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Content
Background
The current situation in India
Developments in other markets
Conclusions and recommendations for India
Investment
risk
Credit risk
Currency risk
Mismatch risk
Operational risk
Expense risk
Insurance risk
Group risk
Credit risk
Regulatory risk
Other risks
Internal
Bonus structure and policyholders
expectation of a smoothed return has
meant that the fall in investment markets
cannot be fully passed on
High level of guaranteed investment
returns and mismatching as a result of
falling investment returns
Regulatory issues
Increase compliance costs
Compensation costs from mis-selling
(USD20 billion)
Government imposed product pricing (UK)
Increasing solvency requirements (Phase 2)
Distributor pressure
Other guarantees
Annuity options
Surrender values
Benefits on investment-linked contacts
Rising costs
Competition from cheaper channels
Traditional approaches to
determining capital requirements
Absolute
amount
Rs. 50 crores
Fixed
factors
6% reserve +
0.45% sum at risk
Absolute amount
with fixed factors
Dynamic
solvency testing
A realistic assessment
of the capital
requirements for the
risks being run
Content
Background
The current situation in India
Developments in other markets
Conclusions and recommendations for
India
India Overview of
solvency requirements
Typical formula approach
Simplistic and easy to administer
Working solvency margin is 150% of the
formula
Minimum solvency requirement of Rs 50 Cr
Solvency margin can be met by Surplus
from Policyholder fund and Shareholder
fund
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Valuation of assets
and liabilities
Solvency requirement
Non-linked business:
Linked Business:
Group Business:
Solvency requirement
for rider policies
Similar treatment for base policies and riders
Simplistic example
Premium = 1.5
Reserves = 0.75
Required solvency margin (RSM) = 3.03
150% of RSM = 4.55
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Limitations of current
framework
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Anomalies
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Content
Background
The current situation in India
Developments in other markets
Conclusions and recommendations for India
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UK Valuation of
liabilities
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Capital requirement
Single tier capital requirement Solvency
margin
Solvency margin defined as % of SAR and
policy reserves
Minimum solvency margin is 800,000 ECU
Assets held at market value/net realisable value
Certain assets are inadmissible for solvency
purposes
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USA Valuation of
liabilities
Net Premium method with a prescribed
minimum basis
Mortality 1980 CSO
Prescribed dynamic maximum valuation
interest rate
Additional cash-flow testing requirement
Capital requirement
RBC = f (C0,C1,C2,C3,C4)
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Canada Valuation of
liabilities
Margins represent limited and reasonable level of misestimation and deterioration from expected experience
scenario assumptions
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Capital requirement
15%
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Solvency Standard
1.
2.
2.
3.
Requirements
Solvency
Solvency
Requirement
Other Liabilities
Resilience Reserve
Inadmissable
Assets Reserve
Expense Reserves
Capital Adequacy
Capital Adequacy
Requirement
Other Liabilities
Resilience Reserves
Inadmissable Asset
Reserve
New Business
Reserve
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Margins
Solvency
Capital Adequacy
Min.
Max.
Mortality
110%
140%
Disability
120%
150%
Critical
Illness
130%
160%
Investment
Linked
0.25%
0.5%
2.5%
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Investment Assumptions
Solvency
Capital Adequacy
Minimum Maximum
Gross Redemption
Yield of a 10 year
Govt Security
BE 0.4% BE 3.0%
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Resilience Reserves
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Resilience assumptions
Solvency
Capital Adequacy
Equity
1.25%
0.5%+(0.4xYield)
Property
1.25%
2.5%
Interest
Bearing
1.75%
1.0%+(0.2xYield)
Indexed
Bonds
0.6%
1.0%
Currency
10%
15%
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Singapore Valuation of
liabilities
Looking to move to a gross premium basis basis selected by actuary, having regard to
professional guidance (a change from net
premium valuation)
Propose risk free rates are used for nonparticipating business (based on government
bonds).
Singapore
Capital requirements
Regulators are proposing a change to the
current traditional framework (3% reserves +
0.2 per mille of sum at risk) that is more in line
with banking sector, is risk based, flexible and
transparent.
New framework will have a fund solvency
requirement (for each fund) (FSR), and an
overall capital adequacy requirement (CAR).
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Singapore
Capital requirements
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Surplus
Fund Solvency
Requirement
Policy
Liability
LC3
Inadmissible Asset
LC2
LC1
Liability
Component
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OCAR
OCAR = IOCAR grossed up for the effect of
the assumed fall in fair value of the
assets backing it
OCAR = IOCAR/0.7 if assets in equities
assumed to fall 30%
OCAR = IOCAR if assets in cash
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IOCAR
IOCAR = Intermediary Ordinary Capital
Requirements before taking into
account the effect of the assumed
falls in fair value of the assets
covering it Resilience scenario
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Country Comparison
Country
India
UK
Valuation
Gross Premium
Net Premium
Solvency
Formula
Formula but
under review
USA
Australia
South Africa
Canada
Singapore
(Proposed)
Net Premium
Gross Premium
Gross Premium
Gross Premium
Gross Premium
RBC
RBC
RBC
RBC
RBC
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Content
Background
The current situation in India
Developments in other markets
Conclusions and recommendations for India
42
Conclusions
Implementation Issues to
consider
Technology
How do we get the know how
Phasing in to existing levels of capital
Setting of the risk charges/parameters
Impact on Business
Big workload on the Regulator and Industry
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Recommendation
IRDA start giving consideration to adopting
a RBC approach to solvency in 3 5 years
The Regulator should involve the Industry
and work together to discuss the
implications of moving to an appropriate
RBC regime for India
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Acknowledgements
We take this opportunity to thank all those
actuaries and Appointed Actuaries in India
who provided us with valuable inputs for
this paper.
All the views expressed in this paper are the
views of the authors and are not necessarily
the views of our employers
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