Life Insurance & Role of Actuary

1. Life Insurance&Role of Actuary 10-12-2012 Aparna

2. Index • Nature of Life Insurance Business • Role of Actuarial function • Roles needing actuarial skills in L. I. Co. • Types Of Life Ins Products • Product Pricing • Profit measures • Reinsurance • Valuation Of Liabilities • Gross Premium Reserve: New GNs • Availability of assets to cover liabilities • Evaluating worth of the company • Projecting the capital requirement • Professional responsibilities • Implications of IFRS • M/S K. A. Pandit

3. Nature of Life Insurance Business • Long term in nature • Usually increasing risk • Level premiums lead to accumulations of Funds • Investment strategy to ensure security and obtain optimal return

4. Shareholders Role of Actuarial function Chief Actuary Regulatory Authority Policy Holders Professional Bodies Competitors

5. Roles needing actuarial skills in L.I.Co • Product Pricing • Reinsurance arrangements • Valuation of liabilities • Evaluating worth of the company • Projecting the capital requirement • Asset Liability Management • Professional responsibilities

6. Types Of Life Ins Products • Conventional With Profit (Participating) • Conventional Without Profit (Non-Participating) • Unit Linked With Profit • Unit Link Without Profit • Unitised with Profit • Universal Life • Unitised Without Profit • Critical Illness • Income Benefit • Surgical Riders • Group Products e.g. group term insurance

7. Product Pricing Different Methods of Pricing: • Cash-flow method • Formula Method

8. Product Pricing contd… Pricing basis includes : • Mortality • Morbidity • Investment return • Expense inflation • Tax & duty • Withdrawal • Statutory basis • Expenses : initial, renewal

9. Product Pricing contd… Pricing basis includes : • Rate of return required by shareholders • Spilt of profits between shareholders & policyholders • Reinsurance arrangements

10. Profit measures: • NPV • IRR • Discounted Payback period

11. Reinsurance • Find a credit worthy reinsurer acceptable by the regulatory authority • Treaty arrangements for all / some products • Decide the retention limits for various products considering the risk appetite of the company • Get competitive rates • Help in product pricing & structuring esp. in new products • Different types of reinsurance arrangements : quota share, risk premium, financial reinsurance etc.

12. Valuation Of Liabilities: • Accurate and complete data of all policies issued • Evaluation of accrued liability based on appropriate estimates of uncertainties including: • Mortality • Morbidity • Investment return • Expense inflation • Expenses : initial, renewal • Withdrawals (if allowed) • All on prudent basis ( Best estimate + MAD) • Additional provisions for contingencies Statutory basis

13. Gross Premium Reserve: New GNs • In line with the RBC requirements • Non ULIP products by GPM • ULIP liabilities are Unit Fund value + non- unit liability • GPM to use prospective method, policy by policy valuation • GPM to use prudent assumptions: Best estimate + MAD • Explicit allowance for future bonuses incl. terminal bonus is required • Option & Guarantees to be reserved for explicitly • Min reserve is max (Zero, Guaranteed SV) • Assumptions are on latest experience & future expectations • Need of experience analysis especially for expenses • Reserves net of reinsurance. i.e. full credit for reinsurance • Additional reserves for: EMR cases, lapsed policies, IBNR etc.

14. Availability of assets to cover liabilities • Admissibility of assets is as per the definition of IBSL regulations • Asset values normally worked out by Company and audited by Auditors • Life Fund worked out after deduction of actual other liabilities and provision • Adequacy of Life Fund to cover estimates of liabilities • Determining excess of life Fund over liabilities

15. Evaluating worth of the company • Through Embedded value (EV) and Appraisal value. • EV = PV(future profits from IF buz.) + shareholders’ share of estate • EV is on Best estimate basis • Appraisal Value = EV + value of expected new business of co. • Used for valuing the shares of the company when listed • Takeover/ amalgamation

16. Projecting the capital requirement • To ensure the solvency of the company at all times on statutory basis • Solvency margin usually prescribed by Supervisors as per Insurance Act or Regulations. • Additional capital required in case of shortfall • Excess if any over solvency margin can be distributed among shareholders and policyholders as provided by regulations • Writing new business • Expansion plans

17. Professional responsibilities • Making sure PRE are met • Treat Customers Fairly • Whistle blowing role • Risk manager • Be professional without prejudice towards shareholders/ policyholders

18. Implications of SLFRS • Prescribed methodology for valuation of assets • Methodology for valuation of liabilities • Realistic valuations may result in changes of values every accounting period • Drastic fluctuations to be taken care of

19. M/S K. A. Pandit • Pricing • Valuation • Peer Review • LAT • ALM • Evaluating worth of company • Use of internationally used actuarial software: Prophet • Clientele across the globe

20. THANK YOU