Success of Crop Insurance in India: Actuarial Challenges and Risks

27th India Fellowship Seminar Success of Crop Insurance in India - Issues for Actuaries in pricing and reserving Cyber risk and Terrorism risk - Challenges in pricing Guide Name Himanshu Garg Supervisor: P.A. Balasubramanian, FIAI Divya Dadlani Sukanta Roy Chowdhary Presenters Names Paul Kruger Zondagh 1 JUNE 2017 Mumbai Indian Actuarial Profession Serving the Cause of Public Interest

Presenters Introductions Paul Kruger Zondagh Founding partner of True South Actuaries & Consultants True South has grown to the second largest provider of statutory services in South Africa Since 2016, acting as the mentor actuary to the Appointed Actuary of the Aditya Birla Health Insurance Company Qualified as an actuary in 1996 and obtained the Chartered Enterprise Risk Actuary (CERA) designation in 2012 Member on various committees of the Actuarial Society of South Africa Divya Dadlani Currently working with the actuarial team of Kotak General Insurance Earlier worked with Aon Hewitt and Towers Watson Cleared SA4 Pensions and Retirement Benefits Graduate in Statistics from Ramnarain Ruia College, Mumbai University Sukanta Roy Chowdhury Currently working with AICI in Actuarial Department. Previously worked with Cigna TTK, Chola MS Have more than 9 years of professional experience Cleared SA3 General Insurance from Institute and Faculty of Actuaries, UK Holds Bachelors in Technology from University of Calcutta www.actuariesindia.org 2

Agenda #1: Background of Crop Insurance in India #2: Professional Issues for Actuaries in Crop #3: Technical Matters - Pricing and Reserving #4: Case Studies on Professional Issues for Actuaries #5: Conclusion and Way Forward www.actuariesindia.org 3

Background of Crop Insurance in India www.actuariesindia.org 4

Overview Launched in January 2016, known as Pradhan Mantri Fasal (PMFBY) (Prime Minister Crop Insurance Scheme) Bima Yojna Higher subsidy, Better coverages for farmers http://agri-insurance.gov.in Portal for Crop Insurance in India Aims to have 50% penetration by 2019 Widely accepted by State Governments Focus on use of technology and operating effectiveness Crop Insurance App Launched for Farmers in India www.actuariesindia.org 5

Overview Agriculture has become the 3rd largest line of business for Insurers (after Motor & Health) Gross Premium >US$3 B# Likely to become 2nd largest in next 3 years Highest Reinsurance spent due to large quota shares and stop loss treaties 5 Government owned Insurers and 13 Private Insurers allowed to underwrite Sum Insured > $30B# The farmer share of premium- One Season One Rate Kharif 2% Rabi 1.5% Farmers Insured > 50 Million# The gap between the actuarial premiums and the rates payable by farmers would be fully met by the government. There is no upward limit on government subsidy. # Market Estimates Only www.actuariesindia.org 6

Overview Pricing approach is recommended in scheme framework however Insurers can adopt alternate approach based on their risk management Reserving is to be done in accordance with various IRDAI Regulations and Risk Management of Insurer Recent Regulatory Changes:- In Solvency Calculation Credit of Reinsurance has been increased to 50% as compared to 30% earlier Premium Receivable can be recognized if pending up to 1 year as compared to 180 days earlier www.actuariesindia.org 7

Professional Issues for Actuaries in Crop Why are Professional Challenges of Actuaries in Crop Insurance unique? Challenges faced by Actuaries in Crop Insurance Applicable Regulations, Guidance Notes, Professional Standards Case Study # 1 Pricing Case Study # 2 Reserving Case Study # 3 - Learnings from Africa www.actuariesindia.org 8

Why are Professional Challenges of Actuaries in Crop Insurance unique? Business has grown too big too fast! Lack of long series credible data and established models for pricing and reserving Highly Volatile class of business By 2019 it is expected that Crop Insurance premium in India will cross $4B Unusual high dependence on Reinsurance capacity Inadequate technical understanding of underlying risks such as weather, yield, agriculture science etc. Government Business tender driven sourcing Claims Assessment also in Government hands Retentions are not more than 20%-25% www.actuariesindia.org 9

Challenges faced by Actuaries in Crop Insurance Data Availability Government remains the primary source of yield data Yield data at granular level Data Gaps Completeness and Accuracy of data available Lack of credible and comprehensive Crop Insurance pricing models for Indian market Lack of persistency / renewal of business as it is yearly tender driven Frequent policy changes by the Government Catastrophic risks in Crop Insurance Less innovation in product features for changing climate as compared to improvements in other countries Crop Cutting Experiments limitations Financial illiteracy among the farmers about product design Enough training to conduct CCEs Complex product design Reliability and validation of yields from CCE and Weather stations Basis Risk for weather based insurance Moral hazard and adverse selection www.actuariesindia.org 10

Applicable Regulations, Guidance Notes, Professional Standards APS 21 Appointed Actuary and General Insurance Business Guidance Note 31 - Financial Condition Assessment Report for General Insurance Companies IRDAI Appointed Actuary Regulations IRDAI (Assets, Liabilities and Solvency Margin of Insurers) Regulations IRDAI (General Insurance Reinsurance) Regulations IRDAI (Actuarial Report and Abstract) Regulations IRDAI Circular on Corporate Governance www.actuariesindia.org 11

Key Messages from APS 21 : Appointed Actuary and General Insurance Business An Appointed Actuary should ensure, so far as is within his / her authority, that the general insurance business of the company is conducted on sound financial lines and monitor any action / practice, which in his / her opinion, is unfair and likely to be prejudicial to the interests of the policyholders. The Appointed Actuary shall certify the IBNR reserves and the premium rates as stipulated in the regulation. The Appointed Actuary must satisfy himself that premium rates for new business or renewal of existing business are fair, i.e., are neither excessive nor inadequate, that is to say sufficient in due course to enable the company to meet its liabilities. Appointed Actuary should be satisfied as far as possible that the data are accurate, reliable and consistent. If there are any doubts on the data, the Appointed Actuary is expected to seek assurance from the company as to their accuracy and completeness. The Appointed Actuary must review the reinsurance arrangements from time to time and consider alternative approaches with regard to retentions and type[s] of reinsurance arrangements www.actuariesindia.org 12

Key Messages from GN31 The Appointed Actuary should check the reasonability and appropriateness of the data and information received for FCAR preparation. The Appointed Actuary should record the inconsistencies observed in the data and explain how the inconsistencies might have impacted the analysis performed. The Appointed Actuary should analyze the adequacy of premium for all LOBs. The Appointed Actuary should comment on the appropriateness of the assumptions underlying the reserving methodology used and any significant movement between closing of accounts and FCAR reporting date should be explained www.actuariesindia.org 13

Technical Matters Pricing Reserving www.actuariesindia.org 14

Pricing Data Crop wise yield data at the insurance unit level is obtained Generally the source of the data is Government Various data validation checks are applied Alternate approaches are adopted for missing and/or erroneous data points Data at least for last 10 years is recommended however larger the time series better it is Threshold Yield It is calculated as per methodology defined in PMFBY framework Typically data for last 7 years and any 2 calamity years within that is taken for calculation Trending / Detrending Various approaches are adopted however not encouraged if data series are not long enough Burning Cost Calculation Calculated by taking average of expected loss cost for each crop and notified Insurance unit District level burning cost is calculated by taking the weighted average Risk Premium Various loadings are done for Catastrophic risks, data limitations, volatility, pre and post harvest covers, multi year tenders, weather forecasts Final Premium Loadings are done for expenses, cost of capital etc Usually 75% is the targeted portfolio priced loss ratio www.actuariesindia.org 15

Reserving Valuation of Liabilities to be done in accordance with IRDAI Regulations It s a short tailed business Not enough quality data for all the crops for reliable analysis Loss experience is very volatile. Relevant quality data is not available for Stochastic reserving model. Commonly used methods are Chain Ladder,BF and ULR . Basic assumption of chain ladder method is that the claim settlement patter in past will repeat in the future. However most of the crop insurance claims were paid subject to the subsidy receipt from the government. Claims are settled quickly when subsidy has been received and claims settlement is delayed in case the subsidy is awaited. This primarily makes claims settlement inconsistent from quarter to quarter, violating the basic premises of chain ladder method. Advantages of ULR Method are: ULR estimates for different product and season were available from claims department; Easy to implement; Not dependent on speed of claims settlement; It embeds the catastrophe claims information through ULR. www.actuariesindia.org 16

Professional Issues for Actuaries in Crop Case Study # 1 Reserving Case Study # 2 Pricing Case Study # 3 - Learnings from Africa www.actuariesindia.org 17

Case Study#1 : Reserving SITUATION An Insurer whose solvency is almost near to minimum solvency has written significant amount of Crop Insurance business in coastal and drought prone areas of India IMD has given positive forecast of the monsoon basis which management has asked the Actuary to consider the practical view while valuing the liabilities related to crop insurance Management expects that this year loss ratio from their crop business won t cross 60% and there won t be any Natural Catastrophe losses. There are no credible yield forecast models available. www.actuariesindia.org 18

Case Study#1: Reserving APPROACH The Actuary is responsible to ensure that underlying assumptions and methodology of reserving is sound. Since the insurer has written most of the business in cyclone and drought prone risks areas hence the Actuary needs to ensure that such catastrophic risks are properly priced and reserved. The Actuary can also take view of external expert judgements subject to proper documentation of the same. www.actuariesindia.org 19

Case Study#2: Pricing SITUATION An Insurer which is about to go for IPO wants to increase its topline (premium) significantly via crop insurance business to make the IPO attractive for investors As the business is tender driven and insurer with lowest premium rates win the business hence management has asked the Actuary to price the tender competitively to ensure that tender is won by them. Management wants to quote rates lower than the last year rates as the loss ratio last year was below 75%. Further, management believes that since more than 85% of the business is Reinsured they don t need to worry about of their financial health. However the Actuary noted that:- Credible long series data is not properly available The States in consideration have history of high loss volatility due to drought IMD forecast for monsoon is not very positive Reinsurance protection and capacity costs have increased as compared to last year www.actuariesindia.org 20

Case Study#2: Pricing PROFESSIONAL ISSUE AND APPROACH It is the responsibility of the Actuary to ensure that premium rates are adequate. Inadequate premium rates may endanger the solvency of the insurer. In case data limitations exist, then the Actuary is required to do further data investigations. The Actuary can also take views from experts such as agro-climatic scientists, weather experts etc. However, such views and any reliance on such views should be properly documented. The Actuary should incorporate proper loadings for catastrophe, data limitations, volatility, expenses etc, in the pricing. The Actuary should form his view of risk (premium rates) basis the assessment of underlying risks instead of advise from the management to acquire business. www.actuariesindia.org 21

Case Study#3:Learnings from Africa CONTEXT One continent, two insurance extremes Mega commercial farms Subsistence farmers Product overview 1 bag of seed @ a time 5% added to seed price Cover = input cost Mobile registration Pay-out to mobile Low or high rain Local weather station NO farm visits www.actuariesindia.org 22

Case Study#3:Learnings from Africa PROFESSIONAL ISSUES Professional design challenges Claims assessment Marketing, distribution Disseminating info At time of design, the actuary is the gatekeeper to ensure value and fairness www.actuariesindia.org 23

Case Study#3:Learnings from Africa APPROACH Our role in product design Use your intellect Use your common sense Listen to your inner voice of reason Our role in pricing, valuation & reporting Professional obligation to ensure the reasonability of your result Professional obligation to communicate with integrity and clearly It is in our hands how our stakeholders will view the profession in future Our role as individuals headed for success Beware of everybody does it like that Be aware of the trappings of success Be aware of the value of balance It is in my hands how my superiors, employees, peers, spouse, children & family will view me It is our choice on whether we ll be adding to the greater good or not www.actuariesindia.org 24

Conclusion and Way Forward www.actuariesindia.org 25

Conclusion and Way Forward Due to size, data limitations, volatility and distribution in the Crop Insurance business, the challenges for Actuaries in India are unique APS and GN issued require Actuaries to analyse adequacy of Premiums and appropriateness of the assumptions / methodology used for Reserving Regulatory environment of Actuaries in India in Crop Insurance is still evolving and hence the Institute can consider merit in releasing a technical and professional guidance note on Agriculture Insurance in India Learnings and experiences from other countries in Crop Insurance can also be considered www.actuariesindia.org 26

Thank You www.actuariesindia.org 27