International Actuarial Association Building up the Actuarial Profession in Africa

1. International Actuarial Association Building up the Actuarial Profession in Africa The Actuarial Profession in Kenya Sundeep K Raichura Presented at 3rd International Meeting of Leaders of the Actuarial Profession in Africa 8 June 2007

2. Agenda • About The Actuarial Society of Kenya • History • Objectives • Structure • The actuarial profession in Kenya • Numbers and areas of practice • Actuarial education • Statutory roles • Pensions and insurance sectors in Kenya • Challenges facing the actuarial profession in Kenya and industry issues • Update on some relevant TASK initiatives

3. About TASK

4. The Actuarial Society of Kenya • Registered 1993 • Launched in 2005 • Brings together qualified and trainee actuaries in professional, educational and research organisations with an aim of promoting the actuarial profession in Kenya and E Africa • TASK functions through its governing Council and Committees (functional, administrative and ad hoc) • Work on three year Strategic Plan in progress

5. TASK Vision “To position the Actuarial Profession in Kenya and the region as the leading profession in the areas of modeling and management of financial risks and contingent events”

6. Key TASK Objectives • To develop and strengthen the actuarial profession in Kenya • To create a forum for members of the actuarial profession to meet and exchange ideas • To support and protect members and present common professional interests to Government and policymakers • To play an active role in actuarial education and the development of local actuarial expertise, professional standards and guidance • To encourage research in the development of actuarial ideas • To improve the education of financial consumers and raise public interest issues • To broaden the scope of the actuarial profession and promote our contribution in wider fields • To establish links with other professional associations in Kenya and internationally with similar objects

7. TASK Progress to Date • Revised constitution still in draft • Considerable time spent on membership categorisation • Strong pressure to include special Associate categorisation for non-statutory work • Intent to become full member of IAA by end 2007 • Committee working on professional code of conduct, which includes IAA common principles of GCAE • And Disciplinary process • Formal process for adoption of standards of practice • Borrowing heavily from other actuarial associations for code of conduct and guidance notes

8. TASK Progress to Date • No of working committees • Membership & PR, Retirement and other Employee Benefits, Insurance and Health Care, Professionalism, Education and Research, Investments and Wider Fields, Secretarial Finance and Fund Raising • Disciplinary and Appeals • Performance erratic • Strategic Plan – needs wider input

9. The Actuarial Profession in Kenya

10. Numbers • 4 qualified actuaries • 3 Fellows of the Institute of Actuaries • 1 Associate of the Society of Actuaries • 40 partly qualified currently working in field • Excludes those who have graduated from local Unis with actuarial science degrees • Many have given up on actuarial examinations • Good number has dropped actuarial examinations for CFA • Over 500 actuarial students at three local Unis: • UoN - started 2000, currently about 240 students, intake of 60 per year, 60ish already graduated • JKUAT - started 2002, currently over 500, intake of 200 • Maseno – started 2006, first intake of 30 students

11. Actuarial Education • Degree programmes aim to teach full core technical subjects excluding ACC • Programme attracting brightest and talented students • But still need to assess minimum entry standards • Large streams • Academic staff likely to be strained • Bigger issue of capacity of market to absorb actuarial graduates in traditional fields (life insurance companies and consulting firms) • Uni programmes not accredited • Also undergrads seem not to be able to register with IoA and do IoA exams whilst in college • TASK committed to supporting local Uni programmes • Resource and time constraint • Two qualified actuaries have offered to teach • & Participate in course reviews and examination marking

12. Areas of employment • Actuarial work as employee of: • Life insurers : 19 • Health care organisations : 3 • General insurers None • National social security schemes : None • Complementary pensions : None • Investment company : 3 • Regulator or Govt Departments : 6 • Banks : 15 • Consulting actuary working mainly in: • Life insurance : 3 • Heath care : 2 (part of time) • General insurance : Not much • Social security 2 (part of time) • Pensions : 12 • Investment : 3

13. Statutory Roles & Issues – Insurance • Insurance Act Cap 487 • Actuarial certification of long term insurance premium rates • Annual statutory actuarial valuations of life funds • Independent actuary report on mergers, acquisitions • Actuary defined a FIA or FFA or such other as approved by Commissioner • Note Dept upgraded as Insurance Regulatory Authority from 1 May 2007 • Full review of Insurance Act underway – RBC and RB solvency margins • No statutory actuarial role for non-life or health care currently • Position paper lobbying for actuarial certifications of technical provisions and of insurer financial condition submitted • TASK hopes to play key role in review of Insurance Act

14. Statutory Roles & Issues – Pensions • Retirement Benefit Act No 3 of 1997 • Triennial actuarial valuations of DB schemes • Minimum funding actuarial valuations (no prescribed basis) and statutory remedial plans • Actuarial certifications of amendments effecting financial health • Actuarial evaluation on winding up • Actuarial certifications of transfer values and commutation terms • Initial statutory requirement for actuarial reviews of DC schemes dropped in 2004 • Regulations on scheme conversions being prepared • Actuary defined as person recognised as such by IoA, FoA, SoA, CIA, AIA, JIA • Some provisions in Income Tax Rules on treatment of actuarial surpluses and deficits

15. Snapshot of Insurance Industry in Kenya • 46 companies of which 23 transact life • Most life companies composite • Estimated total annual premium 2007 of K Shs 40bn (US$ ) comprising: • Life K Shs 12bn (US$ ) • Non –life K Shs 28bn (US$ ) • Estimated total assets of K Shs 100bn (US$ ) • Life K Shs 55bn (US$ ) • Non-life K Shs 45bn (US$ ) • Total aggregate share capital 2005 estimated at K Shs 30bn with total disclosed profit of K Shs 4bn • No company has resident qualified actuary and only a handful have actuarial departments

16. Snapshot of Retirement Industry in Kenya • Sector comprises: • Unfunded PAYG PSSA • NSSF – DC provident fund (K Shs 60bn est) • Occupational schemes (K Shs 170bn est) • Legislation has focused on enhancing protection of members’ benefits and improving governance of schemes • Pronounced trend to DC – particular concerns re contribution rates, distribution and equity of allocation of returns to member accounts, conservative investment strategies, member communication • Re-engineering of public service schemes • Dichotomy of debate re pensions reform • National Pensions Policy proposed with co-ordinated strategy • Studies to introduce universal zero pillar social assistance programme • Reform of NSSF • Proposed conversion of PSSA to NDC for new entrants

17. Challenges facing Actuarial Profession in Kenya • Lack of understanding and hence appreciation by industry and regulators of the whole set of services that actuaries can offer • Most life insurance companies will only call actuaries to undertake yearly actuarial valuations and certify rates for new life products • Trend to DC limiting traditional DB actuarial role • Perceived high cost of actuarial services • Effective implementation of actuarial recommendations • Actuarial education, resource and capacity constraints and lack of accreditation • Capacity of market to absorb actuarial science graduates in traditional fields – frustration and disillusionment of actuarial graduates • Challenge from other courses – CFA • Mentoring and training of students • Wider fields not happening and hard sell, but some individual actuarial graduates have done well in banks, investment houses and IT

18. Challenges facing Insurance and Pension Sectors in Kenya • Insurance Industry • Low level of penetration of insurance particularly life insurance • Customer focus, marketing and distribution strategies, product innovation • Trained man-power across the insurance value chain • IT and processes • Operational, financial and risk management strategies • Pricing and reserving • Lack of data and statistics • Fierce competition and rate under-cutting • Insolvencies and financial distress of insurers and HMOs • Move to fair value accounting and risk based capital • Insurance company taxation

19. Challenges facing Pension Sectors in Kenya • Low coverage • Move to DC and associated challenges • Public sector scheme actuarial deficits • Pensions policy dichotomy • Challenges can in fact be opportunities for actuarial profession in Kenya

20. Update on some relevant TASK initiatives • Strategic Plan • IAA membership – code of conduct etc • Formal internship programmes • Actuaries to volunteer to teach at local Uni programmes • Proposal to regulate role of actuarial profession in Kenya and TASK as statutory professional body • Forum for regulators and policy makers • Forum for CEOs of insurance companies • Work done by actuarial firms on developing mortality tables for insured lives and testing of motor insurance rates for Association of Kenya Insurers • Project ideas and sponsorships for students • Project on comparison of international insurance and pensions regulations • Two position papers to date to Ministry of Finance • Actuarial appreciation course in the local insurance syllabus • Need for more member meetings and forums – two monthly forums • Professionalism course for actuarial practitioners

21. TASK Vision 2010 • Achieve full IAA membership – 2008 • Vibrant and dynamic actuarial profession • Strengthen statutory roles in traditional fields • Local universities accreditation – 2010 • Participate actively in International Congress of Actuaries in SA 2010 • Help we need and suggestions • Collaboration with IAA and African actuarial associations • IAA assistance on education strategy • Regular interaction with peers in Africa and other countries

22. INSURANCE INSTITUTE OF KENYA 20th ANNUAL CONFERENCEParadigm Shift : Managing for High PerformanceRedefining our Core Business: An Underwriters PerspectiveSundeep K Raichura18 Nov 2005

23. Paradigm Shift: Managing for High Performance How do we define high performance from an insurer’s perspective?

24. Paradigm Shift: Managing for High Performance • Questions to a ‘high performing’ composite insurer: • What was increase in gross premiums? • To what extent did increase in gross premium translate to increase in profitability? • What was relative performance of life/non-life business? • What was underlying profitability of individual products? Lines of business? Which areas did well? Which did not? Why? Which products are adding value? Which products are being subsidised? • What was relative performance of ‘offices’? • Were actual premiums consistent with pricing basis? • Was profit underwriting, investment, other? By class? If underwriting, source? • What was expense ratio? Expense overruns? Were profits due to lapses? • Trade-off between profitability v solvency? • What was year on year return on shareholders’ equity? Did it meet shareholders’ hurdle rate? • How was profitability measured? Statutory? Realistic? • Is the capital adequate given the level of business? Etc etc etc • Insurance business a complex business; multi-faceted, multi-risk carrier

25. TABULATED PRÉCIS OF THE INSURANCE INDUSTRY . Market penetration (I.e gross premiums to GDP has remained around 3% for the last five years Source : Report of the Commissioner of Insurance for y/e 31 Dec 2003

26. LIFE VS NON LIFE PREMIUM INCOME Average life : non-life premium ratio : 1:4 Life insurance penetration : 0.7% cf SA approx 16%; Zim 2%; UK/US 10%

27. When was the last time we sharpened our axe as an industry?

28. Challenges Facing the Insurance Industry (1) • Increasing level of penetration, but huge potential • Are customer needs being met? • Customer focus, marketing and distribution strategies, product innovation • Trained man-power across the insurance value chain • As well as appropriate KPI • IT and processes • Operational, financial and risk management strategies • Pricing and reserving • Lack of data and statistics • Fierce competition and rate under-cutting • Underwriters vs intermediaries ought to have synergistic relationship – is there? • Fraud (ambulance chasers, collusion, malpractices) • Professionalism across the insurance value chain

29. Challenges Facing the Insurance Industry (2) • Insolvencies and financial distress of insurers and HMOs • Image • Review of Insurance Act and regulation • Move to fair value accounting and risk based capital • Insurance company taxation • Economic growth and wealth • Conservatism vs innovation (bancassurance) – are we too steeped in tradition? • Do we see the big picture? • Some external, but most internal • Challenges are in fact opportunities for managing for high performance and paradigm shift

30. Paradigm Shift: Managing for High Performance If necessity is the mother of invention, discontent is the father of progress David Rockfeller, American businessman

31. Redefining Our Core Objective Insurance is all about undertaking risk Isn’t risk our raison d’etre? But do we understand the true nature of the risks we face? Do we understand the true nature of our business? What level of risk is acceptable?

32. Paradigm Shift: Managing for High Performance • The word is ERM - Enterprise Risk Management “The discipline by which an organisation (in any industry) assessed, controls, exploits, finances and monitors risk from all sources for the purpose of increasing the organisation’s short and long term value to its stakeholders” Casualty Actuarial Society • Risk management is as much about identifying opportunities as avoiding or mitigating losses ASNZS 4360 –1995

33. Implementing ERM – Internal Environment • Internal environment is the context within which the enterprise functions: • Governance structure • Effective and dynamic leadership • Reporting structure • Assignment of authority • Management style • Ethical values • Risk culture • This foundation and culture will set the course for how risk will be handled across the enterprise • The independence and involvement of the Board and the tone set by management have a critical influence on the internal environment • The Board and senior management must determine their risk objectives, risk appetite, risk tolerances and agree on risk management roles and responsibilities • Enterprise Risk Management Specialty Guide Society of Actuaries

34. Insurance Risks

35. Eg Underwriting Risk • Underwriting process risk – eg financial loss related to selection and approval of risks to be insured • Pricing risk – eg financial loss due to insufficient premium charged for a risk undertaken • Product design risk – eg exposure to events not anticipated in the design and pricing of a product • Claims risk – eg more than/higher than expect claims • Economic environment – eg adverse effect on the company due to changes in socio-economic conditions • Net retention risk – eg losses due to catastrophic or concentrated claims experience due to higher risk retention • Policyholder behaviour risk – eg unanticipated behaviours of policyholders adversely effecting company • Reserving risk – eg inadequate provision in company accounts for policy liabilities

36. Risk Management Strategy (1) • Identify all risks • Formal consideration of all facets of business • How and Why risk can occur? • “What if” considerations? • Quantify the risk • Source • Consequence and severity • Likelihood • Sensitivity analysis

37. Risk Management Strategy (2) • Evaluate the risk • Rating – qualitative and quantitative analysis • Consider controls or treatment • Risk treatment – weigh up the risk and • Retain • Avoid • Reduce likelihood of occurrence • Reduce the consequences • Transfer the risk (eg reinsure) • Establish controls

38. Risk Management Strategy (3) • In respect of risks retained: • Ensure capital is provided to cover risk • If no capital, then don’t accept the risk • Price properly for the risk • Be wary of strategies aimed at improving policy returns where shareholders have to put up capital without extra reward • If the market cannot bear the price, avoid the risk • Scenario test • Be wary of combinations of events • Be wary of undercutting without appreciating impact on overall business • Ensure all parties are aware of risks being undertaken • Ensure coordination between all parts of business • Continually review • Integrated approach is key to successful ERM

39. Paradigm Shift: Planning mindset • Consider following key questions as part of insurance business planning and review to add focus to all areas of insurer’s business, all new initiatives or ventures: • How much capital is required and what is timing of these capital requirements? • What are the options for funding (debt, equity,o/d)? • What impact does undertaking this have on our P&L? • What are the potential returns under the different funding options? • What risks does undertaking this impose on the company? • Is the return consistent with the risk and the shareholders’ hurdle return? • Where and how will this create value? • How does this fit strategically with the company’s existing business; how does this contribute to the company’s vision and goals? • Are there non-financial benefits to the company?

40. Paradigm Shift:Marketing • Who are our customers? • How are we going to sell to them and service them? • What are we going to sell them? • Product is the final element since insurance “sold and not bought”

41. Paradigm Shift:Marketing • Who are our customers? • Analyse the population and its insurance needs • Analysis of current and potential customers critical • Divide into groups which have different characteristics • Same product need or group of product needs • Distribution channel • Population segments • Consider whether any competitive advantage over others • Have we thought of crop insurance, rural population needs, cooperatives, AIDS/HIV solutions

42. Paradigm Shift:Marketing • How do we reach them- Distribution channels? • Brokers • Tied agents • Direct sales force • Other direct sales routes • Telemarketing and call centres • Other innovative structures • Internet?

43. Paradigm Shift:Marketing • Products and product development • What products appropriate? • How does this compare with current offering? • Any niche? • Any unfilled needs? • Level of awareness of potential customers • Innovation • Yet simplicity

44. Paradigm Shift: Competition • Wave of competition - fierce under-cutting • Competition not always on price alone • Alternative strategies: • Better customer focus and products which fit customer needs • Servicing, particularly after sales service • Customer retention strategies • Brand and brand awareness • Claims settlement • Niche marketing • Financial strength • Technology • Distribution channels • Better underwriting and controls • Investment performance • Efficient processes • Loyalty rewards CSR etc etc

45. Paradigm Shift: Trained Manpower • Holds key to managing for high performance • Training and education, with IT skills • Provide information and exposure • CPD • Proper KPIs • Get right people in right places • And incentive structures – align interests of your manpower with your business • Internal environment • Coherent team • Communication

46. Paradigm Shift: IT is the name of the game • No compromise on real-time online IT system • Capturing all processes of the company • Efficiency, integrity of information • Checks, balances through system control • Mitigates and guards against fraud and malpractices • But no good unless critically analyse information • Don’t overlook potential of data mining to your business • Monitor, analyse, trend, dissect data and information for all processes • Develop risk models, scenario tests • Actuaries key here • Invaluable tool for high performance!

47. Paradigm Shift: Importance of the Actuarial Profession • Currently narrow utilisation in life insurance with some exceptions • Largely statutory valuation role and limited product pricing • Myth: Actuaries necessary evil in life, not needed in non-life, other parts of business and for risk management • Many of the issues addressed in this presentation look non-actuarial in nature • Myth: Actuaries too expensive • Do cost benefit analysis

48. Paradigm Shift: Importance of the Actuarial Profession • Truth: Actuarial technical training/skill/approach/rigour/skillset is crucial in making a robust business case • Actuary/actuarial resource should be central to the planning process and should be key player in business planning, development, strategies for growth • Can play crucial role in ERM process even if limited implementation • Actuary can assess and understand the complex interactions of insurance business across all areas and communicate these to all parties, board, management, shareholders and regulators • Can help evaluate implications of courses of action and hence enable more informed decisions • Can make contribution in helping insurers to avoid making potentially costly mistakes • No claim on monopoly on wisdom, but can contribute managerially and technically as part of multi-disciplinary team • Available and growing actuarial resource in Kenya • The Actuarial Society of Kenya (TASK) will be doing its part • Use this valuable resource to turn risk into opportunity!!!

49. Paradigm Shift: Managing for High Performance • Will all this help? • Beating the odds through a disciplined, rigorous approach to insurance business management based on a proper understanding of the business • Risk/reward optimisation • Risk preparedness • Effective enterprise culture • Competitive advantage • Isn’t this what our core business all about? • Isn’t this what high performance is all about?

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