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Impact of Low Interest Rates & Volatile Equity Markets on Life Insurance Product Management and Investment Strategies

Join the 28th India Fellowship Seminar to learn about the current macroeconomic scenario and strategies for managing life insurance products in a low interest rate environment and volatile equity markets.

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Impact of Low Interest Rates & Volatile Equity Markets on Life Insurance Product Management and Investment Strategies

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  1. 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: • RiteshChoudhary • RenuAgnihotri • AnujBudhia 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 www.actuariesindia.org

  3. AGENDA CURRENT MACRO ECONOMIC SCENARIO PRODUCT MANAGEMENT STRATEGIES INVESTMENT STRATEGIES www.actuariesindia.org

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

  5. Will the trend continue? Source – Central Bank websites www.actuariesindia.org

  6. Impact of Falling Interest Rates www.actuariesindia.org

  7. Impact of Falling Interest Rates (Contd.) www.actuariesindia.org

  8. Equity: High Risk, High Return www.actuariesindia.org

  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 www.actuariesindia.org

  10. AGENDA CURRENT MACRO ECONOMIC SCENARIO PRODUCT MANAGEMENT STRATEGIES INVESTMENT STRATEGIES www.actuariesindia.org

  11. Product Management Strategies www.actuariesindia.org 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 www.actuariesindia.org

  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) www.actuariesindia.org

  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 www.actuariesindia.org

  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 www.actuariesindia.org

  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 www.actuariesindia.org

  17. Product Management Strategies Falling interest rate - Lessons from the world www.actuariesindia.org • 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

  18. Product Management Strategies Falling interest rate - Lessons from the world www.actuariesindia.org • US • 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

  19. AGENDA CURRENT MACRO ECONOMIC SCENARIO PRODUCT MANAGEMENT STRATEGIES INVESTMENT STRATEGIES www.actuariesindia.org

  20. 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 www.actuariesindia.org

  21. Risk Mitigation: Hedging strategies www.actuariesindia.org

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

  23. Investment Framework: Holistic approach • 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 • Characteristics • Matching assets • Equity backing ratios • Investment limits/ restrictions • Return volatility – P&L Impact • Impact on capital requirement - RBC www.actuariesindia.org

  24. Case Study: Japan & Germany • Japan (1990-2000) • 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 • New investment regime • Increased investments in less liquid assets – infrastructure projects such as solar & wind energy www.actuariesindia.org

  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 www.actuariesindia.org

  26. Q & A www.actuariesindia.org

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