1. Challenges faced in Asset Share calculations
25th India Fellowship Seminar
Challenges faced in Asset Share calculations
Presented by:
Samit Upadhyay
Jasdeep Singh
Abhinandan Reddy
Guide: Madhura Maheshwari
9 June 2016, Mumbai
Indian Actuarial Profession
Serving the Cause of Public Interest

2. Agenda Define Asset Share Role of Asset Share Introduction
Principles – From Guidance Note 6
Challenges in calculation
Possible Alternatives
Key Consideration in Asset Share Calculation
Questions

3. Introduction

4. Introduction Asset Share is Accumulation of - www.actuariesindia.org
Premiums
Investment Returns
Benefit Outgo
Expenses
Commission
Taxes
Shareholder Transfers
Cost of Guarantee & Capital Charges
Miscellaneous Surplus
Accumulation of -
GN6 definition - An asset share for a policy grouping at a given point in time is the accumulation of the premiums received plus investment income earned from the inception of the policies, less deductions due to benefit payments, commission, expenses, tax, a reasonable cost of capital and of guarantees, contribution from miscellaneous surplus (if considered appropriate) and transfers to shareholders.

5. Introduction Role of Asset Share
Declaration of Bonuses
Surrender Value Calculation
Death Value Calculation
Maturity Value Calculation
Role of Asset Share
Reserving
Investment Strategy
Cost of Guarantee Calculations
Survey Result - Role of Asset Shares among Indian Companies
Milliman India Asset Share Survey – 04th February 2014

6. Key Considerations

7. Key Considerations Policy Grouping Data Basis Smoothing Others

8. Key Considerations Policy Grouping Data Basis Smoothing Others

9. Policy Grouping – Principles
As per GN6 – The Appointed Actuary should consider whether it is appropriate to group policies for the purpose of determining bonus rates.
Asset Share where calculated, should be determined for each policy grouping
Key Considerations for Setting Groups
1. Maintaining Equity – The Grouping of policies should not materially disadvantage one group at the cost of other.
2. Guided by Risk Sharing Rules – Such as views on
- Policy holder’s Reasonable Expectation
- Balance Between Risk & Reward
Basis for Setting up Groups
1. Based on Key Product Features, such as
- Similar Bonus Structure
- Type of Plan
- Date of issue
- Policyholder’s age
2. Other Features, such as
- Bonus earning capacity
- Moneyness of Guarantee

10. Policy Grouping – Challenges
Key Challenges in determining level of grouping for asset share calculation
Avoidance of cross subsidy especially if its systematic
Determination of homogeneity
Large Group : High extent of cross subsidy
Small Group : Credibility of basis and absence of sufficient pooling
Too large Vs too small groups
Investment : Hypothecation of assets and measurement of performance
Mortality : Experience with sufficient credibility
Ability to measure / estimate parameters at the group level.
Establish equity, given practical constraints of systems
Others

11. Policy Grouping – Alternatives
Possible Solution to address the challenges in grouping
By considering volume Discounts
Limit options under a bonus series
Minimise cross subsidy at pricing stage
Start with broader groups and keep splitting as gain credibility
Consider policyholder’s reasonable expectation
Consider the ability of declaration of different regular / terminal bonus rates
Grouping Asset Share at appropriate level
Example - Expenses based on year of issue and product , Investment based on SP/RP, moneyness of guarantees
Aggregate policy level asset shares in groups of regular / terminal bonus series
Policy Level Asset Share & different groups for different parameters

12. Key Considerations Policy Grouping Data Basis Smoothing Others

13. Data : Challenges
As per GN6 – Wherever possible, the Appointed Actuary should make use of actual historical data ... to derive the historical asset share.
Of contracts – for policy level asset share calculation
For measurement of experience
Availability of complete and valid data
Availability of granular data for historical operating experience - most significant challenges faced by companies*
Exacerbated if historical data not stored / captured / complete
Further, difficult to validate
Especially an issue for companies moving to late adoption of asset share
* Millman - India Asset Share Survey 2014

14. Data : Challenges
Availability of granular data for historical operating experience - most significant challenges faced by companies*
* Millman - India Asset Share Survey 2014

15. Data : Possible Solutions
Consistent with Statutory Valuation
Invest in resources to collate & validate data
Only when detailed historical data not available
As per GN 6 – use of proxies to the actual historical experience
Alternate systems like accounting etc.
Checking split between asset share and estate by sources of surplus method
Validate the parameters used

16. Key Considerations Policy Grouping Data Basis Smoothing Others

17. Basis – Principles Identification & Documentation
Treatment (for both surplus & deficit) of various sources of surplus
Guides : Past practice / Benefit Illustration / PRE
Equity, fairness & consistency of approach from year on year
Once sources to be shared ascertained
Use historical experience, only if not available, proxy best estimates can be used
Correspondence between benefit and charge
Consistency depending on the use of asset shares
Statutory valuation basis and book value asset shares
Bonus declaration and possibly market value asset shares

18. Basis – Challenges(1)
In general for various parameters need to establish if asset shares would be allocated
Charges : No sharing of surplus
Experience : Sharing of surplus
Identification of sources : Requires complex modelling, granular experience and attribution analysis
Distribution of a source : usually requires some evidence of recurrence
Companies are in various stages of operation and emergence of surplus is not uniform in each stage
Initial phase : expense overrun
Growth phase : high lapse profits
Maturity phase : relatively low surrender profits

19. Basis – Challenges(2) Conflicting choices for attribution of a source
Competitiveness of existing business vs Support New Business overruns
Solvency of the fund vs boost to payout values
Fairness vs Smoothing and implications to PRE
Equitable allocation of lapse / surrender surplus to continuing policies
May not be fair to share deficit automatically if surplus was shared, eg.
Mortality deficit due to increase in Non Medical Limits for new business
Suitability of expression of a charge wrt a dependent variable, eg.
Moneyness and Cost of Guarantee may not correspond to Charge for Guarantee (% of asset shares)
Allocation of global items like burn through cost Deferred Tax Asset

20. Basis – Alternatives (1)
Attribution of Charge vs Experience
Consistency with Benefit Illustration is paramount (not only figures but also foot-notes)
Adequate documentation (possibly in PPFM) of rationale with expected future treatment shall ensure continuity
Decision making could be shared with the WPC - to ensure consideration from a wider perspective
Test recurrence / emergence of surplus in various plausible scenarios
Decision could be made given FCR scenarios ( possibly even longer term, if appropriate)
Depending on lifestage of the Company, form risk sharing groups, eg
Only policies that supported acquisition overruns shall be shielded from renewal expense overrun or will not be charged cost of capital etc.

21. Basis – Alternatives (2)
Target minimising inter generational cross subsidy
Measure and attribute parameters at appropriate risk group level
Test suitability of charge and its expression by dynamic projection of Asset Shares
Allocation of investment returns commensurate with CoG
Allocation of global Items like burn through cost and DTA could be on
Marginal basis : allocate marginal cost to incremental business
Contribution basis : Each policy contributes to its share of tax and a higher CoG contribution

22. Key Considerations Policy Grouping Data Basis Smoothing Others

23. Smoothing : Principle
Essential characteristic of with profits business
May pool business both within a generation and between generations
Presence of some discretion, however the AA should consider following
Genuine reduction in volatility of payouts
Change in risks of statutory / realistic solvency
All policyholders treated fairly
Consider treatment of smoothing surplus / deficit and if it is
Shared with survivors
Credited to estate / asset shares
Is consistent with PRE

24. Smoothing : Challenges
Explicit identification of smoothing account
Should be supported by asset share or estate
Appropriateness of various smoothing methods
Balance between extent of smoothing and deemed satisfaction of PRE
Choice between smoothing input parameters like investment return or pay out values
Joint impact of smoothing rules with dynamic management actions
Impact on charge for guarantee
Requires complex modelling

25. Smoothing : Possible Solutions
May be simpler to input unsmoothed parameters and smooth payouts
Test resilience of smoothing rules with management actions using stochastic methods
Test if the account tends to zero over medium term
Document the approach - after testing run off of entire business in various economic / operating scenarios
Minimise reliance on estate for smoothing by
Maintain smoothing reserve account as a component of reserve for future bonus to avoid reserving over and above asset share
Smooth both regular bonuses as well as terminal bonus to keep smoothing reserve to its minimum as well as meet PRE

26. Key Considerations Policy Grouping Data Basis Smoothing Others

27. Others – Principle Miscellaneous attribution
Pricing of rider / non par elements needs to be fair 
Reinsurance arrangement should consider risk vs reward, especially if non par business is written in the fund and surplus shared
Overall should be as per PRE of par policyholders 
Segregation and merger considerations
Formal / notional segregation of funds and respective asset shares
Could also be merged if benefits expected from diversification
Separation of measurement / allocation of parameters
Appropriate disclosure made to existing and prospective policyholders

28. Other – Challenges
Allocation of miscellaneous surplus due to absence of separate bonus series could lead to inequity if material
between reinsured and not reinsured policies
between with rider and without rider policies
Allocating the effects of reinsurance especially in surplus/ non proportional type of reinsurance 
In case of non par business / riders
a balance between solvency of the par fund and fairness of pricing
Ability to administer multiple systems in case of a merger
Can significantly increase complexity around data and measurement of parameters
Trade off between diversification credit and separation of allocation to asset shares

29. Others – Alternatives Reinsurance Rider/ Non par business
The effect of reinsurance can be clubbed with mortality experience / charge
This could include the allocated premium for cat re or any other non proportional arrangement
Rider/ Non par business
Could shield the par policyholders till parameter estimates gain credibility
Experience sharing reinsurance arrangements can be helpful to balance solvency and fairness 
Segregation / Merger
AA should document the structure and rationale of the sub-funds and the risks that are shared within each sub-fund for experience pooling
Consistent treatment from year on year 

30. Thank You
Questions?