Navigating Challenges in Entering the Crop Insurance Market
Joining a midsized GI insurance company with expertise in property and liability lines, the appointed actuary faces the dilemma of proposing entry into the crop insurance market. With limited knowledge in this area, the actuary must weigh the operational challenges and capital issues. Various considerations such as reinsurance and risk assessments come into play, leading to a critical decision-making process.
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34th India Fellowship Webinar Date: 30th January 2021 Case Study 10 GI Professional Guide : Anirudh Bansal Presented By : 1. Avnit Anand 2. Parmeshwar L Shelke 3. Piyush Goel
AGENDA Case Study Overview Problem Statement/Dilemma Fact Check Appointed Actuary s Rulebook Options Available Professional Considerations Technical Considerations Alternatives Other Professional Requirements Conclusion & Way Forward Q & A www.actuariesindia.org
Case Study Overview You have recently joined as appointed actuary in a midsized GI insurance company which primarily writes property and liability lines of business. The Company has been making profits over the last few years. Its current solvency position is comfortable. Your CEO has recently approached you to take your views on entering the Crop Insurance market. He has asked you to come up with a business proposal for discussion in the company s business strategy meeting to be held next week. It will be the first such presentation that you will make to the senior management team and you are keen to make a good impression. Your expertise is primarily in the area of property and liability business. There are no Crop insurance experts in your team as well. 1. You are keen to make a good impression on the management team but you do not have expertise in this area. You know that the product will be heavily reinsured. You have also heard that this line of business comes with its own operational challenges and capital issues. Should you just to take up the assignment considering it will be heavily reinsured product and hence limited risk assessment needs to be done? If not, discuss in detail why? 2. What are the alternatives available to you, otherwise? www.actuariesindia.org
Problem Statement/Dilemma Proposal to step into Crop Insurance Market Company : Primary experience in Property and Liability lines Mid size Good solvency position Appointed Actuary : No expertise in crop insurance Keen to make good impression on management team www.actuariesindia.org
Fact Check Company o Mid Size General Insurance Company Property and Liability o Profitable over last few years o Comfortable solvency position Product o New risk to the company and AA o No crop insurance expert in the team o Product would be heavily reinsured o Additional operational challenges o Additional capital issues www.actuariesindia.org
Appointed Actuarys Rulebook Professional Requirements: Professional Conduct Standards APS21: AA & GI Business APS33: Peer Review GI Business GN31: FCR Regulatory Requirements: IRDAI AA Regulations, 2017 IRDAI GI Product Filing Guidelines, 2016 IRDAI circular on annual Actuarial Valuation Reporting, 2017 IBNR Reserves Report FCR
Options Available Take up assignment* *with caveats Other Alternatives www.actuariesindia.org
Professional Considerations www.actuariesindia.org
Professional Considerations Competency APS 21 3.2: No actuary should act as Appointed Actuary if he / she does not have the adequate knowledge relevant to the assignment concerned. There may be exceptional circumstances where this need not apply, but in such cases the Appointed Actuary is to have recourse on a professional and formal basis to an actuary who has such knowledge and expertise and who himself / herself holds a CoP issued by the IAI and such an arrangement must be approved by the IAI as well as IRDA PCS 3.2. Many assignments offered to actuaries require considerable knowledge and experience for proper completion. Requisite knowledge includes methodology, relevant legislation and, in respect of work outside India local conditions and any professional code of practice in the country concerned. Actuaries must not give advice, unless: a) satisfied of personal competence in the relevant matters, or b) acting in co-operation with, or with the guidance of, someone (not necessarily an actuary) with the requisite knowledge and experience. www.actuariesindia.org
Professional Considerations Integrity & Honesty - share with management lack of expertise PCS 2.2 A member has a duty to the profession and must not act in a manner, which denigrates its reputation or impugns its integrity. Responsibility to any client must be consistent with that duty. The requirements of this paragraph do not, however, preclude criticism of the profession which forms part of a justifiable debate conducted in the public interest. APS 21 4.2: The Appointed Actuary must ensure that his / her conduct and reach and depth of his / her functionalities enable him / her to discharge his / her duties and obligations in letter and script in accordance with regulation (9) of AA Regulations www.actuariesindia.org
Professional Considerations Statutory requirements As per guideline, certification by AA is required APS 21 5.1 The Appointed Actuary shall certify the IBNR reserves and the premium rates as stipulated in the regulation. www.actuariesindia.org
Professional Considerations Ethical PCS 2.1 The actuarial profession has an obligation to serve the public interest. Collectively it seeks to do so by informed contribution to debate on matters of public interest and by influencing those with power to protect and enhance the public interest. Individually members must maintain and observe the highest standards of conduct. The standing of the profession depends on the judgment of individual members Conflict of interest APS 21 6.1 The Appointed Actuary must satisfy himself that premium rates for new business or renewal of existing business are fair, i.e., are neither excessive nor inadequate, that is to say sufficient in due course to enable the company to meet its liabilities both in tariff and non-tariff classes of business. If in future, such business is likely to be written on inadequate terms, it will require support from the free assets in the shareholder's fund. The Appointed Actuary should consider the company's ability to continue to write such business in the context www.actuariesindia.org
Professional Considerations Professional Conduct PCS 3.3: Notwithstanding paragraph 3.2, an actuary may provide advice if the circumstances are such that, having regard to all the relevant factors, it would be contrary to the client s interests to decline to do so. However, the actuary must make clear to the recipient that, in the absence of the constraining circumstances, the actuary would have recommended referring the matter to someone with the relevant knowledge and experience www.actuariesindia.org
Other Professional Considerations Actuary must be aware of peer review requirements which needs to be undertaken so should perform duties keeping it in mind He/she should undertake and produce his work if he is confident with his skills so as to justify any assumptions to peer reviewer APS 33: Peer Review of AA s Work in GI Peer review is the use of a second pair of eyes to review and validate some or all of the work of the person who performed that work. It provides a mechanism to test the work and the decisions taken The peer review should cover all relevant and significant aspects of the actuarial work relating to the annual statutory actuarial valuation Actuary should also produce Financial Condition Report and understands all business aspects GN 31: Financial Condition Assessment Report for General The AA should summarize the material risks and issues identified for the insurer Adequacy of reserves Reinsurance Risk Management Framework Capital Adequacy Insurance Companies
Technical Considerations www.actuariesindia.org
Technical Considerations o Reinsurance o The product will be highly reinsured o Limited risk assessment required o Reduced volatility of claims experience o Use of reinsurer s prior experience in crop insurance business. APS 21 8.9: The Appointed Actuary must review the reinsurance arrangements from time to time and consider alternative approaches with regard to retentions and type[s] of reinsurance arrangements o Synergies with existing book www.actuariesindia.org
Technical Considerations o Underwriting & Pricing o Risk of inadequate rates o Adverse selection/Moral Hazard o Capital considerations o Currently good solvency position, so a mis-judgement by Actuary can have adverse repercussions for the company APS 21 7.2 The Appointed Actuary should be satisfied that for a new product or a new area of operations or change in underwriting policies, the company will be able to meet the necessary reserves and solvency margin requirements from capitalwithin the shareholders funds www.actuariesindia.org
Technical Considerations o Reserving o short tailed business o Marketing APS 21 7.1 One of the important factors that will affect the financial position of a general insurance company is its marketing strategy and the projected volume of new business likely to be generated. The Appointed Actuary should form an assessment as to whether the projected volumes are realistic and advise the Board of Directors as to the capital requirements associated with writing the required volume of business www.actuariesindia.org
Technical Considerations o Operational o System changes o Trainings for various departments APS 21 5.2 For the purposes of the regulation the Appointed Actuary must have the above information made available to him / her and he / she must make sure that the company understands the necessity of this information and makes suitable arrangements to ensure that the information is made available www.actuariesindia.org
Communication APS 21: AA & GI Business: 2.3: Any Appointed Actuary, who is uncertain as to the proper course of action to adopt in relation to a potentially significant matter, is strongly advised to seek the help & advice from the IAI If considered to have recourse on a professional and formal basis to an actuary who has relevant knowledge and expertise and who himself / herself holds a CoP issued by the IAI, as per clause 3.2, such an arrangement must be approved by the IAI as well as IRDA Professional Conduct Standards: 3.3: The actuary must make clear to the recipient that, in the absence of the constraining circumstances, the actuary would have recommended referring the matter to someone with the relevant knowledge and experience Clear communication to the Management: Duties & obligations of the AA vs the lack of AA s expertise in the area, and absence of crop insurance experts in the AA s team
ALTERNATIVES www.actuariesindia.org
Repudiate the assignment Why : Limited experience of Appointed Actuary No crop insurance expert within the company Implication : o Affect the position as Appointed Actuary o Lose potential profitable business o Due to lost diversification benefit o Relationship in market o Lose potential for cross selling. www.actuariesindia.org
Other Alternatives Hiring experts and adequate resources within the team Taking advice from external experts / IAI / Senior actuary APS 21 2.3: Any Appointed Actuary, who is uncertain as to the proper course of action to adopt in relation to a potentially significant matter, is strongly advised to seek the help & advice from the IAI Market research using publicly available data. Benchmark against Competitors i.e., competitor-based pricing for initial year. Reinsurer s expertise Coinsurance basis Enter the market on coinsurance basis. www.actuariesindia.org
Regulatory Considerations www.actuariesindia.org
Regulatory Considerations IRDAI (AA) Regulations, 2017: Duties & Obligations: o Rendering actuarial advice to the management of the insurer, in particular in the areas of product design and pricing, insurance contract wording, investments and reinsurance. o Ensuring the solvency of the insurer at all times o Ensuring adequacy of reinsurance arrangements o Contributing to the effective implementation of the risk management system o Ensuring that the premium rates of the insurance products are fair o Ensuring that the actuarial principles are used in the calculation of IBNR, IBNER and PDR reserves www.actuariesindia.org
Regulatory Considerations Guidelines on Product filing procedures for GI Products, February 2016 Use and File Procedures: - The Pricing is made based on sound actuarial calculations, supportive data and the discounts/Loadings offered are on objective basis with appropriate justifications duly certified by the AA - For government sponsored schemes, need for AA s certificate on viability of rates proposed Role of AA as PMC member: - To ensure that due diligence has been carried out on the product development process and pricing in accordance with regulatory stipulations in force - Analyze the impact of product on capital & solvency margin of the insurer and inform the management and board of additional capital requirement, if any, to maintain solvency margin - To ensure the availability of sufficient actuarial resources in respect of products filing with the Authority www.actuariesindia.org
Regulatory Considerations Annual Valuation Reports 2017 circular Report on IBNR reserves Data & methodology used for reserve estimation FCR Current & Future solvency Reinsurance Risk management
Conclusion & Way Forward Appointed Actuary s role is highly regulated by various guidelines, professional code and o standards. The Appointed Actuary should maintain highest standard of conduct since the work is o performed in public interest. The Actuary in this scenario should understand the implications of taking the assignment o and present his/her case to relevant authorities like IRDA, IAI Probable approach & way forward if the Actuary decides to go ahead with the assignment: o o Research and take advice from second actuary and experts. o Consider underwriting the product on coinsurance basis. o Create a comprehensive business plan which contains key milestones and increase market share gradually. o The actuary should consider and communicate the challenges & alternatives available to key stakeholders from time to time in order to avoid any professional misconduct www.actuariesindia.org
Questions ? www.actuariesindia.org
