Case Study G4 – Reserve Ranges
Guide – Mr. K.K. Dharni
Date : 18 December 2014
Presenters –
Vandana Baluni
Irvinder Singh Kohli
Abhijit Pal
In this presentation
 Scope
 Introduction
 Professional Standards Considered
 Factors Influencing Reserves
 Regulations Governing Reserves
 Finance Director’s suggestion
 Options for Resolution of Issue
 Options Available to Appointed Actuary
 Conflict of Interest
 Conclusion
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Scope
Scope
 The case study should be approached principally how to maintain the
professional standard when carrying out professional activities.
 It should also take into consideration how to strike balance with the
consideration of internal relationship with professional matters.
 The practices, GNs & Regulations considered are in Indian market context.
 Other professional matters and technical considerations should be identified
but dealt briefly.
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Introduction to Case Study
Introduction
 A new Company Actuary (AA) of a general insurance company has submitted reserving
reports in accordance with GN12 to the Finance Director(FD).
 FD has commented that recommended reserve will reduce profit below market
expectation hence affecting:
o Downgrading of companies' rating by rating agencies.
o Impact of future business of the company.
o Previous AA had explained FD that actuarial reserving methods subjective.
o The actuaries set the reserves slightly above the mid-point of an implicit range of values and it will be
acceptable if the actual reserves are within this range.
 FD’s is suggesting AA to reconsider recommended reserves and if possible recommend
lower reserves which is with in the implicit range of values.
 AA has to review the recommended reserve and suggest the possible solution.
 Additionally AA point of view is to be explained if AA’s bonus depends on “good” results
of the company or AA owns company shares ( or options), which can be exercised by
him/her.
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Professional Standard Considered
Professional Standards Considered
 Professional Standard - PCS section 2
“An Actuary has a duty to the profession must not act in a manner which denigrates its reputation &
impugns its integrity”
 Breach of standards set by the regulator and the profession should not be
recommended
o Advice given should comply with Section 3.1 & 4.1 of PCS
“An actuary is expected to use best judgment in formulating advice, while paying proper regard to any
relevant professional guidance or other guidance. He must keep himself abreast with updated
professional guidance and adhere to that.”
Also,
“Any material breach of PCS/GN is a ground for complaint under the disciplinary procedures and
would amount to strong prima facie evidence of misconduct”
o Any modification / change in approach of calculating reserve needs regulator’s approval
and which depends on compliance with the extant regulations
 Conflict of Interest as per section 5 of PCS
“Advise given by Actuary is unaffected by interest other than those of the clients”
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Factors Affecting Reserves
Factors Influencing Reserves
 Quality or credibility of data
 Claim Experience
 Impact of Claims
 Change in Segment
 Impact of new product/risk
 Level of prudence
 Reserve deficiency
 Rate revision
 Reinsurance arrangements
 Change in Underwriting guidelines
 Change in Regulation
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Reserving Process
Regulations Governing Reserves
Type of Reserves
 Actuarial Practice standards 21 – Section 8.10 prescribes the reserve a company
needs to hold :
o
The Unearned Premium Reserve (UPR)
o
The Unexpired risk reserve (URR)
o
Claim Reserves comprises
1. Outstanding Claim Reserve
2. Incurred but not reported claims (IBNR Claims)
3. Reported claims where the estimate of loss has not been fully assessed the reserve is referred to as Incurred But Not Enough Reported Claims
(IBNER)
o Expense Reserves
UPR & URR are based on formula or methodology prescribed by regulation.
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Regulations Governing Reserves
Indian Regulations & Reserving Principles
 Indian Regulations for Non – Life Reserves
The Insurance Regulatory & Development Authority (Assets, Liabilities & solvency Margins of Insurer) Regulations,
2000
&
The Insurance Regulatory & Development Authority (Preparation of Financial Statement and Auditor’s report of
Insurance company) Regulations, 2002”
 Reserving Principles
o Reserves should be held on prudent basis (including appropriate MAD) for all liabilities arising
out of the insurance business.
o Reserves should take into consideration nature, term, currency and method of valuation of the
associated assets.
o The value placed on the liabilities must make appropriate provision for future expenses.
o Keeping in view tax regime as applicable to general insurance companies, due allowance must
be made for tax, taking into account the taxation provision of the company
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Regulations Governing Reserves
If the reserve ranges would have been applicable in Indian market
 General Insurance Business: Actuarial Reports (GN12- Faculty & Institute of
Actuaries)
o Reports on reserves may be produced in terms of point estimate or range
of acceptability.
o Where appropriate, report should indicate the sensitivity of the estimates
to variations from the stated assumption.
o When applying statistical methods of estimation, the actuary should be
aware that, in addition to the effect of random variation, there may be
significant sources of error associated with the choice of model or its
parameters. The actuary should consider how these uncertainties should
be communicated to the recipients of the report.
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Finance Director’s Suggestion
Finance Director’s Suggestion
 Considerations for Revised Reserve
o Level of conservatism or prudence built in reserves.
o Any point which has been over-looked for estimation of reserves
o Any event or issue which have occurred after issue of report
o Impact of change in reserves on profit.
o Change in reserve recommended by FD, impact on profit.
o Size of reserve after revision.
o Reserving methodology or approach
o FD recommending change in Outstanding Claim reserves or IBNR (incl.
IBNER).
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Finance Director’s Suggestion
 Challenges in reducing reserves
o Inadequate Reserves - Reserves may not be sufficient to meet all the
liabilities as and when they arise.
o Fair Financial Statement of the company will not be disclosed to
stakeholders.
o Regulatory Interventions - regulator action against the company if reserves
are not adequate.
o Early emergence of profit due to low reserve, which may lead to higher
increase in later years.
o Requirement of higher capital in later years
o Influence on investment strategy
o Payment of Tax /Dividends , which will impact future profit
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Options for Resolution of Issue
Options for Resolution of Issue
Step 1
 Revision of Reserves
a.
b.
c.
d.
e.
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Revisit the reserve estimate to ensure that everything is covered, no errors,
data issues etc.
Revisit the margins built in the assumptions and assess the impact on
reserves if margin are reduced.
Establish if confidence on reduced reserves is possible
Establish reason for higher reserves as compared to previous year (s).
Review if the basis of reserve has been changed and establish reason for the
change.
Options for Resolution of Issue
Step 2 (If AA suggest no revision in reserve)
 Discussion with Internal Stakeholder
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a.
Discuss with Underwriter & Claims Head to understand their view on
future experience is same as AA or different.
b.
Discuss with other Directors in the company and assess their views
Options for Resolution of Issue
Step 3 (If AA unable to get consensus from internal stakeholders)
 Discussion with External parties
o Discussion with counter-parts in other companies to assess if they have
similar view on future experience of the business
o Discussion with Consultants / Reinsurers to assess if experience of the
industry has changed over years and issues faced by the industry or other
companies
o Discuss with previous AA and understand his basis for reserves for previous
accounting period.
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Options Available to Appointed Actuary
Options available to AA
 Decision by Appointed Actuary
o
Reduce reserves
1. Revisit margin and reduce if earlier at higher level
2. Revise reserves and document the revised basis & assumptions in his report.
3. Discuss and explain to FD the rational for the change in reserve and seek his/her views
on proposed reserves.
o
No change in the reserve estimates
1. Discuss with FD and explain the rational/ justification of the reserves
2. Discuss with other Directors of the company and explain the rational/ justification of
the reserves and its impact on the company current and future financial conditions
3. Discuss with senior Actuary and seek advice.
4. Inform regulator his/her stand in case issue is not resolved after discussion with internal
stakeholders.
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Conflict of Interest
Conflict of Interest
Hefty Bonus/Shares or Options held by AA in the Company
According to Section 5.2 of PCS
In the event of any conflict or apparent conflict of interest, the client or clients involved must be
notified at the earliest opportunity and if any advice given to a client is, or will be, influenced by
interests other than those of that client or by any constraint other than that imposed by professional
guidance or other guidance, this must be disclosed in the advice
 Steps to be taken by AA
o The AA should be satisfied in his/her capacity that the recommended reserves is in
the best interest of company.
o The AA must ensure that his/her conduct and reach and depth of his/her
functionalities enable him/her to discharge his/her duties and obligations in
accordance with regulation (8) of AA Regulations.
o The AA should have clear understanding with his/her insurer on the condition of
Appointment and issues related to Bonus or Share should agreed and documented.
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Conclusion
Conclusion
 An Appointed Actuary should serve the public interest along with considering the






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financial soundness of the company.
Needs to maintain the highest standard of professionalism and ethics by highlighting
the conflict of interest to relevant stakeholders
Advice given by Appointed Actuary should be fair and free from any kind of biasness
and should be in line with the regulations/guidance notes.
In case of doubt, should seek advise from senior Actuary / Peer reviewer
An Actuary should be open to discuss any issue with internal & external (relevant)
stakeholder for resolution.
He/ She should have access to information / data from the company which will help
in taking appropriate action related to company.
He should keep regulator/ relevant authority updated about the issues faced by the
company and seek their views/ suggestion on proposed resolution.
Questions ???
Thank You
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