1. Institute of Actuaries of India Actuarial advice and resultant liabilities of an Appointed Actuary India Fellowship Seminar-December 2014 Serving the Cause of Public Interest Indian Actuarial Profession Sipika Tandon Supriyo Chaki Adarsh Kishor Agarwal A V Karthikeyan Under the guidance of Mr. Saket Singhal

2. www.actuariesindia.org 2 Agenda Introduction Appointed Actuaries in India Actuarial advice and risks associated with it Stakeholders – expectations & governing regulations Challenges and liabilities of Appointed Actuaries Impact of Legislation and Regulation Mitigation Plan and insurance protection Professionalism, Ethics and Conduct

3. www.actuariesindia.org 3 Actuarial advice – expert or a mere adviser?  Actuaries can act as expert in a specific area or a mere professional adviser  Expert may fail to follow instructions and unable to explain the deviation  May be liable in negligence for making a mistake in arriving at conclusion Appointed Actuary – working as IRDA’s eye  To inform Authority of own opinion whether insurer has contravened any act  At the same time needs to contribute to business growth – potential conflict of interest Independence of OpinionResponsibilities towards various stakeholders – their expectations and liabilities associated with Appointed Actuary’s advice Actuaries as professionalsAppointed Actuary – a mandatory requirement in Indian insurance industry Introduction

4. www.actuariesindia.org 4 Appointed Actuaries in India Performing a multifaceted role in life and general insurance Central to financial soundness of the company – to ensure that business is conducted in sound financial lines and monitor unfair actions Central to the financial soundness of the general insurance company – to ensure that business is conducted in sound financial lines having regard to Policyholders’ Reasonable Expectations  To perform an annual actuarial investigations into the financial condition of GI business  Certify the adequacy of the claim reserves  Ensure appropriateness of premium rates and policy conditions  Advise the Board on capital requirements  To carry out economic capital calculation  To report in writing to the Board on the results and implications of any valuation carried out for statutory purposes  To carry out actuarial investigations to assess financial soundness of the insurer – FCR requirement  Carrying out valuation of liabilities  Ensure appropriateness of premium rates and policy conditions  Advise the Board on capital requirements  Advise and report on allocation of surplus  To report in writing to the Board on the results and implications of any valuation carried out for statutory purposes

5. www.actuariesindia.org 5 Actuarial Advice Responsibilities of Appointed Actuary in General Insurance Managing actuarial function – Business As Usual (BAU)  Reserve calculation and estimation of reserving uncertainty  Pricing and product design  Asset – liability management and solvency calculation  Insurance contract wording, investment and reinsurance Internal Management Reporting  Rendering actuarial advice to management of insurer  Participation in Board Meetings  Drawing management attention to any potential violation of rule/regulation Regulatory Submission  Certification of IBNR and other reserves  Prepare and submit Financial Condition Report  Economic Capital related submission  Handling associated queries from IRDA Other Professional Responsibilities  Participation in industry bodies and various actuarial committees  Contribution to the development of actuarial profession in India

6. www.actuariesindia.org Risks associated with Actuarial Advice (1/3) Certifying reserve including IBNR Solvency margin certification Certifying reserve including IBNR Solvency margin certification 11  Insufficient IBNR leading to risk of insolvency  Over or under estimation of solvency position Areas of AA adviceWhat can go wrong? Financial Condition Report certification 22  Too many aspects of the business needs to be analyzed  Difficulties to confirm with certainty 6

7. www.actuariesindia.org Risks associated with Actuarial Advice (2/3) Pricing - certifying financial viability of filed products 33  Inaccurate pricing  Internal and external factors to deviate from appropriate pricing structure  Risk of anti-selection and moral hazard Areas of AA adviceWhat can go wrong? Joint sale advertisement certification Mass schemes pricing certification Joint sale advertisement certification Mass schemes pricing certification 44  Information provided is misleading, not consistent with filed product  Inadequacy of pricing 7

8. www.actuariesindia.org Risks associated with Actuarial Advice (3/3) Economic Capital certification 55  Use of wrong methodology or model  Inappropriate assumptions  Data issues – unavailability and less granular Areas of AA adviceWhat can go wrong? Asset Liability certification 66  Failing to consider factors having significant relevance to business  Not including relevant shock scenarios 8

9. www.actuariesindia.org 9 Spectrum of Stakeholders Appointed Actuary’s Advice  Board of Directors  Shareholders  Employees  Credit rating agencies  Brokers  IRDA  Government of India  Existing policyholders  Prospective policyholders  Institute of Actuaries of India  General Insurance Council  Fellow Actuaries  Reinsurers  Corporate Agents

10. www.actuariesindia.org 10 Stakeholders Expectations and governing regulations StakeholdersGoverning Regulations Insurance Regulator  Complying with Authority’s directions from time to time  Complying with various provisions and regulations  Drawing management attention to avoid contravention of Act Internal Stakeholders  Providing actuarial advice on pricing, product design, contract wording, investments and reinsurance  Ensuring the solvency at all time  Working towards increasing the shareholder’s value  Company specific policies  Corporate Governance Guidelines Policyholders  Fair pricing and policy conditions of new and existing products  Maintenance of financial strength to meet future liabilities  Monitor practices, likely to be prejudicial to their interests  IRDA (Protection of Policyholders’ Interest) Regulations, 2002  Actuarial Practice Standard (APS) 21 Professional Associations  To maintain highest professional standard envisaged by the IAI  To make properly reasoned comments on work of fellow actuaries  Participate in Industry Working Parties  Actuarial Practice Standard (APS) 21  Certificate of Practice (CoP)  Guidance Notes & Professional Conduct Standards (PCS)  IRDA (Appointed Actuary) Regulations, 2000  The Actuary’s Act, 2006 External Stakeholders  Perform high end actuarial analyses to meet rating agency needs  Provision of appropriate data and insights to reinsurers  Understand brokers’ views which can be incorporated in product development process  IRDA (General Insurance – Reinsurance) Regulations, 2000  File & Use Guidelines Expectations from Appointed Actuary Liability : Risk of failing to abide by the stipulated regulations and guidelines in providing actuarial advice

11. www.actuariesindia.org 11 Challenges of Appointed Actuaries Too much to carry, too many forces to balance Data integrity and unavailability Unavailability of skilled actuaries to support Ever changing insurance landscape Product innovation New regulatory requirements Demands of different stakeholders Understanding the risks being placed upon the Appointed Actuary

12. www.actuariesindia.org 12 Liabilities of Appointed Actuaries (1/2) Carrying unlimited liabilities… An AA virtually carries unlimited liability for any misdeed/mistake/error of judgment AA can face significant legal risk because of the magnitude of the liabilities belonging to the companies and schemes they advise Various stakeholders are very much affected by AA’s actions in providing advice and services AA can possibly be sued individually for the entire amount of the loss suffered by a claimant High liability due to unavailability of any financial instrument to provide financial indemnity to AA

13. www.actuariesindia.org 13  Disciplinary action by IRDA  Disciplinary Action by IAI  Lawsuits filed by stakeholders against inappropriate advice  Termination from duties by the Employer  Financial penalties  Reputational damage Liabilities of Appointed Actuaries (2/2) Possible consequences of carrying unlimited liabilities

14. www.actuariesindia.org 14 Impact of Legislation and Regulations Key Objectives The various roles performed by Appointed Actuaries in India are regulated and governed by The Actuaries Act, 2006 and the IRDA (Appointed Actuary) Regulations, 2000. The overarching objectives of these are to provide a framework within which the Actuaries need to work and perform contractual obligations. Surrounding regulations – Defines professional misconduct – Actions of Authority, Disciplinary Committee and Council – Appeal procedure and penalties – Quality Review Board The Actuaries Act, 2006 – Specifies duties and obligations – Elucidate the powers of AA – Cessation of appointment of AA – Mentions about absolute privilege of AA IRDA Appointed Actuary Regulations, 2000  Actuarial Practice Standards  Guidance Notes Professional Guidance 2 1  Professional Conduct Standards  Certificate of Practice

15. www.actuariesindia.org 15 Mitigation Plan Operational ways to minimise exposure 4 eye principle to eliminate errors and omissions Maker-Checker-Reviewer Approach Sense check on actuarial analyses Clearly defined Standard Operating Procedure for different activities Ensure data quality – Garbage in- Garbage Out Possible Options Wrong methodology or model is used Inaccurate actuarial calculation Miss out on relevant aspects in actuarial investigations Follow the basic principles  Data extensive work – validation checks are useful ways to minimise over-reliance on data as it is  Many of the tasks are process oriented and periodic in nature – following updated process documents can reduce the risk of process error Which risks are mitigated?

16. www.actuariesindia.org 16 Mitigation Plan Use of professional guidance and other inputs Follow various Guidance Notes issued by the IAI Interaction with Peer Actuaries - Compare high level KPI with Peer companies Continuous professional developments and regular trainings Keep abreast of the various regulatory developments Keep up-to-date with legal and socio economic changes Possible Options Seek professional guidance  Different guidance notes are meant to assist in the provision of actuarial advice and certification in various areas  Important to remain conscious about the legal aspects of professional services and its implications Inappropriate assumptions are used Failing to consider factors having significant relevance to business Data issues not effectively dealt with Which risks are mitigated?

17. www.actuariesindia.org 17 Mitigation Plan Some other areas to lean upon Get Professional Indemnity insurance Self awareness of various potential conflicts of interest Support from appropriate qualified and experienced team members Monitor developments concerning legal liabilities of actuaries in other countries Imposing liability caps to limit the liabilities Possible Options Be aware of external environment  Understand own risk and use suitable insurance plan to protect unforeseen liabilities  Awareness of various forces around and their dimensions can help to act knowledgeably  Acquire and demonstrate high level of corporate skill Influenced to deviate from appropriate pricing structure Failure to convince all parties that the actuarial advice has been fair to all Underestimation of emerging risks and financial liabilities Which risks are mitigated?

18. www.actuariesindia.org 18 Insure Us? Devise Professional Indemnity insurance cover …. So we have discussed High legal risk Potential unlimited liability What to do? Follow operational controls and professional guidance Possibly not enough!!!  Not available in Indian market – possibly PSU insurers cover actuaries, but uncommon  Risks and associated financial liabilities associated in carrying out duties of AA will certainly be minimized  Limit of indemnity can be decided based upon assessment of own risk  To cover liability falling on AAs as a result of errors and omissions committed by them whilst rendering actuarial advice  Cover can be extended to other actuarial professionals, including independent consultants and actuarial contractors  If available at all, it may be very expensive  Not much clarity whether the Companies’ D&O cover can provide safeguard to AAs  Promote a sense of professional confidence among the Actuaries to do their job better  Reasonable pricing is required in view of reported cases of professional negligence involving actuaries  Take support from international market and reinsurers

19. www.actuariesindia.org 19 References In preparing this, we have taken assistance from the following: The Actuaries Act, 2006 (As passed by the House of Parliament) Insurance Regulatory and Development Authority (Appointed Actuary) Regulations, 2000 Guidance Note (GN) 21: Appointed Actuary and General Insurance Business Actuarial Practice Standard (APS) 1: Appointed Actuary and Life Insurance Business Professional Conduct Standards (PCS Version 3.00) issued by the Institute of Actuaries of India Other regulations and guidelines issued by IRDA and IAI “Appointed Actuary – Insure Thyself” by Sampad Narayan Bhattacharya http://actuariesindia.org/downloads/gcadata/8thGCA/Appointed%20Actuary- %20Insure%20thyself_S%20N%20Bhattacharya.pdf http://actuariesindia.org/downloads/gcadata/8thGCA/Appointed%20Actuary- %20Insure%20thyself_S%20N%20Bhattacharya.pdf “Actuaries’ Liabilities” by Jonathan Evans and Wilberforce Chambers for Professional Indemnity Forum Conference, Cambridge, July 2009

20. www.actuariesindia.org 20 Q & A