Download How critical the built up of estate is in participating fund and how

27th India Fellowship Seminar
How critical the built up of estate is in participating fund
and
How best that can
utilised for the benefits of all stakeholders?
Challenges
inbepricing
Cyber risk and Terrorism risk Supervisor:
Guide:
Philip Jackson FIAI
P.A. Balasubramanian,
Presenters:
Sunil Vishnu Savalkar
Shalmalee Prakash Paralkar
Neha Aggarwal
1st & 2nd June 2017
Mumbai
Indian Actuarial Profession
Serving the Cause of Public Interest
Agenda
 INTRODUCTION
Cyber
risk and Terrorism risk -
Challenges
inGENERATED?
pricing
 HOW IS ESTATE
 WHO ARE THE STAKEHOLDERS?
Supervisor:
 WHY TO HAVE ESTATE?
P.A. Balasubramanian, FIAI
 ESTATE – BEST UTILISATION
 ESTATE – IS THERE AN IDEAL LEVEL?
Indian Actuarial Profession
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Introduction
What is a With-Profit / Participating (Par) contract:
Cyber risk and Terrorism risk -
A contract where policyholder participates in any surplus / profits emerging i.e.
the policyholders get a share of profits from the policy
Challenges
in
pricing
IRDAI (Distribution of Surplus) Regulations, 2002 states that the shareholders shall
be allocated “1/9th of the surplus allocated to the participating policyholders”.
Thus, policyholder : shareholder share the surplus in 90:10 proportion.
What is Asset Share:
GN6 defines asset share as “…the accumulation of the premiums received plus
investment income earned from the inception, less deductions due to benefit
payments, commission, expenses, tax, a reasonable cost of capital and of
guarantees, contribution from miscellaneous surplus (if considered appropriate)
and transfers to shareholders”.
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Introduction
What is Estate:
IRDAI (Preparation of Financial Statements and Auditor’s Report of Insurance
Companies) Regulations, 2002 defines FFA as “The FFA shall represent all
funds, the allocation of which, either to the policyholders or to the shareholders,
has not been determined by the end of the financial year”.
Estate can be defined as:
 “excess of par assets over those required to meet the reasonable expectations
of existing participating policyholders”; or
 “excess of par assets over reserves or asset share”; or
 “the undistributed surplus in with-profit fund.”
There is no standard definition of estate. So for our discussion we will not restrict
ourselves to any specific definition of estate, but try to cover generic points on the
topic.
Indian Actuarial Profession
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How is estate generated?
Profits from
surrendered
policies
• Surrender benefit should represent asset share: IRDA
(Non-Linked Insurance Products) Regulations, 2013
• Excess of asset share over surrender benefit is
surrender profit.
• If not allocated to asset share – contributes to estate
when estate is defined as “assets over asset share”
Deferral of
distribution of
surplus
• Entire emerged surplus may not distributed – Some
portion of it may be retained to act as buffer against
adverse events
• If estate is considered as “assets in excess of
reserves”, then such undistributed surplus contributes
to estate.
Indian Actuarial Profession
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How is estate generated?
Deductions
from Asset
Share
• Cost of capital and cost of guarantees deducted from
asset share contribute to estate – if estate is defined as
“assets over asset share”
Riders attached
to par policies
• Riders attached to par policies are written in the par
fund.
• Riders have potential to generate significant profits
• Such rider profit can’t be distributed as and when it
arises
• This rider profit contributes to estate
Non par
business
written in par
fund
• Historically, non participating business allowed to be
written in the Par fund
• Profits from such business can’t be distributed as and
when it arises
• This profit contributes to estate.
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How is estate generated?
Tax Credit
• Tax is payable on distributable surplus.
• Tax may not be payable at the company level, due to
past accumulated losses.
• Tax savings contribute to estate.
Contributions
by
Shareholders
• Contributions from shareholder a major source of
estate in UK(1)
• In India, shareholders can inject, only to declare bonus
if par fund is in deficit and in the first 12 years of the
par fund.
• Alternatively, shareholders can retain their share of
distributed surplus in the par fund – contributing to the
estate.
(1) The UK House of Commons, Treasury Committee’s Report, 2008
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Who are the Stakeholders?
Contributes to the par fund by way of premiums
POLICYHOLDER
Expects good and stable returns in form of bonuses
Entitled to receive 90% of the distributable surplus.
Injects capital to makeup for deficit in par fund
SHAREHOLDER
Expects speedy recovery of capital
Entitled to receive 10% of the distributable surplus
Manages the par fund
MANAGEMENT
Remuneration linked to performance of the par fund
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Who are the Stakeholders?
Interacts with policyholder in the field
DISTRIBUTOR
Expects good sales story aided by historically
competitive bonuses
Ensures fair treatment and security to policyholder
REGULATOR
Lays down the operational framework for business
Ensures compliance with the regulations
For our further discussions, we will consider the policyholder and shareholder
as the primary stakeholders.
Indian Actuarial Profession
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Why to have estate?
1. To pay higher than asset share
• To fund the payouts greater than the asset share
• Payouts greater than asset share happen due to
• smoothing principles of the company or
• due to guarantees provided or,
• due to competitive pressures..
• The company can use estate to
• pay higher bonuses in a falling market
• cut the bonuses slowly
2. Provides investment freedom
•
•
•
•
Improves risk taking capability in the investment strategy
Allows investment in volatile but high return generating assets
Helps increase the return on the fund over longer term
Results in better returns to the policyholders and shareholders.
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Why to have estate?
3. Funds the new business capital strain
• Writing new business may give rise to capital strain
• Can be funded by estate
• Allows to write new business with higher guaranteed component
• Avoids a strain on the solvency position of the company due to writing of
new business
4. Absorb expense over-runs
• Expense over-run = Actual expense – Expense allowances
• Historically, expense overruns partly allocated to the estate
• IRDAI regulation on Expenses of Management may curtail such practice
5. Improves Solvency
• Estate forms part of free surplus
• Improves solvency ratio
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Why to have estate?
6. Withstand adverse events
• One off events can arise either from insurance risk or market risk
• Helps absorb the losses in the event of one off events
• Supports one-off development costs incurred for par business
7. Lower cost of reinsurance
•
•
•
•
Allows to increase exposure to mortality risk
Provides ability to absorb mortality variation
Retention limit could be increased
Reduces dependency on reinsurer and in turn reduces counterparty risk
8. Increases Goodwill
•
•
•
Increases probability of meeting PRE
Improves financial strength by giving ability to withstand risks
Improves credit rating
Indian Actuarial Profession
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Estate – Best Utilisation
SMOOTHING OF BONUS
 Shareholders prefer early return on their investment – higher regular bonus
and low terminal bonus - fluctuation in regular bonus would be acceptable.
 Policyholder expects steady bonuses in line with PRE created by illustrated
bonuses, past declared bonuses and bonuses declared by other companies
 Appointed Actuary needs to maintain a balance between the two opposite
expectations
 Bonus sustainability to be examined under various scenarios (of investment
return, policyholder behaviour, mortality or one off loss) before increasing
regular bonuses.
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Estate – Best Utilisation
FLEXIBILITY IN INVESTMENT STRATEGY
 Shareholders as well as policyholders expect higher returns
 Availability of estate allows investment in riskier asset classes like equity and
property - raising possibility to earn higher investment returns
 Too risky assets may adversely impact the size of estate
 Appointed Actuary needs to evaluate and recommend appropriate investment
strategy that would maintain a balance between risk and reward
 Appointed Actuary should sensitise the management against investment in
too risky assets
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Estate – Best Utilisation
SUPPORT NEW BUSINESS CAPITAL STRAIN
 Shareholders will expect writing new business with lower capital injections in
the par fund
 New products with higher guarantees can be introduced
 These may affect policyholders interest in the estate
 Appointed Actuary must ensure that the policyholders funding the capital are
not unduly penalised
 Policyholders’ capital needs to be treated the same way as the shareholder
capital.
 Credit may be given in the computation of asset share of such policyholders
Indian Actuarial Profession
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Estate – Best Utilisation
ABSORB EXPENSE OVER-RUNS
 Acquisition expenses higher than those implicit in benefit illustration may be
allocated to estate - it is in the interest of shareholders.
 This, however, may not always be in the best interests of the policyholders.
 Regulation on Expenses of Management issued by IRDAI limits allocation of
such expense over-runs.
 Appointed Actuary and Chief Financial Officer must ensure that expenses are
allocated and apportioned to the par fund appropriately
Indian Actuarial Profession
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Estate – Best Utilisation
DECLARING SPECIAL BONUS
 Shareholders may prefer early release of estate for speedy returns on their
investment
 Policyholders will also expect a fair share of estate
 Different generations of policyholders may have contributed differently to the
estate
 Appropriate consideration needs to be given to each generation while
determining their share of special bonus – Equitable distribution of surplus
 Consideration needs to be given to solvency position before and after special
bonus
Indian Actuarial Profession
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Estate – Best Utilisation
GENERATING GOODWILL
 Declaring stable, competitive bonuses and meeting PRE results in happy and
satisfied customers
 Such happy customers help build a positive image of the company
 This improves persistency and adds to shareholder value
 This also helps distributors in convincing prospective policyholders
Indian Actuarial Profession
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Estate – Is there an ideal level?
The above discussion leads to a question:
WHAT IS THE IDEAL LEVEL OF ESTATE?
There is no single answer to this. Areas that may be considered include:
 Supporting solvency is one of the major uses of estate. Management may
use estate to support solvency of non-par business. If this is so, assets will
excessively be locked in the par fund. Therefore, estate can be maintained at
a level which achieves the solvency target only of the par fund.
 Historically, if stable bonus has been maintained then a PRE is created. A
higher level of estate needs to be maintained to sustain this PRE.
Indian Actuarial Profession
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Estate – Is there an ideal level?
 A high level of estate may imply reduced distribution of surplus. This may
suggest a probable unequal distribution across generations of policyholders.
To avoid this, any excess estate over that reasonably required needs to be
distributed – maybe by way of special bonus.
 Higher estate allows greater ability to take risk – increasing risk appetite. The
desired level of risk appetite will guide in deciding the ideal level of estate.
 Thus, the decision of ideal level of estate is subjective and requires a lot of
expertise, experience and judgment of the management especially the
Appointed Actuary.
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Thank You,
Any Questions? .
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