1. Indian Actuarial Profession Serving the Cause of Public Interest
28th India Fellowship Seminar
Low Interest Rates & Volatile Equity markets – Impact on Product Management and Investment strategies for various Life Insurance products
Mentor: Mr. Sunil Sharma
Presenters:
Ritesh Choudhary
Renu Agnihotri
Anuj Budhia
Date: November 9, 2017
Mumbai
Indian Actuarial Profession
Serving the Cause of Public Interest

2. AGENDA CURRENT MACRO ECONOMIC SCENARIO PRODUCT MANAGEMENT STRATEGIES
INVESTMENT STRATEGIES

3. AGENDA CURRENT MACRO ECONOMIC SCENARIO PRODUCT MANAGEMENT STRATEGIES
INVESTMENT STRATEGIES

4. Interest Rate in India: Steadily Declining
During last 5 years interest rate declined from 8.3% to 6.9%
Source – Investing.com

5. European - ECB Refi rate
Will the trend continue?
Economy
Current Interest Rate
(as on 31st Oct, 17)
UK - BOE Bank rate
0.25%
US - Fed Funds rate
1.15%
Japan - BOJ call rate
-0.06%
European - ECB Refi rate
0.00%
Source – Central Bank websites

6. Impact of Falling Interest Rates
Line of Business
Impact
NON PARTICIPATING
Uncertainty about investment income on future premium
Reinvestment risk of income from existing Assets
Altered PH’s behaviour – Guarantee becoming attractive
Increased Capital requirements
PARTICIPATING
Reduction in Bonus rates – may impact PRE
Increase in lapsation/surrenders – PRE not being met
Reinvestment risk of income from existing Assets
Risk of Guaranteed Surrender Benefits exceeding Asset Share
Value of In built guarantees > Asset Shares

7. Impact of Falling Interest Rates (Contd.)
Line of Business
Impact
UNIT LINKED
Impact depends on the actual mix of funds in ULIP products
Impact is lower unless Guaranteed Sum Insured are high
Lower investment returns may reduce marketability
ANNUITIES AND TERM
Lack of long duration assets to match leading to Reinvestment Risk
High Hedging costs
HEALTH
Long Term Health products may be impacted

8. Equity: High Risk, High Return
-52%
71%
17%
-25%
24% 5%
33%
-5%
27%

9. Is Equity Volatility a Cause of Worry
Higher equity volatility Affects the attractiveness of UL products
Impact on returns on PAR fund for both shareholders and policyholders
Potential Increase in Cost of guarantee – burn though cost
Increased capital requirements – in RBC framework

10. AGENDA CURRENT MACRO ECONOMIC SCENARIO PRODUCT MANAGEMENT STRATEGIES
INVESTMENT STRATEGIES

11. Product Management Strategies
Adequate Reserving – prudent long term valuation interest rate
Change in Product mix –switch to less interest sensitive
Product Re-pricing -lower benefits or higher premiums
Change in Bonus Philosophy, if required
Continuous monitoring of experience vs. Pricing bases
Introduction of new products – with lower interest rate Guarantees

12. Product Management Strategies
For Policies which are already in books
Strategy
Setting up adequate reserves with prudent long term valuation interest
Continuous monitoring
Use of appropriate investment strategy – close matching nature and duration ( ALM)
Change Reversionary Bonus subject to PRE and regulatory Framework
Increasing administrative efficiency to reduce/limit expenses
Reviewing premiums if allowed as per policy conditions – difficult for existing contracts
Challenge
Capital strain
Easier said than done
Implication on new business

13. Product Management Strategies
Existing Product portfolio
Strategy
Review the Portfolio
Re-price those offering expensive guarantees/options
Close products to new business which are carrying unviable guarantees
Challenge
New business may get affected
Marketability
Competition may not behave rationally (business risk)

14. Product Management Strategies
New products
Strategy
More focus on protection than saving
Appropriate margin in light of the new insight gained
Reviewable premium (not allowed)
Design Single / Limited Premium Payment term guaranteed products
Price guarantees adequately assuming low interest rate regime to continue
Keeping duration of liabilities on lower side
Transfer/share part of investment risk with the policyholder
Challenge
Marketability
Competition
Implication on new business
Regulatory restrictions

15. Product Management Strategies
New products
Strategy
Non-par savings products
shorter ppt/term
introduce linked version
Par products
Lower reversionary & higher terminal bonus, One time addition
Annuity Products
Revision of annuity rates on a regular basis
ALM
Introduce Variable Annuity – will it be allowed by regulator
Challenge
Marketability
Competition
Not able to meet demands
Regulatory restrictions
Keeping Guarantees manageable

16. Product Management Strategies
Diversifying through New products
Strategy
Diversify into new areas e.g. pure risk products
long term care business
Disability income business
Increase proportion of health insurance business
Grow Individual and group term business
Sell more single premium/ Limited Pay products
Challenge
Developing a new market
Expertise

17. Product Management Strategies
Japan
Change in product mix
Transfer of investment risk to policyholders
Variable life insurance products
Diversification into health insurance, long term care and other products with protection elements
Germany
Focussing on protection type product such as disability income and long term care
replacing traditional saving products with alternative guarantees product viz. Return of the premium
Falling interest rate - Lessons from the world

18. Product Management StrategiesUS
De-risking the products, adjusting benefits and reducing options
Transfer of investment risk to policyholders (Universal Life products)
Variable annuities (VA)
Lower Minimum Guarantees in VUL, VAs
Falling interest rate - Lessons from the world

19. AGENDA CURRENT MACRO ECONOMIC SCENARIO PRODUCT MANAGEMENT STRATEGIES
INVESTMENT STRATEGIES

20. Increased Focus on ALM/ Hedging strategies
Investment Strategies
Impact of falling interest rates
Reinvestment risk: Low returns on investments of future premiums & investment proceeds
Impact on VIF: Negative impact due to lower future expected investment income
Reduced bonuses: With profits
Lower guarantees: Reduced attractiveness
Potential tactical & strategic responses to falling rates
Use of derivatives
Use of ALM techniques
Portfolio immunization
Increased Focus on ALM/ Hedging strategies
Increase investment risk appetite
Use of alternative assets
Shift towards illiquid assets
Return Enhancement

21. Risk Mitigation: Hedging strategies
Instrument
Pros
Cons
Constraints
Interest Rate Swaps
Customizable
Nearly perfect hedge
Expensive
Difficult to unwind
Setting up & administration
Interest Rate Futures
Exchange traded
Easy to unwind
Not customizable
Basis risk
Low & Falling volumes
FRAs
Same as Swaps
Interest Rate Options
Upside is not restricted
Higher cost of hedging
Not permitted by IRDAI
STRIPS
Risk free
No leverage unlike others
Available on few bonds
Recurring deposit/ Partly Paid structures
Customizable to certain degree
Inherent credit/ counterparty risk
Limited availability/ Mostly privately placed
Repo & repurchase
Easy to implement
May be used as a temporary arrangement

22. Return Enhancement Leverage favorable positioning in the markets
Efficient use of conventional assets
Explore investible universe
KEY THEMES
COMMENTS
CHALLENGES
Move towards illiquid assets
Sophisticated equity strategies
Wider spectrum of assets
Increased yield
From sovereign to credit
From liquid to illiquid
Market inefficiencies
Depends on
Availability of assets
Investment restrictions
Equity upside with controlled downside
Structured products
Capital protection products
Wider risk mitigation through derivatives
Regulatory restrictions on using equity derivatives
Complexity of modeling
Not widely understood
Diversified exposure to alternative risks
Infrastructure - InvITs
Real Estate – REITs
Private Debt/ Mortgages
Commodities
Investment restrictions
Availability of assets
Availability of historical data

23. Objectives/ Constraints
Investment Framework: Holistic approach
Appetite
Market
Liabilities
Objectives/ Constraints
Optimal Portfolio
Well diversified portfolio
Wider range of asset classes - market
Optimal point on the efficient frontier chosen based on
Investment objective
Investment risk appetite
Constraints
Fit with liabilities
Regulatory restrictions
P&L/ Balance sheet volatility
Impact on capital requirements
Investment risk appetite
Increase appetite for
higher returns
Investment opportunities
Current returns
Asset correlations
Investment limits/ restrictions
Return volatility – P&L Impact
Impact on capital requirement - RBC
Characteristics
Matching assets
Equity backing ratios

24. Case Study: Japan & Germany
Products with high guarantees
Low interest rates forced greater allocations into risky assets
Asset prices were already inflated- Asset bubble burst
7 insurers became insolvent
Environment – Low interest rate, high volatility in equity and property markets
New investment regime
Better ALM: reduced gap between asset and liability durations
Systematically explored market inefficiencies
Overseas investments (majorly USD)
Germany (ongoing)
Environment – extremely low interest rates for prolonged period
Increased investments in less liquid assets – infrastructure projects such as solar & wind energy

25. Conclusion Low interest rate and volatile equity markets
Makes guarantees more onerous
Make options more valuable in the hands of policyholders
May make ULIP products unattractive
Put strain on capital
Strategies to meet the challenge
Product Management through
reducing Guarantees/Options,
increasing margin,
focusing on protection products,
transferring/sharing investment risk,
reducing durations,
adjusting bonus philosophy
Investment strategy - to have holistic approach in investment with focus on
ALM
Hedging through derivatives
Exploring wider spectrum of asset classes,
Move towards illiquid assets

26. Q & A