Role of CMA in life insurance industry Vadapalli Srinivas

Evolution of Insurance Insurance is sharing of risks. Marine Insurance Mutual Benefit Societies. Less of Government Control

Evolution of Insurance More than 200 Insurance Companies prior to Independence The Insurer – Bank – Industry Settlement of claims – an issue Repudiation of claims on flimsy grounds

Evolution of Insurance First comprehensive legislation in 1938 – “The Insurance Act, 1938” An Act to consolidate the law relating to business of insurance. Establishment of Controller of Insurance Provisions to protect policyholders

Evolution of Insurance Nationalization of life insurance business and the establishment of Life Insurance Corporation of India – 01.09.1956 Monopoly of Life Insurance Business in LIC Nationalization of General Insurance in 1972

Evolution of Insurance Malhotra Committee constituted in 1993 Submitted Report in 1994 Recommended - Insurance Sector to be opened up for Private Players to improve customer service and to increase the coverage of insurance Recommended - Establishment of a Regulator The Insurance Regulatory and Development Authority Act, 1999

Evolution of Insurance Several Regulations brought in – Customer Focus Evolution of ULIPs Challenges in a highly competitive market Unfair Business Practices – sporadic Tightening of Regulations to protect policyholders Regulation of ULIPs – SEBI vs IRDA – Presidential Ordinance

Life Insurance – An Overview Life Insurance business means the business of effecting contracts of insurance upon human life, including any contract whereby payment of money is assured on death ( except death by accident only) or the happening of any contingency dependent on human life ……………………………..

Life Insurance – An Overview The Business involves Product design and development Distribution Policy Servicing including settlement of claims

Life Insurance – An Overview Product Design And Pricing Simple way of looking at Pricing components Mortality Expenses Interest

Life Insurance – An Overview Mortality Rate is simply the probability of a person aged “x” dying within one year before he attains the age of “x+1” For example, if we take a group of 1000 people aged 35 years and before they attain 36 years of age, 3 persons die, we say the Mortality Rate of L(35) – L(36) is 3 per thousand.

Life Insurance – An Overview Thus if an Insurer wants to cover a group of 1000 people aged 35 years for a period of 1 year, considering the mortality rate of 3 per thousand, we require Rs.3000 to cover this group and thus the premium required is Rs.3/- per member assuming that there are no other expenses and there is no profit loading. To this we add “expenses’ to cover the management expenses of the business

Life Insurance – An Overview The premium is always received in advance. All the claims may not occur on day one and the premium lies with the insurer for some time and it earns some interest. A part of the interest may be passed on to the group. Thus the Premium may be taken as Mortality Rate + Expense – Interest earnings

Life Insurance – An Overview Challenges in the fixation of the Premium How to determine the Mortality Rate? Census statistics vis-à-vis the actual experience Life Style – socio economic profile Life Insurance being long-term contracts, how to assume expenses? What should be the rate of interest to be assumed?

Life Insurance – An Overview Level Premium concept Expenses- Assumption challenges Expenses include distribution expenses and management expenses and policy administration expenses. Under Level Premium, expenses have to be assumed for the entire term of the policy. Elements of Fraud – Quality of business Adverse judgments – compliance

Life Insurance – An Overview Challenges in Interest assumptions Volatility in capital markets Inflationary trends Complex financial products Statutory and Regulatory Restrictions Peer Pressure Customer expectations

Life Insurance – An Overview Reinsurance Requirements Catastrophes Statutory Changes – New Section- 45 and the challenges associated with this amendment Solvency Margin Requirements Calculation of fair value for voluntary exits Revenue Account and Balance Sheet Mortality vs Morbidity

Life Insurance – An Overview Surplus or Deficit? Mortality Surplus Investment Surplus Expenses Surplus If Surplus, 10% to shareholders and 90% to Policyholders in case of participating policies Solvency Margin – Statutory Requirement 1.5

Appointed Actuary Appointment to be approved by the IRDAI Life Insurer cannot carry on insurance business without an Appointed Actuary Have powers to access all information and documents. Can attend meetings of the management including BODs, shareholders or policyholders …. Etc.

Appointed Actuary To render actuarial advice on product design, pricing, insurance contract wording, investment and reinsurance. To ensure the solvency of the Insurer at all times. Certification of assets and liabilities. To avoid contravention of the act o prejudice to the interests of the policyholders.

Appointed Actuary Compliance with the Regulations To ensure that the premium rates are fair To consider reasonable expectations of the policyholders in valuation and distribution of surplus.

Syllabus for an Actuary Financial Mathematics Finance and Financial Reporting Probability and mathematical statistics Models Statistical Methods Business Economics and Financial Economics Risk Management Model Documentation analysis and reporting

Syllabus for an Actuary Finance and Investment Enterprise Risk Management Health and Care Other Insurance related subjects

Role of CMA Product Pricing Investment Management –Asset Liability Management Planning and Budgeting Taxation Compliance Valuation Statutory Returns

Role of CMA Solvency Margins – capital sufficiency Developing profitable business models Continuous Market Research Management of various Risks - Competitive Risk, Economic Risk, Reputational Risk, Legal Risk, Compliance Risk, Operational Risk, Taxation Risk, Investment Risk …. etc

Role of CMA Rationalization of costs Optimization of returns Constant vigil Cost control vs cost reduction Conservative approach