Institute of Actuaries of India
Actuarial advice and resultant liabilities of an
Appointed Actuary
Sipika Tandon
Supriyo Chaki
Adarsh Kishor Agarwal
A V Karthikeyan
Under the guidance of
Mr. Saket Singhal
India Fellowship Seminar-December 2014
Indian Actuarial Profession
Serving the Cause of Public Interest
Agenda
Appointed Actuaries in India
Actuarial advice and risks associated with it
Stakeholders – expectations & governing regulations
Challenges and liabilities of Appointed Actuaries
Impact of Legislation and Regulation
Professionalism, Ethics and Conduct
Introduction
Mitigation Plan and insurance protection
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Introduction
Actuaries as professionals
Actuarial advice – expert or a mere adviser?
 Actuaries can act as expert in a specific area or a mere professional adviser
 Expert may fail to follow instructions and unable to explain the deviation
 May be liable in negligence for making a mistake in arriving at conclusion
Appointed Actuary – a mandatory requirement in Indian insurance industry
Appointed Actuary – working as IRDA’s eye
 To inform Authority of own opinion whether insurer has contravened any act
 At the same time needs to contribute to business growth – potential conflict of interest
Independence of Opinion
Responsibilities towards various stakeholders – their expectations and liabilities associated
with Appointed Actuary’s advice
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Appointed Actuaries in India
Performing a multifaceted role in life and general insurance
Central to financial soundness of the company – to ensure that business is conducted in sound financial lines and
monitor unfair actions
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To perform an annual actuarial investigations into the financial condition of GI business
Certify the adequacy of the claim reserves
Ensure appropriateness of premium rates and policy conditions
Advise the Board on capital requirements
To carry out economic capital calculation
To report in writing to the Board on the results and implications of any valuation carried out for
statutory purposes
Central to the financial soundness of the general insurance company – to ensure that business is conducted in sound
financial lines having regard to Policyholders’ Reasonable Expectations
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To carry out actuarial investigations to assess financial soundness of the insurer – FCR requirement
Carrying out valuation of liabilities
Ensure appropriateness of premium rates and policy conditions
Advise the Board on capital requirements
Advise and report on allocation of surplus
To report in writing to the Board on the results and implications of any valuation carried out for
statutory purposes
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Actuarial Advice
Responsibilities of Appointed Actuary in General Insurance
Managing actuarial function – Business As Usual (BAU)
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Reserve calculation and estimation of reserving uncertainty
Pricing and product design
Asset – liability management and solvency calculation
Insurance contract wording, investment and reinsurance
Internal Management Reporting
 Rendering actuarial advice to management of insurer
 Participation in Board Meetings
 Drawing management attention to any potential violation of rule/regulation
Regulatory Submission
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Certification of IBNR and other reserves
Prepare and submit Financial Condition Report
Economic Capital related submission
Handling associated queries from IRDA
Other Professional Responsibilities
 Participation in industry bodies and various actuarial committees
 Contribution to the development of actuarial profession in India
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Risks associated with Actuarial Advice (1/3)
Areas of AA advice
What can go wrong?
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• Certifying reserve including
IBNR
• Solvency margin certification
 Insufficient IBNR leading to risk
of insolvency
 Over or under estimation of
solvency position
• Financial Condition Report
certification
 Too many aspects of the
business needs to be analyzed
 Difficulties to confirm with
certainty
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Risks associated with Actuarial Advice (2/3)
Areas of AA advice
What can go wrong?
• Pricing - certifying financial
viability of filed products
 Inaccurate pricing
 Internal and external factors to
deviate from appropriate
pricing structure
 Risk of anti-selection and moral
hazard
• Joint sale advertisement
certification
• Mass schemes pricing
certification
 Information provided is
misleading, not consistent with
filed product
 Inadequacy of pricing
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Risks associated with Actuarial Advice (3/3)
Areas of AA advice
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• Economic Capital
certification
 Use of wrong methodology or
model
 Inappropriate assumptions
 Data issues – unavailability and
less granular
• Asset Liability certification
 Failing to consider factors
having significant relevance to
business
 Not including relevant shock
scenarios
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What can go wrong?
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Spectrum of Stakeholders
 Board of Directors
 IRDA
 Shareholders
 Government
of India
 Employees
 Institute of
Actuaries
of India
 General
Insurance
Council
Appointed
Actuary’s Advice
 Existing
policyholders
 Prospective
policyholders
 Fellow Actuaries
 Credit rating agencies
 Reinsurers
 Brokers
 Corporate Agents
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Stakeholders
Expectations and governing regulations
Stakeholders
Expectations from Appointed Actuary
Governing Regulations
Insurance
Regulator
 Complying with Authority’s directions from time to time
 Complying with various provisions and regulations
 Drawing management attention to avoid contravention of Act
 IRDA (Appointed Actuary)
Regulations, 2000
 The Actuary’s Act, 2006
Internal
Stakeholders
 Providing actuarial advice on pricing, product design, contract
wording, investments and reinsurance
 Ensuring the solvency at all time
 Working towards increasing the shareholder’s value
 Company specific policies
 Corporate Governance Guidelines
Policyholders
 Fair pricing and policy conditions of new and existing products
 Maintenance of financial strength to meet future liabilities
 Monitor practices, likely to be prejudicial to their interests
 IRDA (Protection of Policyholders’
Interest) Regulations, 2002
 Actuarial Practice Standard (APS) 21
 Perform high end actuarial analyses to meet rating agency needs
 Provision of appropriate data and insights to reinsurers
 Understand brokers’ views which can be incorporated in product
development process
 IRDA (General Insurance –
Reinsurance) Regulations, 2000
 File & Use Guidelines
 To maintain highest professional standard envisaged by the IAI
 To make properly reasoned comments on work of fellow actuaries
 Participate in Industry Working Parties
 Actuarial Practice Standard (APS) 21
 Certificate of Practice (CoP)
 Guidance Notes & Professional
Conduct Standards (PCS)
External
Stakeholders
Professional
Associations
Liability : Risk of failing to abide by the stipulated regulations and guidelines in providing actuarial advice
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Challenges of Appointed Actuaries
Too much to carry, too many forces to balance
Ever changing insurance
landscape
Data integrity and
unavailability
New regulatory
requirements
Unavailability of skilled
actuaries to support
Product innovation
Demands of different
stakeholders
Understanding the risks being placed upon the Appointed Actuary
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Liabilities of Appointed Actuaries (1/2)
Carrying unlimited liabilities…
An AA virtually carries unlimited liability for any misdeed/mistake/error of judgment
AA can face significant legal risk because of the magnitude of the liabilities
belonging to the companies and schemes they advise
Various stakeholders are very much affected by AA’s actions in providing
advice and services
AA can possibly be sued individually for the entire amount of
the loss suffered by a claimant
High liability due to unavailability of any financial
instrument to provide financial indemnity to AA
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Liabilities of Appointed Actuaries (2/2)
Possible consequences of carrying unlimited liabilities
 Disciplinary action by IRDA
 Disciplinary Action by IAI
 Lawsuits filed by stakeholders against inappropriate advice
 Termination from duties by the Employer
 Financial penalties
 Reputational damage
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Impact of Legislation and Regulations
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Key Objectives
The various roles performed by Appointed Actuaries in India are regulated and governed by The
Actuaries Act, 2006 and the IRDA (Appointed Actuary) Regulations, 2000. The overarching objectives
of these are to provide a framework within which the Actuaries need to work and perform
contractual obligations.
Surrounding regulations
The Actuaries Act, 2006
– Defines professional misconduct
– Actions of Authority, Disciplinary
Committee and Council
– Appeal procedure and penalties
– Quality Review Board
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IRDA Appointed Actuary Regulations, 2000
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Specifies duties and obligations
Elucidate the powers of AA
Cessation of appointment of AA
Mentions about absolute privilege of AA
Professional Guidance
 Actuarial Practice Standards
 Professional Conduct Standards
 Guidance Notes
 Certificate of Practice
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Mitigation Plan
Operational ways to minimise exposure
4 eye principle to eliminate errors
and omissions
Maker-Checker-Reviewer Approach
Possible
Options
Sense check on actuarial analyses
Clearly defined Standard Operating
Procedure for different activities
Ensure data quality – Garbage inGarbage Out
Follow the basic principles
 Data extensive work – validation
checks are useful ways to minimise
over-reliance on data as it is
 Many of the tasks are process
oriented and periodic in nature –
following updated process
documents can reduce the risk of
process error
Which risks are mitigated?
Wrong methodology or model is used
Inaccurate actuarial calculation
Miss out on relevant aspects in actuarial investigations
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Mitigation Plan
Use of professional guidance and other inputs
Follow various Guidance Notes
issued by the IAI
Interaction with Peer Actuaries - Compare
high level KPI with Peer companies
Possible
Options
Continuous professional developments
and regular trainings
Keep abreast of the various regulatory
developments
Keep up-to-date with legal and socio
economic changes
Seek professional guidance
 Different guidance notes are meant
to assist in the provision of actuarial
advice and certification in various
areas
 Important to remain conscious
about the legal aspects of
professional services and its
implications
Which risks are mitigated?
Inappropriate assumptions are used
Failing to consider factors having significant relevance to business
Data issues not effectively dealt with
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Mitigation Plan
Some other areas to lean upon
Get Professional Indemnity insurance
Self awareness of various potential
conflicts of interest
Possible
Options
Support from appropriate qualified and
experienced team members
Monitor developments concerning legal
liabilities of actuaries in other countries
Imposing liability caps to limit the
liabilities
Be aware of external
environment
 Understand own risk and use
suitable insurance plan to protect
unforeseen liabilities
 Awareness of various forces around
and their dimensions can help to act
knowledgeably
 Acquire and demonstrate high level
of corporate skill
Which risks are mitigated?
Influenced to deviate from appropriate pricing structure
Failure to convince all parties that the actuarial advice has been fair to all
Underestimation of emerging risks and financial liabilities
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Insure Us?
Devise Professional Indemnity insurance cover
…. So we have discussed
High legal risk
Follow operational controls
and
professional guidance
 To cover liability falling on AAs as a result of errors
and omissions committed by them whilst rendering
actuarial advice
 Cover can be extended to other
actuarial
professionals,
including
independent consultants and actuarial
contractors
 Limit of indemnity can be decided based
upon assessment of own risk
 Take support from international market and
reinsurers
 Reasonable pricing is required in view of reported
cases of professional negligence involving actuaries
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Potential unlimited
liability
What to
do?
Possibly not
enough!!!
 Not available in Indian market – possibly PSU
insurers cover actuaries, but uncommon
 If available at all, it may be very expensive
 Not much clarity whether the Companies’
D&O cover can provide safeguard to AAs
 Risks and associated financial liabilities
associated in carrying out duties of AA
will certainly be minimized
 Promote a sense of professional confidence
among the Actuaries to do their job better
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References
In preparing this, we have taken assistance from the following:
 The Actuaries Act, 2006 (As passed by the House of Parliament)
 Insurance Regulatory and Development Authority (Appointed Actuary) Regulations,
2000
 Guidance Note (GN) 21: Appointed Actuary and General Insurance Business
 Actuarial Practice Standard (APS) 1: Appointed Actuary and Life Insurance Business
 Actuarial Practice Standard (APS) 1: Appointed Actuary and Life Insurance Business
 Professional Conduct Standards (PCS Version 3.00) issued by the Institute of
Actuaries of India
 Other regulations and guidelines issued by IRDA and IAI
 “Appointed Actuary – Insure Thyself” by Sampad Narayan Bhattacharya
 http://actuariesindia.org/downloads/gcadata/8thGCA/Appointed%20Actuary%20Insure%20thyself_S%20N%20Bhattacharya.pdf
 “Actuaries’ Liabilities” by Jonathan Evans and Wilberforce Chambers for
Professional Indemnity Forum Conference, Cambridge, July 2009
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Q&A
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