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3Indian Actuarial Profession Serving the Cause of Public Interest The Actuary India December 2011
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FROM THE PRESS
Business Standard - Among the least
protable across Asia
FROM THE DESK OF
Chairperson - Advisory Group on
Accounting and Solvency -
Insurance and Pension Funds -
KS Gopalakrishnan
DISCIPLINARY PROCEEDINGSCase of Other Misconduct in Relation to
Member of the Institute Generally
C. R. THAKORE (Complainant) Vs
NALIN KAPADIA (Defendant)
BOOK REVIEW
Reliability Engineering and Risk Analysis:
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Mark Kaminskiy and Vasily Krivtsov;
Mercel Dekker, Inc. 1999
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FROM THE CHIEF EDITOR
NICK TAKETdiscusses the changes in theprofession
FROM THE PRESIDENT
LIYAqUAT KHANdeliberates on leadership,responsibility and accountability to members.
REPOTAGE
7th Seminar on Current Issues in Life Assurance
(CILA) by Hardik Thakkar
FEATURES
Repo rate: is awless antidote to manage
ination?
by R Muthukumar and Nitya Nand Tripathi
Unit pricing: Concepts and Challenges
by Shamit Gupta and Sanket Kawatkar
New structure for professionalism
courses introduced by IFA, UK
by Gautam Kakar
MEENA SIDHWANI
Appeal for donation Meena Sidhwani
Memorial Education Award Fund
Meena Sidhwani Memorial awardees
the best and bright ones
Peuli Das
Kunj Maheshwari
STUDENTS COLUMN
General Insurance: a rmer footing on
shaky ground by Jonathan Nicholls, PwC,
Jing (Annie) Luo, AMI
25
28
29
Errata - page 30: Review of thebook titled Stochastic Modeling Theory and Reality from an actuarialperspective was wrongly attributed toSamreen Asif in November 2011 issueof Magazine. It was written by MeghaAgarwal.
30
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4 Indian Actuarial Profession Serving the Cause of Public InterestThe Actuary India December 2011
FROMTHE CHIEF EDITOR
Irecently attended the 7th Seminar on Current Issues in Life Assurance, and was struck by a number of changes
from similar events in earlier years.
First, there was the programme. In previous seminars I have always felt a bit sorry for the organisers who have
had to come up with a topical agenda when at times there was little new happening on the life assurance front.
However, this year the organisers task of setting the agenda had already been done for them by the sheer number
of changes that were happening to the life industry. There were sessions on
the changes in product design brought about by the latest Unit Linked Guidelines;
participating business, which has been given a new lease of life by the above mentioned
guidelines;
the latest pension product circular;
the new Direct Tax Code.
These issues were not so much current as urgent. Although, having listened to all of these
sessions, the presentation on the new IPO norms became perhaps a little less urgent than it
might otherwise have been!
Second, comparing this seminar with some of the very earliest seminars I attended when the
industry had just opened to private companies, I was struck by how youthful the participants are now. Perhapsthis is just me showing my age, but I think it is more than this. There has been a huge change in the prole of
the membership of our Institute. It is great that so many members, who were in 2000 just starting out in our
profession, have so rapidly progressed to be senior members of our profession and also senior members of their
employers organisations. Now they are not only attending these programmes, they are presenting at them and
sharing their experiences with each other and with a new generation of members. This is a tribute to their abilities
and it also reects the great strides that the Institute has made.
With so much talent within the profession the Institute needs to redouble its efforts to ensure that there are
sufcient opportunities to allow that talent to blossom.
It is good news to see that the UK governments Migration Advisory Committee has added the actuarial profession
to its list of occupations for which there is a shortage. This will make actuarial opportunities in the UK more easily
available to overseas actuaries.
However, most members of our Institute would prefer to be able to exercise their professional skills here at home
in India.
The actuarial professions in other countries have sought to increase the opportunities for their members by looking
for other, non-traditional elds in which actuaries can apply their skills.
This approach can surely be applied in India, but our re-invigorated profession is relatively young and not well known
in other elds, so it may take some time before we can look to generate signicant employment opportunities
through wider elds.
I think we need to re-examine the more traditional elds and ask whether there are sufcient fellows, associates
and students employed in these.
Times are difcult for most of the companies within these traditional elds, and so companies are naturally looking
to limit their salary bills.
However, I would argue that it is exactly at these times that the skills that we offer can be of greatest value. This
may sound surprising, but when times are tough it is far more important to understand what is creating value in
your business. In the good times it is possible to carry some excess baggage, but now is the time to really make
sure that you have enough of the right resources to measure exactly what is going on in your company, to highlight
those areas to focus on, and to get rid of those activities that are not adding value or are even destroying value.
I believe the onus lies with the senior members of our Institute to ensure that they are strongly selling the value
of our profession in their own organisations, and ensuring opportunities are created for the more junior members
who will follow in their footsteps in years to come.
Nick Taket
THECHIEFEDITOR
FROM
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5Indian Actuarial Profession Serving the Cause of Public Interest The Actuary India December 2011
FROMTHE PRESIDENThild is the father of man, the saying goes thus. Those having responsibility to manage the affairs of IAI,
particularly the elected Council members and the three ofcers: President, Vice President, Hon. Secretary,
hold responsibility for and thus the accountability to not only the present generation of members but
more so the future. It is a responsibility, which has a depth that is hardly realised in dealing with day-to-day
affairs. Sometimes drivers of decision making motives get hidden under the carpet of seemingly relevant issues
and we end up doing damage to the future members. Such damage manifests itself in a number of ways
for example; many get lured by attractions of a good and rewarding career without realising
whether they possess the necessary skills and aptitude required. Why do these things
happen? One reason is the gateway to the membership which is now called ACET. ACET is
not a new idea at all, details apart. Actuarial Society of India (ASI), the predecessor to IAI
used entry exams for student memberships. It was working well, in the sense that those who
passed through this gate, at least knew the hurdles that were awaiting them on the road to
becoming an actuary. On some unfortunate date in August, 2001 and in a time span of some
minutes the entry exam was abolished and thus came the hurdle of 10+ 2 with minimum of
85% in Mathematics. The 85% was further diluted to 75% some day in the year 2008/2009
without such a decision having been put up on the website, thus the advantage going to only
those who were personally known to some of the leadership collegiums. Decisions of this and
other kinds taken with maturity of thought and motives that drive concern for the child, do
go wrong, looking back in retrospect, corrective actions are being taken. This is the job of leaders who takevoluntary leadership responsibilities driven by inner motivations to serve the cause of public interest and
strengthen the professionalism of the profession that they belong to. It is not enough to take appropriate
corrective actions such as ACET, but important to examine the real driver motivations behind decisions of the
past. As a result of year 2001/02 decision of the 10+2, 85% criteria, we have had about 30,000 persons taking
the student membership, out of whom only about 11,000 remain. IAI has to worry about those who have left,
as having left and certainly disappointed, they are unlikely to be friends of the actuarial profession. The IAI must
feel accountable and should now peep into the past and own up the true motivations then, so that anyone
having such an orientation has very little chance of getting into leadership position.
Meanwhile ACET registration started on 10th November, 2011 and will close at the end of the day on
25th December 2011. Driven by Strategy Initiative exercises and converging thought process that led to draft
Vision, Mission and Values statement, we decided to facilitate this opportunity to all parts of India. The ACETexam will be conducted in 48 cities including in J&K and North East. The paid registrations as on date have
exceeded 1,500 and we hope to cross 2,000 by 25th December, 2011. I have no doubt that ACET has the
potential of changing face of the Indian actuarial profession. In the context of the earlier part of this column I
am deeply inuenced by the Values statement and particularly the very rst one, INTEGRITY;
The Values:
Integrity
Respect for others views
Accountability
Continuing learning/Research oriented learning
Transparency
Be responsive/ sensitive
What is INTEGRITY? Doingthe right thing, even when no one is watching a quote from What Do You Think?
preparing for the questions that all clients ask By Bradley M. Smith, Chairman of Milliman. A book just in 112
pages captures the essence of everything that an actuary, upholding The Values should posses and be proud
of. Get one to read if you wish IAI Library. - B-11144
Coming back to the child: who really is the leader? ...Think.... and to assist us in this thought process, look
deeply at the cover page, put in so thoughtfully by Binita. Our VISION is to develop enduring thought leadership.
Regards
Liyauat Khan
CTHEPRESIDENT
FROM
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6 Indian Actuarial Profession Serving the Cause of Public InterestThe Actuary India December 2011
7TH SEmINaR ON CuRRENT ISSuES IN LIFE aSSuRaNCE (CILa)
The 7th Seminar on Current Issues
in Life Assurance (7th CILA) was
held in Mumbai on 24th and 25th ofNovember 2011. The seminar attended
by 123 IAI members and industry
professionals proved to be a very
effective medium for the exchange of
ideas on number of key current issues
that were listed for deliberations.
Avijit Chatterjee, Chair of Advisory
Group of Life Assurance, kicked off the
seminar by giving the participants a brief
overview of the business environment
that the life insurance companies are
currently operating in and he set the
context for the topics to be discussed
over the next two days.
This was followed by the inaugural
address by Liyauat Khan, President
of Institute of Actuaries of India. He
spoke about several important issues
relating to the profession in his speech,
this included his comments on the
draft regulations on the new eligibility
criteria for Appointed Actuaries as well
as recent implementation of Actuarial
Common Entrance Test (ACET) by IAI.
He also highlighted the participation
of the Institute of Actuaries of India in
the regulatory process by the way of
publishing comments and the success
thereof as evidenced in the IPO norms.
The rst session, the keynote address,
was by Mr. Ashwin Parekh from Ernst
& Young. He traced back the growth
of life insurance industry from its
early days and then spoke about the
current environment that the industry is
REPORTAGE
By Hardik Thakkar
operating in and the inherent challenges.
He underlined hindrances to growth on
account of frequent regulatory changes.He also highlighted on the transparency
in the process of designing , drafting
and implementing regulations which
assist in developing the market by
offering clarity to participants as to its
purpose and intentions.
He cited the example of the process
adopted by the RBI in the last three
years in bringing about a higher order
of participation and transparency in
the formulation of regulations. Someof the examples in how well RBI has
implemented Basel II norms in the
country and the development of an
enabling environment in nancial
inclusion were cases to the point.
Mr. Parekh also said that non-availability
of nancial assets, in particular of longer
terms, would continue to be a problem.
If the Government appreciated the
life insurance industrys need for long
term assets, the sector could providemore of the funding required for the
development of infrastructure.
This was followed by a session titled
Trends in product design and
distribution strategies after the Cap
on Charges by Andrew Cartwright
from Kotak Life. He covered the
regulatory changes affecting the pricing
and product design. Statistics on the
fall in overall new business premiums
after these regulatory changes aswell as change in product mix were
shared by him, including increase in
the proportion of non-linked business
across the industry. Reasons for
Variable Insurance Products (VIP) not
taking off as a product category were
also discussed. It was followed by ahealthy discussion where people across
the industry spectrum expressed their
views on this topic.
The third session was Solvency II:
Practical Implementation by Richard
Payne of PCA. The session was kicked
off by a brief introduction to Solvency
II, emphasizing potential usage of the
framework as a decision making tool.
Mr. Payne followed this by some of the
possible approaches towards Solvency II
implementation. This was followed by a
birds eye view of the processes followed
at PCA wherein Mr.Payne shared some
of his experiences in implementing the
Solvency II regime.
Continuing on the theme of regime
change the next session was on the
implications of Direct Tax Code for life
insurers. There were two presenters:
Satyan Jambunathan from ICICI
Prudential and Heerak Basu from TATA
AIG Life. Mr. Jambunathan outlined
the proposed changes in DTC, which is
Organised by : Life Insurance Advisory group
Held at : Hotel Grand Sarovar, Goregaon
Date : 24 & 25th November 2011
Ashwin Parekh
Richard Payne
Satyan Jambunathan
Avijit Chatterjee
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7Indian Actuarial Profession Serving the Cause of Public Interest The Actuary India December 2011
scheduled for implementation in 2012.
He contrasted the proposed changes
with the current tax regime as well as
between the two drafts that have been
circulated till now.
Mr.Basu covered the potential business
impact on the insurance companies
based on the relative attractiveness
of the insurance products, given the
proposed changes. He considered in
detail the effects on policyholder and on
life ofce tax.
The nal session for the rst day
was on participating business titled
Participating business: Best practice
and desirable regulatory changes by
Sanchit Maini of Max New York Life. He
advocated the concept of a Principles
and Practices of Financial Management
(PPFM) document covering the
various aspects of governance of theparticipating business such as surplus
allocation to various cohorts, use
of estate, allocation of expenses to
participating fund, etc. He emphasized
that alignment of benet illustrations
with asset share calculations and
customer communication in the form
of a consumer friendly version of the
PPFM are some of the practices that are
synonymous with treating customers
fairly in the UK and ensuring thatpolicyholders reasonable expectations
are met.
The sixth session of the CILA seminar
and rst on the second day was
Implications of IPO Norms by Mark
Saunders and James Creedon of
Towers Watson. Mr.Saunders started off
the session with a summary of various
stages involved when company goes for
an IPO, mentioning that pre-IPO project
is undoubtedly very important but that
the post-IPO part is often forgotten by
companies. He then gave the audience
a brief overview of recent insurance
companies IPOs. He commented on the
discount to EV at which some European
insurers were trading and on details of
the relative success of Chinese IPOs
compared to Korean ones.
Mr.Creedon talked about the role of
the Actuary in IPO. This was followed by
an analysis of the draft IPO Guidelines
issued on 21st June 2011. Mr.Creedon
went on to talk about the standard
reporting pack followed during IPOs
of Asian insurers and how the Indian
insurers can improve from this
experience.
The seventh session was an analysis
ofthe guidelines on pension products
issued by IRDA by Sanket Kawatkar
of Milliman. He gave a comprehensive
summary of the draft guidelines. He
also highlighted
some potential
issues from
the insurers
p e r s p e c t i v e .
These included
problems with
implement ing
the rules on
group products
where AssuredBenet applied
on the entire fund but the individuals
would continue to be governed by
scheme rules, ambiguity of lock-in
period and potential confusion due
to having to give illustrations on up to
four different projected rates. A highly
debated topic was removal of portability
of annuity once the accumulation phase
was completed; this topic revealed
conicting views of various stakeholders.
The nal session of the seminar was
on the modelling of life expectancy by
Tushar Chatterjee of Towers Watson.
He talked about how current models
fall short when projecting mortality
improvements. In his opinion a risk
factor based multi-state Markov model
allows for better predicting of mortality
improvements which in turn could
improve pricing and reserving for
annuities. He also said that capturing
information at the underwriting stage
on risk factors that affect mortality
could help in building up information
for improving mortality improvement
projections.
All in all, the event ending with vote
of thanks by Nelius Bezuidenhout,
Secretary to the Advisory Group on Life
Insurance was a grand success with
everyone coming out of it with more food
for thought on each of the important
issues that were debated.
About the Auother
Hardik Thakkar works in the Actuarial
Department of ICICI Prudential Life
Insurance Company as Senior Manager
Sanket Kawatkar
Tushar Chatterjee
Sanchit Maini
Mark Saunders
James Creedon
REPORTAGE
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8 Indian Actuarial Profession Serving the Cause of Public InterestThe Actuary India December 2011
FEATURES REPO RATE: IS FLAWLESS ANTIDOTE TO MANAGE INFLATION?
By R Muthukumar and Nitya Nand Tripathi
On July 26, 2011, Duvvuri
Subbarao (Subbarao), Governor
of RBI, declared 50 basis points hike
in Repurchase rate (Repo rate) to
grapple against the ination. Repo rate
became 8% after the rise. Many of the
economists and entrepreneurs were
not contented with this hike and they
commented it would affect adversely
the Indian economy. Many experts and
economic academicians said that thay
would call it (rate hike) madness. They
are worried that it will kill industry and
investments.On the other side after
analyzing the quarterly monetary policy
on overall growth and ination on the
Indian economy on July 26, 2011,Subbarao commented, Considering the
overall growth and ination scenario,
there is a need to persevere with the
anti-inationary stance. A change in
stance will be motivated only by signs
of a sustainable downturn in ination.
This news inuenced grimly which
tumbled the Sensex by 353 points
(1.4%) to 18,605.18 points on July 26,
2011.
This was the eleventh time when RBIincreased the policy rates since March
2010 (Refer to Exhibit I for Movements
in Key Policy Rates in India from April
26, 2008 to July 26, 2011). RBI hike
repo rate several times with the aim to
tight the liquidity in system and control
the rising ination rate in economy.
However, many of the market watchers,
industrialists, and economists have
criticized about the decision. They
commented that it would not be
adequate to decrease the ination rate.
They also commented that directly or
indirectly it would adversely affect the
entire system. Chandrajit Banerjee,
director general of Confederation of
Indian Industry, commented, The
continued monetary tightening without
any movement on structural reforms
to address supply-side bottlenecks
will have an added impact on capacity
creation and expansion. But during
same time Pranab Mukherjee, FinanceMinister of India, supported the hike
indicating the effects of ination and
said, The rate rise will send a strong
signal to check price-rise expectations
and that ination must be brought
down to support economic growth in the
medium term. The Indian government
has been wracked by a series of
corruption scandals in the past year, and
high inationwhich disproportionately
affects the poorthreatens to erode its
political support further.
During the mid July 2011 a poll was
conducted by The Economics Times with
23 analysts. From the poll results it was
found that none of them expected such
type of aggressive hike, moreover nine of
them anticipated a break into sequence
of rising. However, 14 analysts were in
favor to increase of 25 basis points on
July 26, 2011. Experts opined that the
rate hike would have impact on demand
conditions, slow down purchase of
new housing and consumer durables
and dampen consumer sentiment. It
would affect the Corporate by trimming
working capital downwards in terms of
inventories and outstanding. Thereby,
there will be an adverse impact on
corporate bottom lines too.
But before we analyze the impacts, we
will see what Repo is and what Reverse
Repo is in the following section.
REPURCHASE AND RESERVE
REPURCHASE ORDER
Repo Rate, or Repurchase rate, is the
rate at which RBI lends to banks for
short periods. The repo represents a
collateralized short-term loan, where
the collateral may be a treasury security,
money market instrument, federal
agency security, or mortgage-backedsecurity. This is done by RBI buying
government bonds from banks with an
agreement to sell them back at a xed
rate. If the RBI wants to make it more
expensive for banks to borrow money,
it increases the repo rate. Similarly, if
it wants to make it cheaper for banks
to borrow money, RBI reduces the repo
rate. When RBI reduces the Repo Rate,
the banks can borrow more at a lower
cost. This contributes to lowering of the
rates. Repo Rate used for controlling the
amount of money in the market.
Reverse Repo rate is the rate at which
RBI borrows money from banks. An
increase in Reverse repo rate can cause
the banks to transfer more funds to RBI
due to the attractive interest rates. It
can cause the money to be drawn out of
the banking system.
Repurchase (Repo) and Reserve
Repurchase Order was introduced
in June 2000 by RBI to maintain the
Liquidity Adjustment Facility (LAF) in
the economy. Repos are changing from
time to time under monetary policy
system. The government introduced
this instrument in order to manage the
excess of liquidity in the economy, and
also used to measure the interest rates
in the call/notice money market.
Repo transactions to maintain the
liquidity are carried out through auction
market, which is conducted by the RBI
at predetermined date.
RBI acts as banker for other national and
private banks. Whenever Banks are in a
cash shortfall or a need for liquidity on
a daily basis, RBI becomes the lender.
The Repo system is a formal system
through which the lending process is
guided through which banks borrowfrom RBI. The repo rate is determined
by the Reserve Bank at each meeting
of its Monetary Policy Committee. It is
expressed as a rate per annum.
About the Authors
R Muthukumar, is currently working as
a Case Publishing Manager with IBS,
Hyderabad.
Nitya Nand Tripathi, CFA, is currently
working as a Faculty Associate with
IBS, Hyderabad.
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9Indian Actuarial Profession Serving the Cause of Public Interest The Actuary India December 2011
FEATURES
Signicance of Repo System
The repo rate becomes a benchmark
for the level of short-term interest rates.
For example, if the repo rate increases,
banks have to pay more for repo funds.
Consequently, to retain their existing
prot margins, banks raise the interest
rates at which they take deposits from
and lend money to their customers. This
causes a rise in interest rates or thecost of holding money, thereby helps to
control ination by reducing the demand
for credit to be spent on the purchase
of goods and services. The actions of
RBI are known as the formulation and
implementation of monetary policy.
When setting monetary policy the
RBI decides on the level of short-term
interest rates necessary to meet the
ination target. The Policy decisions
inuence the overall lending policiesof the banks, and also the demand for
money and credit in the economy.
The way in which changes in the repo
rate affect ination and the rest of
the economy is explained in the below
Diagram:
Some have a more or less direct impact
on ination while others take longer to
have an effect. Genrally it is considered
that a change in the repo rate wouldhave its greatest impact on ination.
Banks lending rates and market
interest rates on securities are affected
by both the actual and expected repo
rate change. If a raise in the repo rate
is fully expected, market rates begin to
rise. Then, when the repo rate is actually
raised, there will not be any further
effect on market rates and it merely
conrms market expectations. Repo
Rate change decision thus has an effect
on the interest rates the consumers face
and thereby also on the total demand
and total supply in the economy. Thiswould help in lower ination. (Refer to
Exhibit II for details of Ination % from
January 2008 to July 2011)
During the period October 2008 to
April 2009, Central bank used this
instrument to manage the nancial
crisis by reducing the repo rate by 425
base points and reserve repo rate by
275 base points when all the markets
were moving downwards. As mentioned
in RBI 2009-2010 annual report, when
the liquidity position in the economy
globally were under crisis, the reduced
repo rate led to improve the liquidity
position into the system by ` 5600
billion or equivalent of about 9% of GDP.
Since 2010, the RBI used this instrument
to suck to liquidity from system to
control the ination. On July 26, 2011,
RBI raised repo and reserve repo rate by
50 bps. During the calendar year 2011
and 2010, this was the eleventh timewhen, frequently, repo and reserve repo
rate were raised. RBI took this decision
to control the ination in the economy
(Refer to Exhibit III for Movement of
Ination from 2000 to 30 June 2011).
However, the raising of repo had
affected adversely the other rate
sensitive sectors such as automobiles
manufacturers, real estates and
banks, the growth rate of the economy
and credit growth. On July 27, 2011,
corporate condemned this repo rate
hike and said that this stiff dose will
dampen corporate sentiment and affectinvestment climate. Sectors, which
are most leveraged like infrastructure,
real estate, and nance, will be most
impacted. Some analysts opined that
it would reduce the protability and
growth of the major sectors of the
economy. Most affected sector was
Real estate. New buyers of the houses
also deferred their plans due to high
interest rate and steep rise on the cost
of dwellings. On this alarming situation,
Real-estate developers and property
consultants termed the RBI hiking key
rates as harsh. It would increase the
woes of the sector reeling under high
input cost and poor sales. Experts
are on the view that unless certain
measures are taken to improve supply
system, the increase by RBI will have
only a minimal effect on ination. This
would make cost of funds expensive for
both developers and buyers, thereby
making the business environment very
complex across industries.
The bankers claimed that all types of
loan would be costlier because of this
rise. According to experts, the home loan
rates will move up again. The cumulative
increase over the past year will affect
the loan borrowers. Banks just pass on
the rate hike to home loan borrowers.
For example, for a ` 1,000,000 home
loan over a 15-year period, your EMI will
go up by ` 300. Moreover, the rate hike
will also reduce the eligible loan amountfor new home loan applicants.
The builders were also worried about
their projects. Their cost of project
signicantly increased due to high cost
of borrowing. For instance, construction
cost (steel, brick, labour and cement)
increased by 18% from 2009 to 2011.
The other major hurdle for the real estate
is that RBI laid down strict eligibility
conditions for banks in disbursing loans
to the real estate sector.
The other sector would have adverse
effect is automobile manufacturing.
Obviously end user of this sector is too
affected. This sector also inuenced
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10 Indian Actuarial Profession Serving the Cause of Public InterestThe Actuary India December 2011
FEATURES
.
from two sides: First one, rise in interest
rate, which declined the sales of
passenger vehicle due to high nancial
cost and other one is increase in cost
of raw materials. According to the
Economic Times (July 27. 2011), the
growth rate of the passenger vehicle
sales has dropped to 9% in the June
2011 quarter from 33% a year ago,
largely due to the successive increasein the interest rates.
Road Ahead
On July 26, 2011, after announcing
monetary policy, RBI indicated that it
would continue this hard decision until
there is a fall in price levels. RBI said,
Although the impact of past monetary-
policy actions is still getting transmitted,
considering the overall growth and
ination scenario, there is a need to
persevere with the anti-inationarystance. Moodys, a renowned credit
rating agency argued that the frequent
rate hike doesnt change Indias rating
outlook, but any harm to the economys
long-term growth prospects or risks in
achieving its scal decit aim would
be of concern. Though many of the
analysts perceptions were negative,
however, the governor and nance
minister defended that the hike was
required to control the ination and
better stability for sustainable growth.Global monetary tightening and rising
domestic ination would lead the RBI to
raise interest rates.
RBI Governor D Subbarao said that
ination will continue to be the guiding
factor for monetary policy decisions. He
further added, I want to reassure all of
you that growth is never far away from
our policy radar screen. We are always
concerned about it. But we have to
weigh the balance between growth and
ination.
Exhibit I: Movements in Key Policy Rates in India from
April 26, 2008 to July 26, 2011
Source: www.rbi.org.in
Exhibit II : Percentage of Ination Rate from January 2008 to July 2011
Source: www.rbi.org.in
Exhibit III : Movement of Ination from 2000 to 30 June 2011
Source: www.indexmundi.com and www.in.nance.yahoo.com
14th GCA Theme Contest Winner- Amrita Kaur
meetin the Chllenes of Chne
Amrita Kauris a life insurance actuary based in Mumbai.
She is a Fellow of theInstitute of Actuaries of India.
Heartiest CongratulationsHeartiest Congratulations
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11Indian Actuarial Profession Serving the Cause of Public Interest The Actuary India December 2011
FEATURESUNIT PRICING: CONCEPTS AND CHALLENGES
By Shamit Gupta and Sanket Kawatkar
unit pricing refers to the process
used to calculate the price of each
unit (commonly known as Net Asset
Value, or NAV), in a unit linked fund.It
is important for life insurance companies
to have robust unit pricing processes toavoid the risk of unit pricing errors which
could potentially cause the companies
to pay out large compensation to the
affected policyholders.
Indeed, Guidance Note 1 (GN1) issued
by the Institute of Actuaries of India,
recognises such situations by mentioning
that Appointed Actuaries are required to
be satised that the procedures used to
calculate the unit price and to determine
the compensation to policyholders due
to any material errors in unit-pricing, are
equitable to policyholders that may be
affected either directly or indirectly.
The Insurance Regulatory and
Development Authority (IRDA) has
recently made changes to its earlier
guidelines covering the unit pricing
process to be followed by the industry.
In this article, we examine some of the
concepts underlying the unit pricing
process, particularly in relation to the
importance of allowance for transactioncosts and cut-off timing. In addition,
we will consider some practices that
might possibly lead to unit pricing errors.
Allowance for transaction costs
Insurance companies incur transaction
costs in buying and selling underlying
investments within a unit-linked fund.
These may include expenses such as
brokerage and stamp duty. The quantum
of these costs varies based on the type
of assets transacted, and is typically in
the range of 30 bps to 50 bps. These
transaction costs should ideally be
reected in the calculation of unit prices,
in order to maintain equity amongst
different generations of policyholders.
In 2005, the IRDA released guidelines
for unit-linked products which covered,
amongst other things, a requirement to
follow the appropriation / expropriation
unit pricing methodology to allow for
these transaction costs. In August 2011,
the IRDA released another circularsuperseding these earlier guidelines,
which did away with the appropriation
/ expropriation methodology of unit
pricing. In the following paragraphs, we
discuss the issue of equity amongst
different generations of policyholders
under these two approaches of unit
pricing.
IRDAs 2005 guidelines (CIR No. 32/
IRDA/Actl/Dec-2005)
The 2005 guidelines had rightly stated
the basic euity principle to be
followed in unit pricing, i.e. the interests
of policyholders who have purchased
units in a certain fund and not involved in
a unit transaction should be unaffected
by the transaction.
It follows from this basic equity principle
that since transaction costs are incurred
only when unit transactions take place
(i.e. when the actual sale / purchaseof investments are required), only
those policyholders who request for a
unit transaction should reasonably be
paying for the transaction costs and the
remaining policyholders interests in the
unit fund should remain unaffected. This
was achieved by using the appropriation
/ expropriation unit pricing methodology.
In a unit-linked fund open to new
business, on any given day, there will be
some transactions that would require
investments to be sold (e.g. redemptions
/ surrenders or partial withdrawals) and
some other transactions that would
require investments to be purchased
(e.g. new premium allocations).
If on a particular day, the total unit
allocations (requiring purchase
of investments) exceed the total
unit redemptions (requiring sale of
investments), the unit fund will be a
net purchaser of investments from the
market. In this scenario, the unit price
is required to be derived using the
appropriation price.
On the contrary, if on a given day, the
total unit redemptions exceed the total
unit allocations, the unit fund will be a
net seller of investments in the market.
In this scenario, the unit price is required
to be derived using the expropriation
price.
The IRDAs 2005 guidelines required
these two prices to be calculated as
follows:
Appropriation price: Market value of
investment in the fund + transaction
costs + current assets + accrued
income net of fund management
charges - current liabilities - any
provisions.
Expropriation price: Market value of
investment in the fund - transaction
costs + current assets + accrued
income net of fund management
charges - current liabilities - any
provisions.
The main difference between these
two methods is that while transaction
costs are added in the case of the
appropriation price, they are subtracted
in the case of the expropriation price.
This is intuitively logical, as in a scenario
where we use the appropriation price
(i.e. where the fund would have been anet purchaser of investments from the
market), in order to protect the interest
of the existing / remaining unit-holders
(not involved in the transaction), the
amount of money that should be put into
the fund should be equal to the value of
investments to be purchased plus any
transaction costs that may need to be
paid out subsequently.
Similarly, in a scenario that we use
the expropriation price (i.e. where the
fund would have been a net seller of
investments in the market), in order
to protect the interest of the existing /
remaining unit-holders (not involved in the
About the Authors
Shamit Gupta is an Actuarial Associate
in Millimans life insurance practice in
Mumbai.
Sanket Kawatkar is the Practice Leader
of Millimans life insurance practice in
Mumbai.
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12 Indian Actuarial Profession Serving the Cause of Public InterestThe Actuary India December 2011
FEATURES
transaction), the amount of money that
should be taken out from the fund should
be equal to the value of investments to
be sold less any transaction costs that
may need to be paid out subsequently.
Although the actual transaction costs
will be based on the actual amount
of the transaction (i.e. actual amount
of investments sold / purchased), the
allowance for transaction costs in thisIRDA formula is required to be made
based on the total market value of
investments at the time of carrying
out the unit-pricing. It is only when
transaction costs are allowed for in the
calculated price in this manner that the
basic equity principle is met.
The simple example below illustrates
the working of the appropriation /
expropriation price methodology,
assuming: All the investments in the fund are
in equities
The market value of the equities
does not change over a ve day
period
The transaction costs (TC) are
1% (purposely assumed to be high,
for illustrative purposes) of the
transaction value
As can be seen from the example above,
the unit prices before and after a
transaction remain largely unchanged
(thereby ensuring that the interests
of policyholders not involved in the
transactions are unaffected) by allowing
for the transaction costs in the manner
specied.
In addition, in this example, given that
the market value of equities is assumed
not to change, the ratio of the market
value of investments over the number of
units (i.e. ratio of rows (i) and (ii) in the
table above) is also unchanged (at 10)
throughout the period. This indicates
that the market value of units does not
change as a result of any transaction
and thus ensures that the interests of
the policyholders not involved in the
transaction remain unaffected.
IRDAs 2011 guidelines (No. IRDA/F&I/
CIR/INV/173/08/2011)
The recently released guidelines abolish
the practice of using appropriation and
expropriation prices for unit pricing.
Under the new guidelines, transaction
costs are not required to be reected
in the unit pricing in a manner implied
Allowing for transaction costs as per
2005 IRDA circular
Day
1 2 3 4 5
Value of existing investments (i) =(x) of
previous day20,000 29,900 34,850 32,325 31,315
Number of units in force before
transaction(ii) =
(xiii) of
previous day2,000 2,990 3,485 3,233 3,132
Net policyholder transaction
requests(iii) = Input 10,000 5,000 -2,500 - 1,000 10,000
Allowance for transaction costs in
unit price(iv) =
(i)*TC*if((iii)
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13Indian Actuarial Profession Serving the Cause of Public Interest The Actuary India December 2011
means that the value of each unit held
by the policyholders not involved in any
transaction changes everyday, thereby
implying that the interests of such
policyholders are actually compromised.
Also, at the time of calculation of the unit
price, the insurer would not know the
exact amount of pending transactions
(which are yet to be processed) and
hence, the allowance in unit price for thetransaction costs that may be incurred
on such pending transaction may not be
accurate.
In reality, the transaction costs will be
lower than the one percent that we have
assumed in our examples above (given
the bulk deals insurance companies
may have with the intermediaries) and
the impact on existing policyholders
interests in the fund will be lower on
a day to day basis, as compared to
that shown in our examples above.
However, over the tenure of a contract
(which could extend well beyond 10 -
20 years), not allowing for transaction
costs through the appropriation /
expropriation methodology may have a
signicant impact on the interest of the
policyholders that remain invested in the
fund throughout.
The new methodology proposed by the
IRDA is meant to address the perceived
complexities of appropriation /
expropriation unit pricing methodology.
However, it could contravene the basic
equity principle and could be seen to be
unfair to those policyholders that are not
involved in a transaction.
Cut-off timing
The IRDA has stipulated that companies
need to follow the forward-pricing
approach, i.e. the unit price at which
any transaction takes place is calculated
after the request for such a transaction
is received from the policyholder. TheIRDA has specied a cut off time for
receipt of requests for such transactions
that are required to be processed on
unit prices derived based on the value of
investments on a particular day.
As per the 2005 guidelines, in cases
of allocation or redemption requests
received before 4.15pm on any day,
the unit price calculated as at the end
of the day is applicable. If the request
is received post 4.15pm, the unit price
calculated as at the end of the next day
is applicable.
The stock markets in India close at
3.30pm. Thus, with the cut-off timing
for receipt of transaction requests set at
4.15pm, the insurer faces the risk that
the policyholder can select against it.
Gap between timing of unit pricing and
that of the actual act of investments /
redemptions
There is another (perhaps more serious)
issue pertaining to the current approach.
The insurer should aim to reduce the
risk of adverse market movements, by
ensuring that the time lag between the
valuation of investments / derivation of
unit prices and the actual act of buying or
selling the backing assets in the market,
is minimised.
Based on the current approach adopted
by several companies in the industry,
the unit price for transaction requestsreceived during the day is calculated
in the evening, based on the value
of investments as on that day, and
the actual transactions (to buy / sell
investments) are (at best) carried out
only the following working day. This
exposes the insurance companies to
adverse market movements between the
market prices on the previous day (based
on which the unit prices are derived) and
the price at which the buying / selling of
investments will actually take place thefollowing day.
Perhaps this may be addressed if the
cut-off time for receipt of transaction
requests is actually brought forward to
earlier in the day (e.g. by noon) and all
the following tasks such as valuation of
investments, unit-pricing as well as the
actual processing of transaction and
buying / selling of investments happen
on the same day before the markets
close, based on the mid-day (or closing)
prices in the market.
Unit pricing errors
Unit pricing errors can lead to signicant
nancial and reputational risks for
insurers, but these can be avoided by
developing a robust unit pricing process
with appropriate checks and controls at
all stages. Many companies around the
world have had to payout large sums of
money in compensation for unit pricing
errors. Some examples are given below:
In April 2011, Prudential UK revealed
a tax related unit pricing error in
its unit-linked pension business.
This error is expected to impact 39
thousand policyholders and cost
about 4 million.1
Norwich Union had been incorrectly
charging its stakeholder pensions
customers and had to compensate
them to the tune of 11 million in
2008.2
In 2006, Clerical Medical found unit
pricing related data input errors
totalling around 17 million that
affected 140,000 policies and led to
large compensation payments. 3
Although the regulations regarding
compensation for unit pricing errors
in India are not as evolved as those in
other countries, companies would still
be required to compensate policyholders
in case errors are found in the unit
pricing mechanism. The nancial and
reputational loss that would occur in
such a scenario could be signicant.
Other challenges / issues in unit pricing
Apart from the equity related issues
arising due to non-allowance for
transaction costs in unit pricing, some
other potential causes of errors are given
below: Incorrect asset valuation: For
example, some of the investments are
not valued at the correct market price or
some of the assets are missed out from /wrongly included in the valuation.
Incorrect allowances for tax
applicable on the fund: For
example, not allowing for the tax
deducted at source in the valuation
of investments of the fund.
Depending on how the income /
capital gains tax landscape develops
in India, insurance companies may
need to pay special attention to
the allowance for tax on unrealised
gains and losses in the unit-pricing.
Charges that impact unit price:
Some charges, like the fund
management charge (FMC), are
reected in the unit price of the fund.
If there are any errors in the amount
or type of the charge deducted,
there will be unit pricing errors. One
typical error is not taking physical
funds out of the unit-fund for FMCs,
thereby overstating the subsequent
unit-prices.
1 Source: News report: http://www.telegraph.co.uk/nance/personalnance/savings/8446266/Prudential-admits-4m-mistake-affects-39000-savers.html2 Source: News report: http://www.telegraph.co.uk/nance/personalnance/pensions/3416226/Norwich-Union-pension-customers-to-get-refunds-totalling-11m.html3 Source: News report: http://www.guardian.co.uk/business/2006/nov/28/5
FEATURES
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14 Indian Actuarial Profession Serving the Cause of Public InterestThe Actuary India December 2011
Errors in policy administration
systems and data input errors:
Simple errors in the policy
administration systems or manual
errors in data entry, such as incorrect
transaction details or incorrect fund
splits etc, could lead to unit pricing
errors.
Wrong unit-balances used in unit
pricing: Either some units are notcaptured correctly in the system
or correct unit balances are not
included in the calculation of unit
prices.
Transactions processed at a price
other than the current price: Many
a times, companies carry out certain
transactions in the unit fund at a
unit price that is different from the
currently applicable unit price
for that fund. Unless the company
carries out specic journal entries
(to either put in or withdraw money
from the fund) when reecting
each of these transactions, the
basic equity principle would be
compromised and it would lead to
unit-pricing errors. Examples of such
transactions include:
Giving past unit price for
transaction requests which weremissed out by the companys
data-entry staff
Correction of past data entry
errors (e.g. wrong fund allocation),
requiring reversal of the original
entry and re-submitting of the
correct entry etc.
Delay in error corrections: If a
company nds an error in its system
/ unit pricing, it will need to carry
out the corrective action ideally
Vacancies for ActuarialWe have several vacancies for Actuarial Students at entry level in our Actuarial
Department covering a wide range of roles including product design and development,
statutory valuation, reinsurance, shareholder reporting and business planning.
The Department is engaged in many innovative and challenging tasks and provides a
sound platform for an actuarial student seeking to broaden his/her horizons both
professionally and technically.
We would expect the following from applicants:
Academic Qualification: Bachelors/ Masters in Statistics/ Mathematics/ Science from a
reputed institute
Professional qualifications: Student of Institute of Actuaries of India/IFA/SoA. Nearing
completion of CT Series in IAI/IFA or equivalent in SoA.
Other requirement: Strong analytical and IT skills (including proficiency in MS Officesoftware) coupled with good communication skills.
If you feel you can add value to our organization and to your own career
please send your updated CV to [email protected]
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before any further transactions
are processed. However, this may
not always be practical. A delay in
reecting any corrective action may
further aggravate the magnitude of
unit pricing related errors.
Conclusion
Unit pricing is a complex area and it is
important to have a robust process in
place to avoid / minimize the risk ofcostly errors. In our view, to date it has
not been given the amount of attention
that it deserves. In this article, we have
sought to shed light on some of the
concepts and issues underlying this
area and to help raise the prole of unit
pricing as an important issue.
The views expressed in this article are
authors personal views and not of the
employer they represent.
FEATURES
Actuarial Common Entrance Test (ACET)
Due to overwhelming response from all over India and on request thelast date for registration has been extended to
25th December 2011. No further extension will be done.
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NEW STRUCTURE FOR PROFESSIONALISM
COURSES INTRODUCED BY IFA, UK
By Gautam Kakar
The UK Actuarial Profession has
developed a new regime ofprofessionalism courses which aims at aholistic approach, covering all members,
to ensure that the professionalismtraining benets members continuouslythroughout their careers. Since the
launch of the principles-based ActuariesCode in 2009, the UK ActuarialProfession has endeavoured to embed
the principles (Integrity, Competenceand care, Impartiality, Compliance andOpen Communication) of the Code in its
education and training.
There will be three stages of trainingwithin the new professional skills regime.
1. Online Professional Awareness Test
The rst stage of the new professionalskills curriculum is designed to assist
student members to understand theirduties under the Professions regulatorystructure; that is, the Bye-Laws, the Rules
and Regulations and the Actuaries Code.A new mandatory Online ProfessionalAwareness Test is being introduced for
all students who join the Profession from1 March 2012. Students will be required
to sit and pass the test before they areable to apply for the Business Awarenessexam (CT9). As well as testing knowledge
of the Actuaries Code, scenarios willbe presented in a storyboard formatand students will be required to answer
multiple choice questions based on theethical dilemmas presented. Studentswill be required to apply the principles
of the Actuaries Code in order to answerthe questions posed.
2. Professional Skills Course
The next stage of the new curriculumwill be the Professional Skills Course.Members will be required to complete
the course:
within one year of qualication; or between the fourth and sixth
anniversaries of their admission to theUK Profession, whichever comes rst.
The course is designed to build uponthe Online Professional Awareness Testwhile recognising the increasing levels of
responsibility placed upon members atthis stage in their careers. Members willbe expected to be equipped to manage
the ethical dilemmas which may ariseand to make appropriate decisions toresolve them.
The format of this course will be a choiceof:
(i) a one day face-to-face event where,
in addition to other features,participants will work through case-
lets (mini case studies) both genericand practice specic in nature; or
(ii) a web-based version of the case-lets, which members will be able to
undertake in modules.The course will be introduced from
February 2012 (web-based version fromJune 2012) and replaces the current oneday Associate Course and two day New
Fellows course. Transitional arrangementswill be publicised in due course.
3. Professional Skills for Experienced
Members
After completing the Professional SkillsCourse, members will move to thenal stage of the new professionalism
curriculum: Professional Skills for
Experienced Members. The previousregime of mandatory 10 year
Professionalism Events for ExperiencedActuaries nished with three additionalevents laid on in October and November
2011. The Profession is developing asuite of professional skills events andweb-based modules in partnership with
Leeds Universitys Inter DisciplinaryApplied Ethics Centre with a view tore-introducing a revised mandatory
requirement for experienced membersby June 2013.
Professional Skills Training conducted
by Institute of Actuaries of India
IAI conducts India Fellowship Seminar(IFS). The key highlights are :
IFS is mandated as one of therequirements for admission as FellowMember and hence students who have
passed all subjects of the actuarialexamination or have a few subjects left
and Afliate Members are expected toattend
- IFS is essentially based onProfessionalism Course as prescribed
by the Institute and Faculty of Actuaries(IFA), UK for their requirement andwhich is applicable to students of the
IFA resident in India and/or who arealso members of IAI. IFA has agreedto recognize this Programme as
equivalent to their Professionalismcourse.
- The IFS, however, also providesinputs on India specic regulatory
and legislative environment includinggoverning structure of IAI.
- The seminar consists of presentations
and case studies by participantsthemselves.
- All the participants for admission asFIAI are subject to assessment by
Assessment Committee
It is important that IAIs Professional
course is similar to that of the UKInstitutes professionalism courseconsidering the mutual recognition
agreement and also in order to provideIAI members training at par with globalstandards, although adjusted for local
environment.
The possible changes that may beintroduced in IAIs professionalism
training regime are :
- Make professional skills training as
ongoing requirement for all categoryof members. The frequency oftraining can be linked to the category
of members e.g. after qualication,professionalism training is require atleast once 3 years
- Develop an Actuaries Code basedupon Professional Conduct Standards
and Actuaries Act so that it becomes aguiding principle for all members
- Introduce web based training optionsimilar to that of UK institute. Thiswould be cost effective in terms of
registration cost and would not incurtravelling costs
- Currently, IFS is mandated as one of
the requirements for admission asFellow Member of IAI. This may not benecessary if student members need
to pass professional awareness test.However a seminar or an exam to cover
India specic legislation / industry wouldbe useful before admission as FIAI
Professionalism skills of our members
are very important in todays complexwork environment where there aremultiple stakeholders with paramount
responsibility towards public interest.At IAI, we should aim to provide ourmembers best possible training so that
they are well equipped to take decisionswhen faced with ethical dilemmas or
situations which present conict ofinterest.
The views expressed are his personal.Some of the content of the article is
based on information available from IAI
and IFA.
About the AuthorGautam is a qualied actuary with
experience in life, pensions and
health. He is based in London.
FEATURES
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16 Indian Actuarial Profession Serving the Cause of Public InterestThe Actuary India December 2011
MEENA SIDHWANI MEMORIAL AWARDEES
THE BEST AND BRIGHT ONES
GCA Year NameTime taken leading to
fellowship
7th Feb. 2005 Gautam Kakar 4 years 4 months
8th March. 2006 Rajesh Dalmia 4 years
9th Feb. 2007 Vibha Bagaria 4 years 1 months
10th Feb. 2008 Peuli Das 4 years11th Feb. 2009 Gautam Shah 4 years and 6 months
12th Feb. 2010 Kamlesh Gupta 4 years and 9 months
13th Feb. 2011 Kunj Behari Maheshwari 3 years and 9 months
Winnersnever quit
andquitters
never win.-Vince Lombardi
Winnersnever quit
andquitters
never win.-Vince Lombardi
ANNOUNCEMENT
Late Meena Sidhwani
(1959-2001)
Appeal for Donation...Meena Sidhwani
Memorial Education Award Fund
This appeal is for donation so as to have enough funding on ongoing basis for awarding the BEST & BRIGHT ones
of the Indian Actuarial Profession.
The Award: Cash and personalized Silver Shield - was rst instituted out of donation of ` 50,000/- by Meenas
mother in the year 2003 with rst Award given during 7th GCA in February, 2005. Till 13th GCA there have been seven
Awardees with one of them ualifying in as less a duration as three years and nine months.
The fund has depleted and needs top up.
Objective: To perpetuate memory of Meena Sidhwani (1959-2001) who was one of the two rst fellows (1997) of the
Actuarial Society of India, the predecessor to the IAI. Meena was physically challenged, could walk with difculty
and lost her life on 6th June, 2001 while serving as Chief Actuary of ING Vysya Life Ins.co. Ltd in India.
The Rules for selection of Awardees: The rules as under have been effective from beginning of the institution of the
Award in the year 2003/2004.
Criteria for the selection of Awardees
1. Student who clears all subjects including exemptions leading to fellowship within a span of 5 years from
the date of admission as a student in IAI or the actuarial body for which exams exemption have been
obtained.
2. In case there is more than one student, the selection will be done on the following basis.
Shortest time limit taken.
Highest mark in SA Series (earlier 400 series) subject.
In case if euality still persists, then the prize will be shared eually.
This appeal is to all IAI members to donate. Donation cheue should be drawn in favour of the Institute of Actuaries
of India and send to Gururaj Nayak, Administrative Ofcer.
Liyauat KhanPresident
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17Indian Actuarial Profession Serving the Cause of Public Interest The Actuary India December 2011
Meena Sidhwani Memorial Awardees - the best and bright ones
PEULI DAS
Educational Background
I majored in Economics and completed MS in Quantitative Economics from Indian Statistical Institute,
Kolkata. From there, I chose Actuarial Science as a career path and eventually cleared all the exams of
IAI in 2007.
How did you get to being an actuary
I grew up listening about actuaries from my father who worked with LIC throughout his career. Thats
why, even though it used to be a road seldom taken in those days, I always had an eye towards having a career in this eld.
Eventually, opportunities presented themselves while I was studying at ISI Kolkata. It was the early 2000s - the market was
opening up to the private players and they were actively recruiting from the campuses. It was with one of them that I started
my journey towards an actuarial career. Few years of hard work, perseverance and discipline ultimately led to the Fellowship.
Career Path so far
My career started as an actuarial trainee in HDFC Standard Life Insurance Company in Mumbai in 2003. After a year, I
migrated to USA and started working with Deutsche bank as a Business Analyst for their investment team, helping them to set
up platforms for calculating returns for different asset classes. Meanwhile I still kept alive the motivation and determination
to write and clear actuarial exams from New York. It was during my days with Deutsche Bank that I completed my nal exam
with IAI and decided about switching back to core actuarial again with New York Life Insurance Company. My involvement
was mostly with their JV partner Max New York Life doing US GAAP valuation, business planning and actuarial economic
valuation. After almost 7 years I returned back to India in early 2011 and since then have been working with ING Life
Insurance in Bangalore heading the valuation team.
Pleasure of being an actuary
To me, the pleasure of having a life and career as an actuary is no better described than by the words of the poet Samuel
Johnson: Life affords no higher pleasure than that of surmounting difculties, passing from one step of success to another,
forming new wishes and seeing them gratied.
For an actuary, there are challenges in every step of the way immense responsibilities, a continuous need to reinvent
oneself and prove oneself worthy of a wonderful group of peers and colleagues. But all that pales in comparison to the
satisfaction of providing solutions to everyday business problems that are rigorous, rational, practical and effective; solutions
that have very real consequences for the business and the industry at large. In todays world, there are probably not too
many other career options that would provide that and I am glad that I chose to be on the right side of the fence.
KUNJ MAHESHWARI
Educational Background
An alumini of The Doon School, I graduated in Economics from Shri Ram College of Commerce, Delhi University.I
sat for my rst actuarial exam after joining Towers Watson (then Watson Wyatt) in 2006 and completed my
papers by the time of commonwealth games in 2010, a milestone I wished to achieve when I had rst joined
the profession.
How did you get to being an actuary
The rst time I had heard of actuarial science was back in school, when a career counselor advised of possibleideas for the future. The formal aptitude report had then concluded that I should nd a career related to
economics, statistics and modelling. I think subconsciously, the idea got stuck from there though I never actively revisited the
possibility of being an actuary until I attended a talk by Watson Wyatt whilst in college on graduate opportunities in the rm. I
applied for a position in my nal year and started taking exams once I joined work with Watson.
Career Path so far
Having joined Watson Wyatt as a graduate in 2006, I have been involved in various consulting roles and I am still in my rst job! As
I have progressed through my career, I have had the opportunity to work not only within the Indian life insurance market, but also in
Spain, where I worked for six months, Hong Kong and Singapore. I am currently working out of Manchester, UK.
Pleasure of being an actuary
One of the greatest things about being an actuary is the transferability of our skills across the globe - which reminds me of how
fundamentally important the skills of an actuary are since the same principles are applied across the globe. This also makes me
very proud of being an actuary and being part of such a global network of highly qualied individuals, whose work makes so muchdifference to all peoples well being, yet they carry it out mostly unnoticed (such that most people dont even know what an actuary
is!), reminding me of the humility within our profession.
- Binita Rautela asks some questions
ANDBRIGHTONES
THEBEST
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We are glad to print papers given to us by the New Zealand Society of Actuaries courtesy John Smith for the benet of IAI
students and younger actuaries. These papers were presented at the future pathways meetings held on 15th / 16th March
at centres ofNew Zealand Society of Actuaries and were targeted at senior students to provide background on topical issues
that could be useful for those studying for the nal exams. The recently qualied actuaries and senior students were asked to
author papers in different practice areas. The one General Insurance: A Firmer Footing on Shaky Ground by Jonathan Nicholls,
PwC Jing (Annie) Luo, AMI - is reproduced for the benet of our readers.
GENERAL INSURANCE:
A FIRMER FOOTING ON SHAKY GROUND
abstractIt has been an eventful time for the
New Zealand General Insurance
industry, with a major earthquake in
Canterbury on 4th September 2010, a
fundamental shift in the regulatoryframework, and signicant
developments at ACC. This paper
outlines these key recent developments
and explores the likely impact on the
New Zealand General Insurance
industry. The paper contains the
following three sections:
1) Shaky Ground the 7.1 magnitude
earthquake that hit Canterbury on
4th September 2010 has had a
signicant impact on New Zealands
personal lines insurers as they strive
to cope with the impact
2) A Firmer Footing the establishment
of Prudential Supervision for the
industry through the Insurance
(Prudential Supervision) Act 2010,
and
3) Developments at ACC a look at the
recent changes to NZs accident
compensation scheme, as it strives
to put the sustainability of thescheme on rmer footing.
It should be noted that the paper was
nalised just a few hours before the 6.3
magnitude earthquake in Christchurch
on 22nd February, 2011. This quake
has resulted in large loss of life, and a
nancial cost which is estimated at the
time of writing to be at least double
the initial September quake1. Despite
this, the authors believe that the
publishing of this paper is still
worthwhile, and hope that the reader
Prepared by Jonathan Nicholls, PwC
Jing (Annie) Luo, AMI
nds the discussion of such matters as
the cost sharing and claims management
of value.
SECTION ONE: SHAKY GROUND
New Zealands biggest earthquake
since 1931 hit 40 km west of
Christchurch city, and throughout the
Canterbury region at 4:35 am, 4
September 2010. The 7.1 magnitude
quake, and the thousands of aftershocks
that followed, have caused widespread
damage: chimneys falling, houses
cracking, pipes breaking, and extensive
sinking .Christchurch suddenly became
1 Businesses go for it to survive, http://www.stuff.co.nz/business/industries/4706556/Businesses-go-for-it-to- survive2 Photo from :http://www.lunch.com/Reviews/d/2010_Canterbury_Earthquake-Photos-1607013-2010_Canterbury_Earthquake- 422457.html?pid=03 www.eqc.govt.nz
renowned as the "shaking city".
Unsurprisingly, the quake has resulted
in many claims to insurance companies.
By 10 February 2011 the Earthquake
Commission (EQC), New Zealands
primary residential property provider of
natural disaster insurance, had receiveda total of 179,171 claims. The
Earthquake damage at Manchester Street and corner of Worcester Street, Christchurch2
Canterbury earthquake has been
ranked globally as the fourth most costly
earthquake ever for insurers between
1970 and 2010 according to Earthquake
data published. It is New Zealands
largest single insurance event ever
recorded.
Sharing the Cost
The losses from this quake are shared
between the EQC, insurance companies
and reinsurers. To cover the cost,
insurance companies pass a 5 cent
disaster insurance premium per $100
sum insured value (also known as the
EQC levy) to the EQC since 1993 on
every house and contents policy they
underwrite. The levies have accumulated
to $6 billion in funds since the EQC was
established in 1945. The fund comprises
$250 million in cash, $1.75b in
managed global equities and $4b ingovernment bonds3. This fund is used to
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4 EQC Insurance, http://eqc.govt.nz/insurance.aspx5 EQC Insurance, http://eqc.govt.nz/insurance.aspx6 EQC denes zone C as the area most affected by land damage and will require wide-scale coordinated land repair, or additional protection work such as underground
retaining walls before any rebuilding can take place in the serious damaged zones.
insure residential dwellings, personal
contents and the land within certain
limits against "earthquake, natural
landslip, volcanic eruption, hydrothermal
activity and tsunami" types of natural
disasters4. Similarly, most insurance
companies charge a special catastrophe
insurance premium to cover the extent
of any loss above the EQC cap and to
arrange their own reinsuranceprogramme to cover the losses in any
events. The diagram below illustrates
how policyholder premiums are
allocated between insurance
companies, the EQC and reinsurers.
When a disaster happens, like thisCanterbury earthquake, the EQC pays
the rst $100,000 + GST for losses in
residential dwellings and the rst
$20,000 + GST for personal contents5.
The private insurance companies
contribute the balance of the
replacement value. Both the EQC and
insurance companies have reinsurance
arrangements to cover the total claims
cost over a certain retained amount, as
shown in the following diagram.
The Reaction
The Canterbury Earthquake rocked
many houses and roads, but failed to
shake insurance companies.
Immediately after the quake, the EQC
and insurance companies quickly
responded to their customers needs.
Both the EQC and insurance companies
allocated a lot of extra resources to
respond to quake inquires. The EQC has
set up three ofce centres across
Canterbury, an 0800 number and a
direct line for Kaiapoi. Their staff
increased from 22 people prior to the
earthquake to 280 call centre staff
which includes special dedicated staff
to zone C6. State created four special
mobile claims van centres that moved
around Christchurch streets to assist
State, NZI, ASB, etc. customers lodge
claims. Tower and AMI ew additional
assessors from other parts of New
Zealand to cope with the massive
sudden increase in claims. Most
insurance companies published a range
of information through the media to
help and remind customers aboutlodging claims and how to lodge claims.
Some insurance companies broadened
their existing policy coverage to assist
customers due to the extensive
earthquake damage. AMI extended its
temporary accommodation cover to
twelve months.
Most insurance companies have applied
restrictions when underwriting new
policies within the Canterbury region
since the quake. AMI did not underwrite
new home or contents policies and
offered limited cover for existing
customers who moved to another
house. AA did not insure houses in
Canterbury, except for a change of
ownership of a house currently insured
by AA. State and Tower both applied a
21 day stand down period for earthquake
damage unless a structural engineers
report was provided, declaring the
house not to be structurally damaged.
Just before the 4.9 magnitude Boxing
Day aftershock, most insurance
companies had relaxed their additional
underwriting conditions. Restrictions
have however been applied again
subsequently.
Claims Management
The EQC Act imposes a three month
claims deadline for each earthquake.
The EQC therefore treated some of the
Canterbury aftershocks as separate
events. This has led to the claims
lodgements (to the EQC and insurance
companies) slowing down in recent
weeks. But assessing and settling all
these claims will take time. Good claims
management will be critical for the EQC
and insurance companies. There has
been a lot of similarity between the EQC
and insurance companies on how to
respond and settle claims (for example,
adding staff resource, assigning project
management teams). What is more, the
EQC and insurance companies have had
to work together closely to maximize
claims efciency, e.g. sharing the claims
data between the EQC and other
insurance companies allow all parties to
understand the earthquake damage
better and plan remedial action
accordingly.
As of 4 February 2011, the EQC had
completed assessments for 59 percent
of all claims received so far and aimed
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to complete all assessments by late
March7. The EQC is settling all claims
under
$10,000 in cash, and plans to manage
the claims between $10,000 and
$100,000 through their appointed
project management team, Fletcher
Construction8. Insurance companies are
settling any additional claims that are
not covered by the EQC with their ownassessing teams and contracted project
managers. For example, AMI signed
Arrow as its project manager and State
signed Hawkins to look after claims
assessment and reconstruction. There
is debate on how best to settle the badly
damaged properties. This is an issue
that must be coordinated well between
the EQC, insurance companies,
customers and lenders, especially for
houses that need to be rebuilt. Given
this kind of complexity and the huge
number of claims, there is obviously a
long way to go to resolve everything.
Uncertain Future
It has been several months since the 4
September Canterbury earthquake. The
aftershocks seem to be settling down
now, but experts suggest that
aftershocks may last for many months.
The future is still uncertain.
The rebuilding process of zone C (thearea most affected by land damage)
might have a three-year wait due to the
building of underground dams and new
infrastructure9. The insurance
companies temporary accommodation
allowance will run out for those
householders still away home. The
potential shortage of engineers and
technical professionals could push out
the timeframe and cost of the repair
process. These and similar issues make
it difcult to estimate the full extent of
the Earthquake loss.
So far, the estimate of insured losses of
this quake from various sources has
7 source: Canterbury Earthquake General update at 4 February, www.eqc.govt.nz8 Issues raised at Christchurch City Council Community meeting in November 20109 Three-year wait likely after quake by Ben Heather, www.stuff.co.nz10 Canterbury Earthquake General update at 4 February, www.eqc.govt.nz11 The Canterbury earthquake is now the largest single insurance event in the history of New Zealand http://www.icnz.org.nz/news/291010.php
12 The regulatory environment, ICNZ website (http://www.icnz.org.nz/regulation/index.php)
13 Burrowes, The End of the Wild Wild West Legislative Developments Affecting Insurance, NZSA Conference,November 2010
14 Peter Costello, Australian Minister of Finance, Press Release Report of the HIH Royal Commission [No. 020]
15 Insurance (Prudential Supervision) Bill, NZ House of Representatives website
16 Part 1, section 3(1) Insurance (Prudential Supervision) Act 2010
17 Bill English, NZ Minister of Finance, at the rst reading of the Insurance (Prudential Supervision) Bill (SeeHansard, Volume:659;Page:8313)18 Part 2, section 15 Insurance (Prudential Supervision) Act 201019 Part 1, section 12 Insurance (Prudential Supervision) Act 201020 Part 2, section 34 Insurance (Prudential Supervision) Act 201021 Part 2, section 57 Insurance (Prudential Supervision) Act 201022 Part 2, section 60 Insurance (Prudential Supervision) Act 201023 Part 2, section 73 Insurance (Prudential Supervision) Act 201024 Part 2, section 76-78 Insurance (Prudential Supervision) Act 2010
ranged from $1.5 billion to $6 billion.
$2 billion was initially estimated for the
EQC and insurance companies plus
their reinsurers with a further $2 billion
estimated for commercial insurance
companies. The EQC revised its initial
claims cost estimate of $1-2 billion
(made in late September) to be between
$2.75 billion and $3.5 billion at the end
of December10
. Given the complexity ofclaims settlement and the uncertain
future aftershocks, it is difcult to get an
accurate estimate of the Canterbury
quake claims cost