1. Low Performing Endowments
By Yogita Rawat, Himanshu Bhatia, Ranjan Gupta & Swati Gupta
Guide : Mr. Suresh Sindhi
22nd Indian Fellowship Seminar
Indian Actuarial Profession
Serving the Cause of Public Interest

2. Agenda Case-Study: Background
Underperformance of Endowments: Industry Perspective
Underperformance of Endowments: Possible Reasons
Perspective1: Actuaries are responsible for current Underperformance: Possible Reasons
Perspective2: Another perspective: Actuaries are not responsible for current underperformance:
Solution & Summary

3. 1. Case-Study: Background
Need consideration of two aspects of the case study:
Actuaries working in life companies are responsible for the current underperformance of endowments both with profits and unit-linked, by not being involved enough in the projection process, and by non transparent pricing hence causing misery and disillusionment to many.
Should the Actuarial Profession take on a more general role to whistle blow when we see possible future general problems in areas where it is accepted we have knowledge (particularly life and pensions business)?

4. 2. Underperformance of Endowments: (Industry Perspective)
Outlook I: Policyholders’ Perspective
Returns from endowments lower than what was being promised (illustrated) and priced for?
Par Endowments {Lower Bonuses than promised & priced} &
Unit Linked Endowment Policies {Lower Benefits than illustrated in form of benefit illustration}
Outlook II: Insurance company’s perspective:
Lower Actual profit margins/ Lower profitability from endowments &
Non achievement of Business plans

5. 3. Underperformance of Endowments: (Possible Reasons)
Low Investment returns
Expense overruns including expense inefficiency & allocation (Par Business)
Market conditions supplemented by high guarantees at the start of policy start and Guarantees charges
Low Surrenders; in case of lapse supported products, High surrenders affecting investment returns
Pricing Issues: Relative performance with respect to sales illustration
Product designs as compared to other market solution
Low business volumes; expense inefficiency
Competitors' aggressive pricing

6. Are Actuaries working in life companies responsible for current underperformance?

7. 4) Actuaries are responsible for current Under-performance: Reasons
4.1 Non Involvement in Projection Process
4.2 Non Transparent Pricing
4.3 Professional Obligations
4.4 Regulatory Obligations

8. 4.1 Responsibility of Actuaries: Projection Process
Non Involvement in PROJECTION PROCESS
Projection of all pricing assumptions including
Investment, Expense & bonus loading
Withdrawals
Projections of other Business & corporate plans
Business volume & its subsequent effects on expense & other assumptions
Business profitability

9. Responsibility of Actuaries: Projection Process
Lack of Proactive approach towards investment return projections i.e. strategy and investment function (role of investment actuary)
Lack of Continuous dialogue between Investment, Actuarial and risk teams i.e. lack of Involvement in the projections of long term best estimates of interest rate & bonus rate declarations
Non-Harmony between experience rating and pricing at regular pace
Allocation of expenses(split between par and non par fund)
Competition (guaranteed benefits reasonably supported by projections)
High initial guarantees

10. Responsibility of Actuaries: Projection Process…contd..
Lack of continuous dialogue between marketing, business planning team & Actuaries
Lack of involvement between operational & actuarial functional w.r.t. surrenders
Lack of involvement between Operational & actuarial functional

11. 4.2 Responsibility of Actuaries: Non Transparent Pricing
NON TRANSPERENT PRICING –APS 5
No standard/transparent approach to calculations of Asset share & hence bonuses in case of par business
Business projections based on unachievable plans based on current conditions
Hidden Charges in case of ULIPs
Clear communication in form of benefit illustrations & other demonstrations
Link between benefits flowed & other market conditions applicable (Especially if benefits linked to index/other benchmarks)

12. 4.3 Responsibility of Actuaries-Professional Obligations
Responsibility placed to Actuaries by the virtue of professionalism
GN6-Management of participating life Insurance Business with reference to distribution of surplus
APS 1: “Every actuary has a responsibility to the profession and his/her responsibilities to a client must be consistent with this. An Appointed Actuary is however also in a special position as he/she has statutory responsibilities to the IRDA.”
“The Appointed Actuary must advise the company keeping in view the provisions contained under Section 49 of the Act as to how much of any surplus be distributed to policyholders or transferred to shareholders and recommend the allocation thereof. “
GN 22: Reserving for Guarantees in Life Assurance Business

13. 4.4 Responsibility of Actuaries-Regulatory Framework
Responsibility placed to Actuaries by current regulatory framework
IRDA (Appointed Actuary) Regulations, 2000:submittion of the actuarial advice in the interests of the insurance industry and the policyholders
IRDA (PPI) Regulations,2002: Proper system in place to protect policyholders
IRDA (Distribution Of Surplus) Regulations, 2002: responsibility to advise BODs on bonus distribution
IRDA (Assets, Liabilities And Solvency Margin Of Insurers) Regulations, 2000: puts responsibility to maintain solvency at all time
Various circulars & guidelines issued from time to time

14. 5)Another perspective: Actuaries are not responsible for current underperformance:
Systematic risk: No control over investment market
Lack of hedging instruments & other regulatory restrictions
Limitations of modeling and hypothetical modeling
Current lower Returns in investment :Surrenders responsible to the extent it is responsible for deviation in investment strategy & immediate investment losses
Responsibility of Other specialist functions
Lower marketing volumes: Industry Issue, Lack of Insurance awareness

15. 6. Solution
Role of whistleblowing as required by the virtue of professionalism and regulatory framework & mandated by other stakeholders of insurance company
Active Investment strategies & Investment decision,
Active involvement with other specialists so as to protect policyholders
Involvement in all major business development, risk, corporate governance committee.
Providing its knowledge & depth of working experience: Long run projections based on stochastic modeling
Reasonable guarantees well supported by above projections
Lower initial benefits to be supplemented by proper marketing

16. 7. Summary & Conclusions
“The essence of a profession lies in upholding its standards, technical and ethical, in the public interest”.
Knowledge & actuarial abilities needs to be channelized towards role related to future projections with involvement of other specialists
Transparent pricing
Whistle blowing: A professionally required obligation

17. “Time for two way discussion