36th India Fellowship Webinar
Date: 22 January 2022
Feasibility of offering the Renewal Premium
Discounts
Guide : Avdhesh Gupta
Presented By :
1. Rakesh Kumar
2. Mayuresh Dharap
3. Ayush Jagirdar
4. Adwait Bhagwat
5. Samyak Baid
Introduction of Guide : Avdhesh
Gupta
Avdhesh is a Fellow member of the Institute of Actuaries of India (FIAI)
and Institute & Faculty of Actuaries, UK (FIA). He completed his MSc in
Actuarial Management from Cass Business School, London.
He is currently working as an Appointed Actuary of Bajaj Allianz Life
Insurance Company Limited - a joint venture between the Bajaj Finserv
Limited and Allianz SE. He joined Bajaj Allianz Life in June 2019 and is
responsible for Actuarial Valuations, Shareholder Reporting, Product
Pricing and Financial Risk.
He has over 14 years of experience in the actuarial domain. Prior to
joining Bajaj Allianz Life, he had worked with PricewaterhouseCoopers as
the Principal Consultant in actuarial services. In his earlier stints, he has
led multiple roles at Aegon Life Insurance Company, Swiss Re and HSBC.
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Agenda and Introduction
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Agenda
Introduction
Concerns and uncertainties
Feasibility – Actuarial
Perspective
Feasibility – Regulatory
Perspective
Feasibility – Operational
Perspective
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Introduction
Background and
Opportunity
Recently established small size life insurance
company
Mainly sells Pure Term and Unit Linked products
through online channel
Proposal to offer renewal premium discounts to
policyholders who do physical exercise regularly
Policyholders needs to demonstrate the same to the
Company via a mobile app
Might help in significantly improving the persistency
Concerns raised by CRO on data availability and
credibility in addition to the Covid-19 uncertainties
To discuss the feasibility of the suggestion from
actuarial, regulatory and operational aspects
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Concerns and uncertainties
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Concerns – Data Availability
Does the Company
have the access to
relevant data ?
Difficult to collect
Limitations in the IT
the data from all
systems
the policyholders
Data from
Granularity of data
Reinsurers may be
available
challenge
No prior
data/experience
available
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Concerns – Data Credibility
Data available might not be
credible enough to be able to
use the same for setting the
appropriate assumptions
IT system failures
Lack of credible or relevant
Industry data for
benchmarking the
assumptions
Data may be reliable but
might not be available for the
required time frame
Administrative errors or data
issue with the fields captured
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Covid-19 uncertainties
Covid-19 pandemic is changing or has already changed – our collective calculus of
uncertainty
Covid-19 pandemic in-fact is far more global in scope, more profoundly impactful
and far reaching & is more complex than any other crisis or uncertainties that we all
have experienced
Uncertainties regarding
Global health consequences of the
pandemic
Near, Mid and long term impact of the
measures which we are taking in response
to Covid-19
Long Term Impact on the mortality is still
not known
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Feasibility – Actuarial
Perspective
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Actuarial Feasibility
Parameters to be tracked
Possibl
e
Choices
Hours of No of Calories Hours of Sleep
Step Count
Physical Burnt
Actuarial Aspects
Exercise Practical Aspects
1.Factors
Impact on Health and
to be considered while 1.making a choice
Ease of Tracking
Longevity
2. Parameters tracked by
2. Availability of Past Data
industry peers
3. Single Parameter v.
3. Free Medical Check-ups
Combination of Multiple
to keep moral hazard in
Parameters
check
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Actuarial Feasibility
Defining Discount Structure
On What to Apply Quantum of Discount:
1 2
Discounts?
• Expected Savings in
• Premiums in case of Pure Mortality Costs
Term Policies • Costs of Implementing the
Key • Mortality Charges in case Proposal
Decisio of Unit Linked Policies • Increased Premiums due
ns to be (mortality charges are to reduction in lapses
small proportion of premium
taken and keep on declining)
Single Rate or Slab-
3 Time Period: 4
based Multiple Rates:
• Average PPTs of existing • Mortality improvements
portfolio • Persistency improvements
• Equivalent benefits to single • Ease of Modelling
pay policies / limited pay
policies
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Actuarial Feasibility
Long Term View of Mortality
Causes of Death in Indian Assured Lives Key Considerations:
• For middle and higher
age groups, the major
reason for deaths is
heart related problems
• Regular physical
activity can lead to
improvement in cardio-
vascular health
• Can it also lead to
increase in longevity
(mortality
improvements) over
the long term?
COVID-19
Considerations:
• Impact of COVID-19 on
long term health of a
person
• Vaccination and
Source: IALM 2012-14 Report reduction in number of
deaths due to
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vaccination
Actuarial Feasibility
Mortality Assumption
1 Different mortality: Data Concerns:
Different mortality
assumptions for healthy • Company does not have own
lives who avail the experience
Possibl proposal and other lives • Credible industry data may not be
e available
Choices 2 Applying Setback? • Need to determine the average
Can we apply a 3-5 year proportion of policyholders who are
setback on healthy lives expected to avail the proposal
considering that their Possible Solutions:
life expectancy would
improve by 3-5 years ? • Rely on experience of reinsurer /
foreign partner
• Provide additional margin while fixing
Other Considerations: the best estimate assumptions
• Check the proportion of policyholders
• Can lower term products be offered till who avail wellness initiatives in health
we get credible data relating to mortality insurance
improvements in the long term?
• Reduced anti-selection for future new
business
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Actuarial Feasibility
Expense and Lapse Assumptions
Expense Assumption: Lapse Assumption:
• Following additional costs – • Reduced lapses due to proposed
• Technology Costs improvements in persistency
• Marketing Costs
• Costs of Administration of the • Time frame till which the improvements will
Scheme be observed needs to be estimated
• Extent to which these costs will be • The proportion of policyholders availing the
funded by the shareholders and extent proposal is also crucial here
to which they are to be loaded into the
product • In case of pure term products, reduced
lapses could lead to lower profits whereas
• Possible increase in number of in-force for ULIP, improved persistency may lead to
policies due to improved persistency higher profits
leading to reduction in per policy
expenses in future • Discount on mortality charges may not be
able to reduce mass lapses which happen
after the end of lock-in period (5 years).
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Actuarial Feasibility
Profitability
Financial Viability Pricing Considerations
• Improvement in experience • Pricing assumptions
should be greater than need to be prudent to
discount offered on allow for uncertainty in
renewals for financial actual experience
viability of product • Base premiums might
be expensive than
premiums offered for
plain vanilla pure term
plans and subsequent Shareholder’s return
discounts on renewals • Inclusion of feature
might not be attractive should have be
• Discount on mortality justifiable to
charges for ULIP shareholders
product might not be • Shareholders might
material for require higher returns to
policyholders compensate additional
risk related to data and
Covid-19 uncertainty
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Actuarial Feasibility
Capital Requirement
Higher capital to meet high initial Higher capital to manage higher likely new
expenses in technology, administration, business as renewal discounts might be
marketing and underwriting unique proposition in life insurance market
Higher capital to allow for prudence in Higher capital to manage higher
assumptions and possible uncertainty in persistency of the existing business
actual experience
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Actuarial Feasibility
Reinsurance
• As a small company, the reinsurance support will be
very important to manage capital and mortality risk
• Important risk management tool and reinsurers can
provide crucial technical assistance in pricing and
product design
• Global reinsurer’s experience in other countries might
be used after allowing for differences in demographic
profile
• Reinsurance renewal premium discount or reinsurance
commission might be negotiated or profit sharing
reinsurance arrangement might be explored
• Reinsurance treaty terms and conditions to be in line
with those offered to customers and changes in
reinsurance terms and conditions might not be possible
for existing business
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Actuarial Feasibility
Valuation of Liabilities
• Need to ensure protection to policyholders
• Assumptions for different lives needs to be determined
• Need to consider Margin for Adverse Deviations (MADs) for each set
of assumptions
• Valuation assumptions might be updated in coming years once
sufficient and credible actual experience emerges for the product
• Additional reserve might be required to manage operational risk
related to monitoring of physical activity, fraud situations and
management of administration system
• Additional reserve might be required to manage increase in revival of
existing business
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Actuarial Feasibility
Impact on Solvency Ratio, EV and
VNB
Value of New
Solvency Ratio Business (VNB)
• Impact on VNB needs to
be evaluated for pure
term and ULIP existing
business
For Pure Term
Embedded Value • VNB might fall due to
(EV) increase in initial
Impact on Solvency ratio expenses
Impact on EV needs to be
needs to be evaluated and • VNB might fall due to
evaluated
adequate capital might be lower renewal premiums
required to support the
business For ULIP
• Lower mortality charges
might lead to lower VNB
• Better persistency
might lead to higher
VNB
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Actuarial Feasibility
Actuarial Control Cycle
Specifying
the Problem
Renewal Premium
Discounts and
Discount on
Mortality Charges
Developing
Monitoring the Solution
the 1. Data
2. Setting
Experience Assumptions
1. Actual 3. Pricing and
Experience v/s Product Design
Assumptions 4. Capital
2. Actual Management
Profitability 5. Reserving
6. Modelling
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Feasibility – Regulatory
Perspective
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Regulatory Feasibility
Draft circular on Wellness initiatives
Wellness Design
• Rewards program can be launched with voluntary participation
Pricing Consideration
• Rewards can be provided to existing policyholders provided pricing doesn’t get
affected materially
Policyholders Protection
• Ensure all eligible policyholders should receive clear communication
• In house Grievance Redressal Mechanism must be in place even if services are
outsourced
Operations
• Services can be outsourced, provided guidelines regarding remunerations and
advertising are adhered
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Regulatory Feasibility
Product Regulations, 2019
Product Design
• Shorter policy term can be offered to control the risk till the time
credible experience is developed
Innovative Product
• Company can file this product as innovative product, as this is first of a
kind in market
• Company will have to demonstrate cost is within control and product is
simple to understand
Financial viability
• Company has to demonstrate the financial viability of the product every
year in ARA report
• AA can reprice the product if it is not financially viable
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Regulatory Feasibility
Regulatory Considerations
• Company should ensure system readiness for launch of product as three
Product month window is provided for launch post approval
Approval • Ensure all the requirements as per regulatory checklist are fulfilled
• Appointed Actuary Regulation,2017
• If offered to existing customers, loss of discount on past premiums
Policyholder • Premium charged for new product should be comparable with existing
Fairness product
• Compliance with Protection of Policyholders’ Interests,2017
• Need to ensure all policyholders are informed, failure to communicate
may lead to disciplinary action
Communicatio • Need to revise communicated Benefit Illustration and Policy Document if
n changed for existing business
• APS5 requires no potential information to be withheld in BI and hence
level of discount offered should be provided in BI
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Regulatory Feasibility
Regulatory Considerations
• Appointed Actuary Regulation,2017 requires data to be accurate
• As per APS7, higher MAD can be applied on lapse assumption to consider
Liability lack of experience, data credibility
Valuation • Cautious approach for mortality assumption till volatility due to covid 19
is stabilized
• Additional expenses in development and management of app may lead
to breach of EOM limit set in EOM Regulation, 2016
Expenses • If Company is newly formed and might not have completed 10 years, so
it can opt for exemption on that basis
• Need to ensure projected solvency is more than 150% as prescribed by
Solvency
ALSM Regulation,2016 or company’s internal target at all times
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Feasibility – Operational
Perspective
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Operational Feasibility
Fraud
• Fraud is one of the most major risks in the product:
o Will lead to collection of lower premiums.
o Will lead to collection of data which is not accurate.
• Ways of mitigating risks include:
o Asking for policyholder-specific evidence of exercise.
o Setting policyholder-specific discount criteria.
o Tying up with external apps for better data collection.
o Collecting additional data which will aid in fraud mitigation.
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Operational Feasibility
Communication to Policyholders
• If the structure is introduced in existing products, it will have to be intimated
to all existing policyholders.
• Criteria for discounts should be clearly communicated.
• All marketing documents should have appropriate disclaimers and definitions.
• Communication in Benefit Illustration needs to be appropriate.
• The policyholder needs to be aware in advance about discount level.
• Support staff need to be trained to ensure proper communication.
• Communication on the benefits of exercise.
• Explaining the structure to lesser educated or uneducated policyholders will
be a challenge.
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Operational Feasibility
System Development
• Significant cost of building the app, especially if the company does not have
in-house expertise.
• Developing and testing the app will take a lot of time.
• There has to be segregation of data basis the discount status attained every
year by policyholders.
• Historic level of discounts offered to the policyholders will also need to be
tracked.
• The app has to have appropriate data protection and security measures.
• There is very high reputational risk involved in case of system failure.
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Way Forward
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Way Forward
• Ensure compliance with all relevant regulations, circulars and APS.
• Evaluate the cost and estimated timeline to introduce the product to the
market.
• Collect all the relevant data required to evaluate profitability of the product.
• Perform a cost vs benefit analysis.
• If beneficial to the company, proceed with finalizing the product design and
file with the regulator.
• Proceed with system development.
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Thank You!
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