1. Adrian Allott FIAA 17 December 2008
The Actuarial Management of a Life Insurance Company in an Emerging Market
Adrian Allott FIAA
17 December 2008

2. The Actuary's Toolkit General Skills / Abilities High intelligence
Mathematical & logical aptitude => problem solving
Power users of software e.g. database development, simple programming
Specific skills / knowledge
Actuarial study, e.g. statistics, financial mathematics
Insurance product knowledge
Risk management ethos

3. Stakeholder Requirements
Shareholders
Management
Regulators
Customers
Profession
Performance Measurement
Value Measurement
Financial Stability
Fair Trading
Customer Value
Quality of Advice

4. The Actuarial Control Cycle
Set Assumptions
Analyse
Specify Solution
Monitor

5. Setting Assumptions
One of the actuary's main roles is to model the financial future. In a life insurance company this involves setting assumptions about the following variables:
Mortality, morbidity, persistency, expenses
Agent productivity, recruitment, retention
Investment returns, risk discount rates, salary & price inflation

6. Setting Assumptions (2)
In an emerging market assumption setting is difficult:
There is no credible long term economic experience (post-communist countries have only recently developed market economies)
There is usually no insured lives demographic experience
Population data is difficult to come by and may not be directly relevant to the problem at hand.
Business models may be new and / or untested in the market

7. Setting Assumptions (3)
Possible approaches to assumption setting:
Don't. In some cases the area of activity may be too dangerous to enter without a sound knowledge of the risks.
Set assumptions by reference to another similar market. For example, for Romania I have often adapted Polish experience.
"Taste and see". Make the best possible guess, watch very closely and adapt if necessary.

8. Specifying Solutions: Product Pricing
Historically, pricing by algebraic formulae. Recently, profit tests (financial projections) have been used. Now, stochastic processes are being used to better model uncertainty.
Pricing tools have evolved over the years, from a sharp pencil through financial calculators and PC spreadsheets all the way to sophisticated actuarial projection systems with the ability to model both assets and liabilities stochastically.

9. Specifying Solutions: Reserve Valuations
Insurance reserves are usually the largest liability on a life insurer's balance sheet
Reserves against future benefits, unearned premiums, outstanding claims
Prudent assumptions + solvency margin for financial stability
Projection system preferred to spreadsheets for control and speed

10. Specifying Solutions: Business Valuations
Business valuations are used for mergers & acquisitions, measurement of management performance.
Net assets plus present value of future profits
Standard approaches evolving over time: AP, EEV, MCEV
Stochastic projection system now almost mandatory

11. Specifying Solutions: Other
Distributor remuneration: reconciliation of complex payment schemes to product pricing assumptions
Asset / liability management: identifying and assessing mismatches, capital requirements
User specification and testing of administration systems

12. Monitoring
Daily reporting cycle would typically include branch sales information and unit prices
On a monthly basis statutory reserves and profits would be reported alongside statistical information about sales and persistency
Business values would be produced quarterly, including an analysis of movements c.f. expectations
At the end of each financial year full financial statements are prepared together with a financial condition report

13. Monitoring (2) Check actuals vs plan and prior period
Look for trends and significant variances
Try to ignore noise and random variations
Check for reasonableness (e.g. to spot data errors)
Ensure an adequate, but not heavy, set of data requirements and explain why they are necessary.

14. Analysis
Ad-hoc, in response to issues raised by monitoring (e.g. poor policy persistency)
Programmed, as part of an annual or, say, tri-ennial cycle.
Areas for analysis include expenses, mortality, morbidity, persistency, sales statistics
Analyses have the general purpose of gaining understanding, but can also have specific purposes.

15. Analysis (an Example) Expense analyses assist with:
Managing expenses better
Setting benchmark unit costs
Setting product pricing assumptions
Understanding individual process costs
The usual process involves apportioning last year's expenses by product and activity.
In some cases expenses can be directly allocated while in others they are split according to a 'carrier' or time survey.

16. Other Actuarial Roles 'Too-hard basket' 'Worrier-in-chief' 'Mr No'?
Research & development
Educator
Member of senior management
Customer & shareholder advocate

17. Contact Details