Climate risk management for life insurers
Since climate change will impact insurers, we developed a useful guide to help carriers account for climate-related risks.
Our client was interested in offering lump sums to over 15,000 retirees and terminated participants in order to de-risk their pension plan. A project of this size offered communication, technical, and logistical challenges. Milliman consultants, actuaries, and call center representatives had to work seamlessly in order to meet our client’s needs.
Two mailings were designed for this project. The first was a one-page announcement intended to alert participants that the offer was coming, explain the basics of the offer, and make them aware of the deadline. The second mailing would contain all of the details, election forms, and required legal notices.
For the second mailing, Milliman consultants worked with the client and its legal counsel to create an attractive and user-friendly booklet that satisfied all of the legal requirements for pension distributions, yet would also be understandable to the average retiree. There were many unusual questions to consider when offering lump sums to retirees such as, “What if the participant’s current spouse is not the beneficiary of the participant’s payment—who would need to consent to the lump sum distribution?” and “What will happen if the participant is having medical premiums deducted from his monthly annuity and he chooses a lump sum—how do you make sure that medical coverage does not get dropped?”
To make the process as foolproof as possible, all of the election forms were printed on yellow sheets, perforated so that they were easily removed from the booklet and returned in a pre-printed envelope. To address the complications of getting consent from the current spouse as well as a previous beneficiary, Milliman created a simple chart that explained whose consent was needed for any option that the participant chose.
Certain groups were excluded from the offer, either to simplify the calculations or because of tax complications. For example, participants with Qualified Domestic Relations Orders (QDROs) were excluded because of the manual calculations and research that would have been necessary to determine lump sums for each participant. In addition, certain retirees who began receiving monthly payments before age 59½ were excluded because, if they were to convert their monthly payments to a lump sum, all of their previous monthly payments would be subject to a 10% penalty tax.
While the booklet language was being developed, Milliman actuaries worked on calculating all of the lump sums and annuity options that were being offered. The actuaries were kept informed regarding the development of the booklets so that they would be able to provide all of the necessary information to customize them for each participant.
Lump-sum calculations for retirees are more complex than those for terminated participants. The actuaries had to consider the current ages of the participant and any beneficiary, whether the beneficiary was still living, and the form of payment the participant was receiving. In addition, if the participant was over age 70½, the entire lump sum would not be eligible for rollover because of the required minimum distribution rules.
In an attempt to reach as many participants as possible with these mailings, Milliman used a locator service to get updated addresses for terminated vested participants. In addition, the mailing lists were compared with the National Change of Address database to avoid returned mail.
Printing and mailing 15,000 customized booklets was no small task. Milliman designed the booklets and envelopes so that printing and fulfillment would not introduce the possibility for error. The booklets were created and printed flawlessly and were simultaneously loaded to a website so that participants could access and reprint them if necessary.
A project of this size would generate thousands of phone calls, so Milliman created a dedicated hotline to receive those calls. In addition, because this was a special project, Milliman’s call center created custom materials so that representatives would be able to address participants’ questions regarding this unique offer.
The first completed kit was returned on the second day of the offer. It was followed by thousands more, which told us that the project was a big success. Each form was imaged and reviewed for completeness, and follow-up letters were sent to people who were missing information. We replied to participants quickly so that they would have a chance to provide the missing information before the deadline. The client was firm with the final deadline and any documents received late would not be accepted.
Even though we already had an electronic payment interface with the plan’s trustee, Milliman worked closely with the trustee to ensure that the thousands of lump-sum payments would be made on time. We also tested the ability to turn off annuity payments en masse, so that the monthly payments would stop when the lump sums were issued.
As the payment date approached, we had to keep the client’s treasury group informed so that it would have enough cash in the trust to pay over $200 million of lump sums.
The calculations, communications, printing, and call center launched smoothly and the client was extremely pleased with the outcome. While we received many questions about the nature of the offer and the future of the pension plan, we received very few questions about the paperwork and the process. Good communication was essential to the project, and the coordination between the Milliman consultants, actuaries, call center, and the client ensured that everyone was on the same page.
Retirees were very interested in this offer for various reasons. Some were receiving small monthly payments and appreciated that they could trade that in for a one-time payment that they could use for a particular purpose. Others knew that, because of poor health, they would come out ahead by taking the lump sum. Still others had plans for the money. One retiree we spoke to said that she planned to take the lump sum to move back to her home country of Vietnam and build a retirement home. Personal stories like this help us realize that what we see as a complicated consulting project is actually helping someone realize a life-long dream.