supply chain risks. 4. A seamless product for onshore projects covering handover from construction to operating phases 5. Increased flexibility of aggregate limits and retentions for natural catastrophe risks.

Generalized Linear Model For Life Insurance

PURPOSE

Some traditional one-way  pricing methods do not factor in effects of correlations in the data leading to mispricing of relevant risks.

Not to be confused with General Linear Models, Generalized Linear Models utilizes a Maximum Likelihood estimation method and performs better with larger samples.

Banking Innovations - Part 5 - Regulations, Landscape, Gaps, and Risk Management

This post covers Regulations, Landscape, Gaps, and Risk Management in the fintech industry.

Banking Innovations - Part 4 - Australia and Banking Initiatives

This post covers Australia with an analysis of their Fintech companies and initiatives by banks.

Banking Innovations - Part 3 - Asia and Africa

This post covers Asia and Africa with an analysis of their Fintech companies.

Banking Innovations - Part 2 - USA and Europe

This post covers USA and Europe with an analysis of their Fintech companies.

Banking Innovations - Part 1 - White Paper on Trends and Purpose

1. Banking Innovation is a global growth‐sector. There are three types of banking innovations (on top of the regular IT investments done by banks: (1) In‐bank FinTech innovations – also known as FinServ innovations; (2) Neo‐Banks as part of the FinTech community; and, (3) Non‐Banking FinTech companies.

2. A white paper on Banking Reports by MarketResearch highlight significant qualitative and quantitative differences between five continents examined.

White Paper on Asia Insurance Market Report 2014

1. Asia continues to be a region of contradictions and opposing dynamics, with markets that are extremely developed, markets that are truly emerging, and natural catastrophes among the most devastating anywhere on earth.

2. Insurance industry seems to be in a perpetual soft market, driven by new capital, new capacity, and fierce competition

3. A white paper by StrategicRisk discusses the Asia insurance market for 2014 and beyond.

White Paper on Kidnap and Ransom Insurance

1. Cognizant published a white paper discussing Kidnap and Ransom Insurance at an Inflection Point.

2. The number of kidnappings in the world is increasing dramatically, especially with more people traveling to less developed and politically unstable economies. According to some estimates, two people are kidnapped and held for ransom somewhere in the world every hour; each year, an estimated $1.5 billion is paid in ransom to kidnappers. While kidnap and ransom (K&R) insurance products are intended to reduce financial loss.

Life Expectency & Mortality

 LIFE EXPECTANCY AND MORTALITY

This post will provide basic Information on life expectancy and mortality (death)and how to  account for different age structures of different populations. 

South Africa's Cabinet Approves White Paper on Health Insurance

1. in December 2015 South Africa’s cabinet approved a policy white paper on a compulsory health- insurance plan.

Managing General Insurance Management Expenses

BACKGROUND

Management Expense ratios for an insurance company refers to the percentage of premium used to pay the costs of acquiring, writing and servicing insurance and reinsurance products. It can either be obtained by dividing expenses by total written premium or earned premium.

Underwriters sometimes factor in management expense ratios when pricing premiums. Here is an articles reporting regulator's concerns on increasing expense ratios and what has caused a surged in expenses which has the tendency to spiral out of control if left unchecked especially for companies on an aggressive business expansion plan. 

Insurance Financial Ratios

BACKGROUND
Below are some financial ratios relevant to the insurance management process and provides a rough idea of how management are running the companies and a possible indication of companies’ direction. We will discuss the ratios in-depth in subsequent posts. I have organized them into three main categories as follow:-

1. Underwriting Management Indicators

2. Profitability Indicators

3. Liquidity Measurement Indicators

Interest Rate Models for Insurers

BACKGROUND
This post briefly describes how interest rates affects life and general insurers and plausible models to predict future short term rates or spot rates movements. Interest rates has minimal impact on General Insurers but nevertheless is discussed for comparison purposes.