The Actuarial Management of a Life Insurance Company in an Emerging Market

1. The Actuarial Management of a Life Insurance Company in an Emerging Market Adrian Allott FIAA 17 December 2008

2. Specific skills / knowledge Actuarial study, e.g. statistics, financial mathematics Insurance product knowledge Risk management ethos The Actuary's Toolkit General Skills / Abilities • High intelligence • Mathematical & logical aptitude => problem solving • Power users of software e.g. database development, simple programming

3. Stakeholder Requirements

4. The Actuarial Control Cycle Set Assumptions Analyse Specify Solution Monitor

5. Setting Assumptions One of the actuary's main roles is to model the financial future. In a life insurance company this involves setting assumptions about the following variables: • Mortality, morbidity, persistency, expenses • Agent productivity, recruitment, retention • Investment returns, risk discount rates, salary & price inflation

6. Setting Assumptions (2) In an emerging market assumption setting is difficult: • There is no credible long term economic experience (post-communist countries have only recently developed market economies) • There is usually no insured lives demographic experience • Population data is difficult to come by and may not be directly relevant to the problem at hand. • Business models may be new and / or untested in the market

7. Setting Assumptions (3) Possible approaches to assumption setting: • Don't. In some cases the area of activity may be too dangerous to enter without a sound knowledge of the risks. • Set assumptions by reference to another similar market. For example, for Romania I have often adapted Polish experience. • "Taste and see". Make the best possible guess, watch very closely and adapt if necessary.

8. Specifying Solutions:Product Pricing • Historically, pricing by algebraic formulae. Recently, profit tests (financial projections) have been used. Now, stochastic processes are being used to better model uncertainty. • Pricing tools have evolved over the years, from a sharp pencil through financial calculators and PC spreadsheets all the way to sophisticated actuarial projection systems with the ability to model both assets and liabilities stochastically.

9. Specifying Solutions:Reserve Valuations • Insurance reserves are usually the largest liability on a life insurer's balance sheet • Reserves against future benefits, unearned premiums, outstanding claims • Prudent assumptions + solvency margin for financial stability • Projection system preferred to spreadsheets for control and speed

10. Specifying Solutions:Business Valuations • Business valuations are used for mergers & acquisitions, measurement of management performance. • Net assets plus present value of future profits • Standard approaches evolving over time: AP, EEV, MCEV • Stochastic projection system now almost mandatory

11. Specifying Solutions: Other • Distributor remuneration: reconciliation of complex payment schemes to product pricing assumptions • Asset / liability management: identifying and assessing mismatches, capital requirements • User specification and testing of administration systems

12. Monitoring • Daily reporting cycle would typically include branch sales information and unit prices • On a monthly basis statutory reserves and profits would be reported alongside statistical information about sales and persistency • Business values would be produced quarterly, including an analysis of movements c.f. expectations • At the end of each financial year full financial statements are prepared together with a financial condition report

13. Monitoring (2) • Check actuals vs plan and prior period • Look for trends and significant variances • Try to ignore noise and random variations • Check for reasonableness (e.g. to spot data errors) • Ensure an adequate, but not heavy, set of data requirements and explain why they are necessary.

14. Analysis • Ad-hoc, in response to issues raised by monitoring (e.g. poor policy persistency) • Programmed, as part of an annual or, say, tri-ennial cycle. • Areas for analysis include expenses, mortality, morbidity, persistency, sales statistics • Analyses have the general purpose of gaining understanding, but can also have specific purposes.

15. Analysis (an Example) • Expense analyses assist with: • Managing expenses better • Setting benchmark unit costs • Setting product pricing assumptions • Understanding individual process costs • The usual process involves apportioning last year's expenses by product and activity. • In some cases expenses can be directly allocated while in others they are split according to a 'carrier' or time survey.

16. Other Actuarial Roles • 'Too-hard basket' • 'Worrier-in-chief' • 'Mr No'? • Research & development • Educator • Member of senior management • Customer & shareholder advocate

17. Contact Details aallott@gmail.com +373 68 565 771 +40 72 265 2763