Role of Appointed Actuaries in Indian Insurance Industry

Institute of Actuaries of India Actuarial advice and resultant liabilities of an Appointed Actuary Sipika Tandon Supriyo Chaki Adarsh Kishor Agarwal A V Karthikeyan Under the guidance of Mr. Saket Singhal India Fellowship Seminar-December 2014 Indian Actuarial Profession Serving the Cause of Public Interest

Agenda Introduction Appointed Actuaries in India Professionalism, Ethics and Conduct Actuarial advice and risks associated with it Stakeholders expectations & governing regulations Challenges and liabilities of Appointed Actuaries Impact of Legislation and Regulation Mitigation Plan and insurance protection www.actuariesindia.org 2

Introduction Actuaries as professionals Actuarial advice expert or a mere adviser? Actuaries can act as expert in a specific area or a mere professional adviser Expert may fail to follow instructions and unable to explain the deviation May be liable in negligence for making a mistake in arriving at conclusion Appointed Actuary a mandatory requirement in Indian insurance industry Appointed Actuary working as IRDA s eye To inform Authority of own opinion whether insurer has contravened any act At the same time needs to contribute to business growth potential conflict of interest Independence of Opinion Responsibilities towards various stakeholders their expectations and liabilities associated with Appointed Actuary s advice www.actuariesindia.org 3

Appointed Actuaries in India Performing a multifaceted role in life and general insurance Central to financial soundness of the company to ensure that business is conducted in sound financial lines and monitor unfair actions To perform an annual actuarial investigations into the financial condition of GI business Certify the adequacy of the claim reserves Ensure appropriateness of premium rates and policy conditions Advise the Board on capital requirements To carry out economic capital calculation To report in writing to the Board on the results and implications of any valuation carried out for statutory purposes Central to the financial soundness of the general insurance company to ensure that business is conducted in sound financial lines having regard to Policyholders Reasonable Expectations To carry out actuarial investigations to assess financial soundness of the insurer FCR requirement Carrying out valuation of liabilities Ensure appropriateness of premium rates and policy conditions Advise the Board on capital requirements Advise and report on allocation of surplus To report in writing to the Board on the results and implications of any valuation carried out for statutory purposes www.actuariesindia.org 4

Actuarial Advice Responsibilities of Appointed Actuary in General Insurance Managing actuarial function Business As Usual (BAU) Reserve calculation and estimation of reserving uncertainty Pricing and product design Asset liability management and solvency calculation Insurance contract wording, investment and reinsurance Internal Management Reporting Rendering actuarial advice to management of insurer Participation in Board Meetings Drawing management attention to any potential violation of rule/regulation Regulatory Submission Certification of IBNR and other reserves Prepare and submit Financial Condition Report Economic Capital related submission Handling associated queries from IRDA Other Professional Responsibilities Participation in industry bodies and various actuarial committees Contribution to the development of actuarial profession in India www.actuariesindia.org 5

Risks associated with Actuarial Advice (1/3) Areas of AA advice What can go wrong? 1 Insufficient IBNR leading to risk of insolvency Over or under estimation of solvency position Certifying reserve including IBNR Solvency margin certification 2 Too many aspects of the business needs to be analyzed Difficulties to confirm with certainty Financial Condition Report certification www.actuariesindia.org 6

Risks associated with Actuarial Advice (2/3) Areas of AA advice What can go wrong? Inaccurate pricing Internal and external factors to deviate from appropriate pricing structure Risk of anti-selection and moral hazard 3 Pricing - certifying financial viability of filed products 4 Information provided is misleading, not consistent with filed product Inadequacy of pricing Joint sale advertisement certification Mass schemes pricing certification www.actuariesindia.org 7

Risks associated with Actuarial Advice (3/3) Areas of AA advice What can go wrong? 5 Use of wrong methodology or model Inappropriate assumptions Data issues unavailability and less granular Economic Capital certification 6 Failing to consider factors having significant relevance to business Not including relevant shock scenarios Asset Liability certification www.actuariesindia.org 8

Spectrum of Stakeholders Board of Directors IRDA Shareholders Government of India Internal Insurance Stakeholders Regulator Employees Institute of Actuaries of India Existing policyholders Appointed Actuary s Advice Policyholders Professional Associations General Insurance Council Prospective policyholders Fellow Actuaries External Stakeholders Reinsurers Credit rating agencies Corporate Agents Brokers www.actuariesindia.org 9

Stakeholders Expectations and governing regulations Stakeholders Expectations from Appointed Actuary Governing Regulations IRDA (Appointed Actuary) Regulations, 2000 The Actuary s Act, 2006 Complying with Authority s directions from time to time Complying with various provisions and regulations Drawing management attention to avoid contravention of Act Insurance Regulator Providing actuarial advice on pricing, product design, contract wording, investments and reinsurance Ensuring the solvency at all time Working towards increasing the shareholder s value Company specific policies Corporate Governance Guidelines Internal Stakeholders Fair pricing and policy conditions of new and existing products Maintenance of financial strength to meet future liabilities Monitor practices, likely to be prejudicial to their interests IRDA (Protection of Policyholders Interest) Regulations, 2002 Actuarial Practice Standard (APS) 21 Policyholders Perform high end actuarial analyses to meet rating agency needs Provision of appropriate data and insights to reinsurers Understand brokers views which can be incorporated in product development process IRDA (General Insurance Reinsurance) Regulations, 2000 File & Use Guidelines External Stakeholders Actuarial Practice Standard (APS) 21 Certificate of Practice (CoP) Guidance Notes & Professional Conduct Standards (PCS) To maintain highest professional standard envisaged by the IAI To make properly reasoned comments on work of fellow actuaries Participate in Industry Working Parties Professional Associations Liability : Risk of failing to abide by the stipulated regulations and guidelines in providing actuarial advice www.actuariesindia.org 10

Challenges of Appointed Actuaries Too much to carry, too many forces to balance Ever changing insurance landscape Unavailability of skilled actuaries to support Data integrity and unavailability Product innovation New regulatory requirements Demands of different stakeholders Understanding the risks being placed upon the Appointed Actuary www.actuariesindia.org 11

Liabilities of Appointed Actuaries (1/2) Carrying unlimited liabilities An AA virtually carries unlimited liability for any misdeed/mistake/error of judgment AA can face significant legal risk because of the magnitude of the liabilities belonging to the companies and schemes they advise Various stakeholders are very much affected by AA s actions in providing advice and services AA can possibly be sued individually for the entire amount of the loss suffered by a claimant High liability due to unavailability of any financial instrument to provide financial indemnity to AA www.actuariesindia.org 12

Liabilities of Appointed Actuaries (2/2) Possible consequences of carrying unlimited liabilities Disciplinary action by IRDA Disciplinary Action by IAI Lawsuits filed by stakeholders against inappropriate advice Termination from duties by the Employer Financial penalties Reputational damage www.actuariesindia.org 13

Impact of Legislation and Regulations Key Objectives 1 The various roles performed by Appointed Actuaries in India are regulated and governed by The Actuaries Act, 2006 and the IRDA (Appointed Actuary) Regulations, 2000. The overarching objectives of these are to provide a framework within which the Actuaries need to work and perform contractual obligations. Surrounding regulations The Actuaries Act, 2006 IRDA Appointed Actuary Regulations, 2000 Defines professional misconduct Actions of Authority, Disciplinary Committee and Council Appeal procedure and penalties Quality Review Board Specifies duties and obligations Elucidate the powers of AA Cessation of appointment of AA Mentions about absolute privilege of AA Professional Guidance 2 Actuarial Practice Standards Guidance Notes Professional Conduct Standards Certificate of Practice www.actuariesindia.org 14

Mitigation Plan Operational ways to minimise exposure 4 eye principle to eliminate errors and omissions Follow the basic principles Data extensive work validation checks are useful ways to minimise over-reliance on data as it is Maker-Checker-Reviewer Approach Possible Options Sense check on actuarial analyses Many of the tasks are process oriented and periodic in nature following updated process documents can reduce the risk of process error Clearly defined Standard Operating Procedure for different activities Ensure data quality Garbage in- Garbage Out Which risks are mitigated? Wrong methodology or model is used Inaccurate actuarial calculation Miss out on relevant aspects in actuarial investigations www.actuariesindia.org 15

Mitigation Plan Use of professional guidance and other inputs Follow various Guidance Notes issued by the IAI Seek professional guidance Interaction with Peer Actuaries - Compare high level KPI with Peer companies Different guidance notes are meant to assist in the provision of actuarial advice and certification in various areas Possible Options Continuous professional developments and regular trainings Important to remain conscious about the legal aspects of professional services and its implications Keep abreast of the various regulatory developments Keep up-to-date with legal and socio economic changes Which risks are mitigated? Inappropriate assumptions are used Failing to consider factors having significant relevance to business Data issues not effectively dealt with www.actuariesindia.org 16

Mitigation Plan Some other areas to lean upon Be aware of external environment Get Professional Indemnity insurance Self awareness of various potential conflicts of interest Understand own risk and use suitable insurance plan to protect unforeseen liabilities Possible Options Support from appropriate qualified and experienced team members Awareness of various forces around and their dimensions can help to act knowledgeably Monitor developments concerning legal liabilities of actuaries in other countries Acquire and demonstrate high level of corporate skill Imposing liability caps to limit the liabilities Which risks are mitigated? Influenced to deviate from appropriate pricing structure Failure to convince all parties that the actuarial advice has been fair to all Underestimation of emerging risks and financial liabilities www.actuariesindia.org 17

Insure Us? Devise Professional Indemnity insurance cover What to do? Potential unlimited liability . So we have discussed High legal risk Possibly not enough!!! Follow operational controls and professional guidance To cover liability falling on AAs as a result of errors and omissions committed by them whilst rendering actuarial advice Cover can be extended to other actuarial professionals, independent consultants and actuarial contractors Not available in Indian market possibly PSU insurers cover actuaries, but uncommon If available at all, it may be very expensive Challenges Scope Not much clarity whether the Companies D&O cover can provide safeguard to AAs including Limit of indemnity can be decided based upon assessment of own risk Take support from international market and reinsurers Risks and associated financial liabilities associated in carrying out duties of AA will certainly be minimized Solution Benefits Promote a sense of professional confidence among the Actuaries to do their job better Reasonable pricing is required in view of reported cases of professional negligence involving actuaries www.actuariesindia.org 18

References In preparing this, we have taken assistance from the following: The Actuaries Act, 2006 (As passed by the House of Parliament) Insurance Regulatory and Development Authority (Appointed Actuary) Regulations, 2000 Guidance Note (GN) 21: Appointed Actuary and General Insurance Business Actuarial Practice Standard (APS) 1: Appointed Actuary and Life Insurance Business Actuarial Practice Standard (APS) 1: Appointed Actuary and Life Insurance Business Professional Conduct Standards (PCS Version 3.00) issued by the Institute of Actuaries of India Other regulations and guidelines issued by IRDA and IAI Appointed Actuary Insure Thyself by Sampad Narayan Bhattacharya http://actuariesindia.org/downloads/gcadata/8thGCA/Appointed%20Actuary- %20Insure%20thyself_S%20N%20Bhattacharya.pdf Actuaries Liabilities by Jonathan Evans and Wilberforce Chambers for Professional Indemnity Forum Conference, Cambridge, July 2009 www.actuariesindia.org 19

Q & A www.actuariesindia.org 20