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The Actuary India June 2011

COnTEnTs
www.actuariesindia.org

Chief Editor Taket, Nick Tel: +91/22/6740-3333 Email: nick.taket@idbifederal.com Editor Sharma, Sunil Email: sharma.sunil@iciciprulife.com Puzzle Editor Mainekar, Shilpa Email: shilpa_vm@hotmail.com Manager (Library and Publishing) Rautela, Binita Tel: +91 22 6784 3325 Email: library@actuariesindia.org COUNTRY REPORTERS Smith, John Laurence New Zealand Email: Johns@fidelitylife.co.nz

Kakar, Gautam European Union (EU) Email: kakar.gautam@gmail.com Chung, Phuong Ba Taiwan, Hong Kong & Japan Email: phuongchung1971@yahoo.com Sharma, Rajendra Prasad USA Email: rpsharma0617@yahoo.com Cheema, Nauman Pakistan Email: info@naumanassociates.com Leung , Andrew Thailand Email: andrew.leung@iprbthai.org Krishen, Sukdev South Africa Email: Krishen.Sukdev@absa.co.za

FROM THE CHIEF EDITOR 4 NICK TAKET bids farewell to Dr. Kannan and Mr. Subrahmanyam on their retirement from IRDA and also discusses about current challenges facing the Insurance Industry and the IRDA. REPORTAGE 1st Strategy Initiative Workshop

by Binita Rautela
1st Seminar On Capacity Building In Non-Life Industry-Actuarial And Analytics 6

by Prasun Sarkar
FEATURES

IASB Insurance Contracts Exposure Draft: Summary and Key Observations

by Mark Saunders and John Nicholls


Practical Considerations in Variable Annuity Pricing inspires change for Indian insurers 14

by Novian Junus & David Wang


COUNTRY REPORT

USA -Guaranteed Uncertainty Socioeconomic Influences on Product Development and Distribution In the Life Insurance Industry by Rajendra P Sharma

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For circulation to members, connected individuals and organizations only. Disclaimer : Responsibility for authenticity of the contents or opinions expressed in any material published in this Magazine is solely of its author and the Institute of Actuaries of India, any of its editors, the staff working on it or "the Actuary India" is in no way holds responsibility there for. In respect of the advertisements, the advertisers are solely responsible for contents and legality of such advertisements and implications of the same. The tariff rates for advertisement in the Actuary India are as under: Back Page colour Rs. 35,000/Full Page b/w Rs. 20,000/Full page colour Rs. 30,000/Half Page b/w Rs. 15,000/Half Page colour Rs. 20,000/Your reply along with the details/art work of advertisement should be sent to library@actuariesindia.org ENQUIRIES ABOUT PUBLICATION OF ARTICLES OR NEWS Please address all your enquiries with regard to the magazine by e-mail at binita@actuariesindia.org. Kindly do not send it to editor or any other functionaries.

STUDENTS COLUMN

Impending convergence with IFRSs in India Benefits and Challenges by CA. Sarweshwar Biyani

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FROM THE DESK OF Chairperson Advisory Group on Communication (AGC) - Sunil Sharma 27

BOOK REVIEW A Problem-Solving Approach to Pension Funding and Valuation by William H Aitken Reviewed by Kulin Patel 28

CAREER OPPORTUNITY Apply for Whole-time Member (Actuary) in IRDA. Last date 30.6.2011 Apply for Senior and Junior Actuarial post at Nalin Kapadia Actuarial Consultancy Apply for various vacancies at Mercer 29 30 31

Printed and Published monthly by Gururaj Nayak, Administrative Officer, Institute of Actuaries of india at Alco Corporation, A-1 / 16, Ground Floor, Shah - Nahar Indust. Estate, Lower Parel (W) Mumbai - 400 013 for Institute of Actuaries of india : 302, Indian Globe Chambers, 142, Fort Street, Off D N Road, Near CST (VT) station, Mumbai 400 001. Tel +91 22 6784 3325 / 6784 3333 Fax +91 22 6784 3330 Email : library@actuariesindia.org Webside : www.actuariesindia.org

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The Actuary India June 2011

Mark your dates 14th Global Conference of Actuaries, 19th 21st February, 2012 in Mumbai

FROM THE CHIEF EDITOR


This month marks the retirement from the Insurance Regulatory and Development Authority of two highly respected members of our profession. Dr. Kannan and Mr. Subrahmanyam have both given many years of distinguished service to the insurance industry and to protecting the public interest through their roles at the IRDA. They have been centrally involved in the development and regulation of insurance, and have ensured that there has been a strong actuarial foundation to the work of the Authority. Our profession owes them a debt of gratitude for their efforts and we can feel proud of their achievements. At a personal level I have always enjoyed my interactions with them and am grateful for the guidance and support that they have freely offered over many years. They both leave behind a strong legacy, and whoever takes over their respective roles will find that they are stepping into very big shoes. I hope the IRDA has or will be able to find replacements of equal caliber so as to ensure the continuity of a strong actuarial presence within the Authority. Before joining the IRDA, Dr. Kannan and Mr. Subrahmanyam have both had long and distinguished careers, so I feel sure that their retirement from the Authority is only the closing of one chapter and the beginning of a new one. Whatever their future plans are, I am sure all members of the Institute will join me in wishing them every success for the future as well as health and happiness in all aspects of their lives. ---------The insurance industry was opened up to competition from the first private sector companies around 10 years ago. At that time the IRDA rightly identified products as a key regulatory priority, and consequently instituted the file and use process for new life insurance products. A lot has happened in the intervening years, the IRDA has put in place a comprehensive set of product circulars and guidelines that set out the boundaries within which life companies can develop new products; the industry and the companies have matured; the issues facing the insurance companies have moved away from products towards productivity, expenses and premium persistency; the Authority is now placing far greater emphasis on these new challenges. Given these developments it is natural to ask whether the time has arrived for the Authority to set aside the file and use process and allow companies to develop products within the framework of the existing comprehensive set of guidelines. Of course there would need to be safeguards, but perhaps these could be provided just by a straightforward certification from the Appointed Actuary. This could be based on the current certification at the end of the current file and use procedure to the effect that the product is actuarially sound and the terms and conditions are fair. In addition, the CEO and AA could certify that the product complies with the Insurance Act, the regulations, the product guidelines and circulars. This approach to products would place a greater level of responsibility on individual companies, but the nature of the regulations issued in recent years should make the companies aware of the likely consequences of a failure to live up to the responsibilities placed on them. Now that the IRDA has in place its integrated grievance monitoring system, the Authority should be able to quickly identify any issues thrown up by poor product design, and take immediate corrective action. Such an approach would relieve the Authority of the very significant burden of examining all the new products and product amendments of the growing number of insurance companies. This work load is only likely to grow in future as companies develop more products in search of greater productivity from their distribution channels. Freed from these onerous tasks the IRDA would be better placed to work with the industry in overcoming the current challenges it faces. Nick Taket

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The Actuary India June 2011

REPORTAGE
1sT sTRaTEgy InITIaTIvE WORksHOp
Organized by: the Strategy Initiative Task Force (SITF) Held at: Sea Princess Hotel, Juhu Beach, Mumbai Date: May, 14th 2011 The 1st Strategy Initiative Workshop aimed at Strategy Initiative Wider Group (SIWG) consisting of Council members, Chairs/Secretaries of the Advisory Groups, SITF members and some senior invited IAI members and senior staff of the Institute was first in a series of workshops that have been planned on the subject. By Binita Rautela binita@actuariesindia.org
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Employers perception of the Actuarial functions The Group 3presentation by Nick Taket: Weak member engagement with the Institute

l Left to right Sunil Sharma, Nick Taket, Meenakshi Malhotra, T. Bhargava

Deliberations started on issues and challenges keeping in view the Vision, Mission & Values of the three advisory groups slated for the day: Education, Examinations and Life Insurance. Presentations made by each group centered around:
The Group 1- presentation

Low service delivery of the Institute Secretariat

Institutes reach-out to other jurisdictions for Education and Service Delivery

The Group 4- presentation by Tania Chakrabarti: Competitiveness with comparable professional routes of qualification
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Low Research and Development support to the members Stakeholder/Public perception of the Institute and its members

In conversation Mr. G. N Agarwal and Mr. A. D. Gupta

by Rajesh Dalmia:

The workshop started with address by Mr. Liyaquat Khan. He shared his idea of Vision, Mission & Values and the Strategies to be formulated to address the issues and challenges that the Institute/ Profession is currently facing. He also shared broad outline of these issues and challenges (available at: http://actuariesindia.org/Siwg/1st SIP Workshop_14052011.pdf). The wider group was divided into six smaller groups to discuss, evaluate and articulate the problem areas arriving at commonly accepted solution outlines in respect of the sixteen issues that President, Mr. Khan had listed in his presentation.

Career Opportunities for students and qualified actuaries Institute of Actuaries of India A Global Brand Quality educational Students support for

The Group 5- presentation by Avijit Chatterjee: Reach out to the Institutes space by peer actuarial bodies like IFA and the American actuarial bodies
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Other issues

Continuing Education for qualified members

The Group 2- presentation by Chandan Khasnobis:


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The Group 6 - presentation by Biresh Giri on the suggested steps to be taken during next 2 months so as to formulate the Vision, Mission and Values statement and agree on the Strategic Plan/s. After the discussions and presentations by the six groups, presentations were also made by the Task Force on Education Strategy lead by M Karunanidhi (available at: http://actuariesindia.org/Siwg/ Education strategy_14May2011.pdf), 5

Demonstrating Professional standards for members Employment of members in Nontraditional areas

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The Actuary India June 2011

Left to right Tania Chakrabarti, R. Arunachalam, M Karunanidhi

Left to Right- Sharon D Costa, Gautam Shah and Mehul shah

the Advisory Group on Examination lead by Varun Gupta (available at: http:// actuariesindia.org/Siwg/IAI Strategy ExAG May 2011 V1.pdf) and the Advisory Group on Life Insurance lead by Avijit Chatterjee (available at: http:// actuariesindia.org/Siwg/Function of Life Insurance Advisory Group.pdf) In the first presentation by the Education Strategy Group, strength and weaknesses of current education policy along with the process and content were discussed. It was felt that the process should be modified so as to attract the right talent who so ever remains serious to full qualification. It may be either by

making entry norms more stringent or by giving specific guidance at entry or by discouraging passive students. The second presentation was made by the Examination Advisory Group. The statistical information regarding students and other members was given. Current allocation process of marking of scripts was discussed. It was felt that there are problems observed when examiners are changed and variation is depicted in question paper standards. In the current system there is heavy reliance on voluntary participation of qualified actuaries in the whole process which puts strain on their already busy schedule. The problem has

become more acute due to increase in number of students. The need to develop a formal student feedback mechanism on examination infrastructure was felt. Third presentation was made by Life insurance Advisory Group during which discussions were held on the existing aims, expected deliverables and success indications. It was felt that the purpose of all activities of that advisory group should be focused on making IAI to be recognized as a trusted body that acts in the interest of the industry and general public. It was felt that the Institute members effective participation in the decision making forums of the industry will be a success indicator.

1sT sEMInaR On CapaCITy BUILDIng In nOn-LIFE InDUsTRy-aCTUaRIaL anD anaLyTICs


By Prasun Sarkar Organised by: the Advisory Group for General Insurance Held at: Sea Princess Hotel, Juhu Beach, Mumbai Date: May 26-27, 2011 The purpose of the Seminar was to contribute to the efforts of the Institute of Actuaries of India in building and enhancing the technical skill-set in the non-life insurance industry space by creating a platform for knowledge sharing and streamlining the inflow of skillsets sitting outside the domestic domain. The seminar brought together over a number of actuarial experts and participants representing around 30 companies across the industry. There was discussion on wide range of topics pertaining to actuarial techniques and practical issues related to their implementation. The event was organised around 9 substantive sessions, besides opening and closing sessions. The opening session comprised of introductory speech by the Chairperson- Sharon DCosta followed by Inaugural address by Liyaquat Khan where some of the key challenges in the industry were highlighted along with the actionable items through the Strategy Initiative Project (SIP) of the institute. In the Inaugural Speech Liyaquat Khan President, Institute of Actuaries of India, pointed out some of the key challenges

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faced by the industry at the moment e.g. excess supply at student level as compared to the employment market in India. He also discussed the actionable items from the council through the Strategy Initiative Task Force directed towards tackling these challenges. Key takeaways and some of the issues highlighted 1. Data Capture Formats for Retail Products Sample data or generic data techniques were put forward by him in order to tackle the same. In the session, the audience was particularly interested in the portability issues which were discussed at length by the speaker. Also the participants brought up some of the serious practical issues vis--vis the current market practice in capturing such data. Finally the session was ended with the discussion on the data wish list for loss experience and policy information. 2. Claims modelling predictive

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Participants were more concerned about the practical issues in implementing such a model and also they wanted to know if such a model could directly be incorporated in the pricing process. 3. Pricing of retail Motor products using GLMs. The session was started with definition and principles of ratemaking conceptualized at CAS. The speaker, Dr.Manalur Sandilya pointed out the considerations like exposure units, data, organisation of data and homogeneity. He gave an overview of the two main pricing approaches; loss ratio and pure premium approach. The trade-off between homogeneity and credibility was stressed upon. Approach towards loss development and trends analysis was highlighted for the pricing purpose. Specific stress was given on allowance of catastrophes in rates.

Risk scoring approach was highlighted by the speakers Debashish Banerjee and Abhimanyu Dasgupta for the claims predictive modelling. Business applications were discussed Dr. Manalur Sandilya speaking. e . g . assignment Data capture formats were discussed surveyor medical case over two sessions of the seminar, one and in the context of retail products and the management, soft and other for the commercial products. Dr. hard fraud detection, Manalur Sandilya, speaking in the session reserving and Business started with highlighting the issues like competitive advantage. large volume of data, inaccurate data and Some of the traditional non-traditional need for robust estimates for the retail and Debashish Banerjee speaking. pricing based on GLM. He emphasized data sources were also on two-way interaction with the audience discussed. The Business competitive Key issues like mix of business, reinsurance to discuss on the data required for motor advantage was highlighted in terms of loadings, and operational changes were and some of the non-traditional sources claims portfolio management, performance also discussed at length by the speaker. of these data e.g. subsidiaries having management, business intelligence, 4. Advanced Reserving a bank as a parent co. can derive lot of reduced claimant loss costs, reduced information from it and also because of the turnaround time and others. Finally the The session started with an overview fact that a bank does a lot of due-diligence speakers discussed about issues specific of robust reserving process with all the before issuing a loan. He also stressed on to the general insurance industry like non- necessary elements making it up. The the fact that the information is expensive traditional data sources e.g. CIBIL data, popular methods used in the general and a trade-off has to be struck. Regarding advanced data management techniques, insurance industry were discussed by the health pricing, the data problem with advanced segmentation and analytics and the speaker, Raunak Jha from Deloitte Consulting India Pvt Ltd. corporate book accounts was discussed. developing a scoring system.

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Two blended methods were discussed, the Bornhuetter-Ferguson Method and the Cape Cod approach along with their advantages and disadvantages. The Cape Cod approach in particular was discussed in detail and explained with an example. The key features like trend rate and decay rate were discussed at length in the session. She made it a very interactive session with the audience. Finally the session was ended with discussion on key practical points for considering any particular method. 5. Data Capture commercial products formats for of insights into industry trends through her extensive research on the past 3-4 years of health insurance data. Though some of the trends were thrown open in the forum for any logical explanation but finally it was still hard to explain for the audience also. Suggestions were put forward by the speaker on how to utilize the trend analysis for the reserving purposes. 7. Pricing of Corporate products

The Actuary India June 2011


Finally the session was concluded with discussion on the 3 pillars of Solvency II and frequent references were made to the 3 pillars in Basel II used in the banking system. The audience was particularly interested in knowing some more technical details of the calculation of capital model. 9. Reinsurance Optimisation The objective of this session was to impart some insights into how to decide a reinsurance program based on the corporate strategy, risk appetite and contract availability. The speakers Shalabh Mathur and Sourav Roy discussed two case studies, one highlighting the process of determining the optimal retention point and the other for selecting between alternative contracts. Lognormal distribution was assumed for the loss distribution in all the cases. Although mean loss ratio was used for showing the results but values around it were also stressed upon for taking care of the riskiness of the portfolio. The session was finally concluded by Business considerations and Modelling considerations stressing on the fact that the final choice of a reinsurance contract depends on the individual companys business objective and risk appetite. About the Author Prasun Sarkar is a Corporate Actuary at SBI General Insurance Co. Ltd having expertise in FRM and ERM also. Currently a student member of Institute of Actuaries of India, his basic qualifications are B. Tech (Electrical Engg.) from IIT Kharagpur and PGDM(Major: Finance) from IIM Kozhikode.
Prasun.Sarkar@SBIGeneral.in

Most of the issues related to this topic were already addressed by Dr. Manalur Sandilya in the session on data capture formats for retail products on the first day. Lot of discussion was held with the audience on the capture of right property address which becomes a critical factor in Catastrophic modelling. As per the speaker, even the developed markets get it correct only 80% times of the cases. 6. Health Insurance reserving focussing on claim trend analysis. The session was addressed by Gayle Adams from E-Meditek. Her focus was on practical aspects of health insurance reserving for trend monitoring purposes, managing health insurance portfolio more safely and build a comprehensive industry picture. She went on discussing the functions of a health insurer, the health insurance product spectrum, management control cycle, outstanding claims estimation process and the reserving process. The chain ladder method along with the BF method was pointed out for the reserving process. The most interesting part of her session was the industry statistics. She provided lot

This session was actually clubbed with the session on pricing for retail products by Dr. Sandilya. He started by highlighting failings of traditional one-way classification ratemaking and the advantages of using multivariate analysis. There was an open discussion on the criteria for evaluating appropriateness of rating variables. The mathematical model of GLM was discussed in detail and references being made towards the specific conditions leading to the choice of a particular link function. The exponential family of distributions for the loss distributions were also highlighted in the session. The audience showed particular interest in the session by raising queries on the choice of loss distribution and the quality of data being fed into the model. 8. Capital Modelling

The session was held by Mr. Aditya V. Tibrewala and Mr. Anirudh Bansal from RSA Actuarial Services (India) Pvt. Ltd. They started by highlighting the different types of capital and their needs. All the key risks were discussed in detail. The difference between the Solvency I and Solvency II regimes was presented in a very objective way clearly highlighting the qualitative aspect like risk management differentiating the two. Comparisons were made between the deterministic and stochastic models and risk measures like VaR and Probability of Ruin in stochastic modelling were also discussed.

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The Actuary India June 2011

FEATURES
IasB InsURanCE COnTRaCTs ExpOsURE DRaFT: sUMMaRy anD kEy OBsERvaTIOns
by Mark Saunders and John Nicholls Introduction On 30 July 2010, the International Accounting Standards Board (IASB) published its Exposure Draft ED/2010/8 Insurance Contracts (in the remainder of this article referred to as ED) and accompanying Basis for Conclusions, which is a significant milestone within the second phase of its project to develop a comprehensive standard for the measurement of insurance contracts. With Indian financial reporting standards converging with IFRS, the proposals in the ED will have a significant impact on the financial reporting of Indian insurance companies. A project to develop a financial reporting standard for insurance contracts was instigated by the IASC (the forerunner of the IASB) in 1997. So this has been workin-progress approaching 15 years. It is no wonder certain bodies are getting frustrated with the insurance industry! In 2002, the IASB decided to split the project into two phases, so that limited improvements to financial reporting for insurance contracts could be made within the first phase, before IFRS became mandatory for listed companies in the EU in 2005. As the final deliverable of the first phase, the IASB published IFRS 4 Insurance Contracts in March 2004, effective for financial periods commencing 1 January 2005 or later. Under IFRS 4, insurers can largely continue to apply their current accounting policies to insurance contracts, subject to a number of minimum requirements including a liability adequacy test, separation of certain embedded derivatives, removal of catastrophe provisions, and others. Within the second phase of the insurance contracts project, work on developing a more comprehensive standard for financial reporting for insurance contracts commenced in September 2004. A discussion paper titled Preliminary Views on Insurance Contracts was published in May 2007. In October 2008, the US Financial Accounting Standards Board (FASB) joined the IASBs project. Following 18 months of joint deliberations and an initial field testing exercise, the publication of the exposure draft (ED) on 30 July 2010 is a major milestone in the second phase of the insurance contracts project. The IASB intends to issue a final standard during the final quarter of 2011. No effective date has been announced yet. The IASB has made a number of tentative decisions since issuing the ED. The summary that follows in this article takes into account tentative decisions made by the IASB up to 31 May 2011. Scope of the exposure draft The definition of insurance contracts is largely unchanged from IFRS 4, but additional guidance has been added to clarify that a contract only transfers insurance risk if there are scenarios where the present value of cash outflows exceeds the present value of premiums, and that the timing of payments to the policyholder should be taken account of when considering whether a policy transfers significant insurance risk. Summary of the proposals Basic measurement approach: The measurement for an insurance contract is a current assessment of an insurers rights and obligations under the contract. For contracts other than short-duration contracts, the insurer shall measure the insurance contract as the sum of the following building blocks: Future cashflows in the form of an explicit, unbiased, and probability weighted estimate of the present value of future cash outflows less cash inflows that will arise as the insurer fulfils the contract, adjusted for the time value of money; A risk adjustment that adjusts the discounted future cashflows for the effects of uncertainty about the amount and timing of those future cashflows; and A residual margin that eliminates any gains at inception.

Figure 1: Measurement of an insurance contract under the building block approach

Residual margin

Eliminates any gain at inception (can not be negative)

"Present value of the fulfilment cashflows"

Estimate of the effects Risk of uncertainty about adjustment the amount and timing of cashflows Discounted future Estimate of future cashflows cashflows, adjusted for the time value of money

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The IASB refers to the first two of the above building blocks as the present value of future fulfilment cashflows. For short-duration contracts, being contracts where the coverage period is approximately one year or less, and where the contract does not contain embedded options, a different measurement approach is required. For such contracts, pre-claims liabilities are required to be calculated based on unearned premiums, less an initial deduction for incremental acquisition costs, and subject to a liability adequacy test. Liabilities for incurred claims are calculated using the first two building blocks above. Cashflows: Cashflows included in the measurement of a contract are those which are incremental at a portfolio level. As such, the measurement excludes general overhead expenses. Estimates of cashflows shall be current, unbiased and reflect the perspective of the entity, but for market variables, such as interest rates, be consistent with observable market data. Contract boundary: The measurement of an insurance contract shall include premiums and cashflows arising from those premiums if and only if the insurer can either compel the policyholder to pay the premiums, or the premiums are within the boundary of the contract. The boundary of the contract is the point at which the insurer is either no longer obliged to provide coverage, or has the right and practical ability to reassess the risk of the particular policyholder and reprice accordingly. Time value of money and discount rates: Cashflows are to be adjusted for the time value of money using discount rates that are consistent with current market rates for financial instruments of similar nature, term, and currency to the liabilities, adjusted for factors that are present in the liabilities but not the financial instruments. As a result, the discount rate applied to liability cashflows will be independent of the assets held to back the liabilities, except where the payments to policyholders depend on the performance of those assets. More specifically, if the cashflows of an insurance contract do not depend on the performance of specific assets, the discount rate shall reflect the yield curve for instruments in the appropriate currency that expose the holder to no or negligible credit risk, with an adjustment for illiquidity. Risk adjustment: The risk adjustment shall be the compensation the insurer requires to bear the risk that the ultimate cashflows could exceed those expected. The purpose of the risk adjustment is to measure the effect of uncertainty in the cashflows arising from the insurance contract only. The risk adjustment shall not reflect other risks, such as the investment risk that arises from asset liability mismatches or operational risks relating to future transactions. The risk adjustment shall be determined at the level of a portfolio of insurance contracts, defined as contracts that are subject to broadly similar risks and managed together. The risk adjustment should reflect the effects of diversification within a portfolio but not the effects of diversification with other portfolios held by the insurer. The risk adjustment must be determined by one of three prescribed techniques; confidence level, conditional tail expectation or cost of capital. Residual margin: The residual margin is determined so that, at the point of initial recognition, there is no gain on the contract. The residual margin is to be calculated separately for each portfolio of insurance contracts, and within each portfolio, by contracts of similar inception date and coverage period. If there is a loss, then the residual margin is set to zero and the loss is immediately recognised in profit and loss.

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Since the cashflows included in the liability measurement do not include an allocation of general overheads, the initial residual margin broadly reflects:
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The expected lifetime shareholder profits on the contract (allowing for all expenses); and A component representing the allocation of future general overheads to the contract.

The residual margin determined at initial recognition is to be recognised as income in profit or loss over the coverage period of the policy on the basis of the passage of time or, if significantly different, the expected timing of incurred claims and benefits. The residual margin will accrue interest at a rate locked in at policy inception. The residual margin does not act as a shock-absorber and is not recalibrated for changes in assumptions. Presentation and disclosures: We show in Figure 2 an illustrative insurance company balance sheet. All earnings items relating to insurance contracts should be shown in the profit or loss account and not in other comprehensive income.
Figure 2: Illustrative insurance company balance sheet

Shareholder equity Financial assets Investment contract liabilities Insurance contract liabilities

Reinsurance assets Unit linked assets Other assets

Unit linked liabilities Other liabilities

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The insurance-contracts-related line items in the statement of comprehensive income will take the form of a margin analysis, as opposed to a traditional revenue account Revenue account items such as premiums received and claims paid are required to be disclosed in the notes to the financial statements. For short term business, they may be disclosed in the statement of comprehensive income by way of a disaggregation of the underwriting margin. Disclosure requirements are based on those in the current IFRS 4 and IFRS 7, with disclosures required in respect of the amounts recognised in the insurers financial statements and the nature and extent of risks arising from insurance contracts. Insurers will be required to disclose the risk and residual margins included in insurance contract liabilities, and give information on how the risk adjustment(s) have been determined. Where the insurer has used a conditional tail expectation or cost of capital technique to determine the risk adjustment, it is required to disclose the implicit confidence level this corresponds to. Transition: From the beginning of the earliest period presented in the accounts, an insurer shall measure the liability in respect of the existing in-force portfolio of insurance contracts as the present value of the fulfilment cashflows, without the inclusion of a residual margin. The insurer will derecognise any existing balances of deferred acquisition costs or intangible assets arising from its insurance contracts that have been assumed in previously recognised business combinations, except where these intangible assets relate to possible future contracts. The impact of these changes will be reflected by appropriate adjustments to retained earnings. Differences between IASB proposals and FASB decisions The ED has been published by just the IASB itself. The FASB issued its own discussion paper on insurance contracts on 17 September 2010, seeking additional input from constituents. The FASB discussion paper sets out its preliminary views, and includes a comparison of these views with the IASB ED. The FASB is still to decide whether it will make targeted improvements to existing US GAAP, rather than a comprehensive replacement of the existing standards. The FASB is yet to settle a preliminary view in some instances. In particular, the FASB has not yet settled a preliminary view on the extent to which a building block approach or a modified approach might be used for short duration contracts, or what the modified approach would be (if required). The main differences between the IASB and FASB models are discussed below. Scope: The FASB has tentatively decided that investment contracts with discretionary participating features should not fall within the scope of a new insurance contracts standard. The FASB is also considering whether employee benefits which would meet the definition of an insurance contract should be excluded from the scope, as is the case in the ED. Composite margin: The FASB model does not contain an explicit risk adjustment. Instead the liability measure includes a composite margin which replaces the risk and residual margins and (like the residual margin in the IASB model) is set such that there are no gains on initial recognition of a contract. This composite margin would not be remeasured to reflect any changes in the amount (or price) of risk associated with

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a contract or to reflect changes in other assumptions. The composite margin would run off in line with allocated premiums and benefits under the contract over the coverage and claims handling period and unlike the residual margin would not accrue interest. While the composite margin will not be remeasured, the proportion of the margin recognised in earnings will vary as actual premiums and claims evolve and as expected cashflows change. Key observations on the proposals The ED represents a significant step forward in terms of financial reporting for insurers. However, at the same time, there are a number of areas where we expect the proposals to result in the financial statements of insurers either being less understandable to users or containing less relevant information. Positive aspects The most important areas where the proposals represent an improvement on current financial reporting are as follows:
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For the first time, a uniform reporting standard for insurance contracts is available to all jurisdictions that allow or require the use of IFRS or, subject to some modifications in the proposals, potentially also US GAAP. All margins will be explicitly shown on the balance sheet. This will improve the consistency and comparability between the financial reporting of insurers worldwide. The measurement of insurance contract liabilities will no longer include arbitrary margins as is often the case now, where liabilities are sometimes based on prudential reserves calculated for local regulatory purposes with little or no adjustment.

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assumptions being reflected through profit and loss, which will affect the usefulness of results. It would help users of accounts if the model more closely followed one or other of the approaches. Further, the EDs treatment of market variables is not consistent with the IASBs direction in relation to fair value measurement. For example, proposals for fair value measurement allow for companies to move away from observed market prices in times where markets are disorderly, and allow the use of mid prices (rather than bid prices) for assets that are held to match financial liabilities also measured at fair value. The insurance contracts ED does not contain similar provisions in terms of calibrating market based parameters in times when markets are disorderly or allowing the use of mid prices for assets held to match insurance contract liabilities. This could lead to accounting mismatches between an insurers assets and liabilities. To address this, the ED could be aligned with the IASBs proposed fair value measurement requirements.
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With the exception of the residual margin, the measurement of insurance contract liabilities will be based on current demographic assumptions and interest rates, and not based on those as at policy inception (as is the case currently in some jurisdictions where locked in assumptions are used for reporting). The measure of insurance contract liabilities (excluding the residual margin) is close to an economic measurement, enabling insurers (who use fair value to measure assets) to reduce the accounting mismatches inherent in insurance company accounts. The IASB has recognised feedback on the discussion paper published in 2007 and moved away from the current exit value or transfer value approach and towards a fulfilment or going-concern value for the first two building blocks. The measurement of liabilities will include the time value of all options and guarantees. Financial reporting for life and non-life business will be more closely aligned than before. Further, liabilities for non-life business (other than short duration pre-claims liabilities) will now have to be discounted and will thus reflect the time value of money (unless the effect of discounting is immaterial). While very different to current reporting disclosures, the margins analysis included within the statement of comprehensive income will provide a more useful explanation of the drivers of an insurers financial performance than a traditional revenue account.

The impact of true economic mismatching of assets and liabilities (whether mismatching by duration, by taking equity or credit risk in the assets, or otherwise) will be shown in the financial statements. Liabilities for business with participating features will be more meaningful than is often the case currently, as these liabilities will reflect all expected incremental future benefits rather than just contractual or guaranteed benefits.

Negative aspects Below are aspects of the current insurance accounting proposals that we consider insufficient in terms of improving the understandability and relevance of insurers financial statements.
l

Transitional arrangements have serious flaws: The proposal to have a zero residual margin for business in force at the time of transition is a serious flaw in the ED. This will lead to a significant increase in equity on transition and, potentially, years of losses being reported post transition. Proposed accounting model will lead to unnecessary profit volatility: The accounting model underlying the ED is a hybrid model with a mixture of deferral-andmatching features (i.e., the residual margin, which is not rebalanced when assumptions change) and fair value features (i.e., the discounted future cashflows and risk adjustment, which are updated over time as economic conditions change and non-economic assumptions are updated). This model has unnecessary elements of profit volatility, such as the capitalised impact of changes in non-economic

Profit patterns could be distorted: The ED excludes general overheads from the liability cashflows, which could distort the pattern of profits and undermine the comparability of results. General overheads could be allowed for in the measurement of the liability providing a more meaningful residual margin and expected pattern of profit emergence. The risk adjustment does not reflect actual risk exposures: Because the risk adjustment does not take account of diversification

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between different portfolios, it does not reflect the actual risk exposure of the business. Further, given that alternative methods are permitted for determining the risk adjustment, this will reduce the comparability of financial statements. Conclusions There are many aspects of the current IASB proposals for accounting for insurance contracts that will help achieve more uniform, consistent and comparable financial outcomes for insurers worldwide. However, there are a number of material issues with the current proposals, which may undermine the understandability and relevance of an insurers financial statements. Due to the proposed transition treatment, exclusion of general overhead expenses from liability measurement and given the differing treatment of investment contracts issued by insurers, the information in an insurers financial statements on its own is likely to be insufficient to meet the needs of users in terms of understanding the current and expected future performance of the business. Hence, in our view, there will continue to be a need to report high quality supplementary information. Appropriate-systems and processes will need to be developed to generate the required information in a timely, secure and fully auditable manner. In India, the actuarial systems and supporting processes required for measuring the liabilities will be significantly different from those currently in place. There will be a need for robust experience investigations, assumption-setting processes and cashflow projections for all insurance contracts. Functionality will be required for the valuation of options and guarantees, the risk adjustments and residual margins, and to run these off over the remaining term of the business. Experience suggests that the implementation task is non-trivial, requiring strong actuarial competencies, and needs to be initiated as early as possible. The IASB and FASB are continuing to work through a number of issues highlighted in the comments received in response to the IASB ED and the FASB discussion paper, soliciting additional feedback from industry and user representatives. The IASB is regularly publishing tentative conclusions in a number of areas in preparation for issuing a final standard in late 2011. We hope that future refinements address the negative aspects of the ED, and that convergence with FASB proposals is achieved, to result in a robust and comparable standard for the accounting of insurance contracts worldwide. Main takeaway The IASB Insurance Contracts Exposure Draft represents a significant step forward in financial reporting for Insurers. However, there are aspects of the proposals where we consider changes are warranted in the interests of improving the comprehensibility and relevance of insurers financial statements. So we consider the process still to be a work-in-progress but, as stated at outset, since this has been running since 1997 it surely is time to reach an outcome. While the outcome may not yet be fully appropriate, compared with where things currently stand, the IFRS for insurance contract will significantly improve the consistency of accounting for insurance contracts across markets and will provide a unified base from which to develop future improvements and enhancements.

The Actuary India June 2011


Author profiles

Mark Saunders mark.saunders@towerswatson.com Mark Saunders is Managing Director of Towers Watson in Hong Kong and Asia Pacific Practice Leader for Risk Consulting and the Insurance Sector. He has been a CEO and Executive Director of the Board of life insurers and been working in the Asian insurance industry since 1989. He specialises in determining economic values of Asian insurers having led more than 300 assessments of value across 16 markets and been Expert Actuary for more IPOs and public transactions of insurers in Asia than anyone else. He has also been the Appointed Actuary for ten insurers. He is a Fellow of the Institute of Actuaries of India and a Fellow of 5 other actuarial bodies (UK, US, Singapore, Thailand and Hong Kong).

John Nicholls john.nicholls@towerswatson.com John Nicholls is a Senior Consultant with Towers Watson in Australia, specialising in financial reporting, capital management and mergers and acquisitions. He is a Fellow of the Institute of Actuaries of Australia.
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The Actuary India June 2011

FEATURES
pRaCTICaL COnsIDERaTIOns In vaRIaBLE annUITy pRICIng
by Novian Junus & David Wang

he variable annuity (VA) products have been successful in the U.S. and Japan and are also seeing growing presence in Europe. Although currently VAs dont exist in India, the recent regulatory changes governing unit-linked products mean that companies are increasingly looking at alternative product segments and VAs may very well be one of such segments that a few insurers may be interested in. While it is still uncertain as to when the regulations in India will enable such products to be offered through appropriate hedging arrangements, it is important to develop an understanding of the various considerations involved in pricing such products. As the reader would be aware, VAs are essentially akin to unit linked products with flexible options and guarantees to the policyholders. The main distinguishing feature is that they usually offer guaranteed living benefits (GLB) and guaranteed minimum death benefits (GMDB). Some examples of each of these benefits include: Guaranteed Living Benefit Minimum income benefit Minimum accumulation benefit Minimum withdrawal benefit Guaranteed Minimum Death Benefit Return of premium Roll-up of premium Maximum value at previous anniversaries

From a broad perspective, the VA pricing methodology is a search for an optimal balance between risk and return. The search involves considerations and analyses of four broadly intertwined elements. Actuaries need to fully understand, analyze and communicate to senior management the interaction of these elements. The Four Elements A traditional product pricing exercise searches for the premium rate that meets the profit target. Despite the same fundamental objective, a VA pricing exercise is much more complicated because of the presence of the GLBs as the claims paid under these depend both on market conditions and policyholder behaviour. The charge for the guarantee is in the form of an asset-based charge (GLB charge or rider charge), which is at the same time an additional deduction to the account value and thus increases the cost of the guarantee. The reserve and capital requirements will usually be risk-based and will not be easy to determine. The profitability is extremely sensitive to market conditions and policyholder behaviour, and thus warrants an analysis of not only the expected value but also the tail events. Hedging is typically implemented to reduce the economic risk, and directly affects the reserve/capital requirements as well as the profitability. In essence, Figure 1 illustrates the interaction of the key elements in a VA pricing process. The four boxes show the four elements, the arrows indicate a direct impact from one element to the other, and a dashed arrow indicates a potential impact from one to the other. The four elements of the pricing process are intertwined and influence each other.

Figure1: The Key Elements in A Va Pricing Rider Charge

Reserve/Capital Profitatility

Hedging

It is therefore imperative that the pricing exercise analyzes the interaction of the four elements, which would produce different risk-return profiles with different possible combinations. It is the responsibility of the actuaries to present these combinations and their results in a complete menu for the senior management to study and on which to eventually make a decision. Because of the different risk appetites, different companies would very likely land on different decisions even though they might have the same product under the microscope. Therefore, the VA pricing exercise is essentially a search for the optimal risk-return balance based on each companys risk policy and preference. The table below presents an example of the pricing menu related to a VA pricing: The Hedging Decisions column shows some of the typical selections involved in a hedging strategy formulation, the Greek(s) to hedge. Each Greek measures the change of liability value corresponding to a change in an economic factor, and the cost of hedging increases as more Greeks are hedged. In reality, however, hedging decisions involve far more factors, and therefore the list in this column may vary based on the exact hedging considerations faced by the management. 14

Such guarantees have the potential to pose a significant risk for insurance companies. It is, therefore, essential for actuaries to consider all the issues related to VAs while pricing these products.

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VA Pricing Menu Example Hedging Decisions No Hedging Delta Delta/Rho Delta/Rho/ Vega GLB Charge X1% X2% X3% X4% Reduction in Capital / Reserves Y1% Y2% Y3% Y4% Profit Measures (ROA/IRR, ETC.)

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One way to overcome the problem is to offer a GLB in a successive series of much shorter terms, each having its own price based on the market condition when that piece is offered. In practice, however, such structure could perhaps only be feasible with a guaranteed death benefit rider in a yearly renewable term format. A more realistic scenario, though unlikely to be favoured by the industry, is to have the prices of GLB reset on a frequent basis. The prices would then fluctuate over time as market conditions change. The average of these prices would, however, probably be what the insurer should charge by offering the GLB as a single piece with a longer term. It is thus our view that the GLB charge should be assessed with a longterm view, even though this long-term view may be interpreted in different ways. Some may interpret it by ignoring the current market conditions completely and others by starting at the current market condition and grading over time to the normal condition. The risk-neutral valuation of the GLB rider is just a first step in the VA pricing process. Ideally, one would want to set the GLB charge at the exact level of the riskneutral cost. In reality, this step serves as an indication of how expensive the GLB is and it takes a complete profit analysis to eventually determine the adequacy of the GLB charge. Profit Analysis The fundamental objective behind any pricing exercise is to ensure that the new product meets the profit target. By adding a new GLB rider to an existing base, a VA product alters the profit pattern of the latter. First, the GLB charge is a drag on the account value, reducing other asset-based charges. Second, policyholder behaviour (e.g. lapses, withdrawals) tends to vary widely, making projections of revenues and losses difficult. Third, the reserve and

Average and percentile Average and percentile Average and percentile Average and percentile Evaluation of Rider Charge As with any form of insurance premium, the GLB charge should be set at a level to cover the expected cost of the claims under the rider guarantee and some profit margin. The expected cost of the claims, however, is not as easily calculated as for traditional life insurance products. Simply projecting future cash flows assuming a best-estimate set of assumptions will probably not even result in any projected claims. A GLB acts like a put option. A put option gives the holder the right to sell the underlying asset by a certain date for a certain price. In the case of a GLB, the policyholder has the right to sell the underlying account values, sometimes at a value of zero, prior to the expiry of the GLB rider in exchange for either a guaranteed lump sum or a stream of guaranteed annuity payments. The determination of a put option price is complicated but is possible using the BlackScholes option pricing formula and the concept of risk-neutral valuation. Unlike most financial options that are shortterm and tradable, GLB has much longer coverage periods and cannot be traded. This presents a technical challenge in applying the risk-neutral theory to GLB pricing, because there are typically no observable market inputs for very long dated options. It may not be appropriate to base a longterm GLB charge based on current market conditions, which are short term and can be subject to large variations (e.g. the recent financial crisis).

The GLB Charge column shows the potentially different fees charged to policyholders. In reality, though, competition will usually dictate the desired charge and it is possible that the column contains the same charges for all selections. The Reduction in Capital/Reserve column shows the impact of the pair of hedging decisions and GLB charges on the reserve and capital requirement. It should be noted that not all hedging decisions necessarily produce a reduction in the reserve/capital, which makes it more important that the impact of hedging be studied during the pricing stage. The Profit Measures column shows the financial results from the combination of the hedging decisions, the GLB charge and the reserve/capital requirement. The measures could be anything that companies typically look at for product approval, but it is important that both the expected value and the distribution (with a focus on left tail) be studied. The concept behind the pricing menu is not new: The return is meaningless unless adjusted for the risk undertaken. In reality, however, the extent to which actuaries implement this concept in the VA pricing exercise varies widely. Also, a comprehensive analysis presents quite a few technical challenges, which may discourage actuaries from completing the entire process. In the following sections, we will discuss each of the four elements of the process in more detail:

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capital requirement is much more strenuous on a VA contract with the GLB rider. Hence, actuaries have to perform profit analysis on the entire VA product in addition to just studying the GLB itself. The profitability of the base VA product is driven primarily by the performance of the underlying investments. Without the GLB rider, profit analysis is mostly about finding fees that are adequate to cover expenses and death claims; the fixed expenses (e.g. maintenance) are usually offset directly by fixed charges (e.g. policy fees) and variable expenses offset by asset-based charges. There is as limited a downside loss as an upside gain because the product passes most of the investment risk to the policyholders. Exceptions are perhaps failure to fully recover the acquisition costs or, in the case of a fixed death benefit payment, usually in the form of return of premiums, where the potential death claims may not be fully absorbed by the charges. The introduction of the GLB, however, substantially increases the risk to the company. The risk of making large sums of guaranteed payments increases exponentially with no matching increase in the upside gain. Therefore, if one were to plot the distribution of the profitability of the VA product with a GLB rider, it would most likely be skewed to the left with a long fat tail. The profitability analysis of a VA product, therefore, should focus not only on the expected average profits but also on the probability of not achieving the target profit or the probability of making a loss. A stochastic process that studies the profit across multiple economic scenarios is necessary. The companys reporting framework typically dictates whether the stochastic profit analysis is performed on a riskneutral or real-world platform. In a marketconsistent reporting framework, risk-neutral scenarios would be used. The same type of profit measures as in a non-VA profit study can be used to study VA, such as internal rate of return (IRR), return on assets (ROA), premium margin, etc. Statistical tools, such as histograms or box-whisker charts, can be used to plot the distribution of these measures across multiple economic scenarios. Percentiles, particularly on the left (loss) tail, should be highlighted and reported. Critical p-values, such as probability of losses, should be clearly defined and reported. IRR can sometimes be indeterminable at certain scenarios, and therefore its distribution should be used with caution. Reserve and Capital Different reporting frameworks will have different reserve and capital requirements. The left skewness associated with the GLB rider exposes a company to significant potential losses. The statutory reserve and capital requirements in India for VA products, when established, would likely address this risk. These requirements would most likely mandate a projection of surplus of the entire VA contract over multiple realworld economic scenarios in order to value the risk from GLBs. For each scenario, the greatest present value of the accumulated deficiencies would be calculated. The reserve and required capital would then be set using risk measures such as value at risk (VaR) or conditional tail expectations (CTE). In the context of a pricing exercise, the profitability is affected by interest earned on the reserve and capital as well as by changes in the reserve and capital. The reserve and capital must be projected over the life of the policy for such impact to be reflected. As discussed in the prior section, the profitability of the VA has to be studied across stochastic economic scenarios.

The Actuary India June 2011


Because determination of the reserve and capital also requires stochastic projections, the profit study of the VA product would become a nested stochastic process. The economic scenarios applied to the profit calculations and the reserve and capital requirements calculations would most likely be different as the scenarios for reserve and capital requirements would likely be controlled by regulatory requirements. Running a nested stochastic process for a large enough set of scenarios to generate reasonable results could be very inefficient in terms of run-time, which could extend into days or even weeks. As an alternative to a nested stochastic process, it is possible to use a table approach. The table approach establishes a table that stores the reserve and capital factors varied by dimensions such as in-the-moneyness (ITM) of guarantee, age/sex, and in-force duration; which are generated before the profit test and then loaded as inputs in the profit test exercise. The generation of the table is not trivial work, but the result can provide a very useful basis on which to extrapolate the impact of reserves and capital on different business mixes at different economic conditions. The projected reserve and capital amounts will then be the projected account values multiplied by the corresponding ratios based on the combination of ITM ratio and in-force duration. Impact of Hedging As one of the most common and effective risk management tools, hedging affects the profitability of the VA product in different ways. Hedging introduces additional costs from setting up and maintaining the hedging platform as well as transacting the hedge assets. On average, hedging is expected to reduce the expected profits of the VA product. Hedge assets are typically derivatives whose price sensitivities to different market factors match those of the GLB. With 16

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an appropriate trade position, the value of the hedge assets would move in the opposite direction to the value of the GLB guarantees. The combination of additional costs and potential gains or losses will impact reserves and capital requirements. Though expected to reduce the reserve and capital level, the exact impact of hedging is not straightforward and may vary depending on the exact hedging strategy. The typical hedging strategy in the United States is to dynamically hedge the change in the fair value of the guaranteed claims against different movements in the market factors. The fair value of the guaranteed claims is assessed on a risk-neutral basis. The market factors typically include equity index levels, interest rates, and equity-implied volatilities. More specifically, the sensitivity to these factors is commonly known as the Greeks in the finance area: delta, rho, and vega. Hedging is thus essentially targeted to dynamically hedge one or more Greeks by transacting hedge assets to produce Greeks of the opposite sign. There could however be several disconnects between the dynamic Greek hedging and the statutory reserve and capital requirements. For example:
l l

The Actuary India June 2011


of the relatively short history of GLB products in the market. Therefore, it is a challenge to form a realistic policyholder behaviour assumption. It is therefore crucial for actuaries to perform adequate sensitivity tests to study the results. Summary Here is a summary of the key points discussed in the article: l The adequacy of the GLB charge should be assessed by performing risk-neutral valuation. l The profitability of the entire contract should be analyzed through a stochastic projection with focus on both mean and tail results. l The impact of reserve and capital requirements should be analyzed in the profit analysis. l The impact of hedging should be analyzed in the reserve and capital projections as well as then profit analysis. l Ultimately, the most desired goal of a VA pricing is a product that attracts sales and brings in reasonable profitability by accepting a well-calculated risk. About the Authors: 'Novian Junus and David Wang are Principals in Milliman's life insurance consulting practice in Seattle and have significant experience of developing and managing variable annuity portfolios for life companies.'

Assuming a hedge effectiveness ratio of x% every time a claim arises and modelling the resultant cash flows. Using a nested stochastic projection to calculate the Greeks of the GLB liabilities and modelling the transaction of derivative assets to match the Greeks of the GLB liabilities throughout the projection.

However, the accuracy of any method adopted should not be overestimated. No simulation is likely to truly reflect the hedging in real life, which typically rebalances hedging positions on a much more frequent basis than assumed in a pricing exercise. Weekly or even daily rebalancing in real life is common, but a pricing exercise hardly ever projects more frequently than monthly. The run time required to perform dynamic hedging simulation can be prohibitive, and therefore simplifications in the modelling are probably inevitable, leading to loss of accuracy. Regardless of the approach adopted in hedge modelling, it is important that actuaries consult investment and hedging experts about the modelling methodology and the assumptions, especially since hedge modelling has not been part of the traditional actuarial training. It is also imperative to recognize the limitation of the methodology and achieve a balance between accuracy and practicality. Policyholder Behavior The VA pricing results are sensitive to dynamic policyholder behaviour assumptions. The option nature of the GLB in VA offers policyholders opportunities to select against the company. Thus, the fundamental question behind any dynamic policyholder behaviour assumption is whether policyholders act rationally and always exercise at the optimal time. The historical experience, even in developed market, is unfortunately still scant because

Hedge is targeted at changes in economic value but reserve and capital are setup on a real world basis. The Greek hedging focuses on the value of GLB rider only, but the statutory reserves and capital requirements takes into consideration cash flows of entire contract, which makes the reserves and capital requirements less sensitive to market changes. The impact of dynamic hedging allowed to be reflected in the statutory reserves and capital requirements could be restricted.

David Wang

Novian Junus

David.Wang@milliman.com Novian.Junus@milliman.com

Various methods could be employed to model hedging. For example:

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COUNTRY REPORT
gUaRanTEED UnCERTaInTy sOCIOECOnOMIC InFLUEnCEs On pRODUCT DEvELOpMEnT anD DIsTRIBUTIOn In THE LIFE InsURanCE InDUsTRy
by Rajendra P Sharma The Society of Actuaries (SOA) and the Life Insurance Marketing & Research Association (LIMRA), have recently (in February) released the Guaranteed Uncertainty Socioeconomic Influences on Product Development and Distribution in the Life Insurance Industry report. The report helps to identify key socioeconomic trends influencing the need and demand for the industrys products and services, and how these trends will influence product development and distribution over the next five years. About the Study: The public feels frustrated with the current economic environment and is concerned about the future uncertainties. Their sense of financial security starts with having a dependable source of income whether it is from a suitable job or from a retirement plan sufficient to meet the lifestyle to which people are accustomed. The industry challenge is that people have a hard time recognizing what they need in order to achieve financial security beyond a dependable source of income and how the industrys products and services help fulfill their needs. These uncertain times along with vanishing social safety net, changing demographics and technological innovations will inspire creativity in product development and distribution. Recognizing this, LIMRA and the Marketing and Distribution Section of the SOA sponsored this research paper. 18 The research objectives are to identify: (1) the key socioeconomic trends influencing the need and demand for the industrys products and services, and (2) how these trends will influence product development and distribution over the next five years. Guaranteed Uncertainty: Although the recession of the past three years is technically over, its effects will be felt for several more years. The recent economic downturn, along with its high levels of unemployment and underemployment, is only one element of our uncertain world. Recent decades have witnessed broad scale changes that continue to influence other aspects of our life in ways not fully understood. Some changes noted in the report are positive forces, others more ominous. Positive Forces of Change: (1) The continued evolution of American family, resulting in variety of different structures with unique needs and abilities to manage those needs. (2) Immigration, spreading a wave of multiculturalism from large urban areas to rural towns. (3) Advancements in technology has improved the quality and length of life, increased efficiency and productivity, and created vast new social networks.

Ominous Forces of Change: (1) Aging US population, placing a burden on families, health care delivery, and government entitlement programs.(2) The social safety net of government and employer-based benefits is less certain, causing difficult financial future for the families (3) Wage stagnation and inflation threaten savings and personal/family financial well-being. To meet these challenges of the short term, the industry will have to be nimble in its product development and distribution to stay current with the changing marketplace The Great Recession: The industrys challenge over the next five years starts with the Great Recession, a term given by the media and economists, by many measures is the most severe since the end of World War II. Among the 13 recessions since the end of the war, it is one of the longest (18 months) and one of the deepest economic contractions (a GDP decline of 41%). Also quite unique with this recession are the size and the rate of job losses (nearly 8 million jobs lost within 24

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months from the start of the recession and unemployment rate climbing to 10%).To this if we were to add the discouraged jobseekers who gave up looking for a job and the part-time workers who could not get full-time work, the underemployment rate at the end of recession was at 16.5% at the end of recession. Just these two facts alone are having a major effect on consumer sentiment as well as the industrys sales. Other unique characteristics of this Great Recession are historic low interest rates, decline in housing prices, equities posting negative 10-year returns and the households experiencing negative wealth effect. Todays workers have assumed much greater responsibility for funding their retirement and health care expenditures. Economic Outlook: The recovery has begun quite slowly. Real GDP growth is projected to average 2.4% p.a. over next 10 years, near its previous 10year average of 2.5 percent. The personal savings rate will continue to increase. But slower growth in personal consumption expenditures and rising medical expenses will characterize the coming years. The recent decline in home prices, substantial swings in the stock market over the previous decade, and the impact of the recession will all contribute to a slowing of growth in consumer spending. The slow growth in consumer spending is the major reason for the anticipated slow economic recovery. However, the spending on services is expected to maintain its growth rate from the previous decade. The Bureau of Labor Statistics expects household employment to increase by about 13.1 million over the next 10 years, less than the increase of 13.9 million over the past decade. Additionally, the economy is not expected to reach full employment until 2018. Two indicators of how the industrys customers will use their disposable dollars 19

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over the coming years are the savings rate and household debt. The savings rate has increased, reversing its decades-long decline as consumers have become more cautious in the recessionary period. This trend in personal savings rates has also influenced by savings for retirement, which continues to be less than adequate, even in the publics estimation. In recent years, our economic growth has been fueled by consumer credit. For the past 30 years, consumers spent between 11 percent and 14 percent of their disposable income paying off mortgage and consumer debt. An additional 5 percent is paid to cover other financial obligations such as car lease payments, rental properties, property taxes, and homeowners insurance. Since the start of the Great Recession, consumers have trimmed their debt to levels not seen in the past 10 years. For recent college graduates, debt is particularly troublesome. The average student loan debt level of college graduates was $23,200 in 2008, a figure that grew 6 percent in each of the previous four years. Credit card debt adds to the total. The unemployment rate for this group hovers in the 8 percent range. Implications: Life and annuity products will remain the major sources of retail sales over the next five years. How the products mix will evolve to meet what customers value, is harder to discern. If the trends of the past three decades are a guide, offering a balanced product portfolio will serve as a prudent hedge against this uncertainty. Variable products and consumers changing appetite for risk illustrate the point. Variable life captured nearly a third of the $4.6 billion retail life insurance market in 1999; today it has shrunk to 7 percent, or $812 million. Variable annuities have fared better but have not escaped customers loss of appetite for risk. In 1999 sales were $122 billion, or nearly three fourths of the annuity market; today variable annuities represent nearly 55 percent of the market, or $128 billion. The key implications as a result of the current economic trends include: 1. The growing demand for health insurance and retirement income products will significantly alter the competitive landscape. The effects of health insurance reform will take two or three years to be felt. The effects of retirement income products are already evident and will grow in intensity. 2. Individual life sales will not recover to prerecession levels until 2013. Disposable income, consumer confidence, and interest rates have the most impact on total sales. Disposable income is expected to recover by early 2011, and then grow at a steady pace. However, interest rates are expected to be somewhat volatile, with corporate bond spreads widening and contracting in varying degrees. The outlook for consumer confidence remains weak. 3. Universal life sales will grow the fastest and will take some market share away from other product lines. Whole life sales will grow but not at the pace of the past two years. Growth in term life sales will be positive; however, variable life will remain anemic. 4. Indexed products are posting doubledigit sales growth; however, it is too early to determine whether the guarantees of index products will appeal to former buyers of variable life products.

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5. The outlook for annuity sales is less positive than the outlook for life sales. The primary reason for the sales slowdown is the low interest rate environment. The spread between fixed annuity rates and those for certificates of deposit (CDs) have become much closer, reducing the appeal of fixed annuities. 6. Indexed annuity sales, which hit a record in 2009 and captured 31 percent of the fixed annuity market due to the low interest rate environment, are anticipated to capture an even greater share of this market, at least in the short run. 7. The forecast for variable annuity sales is brighter: After the big drop in 2009,

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sales will grow about 5% over the next five years, reaching $155 billion in 2014. Unlike variable life products, variable annuity sales correlate highly with the equity returns. Consumers continue to show interest in buying variable annuity contracts with Guaranteed Living Benefit (GLB) riders. The GLB election rate, when available at purchase, remained strong at 87 percent during the fourth quarter of 2009. The SOA/LIMRA report further reviews in detail: vanishing social safety net (government & employer-based programs), changing demographics (aging population, market diversity and changing family structure) and technological innovations. The report finally analyzes their impact on marketing and distribution trends. For anyone interested in reading the full SOA/LIMRA Research Report, may use the following link: http://www.soa.org/ files/pdf/research-2011-02-guaranteeduncertainty.pdf

Rajendra P Sharma rpsharma0617@yahoo.com

The Funny Actuary


Question: How many actuaries does it take to change a light bulb? Answer: a) b) c) d) e) f) g) h) i) j) k) How many did it take last year? (Submitted by Steve Mildenhall at mildhall@ix.netcom.com) How many do you want it to take? None, after credibility weighting, we have indications that the bulb is still lit. None, the insurance department is not allowing any modifications to the bulb at this time. Have any of our competitors changed bulbs yet? (b through e submitted by Pip) None, they prefer to leave us in the dark. (submitted by kevin.moorhouse at kevin.moorhouse@lineone.net ) Five: one to screw it in, and four more to estimate the length of its life before being screwed in. The same number that it took last year, adjusted for trending. Two- The Senior Actuary presents the proposal to Managment and the Junior actuary does the work. One- But he/she has to do battle first with Sales and Marketing over the issue. One- But first, it takes ten years to pass the exams.

Acknowledgement: http://users.aol.com/fcas/jokes.html

Dear Members, April 2011 issue listed names of the members whose mail ids are incorrect. Those who have not yet responded requesting them to give their active personal email ids without delay to prevent any lag in communication. You can update your contact by sending an email to actsoc@actuariesindia.org with subject line Update Email (kindly mention your membership id). Gururaj Nayak Head- Administration

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sTUDENTS COLUMN
IMpEnDIng COnvERgEnCE WITH IFRss In InDIa BEnEFITs anD CHaLLEngEs CA. Sarweshwar Biyani
Why need of IFRS?
Over the past decade, a business has to grow more globalized, the need to communicate across the borders has correspondingly increased with the increase in global trade, and consequently there is globalization of capital market. Company in one country is borrowing in the capital market of another country. Investors are investing in the securities being issued by companies of different countries and the companies are getting listed at several stock exchange located in different part of globe. Therefore the financial statements prepared in one country are used in another country. Because of this need, it has been felt that there should be uniform accounting policies worldwide. refers to the new numbered series of pronouncement that the International Accounting Standard Board (IASB) is issuing, as distinct from the International Accounting Standards (IASs) series issued by its predecessor International Accounting Standard Committee (IASC). More broadly, IFRSs refers to the entire body of IASB pronouncements, including IFRSs and interpretations developed by the International Financial Reporting Interpretation Committee (IFRSIC) and IASs and interpretations developed by the former Standing Interpretations Committee (SIC). the IASB follows a thorough, open and transparent due process of which the publication of consultative documents, such as discussion papers and exposure drafts, for public comment is an important component. The IASB engages closely with stakeholders around the world, including investors, analysts, regulators, business leaders, accounting standard-setters and the accountancy profession. The IFRS Interpretations Committee is the interpretative body of the IASB. The Interpretations Committee comprises 14 voting members appointed by the Trustees and drawn from a variety of countries and professional backgrounds. The mandate of the Interpretations Committee is to review on a timely basis widespread accounting issues that have arisen within the context of current IFRSs and to provide authoritative guidance (IFRSICs) on those issues. Interpretation Committee meetings are open to the public and webcast. In developing interpretations, the Interpretations Committee works closely with similar national committees and follows a transparent, thorough and open due process. The IFRS Advisory Council is the formal advisory body to the IASB and the Trustees of the IFRS Foundation. It is comprised of a wide range of representatives from user groups, preparers, financial analysts, academics, auditors, regulators, professional accounting bodies and investor groups that are affected by and interested in the IASBs work. Members of the Advisory Council are appointed by the Trustees.

The Organisation
The IFRS Foundation is an independent, not-for-profit private sector organisation working in the public interest. The governance and oversight of the activities undertaken by the IFRS Foundation and its standard-setting body rests with its Trustees, who are also responsible for safeguarding the independence of the IASB and ensuring the financing of the organisation. The Trustees are publicly accountable to a Monitoring Board of public authorities. The IASB is the independent standardsetting body of the IFRS Foundation. Its members (currently 15 full-time members) are responsible for the development and publication of IFRSs, including the IFRS for SMEs and for approving Interpretations of IFRSs as developed by the IFRS Interpretations Committee. All meetings of the IASB are held in public and webcast. In fulfilling its standard-setting duties

What is IFRS?
International Financial Reporting Standard (IFRS) is a set of accounting standards developed by the International Accounting Standard Board (IASB) an independent group of 15 experts that is steadily becoming the global standard for the presentation of financial statements of public companies. The concept of IFRS is consistent from country to country. IFRSs are partly based on the application of rules and partly on principle and judgment. The work of practicing accountants and standard setters is concerned with the global harmonization of accounting an endeavour in which the International Accounting Standard Board and various national setters have a large and important role. The term IFRSs has both a narrow and a broad meaning. Narrowly, IFRSs

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The Actuary India June 2011


for domestic US companies. The Group of 20 Leaders (G20) called for standardsetters to re-double their efforts to complete convergence in global accounting standards. Following this request, in November 2009 the IASB and the FASB published a progress report describing an intensification of their work programme, including the hosting of monthly joint board meetings and to provide quarterly updates on their progress on convergence projects. In June 2010 the IASB and

Objectives of IFRS Foundation


Principal objectives of IFRS Foundation are:
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to develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standard-setting body, the IASB; to promote the use and rigorous application of those standards; to take account of the financial reporting needs of emerging economies and small and mediumsized entities (SMEs); and to bring about convergence of national accounting standards and IFRSs to high quality solutions.

high quality global standards remains a priority of both the IASB and the FASB. In the light of the progress achieved by the boards and other factors, the US Securities and Exchange Commission (SEC) removed in 2007 the requirement for non-US companies registered in the United States to reconcile their financial reports with US GAAP if their accounts complied with IFRSs as issued by the IASB. At the same time, the SEC also published a proposed roadmap on adoption of IFRSs
G 20 Countries Argentina Australia Brazil Canada China European Union France Germany India Indonesia Italy Japan Mexico

Status for listed companies as of April 2010 Required for fiscal years beginning on or after 1 January 2011 Required for all private sector reporting entities and as the basis for public sector reporting since 2005 Required for consolidated financial statements of banks and listed companies from 31 December 2010 and for individual company accounts progressively since January 2008 Required from 1 January 2011 for all listed entities and permitted for private sector entities including not-for-profit organisations Substantially converged national standards All member states of the EU are required to use IFRSs as adopted by the EU for listed companies since 2005 Required via EU adoption and implementation process since 2005 Required via EU adoption and implementation process since 2005 India is converging with IFRSs over a period beginning 1 April 2011 Convergence process ongoing; a decision about a target date for full compliance with IFRSs is expected to be made in 2012 Required via EU adoption and implementation process since 2005 Permitted from 2010 for a number of international companies; decision about mandatory adoption by 2016 expected around 2012 Required from 2012 Required for banking institutions and some other securities issuers; permitted for other companies Not permitted for listed companies Required for listed entities since 2005 Required for listed entities since 2008 Required via EU adoption and implementation process since 2005 Allowed for foreign issuers in the US since 2007; target date for substantial convergence with IFRSs is 2011 and decision about possible adoption for US companies expected in 2011.

IFRSs Worldwide
IFRSs are being increasingly used by companies throughout the world. The application of IFRS is new experience for the world. The IFRS is gathering storm and most countries have adopted IFRS or their national GAAPs are converging to IFRS. There are approximately 120 countries across the world where IFRS is permitted. Of these, about 90 countries have made it mandatory for their domestic companies to follow IFRS, while in the rest it is optional for companies to either follow IFRS or the domestic accounting norms. European Union - IFRS came into prominence when European Union (EU) decided to adopt it for all its members starting from 2005. EU adopted IFRS to achieve objective of a single capital market. United States - The IASB and the US Financial Accounting Standards Board (FASB) have been working together since 2002 to achieve convergence of IFRSs and US generally accepted accounting principles (US GAAP). A common set of

Republic of Korea Required from 2011 Russia Saudi Arabia South Africa Turkey United Kingdom United States

Source: www.ifrs.org

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the FASB announced a modification to their convergence strategy, responding to concerns from some stakeholders regarding the volume of draft standards due for publication in close proximity. The strategy retained the June 2011 target date to complete those projects for which the need for improvement of IFRSs and US GAAP is the most urgent, whilst identifying those projects for which a later completion date would be appropriate because they address matters of relatively lower priority or for which further research and analysis is necessary. Below table shows status of IFRSs in G 20 countries GAAP and IFRSs. Besides, India is a global country and if it has to invest abroad and attract inbound investment it has to follow global reporting standards. Seen from this perspective, the sooner we converge to IFRS the better. When the world is following IFRS, can we lag behind? Convergence means to design and maintain national accounting standards in a way that financial statements prepared in accordance with national accounting standards draw unreserved statement of compliance with International Financial Reporting Standards (IFRSs). As stated in the concept paper on convergence with IFRS in India issued by ICAI

The Actuary India June 2011


Better access to global capital and reduction in cost of capital - IFRS could make large companies look at other capital markets and in many of those capital markets where IFRSs are accepted to raise capital abroad. Currently, several companies that seek to raise capital and list securities in the US capital market or other exchanges such as the London Stock Exchange may be required to convert their financial statements to IFRS to meet the regulatory requirements or to meet the expectations of the investment bankers and investors. In such cases unless the company has previously adopted IFRS, it would be required to convert its historical financial statements to IFRS for the purpose of listing, which may result in delays and additional costs relating to dual set of financial statements. IFRS eliminates barriers to cross border listings, by ensuring that financial statements are more transparent. Even in cases where listing an overseas exchanges is permitted using local (Indian) GAAP, international investors generally ascribe an additional risk premium if the underlying financial information is not prepared in accordance with the international standards. Thus, the adoption of global standards such as IFRS may reduce the risk premium and consequently the cost of capital. Similarly, companies raising capital and listed only on the local exchanges in India would be able to better attract international investors and reduce risk premium, by providing financial information that is more transparent and understandable for the international investor community. Significantly improvement in comparability of entities IFRS provides more comparability among sectors, countries and companies. By making a shift to IFRS, a business can present its financial statements on the same lines as its foreign competitors, making comparison easier. Easier comparability can both improve and initiate new relationship with

Convergence of Indian Accounting Standard with IFRSs


India has been following Indian GAAP, which is inspired by the erstwhile International Accounting Standard (IAS). However, Indian GAAP has not kept pace with the change that followed IASs updating to IFRSs. The most important change being the application of fair valuation principles. Other than this there are many areas where there are critical differences between Indian

Benefits from convergence with IFRSs


Companies in European Union and across the globe that have adopted IFRS have realized plenty of benefits. Apart from the benefits of having a uniform accounting standard worldwide, IFRS would also enable Indian companies to tap many other benefits.

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investors, customers and suppliers across the globe as the financial statements in accordance with IFRS cut across borders. An IFRS balance sheet will be closer to economic value In IFRS world historical cost will be substituted by fair values for several balance sheet items, which will enable a corporate to know its true worth. Example: intangible assets acquired in business combinations will be recorded separately at fair value, and all financial instruments and all investment properties will be reflected at fair values, thereby reflecting a better measure of the current value of the net assets of the entity. Higher employment and economic growth Convergence with IFRS and to a globally accepted standard will result in growth in international business, higher cross border capital flows and transactions and will provide an impetus for economic growth. Additionally, convergence with IFRS would also benefit the large pool of Indian accounting professionals who can develop IFRS skills and provide these skills to the global marketplace. Reduction in cost of the finance function - Currently, different entities within a group, that reside in different jurisdictions may be required to prepare a dual set of financial statements for external financial reporting; one for the local statutory financial reporting in the home country and second for the reporting to the parent company (assuming that the parent company follows IFRS). The increase in efforts of finance function introduces complexity in financial reporting and increases costs of finance function. Group wise adoption of IFRS will eliminate the need for such multiple reporting, if IFRS is accepted or required in all countries of operation. More trust in Financials - IFRS will lead to increased trust and reliance placed by investors, analysts and other stakeholders in a companys financial statement.

The Actuary India June 2011


IFRS with greater transparency would enable comparison of Indian companies with global peers. Improvement in quality and consistency of information - Internal management reporting under IFRS will also improve the quality and consistency of information that management needs in order to make effective and timely decisions for the business. IFRS reporting actively contributes to effective management of business. When applied throughout a groups accounting processes, IFRS harmonises internal and external reporting by creating a single accounting language across the business. Significant elimination of work burden of subsidiaries - Companies need to convert to IFRS if they are subsidiary of a foreign company that is mandated to use IFRS, or if they have foreign investor that is mandated to use IFRS. IFRS world will eliminate this conversion work and companies will be able to save both cost and time.

Sir David Tweedie, Chairman, IASB, list out the benefits of IFRSs The goal is to create one single set of accounting standards that can be applied anywhere in the world, saving millions for firms with more than one listing investors to compare the performance of businesses across geographic boundaries for the first time. Benefits outweigh setup cost - The benefits of IFRS will outweigh the costs of implementing the new accounting regime. Evidence from those countries that have adopted IFRS indicate that with proper planning, the costs of implementation are modest and are certainly justified by the benefits. To boost merger and acquisition IFRS would bring in more transparency and disclosure and boost merger and acquisition activity as compliance to IFRS would significantly alter the way balance sheets are looked at during acquisitions. Currently, if an Indian company acquires a foreign entity, the financial position on the date of the acquisition and post acquisition results of the foreign entity have to be converted from its local GAAP (which may be IFRS) to Indian GAAP. Similarly, if an overseas entity that follows IFRS acquires an Indian company, the post acquisition financial information would need to be converted from GAAP to IFRS, thereby increasing post-acquisition financial integration efforts and costs. IFRS reporting lowers the cost of integration in post acquisition periods. Transparency about companys activities Reporting under IFRS results in greater transparency about a companys activities to outsiders such as investors, customers and other business partners. As Indian businesses become more global in terms of their operations and investor base,

Challenges in convergence with IFRSs


Regulatory Impediment For a smooth convergence to take place, India needs to amend key provision in the companies Act, Insurance Act, SEBI Act , RBI regulations and some changes in the governing Acts of the three professional accountancy institutesICAI, ICWAI, and ICSI. While the changes to the Companies Act have been provided for in the proposed new companies Bill, sectoral regulators like Reserve Bank of India, SEBI and Insurance Regulatory and Development Authority of India will have to bring in certain changes in their norms. Corresponding amendments in taxation laws may also be required (for example, tax treatment of unrealized gains due to fair value measurements). Lack of trained and experienced resources Currently, India has an extremely limited pool of resources that

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have any form of training or experience in IFRS. Adoption of IFRS would result in a significant demand for IFRS resources. Substantially all of these resources would need to be generated internally by training existing staff. Additionally auditors would need to train their staff to audit IFRS financial statements, and regulators would need to understand the requirements of IFRS. Significant one time cost The cost could be determined largely by size and nature of the respective company. The initial cost to identify and quantify the differences between the Indian GAAP and IFRS, staff training, increased audit cost and implementing IT support could be significant. Some of these costs will represent cost of internal resources, while certain other costs will represent costs of external advisors. Initial challenge lies in making changes to a companys internal infrastructure related to data storage and availability. Greater complexity in the financial reporting process - Adoption of IFRS will result in consideration of several factors that were previously not relevant in preparation of Indian GAAP financial statements. For example, in addition to significant use of judgment, while applying the principle based IFRS, companies would need to increasingly use fair value measures in the preparation of financial statements. The use of fair value measures under IFRS is pervasive and would affect most entities. Companies, auditors, users and regulators would need to get familiar with fair value measurement techniques. It is likely that in the initial periods, this would increase complexity in the financial statements and may make financial statements more difficult to understand for certain class of users. Business performance measurement Due to significant difference between IFRS and Indian GAAP, adoption of IFRS is likely to have significant impact on the financial position and financial performance of most Indian companies. Additionally, the use of

The Actuary India June 2011


fair value will increase income statement volatility. Management would need to re-evaluate internal performance management metrics and incentive structure to align them to IFRS. Similarly, considerable time and efforts would need to be spent on educating and communicating to investors, lenders, the analyst community and those charged with corporate governance of the entity (Board of Directors). Taxation IFRS convergence would affect most of the items in the financial statements and consequently the tax liabilities would also undergo a change. Thus the taxation laws should address the treatment of tax liabilities arising on convergence. It is extremely important that taxation laws recognize IFRS compliant financial statements otherwise it would duplicate administrative work for the organizations. Fair Value IFRS uses fair value as a measurement base for valuing most of items of financial statements. The use of fair value accounting can bring a lot of volatility and subjectivity to the financial statements. It also involves a lot of hard work in arriving at fair value and valuation experts have to be used. Market sensitivity - IFRS is a new concept that in many cases is vastly different from the manner in which it treats the accounting of items in a companys profit and loss account and the balance sheet. The new accounting norms will impact the earnings of many sectors, as under IFRS, the expected-loss model for provisioning that our accounting system now follows will not be allowed. IFRS will allow only an incurred-loss model for provisioning, which will impact the earnings of many firms that have long-term debt. Since some of these reporting standards are market sensitive, they sometimes have material impact on reported results which could lead to stock price volatility.

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Challenges under forthcoming Goods and Service Tax (GST) - There is a need for more clarity on some of the impact areas under GST. This is further accentuated by the fact that IFRS will be rolled out in multiple phases and there will be companies within an industry following different accounting GAAPs. Under IFRS, revenue from sale of goods is recognised only once the effective control over the goods is transferred to the buyer. This could result in difference in timing of revenue recognition in the books of accounts and the invoice date. The incidence of tax under GST framework is likely to be on the basis of invoice. However, if the point of recognition of revenue is different from the invoice, companies would be required to maintain two sets of records, i.e., for accounting and for GST. For the purposes of payment of GST, stock transfers would be considered to be akin to sales and GST will have to be paid on all such transfers. However, stock transfers would not be considered as sales under IFRS. IFRS requires all types of discounts whether volume or cash discounts to be recognised as a reduction from revenue. However, for the purposes of GST, while some discounts like trade discount can be claimed as upfront deduction for payment of GST, discounts such as cash discount or volume discount may not be available as upfront deduction, and would be rather adjustable when the discount is actually passed on to the customer. Three-year switchover to confuse banks, investors - For many years, we will face dual accounting standards and framework. This might be convenient, but is likely to create confusion for users of financial statements, including banks, investors and even regulators. The financial statements of peer companies may not be comparable, posing a challenge for analysts and investors. Consider revenue recognition for multiple element contracts or even a real estate company. The application of IFRS principles and Indian GAAP will lead to varying results for revenue recognition and, consequently, the reported earnings for a particular year. Industry-result comparison by investors and market participants will be challenging. This would also pose a challenge for the taxation authorities because profitability numbers will get reported differently for similar companies.

The Actuary India June 2011


for capital in other countries, while reducing cost and complexity for companies operating internationally. We all look forward to the time when national difference in accounting would be eliminated and hence financial statements from anywhere in the world can be read and understood in the same way by the global businesses and the financial communities. And finally India should follow the league by joining hands with the major countries following IFRS. About the Author: CA. Sarweshwar Biyani is working in IFRSs compliances. He is a student member of The Institute of Actuaries of India and The Institute of Actuaries, UK. He is also a member of The Institute of Chartered Accountants of India (ICAI) and The Institute of Cost and Works Accountants of India (ICWAI).

Conclusion
The move from GAAP to IFRS as a single set of high quality global accounting standard is not only inevitable, but a positive development that would help make capital markets more competitive. Transitioning to IFRS would allow companies to compete CA. Sarweshwar Biyani sr_biyani06@yahoo.com
(Send your comments on this article to library@ actuariesindia.org)

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The payment for the current year (2011-2012) should reach IAI office on or before 30th June 2011. For payment and other details visit the website at www.actuariesindia.org under the tab Download Subscription Renewal Form or contact Ms. Vijaya Bhosle in Subscription Dept at actsoc@actuariesindia.org or Ph: 022 67843302

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The Actuary India June 2011

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FROM THE DEsk OF Chairperson advisory group on Communication (agC) -sunil sharma
sharma.sunil@iciciprulife.com

uring my over two decades of experience in Life insurance industry in India, USA, UK, and South East Asia, I have not heard any executive saying that there has been sufficient level communication between the executive team and the employees. You conduct any employee survey and the typical outcome is highly likely to be that the employees are in general not informed of the key initiatives, rationales for decisions taken, future strategy etc. relating to the company. In this constantly changing world, the importance of communication with all stakeholders can not be overemphasized. General public in India at large is not aware of the Actuarial Profession and the contributions that Actuaries make in protecting the interests of the policyholders. In order for us to ensure that we have sufficient level of communication with members and public at large through the media, President of Institute of Actuaries of India, constituted the Strategy Advisory Group: Communication (SAGC)in Oct. 2010. I would like to take this opportunity to give you an update of some of the initiatives that IAI has taken to enhance the communication with the member and the general public at large:
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will be conducted in the near future. I urge members to actively participate in these surveys and voice your views to help the profession to shape up its activities in general and member services in particular.
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The results of surveys become the basis for the action plan. The strategy advisory group will play an active role in ensuring that outcome of survey result into action by respective Strategy Advisory or Practice Advisory groups. The editorial team of Actuary India has been constantly working to ensure that the quality articles from across the globe are always in pipeline. There has been a significant improvement in the face of the magazine and the editorial team is determined for continuing improvement. In this new era of world wide web and cloud computing, the communication via electronic media plays a very critical role. In order to keep pace with the technology, IAI website has been upgraded. The phase-1 of the website development is over and phase-2 work is progressing. Our expectation is that once phase-2 development is over, members should be able to pay their subscription & exam fees and change their basic demographic information online themselves.

The Global Conference of Actuaries (GCA) provides us a fantastic opportunity to increase the awareness about the profession in general public via Print and TV media. During 13th GCA, the SAGC played a pivotal role in managing the pre event, during the event and post event media communications. There were various interviews conducted by media pre and during the GCA event. As per PR agency that we used, there were about 52 reports published in print media or online resulting from the 13th GCA. Further, few interviews were also aired on certain TV channels.

The profession is going through an exercise to redefine the Vision, Mission, Values and Strategy of the Institute of actuaries of India. A lot of things are happening and the SAGC will have more objectives and functions assigned to it as a result of the brainstorming sessions among the chairpersons and secretaries of various advisory groups which started on 14th May 2011 and more are scheduled in June and July 2011. Aside from other deliverables, we expect to have firmed up IAIs Communications Policy document. Now, I would like to sign off, however, with a promise to get back to you with further updates on further activities that we intent to undertake to enhance the communication with members and general public.

In order to enhance the two-waycommunication with members; opinion surveys have been conducted in past and more opinion surveys

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The Actuary India June 2011

BOOK REVIEW
a pROBLEM-sOLvIng appROaCH TO pEnsIOn FUnDIng anD vaLUaTIOn by William H aitken Fsa, FCIa, Ea
Book Reviewed by Kulin Patel Kulin.Patel@towerswatson.com The introduction is brief and provides the basics of pension theory. The concept of defined benefit versus defined contribution, replacement ratios and broad risks in pension plans are introduced. It should be noted that the book assumes the reader has a basic knowledge of actuarial principles and notation. Very quickly after the introduction, the book gets down into the detail. All the cost methods are described in detail, such as Traditional Unit credit, Projected Unit credit, different Entry Age methods and Aggregate methods. Two aspects become clear early on whilst reading the book. Firstly, the textbook is North America centric. Most of the references are to unit based defined benefit plans such as $10 per month for each year of service. Whilst this may get repetitive, the simplicity of the design helps to easily follow worked examples, which makes it easier to focus on the particular concept. Secondly, the book has example after example through out the chapters ensuring active learning as well as making the theory practical. A special mention must be made to chapter 5, Experience Gains and Losses. This is the highlight of the book. The subject can be complex and very challenging to make practical. This chapter starts with a background of gains and losses and in true form of the book, quickly gets into details with a number of formulae and explanations. The chapter develops the theory of total gains and losses, followed by examples and explanations of breaking down the total gains/losses to separate components. Specific sections are outlined for investment, retirement (normal and early), leavers gain/losses (including any vesting impact), salary and mortality. In most real life situations these items will cover most the gains/losses items commonly encountered. The chapter again has many worked examples and exercises. This chapter definitely has the type of explanation of this topic not commonly found and is very well explained. Chapter 7 is another for special note as a good reference for valuing actuarial equivalence options in pension plans such as early retirement, commutations and forms of pension. The last chapter rounds things up with more text and a summary of concepts and applications. Parts of this are only relevant to the USA, such as tax and regulations and the ST4 or SA4 notes would be more relevant as a learning guide for these wider concepts. In summary, this book is a great introduction to pension funding mathematics and one of the few on the subject. I think the number of practical worked examples will ensure some thorough active learning as well as a useful reference for practioners. Though much of the specifics in the book will not necessarily be currently applicable in India, it does covers all the elements needed to gain a higher understanding of the subject which will be very useful in years to come. 28

Status: Available at IAI Library Book Number: 11146 his book is one of the few textbooks to focus on the subject of mathematics of pension plans (albeit we had a great write up of another in last months edition of the magazine). The primary focus of this book is to present an introduction of calculating normal costs and actuarial liabilities in pension plans. However, it goes further than this and has made for a rounded textbook on the subject. The book is split in to eight sections. The main themes cover a background to pensions, different cost methods, quantifying experience gains and losses, retirement options and wider pension concepts.

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VACANCIES
Vacancies for Actuarial Positions at Nalin Kapadia Actuarial Consultancy
There are two vacancies at our Ahmedabad ofce for senior and junior actuarial positions. Candidates who have completed Five CT subjects including CT1 and CT5 will be preferred. Ability to communicate with clients will be given special weightage. Compensation Package consists of xed pay, variable pay and deferred pay. Perquisites include liberal incentives for actuarial studies, reimbursement of travelling expenses, assistance in cost of housing in form of subsidy, provident fund, Gratuity vesting after 2 years. Attractive compensation package will be offered to right candidates. Undertaking to work for at least one year is part of service conditions. Candidates from Western India will be preferred. Senior vacancy is at managerial level while junior vacancy is at the level of Actuarial Analyst. Please send your CV to nkapadia@vsnl.com or nkapadia@nkapadia.com

QUOTABLE QUOTES
Let us think of education as the means of developing our greatest abilities, because in each of us there is a private hope and dream which, fulfilled, can be translated into benefit for everyone and greater strength for our nation. - John F. Kennedy (Thirty-fifth President of the USA)

BIRTHDAY GREETINGS

Many Happy Returns of the Day


the Actuary India wishes many more years of healthy life to the following fellow members whose Birthday fall in June 2011 June 2011

Balasubramanian, P.A. Khan, Liyaquat Richard Leiser Banks

Boeke Dionys Emil Subrahmanyan, S. G Subrahmanyam K

Sarma, K.P Kannan, R

(Birthday greetings to fellow members who have attained 60 years of age)

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Apply for various vacancies at Mercer