The new (June 2011) 'OECD Health Data 2011' report shows the latest insights in health spending costs. Here are some results for the main OECD countries:

Health Costs




Total health spending accounted on average for 9.5% of the GDP for all OECD countries (main countries: 9.8%).

Public health is  a substantial  part  of  health  funding  in  all  OECD  countries.
Control Health Costs
Key question is: will relative 'big rising spenders' like The Netherlands and the U.S., be able to control their health costs in the near future?

Besides the fact that health costs undoubtedly rise sharply with age, the bulk of 'annual health spending growth' depends mainly on overall population growth, increases in the health prices and the introduction of new high-cost medical products and treatments used by all age groups. 

In controlling health costs, the most difficult an challenging question is in fact:

Our first answer could be : Maximize Health.

In practice we (countries in the world) haven't explicitly defined what we try to maximize... Unfortunately discussing health costs without a clear goal, is an endless road, leading nowhere.... A Health Mission Impossible.....


On top of, 'Health'  is - at its best - a non defined subjective perception.....
Let's dive deeper on this theme of perception. Can we grasp it?

Health Perception
As in every corner of (your) life




Therefore let's take a look at how health is perceived by people in different countries. For a global 'health perception picture' we have to fall back on self-reported health status  figures of around 2006-2007:


As is clear Canada and the U.S. are clear 'feeling healthy' champions, with Japan as poorest performer.

Quality and Quantity of Life
To examine whether the self-reported health status indicator  (representing the quality of life) also indicates a 'longer life expectancy' (representing the quantity of life),  here is the 'life expectancy indicator'.


Surprisingly the results are - at first sight - counter intuitive:

• Japan, with the poorest health perception, scores best in longevity
• The U.S.,  with the almost best health perception, scores worst in longevity

'Good health' and  'life expectancy' 
It is known that elderly people report a less than average good healthy condition.

Unfortunately, as the next diagram indicates, there's no convincing direct relationship between 'perceived good health' and  'life expectancy' or 'median age' (as explaining variables) :


First of all there's a relationship between Economy and Health:

Though declining, more than 50% of all respondents in this survey say that "people's health will get worse".

What's even of more concern, is that younger people are experiencing an increasing feeling of nervousness during the last decades.


This survey supports the idea that perceptions of 'health' and 'happiness' are more or less embedded in a nations' culture and not related to the investments in health.

Find out more on what's going on in Japan beneath the surface on:
Assessment of the Japanese Economy
It's all about Happiness

What remains is that it's all about happiness in life....
And of course happiness and good health are 'somewhat' and 'somehow' related: 

Conclusion
Maximizing or optimizing Health in on basis of 'health investments' (health costs) is tricky business. Although Happiness and Health Perception are related, they both don't relate to health investments.

The maximum price for 'good health' is subjective. Governments will have to border the maximum public financed costs of health on basis of objective goals of health condition (eg. max % obesity, BMI, etc) in relation to what's "bearable" in terms of costs in relation to the strength of their national economy.

Let's conclude with some positive news...


Your Better Life Index
I would like to invite you to take part in the Your Better Life Index.

'Your Better Life Index' was designed as s an interactive tool that allows you to see how countries perform according to the importance you give to each of 11 topics – like education, housing, environment, and so on – that contribute to well-being in OECD countries. Your Better Life Index allows you to put different weights on each of the topics, and thus to decide for yourself what contributes most to well-being.

It is a pioneering, interactive tool combining OECD substance with modern
technology in order to educate, promote dialogue and encourage consensus on the balance between societal and economic well-being. Your Better Life Index will be maintained on an ongoing basis.

Here's MY Better life index as an eample.




Live a healthy and - above all - happy life..... A Better life!

Sources
- OECD Health Data 2011 How Does the Netherlands Compare?
- OECD Health Data 2011 
- Health Self-Reported Health Status 
- Assessment of the Japanese Economy: A Continuing Downward Trend
- Why Does U.S. Health Care Cost So Much? ( An Aging Population Isn’t the Reason)
- The Surveys on the Japanese National Character

 Related
- Does Medicare Work Better Than Private Insurance?
- Balancing Affordability and Value: The Universal Challenge in Health Care Delivery

- Spreadsheet with all health data of this blog

From a European perspective it's hard to understand why the US Health Care Reform creates such a fuzz.

Behind Health Care Reform
At first sight one might think American values were somehow at stake, as UCLA's Dr. Marc Nuwer, a leading expert on national health care reform, stated back in 2008:

• "To heal our ailing health care system, we need to stop thinking like Americans."
  
  
• "Americans prize individual choice and resist limiting care"
  

As one-sixth of Americans are uninsured and especially elderly people are in need of good (insured) health care, one would expect this group to support this new health reform. Think again, the majority of elderly people voted against a guarantee of health insurance for all Americans:


Not a surprise for actuaries of course, because we were already aware of the interesting age-distribution of the uninsured.



Recently, Tyler Cowen, a economics professor at George Mason University additionally stated : Further health care reform doesn’t now seem to promise much to old people, except spending cuts on them. Given their limited time horizons, old people don’t so much value systemwide improvements, which invariably take some while to pay off.

For those of you who are interested in the background and consequences of pay offs regarding limited time horizons, (generation) discount rates and 'Gamma Discounting', the article Caring about the Distant Future: Why It Matters and What It Means from professor Tyler Cowen is a joy to read.

Certainly a 'must read' for actuaries.


Anyhow, the House of Representatives passed the sweeping health care bill recently.

Puzzle is that this bill has nowhere to go in the Senate, as the stumbling block is that government will have to compete with the private insurers.

The solution to this problem is as simple as can be:


Key elements of the new (2006) Dutch Health Insurance Act are:

• All adults are obliged to buy health insurance and can choose any insurer
• Children (under 18 years) are insured for free
• Low income groups receive financial compensation by tax reduction
• All insurers must offer a (governm. def.) policy to anyone who applies
• Basic benefit package is almost comprehensive
• Insurers get compensation for taking on higher risk patients from the risk equalization fund
• Insurers can offer complementary health insurance packages under free market conditions
• Consumers have the right to change insurer at the end of every calendar year if not satisfied or if they change employer
• Insurers have the role of prudent purchasers of health care
  (value for money)
• Providers are encouraged by insurers to deliver high quality care at low costs

In a 2009 Irish (Dublin) Health Actuary Seminar called 'More for less', the Dutch health actuary Enne Osinga explains more of the consequences of this new (2006) Dutch Health Care Model in a presentation called: The Dutch Experience .

I trust the US succeeds in making this important turn around!

Sources:
- Tyler Cowen: Caring about the Distant Future: Why It Matters..
- Economics
- Yahoo
- CNN
- UCLA
- Health Coverage & Uninsured (2009, 2007)
- RIVM Article:Regulated competition behind the dykes?
- Enne Osinga: The Dutch Experience

The Netherlands win the 2009 Euro Health Consumer Index (EHCI), for the second year in a row.

Nevertheless, Denmark keeps its runner-up position from last year. Besides The Netherlands and Denmark there are other strong performers like Iceland, Austria and Switzerland, leaving the UK in a disappointing 14th position....

Index performance criteria
The EHCI 2009 groups 38 indicators of quality into six categories: Patient rights and information, e-Health, Waiting time for treatment, Outcomes, Range and reach of services provided and Pharmaceuticals.
Each sub-discipline is weighted for importance to provide the overall Index score.

HCP research director, Dr. Arne Bjornberg, states: The Dutch might have found a successful approach that combines competition for funding and provision within a regulated framework.

Effective Health (Actuarial) Principles
In actuarial context, the success of the Dutch health system is based on a few very simple principles:

• Risk Solidarity
• Risk Equalization
• No Risk Selection
• Free choice of Care Providers & Health Insurer
• Transparent ranking of Care Providers on bases of cost & quality
• Worldwide cover

The Dutch Health Care System
An excellent summary of the Dutch Health Care System can be viewed on YouTube:

Health care In the Netherlands


Of course the Dutch system is no panacea, there are also many challenges and disadvantages.

Just to mention some....

• How to control Hospital costs?
• (The Future of Hospitals in the Netherlands in 2015)
• The increasing and partly unpredictable run-off period of hospital and specialist care claims costs (DBCs)
• How to create a 'healthy' and financial balance between basic and additional (private) health insurance
• How to control the spiraling and increasing health costs of longevity and how to (ethically) control the costs in the last years of our life?

Nevertheless, the Dutch system can be an inspiring example for countries like the US and the UK.


Let's conclude with an interesting development. In an 2009 article called A Strategy for Health Care Reform, Michael E. Porter presents the principles for a new health system, based on the idea that the central focus must be on increasing value for patients.

Related downloads/sources:

• Download the Euro Health Consumer Index 2009 report
• Download the Index Matrix
• Cartoons: Seppo.net
  

Does life expectancy depends on how much is invested in in Health?
'Of course' one would say as a first response. But on second thought the relationship between healthcare and life expectancy is rather complex:

• More basic healthcare improves the quality of life and therefore life expectancy
• However, countries with relative bad health conditions urge for relative extra investments in health that at first do not directly pay back in extra  life expectancy
• Developed countries that invest a lot in health might invest more than is needed for an optimal life expectancy

Let's take a look at the last available (2011) Top-20 figures:

As discussed, the relationship between Health Expenditure (HE) as a percentage of a country's GDP from a global point of view, is not directly related to Life Expectancy (LE) at birth in a specific country.


Healthcare Investment Optimum?
If you could speak of a HE-optimum, it would be somewhere around 10,6%.
Higher Health Expenditure costs than 10.6% do not seem to contribute to an increase in life expectancy.

Let's conclude with an interactive chart from Tableau Public:


Sources/Links/Downloads
- Health expenditure, total (% of GDP)
- Life expectancy at birth, total (years)

The Netherlands are the overall winner in the Euro Health Consumer Index 2008, launched today in Brussels at a press conference hosted by the Health Consumer Powerhouse.

The Euro Health Consumer Index is the annual ranking of national European healthcare systems across six key areas: Patient rights and information, e-Health, Waiting time for treatment, Outcomes, Range and reach of services provided and Pharmaceuticals.

• The Euro Health Consumer Index 2008 report (pdf) »
• The Euro Health Consumer Index 2008 matrix (pdf) »
• General Press Release (pdf) »
• EHCI Tables and Figures (MS Word) »
• Euro Health Consumer Index 2008 Policy Recommendations (pdf) »
• Data sheets for all 34 indicators in the EHCI 2008 »

As we know, Life Expectation can be measured in many ways. The three most common methods are:

• LE = Life Expectation (standard), the average number of years that a newborn can expect to live.
• HALE = Health Adjusted Life Expectation, the average number of years that a newborn can expect to live in "full health"
• HLE = Healthy Life Expectation, the average number of years that a newborn can expect to live in "full perceived health"

As comparisons between LE an HALE show, 'living longer' doesn't necessarily mean 'living longer in good health'. However, it has become clear that a strong Healthy Working Life Expectancy at age 50 or higher is the best guarantee that people will be able to work longer as they live longer.

One step further. Living in "good (perceived) health" doesn't automatically mean that people are living a happy life.

Happiness is one of the most important lifestyle statistics. Optimizing the number of 'happy years' in our life is therefore an important issue.

Happy Life Expectancy
Here is where Prof.dr. Ruut Veenhoven (Publications), comes in.

Veenhoven defines a different HLE as:

In formula:


The Happiness-score (H) is the average happiness as expressed on a 0-10 scale.

Let's compare the HALE an HLE (Happy Life Expectancy) scores with each other for different (top-30 ranked) countries:

A full list and data is available at the World Database of Happiness.

It's clear that in most top-30 countries we spend about 90% of our life in healthy conditions and only about 70-80% in happy conditions. There room for improvement here! I'll leave the other conclusions up to yourself....

Let's conclude with two other correlated interesting findings:

1. Happy Life Expectancy Determination
What public policies are most conducive to happiness? This requires a view on the determinants of happiness in nations:

It turns out that six societal qualities (wealth, security, freedom, inequality, brotherhood and justice) explain 83% of the differences in Average happiness, 71% of the differences in Inequality of happiness and no less than 87% of the differences in Happy Life Years.
Enough for an interesting discussion between actuaries and politicians, I would say....

2. Wealth and happiness correlation
As expected wealth (expressed in GDP per capita) and happiness (e.g. highly satisfaction) are strongly correlated in clear distinguished regions.
Also the 'mean life satisfaction' turns out to be correlated to different age-groups and countries:


These graphics are food for thought on the relationship between mortality and wealth. More about that soon......

The unemployment Rate in the United States decreased from 7% in November of 2013 to 6.7% in December of 2013.  Good news! Or not?

Unfortunately the unemployment rate is not a beatific 'economy health indicator'.

How come?

Unemployed who no longer search for a job are not 'counted in'.

Do we have a better labor economy health indicator?

An index that would probably be better related to the health of the U.S. economy would be something like the 'Not-Working Rate', implicating the partition of all the people (age 16 or above) that are not working, divided by the number of people that potentially could work.

In fact we can define the 'Not-Working Rate' more or less as 100% minus the 'Employment-population rate'.

'Not Working Rate' = 100% - 'Employment-population rate'

According to chief North American economist for Capital Economics Paul Ashworth,, the employment population ratio is one of the best measures of labor market conditions. This ratio is a statistical ratio that measures the proportion of the country's working-age population (ages 15 to 64) that is employed, inlcuding people that have stopped looking for work.

Enough index-talk discussions... let's look at the Not-Working Rate outcomes.

Not-Working Rates 1948-2013
Let's compare the Not-Working (NW) Rates with the Unemployment  (UE) Rates.

The next chart clearly shows that the NW-Rates are about 4 times the UE rates.
In other words: Unemployment is only a small part of 'Not Working'......

Not-Working Rates 2000-2013
Let's zoom in to the development of the 2000-2013 rates.

Now it becomes clear that the UE Rate keeps up with the NW Rate approximately until the UE Rate in October 2009 hits the 10% ceiling. After that (coincidence?) the UE Rates starts a spectacular downfall from a 10% to a 6,7% level at the end of 2013. However the percentage of people that are not working stabilizes around 41.5% and doesn't  decline!

Let's zoom in to detect this remarkable development..


Conclusion
I'll leave the detailed conclusions up to you.
My main advice is to introduce the 'Not-Working Rate' as an indicator for the labor health of the U.S. economy.

Despite all this labor math, let's hope and pray that people find a job and that the U.S. economy recovers!


Sources/Links:
- BLS Employment-population ratio
- BLS Unemployment rate
- Wikipedia Employment-to-population ratio
-  Actual U.S. Unemployment Rate
- Cartoon

After 'age', what would be the most important explanatory factor with regard to mortality rates or constructing life tables?

As actuaries we've demonstrated our innovation capabilities by developing life tables not only based on 'age' and 'gender', but also (two dimensional) on 'time', 'generation' and 'year of birth'. This helped us to extrapolate future mortality rates in order to predict future longevity with more accuracy.

However, despite our noble initiatives, these developments turn out to be insufficient to put the Longevity Variance Monster back in his cage.

Modern 'life expectancy at birth' predictions for periods of 40 to 50 year ahead, lead to 95% confidence intervals of 12 years or more. Unusable outcomes .....

Let's not even discuss more necessary accurate confidence intervals of 99% or more ....

In our attempt (duty?) to moderate and diminish future life expectancy variance, we'll have to develop new instruments.

The more we know which risk factors 'are responsible for the increase in 'life expectancy', the better we can estimate and diminish future variance.

One of those new approaches is to calculate life expectancies on basis of postcodes.

This new insight can be helpful, but there's a much more important risk factor that has to be included in our life expectancy predictions to definitely kill the Longevity Variance Monster:


In a 2002 research "Longevity From Positive Self-Perceptions" by Levy ( et al.) it became undeniable clear that:

• negative self-perceptions diminish life expectancy;
• positive self-perceptions prolong life expectancy.
  

Older people with more positive self-perceptions of aging, measured up to 23 years earlier, lived on average (median survival) 7.6 years longer than those with less positive self-perceptions of aging. This advantage remained after age, gender, socioeconomic status, loneliness, and functional health were included as covariates.

Here's Levy's top 6 list of risk factors on life expectancy (ordered from greatest to least impact on life expectancy):

1. Age
2. Self-Perceptions of aging
3. Gender
4. Loneliness
5. Functional health
6. Socio-economic status

As we can not change 'age' nor 'gender', let's put some more research on the other risk factors.

Once we achieve to 'explain' the cause of increase of life expectancy on basis of 'new' (soft) risk factors, we - as a society - will also be able to manage life expectancy better (information, education, training, coaching, etc.).

In this way actuaries can help society so that people live longer and stay happy in good health. All on basis of of a sound financial pension and health system, as predicted life expectancy will show a smaller variance.



Help to kill the Life Expectancy Variance Monster.....

Happy 2011, with better expectations and smaller variance!

Sources/related Links:

- Why population forecasts should be probabilistic
- On line Postcode Life Expectancy Tool
- Longevity From Positive Self-Perceptions
- Predicting successful aging (2010)

The current definition of Public Debt is very poor. Only accrued past debt and current budget deficits are measured; no future obligations.


Hot from the press, the 'actuaries' behind the 83rd BIS Annual Report 2012/2013 show us the impact of the commitments to future spending on pensions and health care that are missing in current measure of public debt.

Age-related liabilities as a share of GDP, are projected to rise considerably between 2013 and 2040 in a number of countries.

Please notice that reforms enacted after December 2011, are not included in the next graph.

Actual Public Debt
End 2012, the impact of age-related liabilities on the actual public debt was calculated and analyzed by Stiftung Marktwirtschaft, in cooperation with the Research Centre for Generational Contracts.

In a report called "Honorable States? The Sustainability of European Public Finances in Times of Crisis" they calculated the effects for Europe as follows:



Reforming Social Security 
Without going into details, this graph makes perfectly clear that even an attitude of 'just managing debt' is hopeless and doomed to fail.

'Restructuring public debt' will only be possible if we have the courage to fundamentally restructure our social security system of pensions and health care. The sooner, the better.....

For those who still had hope on a positive U.S. outcome, just take a look at the debt-outcome of two non-EU countries:



Concluding Reflections
To get a sound picture of a country's financial sustainability, a first step would be to annually report real(istic) balance sheets on basis of actuarial public debt, e.g. debt including age related future obligations like state pensions and health care.

Ultimate, we need new market value based 'country state accounting principles' that include a complete set of  "future obligations" and "natural resources" (oil, gas, water power, etc.) on the asset side.

One of the main issues will be how to value a virtual and information society including fast changing and new future developments on basis of outdated valuation methods, developed in last decades of the last century.

Of course THE big challenge with such an ultimate country balance sheet will be how to value "human resources" as an asset. Why?

Because flexibility, responsiveness, education and entrepreneurship will eventually make the big difference in adapting a country's economy to a sustainable future. I suggest we start by valuing actuaries ;-).

Links/Sources:
- Spreadsheet with data used in this blog (xls)
-  83rd BIS Annual Report 2012/2013
- Report Honorable States? (2013)

Recently the European Commission launched the 'Sustainability Report 2009", investigating the long-term (2010-2060)sustainability of public finances.

This report clearly shows the long-term economic effects of the aging society and the continuous increasing life expectancy.

Financing increasing pension and health costs in the next decades, will be a real challenge for almost all European countries. Even more, the current financial crisis and unsure financial outlook urge for severe short term measures in order to prevent much more unpleasant other measures in the next decades.

The report claims that the ability to meet public pensions liabilities is a higher long-term risk for governments than ever before and in most cases reform of member states’ pensions systems is 'must' and can no longer be delayed.

Although the report manly focuses on the increase (the so called delta) of the sustainability gap, I would like to take a look at the development of the aging costs in relation to the debt development of each country.

Development Aging costs
Let's start to take a look at the development of the public pensions liabilities (pension costs) and health costs from a slightly different angle as published in the report:

On average the total aging costs are increasing from 25% in 2010 to about 30% in 2060 on bases of a no-policy-change assumption.But there a countries (BE, EL, LU, SI) that grow way above this average to a level that's even above the current level of countries with high social standards, like Sweden and Finland.

To conquer this development, some member countries are trying to tackling the longevity issue by raising retirement ages.
Not only the pension costs increase, but also the projected long-term increase in healthcare spending is large and constitutes on its own a risk to sustainability.

Countries whose regimes are listed by the report as 'high-risk' in terms of sustainability are: The Czech Republic, Cyprus, Ireland, Greece Spain, Latvia, Lithuania, Malta, the Netherlands, Romania, Slovakia and the UK. In many countries the age-related expenditure is expected to climb quickly against existing financial imbalances.

Development gross debt ratio
As is clear from the next table, the mentioned next decades increase in health and pension costs, in combination with the unhealthy financial situation - due to the credit crisis - cumulates in a clear desperate debt situation for most of the European countries:

The table shows the government gross debt ratio in 2008 and 2009, and the projections for 2010, 2030 and 2060, once the costs of servicing debt and paying for age-related expenditure are taken into account.

As mentioned before, the long-term debt projections have been prepared under a no-policy-change assumption and in partial equilibrium. Given these assumptions, the projections are not robust forecasts and are not meant to be realistic scenarios of what may happen in the future.

The aim of the debt projections is to illustrate the long-term trends and the size of the required remedial action to avoid government debts to enter into an exponentially increasing spiral.

Actuary Involvement
It's clear that the debt and social costs developments are not heading in the right direction..... Actuary involvement to analyze, advice and create new social systems seems necessary.
Actuaries on the bridge, please!

Sources
- IPE
- EC
- Sustainability Report 2009
- Report 2009
- Download: Maggid Excel tables Aging Costs and Debt Development

Have you ever thought about your Pension Date?

Isn't it strange? We live in an era with an increasing (healthy) life expectancy. At the same time, there are strong individual old age health differences, resulting in strong individual 'Job Fit' differences.

Yet our 'Pension Date' is kept collectively fixed at an age of 60, 65 or 67.......

Working keeps you alive
The closer you get to your pension age, the more you realize that a full employment break at 65 (or whatever age) is crazy, unwise and even dangerous.

On top of, the life expectancy of the working population has proven (see: Towers Watson) to be significantly (up to two years!) higher than that of the population as a whole. In other words:

The longer you work, the longer you live....

(Non) Financial Pension Planning
More than just financial, Pension Planning is a common responsibility between the employer and the employee, to fit the employee's work (job) and working hours to his changing abilities as (s)he grows older. This way an employee is able to retire gradually. Now (s)he can adapt step-by-step to the changing new social and working environment, while still adding company value.

As the employer's workforce is - just like society - aging step-by-step, it's in the employer's interest to develop an integral HR-Investment Strategy and Action Plan for every to be defined relevant employee age-group.

Work Ability Index
An excellent way to start is to measure if employees are 'Job Fit' with the so called Workability Index.


 

Work as a burden?
Our present pension system still carries the characteristics of a social environment of the fifties of the last century. In this bible dominated time-frame, work is seen as a kind of burden.:


Nowadays more and more people are perceiving work as a challenge to develop themselves and others in a healthy way. You are not working to finally 'enjoy' your pension 'doing nothing', but you work because it gives life meaning and your pension plan helps you to financially manage your decreasing work-income and your increasing health costs as you get older and older in hopefully relatively good health.

Karl Lagerfeld, the Perfect Example
A strong example of such a new 'life policy' has recently been given by Karl Lagerfeld in an interview with Edie Campbell for Vogue. Karl is almost 80 years (!) old and besides one of the world's successful businessmen, fashion designers, artists and photographers, still vital and going strong in life.

View the next summary and enjoy Karl, regarding his view on retirement....




Change our Pension System
To cope with the aging workforce and to profit from 'elderly workers', employers have to:

• fit their employees' work (job) and working hours to their changing abilities as they grow older.
• This implies that employees have to be able to retire gradually.

A NEW PENSION SYSTEM
A new flexible pension system is needed to facilitate gradually retirement of employees:

1. Skip THE Pension Date
Therefore 'THE Pension Date' in our pension regulations has to be fully skipped as soon as possible and  be replaced by an individual, flexible and gradually applied partial pension.

2. Change Pension Payment Structure

• As from the (example) age of 50, every year the employee and employer agree on what income corresponds with the contracted activities of the employee and what the employee supplementary needs as pension income. 
• Each year, this required 'pension' income is deducted from his pension account. 
• The pension account of the employee yearly grows with the realized investment return of the pension fund and an age-dependent proportional part of the accounts of pensioners that died.
• A yearly pension communication benefit statement informs the employee about the expected development of his yearly pension in the future, in line with the agreement between the employee and the individual employer.

FINALLY...: IF NOT
If companies don't change their HR-Strategy and correlating Pension System, they and their employees will be confronted with unsustainable financial pension outcomes in the future, with as a result:
- Pension Cuts,
- Social Turmoil and
- Declining Profits.

It's the responsibility of every actuary to advice employers to take action in renewing their pension system to the demands of our modern and aging society.

If not.... actuaries will not be seen as advisors or helpers, but as the executioners of pension cuts.

Actuaries, it's up to YOU!

Perhaps some actuarial coaching may help us......

When you - just like me - wonder how Solvency (II) projects are being managed, join the club! It's crazy...., dozens of actuaries, IT professionals, finance experts, bookkeepers accountants, risk managers, project and program managers, compliance officers and a lot of other semi-solvency 'Disaster tourists' are flown in to join budget-unlimited S-II Projects.

On top of it all, nobody seems to understand each other, it's a  confusion of tongues..... 

Now that the European Parliament have finally agreed upon  the Solvency II Framework Directive in April 2009, everything should look ready for a successful S-II implementation before the end of 2012. However, nothing is farther from the truth.....

Solve(ncy) Questions in Time
The end of 2012 might seem a long way of...
While time is ticking, all kind of questions pop up like:

• How to build an ORSA system and who owns it?
• What's the relation between ORSA and other systems or models, like the Internal Model
• Where do the actuarial models and systems fit in?
• What are financial, actuarial, investing and 'managing' parameters, what distinguishes them, who owns them and who's authorised and competent to change them?
• How to connect all IT-systems to deliver on a frequent basis what S-II reporting needs......?
• How to build a consistent S-II IT framework, while the outcomes from QIS-5 (6,7,...) are (still) not clear and more 'Qisses' seem to come ahead?
• Etc, etc, etc, etc^10

The Solvency Delusion
Answering the above questions is not the only challenge. A real 'Solvency Hoax' and other pitfalls seem on their way....

It appears that most of the actuarial work has been done by calculating the MCR and SCR in 'Pillar I'.

It's scaring to observe that the 'communis opinio'  now seems to be that the main part of the S-II project is completed. Project members feel relieved and the 'Solvency II Balance Sheet' seems (almost) ready!

Don't rejoice..., it's a delusion!  The main work in Pillar II (ORSA) and Pillar III (Reporting, transparency) still has to come and - at this moment - only few project managers know how to move from Pillar I to Pillar II.

Compliancy First, a pitfall?
With the Quantitative Impact Study (QIS-5) on its way (due date: October 2010) every insurer is focusing on becoming a well capitalized Solvency-II compliant financial institution.

There is nothing wrong with this compliance goal, but 'just' becoming 'solvency compliant' is a real pitfall and unfortunately not enough to survive in the years after 2010.

Sometimes, in the fever of becoming compliant, an essential part called "Risk Optimization" seems to be left out, as most managers only have an eye for 'direct capital effects' on the balance sheet and finishing 'on time', whatever the consequences......

Risk Optimization is - as we know - one of the most efficient methods to maximize company and client value. Here's a limited (check)list of possible Risk Optimization measurements:

1. Risk Avoidance - Prevent Risk    • Health programs    • Health checks    • Certification (ISO, etc)    • Risk education programs    • High-risk transactions       (identify,eliminate, price)    • Fraud detection       (identify,eliminate, price)    • Adverse selection       (identify, manage, price) - Adjust policy conditions    • Exclude or Limit Risk         (type,term)    • Restrict underwriter       conditions       (excess, term, etc) - Run-off portfolios/products 2. Damage control - Emergency Plans (tested) - Claims Service, Repair service - Reintegration services 3. Risk Reduction - Diversification - Asset Mix, ALM - Decrease exposure term - Risk Matching - Decrease mismatch    AL/Duration - Outsourcing, Leasing 4. Risk Sharing - Reinsurance (XL,SL,SQ) - Securitization, Pooling - Derivatives, Hedging - Geographical spread - Tax, Bonus policy 5. Risk Pricing - Exposure rating, Experience rating - Credibility rating, Community rating - Risk profile rating 6. Equity financing - IPO, Initial Public Offering - Share sale, Share placement - Capital injections

Just to remind you of the enormous financial impact potential of 'Risk Optimization' and to keep your eye on a 'helicopter view level' with regard to Solvency-II projects and achievements, here's a (non-complete but hopefully helpful) visual oversight of what has to be done before the end of 2012.....


Be aware that all Key Performance Indicators (KPIs), Key Risk Indicators (KRIs) and Key Control Indicators (KCIs) must be well defined and allocated. Please keep also in mind that one person’s KRI can be another’s performance indicator(KPI) and a third person’s control-effectiveness indicator.

As actuaries, we're in the position of letting 'Risk Optimization' work.
We're the 'connecting officers' in the Solvency Army, with the potential of convincing management and other professionals to take the right value added actions in time.

Don't be bluffed as an actuary, take stand in your Solvency II project and add real value to your company and its clients.

Related Links:

- A Comparison of Solvency Systems: US and EU
- UK Life solvency falls under qis-5
- Determine capital add-on
- Reducing r-w assets to maximize profitability and capital ratios
- Risk: Who is who?
- Balanced scorecard including KRIs (2010)
- Solvency II, Piller II & III
- Risk Adjusted Return On Risk Adjusted Capital (RARORAC)
- ERM: “Managing the Invisible" (pdf; 2010)
- Unlocking the mystery of the risk framework around ORSA
- Risk  based Performance: KPI,KRI,KCI
- Risk of risk indicators (ppt;2004)
- Defining Risk Appetite
- Risk appetite ING KPI/KRI
- Board fit for S II?
- How to compute fund vaR?
- Technical Provisions in Solvency II
- Insurers should use derivatives to manage risk under Solvency II 
- Solvency Regulation and Contract Pricing in the Insurance Industry
- Overview and comparison of risk-based capital standards 
- Solvency II IBM
- Reinsurance: Munich Re  , Reinsurance solvency II