Low Performing Endowments By Yogita Rawat, Himanshu Bhatia, Ranjan Gupta & Swati Gupta Guide : Mr. Suresh Sindhi 22nd Indian Fellowship Seminar Indian Actuarial Profession Serving the Cause of Public Interest

Agenda Case-Study: Background Underperformance of Endowments: Industry Perspective Underperformance of Endowments: Possible Reasons Perspective1: Actuaries are responsible for current Underperformance: Possible Reasons Perspective2: Another perspective: Actuaries are not responsible for current underperformance: Solution & Summary www.actuariesindia.org

1. Case-Study: Background Need consideration of two aspects of the case study: Actuaries working in life companies are responsible for the current underperformance of endowments both with profits and unit-linked, by not being involved enough in the projection process, and by non transparent pricing hence causing misery and disillusionment to many. Should the Actuarial Profession take on a more general role to whistle blow when we see possible future general problems in areas where it is accepted we have knowledge (particularly life and pensions business)? www.actuariesindia.org

2. Underperformance of Endowments: (Industry Perspective) Outlook I: Policyholders’ Perspective Returns from endowments lower than what was being promised (illustrated) and priced for? Par Endowments {Lower Bonuses than promised & priced} & Unit Linked Endowment Policies {Lower Benefits than illustrated in form of benefit illustration} Outlook II: Insurance company’s perspective: Lower Actual profit margins/ Lower profitability from endowments & Non achievement of Business plans www.actuariesindia.org

3. Underperformance of Endowments: (Possible Reasons) Low Investment returns Expense overruns including expense inefficiency & allocation (Par Business) Market conditions supplemented by high guarantees at the start of policy start and Guarantees charges Low Surrenders; in case of lapse supported products, High surrenders affecting investment returns Pricing Issues: Relative performance with respect to sales illustration Product designs as compared to other market solution Low business volumes; expense inefficiency Competitors' aggressive pricing www.actuariesindia.org

Are Actuaries working in life companies responsible for current underperformance? www.actuariesindia.org

4) Actuaries are responsible for current Under-performance: Reasons 4.1 Non Involvement in Projection Process 4.2 Non Transparent Pricing 4.3 Professional Obligations 4.4 Regulatory Obligations www.actuariesindia.org

4.1 Responsibility of Actuaries: Projection Process Non Involvement in PROJECTION PROCESS Projection of all pricing assumptions including Investment, Expense & bonus loading Withdrawals Projections of other Business & corporate plans Business volume & its subsequent effects on expense & other assumptions Business profitability www.actuariesindia.org

Responsibility of Actuaries: Projection Process Lack of Proactive approach towards investment return projections i.e. strategy and investment function (role of investment actuary) Lack of Continuous dialogue between Investment, Actuarial and risk teams i.e. lack of Involvement in the projections of long term best estimates of interest rate & bonus rate declarations Non-Harmony between experience rating and pricing at regular pace Allocation of expenses(split between par and non par fund) Competition (guaranteed benefits reasonably supported by projections) High initial guarantees www.actuariesindia.org

Responsibility of Actuaries: Projection Process…contd.. Lack of continuous dialogue between marketing, business planning team & Actuaries Lack of involvement between operational & actuarial functional w.r.t. surrenders Lack of involvement between Operational & actuarial functional www.actuariesindia.org

4.2 Responsibility of Actuaries: Non Transparent Pricing NON TRANSPERENT PRICING –APS 5 No standard/transparent approach to calculations of Asset share & hence bonuses in case of par business Business projections based on unachievable plans based on current conditions Hidden Charges in case of ULIPs Clear communication in form of benefit illustrations & other demonstrations Link between benefits flowed & other market conditions applicable (Especially if benefits linked to index/other benchmarks) www.actuariesindia.org

4.3 Responsibility of Actuaries-Professional Obligations Responsibility placed to Actuaries by the virtue of professionalism GN6-Management of participating life Insurance Business with reference to distribution of surplus APS 1: “Every actuary has a responsibility to the profession and his/her responsibilities to a client must be consistent with this. An Appointed Actuary is however also in a special position as he/she has statutory responsibilities to the IRDA.” “The Appointed Actuary must advise the company keeping in view the provisions contained under Section 49 of the Act as to how much of any surplus be distributed to policyholders or transferred to shareholders and recommend the allocation thereof. “ GN 22: Reserving for Guarantees in Life Assurance Business www.actuariesindia.org

4.4 Responsibility of Actuaries-Regulatory Framework Responsibility placed to Actuaries by current regulatory framework IRDA (Appointed Actuary) Regulations, 2000:submittion of the actuarial advice in the interests of the insurance industry and the policyholders IRDA (PPI) Regulations,2002: Proper system in place to protect policyholders IRDA (Distribution Of Surplus) Regulations, 2002: responsibility to advise BODs on bonus distribution IRDA (Assets, Liabilities And Solvency Margin Of Insurers) Regulations, 2000: puts responsibility to maintain solvency at all time Various circulars & guidelines issued from time to time www.actuariesindia.org

5)Another perspective: Actuaries are not responsible for current underperformance: Systematic risk: No control over investment market Lack of hedging instruments & other regulatory restrictions Limitations of modeling and hypothetical modeling Current lower Returns in investment :Surrenders responsible to the extent it is responsible for deviation in investment strategy & immediate investment losses Responsibility of Other specialist functions Lower marketing volumes: Industry Issue, Lack of Insurance awareness www.actuariesindia.org

6. Solution Role of whistleblowing as required by the virtue of professionalism and regulatory framework & mandated by other stakeholders of insurance company Active Investment strategies & Investment decision, Active involvement with other specialists so as to protect policyholders Involvement in all major business development, risk, corporate governance committee. Providing its knowledge & depth of working experience: Long run projections based on stochastic modeling Reasonable guarantees well supported by above projections Lower initial benefits to be supplemented by proper marketing www.actuariesindia.org

7. Summary & Conclusions “The essence of a profession lies in upholding its standards, technical and ethical, in the public interest”. Knowledge & actuarial abilities needs to be channelized towards role related to future projections with involvement of other specialists Transparent pricing Whistle blowing: A professionally required obligation www.actuariesindia.org

“Time for two way discussion www.actuariesindia.org