Political and Legislative Risk

Key Developments During 2018

Brexit

  • The ongoing uncertainty over Brexit is likely to lead to indirect impacts on actuarial work. For example, insurers have taken action to restructure their organisations to ensure continuity of service for existing and new customers (such as setting up operations in EU states, entering into fronting/reinsurance arrangements with local carriers and using Part VII transfers to move books of business into new or existing entities). These actions may lead to increased complexity in operations and data flows impacting actuarial work e.g. valuation data may need to be collected from different sources. However, there is expected to be little direct impact on actuaries from Brexit e.g. membership of the European Actuarial Association is not restricted to EU member states.

Global Geopolitical Risk

  • The World Economic Forum in its latest two reports has highlighted the increase in global geopolitical risk; as illustrated by the North Korean missile crisis, the volatile policy backdrop under the US Trump administration, US-China trade war, the impact on French economic policy of the ‘gilet jaune’ protestors, elections resulting in success for anti-establishment parties in Italy and Sweden as well as currency crashes in Turkey, Argentina and Venezuela.

Guaranteed Minimum Pensions

  • The English High Court ruling in Lloyds Banking Group Pension Trustees Limited v Lloyds Bank plc and others was published on 26 October 2018 and held that UK pension schemes with Guaranteed Minimum Pensions (GMPs) accrued from 17 May 1990 must equalise for the different effects of these GMPs between men and women. The case also gave some guidance on related matters, including the methods for equalisation. The assessment of the GMP adjustment will involve actuaries: the IFoA issued a Risk Alert in November 2018 reminding actuaries to work within their competency highlighting the risk of straying into legal interpretation. There is also an issue for those individuals who have tax protected benefits which generally have a condition that no further contributions can be made. There is a risk that the payment of the GMP adjustment is assessed as a contribution resulting in a loss of the tax protection. HMRC is being made aware of this issue.

Equity Release Mortgages

  • Equity release mortgages are a current cause for concern with the PRA continuing to develop policy in this area. Following consultation paper CP13/18 ‘Solvency II Equity Release Mortgages’, the PRA published a policy statement (PS31/18) and updated supervisory statement (SS3/17) in December 2018 setting out new expectations for equity release lenders to address the risks surrounding the existence of a 'no negative equity' guarantee. For practical reasons, the proposed implementation date will be 31 December 2019. The IFoA and ABI, through the Actuarial Research Centre, has recently commissioned a research project “Equity Release Mortgages: No Negative Equity Guarantee”.

Civil Liability Act (2018) and Personal Injury Discount Rate (‘Ogden rate’)

  • The Civil Liability Act (2018) received royal assent in December 2018. The Act introduces a tariff of fixed damages for soft-tissue injuries lasting up to two years, alongside secondary legislation to increase the small claims limit for road traffic accidents claims to £5,000. The changes are designed to reduce the cost, expense and complexity of dealing with whiplash type injuries and will be facilitated by an online portal for claims (expected to launch in April 2020). The Act also addresses how the Ogden rate, should be set following the cut from 2.5% to (0.75)% in 2017.
  • The Act requires the Lord Chancellor to consult with both the Government Actuary and the Treasury and to determine the personal injury discount rate by 7 August 2019. Subsequent reviews will take place at least once every five years. In defining the rate, the Lord Chancellor must assume that the damages are invested in a diversified portfolio, using an approach to investment that involves more risk than a very low level of risk, but less risk than would ordinarily be accepted by a prudent and properly advised individual investor.
  • In January 2019, The Government Actuary’s Department (GAD) published a technical memorandum setting out the analytical approach that it intends to adopt to support the Government Actuary’s response to the Lord Chancellor in which it explains its methodology around modelling claimant outcomes, the significant assumptions it will make when considering the appropriate investment portfolios, damage profiles and economic scenarios and outlines the outputs that will be produced as part of GAD’s analysis. In order to inform the decision, the Ministry of Justice has issued a call for evidence to gather up-to-date data on how claimants invest their damages, investment advice provided to them and model investment portfolios. The deadline for the response to the call for evidence was 30 January 2019.
  • The setting of the personal injury discount rate is also under review in Scotland. The Bill, which is in its second stage, proposes that the rate be set by the Government Actuary by reference to a notional investment portfolio suitable for a hypothetical investor.

Summary of 2017 Discussion and Actuarial Implications

  • The outcome of Brexit negotiations and the UK government’s strategy for policy decisions following Brexit are key sources of uncertainty. The outcome may impact the context in which actuaries work and/or actuarial work directly e.g. changes to insurance regulation in the UK compared with Solvency II, legality of contracts which are sold by UK companies but underwritten by EU companies.
  • Away from Brexit, actuarial work could be impacted by government decisions on economic factors such as tax rules, changes to pension and other welfare schemes or policies to improve intergenerational fairness. An example is the government White Paper looking at the security and sustainability of the defined benefit pension sector which is likely to lead to changes in legislation to allow new forms of scheme consolidation.
  • International political risks may also affect the work of UK actuaries because they impact on the UK’s relationships with other countries or the business written overseas by UK insurers. They may arise through regulatory requirements, domicile of insured risks, regional economics, or relate to specific characteristics of the work being performed.
  • Political and legislative risk could impact actuaries by directly changing their work e.g. increased regulation on collection and use of data could impact insurance pricing or product design. It could also affect actuaries’ models and assumptions e.g. changes in the taxation scheme may alter individual’s propensity to invest or increased public access to new medicines could improve longevity.
  • Insufficient data can be a key risk during periods of political uncertainty as there may be no relevant history of similar situations. Stress and scenario testing could help actuaries explain the potential impacts to decision makers but incorporating the impact of political decisions into business planning can be difficult and there is a risk that the actual outcome differs significantly from expected.
  • The risk is greater where actuaries have limited knowledge of the factors being considered by government or are unaware of, or give insufficient weight to, the views of other groups that may influence the government’s actions.

Further Reading

Next Hotspot - Regulatory Change

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