Low Performing Endowments
By Yogita Rawat, Himanshu
Bhatia, Ranjan Gupta &
Swati Gupta
Guide : Mr. Suresh Sindhi
22nd Indian Fellowship Seminar
Indian Actuarial Profession
Serving the Cause of Public Interest
Agenda

Case-Study: Background

Underperformance of Endowments: Industry Perspective

Underperformance of Endowments: Possible Reasons

Perspective1: Actuaries are responsible for current Underperformance:
Possible Reasons

Perspective2: Another perspective: Actuaries are not responsible for current
underperformance:

Solution & Summary
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1. Case-Study: Background
Need consideration of two aspects of the case study:

Actuaries working in life companies are responsible for the current
underperformance of endowments both with profits and unit-linked, by not
being involved enough in the projection process, and by non transparent
pricing hence causing misery and disillusionment to many.

Should the Actuarial Profession take on a more general role to whistle
blow when we see possible future general problems in areas where it is
accepted we have knowledge (particularly life and pensions business)?
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2. Underperformance of Endowments:
(Industry Perspective)
Outlook I: Policyholders’ Perspective

Returns from endowments lower than what was being promised (illustrated)
and priced for?


Par Endowments {Lower Bonuses than promised & priced} &
Unit Linked Endowment Policies {Lower Benefits than illustrated in
form of benefit illustration}
Outlook II: Insurance company’s perspective:

Lower Actual profit margins/ Lower profitability from endowments &

Non achievement of Business plans
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3. Underperformance of Endowments:
(Possible Reasons)

Low Investment returns

Expense overruns including expense inefficiency & allocation (Par
Business)

Market conditions supplemented by high guarantees at the start of policy
start and Guarantees charges

Low Surrenders; in case of lapse supported products, High surrenders
affecting investment returns

Pricing Issues: Relative performance with respect to sales illustration

Product designs as compared to other market solution

Low business volumes; expense inefficiency

Competitors' aggressive pricing
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Are Actuaries working in life
companies responsible for
current underperformance?
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4) Actuaries are responsible for current
Under-performance: Reasons
4.1 Non Involvement in Projection Process
4.2 Non Transparent Pricing
4.3 Professional Obligations
4.4 Regulatory Obligations
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4.1 Responsibility of Actuaries: Projection
Process
Non Involvement in PROJECTION PROCESS
Projection of all pricing assumptions including
Investment, Expense & bonus loading
Withdrawals
Projections of other Business & corporate plans
Business volume & its subsequent effects on expense & other assumptions
Business profitability
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Responsibility of Actuaries: Projection
Process
 Lack of Proactive approach towards investment return projections i.e.
strategy and investment function (role of investment actuary)
 Lack of Continuous dialogue between Investment, Actuarial and risk
teams i.e. lack of Involvement in the projections of long term best
estimates of interest rate & bonus rate declarations
 Non-Harmony between experience rating and pricing at regular pace
 Allocation of expenses(split between par and non par fund)
 Competition (guaranteed benefits reasonably supported by projections)
 High initial guarantees
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Responsibility of Actuaries: Projection
Process…contd..
 Lack of continuous dialogue between marketing, business planning team
& Actuaries
 Lack of involvement between operational & actuarial functional w.r.t.
surrenders
 Lack of involvement between Operational & actuarial functional
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4.2 Responsibility of Actuaries: Non
Transparent Pricing
NON TRANSPERENT PRICING –APS 5

No standard/transparent approach to calculations of Asset share &
hence bonuses in case of par business

Business projections based on unachievable plans based on current
conditions

Hidden Charges in case of ULIPs

Clear communication in form of benefit illustrations & other
demonstrations

Link between benefits flowed & other market conditions applicable
(Especially if benefits linked to index/other benchmarks)
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4.3 Responsibility of ActuariesProfessional Obligations
 Responsibility placed to Actuaries by the virtue of professionalism
 GN6-Management of participating life Insurance Business with
reference to distribution of surplus
 APS 1: “Every actuary has a responsibility to the profession and
his/her responsibilities to a client must be consistent with this. An
Appointed Actuary is however also in a special position as he/she has
statutory responsibilities to the IRDA.”
“The Appointed Actuary must advise the company keeping in view the
provisions contained under Section 49 of the Act as to how much of
any surplus be distributed to policyholders or transferred to
shareholders and recommend the allocation thereof. “
 GN 22: Reserving for Guarantees in Life Assurance Business
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4.4 Responsibility of ActuariesRegulatory Framework
 Responsibility placed to Actuaries by current regulatory framework
 IRDA (Appointed Actuary) Regulations, 2000:submittion of the
actuarial advice in the interests of the insurance industry and the
policyholders
 IRDA (PPI) Regulations,2002: Proper system in place to protect
policyholders
 IRDA (Distribution Of Surplus) Regulations, 2002: responsibility to
advise BODs on bonus distribution
 IRDA (Assets, Liabilities And Solvency Margin Of Insurers)
Regulations, 2000: puts responsibility to maintain solvency at all time
 Various circulars & guidelines issued from time to time
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5)Another perspective: Actuaries are not
responsible for current underperformance:
Systematic risk: No control over investment market
Lack of hedging instruments & other regulatory restrictions
Limitations of modeling and hypothetical modeling
Current lower Returns in investment :Surrenders responsible to the extent
it is responsible for deviation in investment strategy & immediate
investment losses
Responsibility of Other specialist functions
Lower marketing volumes: Industry Issue, Lack of Insurance awareness
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6. Solution
Role of whistleblowing as required by the virtue of professionalism
and regulatory framework & mandated by other stakeholders of
insurance company
 Active Investment strategies & Investment decision,
 Active involvement with other specialists so as to protect policyholders
 Involvement in all major business development, risk, corporate
governance committee.
 Providing its knowledge & depth of working experience: Long run
projections based on stochastic modeling
 Reasonable guarantees well supported by above projections
 Lower initial benefits to be supplemented by proper marketing
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7. Summary & Conclusions
“The essence of a profession lies in upholding its standards,
technical and ethical, in the public interest”.
Knowledge & actuarial abilities needs to be channelized towards role
related to future projections with involvement of other specialists
Transparent pricing
Whistle blowing: A professionally required obligation
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“Time for two way discussion
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