Indian Fellowship Seminar - June 2015
L8 - Model Office Projections
Presenters
Ankur Saraf
Arpita Jetha
Bharat Khurana
Guide: Kailash Mittal
18th June 2015,
Mumbai
Indian Actuarial Profession
Serving the Cause of Public Interest
Agenda
1. Background of the case study
2. Assumptions and considerations in the analysis
3. Diagnosis of the problem
4. Views of the Forecasting Actuary
5. Actuarial Function Holder’s views
6. Conclusion
7. Questions and Answers
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Agenda
1. Background of the case study
• Problem statement
• Proposed solution
• Different perspectives
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Background - Problem Statement
As part of annual Financial Condition Report (FCR):
Projected profits in base case are low
Company is not expected to meet it’s profit targets
It is looking at ways to improve the projected profits…
…what are the different options?
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Background - Proposal
Sensitivity analysis suggest:
• Increased charges to policyholders would lead to higher profits
• Profit targets would be met
Based on this we are contemplating to increase the charges…
…But
• New level of charges will exceed market norms
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Background - Different perspectives
To reach to a conclusion, we will consider…
Forecasting Actuary’s views
• Where we will provide our views based on the investigations and market
research
Actuarial Function Holder’s views
• Provides more comprehensive and pragmatic view considering the
regulatory and business implications
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Agenda
2. Assumptions and considerations in the analysis
• Assumptions made
• Other considerations
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Assumptions
Company has underwritten a wide range of products:
• Participating (par), Non-Participating (non-par) life and pensions, Unit linked
products (ULIP)
Charges under ULIP products are reviewable
Premium for traditional products can be changed
Only par business written in the par fund
Company operating on a going concern basis
Stable economic, political and regulatory environment
FCR results based on deterministic modelling
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Other considerations
Due consideration has been given to
• Policyholders’ reasonable expectations created from various sources
• Insurance regulations and other professional standards
Company seeks to treat all customers fairly at all times
• Reviewing charges only in situations where they are justified
Considerations has been given to all the stakeholders
• Policyholders’ interests
• Shareholders’ interests
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Agenda
3. Diagnosis of the problem
• Historical Developments
• Low profitability
• Reasonable profitability
• Future projections
• Different growth dynamics
• Experience expected to worsen
• Situations which justify the charge revision
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Diagnosis - Historical developments
Low profitability
Reasonable profitability
• Priced as a “loss leader” to gain
market share
• Strategically, it should have
resulted into higher profits
through better efficiency
• Why does it not reflect in
projected financials?
• Strategy did not work
• Check with the business
strategy team
• Priced targeting a desired
profitability criteria
• Why financials reflect lower
profits?
• Adverse expense experience
• Growth not as per plan 
different product, channel mix
• Adverse Lapse/surrender
experience
• Low NB growth  insufficient
IF profits
• Inability to cut cost  leading
to inefficiencies in distribution
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Diagnosis - Future Projections
Change in dynamics of projected
new business
• Aggressive future planned NB
growth
• Product mix shift towards capital
intensive products
• Shift in non par would impact
shareholder profits
• Shift in par would not impact
shareholder profits
• Shift in channel dynamics towards
higher expense ratio channels
Change in projection assumptions
• Based on experience
• Excessive prudence in reserving
assumptions  deferment in
profit emergence
• Adverse movements in Interest
rates  fall in Shareholder profits
due to ALM mismatch
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Diagnosis - When to review charges
Situation where charges should be
reviewed
Situation where charges should Not
be reviewed
• Charges low compared to similar
charges under recently priced
products
• Mortality has worsened in general
• Surrenders are high in general
• High inflation and admin charges
not enough to cover expenses
• Losses despite all control measures
• Competitors also facing challenges
in meeting their profit targets, but
do not want to be first to review the
charges
• No signs of adverse
mortality/surrender/expense
experience
• Lower profits because of
inefficiencies in the system
• Lower profits due to higher NB
strains  call for shareholder capital
injection
• Priced as a loss leader to attract
volumes  unable to benefit out of
it
• Revision is not consistent with PRE
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Agenda
4. Views of the Forecasting Actuary
• Product category wise analysis
• ULIP products
• Non-par products
• Par products
• Other factors
• Financial implications
• Legal and compliance
• Market research
• Competition
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Forecasting Actuary’s view (1/6)
ULIP products
• Different charges that can be reviewed
• Allocation, fund management, administration and mortality charges
• Reviewed charges should be as per the latest regulations e.g. cap on
charges, RIY regulations for ULIP etc.
• Matching of charges against corresponding outgoes
• Will help avoiding any liquidity and ALM issues
• Will reduce the impact of early duration surrenders on shareholders value
• Increasing FMC %
• Current FMC not sufficient because of low fund size
• Persistency related risk
• Losses due to policies lapsing before initial outgo is recovered
• Increase surrender penalty – max cap under products regulations
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Forecasting Actuary’s view (2/6)
Non-par products
• Revision of premium rates
• Mortality risk premium
• Expense loadings in the premium
• Revision to special surrender values for saving products
• Surrender values higher than asset shares
• Revise special surrender values so that they are close to the asset shares
• Review the rider premium
• Premium for the attached riders could be increased on account of
increased cost of meeting the benefits
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Forecasting Actuary’s view (3/6)
Par products – Shareholders profit
• Profitability to shareholders from par fund is based on the amount of
transfers
• How to increase shareholder profitability?
• Increasing the charges to asset share would lead to reduction in
policyholder bonuses and hence dip on SH transfers
• What are the other alternatives?
• Increase the premiums, leading to higher bonus earning capacity which
implies higher transfers to shareholders
• Change in expense allocation methodology along with increased charges
to policyholders
• Special bonuses funded through par estate
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Forecasting Actuary’s view (4/6)
With Profit Actuary’s view
• What are the products or cohort of policies where there is scope to increase
premiums or charges
• What is the scope of distributing special dividends funded from par estate
• Will it be able to absorb future NB strains
• Any potential solvency threats
• What would be the impact on the investment strategy of par fund
• Constraints on actions due to PRE and TCF
Any of these action would be constrained by PRE and TCF
• What is stated in the “Principles and practices of financial management
(PPFM )” of the par fund
• Communications to policyholders about increasing premiums or charges
• Benefit Illustrations
• Past practices of the company
• Acceptable market practices
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Forecasting Actuary’s view (5/6)
Financial implications
• Will the company meet it’s profit targets
• Risk of losses due to adverse publicity
• Level of charges would be too high
• Increased lapses and discontinuance
• Leading to lower profits
• Any possible solvency implications
Legal and compliance
• Is it legal to make the changes?
• Check with Legal Advisor of the company
• How will the company ensure that changes are done in a compliant
manner?
• Will take view of the Compliance Officer
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Forecasting Actuary’s view (6/6)
Market research
•
•
•
•
•
•
Market’s view about any possible implications of such changes
What is the basis of such research?
Relevance to our company
What data was used in this research?
Basis and assumptions underlying the research
Reliance and limitations of such research
Competition
• Competitors also facing similar issues?
• How are they managing to be profitable with low level of charges?
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Agenda
5. Views of the Actuarial Function Holder (AFH)
•
•
•
•
Regulatory requirements
Professional requirements
Meeting PRE and TCF
Business implications and risks
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AFH’s view (1/4)
Additional responsibilities of AFH
•
•
•
•
•
•
•
Be compliant with regulations and applicable practice standards
Keep policyholders’ interest at the top most priority
Ensuring solvency in all reasonably foreseeable scenarios
Changing the reserving assumptions to maintain enough prudence
Managing overall performance of the company
Follow the best practices of the market
Communicating the changes and impacts to shareholders and the members
of the Board
… Hence AFHs view should be more comprehensive and pragmatic
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AFH’s view (2/4)
Appointed Actuary
Regulations 2000
• Fair pricing and
ensuring company
solvency
APS 1 & APS 2
• Liabilities and
solvency
Protection of
Policyholders’
Interests 2002
Linked Product
Regulation, 2013
• Disclosures to the
policyholders to
enable them to
make right decision
• Maximum cap on
charges
• Maximum
permissible RIY for
ULIP
APS 3
• Complying
with these as
part of
current work
APS 4
APS 5
• Revision in
assumption/
methodology
has to be peer
reviewed
• Illustrations to
be revised as
per the latest
changes
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Non Linked Product
Regulations, 2013
• Revision of special
surrender values
• Revision of
Mortality risk
premium
GN 6
• Changes to
the par
products
should be
consistent
with these
guidance's
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AFH’s view (3/4)
Discussion points for ULIP RIY regulations
• RIY regulations applicable to old generation products as well?
• Justifying higher admin charges vis-a-vis new products which have lower
charges due to RIY limits
• Mortality charges are excluded for calculation of RIY, so can be increased if
justified by worsening experience
Meeting TCF and PRE requirements
•
•
•
•
Give due regard to policyholder interests
Sufficient disclosures of revised charges to policyholders
Option to policyholders to exit without any exit load
Changes to the par products should be in line with PPFM and With Profit
Actuary’s view
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AFH’s view (4/4)
Business implications and risks
• Company could meet it’s profit
targets
• However it would increase the risk
• Adverse publicity could lead to
higher discontinuance on the inforce book
• Lower business volume leading to
higher expense overheads
• Sensitivity to the company
profitability under new structure
could be high
• Cost of implementing these
changes could be high
• Competitors taking advantage of
the opportunity and company
losing market share
Impact on Appraisal Value of the company
Increase in Value
Decrease in Value
Changes successful
Higher than expected
discontinuance
No adverse
implications on
in-force and new
business
Fall in future NB
leading to decrease in
future value addition
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Agenda
6. Conclusion
• Actions to be taken
• Alternatives
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Conclusion
Review the product proposition
• Review the charges and premiums with due considerations to the
Forecasting Actuary’s and AFH’s View
Alternatives
• Improve the cost efficiency of the company
• Improve profit by targeting better persistency
• Reduce losses by getting into suitable reinsurance arrangements and risk
mitigation activities
• Issue high margin products
• Re-assess the investment strategy to increase profits
• Improve the control measures to curtail losses due to operational risks
• Manage the expectations of future profits with the shareholders
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Thank You
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