Institute of Actuaries of India

Actuarial advice and resultant liabilities of an

Appointed Actuary
Sipika Tandon
Supriyo Chaki
Adarsh Kishor Agarwal
A V Karthikeyan

Under the guidance of

Mr. Saket Singhal India Fellowship Seminar-December 2014
Indian Actuarial Profession
Serving the Cause of Public Interest
Agenda

Introduction

Appointed Actuaries in India

Professionalism, Ethics and Conduct

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

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Introduction

Actuaries as professionals

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 – a mandatory requirement in Indian insurance industry

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

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 Appointed Actuaries in India
Performing 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

 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

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 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 Advice
Responsibilities 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)

Areas of AA advice What can go wrong?

1
 Insufficient IBNR leading to risk
• Certifying reserve including
of insolvency
IBNR
 Over or under estimation of
• Solvency margin certification
solvency position

2
 Too many aspects of the
• Financial Condition Report business needs to be analyzed
certification  Difficulties to confirm with
certainty

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Risks associated with Actuarial Advice (2/3)

Areas of AA advice What can go wrong?

3  Inaccurate pricing
 Internal and external factors to
• Pricing - certifying financial deviate from appropriate
viability of filed products pricing structure
 Risk of anti-selection and moral
hazard

• Joint sale advertisement  Information provided is

certification misleading, not consistent with
• Mass schemes pricing filed product
certification  Inadequacy of pricing

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Risks associated with Actuarial Advice (3/3)

Areas of AA advice What can go wrong?

5
 Use of wrong methodology or
model
• Economic Capital
 Inappropriate assumptions
certification
 Data issues – unavailability and
less granular

6
 Failing to consider factors
having significant relevance to
• Asset Liability certification business
 Not including relevant shock
scenarios

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Spectrum of Stakeholders

 Board of Directors  IRDA

 Shareholders  Government
 Employees of India

 Institute of
Actuaries
Appointed  Existing
of India
Actuary’s Advice policyholders
 General
 Prospective
Insurance
policyholders
Council
 Fellow Actuaries

 Credit rating agencies  Reinsurers

 Brokers  Corporate Agents

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Stakeholders
Expectations and governing regulations

Stakeholders Expectations from Appointed Actuary Governing Regulations

 Complying with Authority’s directions from time to time  IRDA (Appointed Actuary)
Insurance Regulations, 2000
 Complying with various provisions and regulations
Regulator  Drawing management attention to avoid contravention of Act  The Actuary’s Act, 2006

 Providing actuarial advice on pricing, product design, contract

Internal wording, investments and reinsurance  Company specific policies
Stakeholders  Ensuring the solvency at all time  Corporate Governance Guidelines
 Working towards increasing the shareholder’s value

 Fair pricing and policy conditions of new and existing products  IRDA (Protection of Policyholders’
Policyholders  Maintenance of financial strength to meet future liabilities Interest) Regulations, 2002
 Monitor practices, likely to be prejudicial to their interests  Actuarial Practice Standard (APS) 21

 Perform high end actuarial analyses to meet rating agency needs

 IRDA (General Insurance –
External  Provision of appropriate data and insights to reinsurers
Reinsurance) Regulations, 2000
Stakeholders  Understand brokers’ views which can be incorporated in product
 File & Use Guidelines
development process
 Actuarial Practice Standard (APS) 21
 To maintain highest professional standard envisaged by the IAI
Professional  Certificate of Practice (CoP)
 To make properly reasoned comments on work of fellow actuaries
Associations  Guidance Notes & Professional
 Participate in Industry Working Parties
Conduct Standards (PCS)

Liability : Risk of failing to abide by the stipulated regulations and guidelines in providing actuarial advice
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Challenges of Appointed Actuaries
Too much to carry, too many forces to balance

Ever changing insurance Unavailability of skilled

landscape actuaries to support

Data integrity and

Product innovation
unavailability

New regulatory Demands of different

requirements 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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Liabilities of Appointed Actuaries (2/2)
Possible consequences of carrying unlimited liabilities

 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
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Impact of Legislation and Regulations
1 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

The Actuaries Act, 2006 IRDA Appointed Actuary Regulations, 2000

– Defines professional misconduct

– Specifies duties and obligations
– Actions of Authority, Disciplinary
– Elucidate the powers of AA
Committee and Council
– Cessation of appointment of AA
– Appeal procedure and penalties
– Mentions about absolute privilege of AA
– Quality Review Board

2 Professional Guidance

 Actuarial Practice Standards  Professional Conduct Standards

 Guidance Notes  Certificate of Practice
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Mitigation Plan
Operational ways to minimise exposure

4 eye principle to eliminate errors

and omissions
Follow the basic principles

Maker-Checker-Reviewer Approach  Data extensive work – validation

Possible Sense check on actuarial analyses
Options
Clearly defined Standard Operating
Procedure for different activities
Ensure data quality – Garbage in-
Garbage Out
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?

Wrong methodology or model is used

Inaccurate actuarial calculation
Miss out on relevant aspects in actuarial investigations

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Mitigation Plan
Use of professional guidance and other inputs

Follow various Guidance Notes

issued by the IAI
Seek professional guidance

Interaction with Peer Actuaries - Compare

 Different guidance notes are meant
high level KPI with Peer companies
to assist in the provision of actuarial
Possible Continuous professional developments advice and certification in various
Options and regular trainings areas

 Important to remain conscious

Keep abreast of the various regulatory
about the legal aspects of
developments
professional services and its
Keep up-to-date with legal and socio implications
economic changes

Which risks are mitigated?

Inappropriate assumptions are used

Failing to consider factors having significant relevance to business
Data issues not effectively dealt with

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Mitigation Plan
Some other areas to lean upon

Get Professional Indemnity insurance Be aware of external

Self awareness of various potential
conflicts of interest
Possible Support from appropriate qualified and
experienced team members
Options
Monitor developments concerning legal
liabilities of actuaries in other countries
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

Imposing liability caps to limit the
of corporate skill
liabilities

Which risks are mitigated?

Influenced to deviate from appropriate pricing structure

Failure to convince all parties that the actuarial advice has been fair to all
Underestimation of emerging risks and financial liabilities

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 Insure Us?
Devise Professional Indemnity insurance cover

Potential unlimited What to

…. So we have discussed High legal risk
liability do?

Possibly not
Follow operational controls and professional guidance enough!!!

 To cover liability falling on AAs as a result of errors  Not available in Indian market – possibly PSU
and omissions committed by them whilst rendering insurers cover actuaries, but uncommon
actuarial advice
 Cover can be extended to other  If available at all, it may be very expensive
actuarial professionals, including  Not much clarity whether the Companies’
independent consultants and actuarial D&O cover can provide safeguard to AAs
contractors

 Limit of indemnity can be decided based  Risks and associated financial liabilities
upon assessment of own risk associated in carrying out duties of AA
 Take support from international market and will certainly be minimized
reinsurers
 Promote a sense of professional confidence
 Reasonable pricing is required in view of reported
among the Actuaries to do their job better
cases of professional negligence involving actuaries
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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

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Q&A

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