Mortgage life insurance labelled “junk product”

One of the country’s leading financial journalists is saying what many advisors have long believed about mortgage life insurance.

Rob Carrick, of the Globe and Mail, has labelled mortgage life insurance “a junk product.”

Mortgage life insurance was in the news this summer after Stoney Creek resident, Christopher Massa’s death. Massa’s mortgage and mortgage life insurance was with Scotiabank when he was diagnosed with lung cancer. After his death, the bank denied the claim on his $289,000 mortgage “because he was not eligible for insurance coverage based on his health condition.”

“Banks are hyperaggressive in selling this junk product, and some mortgage brokers are getting into the act,” Carrick writes.

Carrick thinks the situation the Massa family faced can be avoided. “Buying insurance to pay off your mortgage if you die is a great thing to do for your family. Just buy it from an insurance company with competitive rates on term life policies. The coverage will most likely be cheaper than a bank-sold policy, and you pick the beneficiary. If you buy coverage from a bank, it gets the money should you die unexpectedly and your family has no say in how it’s used.”



AIG, IBM, Standard Chartered deliver first multinational insurance policy powered by blockchain

American International Group, IBM and Standard Chartered Bank have successfully piloted the first multinational “smart contract”-based insurance policy using blockchain, a distributed ledger technology. The pilot solution was built by IBM and is based on Hyperledger Fabric, a blockchain framework and one of the Hyperledger projects hosted by The Linux Foundation.

Working together, AIG, Standard Chartered and IBM converted a multinational, controlled master policy written in the UK, and three local policies in the US, Singapore and Kenya, into a “smart contract” that provides a shared view of policy data and documentation in real-time. This also allows visibility into coverage and premium payment at the local and master level as well as automated notifications to network participants following payment events, according to a statement. The pilot also demonstrates the ability to include third parties in the network, such as brokers, auditors and other stakeholders, giving them a customised view of policy and payment data and documentation, it said.

Rob Schimek, CEO of Commercial, AIG said: “Our pilot proves blockchain has a powerful role to play in the future of insurance. Any technology, including blockchain, that can increase trust and transparency for an industry whose pillars are built on that, should be fully explored. We’re excited to be delivering innovation that matters to our clients – and co-developing key components of this new technology together.”

The three parties chose to execute this initiative in one of the most complicated areas of Commercial Insurance – multinational risk transfer – to better understand blockchain’s potential to reduce friction and increase trust in other areas of the insurance value chain.

How it works:

  • Blockchain, an immutable, security rich and transparent shared digital ledger provides a single view of truth across all participants while simultaneously providing selective visibility to participants based on their credentials.
  • It provides the ability to record and track events and associated payments in each country related to the insurance policy.
  • No one party can modify, delete or even append any record without the consensus from others on the network.
  • This level of transparency helps reduce fraud and errors, as well as the need for the parties to contact each other to view policy and payment data and the status of policies.

Emily Jenner, Head of Insurable Operational Risk at Standard Chartered, said: “As a global bank we have to ensure consistent, trustworthy and secure financial transactions, be that as part of our business or as customers ourselves. By creating a process by which we can arrange multinational insurance contracts through blockchain we not only have transaction security but contract certainty across multiple business locations.”

Marie Wieck, General Manager IBM Blockchain said: “There is tremendous opportunity to apply advancements in blockchain technology to transform the insurance industry. By creatively leveraging smart contracts to help address tough regulatory requirements across different markets, we are seeing the enormous impact blockchain can have to improve efficiency and open up new business models.”

The multinational “master policy” is written out of London and for the pilot, three local policies were chosen that cover the US, Kenya and Singapore. These three jurisdictions were chosen because the US is a large and complex market, Singapore is a growth market for Standard Chartered, and Kenya has a specific regulatory requirement, known as “cash before cover”, which means that cover must be paid for before it is valid.

“We chose these three territories because of their importance to Standard Chartered and also because of their regulatory complexity, so that we could fully test how blockchain technology might make these contracts work more efficiently,” said Standard Chartered’s Jenner.




Surge in M&A activity expected across insurance industry

An annual survey by Moody’s Investors Service of chief financial officers (CFOs) has revealed that more than 40% are seeking to deploy surplus capital, compared with last year’s 10%.

As 30% of respondents estimated an increased exposure to real estate, private placements, infrastructure, mortgages, and loans, share buybacks have become another popular option for CFOs.

“With large European insurers reporting solid levels of capital, CFOs are turning their attention toward the employment of excess capital. M&A and share buybacks are the main options available to them,” Antonello Aquino, associate managing director, Moody’s, said, according to The Actuary.

As artificial intelligence and the internet of things become their next focus, around 90% of insurers were found to have invested in technology to tune up access to services and office functionality, and to utilize big data.

The results come after Willis Towers Watson’s (WLTW) February research revealed that 49% of global insurers hope to clinch new technologies via M&A activity over the next three years.

“Insurers recognize the importance of building a sustainable digital infrastructure to improve customer engagement and as an essential distribution channel,” Nicholas Chen, digital solutions head – Asia Pacific, WLTW, said. “The tools emerging are often so far removed from insurers’ previous experience that external innovation models are likely to be the only way of expanding digital capabilities. This is expected to lead a wave of new M&A activity in the years to come.”

One third of Moody’s survey respondents recognized prolonged low interest rates as this year’s top challenge, yet the majority of CFOs do not expect to issue large volume debt in the next two years.



Square One finds that 15% of secondary rental suites in Canada are illegal

VANCOUVER, Aug, 2, 2017 /CNW/ – Square One Insurance Services recently surveyed over 5,500 house owners in British ColumbiaAlberta, and Ontario. The survey revealed that 11% of all house owners rent out a portion of their home to non-family members. Alberta had the highest percentage at 14%, followed by British Columbia at 13% and Ontario at 9%.

“We wanted to conduct this survey for two reasons,” says Daniel Mirkovic, Square One’s President. “We’re noticing an increase in inquiries by house owners that are renting a portion of their home to non-family members. We wanted to understand what was driving this increase. We also wanted to understand how house owners are coping with municipal laws relating to rental suites in single-family homes.”

According to the survey, the top three reasons why house owners have rental suites are:

  1. For the extra income (40%);
  2. To help with the mortgage (34%); and,
  3. For companionship (14%).

While mortgage-helpers are well, helpful, there are many municipal regulations that house owners need to be aware of. For example, Vancouver and Toronto have capped the number of rental suites allowed per single-family house to just one. Other regulations, which vary by municipality, usually include: zoning restrictions; building code compliance; unit size restrictions; minimum parking requirements; and, inspection and licensing compliance.

Square One’s survey found that 17% of rental suites in detached houses are considered illegal. Ontario has the highest percentage at 21%, followed by British Columbia at 15%, and Alberta at 14%. The actual percentage is likely to be considerably higher as residents may be reluctant to disclose illegal rental suites.

“Most municipal regulations for secondary suites ensure residents have adequate and safe housing options,” states Mirkovic. “But some, like the one rental suite per single-family house, are just outdated. It’s hard to understand why cities advocating for more affordable housing options would continue to enforce this outdated regulation.”

According to the Canadian Mortgage and Housing Corporation, Ontario has more than 233,000 secondary rental units, British Columbia more than 155,000, and Alberta more than 125,000. Secondary rental units tend to be more affordable than apartment suites. For example, the average cost in Metro Vancouver of a 2-bedroom secondary suite is $1,390/month, while a 2-bedroom apartment suite is $1,450/month.

In addition to municipal regulations, house owners need to be aware of the home insurance implications of having rental suites in their homes.

  • If you added a rental suite in your home, then you’ve likely increased the property value. Most policies require that you advise your provider of any improvements over a certain amount. If you fail to do this, then you may be underinsured in the event of a loss.
  • Most policies also require that you advise of any changes in how your home is used. Failing to disclose rental suites could render your home insurance void. It’s important to note that many providers will insure your home even if you have more than one suite.
  • More people living in your home may mean an increased liability risk. If your tenant, or a guest of your tenant, trips on a ladder in your backyard, or slips on an icy step, then you can be sued for their injuries. You may want to increase your liability coverage.
  • Your policy will not cover your tenant’s property or liability to others. So, make sure your tenants carry their own insurance. This will cover their personal property, and it may cover your property, if they unintentionally damage your home.
  • Your policy will not cover your own property in the unit, such as window coverings, appliances, or furniture in a furnished suite. You may need to add “landlord’s property” insurance to cover anything that you own.
  • If you rely on rental income to help pay your mortgage, then you should purchase insurance to protect against lost income during an insured event. For example, this insurance will replace the income that you lose while the property is being repaired from a fire.

If you’re a house owner with a secondary rental suite, then it’s important to stay informed and to have the right insurance coverage in place. To learn more, speak with your insurance provider or call Square One at 1.855.331.6933.

Established in 2011 and based in Vancouver, British Columbia, Square One offers the only home insurance policy in Canadathat can be personalized to your unique needs. That means you only pay for the protection you need. Square One is also one of the few providers to automatically include earthquake, sewer backup and broad water protection in its policies. Square One currently serves British ColumbiaAlbertaSaskatchewanManitobaOntario and Arizona.



General insurance: The wide-ranging implications of IFRS 17

The new accounting standard for insurance contracts, IFRS 17, will have wide-ranging implications for (re)insurers, and many firms are preparing for significant changes to their business operations

After 20 years in the making, the International Accounting Standards Board (IASB) has published the new accounting standard for insurance contracts, IFRS 17. It will be effective from 1 January 2021, with prior-year comparative reporting required. Here we provide a taster of the key changes to the recognition and valuation of insurance contracts that will affect general insurers.

Currently, comparisons across different industries, products, companies and jurisdictions are difficult. The IASB wants to achieve consistent accounting for all insurance contracts by all companies around the globe (although the US has opted out and US GAAP will persist) and enable comparability with non-insurance products.

Not only will this affect general insurers’ operations, but it will also introduce changes to the presentation of results in the financial statements as well as potentially having an impact on the financial results themselves.

General measurement model

The general measurement model for liabilities under IFRS 17 is known as the building block approach (BBA) and all (re)insurance contracts will be measured as the sum of:

  •  ‘Fulfilment’ cashflows (updated at each reporting date), which are defined as:

– The present value of probability-weighted expected cashflows (best estimate cashflows); plus
– An explicit risk adjustment for insurance risk

  •  Contractual service margin (CSM), which is the expected profit from the unearned portion of the contract


Under the BBA, the CSM is amortised and profits are recognised over time as insurance services are provided over the coverage period of the contract (over the term of the policy). However, losses from onerous (or, more simply, ‘loss making’) contracts are recognised immediately. After the end of the coverage period, any future profit or loss from the run-off of the liabilities (which, in general insurance, usually extends past the end of the coverage period) will flow straight through into the income statement.

Possible simplification

One of the most important questions for general insurers will be whether to use a simplification option known as the premium allocation approach (PAA). This is an alternative to the BBA. This simplification is only permitted in certain circumstances and is only applicable to unexpired risks, but the incurred claims liabilities must still follow the BBA model. Under the PAA approach, the CSM is not required. Rather, at inception, the liability for unexpired risks, or the “liability for remaining coverage” as it will be known under IFRS 17, is calculated as the premiums received less associated acquisition costs. Over time, the liability for remaining coverage is updated to reflect additional premiums received (if any) and the profit that has been recognised in the income statement for the coverage that was provided in that period; that is, the premium earned over the period. Again, similarly to the BBA, any losses from onerous contracts must be recognised immediately at inception and, after the end of the coverage period, any future profit or loss from the run-off of the liabilities will flow straight through into the income statement.

This approach will be permitted for contracts where the period of cover is one year or less, or where the measurement of the liability for remaining coverage would not differ materially from that estimated using the BBA. The standard states that the latter requirement is not met if, at inception, there is expected to be significant variability in the fulfilment cashflows affecting the measurement of the liability for remaining coverage during the period before a claim is incurred. Further, it states that variability in the fulfilment cashflows increases with the length of the coverage period of the contract. In other words, this means that multi-year policies covering risks such as construction, energy, engineering, accident and health, directors and officers, credit and surety, mortgage indemnity and warranty business may not meet the PAA eligibility criteria. Where a firm wishes to use the PAA approach, this will need to be justified, and agreed with its auditor as an appropriate approximation.

Similarities with Solvency II

These core valuation principles for measuring liabilities for insurance contracts may sound familiar from Solvency II; however, there are a number of key differences, as detailed in the table below:

As can be seen from this comparison, the standard leaves a number of areas open to interpretation or offers options for individual companies to make suitable choices. The Solvency II balance sheet is, by and large, prescribed, so there are a number of additional judgments that need to be made by companies in translating between the bases. In order for general insurers to get to grips with the new standard, there are a number of key areas to think about, and firms will need to decide what these changes mean for them. For example:

  •  Eligibility to use the PAA simplification option (discussed above)
  •  Level of granularity for measurement and recognition of onerous contracts
  •  Accounting policy for determining and reporting risk adjustment
  •  Discount rate selection
  •  Additional complexities around accounting for outwards reinsurance
  •  Reporting and disclosures


Level of granularity

Under the new standard, there are requirements on the level of granularity at which the recognition and measurement principles should be applied. Specifically, the principles should be applied at a ‘portfolio’ level, where portfolio is defined as a group of contracts with similar risks which are managed together.

Dividing into these portfolios sounds eminently sensible. However, because the implication of recognising losses immediately means that loss-making contracts should not be allowed to offset profitable ones, insurers will need to split portfolios further. Portfolios will need to be split into groups (once at inception only) which include contracts written within the same 12-month period and contain: 1) onerous contracts (if any); 2) contracts that have no significant possibility of becoming onerous subsequently (if any) and; 3) the remaining contracts in the portfolio (if any). There is, however, an exemption where regulatory pricing constraints exist – for example, currently, loss-making male drivers would not need to be separated from profit-making female drivers because of the EU Gender Equality Law. Further, when using the PAA, it should be assumed that no contracts in the portfolio are onerous at initial recognition, unless facts and circumstances indicate otherwise.

Accounting policy options for risk adjustment

If using the BBA, for most general insurers, the profit from the CSM will be released over a short time period providing little flexibility. The risk adjustment, however, will run off gradually over the full term to settlement of all insurance obligations. Therefore, the risk adjustment will be a key driver of the profit profile over time (sometimes referred to as the profit signature). The risk adjustment on gross cashflows is defined as the compensation that an insurer requires to make it indifferent between the present value of uncertain cashflows and the present value of certain cashflows. For ceded cashflows a risk adjustment must be held to represent the transfer of risk from the insurers to the reinsurer from the underlying insurance contracts.

The insurer needs to decide on the appropriate policy, methodology and assumptions for setting the risk adjustment. Guidance is provided on factors to consider; these are predominantly focused on appropriately reflecting the risk characteristics of the insurance contracts. However, IFRS 17 does not prescribe an approach and so there is significant flexibility. Accounting policy should be considered carefully, given its impact and how the approach will respond appropriately to changes over time – for example, risk changing over the underwriting cycle.


Discount rate selection

The discount rate should reflect the risk characteristics of the cashflows arising from the insurance contracts. It should not reflect risk characteristics of financial instruments held by the insurer unless the insurance contract cashflows have the same risk characteristics.

The discount rate can be determined using either a top-down (starting with an actual or expected reference portfolio rate) or a bottom-up (starting with a risk free rate of return) methodology.

IFRS 17 provides insurers the option to choose to take the volatility due to changes in discount rates straight to profit and loss or through other comprehensive income (OCI). This accounting policy choice is connected to the classification of financial instruments in IFRS 9 (many insurers will have the option to defer the implementation of IFRS 9 from 2018 to 2021, such that IFRS 9 applies at the same time at which IFRS 17 becomes effective).

The treatment of changes in current discount rates in IFRS 17 for insurance contracts creates a potential opportunity to reduce accounting mismatches.

Additional complexities around accounting for outwards reinsurance

Under IFRS17, you must model outwards contracts in the same way as inwards business. This means calculating:

  •  Discounted best-estimate cashflows
  •  Plus allowance for credit risk
  •  Plus risk adjustment (reflecting the risk ceded)
  •  Plus contractual service margin (if applicable).

With the PAA eligibility test having to be applied to outwards contracts too, multi-year reinsurance coverage may have to be measured on a BBA basis. Careful consideration will also need to be taken on how retrospective reinsurance covers are accounted for.

All of this may lead to potential asymmetry between gross and ceded profits/losses.

Presentation and disclosures

Financial statements will look different under IFRS 17. Perhaps the biggest change will be to the income statement, which will no longer show written premiums (these will be disclosed in the notes instead) and revenue and expense will be recognised as earned (not received) or incurred (not paid). Disclosures will be more burdensome under IFRS 17 and in particular will involve detailed reconciliations between opening and closing balances as well as disclosure of the confidence level of the insurance liabilities.

IFRS 4* / IFRS 17

Closing remarks

The standard will go live on 1 January 2021 and it is therefore important for general insurers to begin considering the changes now. As actuaries, we should get involved in the transition to IFRS 17 within our own companies; questions you may want to consider are:

  •  Does this affect the company you work for (are you operating domestically or under US GAAP)?
  •  What will be the impact on your financial results at transition and going forward? Include thinking about accounting policy choices around PAA eligibility, discount rates and the risk adjustment.
  •  What is the operational impact on data, systems, processes and people?
  •  Is there a working group already set up in your company? Who is on it?
  • Are there projects already under way to transform finance/actuarial processes? Are they thinking about IFRS 17? How does this integrate with IFRS 9 work, which may already be under way?

We think that 2017 should see firms begin a process of engaging with key stakeholders, establishing timelines to perform impact analyses and making plans for implementation. This should set companies up to be able to have a timely implementation with time for a dry run before 2021.

Latest findings

The IFoA set up a Working Party in 2015 to consider IFRS 17 for general insurers, and we are exploring the implications together with practical suggestions for implementation. The Working Party presented at GIRO 2016 and will be presenting at GIRO 2017 to provide an update on our work.