Feasibility Discussion on Offering Renewal Premium Discounts in the Insurance Sector

36th India Fellowship Webinar Date: 22 January 2022 Feasibility of offering the Renewal Premium Discounts Guide : Avdhesh Gupta Presented By : 1. Rakesh Kumar 2. Mayuresh Dharap 3. Ayush Jagirdar 4. Adwait Bhagwat 5. Samyak Baid

Introduction of Guide : Avdhesh Gupta Avdhesh is a Fellow member of the Institute of Actuaries of India (FIAI) and Institute & Faculty of Actuaries, UK (FIA). He completed his MSc in Actuarial Management from Cass Business School, London. He is currently working as an Appointed Actuary of Bajaj Allianz Life Insurance Company Limited - a joint venture between the Bajaj Finserv Limited and Allianz SE. He joined Bajaj Allianz Life in June 2019 and is responsible for Actuarial Valuations, Shareholder Reporting, Product Pricing and Financial Risk. He has over 14 years of experience in the actuarial domain. Prior to joining Bajaj Allianz Life, he had worked with PricewaterhouseCoopers as the Principal Consultant in actuarial services. In his earlier stints, he has led multiple roles at Aegon Life Insurance Company, Swiss Re and HSBC. www.actuariesindia.org

Agenda and Introduction www.actuariesindia.org

Agenda Introduction Concerns and uncertainties Feasibility Actuarial Perspective Feasibility Regulatory Perspective Feasibility Operational Perspective Way Forward www.actuariesindia.org

Introduction Background and Opportunity Recently established small size life insurance company Mainly sells Pure Term and Unit Linked products through online channel Proposal policyholders who do physical exercise regularly to offer renewal premium discounts to Policyholders needs to demonstrate the same to the Company via a mobile app Might help in significantly improving the persistency Concerns raised by CRO on data availability and credibility in addition to the Covid-19 uncertainties To discuss the feasibility of the suggestion from actuarial, regulatory and operational aspects www.actuariesindia.org

Concerns and uncertainties www.actuariesindia.org

Concerns Data Availability Does the Company have the access to relevant data ? Difficult to collect the data from all the policyholders Limitations in the IT systems Data from Reinsurers may be challenge Granularity of data available No prior data/experien ce available www.actuariesindia.org

Concerns Data Credibility Data available might not be credible enough to be able to use the same for setting the appropriate assumptions IT system failures Lack of credible or relevant Industry data for benchmarking the assumptions Data may be reliable but might not be available for the required time frame Administrative errors or data issue with the fields captured www.actuariesindia.org

Covid-19 uncertainties Covid-19 pandemic is changing or has already changed our collective calculus of uncertainty Covid-19 pandemic in-fact is far more global in scope, more profoundly impactful and far reaching & is more complex than any other crisis or uncertainties that we all have experienced Uncertainties regarding Global health consequences of the pandemic Near, Mid and long term impact of the measures which we are taking in response to Covid-19 Long Term Impact on the mortality is still not known www.actuariesindia.org

Feasibility Actuarial Perspective www.actuariesindia.org

Actuarial Feasibility Parameters to be tracked Parameters to be tracked Actuarial Feasibility Possible Choices No of Calories Burnt Hours of Sleep Hours of Physical Exercise Step Count Factors to be considered while making a choice Actuarial Aspects Practical Aspects 1. Impact on Health and Longevity 2. Availability of Past Data 3. Single Parameter v. Combination of Multiple Parameters 1. Ease of Tracking 2. Parameters tracked by industry peers 3. Free Medical Check-ups to keep moral hazard in check www.actuariesindia.org

Actuarial Feasibility Defining Discount Structure Quantum of Discount: On What to Apply Discounts? 2 1 Expected Savings in Mortality Costs Costs of Implementing the Proposal Increased Premiums due to reduction in lapses Premiums in case of Pure Term Policies Mortality Charges in case of Unit Linked (mortality charges are small proportion of premium and keep on declining) Key Decisions to be taken Policies Single Rate or Slab-based Multiple Rates: 4 3 Time Period: Average PPTs of existing portfolio Equivalent benefits to single pay policies / limited pay policies Mortality improvements Persistency improvements Ease of Modelling www.actuariesindia.org

Actuarial Feasibility Long Term View of Mortality Causes of Death in Indian Assured Lives Key Considerations: For middle and higher age groups, the major reason for deaths is heart related problems Regular physical activity can lead to improvement in cardio-vascular health Can it also increase in (mortality improvements) over the long term? lead longevity to COVID-19 Considerations: Impact of COVID-19 on long term health of a person Vaccination and reduction in number of deaths due to vaccination Source: IALM 2012-14 Report www.actuariesindia.org

Actuarial Feasibility Mortality Assumption 1 Data Concerns: Different mortality: Different assumptions for healthy lives who proposal and other lives mortality Company does not have own experience Credible industry data may not be available Need to determine the average proportion of policyholders who are expected to avail the proposal avail the Possible Choices Applying Setback? Can we apply a 3-5 year setback on healthy lives considering that their life expectancy would improve by 3-5 years ? 2 Possible Solutions: Rely on experience of reinsurer / foreign partner Provide additional margin while fixing the best estimate assumptions Check the proportion of policyholders who avail wellness initiatives in health insurance Other Considerations: Can lower term products be offered till we get credible data relating to mortality improvements in the long term? Reduced anti-selection business for future new www.actuariesindia.org

Actuarial Feasibility Expense and Lapse Assumptions Lapse Assumption: Expense Assumption: Reduced lapses due to proposed improvements in persistency Following additional costs Technology Costs Marketing Costs Costs of Administration of the Scheme Time frame till which the improvements will be observed needs to be estimated Extent to which these costs will be funded by the shareholders and extent to which they are to be loaded into the product The proportion of policyholders availing the proposal is also crucial here In case of pure term products, reduced lapses could lead to lower profits whereas for ULIP, improved persistency may lead to higher profits Possible increase in number of in-force policies due to improved persistency leading to reduction in per policy expenses in future Discount on mortality charges may not be able to reduce mass lapses which happen after the end of lock-in period (5 years). www.actuariesindia.org

Actuarial Feasibility Profitability Financial Viability Improvement in experience should be discount offered on renewals for financial product Pricing Considerations Pricing assumptions need to be prudent to allow for uncertainty experience Base premiums might be expensive than premiums offered for plain vanilla pure term subsequent discounts on renewals might not be attractive Discount on charges for ULIP product might not be material for policyholders greater than in actual viability of plans and Shareholder s return Inclusion of feature should have be justifiable to shareholders Shareholders might require higher returns compensate additional risk related to data and Covid- 19 uncertainty mortality to www.actuariesindia.org

Actuarial Feasibility Capital Requirement Higher capital to meet high initial expenses in technology, administration, marketing and underwriting Higher capital to manage higher likely new business as renewal discounts might be unique proposition in life insurance market Higher capital to allow for prudence in assumptions and possible uncertainty in actual experience Higher capital to manage higher persistency of the existing business www.actuariesindia.org

Actuarial Feasibility Reinsurance As a small company, the reinsurance support will be very important to manage capital and mortality risk Important risk management tool and reinsurers can provide crucial technical assistance in pricing and product design Global reinsurer s experience in other countries might be used after allowing for differences in demographic profile Reinsurance renewal premium discount or reinsurance commission might be negotiated or profit sharing reinsurance arrangement might be explored Reinsurance treaty terms and conditions to be in line with those offered to customers and changes in reinsurance terms and conditions might not be possible for existing business www.actuariesindia.org

Actuarial Feasibility Valuation of Liabilities Need to ensure protection to policyholders Assumptions for different lives needs to be determined Need to consider Margin for Adverse Deviations (MADs) for each set of assumptions Valuation assumptions might be updated in coming years once sufficient and credible actual experience emerges for the product Additional reserve might be required to manage operational risk related to monitoring of physical activity, fraud situations and management of administration system Additional reserve might be required to manage increase in revival of existing business www.actuariesindia.org

Actuarial Feasibility Impact on Solvency Ratio, EV and VNB Value of New Business (VNB) SolvencyRatio Impact on VNB needs to be evaluated for pure term and ULIP existing business For Pure Term VNB might fall due to increase in initial expenses VNB might fall due to lower renewal premiums Embedded Value (EV) Impact on Solvency ratio needs to be evaluated and adequate capital might be required to business Impact on EV needs to be evaluated For ULIP Lower mortality charges might lead to lower VNB Better persistency might lead to higher VNB support the www.actuariesindia.org

Actuarial Feasibility Actuarial Control Cycle Specifying the Problem Renewal Premium Discounts and Discount on Mortality Charges Developing the Solution 1. Data 2. Setting Assumptions 3. Pricing and Product Design 4. Capital Management 5. Reserving 6. Modelling Monitoring the Experience 1. Actual Experience v/s Assumptions 2. Actual Profitability www.actuariesindia.org

Feasibility Regulatory Perspective www.actuariesindia.org

Regulatory Feasibility Draft circular on Wellness initiatives Wellness Design Rewards program can be launched with voluntary participation Pricing Consideration Rewards can be provided to existing policyholders provided pricing doesn t get affected materially Policyholders Protection Ensure all eligible policyholders should receive clear communication In house Grievance Redressal Mechanism must be in place even if services are outsourced Operations Services can be outsourced, provided guidelines regarding remunerations and advertising are adhered www.actuariesindia.org

Regulatory Feasibility Product Regulations, 2019 Product Design Shorter policy term can be offered to control the risk till the time credible experience is developed Innovative Product Company can file this product as innovative product, as this is first of a kind in market Company will have to demonstrate cost is within control and product is simple to understand Financial viability Company has to demonstrate the financial viability of the product every year in ARA report AA can reprice the product if it is not financially viable www.actuariesindia.org

Regulatory Feasibility Regulatory Considerations Company should ensure system readiness for launch of product as three month window is provided for launch post approval Ensure all the requirements as per regulatory checklist are fulfilled Product Approval Appointed Actuary Regulation,2017 If offered to existing customers, loss of discount on past premiums Premium charged for new product should be comparable with existing product Compliance with Protection of Policyholders Interests,2017 Policyholder Fairness Need to ensure all policyholders are informed, failure to communicate may lead to disciplinary action Need to revise communicated Benefit Illustration and Policy Document if changed for existing business APS5 requires no potential information to be withheld in BI and hence level of discount offered should be provided in BI Communication www.actuariesindia.org

Regulatory Feasibility Regulatory Considerations Appointed Actuary Regulation,2017 requires data to be accurate As per APS7, higher MAD can be applied on lapse assumption to consider lack of experience, data credibility Cautious approach for mortality assumption till volatility due to covid 19 is stabilized Liability Valuation Additional expenses in development and management of app may lead to breach of EOM limit set in EOM Regulation, 2016 If Company is newly formed and might not have completed 10 years, so it can opt for exemption on that basis Expenses Need to ensure projected solvency is more than 150% as prescribed by ALSM Regulation,2016 or company s internal target at all times Solvency www.actuariesindia.org

Feasibility Operational Perspective www.actuariesindia.org

Operational Feasibility Fraud Fraud is one of the most major risks in the product: o Will lead to collection of lower premiums. o Will lead to collection of data which is not accurate. Ways of mitigating risks include: o Asking for policyholder-specific evidence of exercise. o Setting policyholder-specific discount criteria. o Tying up with external apps for better data collection. o Collecting additional data which will aid in fraud mitigation. www.actuariesindia.org

Operational Feasibility Communication to Policyholders If the structure is introduced in existing products, it will have to be intimated to all existing policyholders. Criteria for discounts should be clearly communicated. All marketing documents should have appropriate disclaimers and definitions. Communication in Benefit Illustration needs to be appropriate. The policyholder needs to be aware in advance about discount level. Support staff need to be trained to ensure proper communication. Communication on the benefits of exercise. Explaining the structure to lesser educated or uneducated policyholders will be a challenge. www.actuariesindia.org

Operational Feasibility System Development Significant cost of building the app, especially if the company does not have in-house expertise. Developing and testing the app will take a lot of time. There has to be segregation of data basis the discount status attained every year by policyholders. Historic level of discounts offered to the policyholders will also need to be tracked. The app has to have appropriate data protection and security measures. There is very high reputational risk involved in case of system failure. www.actuariesindia.org

Way Forward www.actuariesindia.org

Way Forward Ensure compliance with all relevant regulations, circulars and APS. Evaluate the cost and estimated timeline to introduce the product to the market. Collect all the relevant data required to evaluate profitability of the product. Perform a cost vs benefit analysis. If beneficial to the company, proceed with finalizing the product design and file with the regulator. Proceed with system development. www.actuariesindia.org

Thank You! www.actuariesindia.org