1. Serving the Cause of Public Interest Indian Actuarial Profession Indian Fellowship Seminar, 2015 Topic ALSM draft Regulations 2015 and its impact on capital requirements Guide Name Mr. SRINIVASA KUMAR CHIRUVOLU Presenters Names NAKUL YADAV ANSHUMALI MISRA ASFA KAUSAR BIHARI 10 th & 11 th of Dec’2015 Mumbai

2. www.actuariesindia.org2 Review of ALSM Regulations ALSM Regulations Asset ValuationLiability Valuation Determination of Solvency Margin Key Areas under ALSM Regulations

3. www.actuariesindia.org3 Consultative Process of ammedment Working Committee constituted by IRDAI Committee Report on ALSM with proposed changes Comments from the Industry on the proposals Exposure Draft on ALSM Regulations Comments on ALSM 2015 Regulation - Exposure Draft Revised ALSM 2015 Regulations Focus of discussionFuture course of action till implementation Background reports and consultations

4. www.actuariesindia.org4 Asset valuation changes Sr. No. Changes to the asset valuation – ALSM 2015, exposure draft Impact on Capital Requirement 1The specific requirement of depreciation of computer hardware and software has been excluded. May change based on current practice. Should not materially impact solvency margin. 2Intangible assets and receivable of unrealizable nature to be taken as inadmissible assets. No impact. Already incorporated in “Preparation of financial statements” and Section 64VB in the Insurance Act 3Service Tax Unutilized Credit disallowed Reduced ASM for companies who are currently utilizing the credit. The asset is not realizable and hence disallowed 4All other assets of an insurer have to be valued in accordance with the IRDAI (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2015 No impact on solvency

5. Asset valuation changes Other forms of capital –Preference Share Capital –Subordinated Debt Amortization of the instruments for solvency –Impact on ASM –Value net of hair cut www.actuariesindia.org Years to MaturityIncluded in capital > 5 years100% 4-5 years80% 3 – 4 years60% 2 – 3 years40% 1 – 2 years20% < 1 year0% 5

6. www.actuariesindia.org6 Asset valuation – Unchanged principles Sr. No. Key assets and their valuation principle 1Debt securities including government bonds shall be Held to maturity 2Debt securities valued at amortized book value 3Equity securities to be valued at fair value on the balance sheet 4Real Estate at historical cost subject to revaluation at least once in three years 5Unlisted and other than actively traded equity securities and derivative instruments to be measured at historical cost No material changes proposed in asset valuation based on the exposure draft for Preparation of Financial statements 2015

7. www.actuariesindia.org7 Liability valuation method changes Explicit allowance for Cost of Guarantee in addition to Cost of Options Impact on Mathematical Reserves Expected to increase Mathematical Reserves where companies are not holding this reserve Extent of increase depends on the nature and materiality of Guarantees in the portfolio and how much is allowed for today Impact on CapitalIn case companies are not accounting for it completely Increase in RSM Reduction in ASM Additional Comments It is expected that companies will be holding Cost of Guarantee as per GN22

8. www.actuariesindia.org8 Liability valuation method changes Use of Higher of (Special Surrender Value, Guaranteed Surrender Value) for the purpose of section 13,49, 64V and 64VA of the Act Impact on Mathematical Reserves Expected to increase as special surrender value is expected to be higher than guaranteed surrender value The impact is expected to be insignificant for most companies are already valuing using this approach Impact on CapitalIf SSV is not accounted for it will lead to Increase in RSM Reduction in ASM Additional Comments Change already incorporated as floor of Surrender Value Payable on GPV in ARA Circular 2011

9. www.actuariesindia.org9 Liability valuation method changes Use of GPV except: Explicit approach for one year renewable group term Higher of Gross Premium Valuation Reserve and Unexpired Premium Reserve for Riders ExplanationOne year renewable term Allow for unexpired risk, premium deficiency and incurred but not reported claims Applies to riders attached to group The rule for ensuring the higher of (GPV, Other approach as per AA) not applicable Impact on Mathematical Reserves Similar methodologies may be followed today Not expected to be material for majority of companies Impact on CapitalDepends on the approach used earlier and may impact RSM & ASM

10. www.actuariesindia.org10 Liability valuation method changes For ULIPs additionally account for :- Non-negative residual additions, if any Zeroisation of negative cash-flows ExplanationRequirement necessitated by new ULIP RIY requirement Impact on Mathematical Reserves Expected to increase reserve if it is not allowed for appropriately today, and Can be material depending on the product structure and mix of business Impact on Capital In the above scenario Increase in RSM Reduction in ASM

11. www.actuariesindia.org11 Liability valuation method changes Variable Linked & Non-Linked Business (Par and Non-Par) Policy account reserves and general fund reserves ExplanationSame approach as that for ULIP With policy account equivalent to unit liabilities General fund reserves shall be determined using discounted cash flow method Including the requirement of non-negative addition The product structure may have some form of guarantees For Par VIP allowance for future regular and terminal bonuses and for taxes Impact on Mathematical Reserves Depends on the changes required, specifically with respect to inclusion of the guarantees Otherwise structurally same as specified in product regulation Impact on Capital Depending on the changes Will impact RSM & ASM

12. www.actuariesindia.org12 Liability valuation assumption changes Use of actual expense experience ExplanationProvided that appropriate additional provisions shall be made if the actual experience has not been considered for the valuation. Impact on Mathematical Reserves Depends on the extent of actual expenses not recognized currently Expected to increase Can be material for companies with high renewal expense overrun Impact on CapitalIn case actual expense experience is not used Increase in RSM reduction in ASM

13. www.actuariesindia.org13 Liability valuation assumption changes Use of lapse rate ExplanationShould be based on prudent assumption Based on past experience of the product or similar products Shall have regard to the expected future experience Impact on Mathematical Reserves Should allow companies to reduce prudence in reserve If currently using perfect persistency and that it is more onerous Otherwise the impact is dependent on the product structure and nature of current assumption Impact on Capital Depends on the actual scenario for company Change in RSM & ASM Will change Capital Requirement & Solvency Ratio Additional Comments The APS 7 prescribes the approach to the level of prudence

14. www.actuariesindia.org14 Liability valuation other changes Business Outside India ExplanationComparison of liability norms with that followed in India If the norms (method and assumptions) lead to lower liability then set additional reserves Impact on Mathematical Reserves Will increase Mathematical Reserves depending on Extent of foreign operations Difference in norms Impact on Capital Depends on the actual scenario for company Change in RSM & ASM Additional Comments Can lead to significant justification depending on Nature of products offered Difference in market conditions – economic and non- economic

15. www.actuariesindia.org15 Liability valuation other changes Statement Added In case reinsurance cash-flows have been allowed in reserves, the valuation basis and methods shall be as per this schedule. Statement Removed Statements pertaining to resilience test reserve or mismatch reserves

16. Changes to solvency requirement Category of changeChanges in exposure draft Minimum solvency requirement Higher of:- 100 % of RSM, Or INR 50 crore (i.e. 50% of minimum capital as per Section 6 of the insurance Act) Control Level of solvency margin Introduced Control Level of solvency margin 150 % of RSM Business outside IndiaSame as that for business written within India Solvency Factors as proposed in the ARA 2015 Regulations – exposure draft More clarity added for the Health riders Might impact the capital requirement

17. Controls around solvency monitoring Solvency Ratio Greater than 150% Less than 150% but greater than Minimum requirement Less Than 50 crore or 100% of RSM No action required from the regulator Action as per Sub-section (3) of Section 64VA of the Act Early stage intervention by IRDAI If it is due to – unfavourable claim experience, sharp increase in volume of new business, then IRDA may direct modifications The Company shall submit a remedial plan within 6 months. Considered default – if no action taken by the insurer Action as per Sub-section (2) of Section 64VA of the Act Company deemed as insolvent and may wound up by court on an application by IRDA Regulatory & Company Intervention

18. Thank you!! www.actuariesindia.org18