Indian Actuarial Profession Serving the Cause of Public Interest 27th India Fellowship Seminar Cyber risk and Terrorism risk - Challenges in pricing Increasing insurance penetration through POS - challenges and solutions Presenter: Richa Mathur Guide : Bikash Choudhary Supervisor: P.A. Balasubramanian, FIAI 1st June 2017 Mumbai Indian Actuarial Profession Serving the Cause of Public Interest

Cyber risk and Terrorism risk - Challenges in pricing Agenda Cyber risk and Terrorism risk - Challenges in pricing Current Scenario of Indian Insurance Industry Regulatory Framework and Timelines Non Life and Health Life What is a POS Product POS Persons POS – an Opportunity Challenges and Solutions Supervisor: P.A. Balasubramanian, FIAI Shall quickly run through the topics I shall be covering (about ½ minute) 1

Insurance Penetration & Density Cyber risk and Terrorism risk - Challenges in pricing Insurance Penetration & Density Supervisor: P.A. Balasubramanian, FIAI The insurance penetration has started its northward journey is evident from the fact that it has increased from 3.3% to 3.44% on the back of various insurance schemes launched by the government. With objective to provide insurance cover to all, the Government launched Pradhan Mantri Suraksha Bima Yojna (PMSBY) and Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJBY) in 2015. However, despite the gentle rise in insurance penetration, which is percentage of insurance premium with reference to the Gross Domestic Product (GDP), it is still quite low, reflecting large untapped potential. Hence, to increase insurance penetration in the country, the industry needs more distributors to travel the last mile. To achieve this goal, what’s needed is a simple certification process for these distributors. IRDAI has acted on the demands of the industry to simplify the distribution network so that simple products can reach maximum people, by allowing for a new type of distributor, called the point of sale (POS) person who are authorised to sell only basic insurance products that don’t require complex distributors. By allowing more people to become distributors, penetration will increase, and insurance can be sold bundled with other products. For instance, a travel agent who sells tickets can also become an insurance POSP. This means that along with customising your travel, they will also be able to provide travel insurance policies. (2minutes) 2

Cyber risk and Terrorism risk - Challenges in pricing Non Life & Health Guidelines Oct 26, 2015 Circular on POSP: Nov 7, 2016 Govt. approved Crop Insurance Scheme through POS Jun 24, 2016 Addition of Products of Sale through POS –July 13 ,2016 Regulatory Framework – Non Life & Health To increase insurance penetration in the country IRDAI introduced ‘Point Of Sales (POS)’ regulations Cyber risk and Terrorism risk - Challenges in pricing Guidelines on POS Person - Non Life and Health : 26 Oct 2015 IRDA/lNT/GDL/ORD/183/10/2015 Circular on Guidelines on POS Person : 11 March 2016 IRDA/INT/GDL/ORD/047/03/2016 Govt. approved Crop Insurance Scheme through POS : 24 Jun 2016 IRDA/INT/CIR/PSP/123/06/2016 Addition of Products for Sale through POS Circular : 13 July 2016 IRDA/INT/CIR/PSP/139/07/2016 Revision in Guidelines on POS Person : 16 Mar 2017 IRDA/ lNT/ GDL/ PSP/058/03/2017 Supervisor: P.A. Balasubramanian, FIAI I shall now run through the journey the insurance industry has travelled and the POS regulations at different points in time The POS insurance sales channel was first suggested by IRDAI in October 2015 to motivate insurers to push more policies in an easier way. On 26 October 2015 IRDAI issued Guidelines on POS Person - Non Life and Health which defines the type of persons who shall solicit and market insurance policies as POSP, the eligibility criteria, process for appointment of POSP and the pre-underwritten insurance products they are authorised to sell. On 11 March 2016 IRDAI issued a circular on these Guidelines on POS Person - Non Life and Health wherein it expanded the range of products that can be solicited and marketed through POSP by non-life and health insurers. These included – Crop insurance with a sum insured limit of Rs.1 lakh per acre for all kinds of crops Hospital cash policy where a fixed benefit in the form of cash for everyday of hospitalization with a limit of Rs. 1 lakh per individual Critical Illness policy which covers 8-9 critical illness’s with the maximum sum insured limit of Rs. 3 lakhs per individual   Soon after on 24 June 2016 the Authority decided to include Govt. sponsored crop insurance schemes that can be solicited and procured through POSP of non-life insurers. These included PMFBY WBCIS CPIS IRDAI received requests by some insurers to further expand the list of products so as to have some parity between the products sold through CSC – SPV and those sold through POS. On 13 July 2016 the Authority issued a circular adding the following products that can be solicited and marketed through POSP of non-life insurers- Cattle/ Livestock Agricultural Pump set insurance Fire & Allied Peril Dwelling Insurance Crop Insurance – PMFBY , WBCIS , CPIS – without any limit on sum insured PMJSBY Recently, on 16th March 2017, the Authority revised the guidelines on Guidelines on POS Person - Non Life and Health by removing the condition of training from and passing of NIELIT examination and instead the General insurer including stand-alone health insurer or insurance intermediary proposing to engage the POS person shall conduct an in-house training of 15 hours, conduct an exam and issue a certificate to the successful candidates. The model syllabus was provided as an annexure to the circular. This circular was effective from 1st April 2017. The change was in line with a similar amendment made in February for POS dealing in life insurance products. (5 minutes) 3

P.A. Balasubramanian, FIAI Regulatory Framework – Life Regulations on POS Products and Persons: Nov 7, 2016 Modifications to Guidelines Feb 7, 2017 Circular on POS Database Feb 7, 2017 Guidelines on POS Product– Life Products : 7 Nov 2016 IRDA/ LIFE/GDL/222/11/2016 Guidelines on POS Person– Life Products : 7 Nov 2016 IRDA/ LIFE/ORD/GLD/223/11/2016 Modifications Guidelines on POS Person : 7 Feb 2017 Circular on POS Database : 13 Apr 2017 IRDA/ lNT/ POS/ GDL/ PSP/084/04/2017 Supervisor: P.A. Balasubramanian, FIAI Having seen the success of POS in the non-life space, the Authority added a fillip in providing easy access to Life Insurance products to people at large and to enhance insurance penetration and density. It issued the Guidelines on POS Person and Products for Life Insurance on 7 Nov 2016, defining the categories of POS Life products that can be sold and the channels allowed to solicit and market these products. On 7th Feb 2017, the Authority revised the guidelines on Guidelines on POS Person - Life by removing the condition of training from and passing of NIELIT examination has amended the procedure / qualification for being a POS person. (1 minute) 4

Cyber risk and Terrorism risk - Challenges in pricing POS Product – Non Life and Health The POSP can only sell the following pre-underwritten products :- Motor Comprehensive Insurance Package Policy for Two-wheeler, private car and commercial vehicles Third Party Liability (Act only) Policy for Two-wheeler, private car and commercial vehicles Personal Accident Policy Travel Insurance Policy Home Insurance Policy Any other policy specifically approved by the Authority Following additional products were included:- Crop Insurance – Government insurance schemes such as Pradhan Mantri Fasal Bima Yojna (PMFBY) Weather Based Crop Insurance Scheme (WBCIS) Coconut Palm Insurance Scheme (CPIS) Hospital Cash Policy – fixed benefit in form of cash for everyday of hospitalization with a limit of Rs.1 lakh per individual Critical Illness Policy which covers 8-9 CI with the maximum sum insured limit of Rs.3 lakhs per individual Cattle/ Livestock Agricultural Pump set Insurance Fire & Allied Peril Dwelling Insurance Cyber risk and Terrorism risk - Challenges in pricing This slide provides a snapshot of all the products that can be sold through a POS Person for Non-Life and Health. These are largely pre- underwritten products wherein based on the information provided by the prospect, the insurance policy is automatically generated by the system. The intervention required for such products is minimal and the training and examination for such persons could be of a lesser degree (1 minute) 5

POS Life Product These are Over the Counter, simple plain vanilla products in which each benefit is:- Simple to understand Stated upfront clearly Fixed/ Pre-defined Pure Term Insurance Product with or without return of premium Non-linked Non-participating endowment (money back feature allowed) “Any other product category” if permitted by the Authority Immediate Annuity with Return of Purchase Price on Death Only non-linked and individual insurance products Product names to be pre fixed with the word-POS(POS- Product Name) Inbuilt ADB rider allowed Certificate of compliance from the CEO and AA to be submitted along with product filing Existing products can be sold after suitable modification and approval by the Authority By definition a POS Life product is a simple plain vanilla type of product wherein each and every benefit is predefined and disclosed upfront clearly at the time of sale itself and is very simple to understand. The categories of products that can be offered under POS and the guidelines around the product design are specified by the Authority: Pure Term Insurance with or without return of premium for age groups 18 – 65yrs with a minimum Policy Term of 5 years and maximum sum assured of Rs. 25 lakh (without ADB rider) Non Linked Non Par Endowment Products with a policy term ranging from 5 to 20 years and maximum sum assured on death Rs. 10 lakh (excluding ADB) Under both these product categories, an inbuilt ADB rider is offered and there is a waiting period up to a maximum of 90 days from the date of acceptance of risks. These products are subject to only non-medical underwriting Immediate Annuity with return of purchase price on death (2 minutes) 6

Additional Features of POS Life Products Key Features Document (KFD) cum Proposal Form for POS Life Products Cyber risk and Terrorism risk - Challenges in pricing Proposal form to consist of two parts- Key Feature Document Proposal form Design Both the parts to be joined by perforation for the ease of separation KFD cum Proposal Form to carry Unique Reference Number on both parts Contents of KFD Cover all key benefits including but not limited to: Sum Assured on death Maturity benefit Surrender value Paid up value(if any) Exclusions Registered name and address of the life insurer with logo For POS Life Products there would be 2 parts of the ‘Key Features Document cum Proposal Form’ where the first part would be the KFD and the second part would be the Proposal Form. Both the parts are joined by perforation so that the KFD can be easily separated and given to the proposer / life assured for his record and the Proposal Form is preserved by the insurer for necessary processing. Every Key Features Document cum Proposal Form is required to contain a unique reference number on both parts (1/2 minute) 7

Entities Authorized To Sell POS Life Products POS Person Life Insurance Individual Agents Intermediaries authorized to solicit Life Insurance products Insurers directly POS-Person-Life Insurance As per the Guidelines on POS– Life Insurance Products dated 7th Nov 2016 the solicitation and marketing of these products is allowed to be done through 4 distribution channels, namely, 1.POS Person Life Insurance 2.Individual Agents 3.Intermediaries authorized to solicit Life Insurance products 4. And Insurers directly (1/2 minute) 8

Training & Certification Point of Sale Person (POSP) Cyber risk and Terrorism risk - Challenges in pricing Appointed by insurers and authorized insurance intermediaries Identification of POSP by Aadhar card no. or PAN card no. 18 years of age 10th standard pass In-house training of 15 hours for the POSP Conduct an examination on completion of training Written agreement with passed POS-persons for sale of POS-products Maintain a record of the training and examination for at least 5 years For POSPs engaged by intermediaries no commission is payable by the insurer For POSPs engaged directly by the insurer, commission as proposed in the product F&U and approved by Authority as applicable to individual agents is payable Appointment Eligibility Criteria Supervisor: P.A. Balasubramanian, FIAI Training & Certification In order to ensure faster certification of point of sale persons and to get such distributors on board quickly, the regulator has relaxed the certification programme by allowing the insurers or intermediaries hiring them to train and examine these individuals in-house. Accordingly, IRDAI has allowed in-house training by the insurer or intermediary engaging the point of sale persons. They will have to conduct an in-house training of 15 hours and an examination thereafter. The insurer or the intermediary will then issue a certificate and maintain the records for at least 5 years. IRDAI has prescribed a model syllabus for training purposes. The eligibility criteria is as simple as being 18 years of age and 10th standard pass. For POSPs engaged directly by the insurer, commission as proposed in the product F&U and approved by Authority as applicable to individual agents is payable (1 minute) Commission 9

Point of Sale Person – Life All proposal forms (physical or e-form) and policies to carry provision to record Aadhar card or PAN card number of sourcing POS-Person In case of sale through insurance intermediary, Aadhar/ PAN card number to be captured in Proposal Form and Insurer to capture the same with the policy Authority may consider the conduct of POS-Person as one of the factors while renewing the certificate of registration of the insurance intermediary Tagging of Proposal Form & Insurance Policy to POSP Compliance Life Insurers & Insurance Intermediaries shall make suitable provision in their Policy Administration System to capture Aadhar card or PAN card number of POS Person – Life Insurance Authority shall specify the format and manner of maintaining the records and filing returns which the insurer and the intermediary shall maintain in electronic form which can be accessed by the Authority on a remote location basis Formats shall give the number of policies sold and the premium collected by POSP on a monthly basis The Authority has specified guidelines on the compliance and monitoring of POS Persons POS Persons are appointed by insurers and authorized insurance intermediaries and are identified by Aadhar card no. or PAN card no. captured in the Proposal Form IRDAI has specified the format and manner of maintaining the records and filing returns which the insurer and the intermediary shall maintain in electronic form which can be accessed by the Authority on a remote location basis The Authority may consider the conduct of POS-Person as one of the factors while renewing the certificate of registration of the insurance intermediary (1 minute) 10

Cyber risk and Terrorism risk - Challenges in pricing POS – An Opportunity! Facilitate the growth of insurance business to increase insurance penetration and density Simplified certification process for agents enables easy sales and policy acquisition Helps to create brand in rural areas / small cities in the long term Relaxed qualification for POS-persons Instant issuance will be appreciated by the policyholder Help reduce per policy cost and making products competitive Waiting period up to maximum 90 days from the date of acceptance of risk Cyber risk and Terrorism risk - Challenges in pricing Currently life insurance policies are designed such that each policy is underwritten for a specific individual-which makes mass-selling difficult. Taking into account the amount of time and effort invested in sourcing policies individually, IRDAI's guidelines on POS give room for the creation of a product with greater flexibility and a different distribution channel. Given that these POSP have a lower qualification and training threshold, compared to other insurance distributors such as agents, brokers and corporate agents, they are authorised to sell products which don’t require a lot of underwriting. The good news is that now even intermediaries can appoint POS persons. This means the industry will be able to increase its distribution network with minimum investment. It allows a customer to buy insurance at an affordable premium over the counter in just few minutes. This should facilitate the growth of insurance business in the country and enhance insurance penetration and insurance density. The process of appointing POS for life insurance industry will simplify the distribution network so that simple products can reach maximum people. Moreover, the TAT for issuance of the policy/acceptance of risk and communication of acceptance is not more than 2 working days from the date of collection of proposal at the point of sale, thereby ensuring instant issuance and increasing policyholder satisfaction. (2.5 minutes) 11

Challenges No medical underwriting will lead to adverse selection against the company TAT for issuance of the policy/acceptance of risk and communication of acceptance: Not more than 2 working days (excluding holidays)from the date of collection of proposal at the point of sale In case of rejection of proposal for any reason, the refund of payment to be done to the proposer/life assured within 7 days from the date of decision 1. As per the IRDAI product specifications for POS products no medical underwriting is required. This may hence lead to adverse selection against the company and the company may attract a large pool of bad risks. It could also lead to an increase in fraudulent claims and higher than expected claims thereby reducing profits and may even lead to losses. Moreover, keeping high margins in pricing to allow for the anti-selection risk will make the product uncompetitive.   2. The guidelines state that the TAT for issuance of the policy/acceptance of risk and communication of acceptance should not be more than 2 working days. This could indeed pose to be a major challenge for insurance companies given – a. the pressure to make a quick decision on the acceptance / rejection of the policy b. The policies are on a centralized basis and sold through Accept / Reject process , thereby making a 2 day TAT quite challenging c. Due to the limited time available with the companies to make a decision on the issuance of a policy, it may i. Find itself accepting a large number of adverse risks and increasing the risk of anti- selection ii. Misinterpretation of data and an increase in fraudulent claims iii. Rejecting profitable contracts , in order to be risk averse    This risk is slightly mitigated due to the waiting period clause of 90 days from the date of acceptance of risk. However, for early deaths where the risk was not adequately priced for may result in losses for the insurer. 12

Challenges Risk of Mis-selling due to relaxed eligibility requirement New market with no experience Lapses would be uncertain Decision to make modifications to existing products or file new products 3. The risk of mis-selling may also increase due to relaxed eligibility requirement. Given that these individuals have a lower qualification and training threshold, and do not have to go through the rigorous examinations like IC33 IC38, compared to other insurance distributors such as agents, brokers and corporate agents, there is a potential risk of increased mis-selling.   4. Another significant challenge for the industry is that sale of products through the POS channel is new and it’s a new market altogether with no experience. The lapse experience for these products and this channel is hence uncertain. The POS products have low ticket size and hence lapsation is indeed a significant risk, with the insurer making losses on early lapses. Moreover, there are no specific branches for the POSP where they could be reached out to and this further increases the risk for the insurers. 5. Another practical challenge which companies face while designing and pricing POS products is the decision on whether to launch a new product or modify an existing product to meet the POS requirements. For e.g. if the same product is to be sold through POSP and other distribution channels then there may be issues on deciding features like waiting period (90 days for POS product), limits on maximum sum assured (25lakhs for term and 10lakhs for Non Linked Non Par Endowment), underwriting requirements, etc. 6.The insurers will also need to make changes to its Policy Administration System to capture all details with regard to the POS channel and consider all operational issues of introducing the new channel. It needs to consider the time, cost and resources required to develop, maintain and monitor this channel. (Total 7minutes on Challenges – Life) Changes required in Policy Administration System 13

Solutions Supervisor: P.A. Balasubramanian, FIAI Stringent non medical underwriting Monitor experience Product Experience POSP - Authority may consider the conduct of POS-Person as one of the factors while renewing the certificate of registration of the insurance intermediary Tracking of POS through centralized database based on IRDAI circular dated 13th April ‘17 Identify products in current portfolio which could be modified Cost effective Ease in obtaining regulatory approval Develop systems and build robust framework and controls to meet TAT and minimize operational errors Cost vs Benefit Analysis Waiting period up to maximum 90 days from the date of acceptance of risk Supervisor: P.A. Balasubramanian, FIAI It is interesting to note that all the challenges under POS are opportunities in themselves. 1. In order to overcome the risk of anti-selection and challenge of increased adverse selection against the company, insurers must strengthen their non-medical underwriting   2. The waiting period up to maximum 90 days from the date of acceptance of risk also provides some relief by reducing the number of claims from early deaths and fraudulent claims. 3. Insurance companies must regularly monitor not only the experience of the products sold through POS but also the conduct and experience of the POSP. 4. The PoS persons will be recognised through their Aadhaar or PAN cards, since these will be mentioned in all policies they sell. The Authority may consider the conduct of POS-Person as one of the factors while renewing the certificate of registration of the insurance intermediary 5. Insurance companies must identify the products in their existing portfolio which could be modified to design and price POS products in the most efficient and cost effective way 6. Companies must focus their efforts and resources in developing systems and building robust framework and controls to meet TAT and minimize operational errors POS is hence an extremely attractive opportunity which all insurers must capitalize on to drive towards increasing insurance penetration and density in the Indian market. (4 minute) 14

Thank You! Supervisor: P.A. Balasubramanian, FIAI