1. Cyber risk and Terrorism risk - Challenges in pricing
27th India Fellowship Seminar
Cyber risk and Terrorism risk - Challenges in pricing
Topic:
General Insurance – Changes in reserving methods as per IRDAI ALSM 2016, Impact on solvency and reserving
Guide Name:
Mr. Palreddy Vishnuvardhan
Presenters Names:
Girinker Aggarwal
Varun Jain
Deepanjali Talwar
Supervisor:
P.A. Balasubramanian, FIAI
Date: 1st June 2017
Mumbai
Indian Actuarial Profession
Serving the Cause of Public Interest

2. Indian Actuarial Profession Serving the Cause of Public Interest
Agenda
Overview of ALSM regulations currently in place (2016)
Changes Related to Reserving
Changes Related to Solvency
Indian Actuarial Profession
Serving the Cause of Public Interest

3. Indian Actuarial Profession Serving the Cause of Public Interest
Overview of IRDAI ALSM 2016
Key Areas of consideration under ALSM 2016
Valuation of Assets
Estimation of Liabilities
Determination of Solvency Margin
Indian Actuarial Profession
Serving the Cause of Public Interest

4. Indian Actuarial Profession Serving the Cause of Public Interest
Valuation of Assets
List of specific assets which should be placed with zero value
Outstanding balances and premiums in India, not realized within 30 days
Premium receivables from State/Central governments, not realized within 180 days
Reinsurance balances outstanding for more than 365 days
Co-insurer balances outstanding for longer than 90 days
Furniture, fixtures, stock and stationary …… etc
Valuation of all other assets in accordance with Regulations and instructions issued by the Authority regarding
Preparation of Financial Statements, Auditor Reports
Other forms of Capital and Investments
Any other regulations applicable
Indian Actuarial Profession
Serving the Cause of Public Interest

5. Estimation of Liabilities (1)
CLAIMS RESERVES
Set across 28 lines of businesses, classified into
Motor
Health
Personal Accident
Travel
Outstanding Case Reserve (OS Reserves)
Estimated using a ‘case by case method’, and amount is to be provided in full
Can use a statistical method
Incurred But Not Reported (IBNR) Claims Reserve
Estimated using actuarial principles and methods, certified by the AA
Calculated by each year of occurrence and summed to total
Assessed on both NET and GROSS of reinsurance basis
Should not discount the estimated future development of the paid claims
Fire
Marine
Other Miscellaneous
Indian Actuarial Profession
Serving the Cause of Public Interest

6. Estimation of Liabilities (2)
PREMIUM RESERVES
Unearned Premium Reserve (UPR)
Set using prescribed formula, certified by CFO and Statutory Auditor
Premium Deficiency Reserve (PDR)
Calculated using actuarial principles
Maintained at the entity level
Unexpired Risk Reserve (URR) = UPR + PDR
OTHER LIABILITIES
Provision for bad and doubtful debts
Reserves for declared/recommended/outstanding dividends
Provision of taxation
Foreign Exchange Reserves
Sundry creditors and other business expenses
Indian Actuarial Profession
Serving the Cause of Public Interest

7. Determination of Solvency Margin
AVAILABLE SOLVENCY MARGIN (ASM)
Excess of assets over liabilities, subject to key specific adjustments
Minimum ASM requirements are set in the regulation
REQUIRED SOLVENCY MARGIN (RSM)
Estimated for 9 lines of business using a standard formula, taking into account
Gross and net written premiums, and gross and net incurred claims
Taking higher of premiums-based and claims-based RSM calculations
Aggregating individual RSMs for all lines into the INSURER’s total RSM
SOLVENCY RATIO
Ratio of ASM to RSM
“Control level of solvency” is set at 150% solvency ratio, breaching which can lead to regulatory actions
Indian Actuarial Profession
Serving the Cause of Public Interest

8. Changes Related to Reserving
Indian Actuarial Profession
Serving the Cause of Public Interest

9. Detailed Business Split for Reserving
Reserves needs to be set for 28 lines of business, increased from 10 lines previously
Motor is now split into 8 lines across OD (3 lines) and TP (5 lines)
Motor OD and non-pool TP need to reserved under 3 lines each – private cars, two wheelers and commercial vehicles
Motor TP Pool now needs to be reserved separately for ‘TP Pool’ and ‘Declined Pool’
Liability is now split into 3 lines
Product Liability, Liability Insurance and Worker’s Compensation
These need to be reserved separately
Indian Actuarial Profession
Serving the Cause of Public Interest

10. Detailed Business Split for Reserving
Health is now split into 4 lines
Individual, Group-Government, Group-Employer and Group-Other
These need to be reserved separately
Recognition of new lines of business
Personal Accident, split into – Individual, Group-Government and Group-Other
Crop Insurance
Travel Insurance
Weather Insurance
Credit Insurance
Rural Insurance is NOT being specified as separate line anymore
Indian Actuarial Profession
Serving the Cause of Public Interest

11. Estimating OS Reserves
Actuaries have the provision of using statistical methods for the calculation of reserves for outstanding claims
Need to provide justification for the same
Appointed Actuary will need to certify the reserves if this method is used
Material changes in claims handling practices, leading to changes on outstanding claims reserve pattern should be taken into account and reported
Indian Actuarial Profession
Serving the Cause of Public Interest

12. Indian Actuarial Profession Serving the Cause of Public Interest
Estimating IBNR
IBNR shall be calculated using multiple actuarial methods
Loss Ratio Method
Basic Chain-Ladder Method (on Incurred and Paid)
Bornhuetter-Fergusson Method (on Incurred and Paid)
Frequency-Severity Method
Rationale for selecting any of the above methods/a different method
Detailed notes if estimates from different methods differ significnatly
Estimating the IBNR for a line of business
IBNR needs to be calculated for each year of occurrence
Negative IBNR in any year should be ignored
Sum of all years’ IBNR = total IBNR
IBNR shall be calculated on a Gross and Net of reinsurance basis
You can see there are many possibilities, and no single right method. Any good actuary will want to use as many legitimate methods for which reasonably good information and time is available, and compare and contrast the estimates from these methods. As with pricing, it is often informative to see the spread of estimates derived from different approaches. This helps us understand better the range and distribution of possibilities, and may give us some idea of the sensitivity of our answers to varying assumptions and varying estimation methodologies
Indian Actuarial Profession
Serving the Cause of Public Interest

13. Indian Actuarial Profession Serving the Cause of Public Interest
Estimating URR
UPR to be calculated for existing business, needs to be certified by CFO and Statutory Auditor
PDR is to be calculated and monitored at the segment level, but reserves need to be kept at the overall ENTITY level
These shall be calculated using actuarial principles
URR = UPR + PDR
Indian Actuarial Profession
Serving the Cause of Public Interest

14. Changes Related to Solvency
Indian Actuarial Profession
Serving the Cause of Public Interest

15. Impact of Changes in Asset Valuation
Increased Scope of assets that need to be set to 0
Additional assets that are to be placed with value zero, for e.g.:
Premiums receivable relating to State/Central govt. not realized within a period of 180 days
Debit balance of profit and loss appropriation account balance
Co-insurer’s balances outstanding for more than 90 days
Balances of Indian and Foreign reinsurers (having branches in India) outstanding for more than 365 days
Leading to a decrease in the Available Solvency Margin (ASM)
Regulation requires Appointed Actuary to sign-off asset valuations
Govt. premium receivables – were initially 90 days, then increased to 365 days – before finalising to 180 days
Indian Actuarial Profession
Serving the Cause of Public Interest

16. Solvency Ratio Requirements
Thresholds specified in the Regulation
Every (re)insurer shall maintain its ASM as a higher of 50% of minimum capital i.e. higher of Rs.50 crores for General insurers and Rs.100 crores for Reinsurers or 100% of RSM
‘Control level of Solvency’ specified as a minimum solvency ratio of 150%
Indian Actuarial Profession
Serving the Cause of Public Interest

17. Controls on Solvency Monitoring
No action required from the Regulator
Greater than 150%
Company shall be asked to submit a financial plan to correct the deficiency within a specified period not exceeding 6 months
Greater than Minimum but less than 150%
Company shall be deemed to be insolvent and may be wound up by the Court on application made by the Authority
Less than Rs.50 crores or 100% of RSM
Indian Actuarial Profession
Serving the Cause of Public Interest

18. Categorization of Lines of Business
PREVIOUSLY – Fire, Marine and Miscellaneous were the 3 broad categories;
With miscellaneous consisting of Motor, Engineering, Aviation, Liability, Rural, Health and Other
In the new regulation, Motor, Engineering, Aviation and Liability have been separated as new categories from Miscellaneous
Rural has been removed as a separate line of business
Indian Actuarial Profession
Serving the Cause of Public Interest

19. Required Solvency Margin
Gross Written Premium incl. Inward Reinsurance
Premiums calculated as ‘Trailing 12 months data’
Gross/Net Incurred Claims incl. Gross/Net IBNR
Incurred claims calculated as maximum of ‘Training 12 months data’ and ‘Trailing 36 months data divided by 3’
RSM1
Factor A is used to scale down Gross Premium.
RSM1 is calculated as 20% of HIGHER of Scaled Gross Premium and Net Premium
RSM = Higher of RSM1
and RSM2
RSM2
Factor B is used to scale down Gross Incurred Claims.
RSM2 is calculated as 30% of HIGHER of Scaled Gross Claims and Net Claims
Indian Actuarial Profession
Serving the Cause of Public Interest

20. Revised Factors for Calculation of RSM
New Regulation has reduced the Factors used to scale down Gross figures
Capital required may be lesser, with everything else remaining the same, for an insurance company with higher ceded premiums as a proportion of gross premium
Crop Factor reduced from 0.7 to 0.5
Indian Actuarial Profession
Serving the Cause of Public Interest

21. Indian Actuarial Profession Serving the Cause of Public Interest