Professionalism issues in estimation of Commercial Vehicle Third Party Reserves Institute of Actuaries of India Serving the Cause of Public Interest Indian Actuarial Profession Shruti Saxena Vaibhav Tyagi Varadaprasad Jagannathan Guide: Khushwant Pahwa

Evolution of Commercial TP Business in India Technical Issues in Reserving Professional Issues in Reserving Recommendations to address professional issues Agenda

Pre-IMTPIP*IMTPIP Post dismantling of IMTPIP and formation of declined risk pool Pre April Post April 2012 (*) India Motor Third Party Insurance Pool Evolution of Commercial Vehicle Motor Third Party

Evolution of Commercial TP Business in India Technical Issues in Reserving Professional Issues in Reserving Recommendations to address professional issues Agenda

Long tail line of business ⁻Significant delays in claim intimation and settlement ⁻No cap on reporting delay and court settlements may take years No limit of liability ⁻There is no upper cap on claim amount ⁻The award is determined by the court based on factors like income, age etc. Tariffed price ⁻Insurance regulator determines the price of the product ⁻May not reflect the true cost of claims and expenses Technical issues concerning third party liabilities

Technical issues concerning third party liabilities (continued…) Limited experience ⁻Loss development not complete even for the earliest years ⁻Public sector/TAC data not available in public domain ⁻Quality & relevance (changing claim practices) issues in historical data Dynamic external environment - claims inflation ⁻Sarla Varma, Rajesh vs Rajbir changed basis of determination of compensation ⁻Increasing awareness

Specific issues in valuation Pre - India Motor Third Party Insurance Pool (IMTPIP) Data quality issues including credibility of claims and exposures Very little true IBNR development, material IBNER development Not enough prior year data available to estimate development Reliance on external sources ⁻Claims’ manager estimates ⁻Industry information Judgemental estimates of ULR Materiality of the book size, and representativeness with current book

Specific issues in valuation India Motor Third Party Insurance Pool Estimate of pool ULR based on pool actuary’s assessment of data Post dismantling, the policies written by company devolved How representative is the pool ULR of the company’s retained book of business Actuary is required by IRDA to conduct periodic valuation of the run-off book Reliance on development of pre-IMTPIP data Is this data representative: Mix and claim practices Management appetite to carry a higher(lower) estimate from GAD

Specific issues in valuation Post IMTPIP Valuation of new book of business written from April 2012 The company’s underwriting pattern will change given the emphasis on profitability Settlement practices may change since pooling mechanism has ceased Greater emphasis on cost containment Impact of declined pool Works on underwriting year clean cut basis Reconciliation of pool actuary’s ULR vs. company’s estimate Data sufficiency issues

Other issues in valuation Reliability of available information ⁻Case reserve estimates may not be reliable indicator of settlement value Complexity of factors involved in settlement Changes in court awards not reflecting across board Use of standard reserves for claims below a threshold or of a particular type (e.g.injury) Closed without payments –potential for re-opening ⁻Payments may not be true reflection of changing trends Recent (underwriting/accident) year paid data will be negligible Current payments of old intimations Reflecting salary levels prevalent then Changes in interest rate Is past inflation likely to continue into the future

Evolution of Commercial TP Business in India Technical Issues in Reserving Professional Issues in Reserving Recommendations to address professional issues Agenda

Professionalism issues- Standards for advice PCS 3.1: Actuaries must not give advice, unless: a) satisfied of personal competence in the relevant matter, or b) acting in co-operation with, or with the guidance of, someone (not necessarily an actuary) with the requisite knowledge and experience Appointed Actuary and their team need to build expertise in valuation ₋Full time appointed actuary and team with experience developing ₋Familiarity with the business plan of the company and changes ₋Familiarity with regulatory environment and its context Thorough knowledge of legal process and legislative environment ₋Need to work with legal experts in MACT as well as in claims settlement

Issues for actuaries valuing liabilities Lack of experienced actuaries in General Insurance ⁻Indian non life actuaries have limited experience Actuarial valuation of IBNR required only from FY 06 Private insurance companies relatively new and growing book Limited expertise for peer guidance/ review ⁻Ability to take and justify judgement calls True IBNR development IBNER provision Estimates of future inflation for estimating loss ratio for budgeting ⁻Cannot consult peer actuaries on account of confidentiality considerations Could be construed as competitive information

Professionalism issues- Standards for advice PCS 3.4: An Actuary must consider the extent to which it is appropriate to carry out investigations to assess the accuracy and reasonableness of any data being used. The advice should normally include an explanation or qualification if the actuary has any reservations about the reliability of data Given the long tail nature of the liabilities the actuary will need historical data Is this data available and credible? Company data vs. IIB data Is this data representative of the current context: business mix, settlement processes Information on court award inflation and exoneration trends may be anecdotal Extrapolating regional trends at national level

Professionalism issues- Standards for advice PCS 3.5: Advice should normally include sufficient information and discussion about each relevant factor and about the results of the actuary’s investigations to enable the intended recipient of the advice to judge both the appropriateness of the recommendations and the implications of accepting them. Further, the actuary should… Detailed Documentation of valuation exercise is critical Validate assumptions through detailed analysis of experience exercise Appropriate communication of assumptions with key stakeholders Use of actuarial judgement and its impact on the analysis Continuous monitoring of emerging experience and communicating its impact with the stakeholders

Professionalism issues- Standards for advice PCS 3.6: An Actuary giving advice which is formulated in the interests of a particular client must ensure that the client is aware that the advice is not of broader applicability than intended by the actuary, nor is it necessarily the advice that would be given to another client… The ULR of old book, IMTPIP, new book and the declined pool will all have to be estimated separately Assumptions, data, methods of estimation will vary according to the context CV-TP liabilities of the pool are fixed across the industry, however individual company books may develop differently ULR for one company may not be representative of ULR for another company or the industry, though these tend to be compared

Professionalism issues- Financial interest PCS 6.3: Financial rewards which are large in relation to the professional time spent, including success related or contingency fees, can threaten objectivity…Accordingly, actuaries are advised to exercise extreme care… Actuary as an employee of a company may have financial interests linked to the financial health of the firm Profit linked Bonus, Stock options, etc. Is it appropriate for actuary to accept significant bonus linked to financial performance of the company, and does it impact objectivity Governance structure How are the KPI’s set and what is the reporting structure (CFO, CUO)

Professionalism issues- Conflict of interest PCS 5.1: Clients are entitled to assume that advice given by an actuary is unaffected by interests other than those of the client, taking account of any identifiable professional or legal duty of care of the client in respect of a third party The valuation of the declined pool is conducted by Actuaries who are also Appointed Actuaries of GI companies Their view on the pool ULR has material impact on the financials of their company

Other professional issues for actuaries valuing CV-TP liabilities Third party liabilities tend to be large part of overall claims reserves ⁻Any change can impact company’s profitability materially Management sensitivity and scrutiny Communicating effectively is very essential Long tail of development ⁻Succeeding actuary will have to manage the legacy of his predecessors ⁻PCS 4.3: May lead to professionalism breach issues between actuaries

Professionalism issues- breach If any member has reason to believe that another member is understating the reserves (wilfully or otherwise) ⁻Eg. Actuaries in the regulatory body or reinsurance companies ⁻Members in other insurance companies (through may be confidentiality issues here) PCS 4.3.3: in deciding whether a breach of guidance is material, the member may need to exercise judgement… PCS 4.3.4: if the member decides that the nature of the breach is such that action is called for, the member must, in the first instance… PCS 4.3.5: If the member does not consider a discussion to be appropriate, or if the matter is not resolved …

Other issues PCS 7: Appointment of New Advisor ⁻Company decides to get peer review done by an independent actuary Involvement of members of overseas Actuarial institutions ⁻Valuation of reserves by overseas holding company’s actuary …and their potential influence on the local actuary in setting reserves ⁻The largest liabilities pertain to IMTPIP which valuation has been done by Government Actuary Department of United Kingdom ⁻Peer review by an overseas actuary

Evolution of Commercial TP Business in India Technical Issues in Reserving Professional Issues in Reserving Recommendations to address professional issues Agenda

Recommendations Institute of Actuaries of India could assist in building awareness On Technical issues… ⁻Facilitate peer to peer interactions in a neutral setting ⁻Build and share technical resources ⁻IIB could build and share industry loss triangles as reference for company’s to consider On Professional issues… ⁻Issue guidance notes specifically relating to third party liabilities valuations ⁻Conduct seminars to facilitate discussions amongst members on issues involved ⁻Sensitize company managements (through Council) and regulator

Thank you