institute of actuaries of india actuarial advice and resultant liabilities of an appointed actuary...
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Institute of Actuaries of India
Actuarial advice and resultant liabilities of an Appointed Actuary
India Fellowship Seminar-December 2014
Serving the Cause of Public InterestIndian Actuarial Profession
Sipika TandonSupriyo ChakiAdarsh Kishor AgarwalA V Karthikeyan
Under the guidance ofMr. Saket Singhal
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Agenda
Introduction
Appointed Actuaries in India
Actuarial advice and risks associated with it
Stakeholders – expectations & governing regulations
Challenges and liabilities of Appointed Actuaries
Impact of Legislation and Regulation
Mitigation Plan and insurance protection
Prof
essi
onal
ism
, Eth
ics
and
Cond
uct
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Actuarial advice – expert or a mere adviser? Actuaries can act as expert in a specific area or a mere professional adviser Expert may fail to follow instructions and unable to explain the deviation May be liable in negligence for making a mistake in arriving at conclusion
Appointed Actuary – working as IRDA’s eye
To inform Authority of own opinion whether insurer has contravened any act At the same time needs to contribute to business growth – potential conflict of interest
Independence of Opinion
Responsibilities towards various stakeholders – their expectations and liabilities associated with Appointed Actuary’s advice
Actuaries as professionals
Appointed Actuary – a mandatory requirement in Indian insurance industry
Introduction
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Appointed Actuaries in IndiaPerforming a multifaceted role in life and general insurance
Central to financial soundness of the company – to ensure that business is conducted in sound financial lines and monitor unfair actions
Central to the financial soundness of the general insurance company – to ensure that business is conducted in sound financial lines having regard to Policyholders’ Reasonable Expectations
To perform an annual actuarial investigations into the financial condition of GI business Certify the adequacy of the claim reserves Ensure appropriateness of premium rates and policy conditions Advise the Board on capital requirements To carry out economic capital calculation To report in writing to the Board on the results and implications of any valuation carried out for
statutory purposes
To carry out actuarial investigations to assess financial soundness of the insurer – FCR requirement Carrying out valuation of liabilities Ensure appropriateness of premium rates and policy conditions Advise the Board on capital requirements Advise and report on allocation of surplus To report in writing to the Board on the results and implications of any valuation carried out for
statutory purposes
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Actuarial AdviceResponsibilities of Appointed Actuary in General Insurance
Managing actuarial function – Business As Usual (BAU) Reserve calculation and estimation of reserving uncertainty Pricing and product design Asset – liability management and solvency calculation Insurance contract wording, investment and reinsurance
Internal Management Reporting Rendering actuarial advice to management of insurer Participation in Board Meetings Drawing management attention to any potential violation of rule/regulation
Regulatory Submission Certification of IBNR and other reserves Prepare and submit Financial Condition Report Economic Capital related submission Handling associated queries from IRDA
Other Professional Responsibilities Participation in industry bodies and various actuarial committees Contribution to the development of actuarial profession in India
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Risks associated with Actuarial Advice (1/3)
• Certifying reserve including IBNR• Solvency margin certification
1
Insufficient IBNR leading to risk of insolvency
Over or under estimation of solvency position
Areas of AA advice What can go wrong?
• Financial Condition Report certification
2
Too many aspects of the business needs to be analyzed
Difficulties to confirm with certainty
6
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Risks associated with Actuarial Advice (2/3)
• Pricing - certifying financial viability of filed products
3 Inaccurate pricing Internal and external factors to
deviate from appropriate pricing structure
Risk of anti-selection and moral hazard
Areas of AA advice What can go wrong?
• Joint sale advertisement certification•Mass schemes pricing
certification
4
Information provided is misleading, not consistent with filed product
Inadequacy of pricing
7
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Risks associated with Actuarial Advice (3/3)
• Economic Capital certification
5 Use of wrong methodology or model
Inappropriate assumptions Data issues – unavailability and
less granular
Areas of AA advice What can go wrong?
• Asset Liability certification
6 Failing to consider factors having significant relevance to business
Not including relevant shock scenarios
8
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Spectrum of Stakeholders
Appointed Actuary’s Advice
Board of Directors
Shareholders
Employees
Credit rating agencies
Brokers
IRDA
Government of India
Existing policyholders
Prospective policyholders
Institute of Actuaries
of India
General Insurance Council
Fellow Actuaries
Reinsurers
Corporate Agents
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StakeholdersExpectations and governing regulations
Stakeholders Governing Regulations
Insurance Regulator
Complying with Authority’s directions from time to time Complying with various provisions and regulations Drawing management attention to avoid contravention of Act
Internal Stakeholders
Providing actuarial advice on pricing, product design, contract wording, investments and reinsurance
Ensuring the solvency at all time Working towards increasing the shareholder’s value
Company specific policies Corporate Governance Guidelines
Policyholders Fair pricing and policy conditions of new and existing products Maintenance of financial strength to meet future liabilities Monitor practices, likely to be prejudicial to their interests
IRDA (Protection of Policyholders’ Interest) Regulations, 2002
Actuarial Practice Standard (APS) 21
Professional Associations
To maintain highest professional standard envisaged by the IAI To make properly reasoned comments on work of fellow actuaries Participate in Industry Working Parties
Actuarial Practice Standard (APS) 21 Certificate of Practice (CoP) Guidance Notes & Professional
Conduct Standards (PCS)
IRDA (Appointed Actuary) Regulations, 2000
The Actuary’s Act, 2006
External Stakeholders
Perform high end actuarial analyses to meet rating agency needs Provision of appropriate data and insights to reinsurers Understand brokers’ views which can be incorporated in product
development process
IRDA (General Insurance – Reinsurance) Regulations, 2000
File & Use Guidelines
Expectations from Appointed Actuary
Liability : Risk of failing to abide by the stipulated regulations and guidelines in providing actuarial advice
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Challenges of Appointed ActuariesToo much to carry, too many forces to balance
Data integrity and unavailability
Unavailability of skilled actuaries to support
Ever changing insurance landscape
Product innovation
New regulatory requirements
Demands of different stakeholders
Understanding the risks being placed upon the Appointed Actuary
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Liabilities of Appointed Actuaries (1/2)Carrying unlimited liabilities…
An AA virtually carries unlimited liability for any misdeed/mistake/error of judgment
AA can face significant legal risk because of the magnitude of the liabilities belonging to the companies and schemes they advise
Various stakeholders are very much affected by AA’s actions in providing advice and services
AA can possibly be sued individually for the entire amount of the loss suffered by a claimant
High liability due to unavailability of any financial instrument to provide financial indemnity to AA
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Disciplinary action by IRDA
Disciplinary Action by IAI
Lawsuits filed by stakeholders against inappropriate advice
Termination from duties by the Employer
Financial penalties
Reputational damage
Liabilities of Appointed Actuaries (2/2)Possible consequences of carrying unlimited liabilities
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Impact of Legislation and Regulations
Key Objectives
The various roles performed by Appointed Actuaries in India are regulated and governed by The Actuaries Act, 2006 and the IRDA (Appointed Actuary) Regulations, 2000. The overarching objectives of these are to provide a framework within which the Actuaries need to work and perform contractual obligations.
Surrounding regulations
– Defines professional misconduct– Actions of Authority, Disciplinary
Committee and Council– Appeal procedure and penalties– Quality Review Board
The Actuaries Act, 2006
– Specifies duties and obligations– Elucidate the powers of AA– Cessation of appointment of AA– Mentions about absolute privilege of AA
IRDA Appointed Actuary Regulations, 2000
Actuarial Practice Standards Guidance Notes
Professional Guidance2
1
Professional Conduct Standards Certificate of Practice
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Mitigation PlanOperational ways to minimise exposure
4 eye principle to eliminate errors and omissions
Maker-Checker-Reviewer Approach
Sense check on actuarial analyses
Clearly defined Standard Operating Procedure for different activities
Ensure data quality – Garbage in-Garbage Out
Possible Options
Wrong methodology or model is usedInaccurate actuarial calculationMiss out on relevant aspects in actuarial investigations
Follow the basic principles
Data extensive work – validation checks are useful ways to minimise over-reliance on data as it is
Many of the tasks are process oriented and periodic in nature – following updated process documents can reduce the risk of process error
Which risks are mitigated?
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Mitigation PlanUse of professional guidance and other inputs
Follow various Guidance Notes issued by the IAI
Interaction with Peer Actuaries - Compare high level KPI with Peer companies
Continuous professional developments and regular trainings
Keep abreast of the various regulatory developments
Keep up-to-date with legal and socio economic changes
Possible Options
Seek professional guidance
Different guidance notes are meant to assist in the provision of actuarial advice and certification in various areas
Important to remain conscious about the legal aspects of professional services and its implications
Inappropriate assumptions are usedFailing to consider factors having significant relevance to businessData issues not effectively dealt with
Which risks are mitigated?
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Mitigation PlanSome other areas to lean upon
Get Professional Indemnity insurance
Self awareness of various potential conflicts of interest
Support from appropriate qualified and experienced team members
Monitor developments concerning legal liabilities of actuaries in other countries
Imposing liability caps to limit the liabilities
Possible Options
Be aware of external environment
Understand own risk and use suitable insurance plan to protect unforeseen liabilities
Awareness of various forces around and their dimensions can help to act knowledgeably
Acquire and demonstrate high level of corporate skill
Influenced to deviate from appropriate pricing structureFailure to convince all parties that the actuarial advice has been fair to allUnderestimation of emerging risks and financial liabilities
Which risks are mitigated?
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Insure Us?Devise Professional Indemnity insurance cover
…. So we have discussed High legal risk Potential unlimited liability
What to do?
Follow operational controls and professional guidance Possibly not enough!!!
Not available in Indian market – possibly PSU insurers cover actuaries, but uncommon
Risks and associated financial liabilities associated in carrying out duties of AA will certainly be minimized
Limit of indemnity can be decided based upon assessment of own risk
To cover liability falling on AAs as a result of errors and omissions committed by them whilst rendering actuarial advice
Cover can be extended to other actuarial professionals, including independent consultants and actuarial contractors
If available at all, it may be very expensive
Not much clarity whether the Companies’ D&O cover can provide safeguard to AAs
Promote a sense of professional confidence among the Actuaries to do their job better
Reasonable pricing is required in view of reported cases of professional negligence involving actuaries
Take support from international market and reinsurers
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References
In preparing this, we have taken assistance from the following:
The Actuaries Act, 2006 (As passed by the House of Parliament) Insurance Regulatory and Development Authority (Appointed Actuary) Regulations,
2000 Guidance Note (GN) 21: Appointed Actuary and General Insurance Business Actuarial Practice Standard (APS) 1: Appointed Actuary and Life Insurance Business Actuarial Practice Standard (APS) 1: Appointed Actuary and Life Insurance Business Professional Conduct Standards (PCS Version 3.00) issued by the Institute of
Actuaries of India Other regulations and guidelines issued by IRDA and IAI “Appointed Actuary – Insure Thyself” by Sampad Narayan Bhattacharya http://actuariesindia.org/downloads/gcadata/8thGCA/Appointed%20Actuary-%
20Insure%20thyself_S%20N%20Bhattacharya.pdf “Actuaries’ Liabilities” by Jonathan Evans and Wilberforce Chambers for
Professional Indemnity Forum Conference, Cambridge, July 2009