Factors Contributing to Underperformance of Endowments in Insurance Industry

Low Performing Endowments Low Performing Endowments By Yogita Rawat, By Yogita Rawat, Himanshu Bhatia, Bhatia, Ranjan Ranjan Gupta & Gupta Gupta Himanshu Gupta & Swati Swati Guide : Mr. Suresh Sindhi Guide : Mr. Suresh Sindhi Indian Fellowship Seminar 22 22nd ndIndian Fellowship Seminar Indian Actuarial Profession Indian Actuarial Profession Serving the Cause of Public Interest Serving the Cause of Public Interest

Agenda 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 2 www.actuariesindia.org www.actuariesindia.org

1. Case-Study: Background Need consideration of two aspects of the case study: Actuaries working in life companies are responsible for the current underperformance of endowments underperformance of endowments both with profits and unit-linked, by not being involved enough in the projection process projection process, and by non transparent pricing hence causing misery and disillusionment to many non transparent pricing 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)? role to whistle blow 3 www.actuariesindia.org www.actuariesindia.org

2. Underperformance of Endowments: (Industry Perspective) 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 4 www.actuariesindia.org www.actuariesindia.org

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 5 www.actuariesindia.org www.actuariesindia.org

Are Actuaries working in life companies responsible for current underperformance? 6 www.actuariesindia.org www.actuariesindia.org

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 7 www.actuariesindia.org www.actuariesindia.org

4.1 Responsibility of Actuaries: Projection Process Non Involvement in PROJECTION PROCESS Non Involvement in PROJECTION PROCESS Projection of all pricing assumptions including Projection of all pricing assumptions including Investment, Expense & bonus loading Withdrawals Projections of other Business & corporate plans Projections of other Business & corporate plans Business volume & its subsequent effects on expense & other assumptions Business profitability 8 www.actuariesindia.org www.actuariesindia.org

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 9 www.actuariesindia.org www.actuariesindia.org

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 10 www.actuariesindia.org www.actuariesindia.org

4.2 Responsibility of Actuaries: Non Transparent Pricing NON TRANSPERENT 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) 11 www.actuariesindia.org www.actuariesindia.org

4.3 Responsibility of Actuaries- Professional Obligations Responsibility placed to Actuaries by the virtue of professionalism GN6 GN6- -Management of participating life Insurance Business with reference to distribution of surplus APS 1: 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 GN 22: Reserving for Guarantees in Life Assurance Business 12 www.actuariesindia.org www.actuariesindia.org

4.4 Responsibility of Actuaries-Regulatory Framework Responsibility placed to Actuaries by current regulatory framework IRDA (Appointed Actuary) Regulations, 2000 IRDA (Appointed Actuary) Regulations, 2000:submittion of the actuarial advice in the interests of the insurance industry and the policyholders IRDA (PPI) Regulations,2002 IRDA (PPI) Regulations,2002: Proper system in place to protect policyholders IRDA (Distribution Of Surplus) Regulations, 2002 IRDA (Distribution Of Surplus) Regulations, 2002: responsibility to advise BODs on bonus distribution IRDA (Assets, Liabilities And Solvency Margin Of Insurers) 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 13 www.actuariesindia.org www.actuariesindia.org

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 14 www.actuariesindia.org www.actuariesindia.org

6. Solution Role 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 15 www.actuariesindia.org www.actuariesindia.org

7. Summary & Conclusions The essence of a profession lies in upholding its The essence of a profession lies in upholding its standards ethical ethical, , in the public interest in the public interest . standards, , technical technical and and 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 16 www.actuariesindia.org www.actuariesindia.org

Time for two way discussion Time for two way discussion 17 www.actuariesindia.org www.actuariesindia.org