Actuary India Dec 2011

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DECEMBER2011

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3Indian Actuarial Profession Serving the Cause of Public Interest The Actuary India December 2011

CONTENTS

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Chief Editor

Taket, Nick

Tel: +91/22/6740-3333

Email: [email protected]

Editor

Sharma, Sunil


Puzzle Editor

Mainekar, Shilpa


Manager(Library and Publishing)Rautela, Binita

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4

c o N T E N T S

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:

A Practical Guide by Mohammed Modarres,

Mark Kaminskiy and Vasily Krivtsov;

Mercel Dekker, Inc. 1999

Reviewed by Peuli Das

SHILPA'S PUZZLES

CAREER CORNER

Vacancies for Actuarial students atTATA AIG Life

Account Executive at Gen Re

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6

Disclaimer : Responsibility for authenticity of the contents or opinions expressed in any material published in this Magazine is solely of its

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Your reply along with the details/art work of advertisement should be sent to [email protected]

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25

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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

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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.

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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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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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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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[email protected]

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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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.

[email protected]

[email protected]

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.


9/32


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


10/32


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


11/32


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

[email protected]

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.

[email protected]


12/32


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)


13/32


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


14/32


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.


15/32


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.

[email protected]

About the AuthorGautam is a qualied actuary with

experience in life, pensions and

health. He is based in London.

FEATURES


16/32


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


17/32


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

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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

Actuary India Dec 2011

Documents

Transcript of Actuary India Dec 2011