Should Expense Overruns be adjusted against
Lapse Profits while calculating the asset shares
in participating business?
By Himanshu Bhatia, Yogita Rawat,
Ranjan Gupta & Swati Gupta
Guide : Mr. Suresh Sindhi
22nd Indian Fellowship Seminar
Indian Actuarial Profession
Serving the Cause of Public Interest
Agenda
•
•
•
•
Introduction
Treatment of Expense Overruns & Lapse profits
Current scenario
Should Expense Overruns be adjusted against Lapse Profits?Factors
– Distribution of Surplus
– Professional Framework
– Regulatory Framework
• UK Scenario
• Summary & Conclusions
• Questions?
www.actuariesindia.org
2
Introduction: Asset share
Asset Shares
• According to GN 6, an asset share for a policy grouping at a given
point in time is the accumulation of the premiums received plus
investment income earned from the inception of the policies,
less deductions due to benefit payments, commission, expenses,
tax, a reasonable cost of capital and of guarantees, contribution
from miscellaneous surplus (if considered appropriate) and
transfers to shareholders.
• Accumulation of
Premiums +
Investment income
-
Benefit payments + Commission +
Expenses + Tax + COC + COG + Misc.
Profit + Transfer to Share Holders
www.actuariesindia.org
3
+
Introduction: Uses of Asset Share
Asset Shares – Uses
• Bonus rates
• Surrender Values
• Maturity Benefits
www.actuariesindia.org
4
Treatment of Expense & Lapse profits in Asset Share
Treatment of Expense in
Asset Shares
Treatment of Lapse Profits
in Asset Shares
• Full expenses charged to
Asset share
• Credited to Asset Share
• Credited to Estate
• Pricing Expense
• Expense used in benefit
illustrations
• Long term Best estimate
www.actuariesindia.org
5
Expense Overruns
High Initial Expenses
• Many insurance companies still relying on agency and third party
distributors which involves high acquisition costs
• High/significant costs involved in setting up Banc assurance/
Direct Marketing/Online sales
• Low Volumes of business
High Maintenance Costs
• Expense inflation & salary inflation
• Enhanced regulatory constraints & reporting
Eg. Significant system development required to cater Shadow
Accounting and Non-Residual Additions (NRA)
• Scale of operations
www.actuariesindia.org
6
Expense Overruns
Treatment of Expense Overruns
• Alternatives
 Full expense charged to AS
 Difference charged to Estate
 Difference charged to Share holders
www.actuariesindia.org
7
Current Scenario
Asset Shares calculation – current Indian Context$
• Treatment of expense overrun – 39% charged the difference to
the Estate, 31% charged the difference to the Share holder &
31% charged the full expense to the AS
• Treatment of lapse profits – 31% credited to AS while 69%
credited to the estate
$ Based
on “India Asset Share Survey” by Milliman dated 04.02.2014
(Based on responses from 14 companies out of 24 life insurance companiesrepresenting 58% of total market)
www.actuariesindia.org
8
Current Scenario
Why is the treatment of
expense overruns not
uniform across industry???
www.actuariesindia.org
9
Expense Overruns & Lapse Profits
The Big Question : Should Expense Overruns be adjusted against
Lapse Profits
• Answer would ideally depend on the following:
 Age of the Insurer & Par-Fund
 Par-Fund Estate
 Company ‘s Par-Fund Management policy
 Comparison of Actual Lapse profits v/s Assumed Lapse Profits
 Policyholder Reasonable Expectations(PRE) set by Benefit
Illustrations & Other Disclosures
 Shareholders’ Attitude & belief: Provisions for expense overruns
 Practice followed by others in industry
www.actuariesindia.org
10
Expense Overruns & Lapse Profits
Charging Overruns to Asset Shares
• Will impact the current generation of policyholders
• Factors affecting distribution of surplus
• Professional Framework
• Regulatory Framework
www.actuariesindia.org
11
Par Fund Management
Distribution of Surplus: factors to consider
• Equity among different class/generation of policyholders
• Market practice and competitors' actions
• Communications to the policyholders in form of sales
illustrations, With profit manual & other correspondence
• Policyholders reasonable expectations and sales practices used
• Shareholders role to support the business initially
• Merge of expense overruns in best estimates expenses
• Professional obligations and Regulatory framework
www.actuariesindia.org
12
Par Fund Management
Asset Shares Vs Par Fund Estate
• Reversionary Bonus v/s Terminal Bonus rates
• Surrender Values
• Maturity Benefits
www.actuariesindia.org
13
Professional Framework
GN 6
• AA must consider the consistency of expenses being charged to
asset shares with what has and is being illustrated to customers.
• Actual allocation to Asset Share w.r.t. renewal expense can vary
on discretion as long as Policy holders’ reasonable expectations
(PRE) encompass
www.actuariesindia.org
14
Professional Framework
GN 6
The amount of expenses charged to the historical asset share of policies
a) The Appointed Actuary must consider the consistency of expenses being
charged to asset shares with what has and is being illustrated to customers. In
particular, the expenses intended to be allocated to the asset shares should be
consistent with the bonuses projected in benefit illustrations.
b) In respect of renewal expenses, so long as policyholders‟ reasonable
expectations encompass expense risk, the Appointed Actuary, when making
the actual allocation to asset shares, may use a degree of discretion in
departing from the expenses implicit in any benefit illustration issued at point
of sale. However, in respect of acquisition expenses, the level of expense
should be known with greater certainty.
Hence, the Appointed Actuary will have less scope to depart from the level of
expense implicit in any benefit illustration when allocating acquisition
expenses to asset shares. The Appointed Actuary should document any such
departure.
www.actuariesindia.org
15
Professional Framework
GN 6
c) Where the expenses allocated to the fund exceed those allocated to the
asset shares, the Appointed Actuary should consider the reasons for this, and
be satisfied that the approach:
i. is sustainable;
ii. is not, by its effect on the estate, expected to affect policyholders‟
reasonable expectations adversely and materially; and
iii. is appropriately reflected in the expenses assumed in the statutory
valuation of liabilities.
www.actuariesindia.org
16
Regulatory Framework
IRDA(Non-Linked Products) 2013 Regulations
• Special Surrender Value(SSV) shall represent the asset share in
case of the par policies, where the asset share shall be
determined in accordance with the guidance or practice
standards issued by the Institute of Actuaries of India
With Profits Committee (WPC)
• Independent committee w. r. t. Decisions related to Par business
www.actuariesindia.org
17
UK Framework
• Role of PPFM: A mandatory with profit guide
• Role of Estate
–
–
–
–
–
•
Investment Flexibility
Requirements of Regulatory capital
Payment of Tax incurred by fund on distribution to shareholders
Covering overruns on existing & new business expense
Smoothing flexibility
Regulatory Approval for difference in pattern of distribution as
compared to previous practice
www.actuariesindia.org
18
Summary & Conclusion:
The bigger picture!
• Answer depends on various factors
• Role of Professional body & Regulatory Body
– Freedom given to industry by the virtue of various provisions of
applicable Professional & Regulatory framework keeping in view
Sustainability of Fund, PREs, Equity Considerations, Shareholder
Approach & Overall Objectives of Business
– Charging the overruns to asset share might be the only option for
sustainability of the company and policyholders ultimately
– Charging the overruns to estate would serve as a balancing act
– Charging the overruns to share holders would ultimately lead to fair
policyholder treatment & curtailing expenses
www.actuariesindia.org
19
Time for Two way discussion
www.actuariesindia.org
20