Institute of Actuaries of India
Professionalism issues in estimation of Commercial Vehicle
Third Party Reserves
Shruti Saxena
Vaibhav Tyagi
Varadaprasad Jagannathan
Guide: Khushwant Pahwa
Indian Actuarial Profession
Serving the Cause of Public Interest
Agenda
• Evolution of Commercial TP Business in India
• Technical Issues in Reserving
• Professional Issues in Reserving
• Recommendations to address professional issues
Evolution of Commercial Vehicle Motor Third
Party
Pre-IMTPIP*
Pre April 2007
(*) India Motor Third Party Insurance Pool
IMTPIP
2007- 2012
Post dismantling
of IMTPIP and
formation of
declined risk pool
Post April 2012
Agenda
• Evolution of Commercial TP Business in India
• Technical Issues in Reserving
• Professional Issues in Reserving
• Recommendations to address professional issues
Technical issues concerning third party
liabilities
• Long tail line of business
⁻
Significant delays in claim intimation and settlement
⁻
No cap on reporting delay and court settlements may take years
• No limit of liability
⁻
There is no upper cap on claim amount
⁻
The award is determined by the court based on factors like income, age etc.
• Tariffed price
⁻
Insurance regulator determines the price of the product
⁻
May not reflect the true cost of claims and expenses
Technical issues concerning third party
liabilities (continued…)
• Limited experience
⁻ Loss development not complete even for the earliest years
⁻ Public sector/TAC data not available in public domain
⁻ Quality & relevance (changing claim practices) issues in historical data
• Dynamic external environment - claims inflation
⁻ Sarla Varma, Rajesh vs Rajbir changed basis of determination of compensation
⁻ Increasing awareness
Specific issues in valuation
Pre - India Motor Third Party Insurance Pool (IMTPIP)
• Data quality issues including credibility of claims and exposures
• Very little true IBNR development, material IBNER development
• Not enough prior year data available to estimate development
• Reliance on external sources
⁻ Claims’ manager estimates
⁻ Industry information
• Judgemental estimates of ULR
• Materiality of the book size, and representativeness with current book
Specific issues in valuation
India Motor Third Party Insurance Pool
• Estimate of pool ULR based on pool actuary’s assessment of data
• Post dismantling, the policies written by company devolved
• How representative is the pool ULR of the company’s retained book of business
• Actuary is required by IRDA to conduct periodic valuation of the run-off book
• Reliance on development of pre-IMTPIP data
• Is this data representative: Mix and claim practices
• Management appetite to carry a higher(lower) estimate from GAD
Specific issues in valuation
Post IMTPIP
• Valuation of new book of business written from April 2012
• The company’s underwriting pattern will change given the emphasis on profitability
• Settlement practices may change since pooling mechanism has ceased
• Greater emphasis on cost containment
Impact of declined pool
• Works on underwriting year clean cut basis
• Reconciliation of pool actuary’s ULR vs. company’s estimate
• Data sufficiency issues
Other issues in valuation
• Reliability of available information
⁻ Case reserve estimates may not be reliable indicator of settlement value
•
•
•
•
Complexity of factors involved in settlement
Changes in court awards not reflecting across board
Use of standard reserves for claims below a threshold or of a particular type (e.g.injury)
Closed without payments –potential for re-opening
⁻ Payments may not be true reflection of changing trends
• Recent (underwriting/accident) year paid data will be negligible
• Current payments of old intimations
• Reflecting salary levels prevalent then
• Changes in interest rate
• Is past inflation likely to continue into the future
Agenda
• Evolution of Commercial TP Business in India
• Technical Issues in Reserving
• Professional Issues in Reserving
• Recommendations to address professional issues
Professionalism issues- Standards for advice
PCS 3.1: Actuaries must not give advice, unless: a) satisfied of personal competence in the
relevant matter, or b) acting in co-operation with, or with the guidance of, someone (not
necessarily an actuary) with the requisite knowledge and experience
• Appointed Actuary and their team need to build expertise in valuation
₋
Full time appointed actuary and team with experience developing
₋
Familiarity with the business plan of the company and changes
₋
Familiarity with regulatory environment and its context
• Thorough knowledge of legal process and legislative environment
₋
Need to work with legal experts in MACT as well as in claims settlement
Issues for actuaries valuing liabilities
• Lack of experienced actuaries in General Insurance
⁻ Indian non life actuaries have limited experience
• Actuarial valuation of IBNR required only from FY 06
• Private insurance companies relatively new and growing book
• Limited expertise for peer guidance/ review
⁻ Ability to take and justify judgement calls
• True IBNR development
• IBNER provision
• Estimates of future inflation for estimating loss ratio for budgeting
⁻ Cannot consult peer actuaries on account of confidentiality considerations
• Could be construed as competitive information
Professionalism issues- Standards for advice
PCS 3.4: An Actuary must consider the extent to which it is appropriate to carry out
investigations to assess the accuracy and reasonableness of any data being used. The
advice should normally include an explanation or qualification if the actuary has any
reservations about the reliability of data
• Given the long tail nature of the liabilities the actuary will need historical data
•
•
•
•
•
Is this data available and credible?
Company data vs. IIB data
Is this data representative of the current context: business mix, settlement processes
Information on court award inflation and exoneration trends may be anecdotal
Extrapolating regional trends at national level
Professionalism issues- Standards for advice
PCS 3.5: Advice should normally include sufficient information and discussion about each
relevant factor and about the results of the actuary’s investigations to enable the intended
recipient of the advice to judge both the appropriateness of the recommendations and the
implications of accepting them. Further, the actuary should…
• Detailed Documentation of valuation exercise is critical
• Validate assumptions through detailed analysis of experience exercise
• Appropriate communication of assumptions with key stakeholders
• Use of actuarial judgement and its impact on the analysis
• Continuous monitoring of emerging experience and communicating its impact with
the stakeholders
Professionalism issues- Standards for advice
PCS 3.6: An Actuary giving advice which is formulated in the interests of a particular client
must ensure that the client is aware that the advice is not of broader applicability than
intended by the actuary, nor is it necessarily the advice that would be given to another
client…
• The ULR of old book, IMTPIP, new book and the declined pool will all have to be
estimated separately
• Assumptions, data, methods of estimation will vary according to the context
• CV-TP liabilities of the pool are fixed across the industry, however individual
company books may develop differently
• ULR for one company may not be representative of ULR for another company or the
industry, though these tend to be compared
Professionalism issues- Financial interest
PCS 6.3: Financial rewards which are large in relation to the professional time spent,
including success related or contingency fees, can threaten objectivity…Accordingly,
actuaries are advised to exercise extreme care…
• Actuary as an employee of a company may have financial interests linked to the
financial health of the firm
• Profit linked Bonus, Stock options, etc.
• Is it appropriate for actuary to accept significant bonus linked to financial
performance of the company, and does it impact objectivity
• Governance structure
• How are the KPI’s set and what is the reporting structure (CFO, CUO)
Professionalism issues- Conflict of interest
PCS 5.1: Clients are entitled to assume that advice given by an actuary is unaffected by
interests other than those of the client, taking account of any identifiable professional or
legal duty of care of the client in respect of a third party
• The valuation of the declined pool is conducted by Actuaries who are also Appointed
Actuaries of GI companies
• Their view on the pool ULR has material impact on the financials of their company
Other professional issues for actuaries
valuing CV-TP liabilities
• Third party liabilities tend to be large part of overall claims reserves
⁻ Any change can impact company’s profitability materially
• Management sensitivity and scrutiny
• Communicating effectively is very essential
• Long tail of development
⁻ Succeeding actuary will have to manage the legacy of his predecessors
⁻ PCS 4.3: May lead to professionalism breach issues between actuaries
Professionalism issues- breach
• If any member has reason to believe that another member is understating the
reserves (wilfully or otherwise)
⁻ Eg. Actuaries in the regulatory body or reinsurance companies
⁻ Members in other insurance companies (through may be confidentiality issues here)
• PCS 4.3.3: in deciding whether a breach of guidance is material, the member may need
to exercise judgement…
• PCS 4.3.4: if the member decides that the nature of the breach is such that action is
called for, the member must, in the first instance…
• PCS 4.3.5: If the member does not consider a discussion to be appropriate, or if the
matter is not resolved …
Other issues
• PCS 7: Appointment of New Advisor
⁻ Company decides to get peer review done by an independent actuary
• Involvement of members of overseas Actuarial institutions
⁻ Valuation of reserves by overseas holding company’s actuary
• …and their potential influence on the local actuary in setting reserves
⁻ The largest liabilities pertain to IMTPIP which valuation has been done by Government
Actuary Department of United Kingdom
⁻ Peer review by an overseas actuary
Agenda
• Evolution of Commercial TP Business in India
• Technical Issues in Reserving
• Professional Issues in Reserving
• Recommendations to address professional issues
Recommendations
• Institute of Actuaries of India could assist in building awareness
• On Technical issues…
⁻ Facilitate peer to peer interactions in a neutral setting
⁻ Build and share technical resources
⁻ IIB could build and share industry loss triangles as reference for company’s to consider
• On Professional issues…
⁻ Issue guidance notes specifically relating to third party liabilities valuations
⁻ Conduct seminars to facilitate discussions amongst members on issues involved
⁻ Sensitize company managements (through Council) and regulator
Thank you