Low Performing Endowments By Yogita Rawat, Himanshu Bhatia, Ranjan Gupta & Swati Gupta Guide : Mr. Suresh Sindhi 22 nd Indian Fellowship Seminar Indian

Low Performing Endowments

By Yogita Rawat, Himanshu Bhatia, Ranjan Gupta & Swati Gupta

Guide : Mr. Suresh Sindhi

22nd Indian Fellowship Seminar

Indian Actuarial ProfessionServing the Cause of Public Interest

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Case-Study: Background

Underperformance of Endowments: Industry Perspective

Underperformance of Endowments: Possible Reasons

Perspective1: Actuaries are responsible for current Underperformance: Possible Reasons

Perspective2: Another perspective: Actuaries are not responsible for current underperformance:

Solution & Summary

Agenda

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Need consideration of two aspects of the case study:

Actuaries working in life companies are responsible for the current underperformance of endowments both with profits and unit-linked, by not being involved enough in the projection process, and by non transparent pricing hence causing misery and disillusionment to many.

Should the Actuarial Profession take on a more general role to whistle blow when we see possible future general problems in areas where it is accepted we have knowledge (particularly life and pensions business)?

1. Case-Study: Background


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Outlook I: Policyholders’ Perspective

Returns from endowments lower than what was being promised (illustrated) and priced for?

Par Endowments {Lower Bonuses than promised & priced} &

Unit Linked Endowment Policies {Lower Benefits than illustrated in form of benefit illustration}

Outlook II: Insurance company’s perspective:

Lower Actual profit margins/ Lower profitability from endowments &

Non achievement of Business plans

2. Underperformance of Endowments: (Industry

Perspective)


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3. Underperformance of Endowments: (Possible Reasons)


Low Investment returns

Expense overruns including expense inefficiency & allocation (Par Business)

Market conditions supplemented by high guarantees at the start of policy start and Guarantees charges

Low Surrenders; in case of lapse supported products, High surrenders affecting investment returns

Pricing Issues: Relative performance with respect to sales illustration

Product designs as compared to other market solution

Low business volumes; expense inefficiency

Competitors' aggressive pricing

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Are Actuaries working in life companies responsible for

current underperformance?


4) Actuaries are responsible for current Under-performance: Reasons

4.1 Non Involvement in Projection Process

4.2 Non Transparent Pricing

4.3 Professional Obligations

4.4 Regulatory Obligations


4.1 Responsibility of Actuaries: Projection Process

Non Involvement in PROJECTION PROCESS

Projection of all pricing assumptions including

Investment, Expense & bonus loading

Withdrawals

Projections of other Business & corporate plans

Business volume & its subsequent effects on expense & other assumptions

Business profitability


Responsibility of Actuaries: Projection Process

Lack of Proactive approach towards investment return projections i.e. strategy and investment function (role of investment actuary)

Lack of Continuous dialogue between Investment, Actuarial and risk teams i.e. lack of Involvement in the projections of long term best estimates of interest rate & bonus rate declarations

Non-Harmony between experience rating and pricing at regular pace

Allocation of expenses(split between par and non par fund)

Competition (guaranteed benefits reasonably supported by projections)

High initial guarantees


Responsibility of Actuaries: Projection Process…contd..

Lack of continuous dialogue between marketing, business planning team & Actuaries

Lack of involvement between operational & actuarial functional w.r.t. surrenders

Lack of involvement between Operational & actuarial functional


4.2 Responsibility of Actuaries: Non Transparent Pricing

NON TRANSPERENT PRICING –APS 5

No standard/transparent approach to calculations of Asset share & hence bonuses in case of par business

Business projections based on unachievable plans based on current conditions

Hidden Charges in case of ULIPs

Clear communication in form of benefit illustrations & other demonstrations

Link between benefits flowed & other market conditions applicable (Especially if benefits linked to index/other benchmarks)


4.3 Responsibility of Actuaries-Professional Obligations

Responsibility placed to Actuaries by the virtue of professionalism

GN6-Management of participating life Insurance Business with reference to distribution of surplus

APS 1: “Every actuary has a responsibility to the profession and his/her responsibilities to a client must be consistent with this. An Appointed Actuary is however also in a special position as he/she has statutory responsibilities to the IRDA.”

“The Appointed Actuary must advise the company keeping in view the provisions contained under Section 49 of the Act as to how much of any surplus be distributed to policyholders or transferred to shareholders and recommend the allocation thereof. “

GN 22: Reserving for Guarantees in Life Assurance Business


4.4 Responsibility of Actuaries-Regulatory Framework

Responsibility placed to Actuaries by current regulatory framework

IRDA (Appointed Actuary) Regulations, 2000:submittion of the actuarial advice in the interests of the insurance industry and the policyholders

IRDA (PPI) Regulations,2002: Proper system in place to protect policyholders

IRDA (Distribution Of Surplus) Regulations, 2002: responsibility to advise BODs on bonus distribution

IRDA (Assets, Liabilities And Solvency Margin Of Insurers) Regulations, 2000: puts responsibility to maintain solvency at all time

Various circulars & guidelines issued from time to time


5)Another perspective: Actuaries are not responsible for current

underperformance:Systematic risk: No control over investment market

Lack of hedging instruments & other regulatory restrictions

Limitations of modeling and hypothetical modeling

Current lower Returns in investment :Surrenders responsible to the extent it is responsible for deviation in investment strategy & immediate investment losses

Responsibility of Other specialist functions

Lower marketing volumes: Industry Issue, Lack of Insurance awareness


6. SolutionRole of whistleblowing as required by the virtue of professionalism and regulatory framework & mandated by other stakeholders of insurance company

Active Investment strategies & Investment decision,

Active involvement with other specialists so as to protect policyholders

Involvement in all major business development, risk, corporate governance committee.

Providing its knowledge & depth of working experience: Long run projections based on stochastic modeling

Reasonable guarantees well supported by above projections

Lower initial benefits to be supplemented by proper marketing


7. Summary & Conclusions

“The essence of a profession lies in upholding its standards, technical and ethical, in the public interest”.

Knowledge & actuarial abilities needs to be channelized towards role related to future projections with involvement of other specialists

Transparent pricing

Whistle blowing: A professionally required obligation


“Time for two way discussion

Documents

Low Performing Endowments By Yogita Rawat, Himanshu Bhatia, Ranjan Gupta & Swati Gupta Guide : Mr. Suresh Sindhi 22 nd Indian Fellowship Seminar Indian