By Himanshu Bhatia Yogita Rawat Ranjan Gupta amp Swati Gupta Guide Mr Suresh Sindhi 22 nd Indian Fellowship Seminar Indian Actuarial Profession Serving the Cause of Public Interest Introduction ID: 1002951
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1. Should Expense Overruns be adjusted against Lapse Profits while calculating the asset shares in participating business?By Himanshu Bhatia, Yogita Rawat, Ranjan Gupta & Swati GuptaGuide : Mr. Suresh Sindhi22nd Indian Fellowship SeminarIndian Actuarial ProfessionServing the Cause of Public Interest
2. IntroductionTreatment of Expense Overruns & Lapse profitsCurrent scenarioShould Expense Overruns be adjusted against Lapse Profits?- Factors Distribution of SurplusProfessional FrameworkRegulatory FrameworkUK ScenarioSummary & ConclusionsQuestions?Agenda2www.actuariesindia.org
3. +Asset SharesAccording to GN 6, an asset share for a policy grouping at a given point in time is the accumulation of the premiums received plus investment income earned from the inception of the policies, less deductions due to benefit payments, commission, expenses, tax, a reasonable cost of capital and of guarantees, contribution from miscellaneous surplus (if considered appropriate) and transfers to shareholders.Accumulation ofIntroduction: Asset share3www.actuariesindia.orgPremiums + Investment income-Benefit payments + Commission + Expenses + Tax + COC + COG + Misc. Profit + Transfer to Share Holders
4. Asset Shares – UsesBonus ratesSurrender ValuesMaturity BenefitsIntroduction: Uses of Asset Share4www.actuariesindia.org
5. Treatment of Expense in Asset Shares Full expenses charged to Asset sharePricing ExpenseExpense used in benefit illustrationsLong term Best estimate Treatment of Expense & Lapse profits in Asset Share5www.actuariesindia.orgTreatment of Lapse Profits in Asset Shares Credited to Asset ShareCredited to Estate
6. High Initial ExpensesMany insurance companies still relying on agency and third party distributors which involves high acquisition costsHigh/significant costs involved in setting up Banc assurance/ Direct Marketing/Online salesLow Volumes of business High Maintenance CostsExpense inflation & salary inflationEnhanced regulatory constraints & reporting Eg. Significant system development required to cater Shadow Accounting and Non-Residual Additions (NRA)Scale of operationsExpense Overruns 6www.actuariesindia.org
7. Treatment of Expense OverrunsAlternatives Full expense charged to ASDifference charged to EstateDifference charged to Share holders Expense Overruns7www.actuariesindia.org
8. Asset Shares calculation – current Indian Context$Treatment of expense overrun – 39% charged the difference to the Estate, 31% charged the difference to the Share holder & 31% charged the full expense to the AS Treatment of lapse profits – 31% credited to AS while 69% credited to the estate $ Based on “India Asset Share Survey” by Milliman dated 04.02.2014 (Based on responses from 14 companies out of 24 life insurance companies-representing 58% of total market)Current Scenario8www.actuariesindia.org
9. Current Scenario9www.actuariesindia.orgWhy is the treatment of expense overruns not uniform across industry???
10. The Big Question : Should Expense Overruns be adjusted against Lapse ProfitsAnswer would ideally depend on the following:Age of the Insurer & Par-FundPar-Fund EstateCompany ‘s Par-Fund Management policyComparison of Actual Lapse profits v/s Assumed Lapse ProfitsPolicyholder Reasonable Expectations(PRE) set by Benefit Illustrations & Other DisclosuresShareholders’ Attitude & belief: Provisions for expense overrunsPractice followed by others in industryExpense Overruns & Lapse Profits10www.actuariesindia.org
11. Charging Overruns to Asset SharesWill impact the current generation of policyholdersFactors affecting distribution of surplusProfessional FrameworkRegulatory FrameworkExpense Overruns & Lapse Profits11www.actuariesindia.org
12. Distribution of Surplus: factors to considerEquity among different class/generation of policyholdersMarket practice and competitors' actions Communications to the policyholders in form of sales illustrations, With profit manual & other correspondencePolicyholders reasonable expectations and sales practices usedShareholders role to support the business initiallyMerge of expense overruns in best estimates expensesProfessional obligations and Regulatory frameworkPar Fund Management12www.actuariesindia.org
13. Asset Shares Vs Par Fund EstateReversionary Bonus v/s Terminal Bonus ratesSurrender ValuesMaturity BenefitsPar Fund Management13www.actuariesindia.org
14. GN 6AA must consider the consistency of expenses being charged to asset shares with what has and is being illustrated to customers.Actual allocation to Asset Share w.r.t. renewal expense can vary on discretion as long as Policy holders’ reasonable expectations (PRE) encompass Professional Framework14www.actuariesindia.org
15. GN 6Professional Framework15www.actuariesindia.orgThe amount of expenses charged to the historical asset share of policiesa) The Appointed Actuary must consider the consistency of expenses being charged to asset shares with what has and is being illustrated to customers. In particular, the expenses intended to be allocated to the asset shares should be consistent with the bonuses projected in benefit illustrations.b) In respect of renewal expenses, so long as policyholders‟ reasonable expectations encompass expense risk, the Appointed Actuary, when making the actual allocation to asset shares, may use a degree of discretion in departing from the expenses implicit in any benefit illustration issued at point of sale. However, in respect of acquisition expenses, the level of expense should be known with greater certainty.Hence, the Appointed Actuary will have less scope to depart from the level ofexpense implicit in any benefit illustration when allocating acquisition expenses to asset shares. The Appointed Actuary should document any such departure.
16. GN 6Professional Framework16www.actuariesindia.orgc) Where the expenses allocated to the fund exceed those allocated to the asset shares, the Appointed Actuary should consider the reasons for this, and be satisfied that the approach:i. is sustainable;ii. is not, by its effect on the estate, expected to affect policyholders‟reasonable expectations adversely and materially; andiii. is appropriately reflected in the expenses assumed in the statutoryvaluation of liabilities.
17. IRDA(Non-Linked Products) 2013 RegulationsSpecial Surrender Value(SSV) shall represent the asset share in case of the par policies, where the asset share shall be determined in accordance with the guidance or practice standards issued by the Institute of Actuaries of IndiaWith Profits Committee (WPC)Independent committee w. r. t. Decisions related to Par businessRegulatory Framework17www.actuariesindia.org
18. Role of PPFM: A mandatory with profit guideRole of EstateInvestment FlexibilityRequirements of Regulatory capitalPayment of Tax incurred by fund on distribution to shareholdersCovering overruns on existing & new business expenseSmoothing flexibility Regulatory Approval for difference in pattern of distribution as compared to previous practiceUK Framework18www.actuariesindia.org
19. The bigger picture!Answer depends on various factors Role of Professional body & Regulatory BodyFreedom given to industry by the virtue of various provisions of applicable Professional & Regulatory framework keeping in view Sustainability of Fund, PREs, Equity Considerations, Shareholder Approach & Overall Objectives of Business Charging the overruns to asset share might be the only option for sustainability of the company and policyholders ultimatelyCharging the overruns to estate would serve as a balancing actCharging the overruns to share holders would ultimately lead to fair policyholder treatment & curtailing expensesSummary & Conclusion:19www.actuariesindia.org
20. Time for Two way discussion20www.actuariesindia.org