15th GCA Souvenir - Ebook

M Karunanidhi President
16 Feb 2012
Dear Friends The registration for the 15th GCA closed on 10th Feb and we have ended with around 770 participants, the highest ever participation in the history of GCA. The theme for the conference, Waves of reforms Oceans of opportunities, coined by Ajai Kumar Tripathi, an Associate member of the Institute, reflects the current state of affairs globally as Governments and Regulators trying to find better ways of supervisory mechanisms to ensure sustainable business environment and gain trust in the minds of the users of financial services. Actuaries have a significant role to play when it comes not only reacting to the reforms and the challenges and opportunities that they present but also proactively engaging with the policy making bodies in the decision making process. We have a number of distinguished speakers, including the Chairman of IRDA, both from India and overseas covering a variety of topics that are pertinent to the current environment that we live in today. It is heartening to note that there is representation from a number of overseas actuarial professional bodies which reinforces the global nature of the actuarial profession. On the evening of 17th Feb in the Actuarial Gala Function and Awards (AGFA), you will find it delightful to watch colorful performances by young and enthusiastic members and staff of the Institute alongside presentation of certificates and awards. I wish you all a very fruitful and enjoyable time spent over the three days, 17-19th Feb 2012, and thank you profoundly for your participation. Kind Regards
M. Karunanidhi President Institute of actuaries of India
Session 3: Key Success Factors in Disability Income Insurance Barry Hewett Senior Actuarial Consultant Munich Re
Waves of ReformsOceans of Opportunities 2013 AGFA & 15th Global Conference of Actuaries
17th 19th Feb, 2013 | Mumbai, India
Agenda
Introduction Disability Income Insurance The Claim Trigger The Benefit Amount Key Success Factors Conclusion
Introduction
Insurance:
A contract in which one party agrees to indemnify another party for the loss arising out of a contingent event.
Gambling:
A bet or wager taken for possible monetary gain.
Introduction
So:
Both Insurance and Gambling involve uncertainty (a contingent event) But the objective of Insurance is to indemnify a genuine loss, while the objective of gambling is to achieve a monetary gain
Agenda
Disability Income Insurance

For Disability Income Insurance:
The Contingent Event (Claim Trigger) is the life assureds inability to earn, due to disability The Loss to be Indemnified (Benefit Amount) is the income actually lost as a result of such disability
Agenda
The Claim Trigger

Although we have determined the claim trigger to be: the inability to earn due to disability, we need to decide such issues as:
whether to cover the inability of the life assured to earn:
in his / her own occupation, or in any occupation to which he / she is suited by training, etc., or in any occupation whatsoever

in his existing work-setting, or in a typical work-setting, or in any work-setting whatsoever
The Claim Trigger

Ultimately, the claim trigger might read:
. . . the life assureds inability to perform at least one of the Material Duties of his / her regular occupation (as set out in the Policy Schedule)
where, Material Duties are defined as:

. . . those duties (as required by a typical employer) which (in a typical work setting) cannot reasonably be omitted or modified without materially impairing the employees ability to earn or obtain remuneration from the given occupation.
Agenda
The Benefit Amount

Although we have determined the benefit amount to be: the income lost as a result of disability, the policy wording needs to be more explicit. In particular, we need to define:
what income is to be covered:
total taxable income, or basic pay, or basic pay plus variable emoluments.
the maximum monthly amount that is to be provided:

x% of pre-tax earned income, or x% of post-tax earned income.
The Benefit Amount

Although we have determined the benefit amount to be: the income lost as a result of disability, the policy wording needs to be more explicit. In particular, we need to define:
the date on which the earned income will be determined:
date of policy application, or date of disability
the treatment of:

lives assured who can continue to work, but subject to reduced hours, or lives assured who can continue to work, but in a reduced capacity.
the start and end of the benefit period
The Benefit Amount

Ultimately, the benefit amount may be defined to be:
The lower of:
PDE PE MBA PDE x% of PDE PE A
where:
PDE is pre-disability earnings PE is present earnings MBA is monthly benefit amount (as set out in the Policy Schedule) A is any other amount payable under disability insurance, sick-pay, early retirement pension, etc.
The Benefit Amount

And pre-disability earnings may be defined to be:
. . . the Earned Income of the life assured calculated on the day immediately preceding the date of disability
where, Earned Income is defined as:

The sum of:
the average monthly pre-tax regular wages earned by the life assured in respect of services or employment duties rendered during the 12 months preceding the date of calculation and the average monthly pre-tax variable income (such as fees, bonuses, commissions, etc.) earned by the life assured in respect of services or employment duties rendered during the 36 months preceding the date of calculation
Agenda
Key Success Factors

For a Disability Income product to be successful and sustainable, it needs to be:
profitable to the insurer of genuine value to the life assured.
The discussion to date has suggested that this is no small order. The remaining slides highlight some of the key requirements for a successful Disability Income product.
Agenda
Introduction Disability Income Insurance The Claim Trigger The Benefit Amount Key Success Factors
Product Design Underwriting Claims Assessment Pricing
Conclusion
Key Success Factors

Product Design:
Satisfy the genuine income loss needs of the client Ensure that there remains an incentive for return to work: deferment periods partial benefits (offset for income earned) rehabilitation benefits appropriate replacement ratios (x%) earning capacity clauses Ensure clear and appropriate definitions and policy wording Ensure product is future-proofed: implications of change in occupation implications of change in income levels, etc.
Agenda
Conclusion
Key Success Factors

Underwriting:
More than for any other product, underwriters will need to pay careful attention to the interaction between: financial risks occupational risks medical risks Special considerations will be required in respect of: self-employed lives part-time workers seasonal workers, etc.
Agenda
Conclusion
Key Success Factors

Claims Assessment:
For Disability Income products, claims assessment is not a onceoff operation, but requires regular, hands-on follow-up Assessing functional ability is far more important than assessing the medical condition - this requires specialist skills To determine the benefit payable each period, claims assessors need to be proficient in reviewing financial information (both at time of disability and during the benefit period) Claims assessors need to appear sympathetic to the claimant, while remaining professional in their assessment Special consideration needs to be given to the challenges associated with claim handling when the claimant is abroad (require repatriation?)
Agenda
Conclusion
Key Success Factors

Pricing:
When Disability Income products first enter a market, there will generally be a paucity of suitable pricing data this places challenges on the actuaries who may need to modify statistics from other countries Disability Income experience is not static it will change with the economic cycle, with advances in workplace safety, as well as with cultural attitudes. In light of these issues, guarantees should be avoided, even when credible past experience is available Both the underwriting and the claim assessment of Disability Income products are more complex than for most policies adequate loadings need to be added
Agenda
Conclusion
Finally, a personal view:
Disability Income Insurance is, no doubt, a challenging product line. However, it is the most valuable product that any Life Insurer can offer to its clients.
Speaker Name Speaker Country Organization Logo (Optional)
Session 3: Key Success Factors in Disability Income Insurance Barry Hewett Senior Actuarial Consultant Munich Re
Waves of ReformsOceans of Opportunities

h Global Conference of Actuaries 2013 AGFA & 15th
Agenda g
Introduction Disability Income Insurance The Claim Trigger The Th B Benefit fit Amount A t Key y Success Factors Conclusion
Agenda g
Introduction
Insurance:
A contract in which one party agrees to indemnify another party for the loss arising out of a contingent event
Introduction
Insurance:
Introduction
Insurance:
Gambling:
A bet or wager taken for possible monetary gain gain.
Introduction
Insurance:
Gambling:
A bet or wager taken for possible monetary gain gain.
Introduction
Insurance:
Gambling:
A bet or wager taken for possible monetary gain.
Introduction
So:
Both Insurance and Gambling g involve uncertainty (a contingent event) But the objective of Insurance is to indemnify a genuine loss, while the objective of gambling is to achieve a monetary y gain g
Agenda g
Disability y Income Insurance

For Disability Income Insurance:
The Contingent g Event ( (Claim Trigger) gg ) is the life assureds inability to earn, due to disability The Loss to be Indemnified (Benefit Amount) is the income actually lost as a result of such disability y
Agenda g
The Claim Trigger gg

Although we have determined the claim trigger to be: the inability to earn due to disability, we need to decide such issues as:
in his / her own occupation occupation, or in any occupation to which he / she is suited by training, etc., or in any occupation whatsoever

in his existing g workwork-setting, g, or in a typical work work-setting, or in any workwork-setting whatsoever

Ultimately the claim trigger might read: Ultimately,
. . . the life assureds inability to perform at least one of the M Material i lD Duties i of f hi his / h her regular l occupation i ( (as set out i in the h Policy Schedule)

. . . those duties (as required by a typical employer) which (in a typical work setting) cannot reasonably be omitted or modified without materially impairing the employees employee s ability to earn or obtain remuneration from the given occupation.

Ultimately the claim trigger might read: Ultimately,
. . . the life assureds inability to perform at least one of the M Material i lD Duties i of f hi his / h her regular l occupation i (as ( set out i in the h Policy Schedule)

. . . those duties (as (as required by a typical employer) employer) which (in (in a typical work setting) setting) cannot reasonably be omitted or modified without materially impairing the employees employee s ability to earn or obtain remuneration from the given occupation.
Agenda g
The Benefit Amount

Although we have determined the benefit amount to be: the income lost as a result of disability, the policy wording needs to be more explicit explicit. In particular, we need to define:
what income is to be covered:
total taxable income, or basic pay, pay or basic pay plus variable emoluments.
the maximum monthly amount that is to be provided:

x% of prepre-tax earned income, or x% of postpost-tax earned income.
The Benefit Amount

Although we have determined the benefit amount to be: the income lost as a result of disability, the policy wording needs to be more explicit explicit. In particular, we need to define:
the date on which the earned income will be determined:
date of policy application, or date of disability
the treatment of:

lives assured who can continue to work, but subject to reduced hours, or lives assured who can continue to work, but in a reduced capacity.
the start and end of the benefit period
The Benefit Amount

Ultimately the benefit amount may be defined to be: Ultimately,
The lower of:
PDE PE MBA PDE x% of PDE PE A
where:
PDE is prepre-disability earnings PE is present earnings MBA is monthly benefit amount (as set out in the Policy Schedule) A is any other amount payable under disability insurance, sicksick-pay, early retirement pension pension, etc etc.
The Benefit Amount

And prepre pre-disability earnings preearnings may be defined to be:
. . . the Earned Income of the life assured calculated on the day immediately preceding the date of disability
where, Earned Income is defined as:

The sum of:
the average monthly pre pre-tax regular wages earned by the life assured in respect of services or employment duties rendered during the 12 months preceding the date of calculation and the average monthly pre pre-tax variable income (such as fees, bonuses, commissions, etc.) earned by the life assured in respect of services or employment duties rendered during the 36 months preceding the date of calculation
Agenda g
Key y Success Factors

For a Disability Income product to be successful and sustainable, it needs to be:
profitable to the insurer of genuine value to the life assured.
The discussion to date has suggested that this is no small order. The remaining slides highlight some of the key requirements for a successful Disability Income product.
Agenda g
Agenda g
Introduction Disability Income Insurance The Claim Trigger The Th B Benefit fit Amount A t Key y Success Factors
Conclusion
Agenda g
Conclusion

Product Design:
Satisfy the genuine income loss needs of the client Ensure that there remains an incentive for return to work: deferment periods partial benefits (offset for income earned) rehabilitation benefits appropriate replacement ratios (x%) earning earning capacity capacity clauses Ensure clear and appropriate definitions and policy wording Ensure product is future future-proofed: implications of change in occupation implications of change in income levels, etc.
Agenda g
Conclusion

Underwriting:
More than for any other product, underwriters will need to pay careful attention to the interaction between: financial risks occupational risks medical di l risks i k Special considerations will be required in respect of: self self-employed lives part part-time workers seasonal workers, etc.
Agenda g
Conclusion

Claims Assessment:
For Disability Income products, claims assessment is not a once onceoff operation, but requires regular, handshands-on follow follow-up Assessing functional ability is far more important than assessing the medical condition - this requires specialist skills To T determine d t i th the b benefit fit payable bl each h period, i d claims l i assessors need to be proficient in reviewing financial information (both at time of disability and during the benefit period) Claims assessors need to appear sympathetic to the claimant, while remaining professional in their assessment Special S i l consideration id ti needs d t to b be given i t to th the challenges h ll associated with claim handling when the claimant is abroad (require ( q repatriation?) p )
Agenda g
Conclusion

Pricing:
When Disability Income products first enter a market, there will generally be a paucity of suitable pricing data this places challenges on the actuaries who may need to modify statistics from other countries Disability Income experience is not static it will change with the economic cycle, with advances in workplace safety, as well as with cultural attitudes. In light of these issues, guarantees should be avoided, even when credible past experience is available Both the underwriting and the claim assessment of Disability Income products are more complex than for most policies adequate loadings need to be added
Agenda g
Conclusion
Finally, Finally a personal view:
Disability Income Insurance is, is no doubt, doubt a challenging product line. However, it is the most valuable product that any Life Insurer su e ca can o offer e to o its sc clients. e s
THE ROLE OF REINSURERS IN HEALTH INSURANCE MANAGEMENT

15th Global Conference of Actuaries Rob Leonardi, Head of Regional Markets APAC, Munich Health
THE ROLE OF REINSURERS IN HEALTH INSURANCE MANAGEMENT

15th Global Conference of Actuaries Rob Leonardi, Head of Regional Markets APAC, Munich Health
Health Care Insurance Session Regulating Health Insurance Business- Aspects & Issues
Alan Watts RGA VP Health Insurance

Agenda g
Role of the Regulator Health Insurance Some examples of Health Insurance Regulations from around the world Some learnings for India
Role of the Regulator g

As a starting point, its important that, at the core of our mission as insurance supervisors is the protection of insurance consumers or policyholder protection, as its known in Europe. We pursue this objective in a variety of ways, using a variety of tools, but in the end, our duty is to create and preserve fair, open, secure, stable insurance markets for the benefit and protection of policyholders.
Peter Braumller, Chair of the IAIS Executive Committee in keynote speech to NAIC National Meeting, August 2012
Role of the Regulator g

More simplistically put:
Solvency of Insurers/Ability to pay claims Regulation should ensure Protect insureds /Policy wording /Insurance Contract
What a Regulator should be doing for Insurers
Ensuring a level playing field Stopping anti-competitive practices Promoting gg good business p practices Growing G i th the market k t
Role of Regulator g
INSURANCE CORE PRINCIPLES, STANDARDS, GUIDANCE AND ASSESSMENT METHODOLOGY 1 OCTOBER 2011 AS AMENDED 12 OCTOBER 2012 ( (WITH NEW ICP 9) ) This publication is available on the IAIS website (www.iaisweb.org). International Association of Insurance Supervisors 2012. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated
Role of Regulator g
I Insurance Core C P Principles, i i l Standards, St d d Guidance G id and d Assessment A t Methodology ICP 1 Objectives, Powers and Responsibilities of the Supervisor ICP 2 Supervisor S per isor ICP 3 Information Exchange and Confidentiality Requirements ICP 4 Licensing ICP 5 Suitability of Persons ICP 6 Changes in Control and Portfolio Transfers ICP 7 Corporate Governance ICP 8 Risk Management and Internal Controls ICP 9 Supervisory Review and Reporting ICP 10 Preventive and Corrective Measures ICP 11 Enforcement ICP 12 Winding-up and Exit from the Market ICP 13 Reinsurance and Other Forms of Risk Transfer ICP 14 Valuation
7
Role of Regulator g
I Insurance Core C P Principles, i i l Standards, St d d Guidance G id and d Assessment A t Methodology ICP 15 Investment ICP 16 Enterprise Risk Management for Sol Solvency enc P Purposes rposes ICP 17 Capital Adequacy ICP 18 Intermediaries ICP 19 Conduct of Business ICP 20 Public Disclosure ICP 21 Countering Fraud in Insurance ICP 22 Anti-Money Laundering and Combating the Financing of Terrorism ICP 23 Group-wide Supervision ICP 24 Macroprudential Surveillance and Insurance Supervision ICP 25 Supervisory Cooperation and Coordination ICP 26 Cross-border Cooperation and Coordination on Crisis Management
Role of Regulator g
The Insurance Core Principles (ICPs) provide a globally accepted framework for the supervision of the insurance sector. The ICP statements prescribe the essential elements that must be present in the supervisory regime in order to promote a financially sound di insurance sector t and d provide id an adequate d t l level l of f policyholder li h ld protection.
A huge expansion of the role of the regulator, but also reflecting change in financial sector & e events ents o over er past years. ears
The interaction between a countrys Health System and Private Health Insurance
Substitute/Primary
Main source of cover = High penetration e.g. USA, Germany, Netherlands Typically covers co-pays/deductibles within the public system F D Denmark, k e.g. France, What is not covered by the public system e.g. Canada, C d K Korea, J Japan Private alternative to the public / universal system = Low penetration e.g. Mexico, UK, Brazil
Complementary
High
Low
Supplemental
Penetration
Duplicate / Double cover
10
Health Insurance & current situation

V Very different diff t roles l for f Private P i t Health H lth Insurance I within ithi the th healthcare h lth system around the world Mi Mix of reimbursement reimb rsement & fi fixed ed s sum m prod products, cts on a g guaranteed aranteed or non nonguaranteed basis (renewal and/or premiums) Products & services geared to handle acute/episodic health events. events Little interaction with assureds Abuse/fraud by assureds & providers Battle to keep pace with medical trend Very varied results
11
Health Insurance
Different from other Insurance lines
Difficulty of describing what is actually covered & what not Subjectivity = Medically Necessary Who decides?? Applicants difficulty in understanding nature & extend of what coverage they actually need. Health Insurance is part of a broader healthcare system & healthcare is everywhere a very high profile political issue.
Despite all the above I was unable to find any specific reference on the IAIS website to Health Insurance.
12
Regulation from around the world
Health Insurance, heavily or lightly regulated??? USA

State by State: Heavy Light California/Florida Alabama/Texas to
UK
Lightly regulated (NHS), but very active insurance organization (ABI) agrees e.g. statements of best practice (good governance?)
Abu Dhabi
- Part of Health Authority
13
Regulation from around the world Abu Dhabi
VISION
The Health System of the Emirate of Abu Dhabi is comprehensive, encompassing the full spectrum of health services and is accessible to all residents of Abu Dhabi Dhabi. The system is driven towards excellence through continuous improvement, and monitored for achievement of targets. Providers of health services are independent, predominately private and follow highest international quality standards. The system is financed through mandatory health insurance. insurance
14
Regulation from around the world Abu Dhabi
MISSION
Ensure reliable excellence in healthcare for the community

Define the strategy for the health system and set PPP roadmap Monitor & analyze the health status of the population and performance of the system Shape regulatory framework for the health system Inspect against regulations and enforces standards Encourage adoption of world-class quality & performance targets Plan capacities and service levels Drive programmes to improve societal health Define minimum standards for health service providers and health professionals Regulate scope of services and premiums & reimbursement rates of providers and payers
+ Have implemented: Electronic Submission of Claims Introduced DRGs 15
Regulation from around the world - Brazil
Premium regulation:
Regulators provide the annual rate increase on individual health insurance Obligatory to apply, regardless of where you are selling, what providers you have or your actual experience Only 3 companies now left in the individual market All others th sell ll t to e.g. self-employed lf l d as Affi Affinity it G Group P Policy li ( (e.g. all ll lawyers) & group policies can have rate increases
16
Regulation from around the world South Africa
Regulation can help some companies:

9 Discovery made Vitality (their loyalty programme) a compulsory purchase when applying for membership of Discovery Health Medical Scheme 9 They built up a massive basis of Vitality members 9 The regulator then clamped down on the compulsory purchase but Vi li was b Vitality by then h well ll established bli h d 9 All other companies now at a disadvantage due to difficulty of building a l loyalty lt plan l f from scratch t h
= Discovery now have a differentiation in the market that no one can challenge
17
Regulation from around the world - Mexico

Late 90s 90 s regulatory change anticipating a Healthcare reform / privatization of Social Security 2 Lines of Health Insurance were created: - A&H - Health Insurance Traditional Major Medical Coverage Above + Preventative Care
Created 2 regulations & regulatory bodies for the new Health Insurance Traditional Insurance + Health Regulations (provision of services) Resulting today in 98% of health insurance is still traditional A&H. D t Due to: - Lack L k of f healthcare h lth reform f - Health Insurance Product too expensive - Regulation perceived as being too onerous & expensive - But insurers are unable to be involved in care/treatment decision, they have been reduced to being just payers.
18
Some learnings g for India

There may be different players BUT the playing field should be level. Medical trend is a reality and needs to be managed by each Insurer according to the profile & performance of their block of business - Price should not be regulated - Medical trend is fast moving g so product/rate review & their approval needs to be fast as well. Regulation should not provide a competitive advantage to some companies & not others If the insurer wants to manage/steer/be involved in actual care then more regulation will follow
19
Some learnings g for India

Heavy or light regulation
As you develop/grow If as a market/industry you cant come together on key issues If you really ll want t to t be b a major j player l within ithi the healthcare system
expect heavy
20
Thank you!! y Questions???

21
Session 4: Economic Capital Modeling in Insurance
- A View on the Dependency Modeling

Charlie Cicci, Specialist Leader, Deloitte Consulting Arijit Das, Manager, Deloitte Consulting
Disclaimer: Views expressed in this presentation are those of the authors alone
What is Economic Capital?
Balance Sheet Capital

= Book Value of Assets Book Value of Liabilities
Economic Capital
Realistic Balance Sheet Market Value of Assets and Liabilities Time Horizon A risk measure (e.g. VaR, TVaR) Confidence Interval
Waves of Reforms
Solvency II and similar regimes in many countries Swiss Solvency Test (SST) ORSA in US IFRS Phase II
Regulators are focusing more on the Risks an enterprise is facing
EC Modeling Benefits
Economic Capital Modeling
Identify, Measure & Model, Control and Report Risks
Strategic decision making
EC Modeling - Challenges
Dependency Modeling one of the major pain areas for the insurance companies
Management buy-in (Use Test) IT infrastructure Dependency Modeling
Challenges
Data availability Resource constraints
Fitness for Purpose
Costly to implement
Why care about Dependence?

Have a look at the tail Dependence in the extreme scenarios or the Tail Correlation can hit us very hard. Example
Motor Premium Mean Loss CV Loss Mean Profit 99.5%ile Loss Stand-alone Capital Need
All values are in million Rupees
Engineering 50 45 10
Aggregate
Dependence Total Capital Normal T Need Correlation 10% 30% 70% 100% 53 60 71 78 58 63 71 78
7 100% 3 40 30
33% 5 98 48
Dependency Modeling Approaches

Dependence Modeling or Risk Aggregation
Variance-Covariance approach
Common Shock
Copula Method
Captures linear correlation Not necessary to simulate the entire distribution
Models underlying risk drivers e.g. Inflation, Natural Catastrophes Theoretically pure approach, but could be complex to implement
Combines marginal distributions to create a joint distribution Flexible and captures nonlinearities
Dependency Modeling using Copula

Gaussian, T or any other Copula Individual Risk Simulation Choice of Copula
Stress & Sensitivity testing, Back testing, Reasonability checks
Validation
Dependency Modeling Framework
Estimation of Parameters
Correlation matrix, Degrees of Freedom
Calibration Aggregation Time horizon, Different levels of aggregation
By Line of Business, Location, Or Other risk categories
Technical Implementation
Simple and cost effective risk aggregation technique
Iman-Conover Method Tools:

Statistical packages R / MATLAB / SAS Our very own Excel Technically similar to the copula methods Concurrent sorting of marginals to achieve desired correlation Simple to implement
Estimating Correlation - considerations
Other uses
Not thinking about Economic Capital Modeling yetWhat else can we do with dependency modeling? Pricing and Underwriting Price based on the risk adjusted returns Portfolio Management Diversification benefit, profitability analysis by line of business
Example
Motor Premium Mean Loss CV Loss Mean Profit 99.5%ile Loss Stand-alone Capital Need Risk Adjusted Return
All values are in million Rupees
Engineering 50 10 45 7 33% 100% 5 3 98 40 48 30 10% 10%
Aggregate
Risk Adjusted Return for Engineering Correlation 10% 30% 70% 100%
Dependence Normal 58% 27% 13% 10% T 32% 20% 13% 10%
Questions?
Celebrating 40 Years of Innovation
Danny Quant Singapore
C2.5 C2 5 Experience, Experience assumptions and planning for retirement Danny Quant F I A Milliman Employee Benefits F.I.A., Benefits, Asia

Agenda g
Background The equation that defines retirement financial security Major driving factors Confidence in the drivers The defined benefit v defined contribution discussion
Why security matters in old age
Employment or catastrophes lead to greater d demands d on elderly ld l generations Opportunities for the children to generate their financial security
Financial security feeds into retirement security which perpetuates the support system
Source: Ageing in the Twenty-First Century UN Population Fund
Facts 58 million people celebrated their 60

in 33 countries.
th
birthday last year.
In 1950 205m people were over age 60. In 2012 810m, one in nine people are over age 60 60. This will be 2b 2b, one in five five, by 2050 2050. In 2007 life expectancy was beyond 80 in 19 countries. Now it occurs In Japan more than 30% of the population is over age 60. By 2050 63 more countries will join Japan. F births For bi th in i 2010-15, 2010 15 life lif expectancy t is i 78/68 (developed/developing). (d l d/d l i ) By 2045-50 it will be 83/74 p y in India has increased to 64 y years ( (males) ) and 65 Life expectancy years (females) from 62 years in 1997 and 32-33 years in 1947
Proportion of population age 60 or over 2012
We can see Japan and some Central European countries are already trying to cope with aged populations North America and Australia also
Proportion opo t o o of popu population at o age 60 o or o over e 2050 050
In less than 40 years only Africa will be OK
Life expectancy p y at birth
Life expectancy p y is expected to continue to improve Whil much While h of f the th improvement has already occurred, it is still expected that life expectancy can p by y another 5 improve years in the next 40 years
(Aged over 65)/(Aged 15-64) - Asia
Everywhere y there will be many more over aged 60 relying on the working population placing enormous strains on PAYG systems
Fertility y rates
Medical improvements and safer working conditions help g life lengthen Alongside is a reduction in births per mother. Often less than the ideal 2.1 replacement level
Distribution of population over age 60
The number of over 60s versus the working population will become a secondary issue The proportion of over 80s will be a huge toll
The fundamental equation
Contributions plus Investment Income equals B Benefits fit plus l Expenses E
February 16, 2013
Perspectives
Defined benefit (final salary structures) Contributions equals l Benefits + Expenses Income + Risk()
DB DB
Defined contribution (accumulation structures) Benefits q equals Contributions + Income Expenses Risk()
DC DC
February 16, 2013
Major j factors for the and the

Income
Attitude to risk Regulations g Strategic asset allocation (market return: ) Tactical asset allocation (manager returns over benchmarks: ) Total expense ratio Retail R t il Institutional Economies of scale Influence (related to other services within asset managerss group)
Expenses
February 16, 2013
Major j factors for the and the Salary inflation

Young v old Juniors v seniors Inflation + Promotional scales
Mortality
Young v old Gender Occupation/industry
February 16, 2013
Salary growth hard to predict over long periods

Upper chart shows classic salary scales Starting with large increases during the accelerating promotion period. Initial growth depends on personal success. Perhaps +/2% p.a. each year at the start. Towards the end of the career increases are generally around inflation whatever grade you have reached. L Lower chart h t shows h range of f salaries that would be achieved at retirement based on these salary scales. The final salary in this example could be 32% higher or 25% lower depending on the rate of acceleration early in the career.
February 16, 2013
From mid career until retirement salary growth is a little easier to predict
Same vertical scales. The ranges of results are much narrower. The initial acceleration due to promotions and other advancements are already in the salary by mid career. From this point much of the growth is inflation driven and is constant at many levels for base salaries The difference in the level of salaries l i for f the th lower l growth th and upper growth ranges are both around 4% of the central assumption. This is convenient for planning the funding of final salary related benefits.
February 16, 2013
The impact of an error in mortality experience
Notice that the confidence in the cost of providing an annuity to an 85 year old is much higher than the cost of providing an annuity to a 65 year old
February 16, 2013
Income and Expense

There are also risk elements in the income and expense components The Th expense component t is i controllable t ll bl t to some extent and should be small compared to the other th components t The investment risk remains and is for another session:
Note that it will be different for DB and DC plans There are techniques to control the downside risk (although it may be at the cost of some of the upside)
February 16, 2013
Suggestion for the future

Consider
A core DC benefit for all employees throughout their careers
Provides universal coverage and a predictable outlay for the employer Driven by affordability, tax incentives and desired replacement ratios
A supplementary DB arrangement that is funded during the latter period of employment and is paid later in retirement
Higher confidence in the funding and payment phases Driven Di b by affordability ff d bili and d assumptions i around d the h utilisation ili i of f DC pot
Retirees have a basic pension in their early retirement years without the worry of whether the defined benefit pot will last until they die The defined benefit entitlement is security for those retirees who survive beyond their average life expectancy age.
February 16, 2013
Implementation
Carry out demographic analysis to see what is the sensible accumulation phase: from age 45? what is the sensible late payment pension start age: at age g 85? Convert existing defined benefit plans to DC plus Late Payment Pension Plans Establish DC plans in the knowledge that they are there for retirement but that the Late Payment Pension will become available at age 85
February 16, 2013
Caveats
The samples in this presentation are for illustration only and depend critically on the underlying assumptions The figures in this presentation are neither guarantees nor forecasts Milliman does not accept p responsibility p y for investment decisions made based on the figures in this presentation No warranty is given for the accuracy or suitability of the figures in this presentation for any particular fund without appropriate due diligence carried out on the funds circumstances i t
February 16, 2013
Ghali Boukfaoui USA
Session S i 8 Economic Scenario Generators and Model Risk
Ghali Boukfaoui Vice President, President Client Solutions Group Group. Numerix

Economic Scenario generators and Model risk

- An ESG will generate multiple scenarios reflecting the risk factors tight to a Currency Currency.
Engine
Risk Factors
Index Modeled
S&P500
ALM Engine ASS SETS PR ROJECT TIONS
EquityRisk FXRisk
Russell2000 000 Other

USDAratedComposite p Index USDBBBratedComposite Index
ESG
CreditRisk InterestRates Risk InflationRisk
CPIIndex
Themodeledindicesareusedasproxiestomodeltheassetsbackingthe liabilitiesorbackingthefreesurplus; TheALMEnginecangofromasimplespreadsheettoanfullactuarial projectionsoftware; InmostcasesInterestRateRiskrequirestomodelthefullYieldCurveat futuretimestepsinordertoreflectliabilityvaluesineachfuturedate.

Scenarios Scenario1 t= ZCB1 ZCB2 ZCB600 ZCB1 ZCB2 ZCB600 0 1 2 0.999297 0.999297 0.999297 0.999252 0.999222 0.999277 0.103746 0.151337 0.166203 0.998612 0.998549 0.998633 0.998434 0.998553 0.998615 0.103746 0.151337 0.166203 48 49 50 0.998509 0.998728 0.998661 0.998423 0.998748 0.998567 0.129762 0.15942 0.135007
InterestRates Risk
Scenario1000
0.998875 0.998875 0.998875 0.998684 0.998899 0.998835 0.129762 0.15942 0.135007
Model risk in the Risk Neutral World:

Risk Neutral is the measure that captures optionality in the Assets and Liabilities; The model should be set to be market consistent, this i achieved is hi d through h h model d l C Calibration; lib i The closer we get to market prices, the more market consistent o our r scenarios are and the more market consistent our results are; Model Risk appears when the model is not adequate or calibration not performed adequately
Example3:MarketConsistencyforaSingleIRModel, theHullandWhite2factors;
5ySwaptionSkewCalibration HW 2F
60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0 0% 0.0%
MarketVolatility
Model Volatility
Example p 3:MarketConsistency yforaSingle g IRModel, , theLiborMarketModel2Factors;

5ySwaptionSkewCalibration LMM2F
50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10 0% 10.0% 5.0% 0.0%
MarketVolatility
Model Volatility
Example1:MarketConsistencyforaSingleEquity Model,theBlackScholesTermStructureCase.
l kTermStructureModel d l Black Implied Volatilitiesfor differentMaturitiesandStrikes
25.00% 20.00% 15.00% 10.00% 5.00% 0 00% 0.00%
95% 100% 105% 3m
95% 100% 105% 6m
95% 100% 105% 12m
95% 100% 105% 18m
95% 100% 105% 24m
Black Implied Volatilities
Market Implied Volatilities
Example p 2:MarketConsistency yforaSingle g Equity q y Model,theHestonStochasticVolatilityCase.

HESTONModel Implied Volatilitiesfor differentMaturitiesandStrikes
25.00% 20.00% 15.00% 10.00% 5.00% 0.00%
95% 100% 105% 3m
95% 100% 105% 6m
95% 100% 105% 12m
95% 100% 105% 18m
95% 100% 105% 24m
p Black Implied Volatilities
p Market Implied Volatilities
Example p 5:Whataboutcombining gIRmodelandEquity q y Model? Volatilityofratesbleedsintheoptionprices,therefore jointcalibrationbecomesnecessarytoperformJoint Calibration. OtherIssuestoconsider: Does D myactuarial t i lmodel d laccept tnegative ti rates? t ? Whatmaximumratedoesmymodelaccept? Myguaranteesaresensitivetobothratesand equities,theyaresensitivetotheRateEquity correlation;
ModelRiskintheContextofEconomicScenarios:
Riskofusingamodelthatispoorlycalibratedtomarketdata: Leadstomisscalculatedmarketconsistentvalue; Riskofcombiningmultiplestochasticmodelswithoutjoint calibration; Risk kof fusingscenariosthat h arenotRisk kNeutral l enough h( (cf, f martingaletests); Riskofmodifyingthestructuralintegrityofeconomic scenariostocontaintherestrictionsofanactuarialmodel;
Thank you
Ghali Gh li B Boukfaoui kf i g gboukfao@numerix.com @
Guy Chennells South Africa Old Mutual
Defined Contribution Investment decisions a tool for meeting conflicting Objectives
Guy Chennells Marketing Actuary at Old Mutual Corporate

Indian Pension Market

EPF
Compulsory (20+ employees) Drawbacks: No equity; no flexibility; lump sum payout
NPS Corporate
Currently must be add on to EPF Some equity allowed, but low Some choice at employer & employee level Basic auto choice lifestage g model
INDIVIDUAL NEEDS
What do p people p saving g for retirement actually need?
South African Research

Common fears & concerns
#
Will it be enough?
Is the investment safe?
Growth objective
Protection objective
Key y common characteristics

1.
Uninformed & disempowered

Dont know what happens to their contributions Intimidated know they dont know
2.
Risk averse
90% of members dont know if their company protects against volatility but assume they do Have a very high expectation that what they have put in they will get out
Quote: General rule of thumb is that what has been put in you will get at least that out.
3.
Most like smoothed bonus concept (when explained what it is)

Most like the predictability, security; Vast majority would prefer smooth, steady growth to taking the highs and lows Value peace of mind
enough, but dont want to think about it

Quote: Even if you do know, what are you going to do?
TRUSTEE / EMPLOYER OBJECTIVES

Conflicting Needs, Conflicting Objectives
Default Fund Objectives j

Good long term growth
It is likely to achieve significant growth above inflation at a sustainable level over the long term Long term growth: Pr (annual real return over rolling 15 year periods > 5.5%)
Consistent medium term growth

It is likely to achieve growth at or above inflation consistently over the medium term (1-5 yrs) a. Consistency >4% over 5 years: Pr (annual real return over rolling 5 year periods > 4%) b. Consistency >4% over 3 years: Pr (annual real return over rolling 3 year periods > 4%) c. Consistency >0% over 1 year: Pr (annual real return over rolling 1 year periods > 0%)
Protection against negative returns

It is likely y to avoid negative g returns (over ( rolling g one-month or one-year y periods) p ) a. Non-negative annual returns: Pr (one year rolling nominal return above 0) b. Non-negative monthly returns: Pr (one month rolling nominal return above 0) c. Expected c pected size s e of o negative egat e returns: etu s mean ea negative egat e annual a ua nominal o a return etu
Basic Investment Strategies g

InvestmentPortolioAssetAllocations
100.0% 90.0% 80.0% 70.0% 60 0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Aggressive E(r)=5 E(r) 5.5% 5% Moderate E(r)=4 E(r) 4.7% 7% Conservative E(r)=4% E(r) 4% LocalCash LocalBonds International Equity LocalEquity
Historical Analysis y
Objective |Investment Strategy 1: Long g term g growth 2: a) Consistency >4% over 5 years b) Consistency >4% over 3 years c) Consistency >0% over 1 year 3: a) Non-negative annual returns b) Non-negative monthly returns c) expected size of negative returns
Analysis period: 40 years to August 2011 AssetClass
Local L lEquity i InternationalEquity LocalBonds LocalCash Inflation
Aggressive 95.7% 80.8% 67.9% 67.2% 87.8% 64.2% -9.0% 9 0%
Moderate 77.7% 77.2% 64.9% 67.8% 90.6% 69.8% -4.4% 4 4%
Conservative 52.5% 58.7% 54.8% 68.4% 96.2% 72.5% -2.3% 2 3%
Index
FTSE/JSE S /JS AllShare Sh TRI I MSCIWorld(inRands) ALBITotalReturn STeFI(AFMoneyMarketIndexbefore2000) CPI
Projection j Analysis y
Objective |Investment Strategy g term g growth 1: Long 2: a) Consistency >4% over 5 years b) Consistency >4% over 3 years c) Consistency >0% over 1 year 3: a) Non-negative annual returns b) Non-negative monthly returns c) ) expected t d size i of f negative ti returns t
5000 scenarios, monthly time-steps, 30 year projections Barrie & Hibbert (B&H) stochastic-volatility, stochastic volatility jump-diffusion jump diffusion (SVDJ) model calibrated to South African market data as at 30 June 2011 Results are averages g across all scenarios
Aggressive 56.9% 61.8% 59.3% 64 9% 64.9% 77.4% 58.5% -7.9% 7 9%
Moderate 50.6% 60.4% 58.2% 67 3% 67.3% 82.3% 60.6% -5.6% 5 6%
Conservative 40.2% 55.7% 54.6% 68 1% 68.1% 85.6% 62.1% -4.3% 4 3%
SMOOTHED SOLUTIONS
Smoothed Bonus
Bonus Smoothing Reserve will move in extreme ranges but average between 0% and 5% Used existing formula for an Old Mutual Product
+15% -10% Same net long-term return as the aggressive i fund less 0.2% policy fee Members cross subsidize one another only works with limited benefit events & timing
Low or zero bonuses during bear markets Positive P iti strong t bonuses during bull markets
Historical Analysis y
Objective |Investment Strategy g term growth g 1: Long 2: a) Consistency >4% over 5 years b) Consistency >4% over 3 years c) Consistency >0% over 1 year 3: a) Non-negative annual returns b) Non-negative monthly returns c) expected size of negative returns Aggressive 95.7% 80.8% 67.9% 67.2% 87.8% 64.2% -9.0% 9 0% Moderate 77.7% 77.2% 64.9% 67.8% 90.6% 69.8% -4.4% 4 4% Conservative 52.5% 58.7% 54.8% 68.4% 96.2% 72.5% -2.3% 2 3% Smoothed 100.00% 86.7% 79.8% 79.7% 99.2% 99.6% -0.7% 0.7%
Projection j Analysis y
Objective |Investment Strategy 1: Long g term growth g 2: a) Consistency >4% over 5 years b) Consistency >4% over 3 years c) Consistency >0% over 1 year 3: a) Non-negative annual returns b) Non-negative monthly returns c) ) expected t d size i of f negative ti returns t Aggressive 56.9% 61.8% 59.3% 64 9% 64.9% 77.4% 58.5% -7.9% 7 9% Moderate 50.6% 60.4% 58.2% 67 3% 67.3% 82.3% 60.6% -5.6% 5 6% Conservative 40.2% 55.7% 54.6% 68 1% 68.1% 85.6% 62.1% -4.3% 4 3% Smoothed 55.00% 61.98% 60.38% 73.76% 91.31% 96.50% -3 55% -3.55%
CONCLUSIONS
Conclusions
1. People have conflicting objectives
Growth & stability/protection
2. Most solutions sacrifice growth for stability

E.g. EPF and NPS in India; many retirement funds in South Africa
3. Smoothing enables both objectives to be met

Higher g allocation to g growth by y dampening p g volatility y through at-benefit mutual insurance
QUESTIONS?
Guy Chennells, Old Mutual South Africa gchennells@oldmutual.com Presentation based on a paper presented at the 2012 annual Actuarial Society of South Africa Convention http://www.actuarialsocietyconvention.org.za/assets/pdf/papers/Guy%20Chen nells%20%20DEFINED%20CONTRIBUTION%20INVESTMENT%20DECISIONS df %20DEFINED%20CONTRIBUTION%20INVESTMENT%20DECISIONS.pdf
David Alexander Hong Kong
Session 10: Asia Asia's s Evolving Risk Based Capital Regimes - Implications for India David Alexander Head of Business Development Development, Asia Swiss Reinsurance Company Limited

Contents
Worldwide W ld id trends d i in solvency l regulation l i Asia Insurance Overview Trends in regulation in Asia Implications of Solvency Changes Outlook How Swiss Re can help Q&A
Worldwide trends in regulation

Risk Based Capital Solvency Regulations
For Dai-ichi Life | XX January 2011 | Confidential and Proprietary
Trend of rules and regulatory changes: I t International ti l convergence of f prudential d ti l regimes i towards economic based frameworks
time
Economic SST / Solvency II Rating agencies IFRS II IAIS
U it d States United St t Federal Insurance Office (FIO) NAIC solvency modernization Systemic risk regulation Compensation regulation SEC roadmap to IFRS Rating agencies regulation Asia Pacific Solvency reforms Investment rules Market access ASEAN Free Trade Area (AFTA)
E Europe Solvency II implementing measures New supervisory architecture (ESAs, ESRB) Insurance guarantee schemes Crisis management and resolution Rating agencies regulation International Financial Stability Board (FSB) agenda Basel III G-SIFI policy measures IASB & FASB project
Illustrative
Switzerland moved to economic based solvency regime ahead of Solvency II Asia countries strengthening solvency standards (RBC based and stress tests) S&P planned review re ie of internal models' to contribute contrib te to global convergence con ergence Statutory regulatory frameworks give different answers compared to SST/Solvency II Total balance sheet and economic-based economic based solvency framework increasingly referred as the international insurance solvency benchmarks
4
with various and mostly adverse i li ti implications f for i insurers

Adverse regulatory implications Increased capital requirements Limits on activities and concerns over complexity Increased I d reporting ti requirements i t and d overall ll costs t Reputational risks in complying with changes Forced restructuring (incl. asset allocation) Extraterritoriality and discrimination Positive regulatory effects Increased use of capital relief solutions Reduction of collateral requirements Harmonisation of supervision Examples Solvency II, US RBC G-SIFI policy measures Solvency II pillar III and ECB Solvency II implementation Solvency II US affiliated tax, Brazil restrictions Examples Solvency y II / Asia RBC State initiatives, US surplus lines Equivalence (EU), FIO (US)
Swiss Re is highly active in addressing these regulatory developments, through both direct contact with supervisors/policymakers and via key trade organisations
The insurance and reinsurance industries weathered the financial crisis fairly well
9 Insurance business was conducted as usual: cover was always provided 9 9 9 9 9
both in insurance and reinsurance, and claims were paid as usual throughout the crisis. Prices and capacity remained stable in most lines of business. There was no experience of runs on insurers and lapse rates in life insurance remained stable. M t capital Most it l was lost l t on assets, t b t (re)insurers but ( )i remained i d solvent l t throughout the crisis Problems were with monoline insurers involved in credit business and (re)insurers with FS operations Very few insurers needed government support and the support needed was minimal compared with banks
Capital management by insurance companies i

Management Task Management-Task
Balancing act between risk and capital L Low capital it l base: b
Higher probability of not being able to pay justified claims
High g capital p base:

High probability of not achieving a return on equity required by investors Key performance indicators for capital management Absolute Return
Examples:: Economic Value Added (EVA) Net income
Relative Return
Examples: Return on Equity EVA margin
Others
Examples: Solvency II ratio Rating
Solvency II
Basic principles of Solvency II compared to Solvency I

Solvency II is the new insurance supervision regime being introduced in the EEA (European Economic Area)
The existing Solvency I regime
Fixed formula approach determining capital requirements based on insurance risks held
The anticipated Solvency II regime

Economic framework taking into account the entire risk landscape and risk management framework
Formula of Solvency I Pillar I Quantitative requirements
Principles of Solvency II Pillar II Qualitative requirements Pillar III Market disclosure
Key conclusions: Capital requirements driven by the volumes of business Only insurance risk considered Partial recognition of reinsurance (eg only up to 50 % in P&C) Capital requirements not reflecting the underlying risk
Key conclusions: Capital requirements driven by the volatility of business Insurance, market, credit and operational risk considered Broader recognition of risk reduction techniques (eg reinsurance) Capital requirements adequately reflecting the underlying risk
Solvency y II Key y elements

Consideration of all risk categories Probabilistic risk measurement
Solvency I
Economic balance sheet

Economic balance sheet
Insurance risk
VaR
Risk aggrega R ation
probability
Market risk
Economic net worth Market value of assets Profit
SCR
Credit risk Operational risk
Solvency Capital requirement ES s
L Loss 1 in 200 Expected years loss result (mean)
Economic value of li biliti liabilities
The Solvency I regime only considers the insurance risk and to some extent the market risk. Other risk categories are covered in different regulatory frameworks (eg upper limits for investments in certain asset categories)
Solvency II risk measure will be based on a Value at Risk (VaR) level of 99.5% which is equivalent to a 0.5% target default probability, and specifies a time horizon of one year
Introduction of market-consistent valuation of balance sheet items Increased volatility of balance sheet items expected
Under the best scenario, , Solvency y II could start to be implemented p either 2015 or 2016, it depends on the length of the legal and political process" (From Insurance Insider magazine, the EIOPA chairman Gabriel Bernardino, October 2012)
10
Asia Insurance Overview
11
11
The Asia market has been growing year after year

Asia insurance market (life and non-life)* 1 200 1,200 1,000 800
USD bn n
10% 8% 6% 4% 2% 0%
600 400 200 0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Total direct premium
Real growth rate
"its only natural for insurers to consider greener pastures in emerging markets such as China, India and Brazil. While there are often obstacles to do business in such countries the need for insurance coverage to meet the financial security demands of an expanding middle class could provide significant growth opportunities for those with the resources and capabilities to capitalize on them " (Deloitte, 2012 Global Insurance Outlook) "the markets are very bullish about the long-term growth prospects for the insurance industry in Asia" 1 (Nomura, 24 Jan 2012)
12
*Source: Swiss Re Economic Research and Consulting
The huge protection gap in Asia implies great growth potential

Mortality Protection Gap
Health Protection Gap
In 2011 Swiss Re's study revealed there is huge mortality protection gap in Asia, which implies massive room for insurers to offer good value insurance products to customers
In 2012 Swiss Re's study forecasted that there will be a huge health protection gap in Asia, valuing to USD 197bn in 2020
Breakdown by market (2020)
Others,9. Indonesia, 8% 4.0% Australia, 4.1% China,37. 0%
60,000 50,000 40,000 USD bn 30,000 20 000 20,000 10,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Protection needed Relevant life inforce Relevant savings
2010 Protection Gap in Asia =USD 41,411bn
South Korea,8.5 % Japan,14. 5% India,22.1 %
"Migration g towards p protection p products is vital: We applaud pp the shift in focus to protection p products p as the low interest rate environment persists and insurance products slowly lose out to other financial products " (JP Morgan 10 Jan 2012)
13
*Source: Swiss Re Mortality Protection Gap Report 2011 and Health Protection Gap Report 2012
Trends in regulation in Asia
14
14
Ri k b Risk-based d capital it l development d l ti in A Asia i

The IAIS is the driving force for the majority of insurance regulators:
Newly adopted International Association of Insurance Supervisors (IAIS) Insurance Core Principles c p es ( (ICPs) C s) Many regulators in the region, and elsewhere in the world, are now citing the ICPs publicly as a driver of their regulatory reform packages Th The ICPs ICP point i tt towards d a more risk-focused i kf d solvency capital calculation approach, with a greater focus on risk management practices and the links between risk and capital No requirement to copy from other supervisors the ICPs allow flexibility
The Simple Factor Based model cannot reflect the real risks risks
Current volatile stock and asset markets are unfavourable to unit-linked insuranced i t d market dominated k t e.g. i in I Indonesia d i Low interest rate that will aggravate the problem of investment yield and negative spread e.g. in Japan and Taiwan Asia is a catastrophe-prone region e.g. in Thailand and Australia
As a result, there is a need and trend for Asia to turn to a more sophisticated p solvency y regime, e.g. Risk Based Capital (RBC)
Source: IAIS ICPs; ASHK-HKFI Seminar June 2012; Asia Insurance Review May 2012; KPMG Evolving Insurance Regulation February 2012; HKFI Monthly Brief Sept 2012
15
Solvency supervision in Asia is moving towards Risk Based Capital

Market Current regime Expected changes
APRA's Life and General Insurance Capital Standards (LAGIC) review review, with the aim of introducing more risk sensitive capital measures and improving the alignment of capital measurements across the industry, will be effective from 1 January 2013. Economic value-based solvency regime to align with Solvency II Improve enforcement Phase in more stringent capital loadings with effect from 1 June 2012; use of internal models Consultation launched for transition to RBC Studying the next generation solvency regime Studying the next generation solvency regime RBC rules l passed, d pending di implementation, i l t ti increasing minimum capital requirements Considering RBC 16
Model-based
Australia
APRA standard models & internal models for non-life insurers
RBC-based
Japan Indonesia Taiwan Singapore Malaysia South Korea Thailand Hong Kong
RBC-based (since 1997) RBC-based (since 2000) RBC-based (since 2003) RBC-based (since 2004) RBC-based (since 2009) RBC-based (since 2011) RBC-based (since 2011) Solvency ratio/margin Solvency ratio/margin Solvency ratio/margin Solvency ratio/margin Solvency ratio/margin
Solvency ratio
India China Philippines Vietnam
Sources: National insurance regulators, Axco Reports, Swiss Re ER&C.
Case study Malaysia RBC Framework - Life

Malaysia RBC was introduced in 2009 RBC Ratio =
Total Capital Available Total Capital Required
x 100
Statutory minimum: 130%
Total Capital Available:
Aggregate of Tier 1 and Tier 2 capital less deductions such as goodwill, deferred tax assets Classification of Tier 1 and Tier 2 depends on degree of permanence and free and clear of any encumbrances Examples of Tier 1 capital: issued and fully paid-up ordinary shares; paid-up noncumulative l ti i irredeemable d bl preference f shares; h retained t i d profits fit Examples of Tier 2 capital: cumulative irredeemable preference shares; subordinated term debts
Risk-based Capital is function including 4 components:
Surrender value, credit risk, market risk, insurance liability and operational risk
TCR =
Max [ [Surrender value capital p charges, g , (Credit ( risk capital p charges g + market risk capital charges + Life Insurance liability capital charges + Operational risk capital charges)]
http://www.bnm.gov.my/guidelines/02_insurance_takaful/01_capital_adequacy/gl_003_24_2 0110513.pdf
17
Case study Malaysia RBC Framework Non Life

Malaysia RBC was introduced in 2009 RBC Ratio =
Total Capital Available Total Capital Required
x 100
Statutory minimum: 130%
Total Capital Available:
Aggregate of Tier 1 and Tier 2 capital less deductions such as goodwill, deferred tax assets Classification of Tier 1 and Tier 2 depends on degree of permanence and free and clear of any encumbrances Examples of Tier 1 capital: issued and fully paid-up ordinary shares; paid-up noncumulative l ti i irredeemable d bl preference f shares; h retained t i d profits fit Examples of Tier 2 capital: cumulative irredeemable preference shares; subordinated term debts
Risk-based Capital is function including 4 components:
TCR =
Credit risk, market risk, insurance liability and operational risk
(Credit risk capital charges + market risk capital charges + General Insurance liability capital charges + Operational risk capital charges)
http://www.bnm.gov.my/guidelines/02_insurance_takaful/01_capital_adequacy/gl_003_24_2 0110513.pdf
18
There is also more codification of allowable structures, for example, Financial Reinsurance in Japan
In Japan, precise definitions and criterion have been outlined by FSA on financial reinsurance.
Financial Reinsurance is defined where initial reinsurance commission is calculated based on future expected profit from the reinsured block of business and paid to a cedant All risks related to the reinsured block are transferred from a cedant to a cedant. reinsurer. In addition there is a clear definition of remote risk reinsurance for new business financing which is used extensively by Japanese companies New business financing can provide upfront financing to insurers as acquisition cost reimbursement. These new business financing deals have been understood by the FSA as coinsurance. The generally accepted view in the market is that as long as the amount amo nt of reinsurance reins rance financing does not exceed e ceed actual act al acquisition acq isition costs, the FSA will not scruntinize or object to such structures.
The guidelines provided by the regulators will help insurers and reinsurers to carry out business more effectively. y Reinsurance can act as an alternative source of capital to insurers and help them to improve capital positions.
19
Implications of y Changes g Solvency in Asia
20
Implications of Solvency Changes Market Consolidation in Asia? For example, Malaysia

Since M Si Malaysia l i i implemented l t d RBC i in 2009 2009, M&A activity ti it h has i increased d substantially, b t ti ll especially the P&C market
Acquirer Allianz General Insurance Company Tokio Marine Insurancs (Malaysia) Berhad MSIG Insurance (Malaysia) Berhad Overseas Assurance Corporation Malaysia AXA Affin General Insurance Berhad Fairfax Asia Ltd Ace Insurance Zurich AMG Insurance (IAG's 49% JV ) AIA Group Limited Acquired Commerce Assurance Berhad PanGlobal Insurance Berhad Hong Leong Assurance Berhad Tahan Insurance Berhad BH Insurance Berhad Pacific Insurance Berhad Jerneh Insurance Berhad MAA Berhad Kurnia Insurans (Malaysia) e ad Berhad ING Malaysia Life / P&C P&C P&C Life , P&C P&C P&C P&C P&C Life , P&C P&C Life 21
Date 2007 2008 2010 2010 2010 2010 2010 2011 2011 2012
Other implications to consider consider

More alignment of stakeholder s' interest
Change in reserving basis?
Investmen est e t decisions
Change in product strategies?
Potential restructuring of financial conglomerate s over time
Focus on financial strength g of counterparties
Availability p of expert resources
Source: KPMG Evolving Insurance Regulations March 2011, Ernst & Young Solvency II implications for Asian life insurers 2011
22
Outlook
23
23
Expected p typical yp model for Risk Based Capital in Asia
Typically the RBC model attempt to take into account all sources of risk that could affect insurer solvency
Risk Based Capital Requirement
Insurance Risk (Life/P&C)
Credit Risk (Life/P&C)
Market Risk (Life/P&C)
Operational Risk (Life/P&C)
Liquidity Risk (Life/P&C)
ALM Risk (Life)
Interest Rate Risk (Life)
Some risks are inter-related e.g. e g Reinsurance arrangement covers both Insurance Risk and Credit Risk e.g. Bond investment covers both Market Risk and Credit Risk
There will be allowances for diversification, , correlation and stress scenarios

24
Implications of the different risk factors
Insurance Risks
Reserving, written premium, growth Catastrophe, Catastrophe pandemic Majority of capital for P&C companies
Market Risks / Liquidity Risk
Volatility of assets Asset concentration Collateralized assets, liquidity Equity market shock
Asset Liability g Risks / mismatching Interest Rate Risk
Majority of capital for life companies Duration matching, cash flow matching Guaranteed interest rate, negative spread
Credit Risks
Reinsurance recoverables, other receivables Credit ratings of counterparties of derivatives, bond issuers Downgrade risk, default risks
25
How Swiss Re can help

26
Bespoke p solutions can be p provided in the Life and Health arena

Yearly Renewable Terms Coinsurance on In Force Structured reinsurance solution Contingent reinsurance solution Innovative Reserve Management Claims volatility cover Securitisatio n of extreme mortality risk Risk swap
Improve solvency capital
9 9
9 9 9
9 9 9 9
9 9 9 9 9 9 9 9 9 9
Reduce earnings volatility
As an alternative source of capital
Decrease extreme risk exposure
More diversified risk portfolio
27
as well as in the Property and Casualty arena

some sample solutions
Retrospective R t ti cover : LPT/ ADC Improve solvency ratio V l tilit Volatility protection solution Flexible quota share treaty Insurance linked securities
9 9 9 9***
9* 9 9
9 9** 9
9 9 9
Reduce earnings volatility
Decrease risk exposure
Upfront P&L benefit to insurers
9* 9** 9***
The effect will depend on the solvency regime, this solution is not effective under Solvency I. A quota share treaty with fixed commission won't won t necessarily reduce volatility on earnings earnings. The positive impact on insurers' P&L will normally emerge when there is a difference on reserve valuation basis (discounted or nominal).
28
Examples of recent Swiss Re deals with capital motivation

2008 Cashless Reinsurance Financing Regulatory capital support 2001 onwards Cashless new business Financing Risk protection for annuities 2010 onwards Coinsurance Coinsurance on large block of health business, fund-withheld structure 2010 Innovative Reserve Management Participating business
Global insurer in Taiwan
Foreign insurer in Japan
Large domestic insurer in China
Large global insurer in HK
Amount: USD 70m+ Sole reinsurer:
Many years of ongoing new financing Reinsurer:
Reserve/ capital relief for insured: USD 300m Sole reinsurer: Sole reinsurer:
2011 Innovative Reserve Management Quota share on guaranteed risk premium basis
2011 Coinsurance on In Force Medical insurance business in Japan
2011 Flexible Quota Share Regulatory solvency capital support P&C Solution
2012
Solvency capital support
Mid-sized domestic insurer in China

Reserve/ capital relief for client: USD 95m (to help improve solvency at Q2 and Q4) Sole reinsurer:
Global insurer in Japan
Large domestic insurer in China
Large insurer in Malaysia
Sole reinsurer:
Sole reinsurer:
Sole reinsurer:
29
Q&A
David Alexander Phone: +852 2582 5689 @ Email: David_Alexander@swissre.com

30
Legal notice
2013 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivatives of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re. Although all the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial and/or consequential loss relating to this presentation.
31
In these turbulent times, who knows what opportunities may blow your way?
Crisis in the Eurozone. Global lack of confidence. Uncertainty. Unrest. In such a volatile economic climate, many peoples first instinct is to run for shelter. But what if that meant missing out on fresh possibilities? At Swiss Re, confronting uncertainty has been our business for almost 150 years. And now, in todays ever more rapidly shifting risk landscape, our task is to be ever more agile and alert. Were here to identify emerging risks and opportunities alike, and enable our clients and brokers to look beyond the immediate challenges. At Swiss Re, risk is our raw material; what we create is opportunity. See which way the wind is blowing at www.swissre.com
GCA_Windmill_EN_120113.indd 1
12.02.13 10:22
Australian School of Business A t li S Australian School h l of fB Business i
Australian School of B i Business
The Future Actuary y and Role of Actuarial Education

Michael Sherris
CEPAR, School of Risk and Actuarial Studies University of New South Wales Wales, Sydney AUSTRALIA
17 February 2013 IAI Students EVENT
Overview
What is an actuary? Actuaries as Innovators Learning from Related Disciplines The Future Actuary Actuarial Education and Research
Definition of Actuary
actuary [ ktr]n pl -aries aries(Business / Professions) a person qualified to calculate commercial risks and probabilities involving uncertain future events, esp in such contexts as life assurance[C16 (meaning: registrar): from Latin cturius one who keeps accounts, from actum public business, and acta documents, deeds. See ACT, -ARY] actuarial [ kt rl] adj Collins English Dictionary Complete and Unabridged HarperCollins Publishers 1991, 1994, 1998, 2000, 2003 actuary t A specialist in the mathematics of risk, especially as it relates to insurance calculations such as premiums, reserves, dividends, and insurance and annuity rates. They work for insurance companies to evaluate applications based on risk. Read more: http://www.investorwords.com/96/actuary.html#ixzz2JnSU2wCj
Actuaries Institute (Australia)
What is an Actuary? Actuaries are among the brightest people in the business world. They apply their mathematical expertise, statistical knowledge, economic and financial analysis and problem solving skills to a wide range of practical business problems. Actuaries help organisations to understand the long-term financial implications of f their th i d decisions, i i many of f which hi h can affect ff t i individuals di id l as well ll as th the wider id community. What do they do? Actuaries apply their skills in a variety of areas including: Measuring and managing risk and uncertainty Designing financial contracts Advising on investments Measuring demographic influences on financial arrangements Ad i i on a wide Advising id range of f fi financial i l and d statistical t ti ti l problems. bl
Actuaries as Innovators
Pioneers:
Survival models: the life table: application to life insurance Fi Financial i l mathematics: th ti annuities, iti b bonds, d i insurance Stochastic Processes and risk models: application to nonlife insurance and solvency Multiple state/risk models: application to pension funds, health and long term care insurance Asset management: asset and liability matching Risk sharing and contract design: profit sharing and participating insurance
Learning from Related Disciplines

Demography Epidemiology Applied Statistics Probability and Stochastic Processes Mathematical Finance Insurance Economics A li d Fi Applied Finance Financial Economics Ri k M Risk Management t
The Future Actuary
Strong quantitative skills increased use of data analytics (data mining), individual data analysis (panel data) Strong understanding of probability models and estimation Markov multiple state models, continuous and discrete state and continuous time models (jump, diffusion processes) Strong understanding of financial economics valuation of contingent claims, stochastic calculus, hedging Strong understanding of insurance economics motivations ti ti of f risk i k management t (frictional (f i ti l costs), t ) design d i of risk sharing contracts, policyholder behaviour (adverse selection, selection moral hazard)
The (Past, Present and) Future Actuary

Understanding of broad business applications Interpretation of model results and analysis Understanding model limitations P ti l recommendations Practical d ti C Communication i ti
Actuarial Success
Strong interest and ability in mathematics and applications to business Problem solving and general reasoning Commerce and business ability Communication skills Dedication and motivation to succeed Building g a track record of success
Role of Actuarial Education

Universities:
Basic and Advanced education syllabus innovation, postgraduate coursework R Research h fundamental f d t l and d applied, li d PhD
Profession:
Practice areas and codes of conduct practice areas Recognising more advanced university education in developing areas Risk Management
Industry
Work experience while studying - internships
Individual skills and CPD

Life long learning, learning taking risks Postgraduate education MBA, MBA Masters Research degree - PhD
P ti l skills Practical kill computing, ti technology, t h l d data, t management t E Experience i consulting, lti corporate, t i insurance, fi finance
The Future Actuary

Technically strong Being recognised as good at what we do
Keeping up with technology and other related disciplines I Innovation ti in i modelling d lli and d managing i risk i k A i ti f Aspiration for leadership l d hi
Thank you very much!

Michael Sherris m.sherris@unsw.edu.au
Reference: Sherris, M. (2006), Actuarial Education and Research: A Perspective From Down Under, Under Editorial, Editorial ASTIN Bulletin, Bulletin Vol 36 36, 1 1, 1-3 1 3.
13
Dr. Amarnath Ananthanarayanan India
C4.1 C4 1 General Insurance in India A View Designing the Product that would be the APPLE of The Eyes of Customers & Partners
Dr. Amarnath Ananthanarayanan CEO & MD Bharti AXA General Insurance

Abstract
" Product design is all about knowing what the customers as well as distribution partners want and at times what the customers want versus what the partners want maybe in p is to elucidate statistical techniques q conflict. The attempt that ensure a product design process creates products that while hil maintaining i t i i th profitability the fit bilit of f general l insurance i companies gains immediate acceptance from both
customers and partners."
Pricing g & Product Features

Conjoint determine Analysis: the relative Attempts to importance
consumers attach to salient attributes y attach to the levels and the utilities they of attributes. lik like Example: a Would or
consumers
d d tibl deductible
voluntary excess in their Motor policy
Knowing What Features A Customer Wants K i Wh t Product P d tF t C t W t Is I Critical To What Features & Pricing One Should Have
Price Volume Tradeoff

Revenue = Price x Quantity Change In Revenue = Change In Price x Change In Quantity Elasticity = Percentage Change in Quantity Demanded for a Percentage Change in Price Price Price Elasticity < 1 Or Inelastic Elasticity > 1 Elastic Revenue Revenue or or Depends On Depends On
P
Product 1
Quantity Quantity
or or
Product oduc 1: Price ce = Revenue e e ue

Product 2
Product 2: Price = Revenue
Elasticity Key Determinant Of Pricing Decision
Partners Reaction
Lower Pricing Could Mean Lower Per Policy Remuneration but Overall Higher Remuneration Higher Pricing Could Mean Higher Per Policy Remuneration but Overall Lower Remuneration
Profitability y
Lower Pricing Could Mean Higher Loss Ratios but Lower Ratio Higher Pricing Could Mean Lower Loss Ratios but Higher Combined Operating Ratio Capital Requirement ??? Combined Operating
Profitability y
And the Most Obvious Higher Per Policy Remuneration Means Lower Profitability or Higher Prices for Customers
Can C
we
d i devise
t d ff trade-off
between Per Policy Remuneration & Loss oss Ratios at os To o Ensure su e Opt Optimal a Pricing ???
Predicting g Losses
Tools Available This is an area that is more developed in India as opposed to other areas in terms of statistical analysis Hazard Rates 9 Survival Functions
Challenge In India is Availability Of Reliable Long Run Customer Data
Revenue Maximization basis Location and Companies p competing p g for market share
p1 + t (1 (1-z) z) p2 + t z
Q = f(p,z)
Value
P = price, Q = quantity & z is a continuous variable taking values between [0,1] representing the customer p2 + t z p1 + t (1-z)
Value
p1 p2
p1
p2
0
Buy From Company1 Dont Don t Buy Buy From Company 2
0
Buy From Company 1 Buy From Company 2
Higher Pricing, Lower Volume
Higher Volume, Lower Pricing
Competition ????
Profitability y
S Where So Wh Is I The Th APPLE ???
Final Comments
1 2 3 4 5 Know Your Customers, Partners & Competition p Test & Learn .. And Learn More .. As There is No Simple Answer Requires Creation Of Separate Expert Team CEO Driven .. Organization Wide Buy In Focus On Selling Value Value, Not Price
Having An Analytics Mindset & Executing On This Initiative In The Indian Insurance Industry Will Be Very Critical To Its Success
Thank You
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Jill Hoffman Singapore
S4 - Regulatory changes in Singapore and implications for Asia-Pacific Jill Hoffman FSA FCIA, FSA, FCIA FSAS Singapore Actuarial Society

Agenda g
RBC2 FAIR Others
RISK BASED CAPITAL 2
Risk Based Capital p ( (RBC) )2

MAS issued a Consultation Paper in June 2012
One month response time
SAS gave a formal response

Efforts of ERM, Life and Non-Life committees Had a members forum on the response over 100 members attended!
RBC2 is not a significant overhaul of current framework, but rather improvements to:
Comprehensiveness of risk coverage Risk Sensitivity
RBC2 Highlights g g
Proposal 5 - recalibrate risk requirements using the Value at Risk (VaR) measure of 99.5% confidence level over a one y year p period.
VaR 99.5% confidence level (1 in 200 year event)
Widely adopted as a solvency standard Easy E to t compute t
Singapore insurance market has survived through a number of global and Asian economic crises without major problem implies that the current RBC regime is operating g at a satisfactory y level
Is VaR 99.5% too high?
RBC2 Highlights g g
Proposal 6: MAS proposes not to allow for diversification benefits when aggregating the capital risk requirements. q
MAS is, however, prepared to consider diversification benefits if the industry is able to substantiate, with robust studies and research conducted on the local insurance industry industry, that there are applicable correlations which can be relied on during normal and stressed times.
Implies perfect correlation and will create a much higher capital standard than the 1-in-200 year basis.
RBC2 Highlights g g
Proposal 3: MAS proposes to incorporate an explicit risk charge to capture operational risk within the RBC 2 framework
x% of the higher of the past 3 years averages of (a) earned premium income; and (b) gross policy liabilities, subject to a maximum of 10% of the total risk requirement requirement. Where x = 4% (except for investment-linked business, where x = 0.25% given that most of the management of investment-linked fund is outsourced) t d)
Issues with a standardized formula:

No reward to companies who have good risk management No recognition different riskiness of different lines of business
RBC2 Highlights g g
Proposal 9: MAS proposes to allow a part of the negative reserves to be recognised as a form of positive financial resource adjustment j ( (FRA) ) under Financial Resources. MAS will consult further on the amount to be recognised.
On Balance Sheet Negative Reserve in the policy liabilities Market consistent, economic value of the business Taxes???
Off Balance Sheet Negative reserves as positive FRA Negative reserve not reflected in economic value of the business No tax consequences q
RBC2 Highlights g g
Proposals 11 & 12: Prescribed Capital Requirement (PCR) is the higher supervisory intervention level which corresponds p to a VaR of 99.5%. Minimum Capital p Requirement (MCR) is the lower supervisory intervention level which corresponds to a VaR of 90%. Both have to b maintained be i t i d at tb both th th the company l level, l as well ll as at t an insurance fund level. PCR for company level only?
Excessive if fund level
MCR for fund level only?
RBC2 Highlights g g
Explicit charge for spread risk No explicit charge for liquidity risk
Taken care of via stress testing
Explicit charge for cat risk

Man-made, , natural and pandemic p
Focus on ERM and ORSA Implementation p date: 31 December 2013

Pushed back to 1/1/2015
FINANCIAL ADVISORY INDUSTRY REVIEW FAIR
Background g
Speech to the LIA in March 2012 Changing environment:
%age of Total Assets
18 16 14 12 10 8 6 4 2 0 Life Insurance Financial Investments 0 2000 2011 0 5 10 15 Singapore Asia Pacific Global 20
Feel ready for retirement?

25
http://www.mas.gov.sg/News-and-Publications/Monetary-Policy-Statements-and-Speeches/2012/Financial-AdvisoryServices-Putting-the-Customer-First.aspx Nielsen Company Global Ageing Report (February 2011)
Objectives j
Five Key Thrusts of FAIR: 1. Raise the competence of financial advisory representatives 2. Raise the quality of financial advisory firms 3. Make financial advice a dedicated service 4. Lower distribution costs of insurance products 5 Promote 5. P t a culture lt of f fair f i dealing d li Objectives: 1. Enhance the professional standing & competence of financial advisers 2. Create a more competitive & efficient system for the distribution of life insurance & investments
Protect & Benefit the Customer.
1. Raise the competence of financial advisory representatives

Product Knowledge:
New exam modules Pushback:
I only sell simple products why understand the complex Academic qualifications are enough
Raising R i i entry t requirements: i t

Currently is four GCE O level passes
2. Raise the quality of financial advisory firms

FA firms can be quite small
Doubling up of duties as representative / CEO / CFO / Compliance Officer
MAS will review the management expertise & financial resources of FA firms
Take this into account when admitting new FA firms
3. Make financial advice a dedicated service

Unregulated activities of FA reps
Activities with clear conflict:
Money lending Promoting junkets for casinos Selling real estate Marketing investment products which do not fall under Financial Advisers Act
3. Make financial advice a dedicated service

Role of Introducers
Introducers are paid a fee / % of commission to reach out to customers
FA activities in insurance broking firms

FAIR will review the scope Ensure expertise and compliance
4. Lower distribution costs of insurance products

Direct Sales of simple products
Why not internet sales for life insurance? Simple term
Commission based remuneration & distribution structure

Underlying inefficiencies FAIR will do a fundamental review Does current structure align representative & consumer? UK & Australia moving towards a fee-based model
4. Lower distribution costs of insurance products

Enhance transparency
Benefit illustrations show the TOTAL distribution cost
Not payout to the rep
Investment linked policies

Illustration not clear on split between protection & investment
5. Promote a culture of fair dealing

Board & Senior Management to set a strategy to achieve
Fair dealing outcomes Monitor its implementation p Train staff & reps Revenue targets must never be at the expense of treating customers t fairly f i l & honestly h tl
Enhance transparency of products

Product Highlights Sheet Customer Knowledge Assessment
Does the customer have relevant knowledge / experience to understand the risks in the products
Other Changes g
EAAC Resorts World, Singapore October 15 18, 2013
References
www www.mas.gov.sg mas gov sg / News and Publications / Consultation Papers / Closed http://www.mas.gov.sg/en/News-andhttp://www.mas.gov.sg/en/News and Publications/Consultation-Paper/2012/ConsultationPaper-on-Review-on-Risk-Based-Capital-Framework-ofInsurers-in-Singapore-RBC-2-Review.aspx
Th k you very much Thank hf for your attention. tt ti
Jill Hoffman President, Singapore Actuarial Society Deputy Managing Director & Head of Pricing Munich Re, Singapore JHoffman@MunichRe com JHoffman@MunichRe.com
2 2009 Mnchener Rckvers sicherungs-Gesellschaft 2009 Munich Reinsuran nce Company
Jim Oatman USA McKinsey & Company
Health Insurance Concurrent Session 3 Risk Adjustment in Health Insurance
Jim Oatman FSA, MAAA Senior Vice-President Vice President Advanced Analytics Health Revenue Solutions McKinsey & Company
Health Risk Adjustment j

Topics to be Discussed Today What is Risk Adjustment? History y of Risk Adjustment j Developing a System of Risk Adjustment Risk Adjustment Under the Affordable Care Act Impact of Risk Adjustment Under the Affordable Care Act Evaluation of Risk Adjustment Under the Affordable Care Act Questions
What is Risk Adjustment? j
Normalizing g the claims cost of a population based on each individuals health conditions, conditions age g and gender g
Purposes p of Risk Adjustment j

Adjust payments to bearers of risk so that: They are indifferent to health conditions, age and gender of their population They are incented to lower the cost of care for individuals in their population They are incented to improve the health of p p individuals in their population Underwriting and pre-existing condition exclusions are not necessary
What Risk Adjustment Does Not Do Adjust for cost differences among payors Eliminate cost of outliers Eliminate variations in intensity of treatment among health care providers Eliminate variations in cost within a condition or condition category Pay for outcomes Risk prediction
Typical Risk Adjustment Formula
Risk Adjustment Payment = B Benchmark h kC Cost t x Risk Adjustment j Factor x Geographic Cost Adjustment x Adjustment Adj t t Factor F t to t Balance B l to t 0
History of Risk Adjustment in USA Medicare DRG System Not really a risk adjustment system, but significant move away from paying based on volume of services Prospective payment system for hospital claims l i i introduced t d di in 1983 Changed g basis of p payment y from billed charges to diagnosis based groups No normalization
History of Risk Adjustment in USA Adjustment of physician capitation rates based on severity of illness Physicians being paid per member per month capitation complained their patients were older and sicker than average Payors P developed d l d adjustment dj t t process based on severity of illness
History of Risk Adjustment in USA Medicare Advantage Risk Adjustment Medicare Advantage plans were attracting younger and healthier populations than Medicare fee for service program System of adjusting payments to plans b based d on hi hierarchial hi l condition diti categories t i was developed and phased in Prospective system of risk adjustment
History of Risk Adjustment in USA Medicaid Risk Adjustment Many states adopted a risk adjustment program for managed medicaid plans Condition categories first developed based on drug claims, diagnosis codes added l t later
History of Risk Adjustment in USA Risk Adjustment Under Affordable Care Act 3 Rs 3 Programs:
Risk Adjustment - permanent for individual and small group, normalize risk among carriers Reinsurance 2014-2016 buffer individual market conversion to guaranteed issue 2016 stabilize rating Risk Corridors 2014 -2016 and financial results in individual and small group market as carriers implement exchanges and other reforms
Developing a Risk Adjustment System
Data Collection Condition Groupers Model Selection P Payment t Calculations C l l ti Payment y Process Transparency F d Abuse, Fraud, Ab G Gaming i
Data
Enrollment Data Product & Premium Data Physician Claims H Hospital it l Cl Claims i Pharmacy y Claims Coding: Diagnosis, Procedure, Revenue, HCPCS Place of Service HCPCS, Service, Specialty Billed, Allowed, Paid Charges
Modeling g
Methods: linear regression regression, generalized linear, quantile regression, neural networks etc. Validation: hold out sample, time period sample, permutation test Test T t criteria: it i R-squared, R d MAPE MAPE, RMSE RMSE, other statistical tests Concurrent vs. Prospective
Payment y Methodology gy
Centralized aggregation of data and funding, distributed data repositories Establish the normalized benchmark payment amount Collect input data from all participants Payment timing including payment j adjustments
Risk Mitigation g Under ACA
Risk Mitigation Under ACA - Reinsurance
Temporary 2014 2014-2016 2016 Individual market only Payment Targets $20 billion, $10b, $6b & $4b in 2014, $ , 2015 & 2016 Aproximately 13%, 8%, 5% of premium Attachment Att h t point: i t $60,000 $60 000 Cap: $250,000 Coinsurance: 80% in 2014 Funded by pmpm fee on all market segments
Risk Mitigation under ACA Risk Adjustment
Permanent small group & individual Concurrent, at state and segment level Payments based on state average premium j coefficients based on 15 sets of risk adjustment adults, children, infants for each of 5 different product types p yp 127 HCC payment categories, reduced to 100 by grouping & using same coefficients Infant risk adjustment based on severity and degree of premature birth
Risk Mitigation under ACA Risk Adjustment
Age and gender factors in addition to condition Approximately 20% of adults, 10% of children, 45% of fi infants f t h have a scored d & paid id condition diti Payments are made based on average gross premiums in a market, not expected claims y based on claims reported p in Concurrent system current year Effectively marks up claims by expected administration costs and profit built into premium
Impact p on margins g
Impact p on total value
Risk mitigation of high cost claimants
Reinsurance Population p
Operational p Implications p
Coding Provider Evaluation C Care M Management t Analytics y
Q Questions? ti ?
PREMIUM INCOME
bn euros
2.4
2005*
9.5
bn euros
2012 (estimated)
10 YEARS OF GROWTH
SHAREHOLDERS EQUITY
bn euros
0.6
2003*
4.7
bn euros
2012 (end of September)
Ten years ago, SCOR was confronted with extremely serious problems that threatened its very existence. The Group overcame them all. It recovered completely and went on to actively continue its expansion throughout the world. It has benetted from the staunch support of its shareholders, the exemplary loyalty of its clients and the unfailing commitment of all its teams. SCOR has become stronger throughout these past few years. The Group has seen rapid growth both organic and external, successfully integrating three companies. Ithas a recognised level of solvency its rating, which currently stands at A+, has been upgraded twice since the beginning of the crisis. It generates a high level of protability with the best total shareholder return amongst the major reinsurers since 2005. With its prudent underwriting and investment policy, SCOR has managed to absorb all the major natural and technological catastrophes, as well as the nancial problems, that have marked the past ten years. Having become the fth largest reinsurer in the world, SCORs ambitions are undiminished. More than ever, the Group is devoting itself to continuing its momentum, combining growth, protability and solvency, in the interests of its clients and to the benet of its shareholders. Denis KESSLER Chairman & Chief Executive Ofcer
BALANCE SHEET TOTAL
13.5
bn euros
32.4
bn euros
2004*
2012 (end of September)
MARKET CAPITALISATION
bn euros
0.3
2002*
3.9
bn euros
2012 (end of November)
RATING
A+
2003* 2012 (end of November)
BBB
SCOR TEAMS
1,176
employees
2,153
employees
2003*
2012 (end of October)
OVER
of operating cash ow generated since 2005

(until the end of September 2012)
3.5 BILLION EUROS
Access the latest SCOR nancial information on your iPad
OVER
of dividends paid between 2005 and 2011
1 BILLION EUROS
> www.scor.com
Base year corresponding to the lowest point from 2002 onwards.
AP_Scor_India_7.25x10.5_UK.indd 1
25/01/13 17:52
Frank Ashe Australia
S4: Behavioural Economics: Biases and their impact on Judgement Frank Ashe Applied Finance Centre Centre, Macquarie University Independent Consultant

Biases affecting judgements

Decision-making, belief and behavioral biases Many of these biases affect belief formation, business and economic decisions, and human behavior in general. They arise as a replicable result to a specific condition: when confronted with a specific situation, the deviation from what is normatively expected can be characterized by: Ambiguity effect the tendency to avoid options for which missing information makes the probability seem "unknown."[8] Anchoring or focalism the tendency to rely too heavily, or "anchor," on a past reference or on one trait or piece of information when making decisions. Attentional bias the tendency to pay attention to emotionally dominant stimuli in one's environment and to neglect relevant data, when making judgments of a correlation or association. Availability heuristic the tendency to overestimate the likelihood of events with greater "availability" in memory, which can be influenced by how recent the memories are, or how unusual or emotionally charged they may be. Availability cascade a self-reinforcing process in which a collective belief gains more and more plausibility through its increasing repetition in public discourse (or "repeat something long enough and it will become true"). Backfire effect when people react to disconfirming evidence by strengthening their beliefs.[9] Bandwagon effect the tendency to do (or believe) things because many other people do (or believe) the same. Related to groupthink and herd behavior. Base rate fallacy or base rate neglect the tendency to base judgments on specifics, ignoring general statistical information.[10] Belief bias an effect where someone's evaluation of the logical strength of an argument is biased by the believability of the conclusion.[11] Bias blind spot the tendency to see oneself as less biased than other people, or to be able to identify more cognitive biases in others than in oneself.[12] Choice-supportive bias the tendency to remember one's choices as better than they actually were.[13] Clustering illusion the tendency to over-expect small runs, streaks or clusters in large samples of random data Confirmation bias the tendency to search for or interpret information or memories in a way that confirms one's preconceptions.[14] Congruence bias the tendency to test hypotheses exclusively through direct testing, instead of testing possible alternative hypotheses. Conjunction fallacy the tendency to assume that specific conditions are more probable than general ones.[15] Conservatism or regressive bias tendency to underestimate high values and high likelihoods/probabilities/frequencies and overestimate low ones. Based on the observed evidence, estimates are not extreme enough[16][17][18] Conservatism (Bayesian) the tendency to revise belief insufficiently when presented with new evidence (estimates of conditional probabilities are conservative)[16][19][20] Contrast effect the enhancement or diminishing of a weight or other measurement when compared with a recently observed contrasting object.[21] Curse of knowledge when knowledge of a topic diminishes one's ability to think about it from a less less-informed informed perspective perspective. Decoy effect preferences change when there is a third option that is asymmetrically dominated Denomination effect the tendency to spend more money when it is denominated in small amounts (e.g. coins) rather than large amounts (e.g. bills).[22] Distinction bias the tendency to view two options as more dissimilar when evaluating them simultaneously than when evaluating them separately.[23] Duration neglect the neglect of the duration of an episode in determining its value Empathy gap the tendency to underestimate the influence or strength of feelings, in either oneself or others. Endowment effect the fact that people often demand much more to give up an object than they would be willing to pay to acquire it.[24] Essentialism categorizing people and things according to their essential nature, in spite of variations.[25] Exaggerated expectation based on the estimates, real-world evidence turns out to be less extreme than our expectations (conditionally inverse of the conservatism bias).[16][26] Experimenter's p or expectation p bias the tendency y for experimenters p to believe, , certify, y, and publish p data that agree g with their expectations p for the outcome of an experiment, p , and to disbelieve, , discard, , or downgrade g the corresponding p g weightings g g for data that appear pp to conflict with those expectations.[27] False-consensus effect - the tendency of a person to overestimate how much other people agree with him or her. Functional fixedness - limits a person to using an object only in the way it is traditionally used Focusing effect the tendency to place too much importance on one aspect of an event; causes error in accurately predicting the utility of a future outcome.[28] Forer effect or Barnum effect the observation that individuals will give high accuracy ratings to descriptions of their personality that supposedly are tailored specifically for them, but are in fact vague and general enough to apply to a wide range of people. This effect can provide a partial explanation for the widespread acceptance of some beliefs and practices, such as astrology, fortune telling, graphology, and some types of personality tests. Framing effect drawing different conclusions from the same information, depending on how or by whom that information is presented. Frequency illusion the illusion in which a word, a name or other thing that has recently come to one's attention suddenly appears "everywhere" with improbable frequency (see also recency illusion).[29] Gambler's fallacy the tendency to think that future probabilities are altered by past events, when in reality they are unchanged. Results from an erroneous conceptualization of the law of large numbers. For example, "I've flipped heads with this coin five times consecutively, so the chance of tails coming out on the sixth flip is much greater than heads. heads " Hard-easy effect Based on a specific level of task difficulty, the confidence in judgments is too conservative and not extreme enough[16][30][31][32] Hindsight bias sometimes called the "I-knew-it-all-along" effect, the tendency to see past events as being predictable[33] at the time those events happened. Colloquially referred to as "Hindsight is 20/20". Hostile media effect the tendency to see a media report as being biased, owing to one's own strong partisan views. Hot-hand fallacy - The "hot-hand fallacy" (also known as the "hot hand phenomenon" or "hot hand") is the fallacious belief that a person who has experienced success has a greater chance of further success in additional attempts Hyperbolic discounting the tendency for people to have a stronger preference for more immediate payoffs relative to later payoffs, where the tendency increases the closer to the present both payoffs are.[34] Illusion of control the tendency to overestimate one's degree of influence over other external events.[35] Illusion of validity when consistent but predictively weak data leads to confident predictions Illusory correlation inaccurately perceiving a relationship between two unrelated events.[36][37] Impact bias the tendency to overestimate the length or the intensity of the impact of future feeling states.[38] Information bias the tendency to seek information even when it cannot affect action.[39] Insensitivity to sample size the tendency to under-expect variation in small samples Irrational escalation the phenomenon where people justify increased investment in a decision, based on the cumulative prior investment, despite new evidence suggesting that the decision was probably wrong. Just-world hypothesis the tendency for people to want to believe that the world is fundamentally just, causing them to rationalize an otherwise inexplicable injustice as deserved by the victim(s). Less-is-better effect a preference reversal where a dominated smaller set is preferred to a larger set Loss aversion "the disutility of giving up an object is greater than the utility associated with acquiring it".[40] (see also Sunk cost effects and endowment effect). Ludic fallacy - the misuse of games to model real-life situations. Mere exposure effect the tendency to express undue liking for things merely because of familiarity with them.[41]
More biases
Money illusion the tendency to concentrate on the nominal (face value) of money rather than its value in terms of purchasing power.[42] Moral credential effect the tendency of a track record of non-prejudice to increase subsequent prejudice. Negativity bias the tendency to pay more attention and give more weight to negative than positive experiences or other kinds of information information. Neglect of probability the tendency to completely disregard probability when making a decision under uncertainty.[43] Nonsense math effect - the tendency to judge information containing equations higher regardless the quality of them. [44] Normalcy bias the refusal to plan for, or react to, a disaster which has never happened before. Observer-expectancy effect when a researcher expects a given result and therefore unconsciously manipulates an experiment or misinterprets data in order to find it (see also subject-expectancy effect). Omission bias the tendency to judge harmful actions as worse, or less moral, than equally harmful omissions (inactions).[45] Optimism bias the tendency to be over-optimistic, overestimating favorable and pleasing outcomes (see also wishful thinking, valence effect, positive outcome bias).[46][47] Ostrich effect ignoring an obvious (negative) situation. Outcome bias the tendency to judge a decision by its eventual outcome instead of based on the quality of the decision at the time it was made. questions. For example, p for certain types yp of q questions, answers that p people p rate as "99% certain" turn out to be wrong g 40% of the time.[16][48][49][50] Overconfidence effect excessive confidence in one's own answers to q Pareidolia a vague and random stimulus (often an image or sound) is perceived as significant, e.g., seeing images of animals or faces in clouds, the man in the moon, and hearing non-existent hidden messages on records played in reverse. Pessimism bias the tendency for some people, especially those suffering from depression, to overestimate the likelihood of negative things happening to them. Planning fallacy the tendency to underestimate task-completion times.[38] Post-purchase rationalization the tendency to persuade oneself through rational argument that a purchase was a good value. Pro-innovation bias the tendency to reflect a personal bias towards an invention/innovation, while often failing to identify limitations and weaknesses or address the possibility of failure. Pseudocertainty effect the tendency to make risk-averse choices if the expected outcome is positive, but make risk-seeking choices to avoid negative outcomes.[51] Reactance the urge to do the opposite of what someone wants you to do out of a need to resist a perceived attempt to constrain your freedom of choice (see also Reverse psychology). Reactive devaluation devaluing proposals that are no longer hypothetical or purportedly originated with an adversary. Recency bias a cognitive bias that results from disproportionate salience attributed to recent stimuli or observations the tendency to weigh recent events more than earlier events (see also peak-end rule, recency effect). Recency illusion the illusion that a phenomenon, typically a word or language usage, that one has just begun to notice is a recent innovation (see also frequency illusion). Restraint bias the tendency to overestimate one's ability to show restraint in the face of temptation. Rhyme as reason effect rhyming statements are perceived as more truthful. A famous example being used in the O.J Simpson trial with the defenses use of the phrase "If the gloves don't fit then you must acquit." Risk compensation / Peltzman effect the tendency to take greater risks when perceived safety increases. Selective perception the tendency for expectations to affect perception. Semmelweis reflex the tendency to reject new evidence that contradicts a paradigm.[52] Selection bias - the distortion of a statistical analysis, resulting from the method of collecting samples. If the selection bias is not taken into account then certain conclusions drawn may be wrong. Social comparison bias the tendency, when making hiring decisions, to favour potential candidates who don't compete with one's own particular strengths.[53] Social desirability bias - the tendency to over-report socially desirable characteristics or behaviours and under-report socially undesirable characteristics or behaviours.[54] ][ ] Status quo bias the tendency to like things to stay relatively the same (see also loss aversion aversion, endowment effect effect, and system justification) justification).[[55][56] Stereotyping expecting a member of a group to have certain characteristics without having actual information about that individual. Subadditivity effect the tendency to estimate that the likelihood of an event is less than the sum of its (more than two) mutually exclusive components.[57] Subjective validation perception that something is true if a subject's belief demands it to be true. Also assigns perceived connections between coincidences. Survivorship bias - concentrating on the people or things that "survived" some process and inadvertently overlooking those that didn't because of their lack of visibility. Texas sharpshooter fallacy - pieces of information that have no relationship to one another are called out for their similarities, and that similarity is used for claiming the existence of a pattern. Time-saving bias underestimations of the time that could be saved (or lost) when increasing (or decreasing) from a relatively low speed and overestimations of the time that could be saved (or lost) when increasing (or decreasing) from a relatively high speed. Unit bias the tendency to want to finish a given unit of a task or an item. Strong effects on the consumption of food in particular.[58] Well travelled road effect underestimation of the duration taken to traverse oft-traveled routes and overestimation of the duration taken to traverse less familiar routes. Zero-risk bias preference for reducing a small risk to zero over a greater reduction in a larger risk. Zero-sum heuristic Intuitively judging a situation to be zero-sum (i.e., that gains and losses are correlated). Derives from the zero-sum game in game theory, where wins and losses sum to zero.[59][60] The frequency with which this bias occurs may be related to the social dominance orientation personality factor.
Source: Wikipedia: List of biases in judgment and decision

making
Factors to be discussed
Controlled and automatic brain processes Culture Beliefs T t and Trust d trustworthiness, t t thi fairness f i Ambiguity g y and disgust g
Controlled and Automatic

Controlled
Serial, invoked deliberately when surprised or challenged, subjective feeling of effort, can be described
Automatic
Parallel, Parallel not accessible to consciousness, effortless
Kahneman Thinking Fast and Slow calls these System 2 and System 1 respectively
Controlled & Automatic (ii) ( )

Automatic in top top, side and back (old brain) and body
Automatic processes are fast Emotions are important p automatic p processes
Controlled in frontal brain (new brain)

Controlled C t ll d processes ( (slow) l ) can often ft misinterpret why automatic response was what h t it was
Policy y and culture

Policy needs to be driven by the controlled brain processes
Rational outcomes, consistent over time Slow, , deliberative, , effortful
Culture drives most decision making

Automatic, A t ti easy, fast f t Inconsistent decisions
Policy y and Culture (ii) ( )

Education can sometimes make a controlled process become automatic
This can be a cultural change Commonly y used in Singapore g p Long, slow mechanism
What is Culture?
The way we do things 'round round here
Too simple, but effective
Beware of The Fallacy of Composition

Families, societies and organisations are different from the sum of the individuals What is good for, or what can be done by, a component of a composite may not be good for or be able to be done by the composite p
Culture governs what is perceived at organisational level

What does a group respond to?
Speed of perception and speed of response
What does a group actively look for?

What does a group believe is out there?
9
Beliefs
The creation and use of our minds mind s model (view) of the world is an automatic process
We believe world has a particular structure
Perception of the world is governed by our model

Almost Al t always l we only l see things thi consistent i t t with our model Facts that are ambiguous or inconsistent with our views will be interpreted/twisted to be consistent
10
Beliefs (ii) ( )
If evidence is needed for our view we look for confirming evidence
Confirmation bias
Changing somebodys somebody s beliefs involves much emotional turmoil

Resisted R i t d strongly t l
Macroeconomics (example) ( p )
Model of the economy is a belief for many people
Politicians, senior bureaucrats, commentariat
Explains austerity thinking in North Atlantic countries Belief B li f h heuristics i ti are strong t The GFC has caused a reappraisal pp of neoclassical economic model that most people have
12
Trust and fairness

Trust and trustworthiness trustworthiness, and the concept of fairness seem to be important for exchange economies
See capuchin p and chimpanzee p studies ( (de Waal), oxytocin effects (Fehr), punishment for unfair behaviour (various) ( )
Can the industry demonstrate sufficient trustworthiness?

Does a mutual have subconscious advantages d over a public bli company? ?
13
Disgust g
People react to the subconscious emotions of disgust:
that they experience when they see that they've made a loss, and also associated with the uncertain risks (in contrast to known risks) ) that are around now
These subconscious emotions make us recoil from the thing that raised the emotions
Why is ambiguity aversion so strong?
Stochasticity vs ambiguity
Known vs unknown randomness
Known or familiar risks generate:

Fear, Fear excitement
Unknown risks, ambiguous risks generate:

Disgust, fear Disgust g is stronger g than p pain Remove source of disgust before pain Physical disgust generated by sources of infection 15
Conclusion
This is too short an exposition to have conclusions A deeper recognition of behavioural biases, and how deeply they are embedded b dd d i in us all, ll needs d t to b be maintained at all levels of a company
16
Questions and comments
17
John Holden Chief Executive Officer
Distribution Risk kAssessment S i i Servicing TheBig BigIdeas Ideas Challenges
Data
DigitalImpact
Enableanalyticsforclaims,lapses,salesquality Geographynolongerdependantontransmissionof physicaldocuments Automateanddelegateservicing
Customer;distributor;thirdparty
DigitalImpact
Wordofwebtoinfluence
Relatively R l i l trusted d Leavesconsumerincontrol
Reachandspeedofsocialmedia
Weallliveinglasshouses!
Consumerdigital=handheld
Suppo ortActi ivities
Ac ctuarial l Op peration ns Procurement Inv vestmen nt Man nageme ent Marketing&Sales Service e
Finance
HumanResourceManagement
TechnologyDevelopment
PrimaryActivities
Challenges TheToDoList
Abandonwhatbroughtyouthisfar Howtogiveadviceandgetfairlyrewardedforit KYC AML Simplicitynotcomplexity
Challenges TheToDoList
Managingyourreputationincyberspace Choosingwhattokeepandwhattooutsource Managingoutsourcedprovidersandprocesses Enablingprudentregulationfromregulators
John Holden Chief Executive Officer
A clear perspective
At Towers Watson, our focus is on helping you gain clarity to make the right decisions.
Our approach is grounded in our deep experience working on a wide range of people, risk and financial issues. And our perspective begins at eye level with a clear understanding of your organization, the way you work, your goals and your challenges. By connecting the big picture and your picture, we help you achieve real-world results. Towers Watson. A global company with a singular focus on our clients.
Benefits Risk and Financial Services Talent and Rewards towerswatson.com
S8-Predictive Analytics
Darryl Wagner, FSA, MAAA Principal, Deloitte Consulting
Agenda
Introduction and Background Predictive Analytics and Insurance Examples of Predictive Analytics Applications Making Predictive Analytics a Reality
Introduction and Background
Why Predictive Analytics?

Organizations of all kinds are eagerly seeking new ways to leverage the large and ever-growing stores of high-quality data now available. Businesses and disciplines that rely heavily on data analytics include marketing, health care, finance and resources management. But industries of nearly every type are coming to appreciate the central role played by data analytics in effective decision-making at the highest organizational levels.1 Recent Business Publications
Data , data, everywhere A special report on managing information, February 27th, 2010
"Inside Deloitte's Life-Insurance Assessment Technology," November 19, 2010
Insurers Test Data Profiles to Identify Risky Clients, November 19 th, 2010 Report on Insurance, "Driving Operational Excellence in Claims Management," February 21, 2011 Data has long been realized to provide value. Predictive Analytics allows a company to harness this value to make more informed decisions
1 Northwestern Universitys Master of Science in Predictive Analytics, http://www.predictive-analytics.northwestern.edu/
Why Predictive Analytics?

Predictive Analytics involves the use of modern data mining, pattern matching, data visualization and modeling tools to produce analyses and algorithms that help businesses make better decisions. With this foresight, analytics can help determine which events may have the most impact on Genworth. Predictive Analytics has come into its own, both because of the findings of cognitive science and behavioral economics, and also because of a recent and rapid proliferation of huge databases, cheap computing power, and advances in data acquisition, aggregation, visualization, applied statistics and machine learning techniques. Notable factors include the following: The Data Deluge We now gather, store and transmit unimaginable quantities of data each day. The problem, as anyone facing an inbox full of email well knows, is that evaluating and responding to more information requires that scarcest of resources time and attention. Analytics is increasingly regarded as a necessity to focus decision-makers attention on the meaningful insights hidden in the depths of oceans of data. Algorithms and Software Increasingly powerful tools and methods for analyzing data and providing better insights are being discovered and promulgated at an unprecedented rate. Increased Awareness Farsighted leaders in a variety of domains are increasingly aware of the competitive and operational advantages that analytics can bring.
Many insurers may be missing the opportunity to enhance profits and drive value through Predictive Analytics, and those who explore these capabilities could gain a competitive advantage
Beyond Insurance
Business applications for predictive analytics cut across a broad spectrum of industries. Banks have used credit scores (FICO) to segment creditworthy from noncreditworthy borrowers the process of offering/pricing loans was transformed Progressive insurance pioneered the application of credit scores to pricing auto insurance Capital One runs 1000s of marketing experiments per year, testing the effectiveness of different combinations of interest rates, marketing channel, and incentives Predictive models are used to predict the price of different wine vintages based on variables about the growing season Decision tree models are used to help ER doctors better triage patients complaining of chest pain Harrahs casinos predicts the walk-away pain point for each player to strategically deploy luck ambassadors bearing gift certificates for dinner and drinks Health plans are using lifestyle data and behavioral modeling to identify those members who are most willing to change
Predictive Analytics and Insurance
Insurance is founded on data
Insurance industry contains large amount of data and is ideal for data mining and predictive modeling applications. Information age provides a wealth of external/3rd party data sources.
The Strategic Use of Predictive Analytics in Insurance
Underwriting Model Lift Curve (Hypothetical)
Like baseball, insurance is a numbers game.

Both fields are awash in data and a lot of money is at stake!
Percent Declined
80%
70%
60%
As with baseball, so in insurance: All of this data until fairly recently has not been used in strategic ways. Life insurance example: Models can be built to assign probabilities of (e.g.) being declined or (e.g.) being assigned to the best underwriting class based on readily available data.
50%
40%
30%
20%
10%
0%
10
Model Decile (Predicted Value)

80%
Strategic application: data-driven underwriting

Percent Declined
70%
60%
Models estimate the probabilities that a risk will fall into the best / worst underwriting classes. In this hypothetical example
Worst 10% of risks have a >70% decline rate
50%
40%
30%
20%
10%
0%
10

80%
Strategic application: data-driven underwriting

Percent Declined
70%
60%
Models estimate the probabilities that a risk will fall into the best / worst underwriting classes. In this hypothetical example
Worst 10% of risks have a >70% decline rate Best 10% of risks have <5% decline rate
50%
40%
30%
20%
10%
0%
10
Conceptual Overview and Potential Business Value
Predictive analytics or the process of using a variety of statistical techniques from modeling, data mining, and game theory to analyze current and historical facts to make predictions, as well as assess risks and opportunities, about future events. Predictive analytics are now being used in a wide variety of fields such as healthcare, pharmaceuticals, financial services, insurance, and telecommunications.1
Innovative Data Sources Segmentation Business Value
Agent Recruitment & Retention
Analytic rigor applied to subjective process Rules based candidate prioritization Expanded, diversified recruiting pool
Traditional internal data sources
Non-traditional external individual or household-level data sources

Consumer Data Financial Data Deloitte Disease States Lifestyle Data
Algorithmic Solution Data aggregation and data cleansing
Marketing Campaigns (Target Marketing, Lead Generation)

Segmentation beyond traditional likely to buy Eliminate those who are not likely to qualify Application Triage Eliminate time-consuming and physically invasive tests for certain applicants Streamline application review process Improve ease of doing business
Application Data
Evaluate and create variables
Customer History
In-force Management (Customer Retention, CrossSell and Up-Sell Programs)

Identify compounding components of at risk-customers Develop, deploy data driven intervention strategies Improved mortality by focusing retention efforts on best risks
Medical Data
Household Data
Develop analytical solutions
Claims Management
Streamlined claims adjudication / fraud detection process Understand exposure and identify improvement opportunities
Non-traditional data unlock new insights into customer and employee populations
Score individual profiles
Member Lifetime Value

Deeper understanding of the lifetime value of customers Develop an aggregate present value of future profits for all customers across all product lines
1 University of California, Predictive Analytics Center of Excellence, http://ucsdnews.ucsd.edu/pressreleases/sdsc_announces_center_of_excellence_for_ predictive_analytics/
Overview of Business Applications Across Insurance Policy Lifecycle
Predictive Analytics Enabled applications span the entire insurance policy lifecycle.
Simplified Insurance Lifecycle
Obtain Agent / Retain Recruitment Sales / Retention Force Design & Develop Products Marketing Campaigns Assess Client Needs / Illustrate Submit & Process Application Underwriting Requirement In-Force Management Claims Management
Agent Recruitment / Retention

Improve efficiency of Agent recruiting Improve effectiveness of Agent retention
Target Market / Lead Generation / Cross-Sell / Up-Sell

New - Likely to Qualify Potentially much better segmentation
Application Triage
Risk segmentation Streamline app review process Speed to issue for healthiest lives
In-Force Management
Health risk evaluation Efficient use of resources / budge Better understand where pro active programs effective
Claims Management
Improve exposure analysis Fraud detection tool and expedited adjudication
Possible Data for Life Insurance Algorithms

An insurance-based Algorithmic Solution approach starts with all of the traditional data that can be captured within the first 48 hours. This information can then generally be supplemented1 with a variety of external datasets. This approach can assist in segmenting those who may otherwise appear indistinguishable from one another.
Data category Application Basic demographics Medical history Family history Paramedical examination Fluids Height/weight Other medical/interview Telephone interview APS/medical records Treadmill Test EKG MIB (Medical Information Board data) Rx (prescription data) Driving record (MVR) Traffic conviction history Auto accident history Existing policy data 3rd party data l l l l l l ? l l l l l l l l l l l l l l l l l l Traditional Underwriting New Business Application Triage Target Marketing / CrossSelling Applications
1 Timing depends on MVR delivery (slower in some states) and arrangements with third-party data providers
Examples of Predictive Analytics Applications
Algorithmic Solutions Broader Business Applications

Agent Recruitment and Retention
An additional high-value area where Predictive Analytics might provide competitive advantage is in the area of recruiting and retaining and agents.
Agent Recruitment / Retention Design & Develop Products Marketing Campaigns Assess Client Needs / Illustrate Submit & Process Application Underwriting Requirement In-force Management Claims Management
Agent Analysis
Chance of longer term agent success
Illustrative Results
Lower Scoring Sales Force 40% Higher Scoring Sales Force 60%
2.5 X more likely to meet companys definition of a Successful Agent
The analysis can be based upon internally available information:

Not-in-Good-Order Field Underwriting Business Quality Requirements Turnaround Call Center Questions / Calls Cycle Times Sales Patterns
ILLUSTRATIVE
Benefits Rules based candidate prioritization Expand and diversify recruiting pool Retention indicators
Algorithms score weighted factors and can provide ongoing monitoring for at-risk producers and enable more targeted coaching / assistance Ironically, the most common obstacle is the failure to methodically capture key data
< 20% chance of meeting companys definition of a Successful Agent
Pop. Avg.
Low Score
High Score
Broaden Your Exposure - Agent Success Segmentation
There have been several types of models that approximate agent success. Career focused models have been developed models that look at a prospects propensity to become a successful agent, whereas independent channels models have identified those independent agents who are most likely to generate product specific revenue streams. Lower Scoring Top Scoring Candidates 70% Candidates 30% The model scores individuals from 1 to 10 with 1 being the lest likely to resemble a successful agent and 10 being the most likely. The model is then tested on a validation set of data and the results are presented in a lift curve as shown below. Candidates in the first couple of deciles have less than a 20% chance of becoming successful agents Candidates in the best deciles have almost a 60% chance of being successful.
Chance of becoming a successful agent
2.5X More Likely to be a Successful Agent
Less than 20% Chance of Becoming a Successful Agent Pop. Ave.
Low Score
High Score
Algorithmic Solutions Broader Business Applications Marketing Campaigns Target Marketing, Lead Generation, Cross-Sell, Up-Sell
Predictive Analytics can also provide opportunities to more efficiently and effectively target solutions to consumers and customers. Using Likely to Buy in tandem with Likely to Qualify (new to the market) not only helps you segment those who are likely to buy a policy, but are also likely to qualify for that policy.
Agent Recruitment / Retention Design & Develop Products Marketing Campaigns Assess Client Needs / Illustrate Submit & Process Application Underwriting Requirement In-force Management Claims Management
Benefits Deeper segmentation of consumers and customers More cost effective and productive marketing campaigns Better agent and customer experience
Predictive model helps to focus marketing effort
If there is no application data or signature authority to obtain MIB or MVR, a health risk based model using only marketing data can be constructed to identify individuals who would likely be declined through traditional underwriting, to identify the best mortality risks, and to identify segments of the population well suited to a particular product or type of underwriting.
Cross marketing models help to estimate the likelihood of application acceptance

Typically, nothing is known about health status before an applicant applies and is underwritten. However, a marketing model can provide an advanced look to help allocate marketing resources. As the graph shows, declined and rated cases are much more likely to score poorly in the model. Results shown are for a client who is building this into their cross marketing to sell life insurance products to annuity customers.
Algorithmic Solutions Broader Business Applications Why Consider Application Triage?

Todays discussion will focus primarily on benefits of Predictive Analytics enabled Application Triage, as well as requirements to leverage Predictive Analytics for process improvement.
Obtain Agent / Retain Recruitment Sales / Retention Force Design & Develop Products Market to / Marketing Identify Campaigns Clients Assess Assess Client Client Needs Needs / Illustrate / Illustrate Submit Submit & Process Process Application Application Underwriting Underwrite Requirement Risk In-Force Management Claims Process Managemen Claims & t Disburse
Predictive Analytics Enabled Application Triage Process

ILLUSTRATIVE
Application completed
Expedited
Medical tests not required Policy issued Processing time several days
Benefits Eliminate timeconsuming, expensive and physically invasive tests for certain applicants Streamline application review process Improve ease of doing business
Tele-Interview completed if required)
Algorithm Raw Score
Insurers Underwriting Rules
Additional Data Sources:

MVR MIB 3rd Party Marketing Rx
Traditional
Obtain and analyze medical test results Policy issued or denied Processing time several weeks
An underwriting model can reasonably replicate results
An underwriting model using application data, MIB data, motor vehicle and third party data can reasonably match fully underwritten pricing mortality assumptions for a significant portion of the business - including the preferred class. The graph shows actual results for a recent engagement. When business rules are added, results are often improved.
Algorithmic Solutions Broader Business Applications In-Force Management

Some companies could enhance the management of their substantial in-force block, where Predictive Analytics are typically focused on business losses and lapses rather than actually improving the business.
Agent Recruitment / Retention Design & Develop Products Marketing Campaigns Assess Client Needs / Illustrate Submit & Process Application Underwriting Requirement Manage and In-force Service InManagement force In-force Management
Inforce business
Algorithm Score Likely to Lapse
Benefits Identify compounding components of at riskcustomers Develop, deploy data driven pro-active intervention strategies Improved mortality by focusing retention efforts on best risks
Nontraditional data appended
Low Score High Score
High Score
Focus retention rerouces on the most qualified customers most likely to lapse
Continue current retention processes
Health Risk
Algorithm Score
Low Score
Continue current retention processes
Spend fewer retention resources where they will have the least effect
Targeting retention effort help to reduce lapse rates
Our modeling efforts have proven quite successful in predicting likelihood of surrender/lapse. The 10% of the population with the lowest model scores are nine times more likely to surrender than the 10% who score the highest. Customer retention efforts should focus on retaining customers who are most likely to lapse.
Algorithmic Solutions Broader Business Applications Claims Management

Predictive Analytics will provide granular insight into key performance indicators for the Claims business enabling management to more efficiently meet the businesss strategic objectives..
Agent Recruitment / Retention Design & Develop Products Marketing Campaigns Assess Client Needs / Illustrate Submit & Process Application Underwriting Requirement In-Force Management Claims Management
Executive
Strategic
Strategy Set of initiatives and activities, guided by vision and values, which aims to provide the enterprise with a competitive advantage Objectives A set of targets derived from overall strategy, which can be tracked and monitored via Key Performance Indicators Key Performance Indicators Comprised of relevant measures and metrics, and should be linked to factors needed for success. For example: Claims Severity by Product and Coverage., Loss Type, Claims Stage.
Loss
Understand exposure levels and identify opportunities to propose strategies for future claim handling Determine whether recovery levels and claims investigation experiences are consistent with targets & expectations Identify potential operational issues / risks (based on type, frequency and size of fines/penalties, e.g. vendor contract and cost management to inform sourcing strategies) Determine consistency of work quality vs. targets and expectations and identify potential risk areas that should be identified for remediation Understand overall claim volumes and identify potential issues that may cause the quality of adjusting process to deteriorate
Financial
Benefits
Management
Fraud & Recoveries
Analytical
Streamline claims adjudication / fraud detection process Expose and identify improvement opportunities
Fees
Metrics The actual performance measured by quantitative data For example: Reported Claim Count, Closed Claim Count, Change in Reserves
Transactional
Operational
Operational
Quality
Claim Volume
Algorithmic Solutions Broader Business Applications Potential LTC Application

For LTC insurance, we envision that Predictive Analytics will be used to better understand both the likelihood of developing certain cognitive or physical impairments that would incur LTC claims, as well as to model whether a policy holder is likely to have higher or lower than average claims costs in the event they do experience a claim. Based on these advance analytics the insurer can determine courses of action for different groups of applicants. Example of Process
Data Sources:
Completed Application Claim Costs by Impairment
ILLUSTRATIVE
High Expected Cost

Decline coverage Impose limitations on coverage (i.e. cap benefit payout or duration) Charge higher rates Create substandard class
Telephone/Live Interview Predictive Algorithm: Impairment Distribution
Severity Algorithm
MVR
Modeled Claim Cost
Average Expected Cost

Current New Business Process is unchanged
MIB
Incidence Algorithm
Predictive Algorithm: Claim Cost
Low Expected Cost

Aggressive marketing plan Offer lower rates or additional preferred classes to applicants
3rd Party Lifestyle Data
Rx Database
Making Predictive Analytics a Reality
What capabilities are required in order to deliver these analytic-driven improvements?
Provide the ability to pull and integrate data from multiple, disparate systems. Data and technology Never assume that data is correct. Ensure that all data sets have the integrity and quality required before running analysis. Design adequate databases/data cubes to improve the outcomes/ findings of the analysis. Provide the ability to analyze and integrate external data, both qualitative as well as quantitative. Apply multiple analytic tools on the same issue in order to triangulate in on the real issue. Analytics and process Never talk or analyze in averages real benefits can only be realized by dealing at the most granular level. Aggregate measures hide variance. Prioritize the implementation of improvement opportunities by value the realization of tangible benefits early on is the most effective way to obtain buy in. Strong executive sponsors that can drive cooperation and build consensus across stakeholders groups with conflicting interest (e.g. finance and sales). Involve resources who are experienced not only in the analytic techniques, but also in the business. Recognize that your results will often be counter-intuitive to your audience, and that you will be fundamentally challenging years of accumulated conventional wisdom.
People and organization
The success of an predictive analytics initiative will depend on your ability to anticipate and manage the typical challenges at every stage of the process
Building infrastructure
Conducting analysis
Driving adoption Test your results against the most conservative scenarios. Do not present analyses to executives that have not been validated with the owners. Be absolutely certain of the analysis. One small error anywhere calls into question the whole initiative. Your results will be challenged be prepared to respond.
Do not accept data at face Do not rely on analytic insight value. Explore what is supposed only business insight is to be in the data field versus required. what is actually in the data field. Expect technical challenges Avoid multiple versions of the databases crash, people make truth one source of data is mistakes. Plan for them. critical Do not take outliers at face When buying analytic capacity, value they are often double or triple your expected anomalies or mistakes. capacity and speed requirements. Do not implement improvement opportunities without base-lining current performance.
Implementing predictive analytics is not a big bang. Develop capabilities over time and customize them to your needs
Philosophy Adopt a crawl, walk, run approach Value first Technology second Transfer knowledge and capabilities Allow for adjustments to plan and resourcing with minor disruption Enable executive go/no-go decision points
Rationale Achieving analytics excellence requires focusing on each major process separately. Addressing the entire process will delay results and could lead to poor implementation decisions. Relentlessly focusing on margin improvements prevents the program from being a only technology driven. Value is delivered through operational and decision-making improvements not a new platform. Maximizing the value of you advanced analytics investments requires adequate knowledge transfer to build strong in-house capabilities to use analytics in a repeatable and sustainable way. Program needs to be flexible to meet unexpected changes in the business and priorities. Investments are made based on prior success. Limits downside of the business case. Executive interactions are more frequent and ensures a focus on value.
Skill set needed for an predictive analytics project

Skill Set Statistical Actuarial and insurance Programming IT system administration Project management Expert level, beyond college/actuarial exams Subject matter expertise in the industry Need scalable software, computing environment Data extraction, data load, model implementation Critical due to scope and multi-disciplinary nature of the project
Data analytics is a natural extension of traditional actuarial capability, but more than traditional actuarial capability
Summary: Extracting profit from data
The use of predictive analytics has become a powerful tool to drive decision making and increase value across sectors and industries. Implementing predictive analytics is not a big bang. Develop capabilities over time and customize them to your needs. Link objectives with clear business drivers Know your data Start Simple Leverage existing insights Make it actionable and measurable Test and learn
Jonathan Porter (Canada)
Reinsurance Services to Grow and Optimize Protection Business Jonathan Porter, FSA, FCIA
SVP & Chief Pricing Actuary Actuary, International Markets Markets, RGA

Motivation for Reinsurance
*Source: NMG Consulting, Sep 2012 Key Decision Makers in Asia
Reinsurance Services
Audit
Ensure compliance with internal standards
Claims Support
Case management management, 2nd opinions Electronic claims management
Research & Development

Industry y studies, , research papers p p
Reinurance Services
Business Review & Analysis
Product development Experience analysis Competitive benchmarking
Risk Ri k E Evaluation l ti
Facultative case and underwriting support Electronic underwriting
Training & Education

Underwriting manual and training Seminars, secondments, publications p
The Reinsurer Value

Broad knowledge across both local and global markets Technical expertise across various disciplines Additional resources and capital Timeliness already developed solutions Partnership and risk/reward sharing
Product Development p
Idea Generation End user surveys of clients, distributors Benchmarking and product portfolio review Product development p workshops p with distributors & life insurance companies Manufacturing g of the Product Pricing of products including assistance in regulatory filing documents Development of underwriting and claims forms, guidelines & policy documents in partnership with our clients Sharing of RGA pricing methodology and information to assist regional chief actuaries act aries in product sign-off when pricing relies on reinsurer pricing or risk management decisions up sell and cross cross-sell sell programs Development of up-sell to improve the success of product launches
Idea Generation
Evolution
Manufacture
Launch
Launching of the Product Presentation to agents and other distributors at sales launch & training sessions Payment of and hosting of sales competitions to best selling branches Evolution of the Product Presentation of market studies and analysis Refining the products next generation and provision of market data
Evolution
Idea Generation
Manufacture
Launch
RGA has a strong track record in helping bring new products to market in Asia
The first Th fi t Limited Li it d Pay P Critical C iti l Illness Ill products d t in i Hong H Kong K (Hang (H Seng S Life Lif 2006) First HNW product in Asia (2000) First Permanent Health Insurance Product in Asia The first Critical Illness product in Korea (2005 with Samsung) First SME product in Asia (Siam Commercial Life in Thailand 2008) First Advantage program in Asia (2000 CMG HK) First fully simplified issue product in Asia (HSBC Life 2008) The first Bancassurance Long term Care product in Japan (2012) First Guaranteed issue Ladies, Cancer, Critical illness, Surgical Products in HK (2006) First Guaranteed Issue Whole Life in Thailand (2009) First Online Term Products in India (2009) First Guaranteed Issue Critical Illness Product in Indonesia (2012) First Simplified Issue Early CI Product in Indonesia (2012)
Case study challenge
Limited pay critical illness product Interest rates dropped, re-pricing needed for long term product with material investment risks
Solution
New product features to disguise re-pricing exercise from agents / consumers consumer s perspective
10 year booster benefit Catastrophic Critical illness
Innovative Reinsurance structure to enable direct company:

Relief of capital / reserve strain (on a HK statutory basis) Price more aggressively gg y despite p working g within a market consistent pricing framework (ie; improved pricing on a European basis)
Reinsurance rate guarantee to enable pricing of limited pay (gross premium) products Simplified issue / Guaranteed issue campaign to existing customer to enable up-sell and cross-sell
Results
Number one product and NBEV driver for this company in Hong Kong and a product mentioned by the Global CEO in recent analyst briefing Sold 6 6,000 000 policies in the first month due to tailored up-sell and cross-sell initiatives Won Best-in-Class Best in Class Critical Insurance product award at the Hong Kong BENCHMARK Wealth Management Awards 2012
Experience p Analysis y
Reinsurers like RGA have significant expertise in analyzing data and identifying actionable information f Tools, methods and resources that facilitate accurate and speedy analysis Can C apply l i insights i ht f from comparisons i t to:
Own reinsurance block Other companies (across markets) Industry studies and other R&D efforts
A client asked RGA to perform an experience analysis on a block of medical reimbursement business to answer the following questions
1. Is there any difference in claims experience between the manually and automatically underwritten businesses? 2. Are our substandard loadings reasonable? 3. The underwriting was done branch offices until 4 years ago at which time these operations were moved to the head office. Did this impact claims experience? 4. Is there a good way to identify the agents with poor experience to assist underwriters? 5 Can RGA provide us with the ability to break out attributes for each branch and/or city? 5. 6. Can RGA provide us with the ability to analyze Length of Stay and Average Cost by Hospital?
Solution
Received data from client covering 760,000 policies and 150,000 150 000 claims Deployed global RGA resources to perform analysis
Joint effort between experience study experts and local office representatives Worked with client to scrub data and ensure accuracy Calculated results using RGA experience study system Reviewed client questions and additional findings
Translated results to clients native language and presented findings
Results
Client extremely happy with work product P id d i Provided in d depth h experience i analysis l i report Answered all of the client questions Provided additional insights to better manage their business
1. 2. 3. 4. 5. Female claims are for higher average amounts than males Split of length of stay in hospital by cause of claim Occupation rating has a material impact on claims experience Experience has been improving over time directly related to improved claims management and underwriting practices Isolated average claim size over time to provide indication of inflation cost
Why y Electronic Underwriting? g

Increased I d Sales Improved Analytics y MoreEfficient Processing Underwriting
DecisionsmovedclosertoPOS Simplifyprocesstoa transaction Virtuouscycleofrule development Targetmarketandbranding Growthwithbaselinestaff Quickertimetomarketfor decisions Morepredicabledecisions Useofratingsandexclusions Managescarceresources
Competitive Proposition
Electronic Underwriting g
A virtual company that provides insurance solutions for mortgage brokers and non-bank mortgage lenders across Canada Too many applications were held up in underwriting waiting for the information to be received from the applicants or the doctors On average it was taking 20 20+ days to process any application that required underwriting
Solution
A business case that eliminates declines and improves Not Proceeded With rates to reduce the underwriting time and decrease third party medical expenses Built straight through processing with automated underwriting gp process with AURA Uses AURA for tele-underwriting for cases that require additional information Uses AURA to automatically underwrite electronic laboratory results for clients
Loansofficermeetswithclientand completes1pageapplication ApplicationisFAXedtoBenesure Server OCRreadsapplicationand makesroutingdecision
TPCallCentrereceives casedetailsandcallsclient within24hrs. Require q Teleinterview
AURAUnderwritingRules
OrderBlood Profile CallCentre ConductsQuestionnaire Avgtime1518minutes
CleanCase Automatic Issue
B
70%Issued
September 06, 2011
A
Reflexive questions submittedto RulesEngine
Blood/ U i Tests Urine T t
Referred toUnderwriting
Accepted
Issuance
Results
70% issued without further underwriting 85% of remainder issued after tele tele-underwriting underwriting Average time to issue declined from 18 to 4 days Third Party y Medical expenses p declined by y 60% Ability to offer ratings and exclusions means more accepted cases Issuing I i an accident id t only l policy li t to d declines li means everyone i is offered a product Mortality y experience p has been better than expected p Sales up from 10,000 per year to 40,000 in 3 years
Conclusions
Access to services is a key motivation for using reinsurance, notably in Asia Reinsurers add value through:
Their global view within and across markets Technical expertise Additional resources and ideas Risk sharing partnership
Services cover broad areas related to:

Controls and back office support Risk evaluation Portfolio optimization through product development, experience analytics R&D Training & education
The experience stays with you
Actuarial opportunities at all levels Mumbai

Your career is just that; yours. You choose it. You live it. You make it happen. To get the best from it, you need the best opportunities. Join us in our Actuarial & Insurance Management Solutions practice in Mumbai, where youll get the best possible career as an Actuary. Whether your background is in life or non-life insurance, this is a chance to broaden your horizons with one of the worlds leading professional services organisations. As well as giving you the support you need to build on your professional capabilities, well help you develop the more rounded business skills that could take your career with us in any number of different directions. Join PwC were focused on helping you reach your full potential. Take the opportunity of a lifetime To nd out more, email us at:
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06/02/2013 14:03
C4.3: C4 3: (1615 - 1745) - Risks in General Insurance Kenneth Cunningham Vice President, President Analytics, Analytics LexisNexis Risk Solutions

Credit reports contain detailed information about people peoples s credit transactions
Credit applications Credit usage: balances, repayment ontime vs. vs late vs vs. delinquent
Insurance I Credit Score
748
Relative weighting for score 2
Credit information is highly predictive of claims behaviour in motor insurance
Why ? Careless with finances = careless with physical assets ? Financial stresses = driving distractions
Source:TheRelationshipofCreditBasedInsuranceScorestoPrivatePassengerAutomobileInsuranceLossPropensitypublishedbyEPICActuaries,June2003
How do Insurance Scores differ from Lending Scores? Lending Credit Scores
Financial Models are developed on bad debts or 90+ delinquencies Financial Scores rank order the odds of credit bads
Insurance Credit Scores

Insurance Models are developed on historical insurance losses
Insurance Scores rank order claim frequency or a similar metric ti Insurance scores are not as dependent on derogatory behavior
Financial scores are more sensitive to credit delinquencies
Credit reports are retrieved, and the resulting scores used for underwriting and pricing
Step 1
Policyholder details e.g. name, address, DOB, phone number
Matching and Linking Credit bureau
Insurer
Insurance Credit Scores Step 2
Credit Scoring Models
Credit report i.e. credit transaction information & credit score
(good credit) ) -> lower insurance risk -> ( (somewhat) ) lower p price if (g if (poor credit) -> higher insurance risk -> (somewhat) higher price
5
The key ingredient needed is identity data
Identity data is used to query against the credit bureau Current hurdles
Not collected Not reliable May not be in the credit bureaus coverage zone
These are improving every day and surmountable

Improvement in matching and linking technologies with multiple data sources Some segments have better identity data than others e.g. banca
Theres value in using the portion of good identity data

6
Failing to price to credit, like other information asymmetries, leads to adverse selection Adverseselection
High i hPrice i
Withoutcreditinformation, these h i insurerswin i moreloss l makingbusiness
Creditinformation f usersare moreabletoaligntheirprices totruecosts Others willfaceincreasing pressureonunderwriting results. orhavetoincreaseaverage prices(i.e.raisethewholebar), resultinginlowervolumes
Notusingcreditinformation
LowPrice
andlosebusinesswith profitablecustomers
LowScore/ LowRisk HighScore/ HighRisk
One way to get started with using credit in UW & pricing is by consuming an insurance risk score
Methods of Incorporating Credit into UW & Pricing
A. Create statistical models using credit variables with internal analytics team Difficult to do hundreds of relevant data attributes
B. Using a credit bureau's credit score A credit dit score i indicates di t th the risk i k of f credit dit d default f lt somewhat h t predictive di ti of f claims l i No need to investigate hundreds of data attributes Still need an internal team to translate credit score to an underwriting or pricing d i i but decision b t may complicated li t d d due t to i indirect di t relationship l ti hi
C. Using an insurance score Directly indicates the risk of an insurance claim, pre-correlated against the hundreds of credit attributes Easily adapted into underwriting and pricing tables due to direct relationship higher scores => higher propensity to claim
8
Applications of Credit Data
PersonalAuto SmallCommercial LifeInsurance HealthInsurance P Personal lP Property
Underwriting Rating PolicyRenewal Marketing
Insurers will need to experiment to determine the applicability and value of credit data to the different lines of business
The credit information wave has formed. It is time to get in front of it or get left behind
The The time seems right .but what about the challenges in India India
Name and address data quality Coverage of the population by the credit bureaus Challenge of setting prices in some distribution channels Competitive position
10
KenCunningham LexisNexisRiskSolutions ken.cunningham@lexisnexis.com 09004388044
Krishnan Ramachandran India Apollo Munich
C1.1 C1 1 Health Insurance Penetration in India Krishnan Ramachandran Chief Operating Officer Officer, Apollo Munich Insurance Company

Government Health Insurance Schemes: Table of Contents

Who are the beneficiaries? What are the benefits? How are the schemes funded? provider p payments y made? How are p What has been the impact ? What are the challenges? Way Forward
Schemes and Beneficiaries(1) ( )

Scheme Employees State Insurance Scheme Geography Pan India Target Population Number of Beneficiaries
All employees from Approx. 55 Mio. any firm having more than 10 employees & earning up to 15000 a year Largely employees & pensioners of central govt MPs govt., MP s, state governors Members of rural cooperative ti societies i ti Families with white ration card Approx. 3 Mio
Central Government Health Insurance Scheme Yeshasvini Rajiv Aarogyasri
25 cities
Rural K Karnataka t k Andhra Pradesh
Approx. 3 Mio. Approx. 70 Mio.
Source :Government Sponsored health insurance in India: Gerard La Forgia and Somil Nagpal
Schemes and Beneficiaries(2) ( )

Scheme RSBY1 TN Chief Ministers Scheme Vajpayee Arogyshri2 Geography Pan India (30 states) Tamil Nadu Target Population Below Poverty Line (BPL) BPL & families with annual income < Rs. 72 000 72,000 BPL Number of Beneficiaries Approx. 103 Mio. Approx. 38 Mio
Karnataka
9.5 Mio
Across all the government schemes, there are approx. 280 Mio beneficiaries. beneficiaries Over 220 Mio. Lives covered in the last five years.
1: RSBY Website, assuming 3 members per active card 2: Website Source: Government Sponsored health insurance in India: Gerard La Forgia and Somil Nagpal
Benefits, , Funding g & Payment y (1) ( )

Scheme Employees State Insurance Scheme Central Government Health Insurance Scheme Y h Yeshasvini i i Benefits Comprehensive IP & OP benefits Source of Funds Employer & Employee contribution, State subsidies Payment Mechanism Budget for own facilities salary facilities, for staff, package rates for private facilities
Comprehensive IP & OP benefits
Employee Salaried doctors, contribution Package rates for (small) Central private facilities (small), government funds Beneficiary B fi i & State government contribution P k Package rates t
1200 notified tifi d surgeries i (specified exclusions), Rs. 200,000 per person
Benefits, , Funding g & Payment y (2) ( )

Scheme Rajiv Aarogysri Benefits 938 identified hospitalization procedures, Rs. 150,000 per family with a buffer of Rs.50,000 IP cover with SI of Rs. 30000 per family Source of F d Funds State government Payment M h i Mechanism Package rates with public and private providers Package g rates with public and private providers Package rates based on provider tier p Package rates
RSBY1
Central and State government, beneficiary State government State government
TN Chief Ministers Scheme Vajpayee Arogyshri2
400 defined surgical procedures. Rs. 100,000 per family y 402 predefined packages and 50 follow up. Rs 150,000 per family with a buffer of Rs 50,000
Impact p
Access Protection Health H lth Status
Access has improved Large number of private facilities in the fold Limited formal evaluation Early indications are that goal is being achieved in a limited way Li Limited it d i impact t New schemes focus on secondary / tertiary care
7
Challenges g
Targeting & Beneficiary identification Institutional capability 1) People 2) Process 3) T Technology h l & St Standards d d
Payment mechanisms 1) Fee for service 2) Package rates
Limited focus on primary care
Fraud and Abuse
Challenges g : Fraud & Abuse
Way y Forward - Micro

Unify Approach 1) Benefit design 2) Coordinating Agencies 3) P Payments t & Platforms Pl tf Consolidate p purchasing g power with providers to drive 1) Quality 2) Efficiency
Governance & Institutional capability
Minimize duplication and risk of fragmentation
Focus on data quality and standards

10
Way y Forward - Macro

How should H h ld I India di achieve hi U Universal i l Healthcare?
Supply vs. Demand side
Focus on public health needs to increase

Preventive and Promotive Clean Water Sanitation Personal hygiene
11
THANK YOU
12
C2.3 C2 3 Employee benefits India and beyond Kulin Patel, FIAI, FIA Director Client Management Towers Watson India

Agenda g
Our evolution continues Actuaries A t i in i f focus each y year Evolution will continue
Annual round up India Inc. overview
Where is our time being spent? p
Whats on the horizon?
Snapshot p AS15 India Inc.

3 600 billion rupees 3,600
DB obligations 2012 BSE100
Increase of 45% from 2011

Other DB Plans
BSE 100 excluding PSU banks Classification of Defined Benefit Schemes by y liability y
Other Other DB plans plans significant increase (up from 22% 2011) - Largely PF disclosures Overall, Overall still BSE dominated by PSU Banks Overall funding from 80% to 86%
42%
33%
Gratuity
DB Pension
16%
L Leave B Benefit fit
9%
Snapshot p AS15 India Inc.

Median Salary increase assumption around 6% 6%.
Wide spread continues Short term volatility continues continues
Median discount rate 8.5% compared to 8% year before. 2013 looking like 8% to 8.25%?
Actuaries in focus
Auditors continue to increase involvement
Assumptions Gains/Losses explanations
Clients nervous on volatility and especially quarter t to t quarter t

Need to educate clients to their drivers of costs / li biliti liabilities
Multinational companies - Oversea parents becoming more involved
Actuaries in focus
Key buyer of actuarial services largely aware of requirements and need for actuary Many M not t aware of f Professions P f i guidance id f for actuaries and standards Call for the profession to update stakeholders on upcoming regulatory and framework changes
Evolution to continue
Increased focus on India actuaries helping Indian multinationals for overseas GAAP trends, especially with IAS developments and M&A situation Greater G t requirement i t to t understand d t d changes h in i liabilities and business context More detailed disclosures at home
PF trusts valuations towards IndAS19, more risk related disclosures
Evolution to continue
Funding plans? More companies looking to fund gratuity.. Were W a young society i t BUT still till millions illi coming into retirement
DC environment may pick up as need for retirement income highlighted
Superannuation S ti vs NPS?
Actuaries needed in education and awareness b th for both f corporate t and d individuals? i di id l ?
Summary y
Actuaries opportunity to step up collectivity for clients and the public
Ensure companies understand relevance of liabilities to the business Increased I d scrutiny ti l leads d t to assumptions assistance and advice Educate on the risks and characteristics of plans A i t with Assist ith b business i planning l i
Thank you..
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S8 Pl Plenary S Session i - Round R dT Table bl

Actuarial model developments: How to implement change successfully
Marc Fakkel Partner Actuarial Modelling Centre Partner,

Industry y observations
Talent wins games, but teamwork and intelligence wins championships. Michael Jordan Actuarial modelling requires appropriately trained modellers. To be successful a delivery will require more than actuarial modelling talent. talent
Delivering successfully will require effective teaming and intelligence to be put into the development process. process
HOW you do what you do is as important as WHAT you are trying to do
Development p p processes
If If you cannot describe what you are doing as a process, p ,y you dont know what you are doing.
Good design adds value faster than it adds cost. cost
Managing g g the development p

Trying Tr ing to manage a project without project management is like trying to play a football game without a game plan
The single best payoff in terms of project success comes from having gg good p project j definition early. y Duration estimates are just that, estimates. The activities will occur in the future and there are no facts about the future In poorly run projects, problems can go undetected until the project fails It fails. It's s like the drip...drip...drip drip drip drip of an leaky underground pipe. pipe Money is being lost, but you don't see it until there is an explosion.
Managing g g risks
One One test is worth a thousand expert opinions. opinions.
When When end users get involved in the final stages of testing, light bulbs go on, and they often have an "aha" moment. Unfortunately, that is often too late.
Project j proposals, p p , business cases or cost benefit analyses y are probably p y being massaged (either by underestimating costs or timeframes or by being very optimistic about the benefits) so projects will be approved. Event management is the same as for any project - the project plan needs to include an appropriate change control process
Practicality y
Planning without action is futile, action without planning l i i fatal is f t l
Survey respondents estimated that if 100% of defects were addressed and remediated prior to production, they would experience a 32% cost savings.
Some insights g
Analysis and design stages are critical to deliver successfully Scope and Technical Specifications need to be well defined Flexible resource model to optimise the resources used Agree the standards to ensure consistent quality and processes Good governance and project management is essential to ensure the development is well tracked including the management of risks, assumptions and dependencies which will impact the deliverables Good collaboration between the stakeholders ensures good estimates and work plans are drawn up Forward planning is essential to manage the future supply and demand of resources and to ensure plans are efficiently managed Regular g updates p and risk management g with stakeholders to understand the project status as scope, plans, and estimates change
Industry y trends
Actuarial modelling as a function is progressively spanning the Finance (Actuarial) function and the IT and Change functions. functions Companies are at different points on their journey but I am beginning to see clear industry trends around the processes which are becoming more professional and industrialised as IT style approaches are adopted.
I have seen a number industry trends for actuarial model development including: Clearer separation between R&D, development, production and reporting processes Embracing IT methodology to development e.g. proper development life cycles End to end model development processes incl. development of requirements & specifications Clearer business acceptance and sign off processes including full traceability Utilising professional project managers for actuarial model builds with well defined plans More regular and standardised project reporting Improved governance and management of issues, risks and dependencies More granular work packages and associated tasks Improved workload balancing which is more consistent with change demand
Actuarial development processes need to transition to ways of working which are more professional and industrialised - consistent with IT best in breed.
Melanie Puri Aditya Mahindroo
The Future of Life Insurance

Melanie Puri PwC, Director Aditya Mahindroo PwC, Senior Consultant

2013 AGFA & 15th Global Conference of Actuaries
Agenda
How do global life insurance groups make money? Is the same true in India? Which risks should insurers retain? What is the impact of a SII-type regime and what do investors want? RBC lessons from Solvency II What do policyholders want?
What next?
How do global life insurance groups make money? Embedded value (EV) is one measure of the value of the shareholders interests in the business
TVOG Present Va l u e o f Profit Cost of Capital Va l u e i n Force EV Net Worth
Required Capital Free surplus
The change in the EV shown in the Analysis of Earnings is one measure of profit There are others some look at IFRS earnings......
3
How do global life insurance groups make money? Where does the change in EV come from?
Analysis of change in the EV of a large European life insurer
Economic variance can be highly positive or negative, depending on market performance Insurers have historically made money by taking market risk - but taking market risk in a SII world has become expensive.........
Is the same true in India?
There are other factors that currently lead to Indian insurance companies losing/making money from other sources: Lapse rates higher than expected Distribution costs high (higher than expected??) Are these short term issues that can be fixed or more fundamental that cant? In the longer term taking market risk - and earning returns from doing so is still likely to play a large part in insurance company profits Prescriptive safe investment rules do not mean that Indian insurers do not take market risk.......
Is the same true in India?
Market risk exists in India.....

Interest Rate Risk Products with interest rate guarantees Is it possible to earn the guaranteed rates for the entire duration? Sovereign default risk on bonds? Reinsurance default? How much allowance in pricing and valuation? Assets matching long term liabilities unavailable At time of reinvestment, interest rates may be far lower than today For UL, many assume no market risk...... UL profit PV(AMCs Expenses) Falling market values impact future stream of AMCs
6
Default Risk
Mismatch Risk
Expense Risk
Which risks should insurers retain? Could Europes challenges become Indias challenges?
Long-Term Risks Long term products What will interest rates be in 20, 30 years?
Low Interest Rates Without taking sufficient market risks, returns on capital after expenses unattractive.
Global Regulation Introduction of worldwide regulatory standards (e.g. RBC) Market consistent pricing already a requirement in some Indian life companies....
7
Real returns may not be achieved

Reduced demand, high costs With profits business
Which risks should insurers retain product implications in India Examine the shift from unit-linked to traditional products
PREMIUM (Crores) 2010/11 2011/12
Non linked
Life with profit without profit General Annuity and Pensions with profit without profit 104 7,324 287 8,297 5,160 6,031 10,624 5,805
Total Non linked

Linked
Life with profit without profit General Annuity and Pensions with profit without profit
18,618
25,013
1 28,502
14,957
Insurers have been selling more traditional savings products over the last few years... .. with guarantees on death / surrender / maturity Issues around Asset - Liability mismatch Are long term bonds available to match 15-20 year contracts? How will these products look if an RBC regime is introduced?
27,394
686
Total Linked
Single premium only Source: www.irda.gov.in
55,897
15,643
What is the impact of a SII type regime and what do investors want? Investors and Insurers needs are tricky to align
Can come from Strategy (investing but no cash? divesting etc) but higher earnings potential generally equates to taking higher risk (usually market risk) Post SII, value is volatile if market risk is taken. Difficult to achieve stable increasing dividend stream and stable capital requirement. Can earnings come from somewhere else?
Upside share price
Stable (increasing) dividend stream Investor Wants Stable capital requirement
Insurer s Dilemma
Taking any market risk leads to significantly higher capital requirements post SII......
Understandable Financial Disclosures
Investors will invest in other sectors that are easier to understand and less volatile ...
RBC Lessons from Solvency II
Recent newspaper headlines indicate that the introduction of RBC may not be far away
IRDA plans to introduce risk-based
solvency
IRDA mulls risk based solvency model for insurers
IRDA looking at risk based solvency models for insurer
And whilst the intention may be an RBC system similar to others in Asia rather than Solvency II are there any lessons that can be learned?
10
RBC - Lessons from Solvency II Understand the aim of the regulation.....

To improve policyholder protection....yes but what else? How? To increase capital requirements? How do capital requirements look compared to other industries? To ensure insurance companies survive and meet policy obligations To introduce a fully market consistent capital regime? To introduce a regime where capital requirements vary with the risks taken.....but not necessarily fully market consistent?
Overall
Policy makers/ Regulator
Increase public confidence in the life insurance sector?
Policyholders
Product level
Which products are important in the context of wider government policy aims (e.g. Individual saving/provision for retirement rather than reliance on the state)?
Which products should still be attractive/affordable post the introduction of the regime? 11
RBC - Lessons from Solvency II Understand the impact on capital requirements, value, solvency ratios and volatility in results before agreeing the framework
Post-2008 Financial Crisis Pre-2008 Financial Crisis
Financial Crisis
Market consistent regime sounded sensible in theory but no one really understood the numbers
Internal Runs (2009) and QIS 5 (2010) Gave insight into: Capital requirements Value Volatility (both balance sheet and capital requirements) from period to period
Real impact understood
Back to the Solvency II drawing board

12
RBC Lessons from Solvency II Clarity on role of insurance in wide economic context
Traditionally... Life insurers provide long term liquidity to the wider real economy
Not well thought through
Solvency II...
Movement to shorter term assets encouraged due to capital charges

Not well thought through
Long term guaranteed business discouraged New regulations...
Example Under current proposals, infrastructure bonds would be treated as corporate bonds under Solvency II and the capital charge would be 32.5% for a BBB-rated infrastructure bond of more than 25 years' duration.
See IMF paper published in 2011 Possible unintended consequences of Basel III and Solvency II
The role of insurance companies in the wider context of the real economy and capital markets borne in mind 13
RBC Lessons from Solvency II Transparency of results

S o l v e nc y I I
EU
Insurers required to publish Solvency and Financial Condition Report

Consider level of disclosure RBC
Some Asian Markets
2
Consider type of disclosure
The regime has almost been distilled down to a single number an RBC solvency ratio.
India No public disclosures for most life insurers (e.g. annual EV disclosures). 14
Introduce RBC regime
RBC - Lessons from Solvency II Keep the number of parties to a minimum...

EU has a particularly cumbersome decision making mechanism
European Commission Council of the EU EIOPA
European Parliament
(Too) many industry bodies not always presenting a coherent view (got better over the years...)
CFO Forum CRO Forum Insurance Europe Groupe Consultatif
Distrust/tension between industry and the regulator(s)......

Industry felt that regulators were determined to introduce a fully market consistent regime regardless of whether that was appropriate for the industry and policyholders - and regardless of the impact on the industry
Regulators felt that industry was solely focused on reducing capital requirements
15
What do policyholders w ant?
The financial world was badly impacted by the 2008 credit crisis and the ongoing economic crises since then.......
Insurers have survived and done better than banks, but the reputation of the industry has been impacted
16
What do policyholders w ant?

Inflation beating returns? Benefits in line with illustrations provided at outset
!
Wa r n i n g i f b e n e f i t s m a y b e l o we r t h a n e xp e c t e d
S e c u r i t y - I n s u r anc e companies that do not go bust before benefits are due....

tn time
t1
Guarantees that meet insurance a n d s a vi n g s n e e d s
Ac t u a r i e s n e e d t o play a strong part i n m e e t i ng t h e s e p o l i c yh o l d e r n e e d s a n d a s s i s t in g i n t h e d e v e l o pm e nt o f n e w r e g u l a t i on 17
What next?
Video
The video
PwC
18
Employee Benefits India and Beyond Update on Retirement Benefits outside of India
Neil Narale FSA, FCIA Leader of Actuarial Off Off-Shore Shore Team, Team Mercer (India)

Agenda
Current themes on retirement issues around the world Updates on Retirement Benefits from a mature and emerging market:
US
South Korea
Looking ahead
Current themes on retirement issues around the world
Employer pension arrangements continue to decline
Sponsors are in need of new methods to deal with their e pe pension s o de deficits c s
Adequacy of pensions a challenge
Updates on Retirement Benefits from a mature and emerging market US
South Korea
S&P 1500 Funded Status and Deficit at Month End Calculations Based on AA Discount and Market Value of Assets
Surplus / (Deficit) (Left Hand Scale) $100 billion $ billion

June 30, 2008
Funded Status (Right Hand 105% Scale)

December 31, 20 D 009 December 31, 2 2010 June 30, 20 011
100%
De ecember 31, 2011 June 30, 20 012
Surplus / (Deficit)
($100billion)
er 31, 2007 Decembe
December 31, 2008
June 30, 200 09
77% funded status is up from 74% at the beginning of the year.
95% 90% 85% 80% 75% 70% 65%
($200billion) ($300billion) ($400billion) ($500billion) ($600billion) ($700billion) ($ )
Funded Status
June 30, 2010
December 31, 2012
$482 billion deficit is down from $557 billion at the beginning of the year. Equities returned 5.18% during January (based on S&P 500 total return index). 3.90% discount rate for a mature plan, which is up 19bp for the month. The average rate for this plan since i 12/31/2000 i is 5.77%.
Surplus/(Deficit) ( ) represents the estimated aggregate gg g global g pension assets of all companies in the S&P 1500 minus the estimated aggregate global Projected Benefit Obligation (PBO). Funded status represents the ratio of these two amounts.
Ja anuary 31, 2013
MAP-21 Pension Provisions Su Summary ay
Moving Ahead for Progress in the 21st Century Act (MAP-21) (MAP 21), signed into law by President Obama on July 6, 2012, containing key reforms for pension plan sponsors
Stabilizes segment discount rates for certain purposes Increases PBGC flat-rate and variable-rate premium requirements Extends the ability to use excess pension plan assets for retiree medical and group-term life benefits
MAP-21 Pension Provisions Stabilized S ab ed Seg Segment e Rates a es Description of the stabilized segment rates
R Retain t i 24 24-month th averaging i period i df for segment t rates, t b but t constrain t i each h rate to within corridor of the 25-year average for that segment 10% corridor in 2012, 15% in 2013, increasing 5% per year to 30% in 2016 and db beyond d Plans can still elect full yield curve for month before valuation date
For example, plans with reduced risk investment strategy
For 2012, sponsors have option to continue using the non-stabilized segment rates Stabilized segment rates decrease minimum funding requirements materially for the 2012 & 2013 plan years
Effect quickly fades thereafter due to widening corridor
MAP-21 Pension Provisions Stabilized Segment Rates

Illustration of second segment g rate*
9%
Corridor drops as high rates from 1980s fall out of 25-year average
Widening corridor around 25-year average rate
Stabilized 2nd segment rate Stabilization increases near-term discount rates, but effect disappears over time
PPA 24-month average g 2nd segment g rate
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
* Assumes monthly spot rates rise gradually from 2014 through 2017, then level off (24-month average segment rates lag monthly spot rates)
Summary of the GM and Ford Transactions
GM
Offering lump sums to 42,000 US salaried retirees and beneficiaries Spun off actives and terminated vested participants to new plan, and terminating remaining retiree liability
Purchasing a group annuity from Prudential to cover the remaining salaried retirees and those who do not elect lump-sums
Anticipates contributing $3.5 billion to $4.5 billion to fund the transaction, representing approximately 110% of the GAAP liability Expected to reduce pension obligation by $26 billion This transaction is truly groundbreaking for the pension industry
First jumbo transaction Separate account structure to increase participant security
Ford
Offering lump sums to 90,000 US salaried retirees and former employees Expected to reduce pension obligation by up to $18 billion No annuity purchase involved at this time
South Korea pension system
Current p plan
New p plan (from ( 2010) )
Severance Pay System (SPS)
Employee Retirement Security A t (ERSA) Act
Tier 2
Insurance contract or Trust contract
Or
Corporate DB plan
And
Corporate DC plan
National Pension Scheme (NPS)
Tier 1
Pension landscape in South Korea Major differences between SPS and ERSA
SPS Permitted Plan Type DB only ERSA DB or DC
Funding Requirement
None
60% for DB 100% for DC Possible only for emergencies
In-service Withdrawal
Permitted
Form of Payment
Lump sum only
Lump sum or annuity Yes
Corp tax benefit on external funding after 2010
No
Pension landscape in South Korea Plan choices after ERSA
Continue SPS
Loses employer tax benefits Less security for employees Minimum benefit: 8.3% final pay per year of service Can keep same benefit as SPS 60% of external funding test at year end Keeps employer tax benefit on contribution Minimum contribution: 8.3% annual pay Transfer investment risk to employees Voluntary employee contribution permitted Keeps employer tax benefit on contribution
Adopt DB
Adopt DC
Market Trend Adoption by Company Size
(# of companies)
Under 10 10~29 30~99 100~299 300~499 500 ~ employees employees employees employees employees employees Number of companies adopted ERSA Number of total companies Ratio (/) Total
99,724
43,461
17,800
4,695
773
1,007
167,460
1,273,047
178,396
54,720
10,969
1,425
1,293
1,519,850
7.8%
24.0%
32.5%
42.8%
54.2%
77.9%
11.0%
Source : Financial Supervisory Service (August, 2012) N t Duplicated Note: D li t d contracts t t are excluded. l d d
Market Trend Adoption by Plan Types (number of plans)

DB Number of Plans Ratio 60,032 35.8% DB & DC 3,796 2.3% DC 75,739 45.2% IRA 27,893 16.7% Total 167,460 100%
Source : Financial Supervisory Service (August, 2012)
Local Companies
Foreign Affiliated (FA)
28 7% 28.7% 71.3% 58.7%
41.3%
DB
DC
DB
DC
Looking ahead
C4.3: (1615 - 1745) - Flavours of risk

Nirav Patel Actuarial and Insurance Management Solutions PwC UK

What is risk?
Ri k i Risk is an extremely t l b broad d concept t
We think about risk slightly g y differently y
Risks facing a General Insurer

I Insurance Underwriting, U d iti R Reserving, i R Reinsurance i
Market Investment, Investment Currency, Currency Inflation
Credit Business credit risk risk, Asset credit risk
Liquidity
p Operational
Group
Insurance risk
Underwriting risk
Product design Underwriting process Data Methodology M th d l and d assumptions ti Communication with other stakeholders Reviewing external studies on market competition and regulatory pressures Pricing and Underwriting Committee and its interaction with other committees.
Insurance risk
Reserving risk
Reserving model Data Methodology and assumptions Validation V lid ti of f results lt Documentation Peer review Communicating results Reserving Committee and its regular interaction with other committees Reinsurance management
Other risks
Market risk
Treatment of reinsurance and investments as assets Change in value of the underlying invested assets, e.g. Equity, property Impact of change in variables, e.g. Interest rate, currency, spot rates Risk based stresses to analyse impact on portfolio Data
Credit risk
Treatment of credit risk within different types of assets. Failure of reinsurer Non-performance of assets
Other risks
Liquidity risk
Aggregation of losses Expansion including new business strain
Group risk
Actively looking for concentration of risk Comparing target portfolio mix against actual and creating a feedback loop into pricing mechanisms.
Other risks
Liquidity risk
Treatment of liquidity Impact of different scenarios on liquidity
Challenges
Actively looking for concentration of risk Comparing target portfolio mix against actual and creating a feedback loop into pricing mechanisms.
Operational risk
Th risk The i k of f loss l arising i i from f inadequate i d t or failed f il d i internal t l processes, personnel or systems, or from external events The key stages for managing operational risks are:
Risk Identification
Risk Assessment
Risk Reduction and Monitoring
Operational risk - Challenges

Key Person Risk
Third party management
Training and Development
Challenges
Systems
Fraud
Legal
Governance
Very V simple i l concepts t b but t often ft the th least l t used d Incorporate management controls at the outset
Documentation Modeling g Reporting Peer review The role of internal audit and risk committees
Compliance!
Embedding risk behaviours

The required risk behaviours can only be delivered and sustained through changes to working practices, supported by processes and with buy-in from leaders/process owners
Define D fi leaderships l d hi vision i i for f Risk in Action and behaviours

Aligned to organisational and risk strategies and the operating model
Desired business outcomes

e.g. Increased risk awareness, management and governance
Establish and communicate clear risk working practices:

Focus on the key moments that matter and write responses Tighten roles controls roles, controls, process process, (formal & informal) governance...
Operating Model
Review the people (and nonpeople) processes:

Select key levers to pull, e.g. reward, L&D, performance management, role definitions, procurement, new client etc Review supporting IT
Risk in Action Behaviours
4 5
Align L&D activities/Comms:

Develop relevant learning Make changes to existing progs Reinforce the change
Risk Working Practices Strategy Leadership
People and other processes (Levers)
Establish measurement:
D Determine t i k key metrics t i and d set t up reporting capability to monitor progression
12
Enterprise Risk Management

What Wh t it ERM? Benefits of ERM
Better risk reporting Align g strategy gy with risk appetite pp Manage and/or transfer risk effectively Comprehend links between growth, risk and return Assess economic capital Better allocation of capital and resources
How do we make use of this framework?
A Kindergarten guide to modern monetary theory Days 1-4

Prepared by Frank Ashe
Frank Ashe
Kindergarten Modern Monetary Theory
A Kindergarten guide to modern monetary theory

Frank Ashe
Abstract
A short guide to modern monetary theory is given. The approach is kept as simple as possible to highlight the logical coherence of the system of fiat money and its differences from a goldstandard theory of money. The role of the government is central to this discussion. Many common ideas concerning money, which are holdovers from a gold standard, do not hold under a fiat system and this has implications for financial systems. Keywords: money, gold standard, credit, modern monetary theory, fiat money
When reading about modern monetary theory I suggest the following procedure: Forget who you are. Forget what you think of government good or bad unless you are going to be able to get rid of government (that is, establish pure communism) you are stuck with it. Forget what you think of social policy you may hate the unemployed or you may feel compassion forget all emotions. Forget what nation you live in it doesnt matter. Forget all prior economic concepts and training (if any). Then just try to understand what you read. Bill Mitchell
1
With a number of commentators coming up with contradictory views on how the world will come out of the GFC I was forced to wade into the morass of economic thought myself and see if there was anything that could be sensibly said. The risk of the world ending up in unpalatable economic circumstances needs to be understood by any company in the finance industry, so what should a risk manager know? In terms of a standard risk management framework I was at stage one identify the risks. Could I listen to the experts? No, they disagreed with each other. Could I get them to sit down and debate the matters sensibly? No, they talk past each other and dont listen. That in itself raises big risk management issues at a strategic level we may or may not have a huge risk with no simple way of finding out. You have to assume the risk is there and plan accordingly. Separately, I chose to see if I could make sense of the arguments. The following highly simplified account of fiat money and credit creation is my attempt to put one part of the economic theory, given the name of Modern Monetary Theory by its
1
Mitchell, B. (2009). "In the spirit of debate my reply Part 2." Retrieved 8 October 2009, 2009, from http://bilbo.economicoutlook.net/blog/?p=5224.

2
developers , into plain talk. I have deliberately tried to dumb down the language as much as possible to ensure that anything that may be wrong will be glaringly obvious it is far too 3 easy to hide critical issues behind obfuscatory academic jargon . This area of the theory of money is contentious, as all monetary theory seems to be. My particular interest in this particular theory is due to the very simple nature of its assumptions and the clarity of its logic essentially looking at the consequences of a stock/flow consistent analysis of money and credit. One important point that flows from this analysis is a recognition that most of the current discussion on the topic of money, credit, and the government sector finances has a language that comes from the gold standard era of money. Most economies have been in a fiat money system since the mid 1970s its time to move the discussion onto the proper footing. As part of this, Ive noticed it is easy to become confused between the boundary line demarcating (i) and (ii) and the boundary line demarcating (ii) and (iii) where: (i) what is easily accomplished using the current economic institutions, widely interpreted as: laws on budgetary outcomes; notional independence of central banks; presentation and discussion of government finances; imagined reactions of bond markets etc i.e. the self-imposed constraints under which a government manages the economy; what is actually happening under a fiat money system; what is not allowed under a fiat money system.
(ii) (iii)
In discussion with various people I have found this confusion to be very difficult to overcome. The self-imposed constraints have so muddied the stream of discourse that it is difficult to see what is happening beneath the surface. The following classroom discussion looks at the basic flows of a fiat money system. It does not consider the Jobs Guarantee component of MMT. For those people who start to read this and feel their hackles rising, please read Bill Mitchells quote above. If you dont like the conclusions then please point out the error in my assumptions or my logic. It is not sufficient to point to a conclusion and say that its obviously wrong from personal observation, the obviousness of the wrongness is driven by imagining the self-imposed constraint is actually a logical constraint, or by cognitive 4 dissonance. As Keynes said Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. No kangaroos are allowed no jumping to conclusions that are not completely supported by the assumptions that have been made so far.
None of the ideas presented in the class discussion are my own. I am presenting others ideas. The best introduction to the ideas is via an excellent series of articles on Bill Mitchells blog at http://bilbo.economicoutlook.net/blog. Wray (1998) gives another exposition of the ideas. As an example, see Walsh, C. E. (2010). Monetary Theory and Policy. Cambridge, Massachusetts, The MIT Press., which has been cited (on the back cover) as the best, indeed only worthwhile, textbook on the subject. Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. Cambridge, Macmillan, Cambridge University Press., Ch24.
Everything I know about economics should have been taught at kindergarten!

Miss Moneypenny is a kindergarten teacher with a very bright set of pupils: Neo, a bright boy who loves playing with models and watches lots of science fiction and fantasy movies peopled with supercomputers capable of fantastic computations, beings who can see all possible outcomes of theirs and others actions, and humans without emotions clouding their thinking; May, a clever girl who prides herself on changing her opinion when the facts change; Karl, always thinking about the underdog; Frank is a risk manager at a complex, diversified financial services company who has crept into the class because he cant understand whats happening in the GFC. He has a PhD in thinkology but still gets confused when academic economists throw big words 5 at him .
Class Moneypenny
Miss, where does money come from? Thats a long story. Well have to talk about people and groups of people and trusting each other.
The major players
Here are the Australian people
Here is their Government.
The people tell the government what to do. This is democracy. Well ignore this for the moment and pretend the Government is not listening to the people.
For example: non-superneutrality of money, non-separable preferences, the Taylor principle is based on the mapping from policy response coefficients to eigenvalues in the state space representation of the model. These come from Walsh (2010), a book described by the Chief of Economic Research at the Central Bank of Chile, as a pleasure to read.
Here is the rest of the world well ignore them 6 for the moment .
The government can do things that ordinary people arent allowed to, like make laws. This is one reason the people invented government. For understanding money we need to just remember that we cant assume that the government has to follow the same rules as 7 people its a different sort of entity .
The Real Economy Part 1

Moneypenny Neo Moneypenny
People have a habit of acquiring and disposing of things. These trades are called the economy. What about making things? Isnt that important? Well only look at what people swap between themselves. If you make something for yourself then its your own business. The economy is what everybody does for other people. What is the size of the economy? The economy is big. If we add up all the cash and credit that people use to buy things in a year then that is one way to guess the size of the 8 economy in that year . But first I need to tell you what cash and credit are.
Class Moneypenny
There is no significant change to the arguments when we consider the rest of the world. The class asks so many questions later that Miss Moneypenny does end up discussing what happens with the rest of the world on Day 4 and later. Remember the Fallacy of Composition. The properties of an aggregate entity may not be deducible from the properties of its constituents. The most well known examples in economics are most probably the Paradox of Thrift and the Tragedy of the Commons. If we want to look at what the people in the economy make in a year then that is a much more difficult question as most things that people make are not sold, and so we dont have a simple way of adding them up. Economists try to add up the value of things that are bought and sold (in jargon this is PQ where P is the typical price and Q is the quantity of things sold), and then try to avoid double counting. This gives them GNP or GDP.
Cash
This is physical money. Some people call it cash.
Often people put a price on the things they want 9 to get, or get rid of.
People can swap physical money for things the price is how much physical money to swap. This is called buying and selling.
If people dont have physical money then they can trust each other to pay later.
Karl Moneypenny
What if you have nothing to get rid of? How do you get cash or credit? Oh Karl! You always have your free time, or time that youre spending doing something you dont like. You might get someone to buy your time to pick up some rubbish. Then you can use the cash to buy the time of someone to tidy your room. If you like tidying your room less than picking up rubbish then youre ahead!
Credit
If I promise to pay you cash for something youve given me then I have a financial liability and you have a financial asset. No net financial assets or liabilities have been 10 created . This is called credit creation and it creates credit.
May MP
My liability of $100 = Your asset of $100 Gross credit is increased by $100
What happens if you lose an IOU? You lose a financial asset and the person who owed you the money no longer has the liability. Everything still balances.
9 10
Things include services and intangibles. Notice that there is no net saving being done. Every asset has a corresponding liability.
Sometimes people trust each other a lot. The amount of credit goes up because were quite happy doing things for people and trust well be paid later. Sometimes people dont trust each other much. The amount of credit goes down. We give people back their IOUs and ask for the money. People lose trust if they think the other persons promises to pay wont be kept.
Neo Moneypenny
What will stop the amount of credit just going up and up and up? Thats a difficult question that well come to later. But simply, if we all trust each other enough then there is nothing to stop the amount of credit growing bigger and bigger and bigger, 11 just like blowing a bubble . Thats silly, Miss. People could see whats happening and theyd stop trusting each other. It would be nice to think so, but it doesnt happen.
Neo Moneypenny
Financial Instruments
One person can promise another to pay them $(1+i) in the future. This is a financial instrument. The price of this instrument now is $1. A simple name for this is a bill. The number i is the amount of interest paid. 12 Some people call i a rate of interest . If I sell you a bill then I have a financial liability and you have a financial asset.
May
So if I wanted to spend cash so I could run a shop, then I could sell you a bill and get the cash?
11
For anybody who thinks that a banks credit creation may be constrained by its capital, or regulators, or shareholders, or the market, or its Board, or its risk managers, may I ask you to consider UBS in the period to 2008 - UBS (2008). Shareholder Report on UBS's Write-Downs, UBS AG: 50.. UBSs balance sheet kept expanding through their buying (or creating) CDOs funded at a positive spread (not risk adjusted) to the cost of UBS borrowing money. While there were enough people capable of imagining that the CDOs were risk-free there was no constraint on their balance sheet. This stopped when their CDOs lost so much money that these instruments could no longer be imagined to be riskfree. Rates of interest usually make discussing rates of return easier. However as anybody who has tried to figure the rate of return for a highly structured cash flow has found, there may not be a simple number for the return that satisfies our conceptually clean idea of a return for a bill. Moneypenny leaves interest rates out of her discussion for the very good reason that they may be confusing.
12
Moneypenny
Thats right, May. I wouldnt even need to have the cash. If other people trusted my credit then I could just give my bills to you and you use them to buy what you needed. Wow! Weve talked about credit creation and we havent mentioned banks! Banks are special, but not as special as some people think they are. Is this credit really what we call money? Some people would say so , but its confusing if we do while we have this conversation. Well try not to call it money, its credit. Of course you can buy things with this credit, which is why people loosely call it money. If we call this idea money creation then some people get even more confused, so we wont!
13
Neo Moneypenny May Moneypenny
The Payment System

Here is an ordinary bank. To keep things simple we will sometimes treat banks like people, but its silly to think like that all the time. People trust banks a lot
14
If lots of credit has been created people can lose track of who owes whom how much. Banks have created a payment system to help solve this problem. This is a service that banks sell to people. Banks set up accounts for people where the people can keep track of all the credit theyve created or been given. Most people have bank accounts.
The account is a number in a ledger.
13
See Committee on Payment and Settlement Systems (2003). The role of central bank money in payment systems. CPSS. Basel, BIS. as an example of a document that calls this commercial bank money as distinct from central bank money. The exchange rate between the two is one-for-one. Usually!
14
If I give the bank $10 of physical money they increase my account by $10. If I take $10 of physical money then they decrease my account by $10. The banks balance sheet is always balanced A positive amount in my account is a financial asset for me and a financial liability for the bank. If Adam and Betty have accounts with the same bank and Adam owes Betty $10 then Adam can tell the bank to decrease his number by 10 and to increase Bettys by 10. After this Adam doesnt owe Betty anything. If Adam and Betty have accounts with different banks then Adams bank will decrease Adams account by $10 and pay $10 to Bettys bank, which will increase Bettys account by $10. This is an interbank transfer. To make sure that the transfers can occur the banks may keep some physical money on hand. This is called liquidity. But there are other ways that banks can transfer money! We need to know a little bit more about banks first.
Bank liability = $10 owed to me Bank asset = $10 cash
The Banking System

Banks trust some people Banks like buying bills from people they trust. This is called bank lending. Banks like charging a large amount of interest. Banks dont have enough physical money for all 15 their lending and so they create credit . The number in the borrowers account goes up when 16 the bank buys a bill (makes a loan ).
15 16
Liability = $100 in borrowers account Asset = $100 PV of bill
The technical term is fractional reserve banking. Note that Miss Moneypenny is trying to keep the idea of credit distinct from the idea of physical money - cash. Talking about money without a precise definition of what you mean can easily confuse things. Because of this possible confusion she is precisely saying what she means without using loose terminology. This avoids the trap that some people (Austrians are particularly prone for some reason) fall into when they talk about money. They use a loose term and then try to measure it in some fashion. Moneypenny follows Humpty Dumptys orthopraxis When I use a word, Humpty Dumpty said, in a rather a scornful tone, it means just what I choose it to meanneither more nor less. Carroll, L. (1871). Through the Looking-Glass, and What Alice Found There Macmillan.
Everybody likes balance sheets to balance, so we are happy.

May
Lets pretend Bank A is creating lots of credit. What will happen? Adam has borrowed from A so he can spend and now he owes money to Betty who banks with B. Through the payment system, A now has to pay B some physical money but cant do it, so must borrow credit from B or from someone who can transfer credit to B. This is the interbank money market. If A does this borrowing too often then other banks will start to demand a larger and larger amount of interest because they will lose trust in 17 A . A simple way for A to manage this risk is to have half of its liabilities created by people who will be taking money out of the bank, and half from people who will be putting money into the 19 bank. . To make sure people will put money into their accounts in A, it must pay enough interest. Frank has to unlearn. He was taught that banks recycle savings. Now he sees that bank lending occurs first and then the bank may need to ensure that the savings and deposits stay with it to balance its lending.
18
Liabilities: $50 in Adam account $50 IB borrowing Asset: $100 PV of bill
17
In an extreme case we may find that no bank will be willing to lend to A, in which case the CB will have to lend to A as a lender of last resort Of course banks will also need to ensure there is some matching of the duration of the assets and liabilities, something that is beyond this class at the moment, but may be reached at a later day. This observation allows us to make some amusing corollaries. Borrowers create an asset for a bank but also a liability, being a bank account from which they will be drawing money. Depositors for the bank will be putting money into their accounts, which are also liabilities. So a bank needs to ensure that the liabilities created by its lending are, to some extent, cash flow matched with the liabilities created by its depositors and its borrowing. So asset-liability management can actually be thought of as only liability management!
18
19
10
Neo
How do we know the savings will occur? The interbank transfer earlier only occurred when Betty had an increase in her account as Adam spent his credit. If Adam hadnt spent his credit there would have been no problem. If Adam spent his credit with Cathy who banked with A then there wouldnt have been any problem either the credit would have remained on As balance sheet. Lending creates the savings to support it. 20 Frank has to unlearn more . All that stuff about IS-LM curves and pools of loanable funds, which he cant remember much anyway, is meaningless. Banks can lend as 21 much or as little as they like . If Betty demands that Adam pay her with cash then Adam has to ask bank A for the cash first. This will come out of bank As liquidity. Betty doesnt have to put her cash into a bank account, she can just keep it. Bank A has used its liquidity to finance the loan to Adam.
Karl
Where did this liquidity come from? Other people must have given cash to A before Adam asked for it.
Karl
What if A doesnt have enough cash? Bank A will have to use credit to buy cash from some other bank.
Karl
What if no other bank has enough cash? Bank A will have to tell Adam that it cant give him cash. Adam will have to tell Betty that he cant give her cash and must use credit. If everybody wants to use cash and there isnt enough cash then people wont be able to do as much buying and selling. This means the economy wont grow and may even become smaller. If I didnt trust the bank and my account was positive then I would demand physical money.
20 21
Frank is grateful he only did one economics course. That limits the amount he has to unlearn! A lot of people get confused because in the early days of the banking system the banks needed to have the deposits before they could lend. This is still the way that banking is taught in many places. But if we want to understand the current system we should examine what is happening now, not how it worked in the past.
11
If everybody did this then the banks would be in big trouble because the amount of credit is usually much bigger than the amount of physical 22 money .
Fiat money
Only the Government can make money. There are two ways the Government can make money. Firstly, the Government can make physical money If any of the people try to make cash then the Government locks them in jail. Jailing is another thing the government can do that individual people cant do. The government puts cash into the economy by giving it to people or buying things from them.
Here is the Central Bank .
23
The Central Bank is owned by the Government. The CB thinks it is independent, but it will always do what the government says to, if the government really wants it. Ordinary banks are owned by the people Ordinary banks have an account with the Central Bank This is called an Exchange Settlement account.
22
For an account of fractional reserve banking see Wikipedia or any basic economics textbook. At the level of discussion weve reached at this point there is no concept of a bank receiving deposits and then lending out a fraction of those banks lend first and then get deposits. Im conflating the role of Treasury and central bank here, but as both are arms of government Im not losing anything. Im assuming that the government knows what its doing and is coordinated. Please feel free to make your usual jokes at this point. At a practical level the Treasury and Central Banks do coordinate the nitty gritty details of money extremely well. Separate Central Banks and Treasuries are two of the institutions that are set up manage the economy. For discussion of the actual flows of money within and between the private and public sectors of the economy we dont need to distinguish them.
23
12
All these accounts are just a number in a ledger
The number for a bank has to be bigger than 0. If a bank gives the CB cash then the ES account goes up, if the bank takes cash from the CB their account goes down. If bank A wants to transfer credit to bank B then it can ask the CB to transfer credit from As account to Bs. This means A and B dont need to keep as much cash as liquidity. If a bank receives net credit transfers from other banks then its ES account goes up; if it pays net credit transfers then its ES account goes down.
The government account

The government has an account at the Central Bank. The government can make money by telling the CB to transfer money out of its account to a banks ESA. There is no limit to how much the government can transfer from its account. The government account has no limits it can 24 be as big or small as it likes . Only the government is allowed to do this. When the government account goes down and the ES balances go up some people call this printing money. This is just meaningless loose talk. Physical money and ES balances are called high 25 powered money (HPM) or central bank money . We will just call this money. This transfer from the government account is the second way in which the government makes money.
24
$1,000,000,000,000 = One trillion dollars is only 13 keystrokes.
Yes, there are institutional arrangements that make this more difficult for a government. But remember that the institutional arrangements are self-imposed, not a logical necessity. There are various other names as well.
25
13
This ends this lesson.

Class
But this sounds like cheating. There must be lots of things that can go wrong if the government can just make more and more money. Yeah, my Uncle Milt tells me that all the time. May be, but that is a separate question and well have to consider it at another time. The question you asked was where did money come from thats what I answered. Now lets do astronomy. I want you to draw a black hole
Neo MP
14
Day 2
The next day the class presses Miss Moneypenny for more information on basic monetary theory.
Government spending
Class
Miss, what happens if the government just makes lots and lots of money? Wont prices just go up and up? The Government can buy and sell things. When the Government buys things from a person P it can give them cash or transfer credit from the Governments account to their bank account. The bank has no increase in net assets but P does. This balances the liability in the 26 government account . When the Government sells things it demands that it be paid in cash or as a transfer of credit 27 from a bank that has an ES . If the government wants to help somebody then it can just give them money (cash or a transfer from the government account).
28
Moneypenny
Govt acct down $100 ESA up $100 then Ps acct up $100 Govt liability $100 Bank asset (ESA) $100, Bank liability (to P) $100 Ps asset $100
If the government gives money to Adam then the CB decreases the government account, increases the ES account for Adams bank, and the bank increases Adams account. When the government spends money the ESA for a bank increases. When the government extracts taxes or fees then the banks ESAs go down. If the government wants to give the CB an asset in exchange for creation of HPM then it can sell the CB a bill or a bond. This creates a liability for the government and an asset for the CB.
26
Something huge just happened here, which the class will get to later. For the impatient people who cant wait, what weve just seen is that the private sector (i.e. people) just got some net financial assets. The private sector didnt have this before, net financial assets were zero. The only way the private sector can have net savings is if the government sector has net borrowings. Im ignoring correspondent banks see Committee on Payment and Settlement Systems (2003). The role of central bank money in payment systems. CPSS. Basel, BIS., for a fuller explanation that complicates but does not change the argument. If you dont like the idea of help then just assume the government wants to give somebody some money for some reason.
27
28
15
A bond is just a bill with more than a year till its repayment.
May Moneypenny
Isnt this just playing with words? the government account was already a liability? Some people like this approach because it looks like the CB balance sheet will balance. Not everybody looks at the total government spending as a drawing down of a bank account with the CB. So youre right May, the countrys balance sheet always balanced anyway. When the government account went down, the peoples accounts went up. When the government sold the bill the liability just got shifted to another form. The government can also sell bills to the people instead of the CB.
Neo Moneypenny
What if nobody wants to buy the government bills? Wont their price have to drop? Well answer this later.
Government Taxes and Fees

The government also takes money from people. This is called taxes and fees. The taxes and fees must be paid in cash or credit transfers from banks with an ES account. The amount of net physical money flow (cash) from the government is small, and well ignore this. Anyway, the government ends up giving almost all of this cash to the people anyway. If we all used credit cards or debit cards then we wouldnt need cash. When the government spends money the peoples bank accounts go up. When the government demands money the peoples bank accounts go down. The same thing happens to the banks ESAs. If the government takes more money than it spends it is called a surplus. The opposite is called a deficit. When the government has a surplus then the peoples bank accounts and the banks ESAs go down. Taxes and fees given to the government is equivalent to destroying money, just like the government spending money or giving money to people is creating money.
16
There is no direct linkage between taxes and fees demanded by a government, and the spending of a government. Governments do not need to raise taxes or borrow money in order to spend money If bank accounts are too hard to think about, then imagine just using cash. When the government gets cash by taxes it burns the bank 29 notes and melts down the coins . When it needs to spend money it prints new bank notes and mints new coins. If the government has a deficit it is creating money, if it has a surplus then it is destroying money. Frank is sure this wasnt in his economics course.
Private Sector Saving

Neo
What happens if we all want to save money? Thats a good thing isnt it? My mummy and daddy need to save for their retirement in 35 30 years time . Lets call the non-government part of the economy the private sector. If you want to save money using bank accounts or bills from companies then every one of these instruments has a corresponding liability. The private sector as a whole has no net savings. If ordinary people want to save with the private sector then there has to be part of the private sector that wants their savings, otherwise the savings will just accumulate and earn no interest.
Moneypenny
Kay Moneypenny
Why wouldnt the banks pay them interest? The banks only want to take deposits if theyve lent the money out to somebody. If more people want to deposit money than the banks can find lenders then the banks will not give the depositors any interest.
29
This is not far-fetched. As mentioned on p46 Wray, L. R. (1998). Understanding Modern Money: The Key to Full Employment and Price Stability, Edward Elgar Publishing., hazelwood tallies were used as a record of debts and credits by the UK Exchequer up till 1826 and were effectively used as money. In 1834 a large number were burnt in the furnace of the Houses of Parliament, which overheated and caused the Houses to burn down. Yes, the class is 6 years old now, their parents are 35, and when they reach retirement age it will have to be beyond 70 years of age.
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If the depositors still want to put money in the banks with no interest, then the banks will start charging them fees so that they can still make a profit.
Neo
Then why not invest money in the stock market? My parents say that is always a good investment for the long run. A share in a company is still a financial asset and leaves the net financial assets of the private sector at zero. If you buy a share your cash holding goes down and your share assets go up by the same amount. The person who sold the share now has cash and their cash holding goes up. Also consider, if shares are so good then why has the person who originally held the share sold it? It doesnt matter whether a person saves via bills or shares, we still have net zero financial assets in the private sector. Some parts of the private sector can save only if there is another part of the private sector that wants to be a borrower. The only way the private sector can be a net saver is if the government sector runs a deficit. The simplest way to see this is to imagine a world where all money is cash. If people want to save by putting coins in a piggy bank then the coins have to be issued by the government and be in surplus above what the government demands back in taxes and fees. Thats a government deficit. Now this really wasnt in Franks basic course. What was he being taught? Ah now he remembers! Back in the early 1970s all the textbooks were written during the Bretton Woods era, effectively a gold standard. He 31 hopes the textbooks have improved by now .
Moneypenny
Neo
What if the government makes the deficit so big that there is more money than people want to save? What happens to the extra money? Thats what we asked at the beginning of class! How does all this affect actually making stuff? We have to get our lunch from somewhere.
Karl
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Unfortunately for many students most of the textbooks havent improved.
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May Moneypenny
What happens if the government runs a surplus? Some politicians say this is a good thing. Thats enough for today. Lets do something with animals. Lets look at some animals and see what they have in common. Then we can draw what we imagine their last common ancestor looked like. Ok, well start with a horse and a bee.
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Day 3
On the third day there were a number of questions left over.
Government deficits
Class
Miss, what happens if the government just makes lots and lots of money, more than it takes in taxes? The Government has a deficit. Some of that money will be immediately saved by the private sector as we talked about yesterday. In other words, it will just stay in their bank accounts or will be used to buy financial assets and will then sit in the financial asset sellers account. The extra money that isnt saved will be used to buy various things. This will lead to more things being bought and sold, or if there is no way people can make more things then the prices of things will most probably rise. If people arent working as much as theyd like, or if factories arent working as fast as they can then the extra spending will most probably be a good thing. All of the deficit will be sitting in somebodys bank account at all times, so represents net financial assets of the private sector.
Moneypenny
Neo
What happens if the government spends more and more and more money? It depends on what's happening in the economy. Let's say that Adam wants to buy some milk but can't because he doesn't have a job. In fact lots of people don't have jobs. Companies don't want to give people the jobs because they're not sure that they can sell what they make. Banks don't want to lend money to people because they worry that they won't be able to get their money back.
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What happens if the government gives Adam $10?
Government account at CB goes down by $10 Bank reserve account goes up +$10 Bank liability to Adam $10 Adam asset +$10 Adam account $0 Milkman account +$10 Milkman account goes down Farmer account goes up
Adam buys $10 of milk from the milkman The milkman gives some money to the dairy farmer If the milkman and the farmer had spare time and spare milk then this extra activity won't cause them to raise their prices. The economy grows by the amount of spending that the $10 given to Adam makes as it passes from person to person. The $10 stays in the banking system as a liability of the bank, and as an asset of whoever leaves some of it in the bank instead of spending it all as it passes from hand to hand. So if there is a lot of spare time and lots of things that people want to sell then this extra money made by the government won't move prices up. On the other hand, let's say the farmer had no spare milk to sell. Then Adam wanting more milk will most probably make the price go up. There is no simple answer to the question of what happens if the government keeps spending money. If there are plenty of people who want to work but can't get a job, and people have plenty of things to sell and no buyers, then the extra government money won't make prices rise. If there are few spare goods, and almost 32 everybody has a job then prices will rise .
Adam spends $10 milkman spends $9 farmer spends $8 on clothes tailor spends $7 ... ... last person saves $1
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Weve come to an important point here, which is perhaps too complicated (maybe unnecessary) for a kindergarten class as it involves a degree of unlearning, and our little kiddies havent learned bad ways of thinking. Notice that there is no question about funding the deficit, if we consider funding as being via taxation or borrowing. The government can just spend any amount the additional spending is funded via
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Class
Is that the only effect of government creating money? No. There is an effect on interest rates. The bank has an extra $10 in its reserves. If the central bank doesn't pay interest on these reserves then the bank will make more money if it takes the money out of reserves and lends it to somebody. Because the bank needs to find some one to lend the money to, it has to charge a lower rate of interest than normal. The more money the government spends, then the more the bank has in reserves. This means there is more the bank wants to lend and so the interest rate has to go down further. Frank is now extremely confused and needs to unlearn even more stuff. He keeps hearing from some economists that if the government keeps spending then interest rates will have to rise. Now he sees that as long as there is slack in the economy, more government spending will cause interest rates to drop. This can't be right! What country has a very high government deficit and low interest rates? Oh! Japan!
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Class
What happens in the opposite case. What if the government has a surplus and takes more taxes than it spends? Remember in yesterday's class we talked about a surplus being the same as a government destroying money. Well, if there is too much money in the economy then maybe that's a good thing. If there is just the right amount of money, maybe that's a bad thing.
seigniorage, the creation of money. Walsh (2010) Chapter 4 shows one way to consider seigniorage as one component of funding a government spending. It is the question of what happens in the economy that decides how much of a surplus or deficit the government should aim at. Thinking about how a government needs to finance a deficit is one of the institutional frameworks of an economy that hides what is actually happening with fiat money. The nexus between spending and taxing or borrowing is via the effect on the economy, not via an artificial consideration of funding.
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This is complicated by the inability of banks to exchange CB reserves for ordinary deposits. In most economies the interest rate effect is transmitted through the government bond, note and bill markets.
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Class
How can you have too much money? Imagine if a bank was feeling very happy and trusted lots of people. Then it might lend them lots of money. If everybody is already working hard and making all that they could make, then this extra money might just make the price of things go higher. That's too much money. If the government spends less or takes more money in taxes and fees then the money will be taken out of the economy. That would most probably be good. Frank wonders about raising interest rates? Would this have the same effect? Its most probably too difficult for a kindergarten 34 class .
Class
What happens if the government runs a surplus and there is just the right amount of money in the economy and everybody is working? Let's say Adam now has to pay an extra $10 in taxes. He decides that he will pay taxes rather than spend the $10 buying something from Beth. The government keeps this $10 and so the net financial assets of the private sector has fallen. Beth now has $10 less money coming in, and so she has to decide where she will stop some of her spending or saving. If Beth cuts her spending by $10 then somebody else has to then cut their spending or saving by $10. The net financial assets will shrink. But there was another way Adam could get his $10. That is by borrowing the money from the bank. When we looked at bank lending money two days ago, we said that the people who borrowed the money spent it and the money went into their bank account, so the bank still had the same amount of assets as liabilities. This doesn't happen now. Adam takes his money and gives it to the government. The bank has to find someone who is willing to lend it $10.
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This is a difficult topic and Ms Moneypenny will get to it when she has taught the class a bit more.
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Whoever lends the bank $10 will have $10 less to spend and the economy will shrink like it did before. So if the government runs a surplus then the 35 economy will shrink . Neo MP But isn't the government saving this surplus? You weren't listening properly yesterday! Where does the government put this surplus? It is just a number in a ledger. You and I can save money, but the government is a different sort of thing.
Government saving in financial assets

May MP What happens if the government wants to save? Who is it going to give the money to? The government has to buy something from somebody. If it buys a persons labour or their physical asset then that is just the same as the government spending money. If the economy has some slack then prices may not rise, but if the economy has no slack then the spending may increase prices. If the government buys financial assets then the price of those assets may also be pushed up, unless there is more of the financial assets than people want. The price that the government pays for the financial assets will be transmitted as cash into that persons bank account. So government saving is just like spending. It creates net financial assets in the private sector. In fact, the more the government saves like this, then the lower will be the surplus. If the government tries to save all the surplus then 36 there really isnt a surplus . Government spending + saving = private income + assets
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In modern times, when governments have a run of (true) surpluses they have always been followed immediately by a recession. It is difficult to show causation in these instances as an exogenously caused recession will usually stop surpluses because of automatic stabilisers. The importance of the logical argument in class is that it shows that there is an important effect on the economy when the government runs a surplus. This effect does not depend on theories of money, it is a simple application of stock/flow analysis. On the other hand, if the government just leaves the money sitting at its CB on the government account then this is equivalent to the money being destroyed there is no effect on the private sector. The money is recreated when the government spends by either buying assets, labour, or private
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Karl
So if the government is running a surplus because the economy is hot, then spending that surplus by buying assets may just cause price rises. Very good, Karl. If the government wants to slow an economy by having a surplus then it can only do this by destroying the money. If the government has a surplus when the economy is not overheating then it is shrinking the economy by destroying the private sectors net financial assets. If the banks keep lending fast enough then the economy may keep growing because we see the amount of buying and selling still going up. If the government keeps taking more money than it spends then the private sector may eventually reach a point where it feels that its net financial assets are too low. At this point some people might start to try to save more assets. This will slow the economy as we discussed earlier.
MP
MP
Now were finished this topic. There is a lot more to discuss but thats enough for now.
sector financial assets. Any interest payment on the balance kept at the CB is just a fictional accounting entry the government has no more capacity to spend than it did otherwise.
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Day 4
On Day 4 the class wants to discuss something that was passed over on Day 1 what about the rest of the world? Does it have an effect on the conclusions about modern money?
Class
Miss, you ignored the rest of the world when we talked about money before. But we get lots of our phones and other things from overseas, what if they didnt want our money? Why would they sell us things? I still want to talk to my granny in England on the phone each day, but if nobody wants my mummys dollars then I cant do that. Its a little more complicated than last time, but in the end its about people, and groups of people, trusting each other.
May
Moneypenny
The major players
Here are the Australian people
Here is their Government.
Here is the rest of the world its made up of .people and governments too.
The Real Economy Again

Moneypenny
Just like in our economy, we like to swap and trade things with people in other parts of the world. When we add up all the trading between people all over the world its called the global economy. What is the size of the global economy?
Class
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Moneypenny
The global economy is much bigger than any one countrys economy. Like I mentioned earlier, if we add up all the cash and credit that people use to buy things in a year then that is one way to guess the size of the local economy in that year, we can do the same thing for the world. What makes it harder is that different countries use different sorts of money.
International Money
All countries have some form of physical money - cash. Countries also have their own Central Banks. These CBs have Exchange Settlement Accounts (or Reserve Accounts) that their local banks use as part of their payment system.
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People put a price on the things they want to 40 get, or get rid of , in their own currency
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One of the things you can buy is an amount of another countrys money. Lets use an example to keep this as easy as possible an Australian, Sheila, wants to use Australian dollars to buy a British pound. A Briton, Tommy, may want to sell their pound for $2.00. This price is called an exchange rate 1 = $2.00
Neo
Miss, all British prices are in pounds, why isnt the price of a pound also given in pounds?
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Miss Moneypenny doesnt want to go into the messiness of the Eurozone, and for the purposes of this discussion she is treating that zone as one country, which, in terms of this discussion, is entirely accurate. She is keeping things at the level of developing and developed economies. She doesnt want to discuss the problems of countries that are so mismanaged they dont have a credible central bank. This includes the Eurozone. We are not going to get into the vexed question of value in this discussion because we are talking about money, and so the only thing we can see are the transactions being undertaken. Because we are looking at the mechanics of money we will also assume that any issue of coercion in these transactions can be ignored essentially the transactions are freely entered into. Things include services and intangibles.
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Moneypenny
It is, Neo! The price of a pound in pounds is always a pound! But if somebody wants to buy a pound using dollars then you have to give the price in dollars. Its the same when Sheila wants to buy or sell a dollar, she has to give the price in pounds to Tommy. Frank has to be very careful here. He is always confused when talking about currency and is likely to get things backward.. The exchange rate 1=$2 is also the same rate that would be used if Sheila wanted to sell dollars. She would sell $2 for a price of 1. If Tommy and Sheila were happy with cash then they could swap a $2 coin for a 1 coin and that would be that. But if it was $2m and 1m then we need to go through the payment systems. Tommy and Sheila each need an account in dollars and pounds one for paying and one for receiving. This is two bank accounts each. Sheila is going to give $2m to Tommy and receive 1m in exchange. If Tommy and Sheila both use the same 42 Australian bank then that bank decreases Sheilas dollar account by $2m and increases Tommys dollar account by $2m. Tommys pound account is decreased by 1m and Sheilas pound account is increased by 1m.
Sheila $2 Tommy Tommy 1 Sheila
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Things are actually a little trickier than that. As discussed on Day 2, the payment system allows credit in a bank account to be transferred to some other bank in the banking system. At the root, this is done via the RAs. There is an implicit one-to-one exchange rate between a dollar (or pound) in a bank account and a dollar (or pound) in a RA. Note that this bank must offer both dollar and pound accounts.
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If Tommy and Sheila use different banks, which is quite common if they are in different countries, then the dollar cash flows go through the Australian payment system and the pound cash flows go through the UK payment system. The banks need to have an account with some bank in the other payment system for this to work. In other words, Sheilas bank has to have a pound account with a bank in the UK payment system so it can access that payment 43 system. And vice versa . The Australian bank may own the bank in the UK with access to the payment system. Similarly for the UK bank owning an Australian bank.
Tommys bank Sheilas bank
RBA
BoE
International Trade
Karl
Miss, why do Australian banks have to borrow overseas? My mum says this is letting us be controlled by foreigners. Lets see what happens when somebody buys something from overseas.
Moneypenny
Sheila wants to buy an Aston Martin One-77 from Tommy. This costs 1m . She will have to find $2m to pay for this.
Sheila buys 1m from her bank for $2m and asks Aus Bank to put this into Tommys UK Bank account. To do this, Aus Bank buys 1m from UK Bank and transfers this to Tommys account. Lets look at what happens in detail. We will assume that Aus Bank has a pound account with UK Bank, and UK Bank has a 44 dollar account with Aus Bank . Aus Bank adjusts Sheilas account down by $2m. Aus Bank credits UK Banks dollar account by $2m. Aus Bank starts with a $2m liability (to Sheila) and ends with a $2m liability (to UK Bank).
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Settlement most probably would be done via CLS Banks continuous linked settlement accounts, but as these effectively clear through the central banks this is left out of the discussion. See http://www.cls-group.com/About/Community/Pages/CentralBanks.aspx Were talking about correspondent banks with their nostro and vostro accounts.
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UK Bank credits Aus Banks pound account by 1m. UK Bank transfers 1m from Aus Banks account to Tommys account. Aus Bank starts with no pounds and ends with no pounds. Notice what has happened here. Aus Bank now has a liability of $2m to UK Bank. UK Bank has a $2m asset in Australia. There has been no growth in credit in dollars. UK Bank started with nothing and ends with a $2m asset (owed by Aus Bank) and a 1m 45 liability (to Tommy) . There has been an increase of 1m in credit in pounds. It looks like UK Bank has lent more pounds. If there are no other overseas transactions in the opposite direction then Aus Bank has a liability to UK Bank at the end of the day. This is exactly the same position that Aus Bank would have if it had borrowed $2m from UK Bank. What this means is that Aus Bank automatically looks like it has borrowed from overseas whenever it helps one of its customers buy something from overseas. Note very carefully: Aus Bank did not have to explicitly borrow money overseas, the liability occurred when Aus Bank bought 1m from UK Bank and UK Bank was comfortable having a $2m asset at Aus Bank (its positive account balance). UK Bank has bought the $2m account for 1m.
May Moneypenny
What happens if no one wants to sell pounds to Aus Bank? Aus Bank would not be able to sell the pounds to Sheila, so she would have to go to another bank (XYZ) for the pounds. The dollars would be shifted from her account through the ESA to XYZ bank and things would go through as weve just explained.
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UK Bank has a currency mismatch. There has to be someone in this series of transaction who ends up with a currency mismatch as we have a physical asset that has its price denominated in pounds being bought by someone using dollars. It could be Sheila, who could borrow pounds directly; or Tommy, who could just accept the dollars; or Aus Bank, who could credit Tommy using its ESA without buying new pounds.
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Complicated part that can be ignored

Things get more complicated if we look at what happens if Aus Bank and UK Bank dont have accounts with each other and Aus Bank buys pounds through another bank XYZ Bank.
Aus Bank $ESA is reduced by $2m and XYZ 46 Banks $ESA is increased by $2m .
Aus $
XYZ $ XYZ Banks ESA is decreased by 1m and Aus Banks ESA increased by 1m. Aus Bank transfers 1m from its ESA to UK Banks ESA and ESA credits Tommys account with 1m. Aus Bank starts with no pounds and ends with no pounds. Aus Bank starts with a $2m liability (to Sheila) and a $2m asset in the $ESA. It ends with an $ESA which is $2m lower than it started and no $2m liability. Its balance sheet still balances XYZ Bank ends with $2m extra in its $ESA (a new asset) and 1m less in its ESA (less 47 assets). Its balance sheet still balances . UK Bank started with nothing and ends with a 1m more assets in the ESA and a 1m liability to Tommy. If Aus Bank needs to find $2m to get its $ESA back up to its original size then it knows that XYZ Bank may have too many dollars and so it should be able to borrow them. When Aus Bank borrows from XYZ Bank we have $2m transferred from XYZs $ESA to Aus Banks $ESA and Aus Bank has a $2m liability to XYZ Bank. This is explicitly borrowing money from overseas (if XYZ is overseas), but see the later discussion on other ways Aus Bank could fix up its shortfall..
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This could be happening through CLS Bank. I have removed CLS Bank from the description and presume everything is operating through the ESA of the central banks. But the balance sheet needs to be adjusted in the future as the exchange rate moves - profit or loss will appear.
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Aus Bank has a $2m asset in its ESA and a $2m liability to XYZ. XYZ has $2m fewer assets on its ESA which is matched by a new $2m asset from Aus Bank. So, whether it looks like an Australian Bank has borrowed overseas depends on whether it has accounts with other overseas banks or it has to settle its buying and selling through ESAs.
Complicated part finished

Karl Moneypenny
What if the foreign bank wanted its money back? Lets take the first case: Aus Bank has a $2m liability to UK Bank. It now needs to pay that $2m. Lets also assume that UK Bank has a $ESA. Aus Bank moves $2m from its $ESA to UK Banks $ESA. This pays back the loan. Aus Bank has $2m less assets in its $ESA and $2m less liability. Its balance sheet still balances and is $2m smaller.. UK Bank has $2m more assets in its $ESA and $2m fewer assets in its loans. Its balance sheet still balances and is the same size. The amount of credit in $A is $2m lower. The total amount of money in the ESAs stays the same.
Karl
What if Aus Bank didnt have enough in its $ESA? There are a number of ways this could be done. The simplest would be for Aus Bank to borrow $2m from someone who doesnt bank with Aus Bank this could even be another bank. This then would transfer $2m from their banks $ESA into Aus Banks $ESA. The total amount of credit in the system stays the same. Secondly, Aus Bank could sell some of its assets to someone for $2m and this would be transferred to the Aus Banks $ESA. Notice that the assets need to be sold to someone who doesnt bank with Aus Bank so that there can be a transfer of money between the two ESAs.
Borrow
Sell assets
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The total amount of credit in the system stays the same. If Aus Bank sold one of its assets to a depositor for $2m then it would reduce the depositors account by $2m. This would reduce Aus Banks balance sheet by $2m but would not change its $ESA. Thirdly, if Aus Bank has good quality assets then the RBA may buy them and credit the $ESA.
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Sell to central bank
Fourthly, the RBA may lend $2m to Aus Bank for a short period of time the RBA will credit 49 $2m to Aus Banks ESA . Notice in all this that the total amount in the $ESA either stayed steady if the banks did something with other people or the amount went up if the bank did a transaction with the central bank.
Karl
Borrow from central bank
What if no foreign bank wanted to have a positive account with an Australian bank? Wouldnt they cause a massive crash? There would be a big shift of $ESA assets from accounts of Australian banks to accounts of foreign banks. This may cause all the Australian banks to have amounts in their $ESA below what the central bank likes, or the 50 amounts may even be negative. I told you ways that the banks who are short can solve this problem earlier. In the shortterm the only way to fix this is for the RBA to 51 lend money to the Australian banks. Notice that the foreign banks still own A$.
Moneypenny
Neo
Where does the RBA get the money? It cant just come out of thin air!
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Such as Australian Commonwealth Government Bonds Of course the third and fourth methods are often combined in a repo transaction. This distinction between Australian and foreign banks is arbitrary, it could just as easily describe some other subset of banks having ESA assets moved from them. These would then be short ESA cash but other banks would be equally long. There can be a run on a subset of banks but there cant be a run on the banking system as a whole apart from cash, the only way to get money out of a bank is to transfer it to another bank or else buy something with it, which then transfers the money to the account of the seller. Via repo transactions usually.
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Moneypenny
Neo, youve forgotten our earlier lesson. The central bank is a bank, and can create credit the same way as any other bank. There is no physical limit to how much it can create, though there may be other limits. What if all the foreign banks wanted to get out of Australian dollars? What if they didnt trust the $ESA amounts at the RBA. First we need to notice that we made things too simple in our talk earlier. We made it seem that all the people who had an account in dollars and who owed pounds were foreign banks, and all their holdings were in $ESAs.. This doesnt have to be the case; it could be companies and people who have the mismatch directly. This does not change the discussion below. We also need to be careful about what we mean when we say the banks dont trust the $ESA amounts at the RBA. There are two separate things the safety of the amounts of the $ESA, and the fact that the assets in A$ arent matched by debts in A$. The amount in the banks $ESA can only be made smaller by a deliberate act of the Australian government. This is a political 52 question and wont be discussed here . If a foreign bank wants to reduce its net exposure to A$ then it has to find someone who would want to buy A$. This would then allow it to reduce its dollar holdings by transferring the amount to that other person.
Karl
Moneypenny
Karl Moneypenny
What if its a person who wants A$? The person (P) who buys the A$ has to have an A$ bank account, and the bank that has P as a customer will have the $ESA account. This will be matched by the account with P so it wont have a net exposure to dollars. If nobody wants to buy dollars at the current price then the price of dollars will have to drop until somebody is willing to buy dollars at the lower price.
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The economic and political situation would have to be extreme for this to be contemplated by the government. Even in the turmoil of the GFC there was no sovereign country that contemplated this. Note that Iceland defaulted on its GBP and EUR obligations, not its ISK obligations.
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The people who start with assets in dollars will lose when this happens because their assets in dollars will be worth less in the foreign currency, while their debts in the foreign currency will still be worth the same amount.
Neo Moneypenny
What if nobody wants to buy dollars at all! Nothing will happen there will be no foreign currency exchanges for dollars. The people who have dollars cannot buy foreign currency and the foreigners who have dollars cannot sell them. All transactions in dollars will continue as normal. That nobody would want to buy dollars is very unlikely. There are lots of Australians who have some foreign currency and when the price of dollars gets cheap enough then Australians will buy dollars with the foreign currency they own. It is quite likely they will get many more dollars for the foreign currency than they paid for it. Or, Australians that have physical assets that foreigners want, like iron ore, could sell the iron ore to someone who has dollars and have the A$ transferred to their account.
Karl Moneypenny
What if its not foreign banks that own the dollars but its foreign people or companies? Theres not much difference. The people with the dollar assets have to find someone who wants the dollars. Otherwise they are stuck with them. If a person P has lent ABC bank $Xm, say by owning a bank bill, then when this needs to be repaid ABC bank puts $Xm into Ps account. If P then wants to get rid of this money they have to find someone who wants dollars. Its the same problem that the bank had. If P doesnt want the dollars to be owed to it by ABC bank then they have to transfer them to a bank that they do trust.
May
Miss, Ive heard that Australian banks have borrowed overseas and could have a problem if foreigners dont want to lend to them anymore. Is that true?
Moneypenny
You shouldnt believe everything youve heard, especially in newspapers, and especially if the banks tell you it.
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Lets assume that the banks have borrowed only in A$. We have a simple question to ask given what we have discussed up to now. What are the foreigners going to do with their A$? Their A$ will be in a bank account or be an financial asset like a bill for A$1m. When the bill matures the bank will create the A$1m in 53 the foreigners account and destroys the bill. The foreigners are stuck with A$. The only way they can get rid of them is to find an Australian who wants them for a sufficient price in another currency. So the problem is not with Australian banks if the foreigners want to reduce their lending, the problem is with the foreigners. How are they going to reduce their A$ holding? The reason it seems to be a problem is that people forget that the whole banking system acts in a different way to an individual bank. A single bank may have a problem if people dont want to lend to it, but the banking system as a whole does not have a problem. Assets still match liabilities, which have just changed form, not amount.
The Payment System

Neo Moneypenny
Where does this Australian money actually live? Is it overseas or is it in Australia? Remember that, apart from cash, the money that ordinary people have is just a promise from a bank that they have a certain number of dollars in their bank account. This bank account can be used to pay bills and buy things through the banks payment systems. The payment system operates through the central banks Reserve Accounts. If the bank that has your A$ account is overseas then you, and everyone you want to buy things from, have to trust that bank to operate the A$ accounts in a sensible fashion.
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This is the opposite operation of the bank destroying A$ in an account when it originally sells the bill.
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The simplest way for this to happen is for the overseas bank to be connected to the Australian 54 payment system . And that is quite enough for today.
For more background on these ideas a partial bibliography is: (Wray 1998), (Wray 2007).
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This is the usual case. See, for instance, paragraph from p7 of He, D. and R. N. McCauley (2010). "Offshore Markets for the Domestic Currency: Monetary and Financial Stability Issues." SSRN eLibrary. That said, it should be clear that in the normal case the offshore market does not exist in isolation. In fact, the payment flows associated with these accounts and investments ultimately pass through bank accounts in the United States, just as payment flows associated with non-bank financial intermediaries in the United States ultimately pass through banks in the United States. While the US authorities put in place capital controls from the late 1960s until the early 1970s, they never impeded the flow of payments through US banks to allow the settlement of offshore trade and investment transactions. Offshore markets in a currency can flourish if offshore financial institutions are able to maintain and to access freely clearing balances in the currency with onshore banks (Dufey and Giddy (1978)). In other words, non-resident convertibility of the currency is allowed at least for overseas banks. Once this condition is met, both long and short positions in the currency can be built up offshore even without a wholesale liberalisation of capital account controls by the onshore country authorities. If offshore banks do not have free access to clearing banks kept with onshore banks, then offshore markets can still exist, though in a more limited fashion, through non-deliverable contracts, as argued below. What are these non-deliverable contracts? Interest rate swaps and forward currency contracts. Notice that He and McCauley say, contrary to what some people expect, Eurodollar accounts in London eventually clear through the US.
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Bibliography
Carroll, L. (1871). Through the Looking-Glass, and What Alice Found There Macmillan. Committee on Payment and Settlement Systems (2003). The role of central bank money in payment systems. CPSS. Basel, BIS. He, D. and R. N. McCauley (2010). "Offshore Markets for the Domestic Currency: Monetary and Financial Stability Issues." SSRN eLibrary. Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. Cambridge, Macmillan, Cambridge University Press. Mitchell, B. (2009). "In the spirit of debate my reply Part 2." Retrieved 8 October 2009, 2009, from http://bilbo.economicoutlook.net/blog/?p=5224. UBS (2008). Shareholder Report on UBS's Write-Downs, UBS AG: 50. Walsh, C. E. (2010). Monetary Theory and Policy. Cambridge, Massachusetts, The MIT Press. Wray, L. R. (1998). Money and Taxes: the Chartalist Approach. SSRN eLibrary. Wray, L. R. (1998). Understanding Modern Money: The Key to Full Employment and Price Stability, Edward Elgar Publishing. Wray, L. R. (2007). Endogenous Money: Structuralist and Horizontalist. SSRN eLibrary.
38
15thGlobalConferenceofActuaries PlenarySession ActuarialFrontiers

17TH19THFEBRUARY FEBRUARY,2013ATHOTELGRANDHYATT(Santacruz East), East) MUMBAI
ModellingandManagingLongevityRisks
MichaelSherris
CEPAR, ,AIPAR SchoolofRiskandActuarialStudies AustralianSchoolofBusiness UNSW
Coverage
GlobalPensionsandLongevityRisk LongevityRiskModellingandManagementFrontiers ResearchprojectsinCEPARandSchoolofRiskandActuarialStudiesatUNSW Areas:
consistentframeworkforstochasticmortality ageperiodcohortmodels longitudinalmortalityriskfactorsandNorwegianmortality modellingcauseofdeathandcauseelimination regulationandcapitalrequirementsforlifeannuitiesinaninsurervaluemaximisation framework residentialhousepriceriskmodellingandapplications healthriskandfinancinglongtermcareincludingreversemortgages
PensionSystemsAsiaPacific
PredominantlyPublicDBandDCschemes PrivatemandatedDCschemes Australia
CoverageofMandatoryPension Schemes
Pakistan India Vietnam Indonesia Philippines China Thailand SriLanka Malaysia Korea Singapore g p HongKong Italy France OECD34 Germany Australia Canada UnitedStates UnitedKingdom NewZealand J Japan 0 10 20 Populationaged15to64
Relativelylow coveragein Asia/Pacific countries Potential future increasesin coverageand funding implications
30 40 50 60 70 80 90 100
Source:PENSIONSATAGLANCEASIA/PACIFIC2011OECD2012WorldBankPensionDatabase
PopulationAgeing Asia
Projected percentage of population aged 65 and over (Asian economies) 35
CHN
30
IND IDN MYS
Ageing acrossthe region Implications forretirement andlongterm careand healthcosts
25 Perce entage
20
PAK PHL SGP
15
10
LKA
THA VNM
0 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 Year
Source:PENSIONSATAGLANCEASIA/PACIFIC2011OECD2012
ConsistentDynamicMortalityModel
Survivorcurve Multiple p factors Swedishmortality1910to2007 ages50to100

6
Age Period CohortModels

Trendmodels birthyearorcohorteffecta significant i ifi ttrend t dfactor f t Periodeffectslesssignificant(Spanishflu) LinkstoLeeCarter
LongitudinalAnalysis HRSand NorwegianData

Paneldataand logisticmodels Mortalityrisk factorsatan individuallevel
CausalMortalityModelling
Simultaneously modelledperiodic mortalitytrendsby causeofdeath.
Thei Th impact tonlif lifeexpectancy t undercauseelimination. Inherentdependenciesamong competingcausesisaccountedfor!
PwCMercerPensionerData
Pensioners by cohorts (Relevant ages)
0.3 0.25
Smoo othed x
C1: born 1915-24 C2: born 1925-34
Hazard Ratios (Cox PH model)

Males Pension sizes: Low Average (ref.) High Specific f schemes: Federal-CSS (ref.) Federal-PSS NSW-SSS NSW-SASS NSW-PSS NSW-EISS Victoria-SSS Victoria-ESSS South Aust-SASS Tasmania-RBF Tasmania RBF Western Aust-GESB Queensland-SS Queensland-PS Grouped schemes # subjects Chi-squared df Adjusted R2 1.23*** 1.00 0.64*** Females 1.13*** 1.00 0.77***
0.2
C3: born 1935-44
0.15
C4 born C4: b 1945 1945-54 54
0.1 0.05 0 55 60 65 70 75 80 85 90 95 100

Age
As a proporti ion of General Pop. mort tality rates
1.4 12 1.2 1.0 0.8 0.6 04 0.4 0.2 0.0 55
Extent of Longevity Selection Risk
1.00 0.71*** NA(b) NA(b) NA(b) NA(b) NA(b) 1.01 NA(b) 1.00 1.07** NA(b) 1.38 1.03** 111,257 1,162 8 3.2%
1.00 0.84 1.05 0.90 NA(a) NA(a) NA(b) 0.86 NA(b) 1.01 1.16** 0.97 NA(a) 1.13*** 47,350 102 10 1.1%
60
65
70
75
80
85
90
95
100
105
Age
Our estimates/ALT
Mercer's estimates/ALT
10
RetirementIncomeProductPortfolios
ImportanceofGSA ( t lrisk (mutual i ksharing) h i ) whenguarantee productsinclude loadings(capital costs) Indexedannuities dominate
Phasedwithdrawals (bequestmotive)and deferredannuity
Hanewald,PiggottandSherris(2011),IndividualPostRetirementLongevityRiskManagementUnder SystematicMortalityRisk.
11
SolvencyandPricingforLifeAnnuities
Differentdefaultlevels:optimal loadingthatmaximisesEVA Sensitivitytosolvencyhas importantimpactonvalue
12
LifeInsurerLongevityRiskManagement
Amulti ltiperiod i dstochastic t h ti model d lfor f an annuityproviderfacingsystematicand idiosyncraticlongevityrisk Capital,premiumloading,longevity swap,longevitybond Frictionalcostsvs.costsfortransferring longevity g yrisk
SurvivalcurveforecastbasedonAffine TermStructureModelinBlackburnand Sherris(2012)
13
Thankyou MichaelSherris CEPAR,SchoolofRiskandActuarial Studies AustralianSchoolofBusiness UNSW

m.sherris@unsw.edu.au http://www.cepar.edu.au/ p // p /
AustralianResearchCouncilLinkageGrant
ARC CLinkage i k Project j 2008LP0883398 0883398 ManagingRiskwithInsuranceandSuperannuation asIndividuals I di id l Age A (20092013)
IndustryPartners:PwC,APRA,WorldBank Longevity Risk Models
Models to quantify risks related to longevity and morbidity
Product Risk Management and Residential Housing

Pricing, solvency, risk management and regulatory requirements for the prudential operation of longevity markets and institutions
Policy y and Regulation g

Prudential and policy implications of new product innovations in both retail and wholesale financial markets
15
ARC Centre of Excellence in Population p Ageing Research (CEPAR)

http://www.cepar.edu.au/ Collaborating universities: UNSW, The University of Sydney and th A the Australian t li N National ti lU University i it (ANU) The ARC Centre of Excellence in Population Ageing Research brings together g researchers, ,g government and industry y to address one of the major social challenges of the twenty first century. It will establish Australia as a world leader in the field of population ageing research through a unique combination of high level, cross-disciplinary cross disciplinary expertise drawn from Economics, Psychology, Sociology, Epidemiology, Actuarial Science and Demography Science, Demography.
16
For information: ARC L Longevity it Li Linkage k P Project j tR Research hW Working ki Papers P

2009and2010 S.WillsandM.Sherris:IntegratingFinancialandDemographicLongevityRiskModels (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1139724) S.WillsandM.Sherris:Securitization,StructuringandPricingofLongevityRisk(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1139726) Y.Choi andC.Kim:SecuritizationofLongevityRisksusingPercentileTrancheMethods (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1349398) C.N.NjengaandM.Sherris:LongevityRiskandtheEconometricAnalysisofMortalityTrendsandVolatility (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1458084) A.Ngai andM.Sherris:LongevityRiskManagementforLifeandVariableAnnuities (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1587890) J.EvansandM.Sherris:LongevityRiskManagementandtheDevelopmentofaLifeAnnuityMarketinAustralia (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1585563) D.SunandM.Sherris:RiskBasedCapitalandPricingforReverseMortgagesRevisited (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1588342) A.TangandM.Sherris:SpatialVariabilityinMortalityandSocioeconomicFactorsforAustralianMortality (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1594522) S.Gaille ill and dM.Sherris: h i AgePatternsand dTrends d in i Mortality li by b Causeof fDeath hand dImplications li i for f Modeling d li Longevity i Risk i k (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1694272) S.Gaille andM.Sherris:Modeling LongRunCauseofDeathMortalityTrends(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1705696) SGaille andM.Sherris:ImprovingLongevityandMortalityRiskModelswithCommonStochasticLongRunTrends (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1702029) J. J R. R Piggott Pi ttand dH. H Bateman: B t Too T Much M hRi Risk kt toI Insure? ?The Th Australian A t li (Non (N )Market M k tfor f A Annuities iti (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1706900) C.S.Kumru andJ.R.Piggott:ShouldPublicretirementProvisionbeMeanstested? (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1417763) R.SaneandJ.R.Piggott:ElderlymobilityandTradedownsinAustralia
2011 M.SherrisandS.Su:HeterogeneityofAustralianPopulationMortalityandImplicationsforaViableLifeAnnuity Market(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1779442) C.N.NjengaandM.Sherris:Modeling MortalitywithaBayesianVectorAutoregression (htt // (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1776532) / l3/ f ? b t t id 1776532) C.QiaoandM.Sherris:ManagingSystematicMortalityRiskwithGroupSelfPoolingandAnnuitisation Schemes (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1791162) C.BlackburnandM.Sherris:ConsistentDynamicAffineMortalityModelsforLongevityRiskApplications (htt // (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1832014) / l3/ f ? b t t id 1832014) D.H.AlaiandM.Sherris:RethinkingAgePeriodCohortMortalityTrendModels (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1838805) K.Hanewald,J.R.Piggott,andMichaelSherris:IndividualPostRetirementLongevityRiskManagementUnder S t Systematic ti Mortality M t lit Ri Risk k(htt (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1910961) // / l3/ f ? b t t id 1910961) K.HanewaldandM.Sherris:HousePriceRiskModelsforBankingandInsuranceApplications (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1961402) D.P.Blake,C.Courbage,R.D.MacMinnandM.Sherris:LongevityRisksandCapitalMarkets:The20102011 U d t (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1964636) Update (htt // / l3/ f ? b t t id 1964636)
2012 J.Ziveyi,C.Blackburn,andM.Sherris:PricingEuropeanOptionsonDeferredInsuranceContracts (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2005461) H.Chen,M.Sherris,T.SunandW.Zhu:LivingwithAmbiguity:PricingMortalityLinkedSecuritieswithSmooth A bi it Preferences Ambiguity P f (htt (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2007342) // / l3/ f ? b t t id 2007342) M.SherrisandD.TPHoQuang:PortfolioSelectionforInsuranceLinkedSecurities:AnApplicationofMultiple CriteriaDecisionMaking(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2020712) M.SherrisandE.Veprauskaite:AnAnalysisofReinsuranceOptimisationinLifeInsurance (htt // (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029314) / l3/ f ? b t t id 2029314) D.H.Alai,Z.LandsmanandM.Sherris:LifetimeDependenceModellingUsingtheTruncatedMultivariate GammaDistribution(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2033454) M.Nirmalendran,M.SherrisandK.Hanewald:SolvencyCapital,PricingandCapitalizationStrategiesofLife A Annuity it P Providers id (htt (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2069594) // / l3/ f ? b t t id 2069594) J.HY.Fong,J.PiggottandM.Sherris:PublicSectorPensionFundsinAustralia:LongevitySelectionandLiabilities (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078683)
Concurrent Session C4: 3 : Future of Non Life Insurance and DFA tools R. Chandrasekaran Secretary General, General General Insurance Council India

Industryhasgrown4timesinthepast11years
70 000 70,000 60,000 50,000 40,000 30,000 20,000 10 000 10,000 0 200102 200203 200304 200405 200506
GDPI/ GDP ,% %
0 80 0.80 0.60 0.40 0.20 0.00
Rs.Crores
200607
200708
200809
200910
201011
GDPI
IndustryPenetration
GeneralInsuranceIndustryComparison(FY12vs FY01)
Parameter FY12 FY01
No.ofInsurers No.ofOffices No.ofPolicies(million) No.ofEmployees No.ofAgents TotalAnnualPremium(Rs.Crs)GDPI PaidupCapital(Rs.Crs) FDI(Rs. (Rs Crs) Investment(Rs.Crs)
Source : IRDA Handbook, 2011, GIC Council Primary data
27 7,035 100 95,726 461,886 58,326 7,396 1 886 1,886 18,758
201112
9 3,252 37 80,900 45,000 10,137 1,247 119 850
Penetration A comparison p with BRIC countries

Industry Premium as % of GDP
3.00 2.50 2.00 1.50 1.00
0.56 0.70
0.67
0.62
0.64
0.61
0.60
0.60
0.60
0.60
0 50 0.50 0.00
Source : IRDA Handbook, 2011
20010 02
20020 03
20030 04
20040 05
20050 06
20060 07
20070 08
20080 09
20091 10
Brazil
Russia
India
PRChina
20101 11
Insurance Density in India
Life 60
Non-Life
50
40 US Dollar
30
20
10
0 Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source : Sigma report, Swiss Re
Premium - 2001- 2012

30 00 30.00 70 000 70,000
25.00
60,000
50,000 GDPI (Rs. In C Crores) 20.00 Y-o-Y Grow wth % 40,000 15.00 30,000 10.00 20,000
5.00
10,000
0.00 2002 2003 2004 2005 2006 2007 Financial Year 2008 2009 2010 2011 2012
Net Retention 2005-06 till 2010-11
Source : IRDA
Underwriting results
Detariffication
25
Compan ny Count
20 15 10 5 0 2001 102 2002 203 2003 304 2004 405 2005 506 2006 607 2007 708 2008 809 2009 910 2010 011 2011 112
Companies
CompaniesReportingProfit
CompaniesReportingLoss
21 Cos in red for FY11 & FY12 owing to Motor TP Insurance provisioning Declining support from investment income from FY09 onwards Between FY04 to FY08, significant contribution to PAT from companies & Specialized insurance Cos (ECGC, AIC)
Source : IRDA Handbook, 2011, GIC Council Primary data
PSUs, Private Sector Insurance
Profit After Tax
Rs. In Crores R
Private (excl Hlth Cos) Public Total
200405 Private (excl Hlth Cos) 121.92 121 92 Public Total 1,171. 1,293.
200506 154.38 154 38 1,319. 1,473.
200607 227.89 227 89 2,907. 3,135.
200708 44.46 44 46 2,205. 2,249.
200809 (172.2 (172 2 498.33 326.11
200910 (220.4 (220 4 1,062. 841.68
201011 (926.4 (926 4 (69.01 (995.4
201112 (1,120 (1 120 1392.59 272.39
Source : Fin .Highlights; Figures exclude .ECGC / AIC; Figures exclude Health Companies
Property Insurance

Property Exposure & Premium 2002-03 till 2010-11 2010 11

%increase i or decreasein Accumulationfrom lastyear 8.58 41.64 21.12 31.06 73.87 35.74 5.20 38 70 38.70 %increase i or decreasein Premiumfromlast year
FinancialYear 2003 2004 2005 2006 2007 2008 2009 2010 2011
S.IAccumulation (Rs.InCrs) 538,922.20 516,609.00 731,713.31 886,276.50 1,161,536.19 2 019 586 99 2,019,586.99 27,41402.65 28,83,830.96 39 99 313 82 39,99,313.82
Premium (Rs.InCrs) 3,658.89 3,876.87 4,207.30 4,725.25 5,533.55 4 949 62 4,949.62 4,993.74 5,554.89 6 471 18 6,471.18
5.96% 8.52% 12.31% 17.11% -10.55% 10 55% 0.89% 11.24% 16 51% 16.51%
Property exposure and Premium
Fire Insurance (Rate per mille)
Net Incurred Claim Ratio Trend
Trend Analysis - Fire

100% 80% 60% 49.57% 40% 30.33% 20% 0% -20% Net Incurred Claims ratio% Operating Profit ratio% 2003-04 30.33% 49.57% 2004-05 39.54% 38.55% 2005-06 64.56% 18.16% 2006-07 54.61% 31.26% 2007-08 72.88% 24.76% 39.54% 38.55% 18.16% 64.56% 54.61% 31.26% 24.76% 3.41% 1.32% -9.60% 2008-09 71.85% 3.41% 2009-10 76.66% 1.32% 2010-11 83.84% -9.60% 72.88% % 71.85% 76.66% 83.84%
Net Incurred Claims ratio%
Operating Profit ratio%
I n
C r o r GWP e Net Premium s
5000 4000 3000 2000 1000 0
2003-04 3161.62 2014.45
2004-05 3341.44 2184.24
2005-06 3750.06 2157.15 GWP
2006-07 4157.14 2022.25 Net Premium
2007-08 3517.29 1885.2
2008-09 3420.04 1986.57
2009-10 3869.25 2122.21
Dynamic Financial Tool for non life insurance industry

What is DFA?
Dynamic Financial Analysis (DFA) Systems model the Entire Operations (Liabilities and Assets) of an Insurance Company Statistical Simulation Techniques are used to model not only Point Estimates Estimates, but also the Distribution of Outcomes This s Provides o des Answers s e s Conventional Co e o a Analysis a ys s ca cannot o
What Is The Chance Of A Given Financial Result? How Often Is A Given Alternative Better? T What To Wh t Degree? D ? Under What Circumstances?
Steps in a DFA methodology

1 Identify Companys 1. Company s Needs and Objectives
i. ii. Return What is your measure of success? Usually stated in accounting terms Risk Why do you buy reinsurance? Measure of volatility of return, usually downside
2. Develop a Model Underlying Gross Liabilities by Line of Business 3. Select Reinsurance Options to Compare
a) b) ) c) d) e) How does changing retentions impact net results? What combination of excess and p pro-rata work best? What is impact of changing covers or inuring structure? How do loss sensitive and commission terms impact results? What is effect of combining programs across operating units?
4. Run DFA Model Several Times with Varying Structures 5. Create Output Statistics and Graphs / Tables to Evaluate Options p
A DFA model for an Insurance company
Data Requirements for a DFA tool

Data item Exposure Premium rates Premium receipt pattern Earning pattern Acquisition costs Operating costs UPR as at 31 Dec Claim reserves as at 31 Dec Claim payment pattern Claims inflation General inflation Mean of attritional loss ratio Standard deviation of attritional loss ratio Mean of large loss frequency Standard deviation of large loss frequency Mean of large loss severity Standard deviation of large loss severity Cat loss output Retrocession programs Retrocessionaire shares and credit ratings Correlations between groups Correlations between years Correlations between investment assets Correlations of investment assets with credit defaults Investment portfolio composition M Mean of f return t for f each h asset t class l Standard deviation of return for each asset class List of major operational risks Loss distribution for each major operational risk Correlation of operational risks with other components Capital required for special contracts Correlation of special contracts with other components Required output Category Earning Earning Earning Earning Expenses Expenses Run off Run-off Run-off Losses Losses Economic Losses Losses Losses Losses Losses Losses Losses Retrocession Retrocession Correlations Correlations Correlations Correlations Investment I Investment t t Investment Operational Operational Operational Special Contracts Special Contracts Output Primary Source Business Plan Business Plan IT IT Business Plan Business Plan IT IT Actuarial Business Plan Business Plan Business Plan Actuarial Claims Actuarial Claims Actuarial Internal Auditor Internal Auditor Internal Auditor Management Management Management Management Accounts M Management t Management Internal Auditor Management Management Management Management Management Secondary Source
Actuarial IT
Actuarial
Actuarial Actuarial Actuarial Actuarial A Accounts t Accounts Internal Auditor Internal Auditor Technical Technical
Sample input screen shots!
Single (Risk) Loss
Exposure curves used as Inputs!

LOCAL Small commercial (Swiss Re c = 2) (SI basis) ARAB Small commercial (Swiss Re c = 2) (SI basis) FAR EAST Small commercial (Swiss Re c = 2) (SI basis) INDIA Small commercial (Swiss Re c = 2) (SI basis) IRAN & TURKEY Small commercial (Swiss Re c = 2) (SI basis)
Fire
Motor Accident Med Ex E GA Other
UK / International Commercial GL - Low n/a / n/a
Benfield internal curve n/a / n/a
UK / International Commercial GL - Low n/a / n/a
UK / International Commercial GL - Low/Benfield internal curve for Proportional n/a / n/a
UK / International Commercial GL Low/Benfield internal curve for Proportional n/a / n/a
Engineering
Medium commercial (Swiss Re c = 3) (SI basis)
Hull
C Cargo
Medium commercial (Swiss Re c = 3) (SI b basis) i )
Medium commercial (Swiss Re c = 3) (SI basis) b i )
Profit and Loss Calculations

Accident Year Western Fire 2,180,000 2 180 000 206,868 15,555 222,424 1 958 241 1,958,241 1,653,535 88,451 1 565 084 1,565,084 436,133 0 436 133 436,133 90,997 (42,976) (133 973) (133,973)
Region Line ofBusiness (LOB) Gross premiumEarned Base RIPremiumEarned Re instatement premium TotalRIPremiumEarned Net PremiumEarned Gross Losses incurred Recoveries Incurred Net Losses Incurred Gross Expenses CommissiononInwardBusiness Net Expenses Gross UnderwritingResult Net UnerwritingResult Net Reinsurance Benefit
A Gross and a Net Summary
DFA Application for reinsurance

Schema DFA model for Reinsurance
Model Insurance and Asset Portfolio
Define Reins Structure
Simulate Results
Gross, Ceded, and Net et Results, esu ts, in Financial Accounting Framework
Loss distributions Limits Retentions Premiums Ceded Rates Balance Sheet
Reinsurance Model Options p

Gross G Business B i Loss L M Models d l
Aggregate loss models Individual Loss Models Frequency - Severity models for large losses Catastrophes losses
Individual Loss models Inputs from external CAT models
Reinsurance Options Net Business

XOL retention Pro Rata
Cession Fixed vs Sliding scale commission
Stop loss (attaching at 85% loss) and LAE (10 points of limit)
Model Outputs
Graphs
Shows range of outcomes for various options
Distribution table
Shows outcome averages and risk measures
Mean and Standard Deviation Percentiles
Risk Return graph

Shows risk return trade-off
Financial Statements
Balance Sheets
Nominal Net Present Value
Income Statements Cash Flow
Individual large loss

Individual Occurrence exceedence curves at various return periods for each Territory, Class and Sub-Class of business
P Pro R at ta F ire XL F ac
In d ivid al larg e lo ss O EP ( n o n -C A T ) 2 5 10 15 20 25 50 75 1 00 1 50 2 00 2 50 5 00 1000 0 22 6,59 8 42 9,44 8 47 6,12 6 51 7,34 2 52 3,19 4 57 2,92 1 57 9,19 6 58 2,38 2 58 5,52 7 58 6,93 4 58 7,83 4 58 9,70 9 70 3 59 0,69 9 0 125,334 173,204 175 804 175,804 177,201 0 128,520 217,459 333,612 452,733 941,442 1,179,722 1,412,752 1,597,888 1,678,842 1,723,750 1 762 882 1,762,882 1,820,656
Catastrophe Excess of Loss pricing

A t l L Actual Layering i I Information f ti XLlayer 1 2 3 4 Limit Deductible Actual ROL% LossRatio AdjRate 600,000 600 000 400,000 400 000 22.00% 22 00% 60 00% 60.00% 15 20% 15.20% 2,000,000 1,000,000 9.50% 39.58% 3.91% 2,000,000 3,000,000 5.90% 33.75% 2.03% 3,000,000 5,000,000 2.56% 25.00% 0.64%
ROL% 22 20 4 20.4 18.8 17.1 15.5 13.9 12.3 10.7 9 7.4 5.8 4.2 2.6
Implied riskrate 16 13% 16.13% 3.92% 1.54% 0.80%

LossRatio% 60 57 1 57.1 54.2 51.3 48.3 45.4 42.5 39.6 36.7 33.8 30.8 27.9 25
Property cat XL evaluation
Benefits of DFA Process Evaluate alternative Reinsurance Programme Risk vs Return trade off
Net profit profit, Return on Equity Equity, Return on Capital, etc.,can all be used to define Return Standard deviation or Variance can be used as simple measures of risk ; however it is more common to look at measures such Value at risk (VaR) or Tail value at risk (TVaR).
Ceded p premium vs ceded risk Maximise net profit vs return on equity Impact on capital requirement
Utility of DFA methodology

DFA studies can be made on a one-time basis, , if strategic g decisions of great significance are to be made.
Mergers and Acquisitions, Entry in or exit from some business, Thorough rebalancing of
Reinsurance structures or Investment p portfolios, , or Capital market transactions
If a company has set up a DFA model, it can recalibrate and rerun it on a regular g basis, , (quarterly (q y or y yearly) y) in order to evaluate the in-force strategy and possible improvements to this strategy. In this way, y, DFA can be an important p part p of the companys p y business planning and enterprise risk management setup.
Non life insurance and DFA tools
Business mix: Reinsurance: Asset allocation: Capital: Profitability S l Solvency : Compliance: Sensitivity: Dependency:
Conclusion Non life insurance industry is poised for significant growth in volume and complexity in the next decade decade. Management analytical tools cannot be static; i t d th instead they need dt to b be d dynamic i t to project j t downside probabilities and severity The market needs to adopt DFA tools and methodologies.
Thank you

H lth Insurance Health I Concurrent C tS Session i 3
Health Care Reforms in the USA and Lessons for India
Waves of ReformsOceans of Opportunities pp th 2013 AGFA & 15 Global Conference of Actuaries February 17-19, 2013 Mumbai, India Presented By: Richard A. Kipp, MAAA Principal and Consulting Actuary Milliman
May 31, 2012
October 25, 2012
Health Reforms At A Glance

Affordable Care Act (ACA) came into law which puts in place comprehensive reforms. Improves p access to affordable health coverage g and access to care for the most vulnerable. Protect consumers from abusive insurance company p yp practices. It allows all Americans to make health insurance choices that work for them. It provides new ways to bring down costs and improve quality of care.
February 18, 2013
Annexure
Additional details of the US health care reforms
October 25, 2012
Key y Features
Summary of Benefits and Coverage (SBC) and Uniform Glossary
Health insurers are required to provide an easy to understand summary about a health plans benefits and coverage. It helps in to better understand and evaluate your health insurance choices.
Preventive Care Services

Under ACA, ACA people enrolled under health plans may be eligible for some important preventive services which can help them avoid illness and improve their health at no additional cost.
P E i ti C Pre-Existing Condition diti I Insurance Pl Plan (PCIP)

The Pre-Existing Condition Insurance Plan makes health coverage available to those who have been denied health insurance because of a p pre-existing g condition, and have been uninsured for at least six months. It can also be used to treat pre-existing disease
February 18, 2013
Key y Features
Childrens Pre-Existing Conditions
Under ACA, health plans cannot limit or deny benefits or deny coverage for a child younger than age 19 simply because the child has a pre-existing condition that is, a health problem that developed before the child applied to join the plan.
Curbing Insurance Cancellations

ACA stops health plans from retroactively canceling the insurance coverage solely because member & members employer made an honest mistake on your insurance application.
Fi hti Unreasonable Fighting U bl Health H lth I Insurance P Premium i I Increases

The Act ensures that, in any State, large proposed increases will be evaluated by experts p to make sure they y are based on reasonable cost assumptions p and solid evidence. Additionally, insurance companies must provide easy to understand information to their customers about their reasons for significant rate increases.
February 18, 2013
Key y Features
Removes Insurance Company Barriers to Emergency Services

You can seek emergency care at a hospital outside of your health plans network. You do not have to bear extra co-pay or co-insurance.
Consumer Operated and Oriented Plans (CO-OPs)

ACA creates a new type of non-profit health insurer. These insurers are run by their customers CO customers. CO-OPs OPs are meant to offer consumer-friendly consumer friendly, affordable health insurance options to individuals and small businesses.
The Health Insurance Marketplace (Exchanges)

The Health Insurance Marketplace is designed to make buying health coverage easier and more affordable. The Marketplace will allow individuals and small businesses to compare p health p plans, g get answers to q questions, find out if they y are eligible g for tax credits for private insurance or health programs like the Childrens Health Insurance Program (CHIP), and enroll in a health plan that meets their needs.
February 18, 2013
Key y Features
Medical Loss Ratio (MLR)

MLR requires insurance companies to spend at least 80% or 85% of premium dollars on medical care, with the review provisions imposing tighter limits on health insurance rate increases. If they fail to meet these standards, the insurance companies will be required to provide a rebate to their customers.
State Innovation Waivers

The Affordable Care Act allows for States to pursue strategies to help people obtain affordable health insurance. The rules lay out the steps States will have to take to gain an Innovation Waiver under the Affordable Care Act.
Annual Limits
Annual limits are the total benefits an insurance company p y will p pay y in a y year while an individual is enrolled in a particular health insurance plan. Starting in 2014, the Affordable Care Act bans annual dollar limits.
February 18, 2013
Key y Features
Healthcare.gov
HealthCare.gov is the first central database of health coverage options, combining information about public programs with information on more than 8,000 private insurance products. Consumers can review options specific to their personal situation and local community. The website connects consumers to quality rankings for local health care providers as well as preventive services.
Risk Mitigation
There are three risk mitigation tactics in play starting in 2014. They are Risk Adjusters, Reinsurance and Risk Corridors.
Taxes and Fees

There are numerous new taxes and fees that are assessed for various purposes.
Many other features too numerous to describe
10 February 18, 2013
Summary of ACAs 3 Main Risk Mechanisms

Reinsurance Goal Reimburse individual carriers for likely adverse selection due to insuring highest cost individuals. Adjusters Mitigate adverse selection by ensuring plans compete based on efficiency (e.g., discounts, admin costs, etc.), not health status. HHS will use a distributive approach ht to collect ll t medical di l diagnoses (HCCs) and calculate a zero-sum payment transfer among the carriers based on a concurrent basis on medical and Rx costs for their risks insured. January 1, 2014 Contributions end December 31, 2016 Payments 2016; P t may go through th h 2018 I d fi it Indefinite D December b 31 31, 2016 Corridors Give carriers comfort when participating in new markets on 1/1/14 by limiting their gains / losses. Go e Government e will co collect ec from o (o (or reimburse) qualified health plans based on their financial results beyond a 3% loss ratio corridor after the reinsurance and risk adjustment calculations calculations.
Mechanism
All plans l (including (i l di self-funded) lf f d d) will pay into a pool from which individual carriers will draw based on a percent of individual claims beyond an attachment point.
Starts E d Ends
Authority Markets
State Option Pay: Commercial FI/SI plans; Receive: Ind non-GF Exch & Non
HHS
Individual and Small Group QHP Only: QHPs O l Exchange E h and dN Non
E h Exchange and dN Non-Exchange E h ( (excl. l G Grandfathered) df th d)
Pricing g for the 3 Rs

Reinsurance

Quarterly payments starting January 15, 2014 Calculate tax and build it into the insurance prices Factor in reimbursement for any individual exchange business
Risk Adjusters

Load base rate for average morbidity of insureds Consider uninsured and newly self self-insured insured Price to a 1.00 risk [with potential margin to reflect imperfect risk adjusters] Need to work risk scores to improve revenue
Risk Corridor

Estimate net impact of pricing too high/low May want to use in pricing strategy
Temporary p y Risk Corridor Program g

Risk corridor compares p Allowable Cost to Target g Amount Any gain/loss is shared with HHS Proposed p Rule changes g definition of Allowable Administrative Cost to include taxes and profit Purpose to make Risk Corridor program consistent with MLR d fi iti definitions and d approach h Recognizes that issuers should be allowed to make a profit Profit defined as: Greater of
Three percent of after-tax premiums earned; and 2. Premiums earned minus allowable costs and administrative costs Subject to 20% cap on allowable administrative costs
1.
Selected ACA Taxes / Fees

Reinsurance Subsidy
All markets help subsidize poor morbidity in individual market 2014-2016 $12/$8/$5 billion total; $10/$6/$4 billion shared; $2/$2/$1 billion Treasury Plus Administrative $ PMPM Paid (?) $5 $20-50 PMPM Indiv. Offset 1-2%
Health Insurer Fee/Tax (ACA Sec. 9010)

Fixed fee collected by government based on allocation of premium relative to total Indefinitely 2014: $8B 2015/6: $11.3B 2017/8: $13.9-14.3B Index: Premium Trend $5 PMPM (?) 1-2%
Comparative Effectiveness Research

Fee funds research to compare health outcomes and clinical effectiveness 2012 2019 PY ending on or after: 10/1/12: $1 PMPY 10/1/13: $2 PMPY Indexed to NHE <0.2%
Cadillac / Excise
Method to put individual and group insurance on taxation level playing field 2018+ 40% of fully insured equivalent costs over $10,200/$27,500 trended at CPI-U+ Varies based on many factors, incls: FSA/HRA/HAS NA
Rationale/Description
How long?
How much?
Dollars
Est. PMPM Est. % Prem Individual Small FI Who Pays? Large FI Self-insured Exemptions Other Thoughts
Applicable to Carrier Employer will ultimately pay the bill Plan Sponsor (TPA liable?) Stop-loss Only or NA 0%: <$25M $ prem, NPs, Ltd ben. policies 50%: $25-50M,501(c) FIT: Not deductible NA:DI, LTC, MedSupp I l Medicaid Incls: M di id MCO MCOs Plan Sponsor Medicare, Medicaid, Stop-loss carriers, FSAs, etc. Higher thresholds for high risk groups, Applies to GFd plans Rationale: (1) Reduce utilization and (2) Fund UId
This is one of the three risk adjustment mechanisms.
Health Insurance Fee/Tax ( (ACA 9010) )

General
Government will allocate tax based on premiums Payments are due September 30th in given year
Premium calculation
Premiums = (First $25 million x 0) + (50% x 2nd $25 million) + (Premium > $50 million) Net written + reinsurance written less ceded ceding commission Includes: Hospital, medical, vision, dental, FEHBP, Medicare, Medicaid Excludes: Accident, disability, critical illness, indemnity, LTC, Med supp
Special Treatment
Tax-exempt entities count 50% of their premium Entities are exempt if they are:
Non-profit and get >= 80% revenue from government programs Self-funded plans (with the possible exception of stop-loss premiums)
CCIIO The Center for Consumer Information & Insurance Oversight
www.cciio.cms.gov 16 February 18, 2013
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Session 3: Concurrent Sessions on Health Care Insurance The Role of Reinsurers in health insurance management
Rob Leonardi Head of Regional Markets, APAC - Munich Health
Topics
Healthcare is local and complex The Role of Reinsurers A Range of Services Services Examples
Healthcare is local and complex
What do regional PHI markets look like?

Asia Pacific Regional Private Health Insurance Developments
Private Health Insurance CAGR 2006-2011 estimated
Premium size of Private Health Insurance 2011 (estimated) with population in bracket (million)
Cambodia (15)
28%
India (1,200) Laos (7)

18%
Korea (49) Indonesia (230) Malaysia (28) Singapore (5)

Size represents 1 billion USD
In Comparison, Germany (82): 46 billion USD premium; 3% CAGR; PHI as 12% of THE
China (1,347) Philippines (92) Vietnam (88) Mongolia (3)

Japan (127) -2% 0% 5%
Thailand (68) Hong Kong (7)
8%
Australia (21) New Zealand (4)
Taiwan (23)
10%
15%
20%
25%
PHI as % of Total Health Expenditure (2011 estimated)
Source: Munich Health Research
Medical Trend measured by Insurers in the region

Gross Medical Trend* is a survey based index developed by Tower Watson to illustrate the percentage increase in medical cost (trend) for selected insurers portfolio** in each of their representative countries.
Medical Trend Estimates 2012
2012 Gross Medical Trend 2012 Medical Trend net of general inflation 14% 13% 12% 13.0% India 11% 10% 4.4% 9% 7.5% 4.8% 6.2% 8.4% 6% 5% 5.5% 8% 7%
Gross Medical Trend Development 2009-2012
China
14% 12%
US
11.8% 10.6%
10% 8% 6% 4% 2% 0%
9.3% 6.0%
China India Indonesia Singapore France
UK
9.9%
7.4%
14.0%
Indonesia
UK US
France
Singapore
2009
2010
2011
2012
* This index reflects the increases in both price inflation and utilization, and is only one component (medical insurance) when measuring medical inflation **The survey was conducted for the past four years among 170 leading health insurers that provide medical insurance solutions to employers in 37 countries throughout Asia, Africa, Europe and the Americas.
APAC Health Insurance Potential

Key Markets Healthcare Environments
India Aging Population Dominant Distributor of PHI Tax Incentives for PHI Restrictions on Premium Rates Minimum Benefits Schedule Guaranteed Renewal Portability of PHI policy Medical Underwriting allowed Reimbursement product as % of total PHI portfolio
(in terms of premium, excl. CI)
China Yes
Hong Kong Yes
Indonesia No Life No No No No No Yes 75%
Malaysia No Life Yes No No No No Yes 65%
Thailand Emerging Life No No No No No Yes 60%
Australia Yes Health Yes Yes Yes Yes Yes No 90%
Singapore Emerging Life Yes notify Yes Yes Yes Yes 45%
Sri Lanka Emerging Life / Nonlife Group only notify No Some No Yes 70%
Emerging
Life / Non- Life / Non- Life / Nonlife / Health life life Yes notify No Some Yes Yes 70% Group only Group only No No Some No Yes 20% No No Some No Yes 40%
PHI as funder of private providers Provider contracting Government capitation funding Health Statistic Availability
insignificant insignificant significant insignificant insignificant insignificant significant early stage early stage No Limited No Limited common No Limited not common No No common No No not common No No regulated Yes Yes
significant insignificant No Yes Limited early stage No Limited
*NHI National Health Insurance Source: MH market research
The Recipe:
Active management of the Health Insurance Value Chain
Actuarial analysis / pricing Information technology Underwriting
Claims management
Cost and risk management
Product development
Medical management Network management
Distribution / customer service
Addressing the potentials Macro Trends and Challenges

Trends and Challenges
Increase in average income Aging population / population structure change (inverted pyramid): sustainability pressure challenging public spending. Dynamic health care supply and demand, surging needs for preventive programs Medical progress (including new technologies) and higher medical inflation Growing needs from healthcare provider (incl. management and billing support) Increasing pandemic risk across the region Dynamic regulatory frameworks Increasing competitive forces
Questions to answer
How to manage the increasing volume and complexity of healthcare demand? How will high quality and scientifically state-of-the-art medical care remain affordable? What are the important issues for health insurers and society as a whole? How will regulation shape the market space for PHI ? What is a sustainable basis for differentiation ?
7
Topics
The Role of Reinsurers
Roles in the Health Risk Value Chain

MH business models
Risk taking
Financial protection
Brand/ License Sales Administration Disease mgmt
Managed Care Services

Demand mgmt Medical mgmt Network mgmt
TPA / Assistance
Classic capacity reinsurance Classic primary insurance
Core business Integrated parts of the value chain (market dependent) Parts of the value chain covered
Administration plus Managed Care Services Integrated reinsurance (including TPA) Integrated primary insurance
9
The Role of Reinsurers
Acting as more than a source of Capacity

Improving Health Insurance Results
Provision of reinsurance capacity Source of capital management solutions Enhancing product and service design as well as innovation for our clients to increase their sales, profitability, customer satisfaction and retention Improving risk management and risk transfer loss ratio optimization Process reengineering and managing costs down expense ratio optimization
10
Topics
A Range of Services
Potential services along the health risk value chain
Actuarial
Product Development
Market and customer assessment
Marketing / Sales
Market and customer assessment
Underwriting/ Risk Assessment

Initial high level assessment
Claims- / Networkmanagement
1st client approach Claims / Network
Medical Management
Initial medical review
IT Services
Assessment
Basic actuarial approach / def.
Review of processes and IT
The initial assessments service to identify the areas, where our services can create the most client value First Actuarial Diagnosis Re-pricing, premium adjustments Pricing new simple products Monitoring system, KPI Group monitoring & renewal pricing Business Intelligence System Integrated and market-oriented product development & sales approach Innovation transfer Generic product development process Sustainable product design Development of best-practice sales approach Implementation of new sales concepts Monitoring/ review of sales strategy Underwriting analysis Underwriting workshops and trainings Medical underwriting guidelines Review of claims processes, provider profiling Medical network management Evaluation / steering high cost claims Feasibility check Health systems Business Intelligence solutions IT Consulting
Prevention programs Disease management
Best Practice Services
Edit engines for claims management including data analysis
12
Topics
Services Examples
Product evolution
Example: Health Plus by Health.com.au, Australia
Level of maturity
Sales & Marketing
Example: Discover Health by Discovery Insurance, South Africa
Vitality points system via partnerships with numerous gyms, travel operator, lifestyle providers, etc. to offer cash discount
Example: YouGenio Plus by DKV-Globality, Germany 24-hour medical assistance, Medical evacuation and repatriation Support and information, e.g. medical second opinion, treatment course management, translation Assumption of costs guarantee and/ or payment of an advance Examples: Easy Health Standard by Apollo-Munich, India
Services
Products
Simple hospital Room&Board and surgical reimbursement Pre and post-hospitalization expenses, prescription drug cover Expenses for Organ donor, emergency ambulance expenses
Integration of Units/Departments
Diversification depends mainly on the level of market maturity:
while product concepts itself can be the key to innovation and growth in lower-developed markets, a mixture of products and service components is needed in emerging markets.
In general it can be said, that the more developed a market is the more focus needs to be put on sales & marketing concepts as this is the most promising way to gain operational effectiveness and competitive advantage in the long run.
14
Basic Level
Advanced Level
Completely online quotes and sales Online underwriting, claims submission and quick processing. Simple and flexible products
Services Examples
Leading Group Insurer improving profitability

Client & Market Background Issues
Strong brand based on financial stability and long history. Leading health player with large sales force and efficient claims Imminent Health Reform implies both challenge and opportunity.
Scope of Work
IT System Capital Relief workflow.
Weakness in large group market segment. UW approach can lead to pricing risks; Claims not pro-actively managed. Absence of medical analytics and utilization review. Lack of data analytics restricts possibility to develop more sophisticated products.
Outcomes
Actuarial and Operational Services (CRI) Product Development Marketing Sales Underwriting Claims Med. Mgt.
Review functional areas Sales, UW, Claims, Actuarial, Products etc.
Post-mortem analysis of UW results on renewal and new sales Introduce Group-specific KPIs and Group Pricing Tool based on data analysis Adjustment recommendations to the UW approach Differentiated pricing decisions higher retention of better risks Improved renewal decisions based on quantitative arguments IBNR study to provide accurate reflection of reserve adequacy
Detailed medical profiling against multiple criteria Establish reasonable and customary norms Structured utilization review Proper understanding of dynamics behind claims patterns Subsequent Risk relevant product / intervention design Design of provider reimbursement model
Expected: Better completion rate, faster returns and detailed information; quicker underwriting; enhance data analysis and improve underwriting decision; top and bottom line growth, enhanced market leadership in health insurance.
Visions and Feedback Management by Data will occur on a extensive basis in Actuarial function. Provider Management Innovations will make an operational difference.
15
Services Examples
Data Requirements development and implementation

Reimbursement products
Policy Data Requirement
Policy number Name Gender Date of policy inception Date of policy renewal Date of birth Plan Type or Sum Assured Written Premium, Premium payment mode Exclusion, if any and/or risk loadings
Claims Data Requirement Fix-benefit Product

Claim number Plan Type or Sum Assured Date of Admission Date of Discharge Date of Notification Date of Payment Type of illness/injury (ICD-9 classification) Surgical procedure (CPT-4) Surgeons name Claims (type of currency, by submitted and approved) Daily Hospital Cash due to sickness Daily Hospital Cash due to accident Daily Hospital ICU
Indemnity Product
Claim number Plan Type or Sum Assured Date of Admission Date of Discharge Date of Notification Date of Payment Type of illness/injury (ICD-9 classification) Surgical procedure (CPT-4) Surgeons name Claims (type of currency, by submitted and approved) Room & Board (including ICU) Surgery cost Anesthesia fees Operating theatre charges Inpatient/Specialist consultation cost Miscellaneous cost Day surgery (if any) Pre Hospitalization cost (including diagnostic fees) Post Hospitalization cost Medication/Drugs cost Other charges Total claims
Non-hospitalization claims (if applicable) Outpatient clinical consultation fees Prescription drugs Diagnostic test including X-rays Specialist consultation fees Dental treatment Other type of benefits
16
THANK YOU!
Rob Leonardi Head of Regional Markets, Asia Pacific
+65 6318 0408 rleonardi@munichhealth.com
Sanket Kawatkar India
C3: Persistency and its impact on valuation of life insurers Sanket Kawatkar Practice Leader Life Insurance, India Milliman
Disclaimer
The views and opinions expressed in this presentation are those of the author and not of the employer he represents
Why is good persistency important? Life insurance long term business Cost structures - designed to generate policyholder value in the long run Adverse social implications due to poor persistency Poor persistency results in lower supply of long term funds Bad press / reputation not good!
Policy lapse rates from other markets

Singapore First year lapse rates approx. 1.5% - 2% Total lapses by policy year 5 approx. 10% Hong Kong Overall lapse rates approx. 5% - 8% UK First year lapse rates approx. 10% - 12% Total lapses by policy year 3 approx. 30% Indonesia High (e.g. 25% - 35% first year) Sri Lanka
High (e.g. 35% - 45% first year)
Source: MAS (Singapore); OCI (Hong Kong); FSA (UK); Authors experience (Indonesia / Sri Lanka)
Indian experience: examples

Worsened first year premium persistency
100% 80% 60% 40% 20% 0%
FY07-08 FY08-09 FY09-10 FY10-11 FY11-12
Bajaj Allianz Source: Company public disclosures
Met Life
ICICI Pru
Reliance Life
Lapse rates High First year lapse rates typically around 25% - 50% Approx. 50% - 70% of the business is lapsed within first 3 policy years
Does anybody benefit from high lapses? Distributor? High upfront commission vs. lost renewal commission Short term gain vs. long-term loss Shareholder? Lapse profits or expense inefficiencies? High valuations? Sustainable? Regulatory intervention?
How well do we know the actual lapse experience?

Have we analysed experience in detail? Policy surrender or premium discontinuity Surrender of paid-up policies Revival experience Partial withdrawals By mode of premium payment By distribution channel By product / product line By policy size Do we have sufficient credible experience to analyse? Pre vs. post September 2010 policies Impact of changing product strategies Impact of volatility in stock market performance Impact due to changing distributor behaviour How about policy lapse rates beyond 10 years?
Valuation of life insurers Several questions, but no clear answers: What is the best estimate lapse / surrender assumption? Whats the new business margin for products sold in India? What is the appropriate level of valuation of life insurance businesses in India?
Example: new business margin in ULIPs

Regular premium ULIP (post September 2010) Policy term 10 years Premium 25,000, SA - 250,000 Male 35 Other projection assumptions A set of typical assumptions seen in the market
Lapse rates 25% / 10% / 5%+ / 15% / 5%+ New business margins 8% Lapse rates 50% of the above level New business margins 12% Lapse rates 150% of the above level New business margins 5% Lapse rates 25% / 10% / 5%+
New business margins 9%

Lapse rates 20% / 10% / 5%+ / 3%+ New business margins 10%
How can we advise our clients?

Do not change margins / valuations by: Adopting a lower surrender value scale (e.g. in traditional products) Increasing / decreasing the lapse experience Be truthful and frank we dont know much about the future likely lapse / surrender experience Illustrate profitability margins / valuations at a range of scenarios and educate our client Educate our client on the implications of different levels of lapse / persistency rates on different products, e.g. Current unit-linked products low lapse rates may increase the margins Current traditional products low lapse rates may generally decrease the margins Design products that minimise the surrender / lapse profits / losses (to the extent possible!)
Thank you!
EV3RYTH1NG 1N L1FE HA5 A R1GHT NUMB3R

Use the Bajaj Allianz Right Insure Calculator and find out the right number of your life insurance cover. For details: SMS KNOW to 56070 or visit support.bajajallianz.com
Visit: www.bajajallianz.com http://www.facebook.com/jiyobefikar twitter.com/bajajallianz

Bajaj Allianz Life Insurance Co. Ltd., | G.E. Plaza, Airport Road, Yerawada, Pune - 411006. Reg No.: 116.
Insurance is the subject matter of the solicitation
BJAZ-O-0684/1-Oct-12
Speaker Name Speaker Country Organization Logo (Optional)
Click to add Session number and presentation title Tassos Anastasiou RSA Emerging Markets Actuary

Which size?
Outsourcing Global Centre ofSourcing Excellence
Outsourcing and Offshoring
Operating p g Models
Research & Development Retaining Expertise Specialised Skills Tailored Deliveries Strategic Purpose Diversification Talent Pool Scalability Wage Cost Arbitrage Wages Cost Arbitrage Operating Cost Arbitrage Offshoring Diversification Talent Pool Scalability Wages Cost Arbitrage Operating Cost Arbitrage Global Sourcing Specialised Skills Tailored Deliveries Strategic Purpose Diversification Talent Pool Scalability Wages Cost Arbitrage Operating Cost Arbitrage Centre of Excellence
?
Va alue Addition
Operating Cost Arbitrage Outsourcing
Challenges g
Implementation p Stage
Strategy Regulatory Requirements Location Operational Infrastructure Time Difference Language Finding Right Talent
Growth Stage
Compliance with general and industry-specific regulations Data Security Technology Scalability Physical y p proximity y Commercial Awareness Effective Learning & Development
Stability Stage
Organisation Structure Governance Model Operational Capacity Leadership Skills Talent Retention Brand Image Innovation & Creation Global Changes
Customer Perspective p
Excellent Service Delivery
Clear Understanding of Needs Ownership of the Projects High Technical Capability Ability to Challenge the Results Flexible Work Approach
Competitive Advantage
Instant Access to Trained Resources Knowledge Retention & Succession Planning Timely Delivery Refined Dynamic with External Consultants
Enriching Cultural Experience

Friendly & Caring People Motivation Hospitality
A few thoughts g
Keep abreast of technical developments Develop further the mechanism to improve understanding and application of local markets issues issues. Provide platform for development of business & leadership skills.
Health Insurance Concurrent Session 3
Health Care Reform in the USA and Lessons for India

Sandeep Patel CEO & MD CignaTTK Health Insurance Co. Ltd.

AGENDA
Introductions Key Messages US Update: Update Pre-Reform Health Care Market Health Care Reform and Market Implications Trends and Lessons for India Q&A
Key Messages
The US market is a combination of government and private systems Current challenges include: Access: 50M uninsured Escalating cost Uneven quality Health Care Reform will expand coverage, but do little to address cost or quality Reform may drive movement from employer-based employer based to individual coverage under health care exchanges with worst case market estimates of up to 26% by 2019 General G l global l b lt trends d are moving i t towards d cost t sharing, h i personal l responsibility and wellness to reduce the demand for services and improve productivity and well being
Pre-Reform Health Care Market
Pre-reform Key Characteristics

The US market is a combination of government and private systems Age 65+: Federal (Medicare) Safety net for poor: Federal / State (Medicaid) Private: Largely employer-based
Employer-based cover represent ~150 million of the ~177 million with private sector primary cover
Doctors and hospitals are largely private Hospitals are a mix of not-for-profit and for-profit Current challenges: Access: 50M uninsured Escalating cost Uneven quality
Health Insurance by Program

Millions of People
40 50 27
Billions of Dollars
$807
Medicare Employer Medicaid

$183 $822 $286
47
Ind. & Other Uninsured

$283
150
Sources: Congressional Budget Office; Centers for Medicare & Medicaid Services Source: Centers for Medicare & Medicaid Services, 2008
Of those covered, , 67% have private p coverage g and 33% have g government coverage. g Tax policy encourages employer-based health benefits. Tax deductible for employers and tax-free for employees.
Health Insurance Structure

Commercial Employer I Insured d State Employer / Individual Employer / Individual Negotiated by Insurer Managed care Employer S lf F d d Self-Funded Federal / State Employer / Individual Att ib t Attribute Regulator Who Pays I di id l Individual State Individual M di id Medicaid Federal / State Federal / State M di Medicare Federal Federal
Responsibility
Individual
Employer / Individual
Government provided
Government provided
Hospital & Physician Pricing Program Type
Negotiated by Insurer Managed care
Negotiated by Insurer
Set by State Government See any doctor / managed care Poor Fair
Set by Federal Government See any doctor
Managed care
Access Participation
Excellent Low
Excellent Varies by Employer
Excellent Varies by Employer
Very Good 100%
Government sets rates for Medicare and Medicaid. Insurers negotiate rates for private insurance.
Health Insurance Premium Spending

3% Insurer Profits 4% Consumer Services, Provider Support and Marketing 6% Government Payments, Compliance, Claims Processing and Other Administrative Costs 5% Other Medical Services 33% Physician Services
14%
Drugs
20%
Inpatient Costs
15%
Outpatient Costs
87% of premiums are spent on medical care. Only 13% is spent on administration and other expenses.
Health Care Reform and Implications
Primary Objective
Reform is primarily designed to: Reform insurance (eliminate medical underwriting & benefit maximums) Increase access (expand coverage to more people) Increases Medicaid enrollment Coverage C t to 133% of ff federal d l poverty t l level l Establishes Health Care Exchanges where small groups and individuals can shop p for insurance Federally provided subsidies for <400% federal poverty level Cost and quality largely unaddressed Some pilots
10
Principles & Highlights
INSURANCE REFORM
2010 & 2011: Changes in Plan Design / Benefits Gradual elimination of benefit maximums 100% coverage for preventive care 2014: Individual & Small Group (1 50) Exchanges Coverage available regardless of health conditions Limits on cost differences based on age
11
Principles & Highlights
INCREASED ACCESS
2014: 2014 Most individuals will be required to buy health insurance Low income individuals will receive subsidies Employers with 50 or more employees must offer coverage or pay a fine Expansion of Medicaid (government coverage for the poor)
12
Shift in Market Composition

Effects on Insurance Coverage (Millions of non-elderly people, by calendar year) Medicaid & other government programs for the poor Employer Pre-Reform Non-group & Other Uninsured TOTAL M di id & other Medicaid th government t programs f for th the poor Change (+/-) due to Health Care Reform Employer Non group & Other Exchanges Uninsured Number of Non-elderly People Uninsured Changes to Uninsured Population with Health Care Reform Insured Share of the Non-elderly Population Including All Residents 2010 40 150 27 50 267 * * * 0 * 50 2014 35 161 28 51 274 10 4 -2 8 -19 31 2019 35 162 30 54 282 16 -4 -5 24 -32 23
81%
89%
92%
Insured Share of the Non-elderly Population Excluding Unauthorized Immigrants
83%
91%
95%
Reform will lower the uninsured from 50M to 23M and increase Medicaid enrollment.
Source: Congressional Budget Office
13
Market Implications
MARKET SEGMENTS Medicare profit margins squeezed (insurers & doctors / hospitals) - But number covered still growing as baby boomers turn 65 Medicaid grows by 50% - State budget challenges Individual (on & off exchange) grows by 50% - 100% - Rules of competition change Employer is still largest for foreseeable future - Cost pressures remain - Employers requiring more individual responsibility & accountability
14
Market Implications
STAKEHOLDERS Insurers changing market offers risk & opportunity - Movement among individual, group and government programs - More direct consumer involvement in purchasing decisions Doctors - Shortage g in some specialties p - Continued move away from solo practitioner - Self Employed: 2002 75% 2009 49% Hospitals p continued consolidation ( (hospital p mergers g and hospitals p merging g g with clinics and other health care professionals) - Technology requirements / complexity drive scale - Physician practices control supply chain - Accountable Care Organizations to manage all care for groups of patients - Fees: reduced & based more on results
15
Trends and Lessons for India
Current Market Assessment

Underinsured population with unequal access to care Socio economic and health trends increase demand Socio-economic Long-term need for cost containment and trend management Existence of tax benefits tied to individual and group insurance Need for harmonious balance of p public and p private funding g Government stated desire to promote private health insurance Government push to PSU carriers to utilize disciplined pricing strategies Movement towards health insurance reform and standardization Public and private partnership approach to BPL Schemes No clear guidance on governments perspective on universal healthcare PSU product pricing strategy is still not aligned with actual loss ratios Limited insurer ability to affect health care cost and quality Fraud is a perpetual problem A still evolving regulatory framework
Strong long long-term term outlook
Recent beneficial Structural changes
Continued unattractive mass market dynamics
The market has a lot of potential, however a more cohesive public and private partnership approach needs to be taken to drive sustainable change.
17
Trends and Lessons For India

Systematic Demand Drivers
One Size Fits All Product & Clinical Delivery Expansion of Private Facilities Lack of Preventive Care Benefits Employer Reduction in Coverage Systematic Modifications
Individual Demand Drivers

Individual Wealth Accumulation Medical Inflation and Uncertainty Increase Focus on Health & Longevity More Demand for Quality y Care Incentives I ti for individual purchase
Ability to create Value
Sustainable Differentiation
Value Creation
Product / Service Design Health & Wellness Tools and Services Provider Network Development Clinical Mgmt. g and Health Coaching g
Differentiation
Network Management Consumer Engagement & Informatics Distribution
Consumer empowerment is key to a sustainable healthcare model.
18
Sustainable Solutions via Partnering

MANAGING DEMAND FOR SERVICES Creating Awareness Wellness Health Management End-to-End Care Management Chronic Condition Management Cost-sharing C t h i Personal Responsibility Empowerment through informatics PUBLIC / PRIVATE PARTNERSHIP Using public/government sector to control the supply of services and prices Using the private sector to create competition between insurers and providers around access, quality, & value Using social insurance system to support/subsidize focus segments segments. Using the private sector for core & supplemental products to augment the social insurance system
19
Questions?
India Organization Logo (Optional)
Session 3: PROFESSIONAL CONDUCT ISSUES-WITH PARTICULAR REFERENCE TO EMPLOYEE BENEFIT PLANS K SUBRAHMANYAN AND K SRIRAM CONSULTING ACTUARIES

Agenda
Setting g the Context Building Blocks of Trustworthiness The Actuaries Code of IFA Professional Conduct Standards Comparative Snapshot Professional Conduct Issues Suggestions For Addressing Professional Conduct Issues E l i P Evolving Paradigm di of fP Professional f i lR Regulation l i
Setting The Context

Face is index of mind mind.
Face of our professional body is index of public image.
Feelings of the face are entirely due to the way how we behave and conduct ourselves before the public
Setting the Context

There is a widespread perception that public trust in the Professions has declined significantly in the last 20 to 30 years. y This p perceived lack of trust can be attributed to many y factors, some of which are internal to the Professions themselves Trust is easily lost by the actions of a Profession or its individual members
Setting g the Context

To justify or deserve public trust trust, a Profession needs to fulfill the following key criteria: In a specific field of learning, a profession must provide leadership p p to the p public it serves Rules and standards enforced by y the governing g g body y should be designed for the benefit of the public and not for the private advantage of the members
Setting the Context

How do we define trust?
Trust involves a willingness to place confidence or faith in another person or organization to fulfill a course of action competently and ethically
Trust worthiness is the sum total of the qualities which earn that confidence
Building Blocks of Trust Worthiness

The Actuaries Actuaries Code of The Institute and Faculty of
Actuaries Integrity Competence and Care Impartiality Compliance Open Communication
Professional Conduct Standards(PCS)- A Comparative Snapshot

PCS Institute And Faculty of Actuaries [IFA] PCS Institute of Actuaries of India [IAI] Code of Professional Conduct Institute of Actuaries of Australia Criteria for a Code of Professional Conduct- International Actuarial Association [IAA]
Professional Conduct Standards IFA and IAI
Common Framework Covers, interalia, aspects such as Standards for Advice Appointment of the Advisor Breach B h of fP Professional f i l St Standards d d Action to be taken on discovering an apparent breach by another member
Places considerable reliance on the conscience of each individual member and the collective conscience of all members to maintain the highest standards of conduct
Code of Professional Conduct Institute of Actuaries of Australia
A distinctive feature of this Code is about preventing misuse of Actuarial Advice : A member must not provide professional service if the result will be used to evade the law or in a manner that is likely to mislead third parties p
Where misuse is not rectified and maintenance of confidentiality is materially damaging to third parties, the member must consider if there is a g greater obligation g to the third p parties than to the maintenance of confidentiality
PROFESSIONAL CONDUCT ISSUES

Professional Conduct Issues arise when market practices deviate from : Actuaries Act Guidance Notes (GNs) Actuarial Practice Standards (APSs) Professional Code of Conduct (PCC) issued by our professional body [Professional Requirements or PRs]

Under the Current Professional Regulatory Framework: Actuaries need to comply with GNs, GNs APSs, APSs PCC PCC, and Actuaries Act, on voluntary basis. Actuaries, when they come across non-compliance, by other members, , need to formally y complain p to DC [Disciplinary Committee] as per the procedures. Regulatory Mechanisms for ensuring compliance

Let us consider two major issues:
Acceptance of an Assignment [PCS, Actuaries Act]
Non-Conformity of Actuarial Reports with GNs/APSs

Issue 1: Acceptance of an Assignment [PCS [PCS, Actuaries Act] As per PCS, PCS new actuary has to inform the old (previous actuary), about the assignment being taken up; and previous actuary p y has to respond. p Concerns: Consequences q of the new actuary y not informing g the previous actuary Can the previous actuary y refrain from responding g to the request from the new actuary ? Other Issues which can be experienced in this context

Issue 2: Non-Conformity of Actuarial Reports with the GNs and APSs Concerns: New New actuary is aware of the breach but fails to whistle whistle blow ? Role of the Actuarial Profession to monitor compliance with GNs and APSs through g Proactive Regulation g and Regulation by Exception. Scale and Strength of Penalties for Non Compliance

Other Ot e Issues ssues o of Co Concern ce : Scale Scale of Professional Fees Can the Profession insist upon an upfront disclosure of the fee charged -particularly when the client chooses to change the Advisor ? Can the Profession specify minimum professional fees?
9 Parallel from the Accounting Profession

Other Issues of Concern : I Issue: Scope S for f Misrepresentation Mi t ti ? Can C Mi Misrepresentation t ti b be curbed b d th through hP Professional f i l Regulations? Role of the Profession in raising awareness levels amongst users of Actuarial Services Services.

Some Suggestions for Addressing the Identified Issues: There must be a requirement for compulsory registration with the IAI for those members who are engaged g g in actuarial assignments g in the arena of Employee Benefits . Certificate of Practice must be a prerequisite for these members in practice. The actuary must disclose his membership number, registration number (issued by IAI),COP number and the contact details in his report.

Some Suggestions for Addressing the Identified Issues: The Advisory Group (AG) on Pensions & Other Employee Benefits (PEBSS) can be authorized to : Monitor and evaluate professional practice with particular focus on monitoring p g compliance p with the Actuarial Practice Standards; and Report to the Disciplinary Committee [DC] about the issues which constitute Breach of Professional Standards.

Some Suggestions for Addressing the Identified Issues:
IAI to create an awareness amongst Tax Authorities and the Accounting Profession for ensuring that the actuarial reports which they receive are signed by the members of IAI with the necessary credentials Registered actuaries shall send compliance report for renewal of COP. IAI shall initiate awareness campaigns for clients clients. provide additional g guidance for members on subjects j such as IAI shall p Minimum Fees, Conflicts of Interest and Whistle Blowing Members M b t to get t guidance id f from the th Advisory Ad i G Group [AG] on professional conduct issues/concerns.
Evolving Paradigm of Professional Regulation

According to the Professional Associations Research Network[PARN], the three pillars of Professional Regulations are :
Entry Standards Complaints and Discipline Schemes [Regulation by Exception] Positive P iti S Supports t f for Ethi Ethical l Behavior[ B h i [P Proactive ti R Regulation] l ti ]
Most Professions including the Actuarial Profession are placing a greater emphasis on[a] designing proactive quality assurance mechanisms ; and [b] initiating awareness campaigns for the end users of their professional services. In other words, there is a growing emphasis on strengthening the third pillar - Proactive Regulation We believe that our suggestions gg for strengthening g g Professional Regulations g span both the second and the third pillars- Regulation by Exception and Proactive Regulation
Th k You Thank Y
Concurrent Sessions on Health Care Insurance Claims Volatility in Health Portfolios
Herbert Meister Chief Actuary, APAC - Munich Health Singapore
Topics
Introduction Reasons for Claims Volatility Challenges Opportunities
Introduction
Claims Experience
0.9 0.8 0.7 0.6 0.5 0.4 Loss Ratio
0.3 0.2 0.1

0
3
years
Introduction
Claims Experience
0.9 0.8 0.7 0.6 0.5 0.4 Loss Ratio
Regular volatility?
Regular volatility?
0.3 0.2 0.1

0
years
4
Introduction
Claims Experience
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1 2 3 4 5 6 7 8 9 10 Loss Ratio Loss Ratio Estimation A ?
years
5
Introduction
Claims Experience
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1 2 3 4 5 6 7 8 ?
Loss Ratio Loss Ratio Estimation A Loss Ratio Estimation B
9 10
years
6
Topics
Reasons for Claims Volatility Healthcare Reforms
Reasons for Claims Volatility

Healthcare Reforms change consumer or provider behavior
Taiwan Inpatient Incident Rates
13.50%
13.00%
12.50%
12.00%
11.50%
11.00% 2005 2006 2007 2008
2009
2010
Incident Rates Taiwan NHI

Healthcare Reforms change consumer or provider behavior
Taiwan Inpatient Incident Rates
13.50%
13.00%
12.50%
12.00%
11.50%
11.00% 2005 2006 2007 2008
2009
2010
Incident Rates Taiwan NHI
DRG based provider payment started in 2006

10

Epidemics/Pandemics
1918 Spanish flu A (H1N1) -Avian FluCa. 20-40m deaths Incident rates hospitalisation: 2.6%
Source : Robert Koch Institute
1957 Asian flu A (H2N2)
1968 Hong Kong flu A (H3N2)
Ca. 1.5m deaths
Ca. 0.75-1m deaths
11

Epidemics/Pandemics change consumer or provider behavior
Incident Rates Taiwan
13.0% 12.5% 12.0% 11.5% 11.0% 10.5% 10.0% 9.5% 2000 2001 2002 2003 2004 2005
2000
2001 2002 2003 2004 2005
SARS Pandemic effect 2003 in Taiwan

12
Reasons for Claims Volatility New or Revised Products
13

New or Revised Products change consumer or provider Behavior
Incident Rates Inpatient Product, Hongkong
12.4%
12.2%
12.0% 11.8%
11.6%
11.4% 11.2% Existing Product
11.0%
10.8% 10.6% 10.4%
Considerable and unusual decrease of incident rates. Why?

14
2009
2010
2011
2012

Product Features Existing Product New Product
Pre&Post Hospitalisation
Reimbursment with sublimits
Reimbursment with sublimits same as existing product
Hospitalisation Expenses Max Entry Age
Reimbursment with sublimits 75
Reimbursment with sublimits same as existing product

75
Guaranteed Renewable
Top Up Option at defined age (30,40,50,60)
upto age 100

yes
upto age 100

yes
Loyality Bonus (5% of annual premium)

Premium Type
every 10th policy anniversary

Annual Risk Rate
no
Level Premium
15

Incident Rates Inpatient (old and newly launched) Product, Hongkong
20.0%
18.0% 16.0% 14.0% 12.0%
10.0%
8.0% 6.0% 4.0% 2.0%
Existing Product New Product
0.0%
2009
Launch of new product end of 2010 lead to anti-selective behavior of existing insured's against the new product
16
2010
2011
2012
Reasons for Claims Volatility Outlier Claims
17

Outlier Claims
Male, birth year 1989, Diagnosis: Hemophilia A , Germany
Year
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total
Inpatient Costs
43,688 0 0 2,118 425 45,251 0 825 0 0 92,307
Outpatient Costs
1,287,687 2,250,997 2,033,927 1,282,623 2,676,934 3,749,643 4,550,399 4,264,226 3,695,989 2,934,736 28,727,161
Dental Costs
1,211 1,244 1,409 646 735 65 0 122 0 69 5,501
Total Costs (Euro)

1,332,585 2,252,241 2,035,336 1,285,387 2,678,094 3,794,959 4,550,399 4,265,173 3,695,989 2,934,805 28,824,968
-Hemophilia is a chronic and expensive condition
- Pharmaceutical products
accounted for greater than 90% of total medical costs. -
18

Extended Geographical Scope of Coverage/ Increased SI
Inpatient Product in Indonesia
Benefit Hospital Daily Benefit ICU Daily Benefit Oversease Hospitalisation due to accident Surgery Minor Intermediate Major Complex 1 unit in Ruphia 1 unit in USD
40,000 80,000 80,000
20 40 40
100,000 200,000 300,000 400,000
50 100 150 200
Exposure (normed) Premium
1 IDR 2000 USD 1
19

Loss Ratio Ruphia Plan USD Plan
2006 43.5% 157.3%
2007
2008
2009 49.3% 301.0%
46.9% 49.5% 170.0% 290.0%
20

Experience Ruphia/USD Plan
90.0% 80.0% 70.0% 60.0% Loss Ratio 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Ruphia Plan USD Plan with corrected Premium
2006
2007
2008
2009
21

Increased Sum Insured Virtual Example: Indian Inpatient Product with currently sum insured of 3 lacs shall be increased to 5 lacs Portfolio of 20,000 Insureds Incident Rates 5%, e.g. 1000 claims are expected We assume Incident rates follow Poisson Distribution with Fitted claim size distribution: LogNormal assuming average bill size of Rs 30,000 and standard deviation of Rs 60,000 We assume one cat event every 200 years
22

Increased Sum Insured
Standard Deviation of Result

8.20% 8.00% 7.80% 7.60% 7.40%
7.20%
7.00% 6.80% 6.60% Standard Deviation of Result
6.40%
6.20% 6.00% Unlimited
Based on 50T iterations
SI = 5 lac
SI = 3 lac
23
Topics
24
Challenges
Accuracy of Reserve Calculation Accuracy of performance forecast and Accuracy of premium adjustments Accuracy of Planning Expected Profitability
Volatility
25
Challenges
Example 1: Best Estimate LR = 65%, Expenses&Commission=27% LR follows Lognormal Distribution
TR in % of Premium
13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% 35% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0% -8.0% -9.0% -10.0% -11.0% -12.0% -13.0% -14.0% -15.0%
Distribution of Tecnical Results
Confidence Level
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
Technical Result High SI

TR = Premium Claims 27%*Premium Chart is based on 50T iterations
Technical Result Low SI 26
Challenges
Example 2: Increase of SI (Parameters same as Example 1)
TR in % of Premium
13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% 35% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0% -8.0% -9.0% -10.0% -11.0% -12.0% -13.0% -14.0% -15.0%
Distribution of Tecnical Results
Confidence Level
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
Technical Result Low SI
TR = Premium Claims 27%*Premium Chart is based on 50T iterations
27
Topics
28
Opportunities
Volatility is the basis of health insurance and insurance business Reduction expected volatility is the basis of new products and growth. For instance products with
Higher Sum insured Wider geographical scope of coverage Delayed benefits Portability .
Manage your own portfolios volatility well..
29
Opportunities
Use appropriate pricing models taking expected volatility into consideration Estimate expected future volatility and take future developments, like launch of new products, product modification, regulatory changes into consideration Consider mitigation measure like annual limits and reinsurance to reduce and manage portfolios expected volatility
30
Opportunities
TR in % of Premium
13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% 35% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0% -8.0% -9.0% -10.0% -11.0% -12.0% -13.0% -14.0% -15.0%
Distribution of Tecnical Results with and w/o Aggregate Stop Loss (30% Coinsurance)
Confidence Level
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
Technical Result Low SI
Technical Result High SI after Reinsurance
31
Thank You
Herbert Meister Chief Actuary, APAC - Munich Health Singapore
32
Jonathan Porter (Canada)
Reinsurance Services to Grow and Optimize Protection Business Jonathan Porter, FSA, FCIA
SVP & Chief Pricing Actuary Actuary, International Markets Markets, RGA

Motivation for Reinsurance
*Source: NMG Consulting, Sep 2012 Key Decision Makers in Asia
Reinsurance Services
Audit
Ensure compliance with internal standards
Claims Support
Case management management, 2nd opinions Electronic claims management
Research & Development

Industry y studies, , research papers p p
Reinurance Services
Business Review & Analysis
Product development Experience analysis Competitive benchmarking
Risk Ri k E Evaluation l ti
Facultative case and underwriting support Electronic underwriting
Training & Education

Underwriting manual and training Seminars, secondments, publications p
The Reinsurer Value

Broad knowledge across both local and global markets Technical expertise across various disciplines Additional resources and capital Timeliness already developed solutions Partnership and risk/reward sharing
Idea Generation End user surveys of clients, distributors Benchmarking and product portfolio review Product development p workshops p with distributors & life insurance companies Manufacturing g of the Product Pricing of products including assistance in regulatory filing documents Development of underwriting and claims forms, guidelines & policy documents in partnership with our clients Sharing of RGA pricing methodology and information to assist regional chief actuaries act aries in product sign-off when pricing relies on reinsurer pricing or risk management decisions up sell and cross cross-sell sell programs Development of up-sell to improve the success of product launches
Idea Generation
Evolution
Manufacture
Launch
Launching of the Product Presentation to agents and other distributors at sales launch & training sessions Payment of and hosting of sales competitions to best selling branches Evolution of the Product Presentation of market studies and analysis Refining the products next generation and provision of market data
Evolution
Idea Generation
Manufacture
Launch
RGA has a strong track record in helping bring new products to market in Asia
The first Th fi t Limited Li it d Pay P Critical C iti l Illness Ill products d t in i Hong H Kong K (Hang (H Seng S Life Lif 2006) First HNW product in Asia (2000) First Permanent Health Insurance Product in Asia The first Critical Illness product in Korea (2005 with Samsung) First SME product in Asia (Siam Commercial Life in Thailand 2008) First Advantage program in Asia (2000 CMG HK) First fully simplified issue product in Asia (HSBC Life 2008) The first Bancassurance Long term Care product in Japan (2012) First Guaranteed issue Ladies, Cancer, Critical illness, Surgical Products in HK (2006) First Guaranteed Issue Whole Life in Thailand (2009) First Online Term Products in India (2009) First Guaranteed Issue Critical Illness Product in Indonesia (2012) First Simplified Issue Early CI Product in Indonesia (2012)
Limited pay critical illness product Interest rates dropped, re-pricing needed for long term product with material investment risks
Solution
New product features to disguise re-pricing exercise from agents / consumers consumer s perspective
10 year booster benefit Catastrophic Critical illness
Innovative Reinsurance structure to enable direct company:

Relief of capital / reserve strain (on a HK statutory basis) Price more aggressively gg y despite p working g within a market consistent pricing framework (ie; improved pricing on a European basis)
Reinsurance rate guarantee to enable pricing of limited pay (gross premium) products Simplified issue / Guaranteed issue campaign to existing customer to enable up-sell and cross-sell
Results
Number one product and NBEV driver for this company in Hong Kong and a product mentioned by the Global CEO in recent analyst briefing Sold 6 6,000 000 policies in the first month due to tailored up-sell and cross-sell initiatives Won Best-in-Class Best in Class Critical Insurance product award at the Hong Kong BENCHMARK Wealth Management Awards 2012
Reinsurers like RGA have significant expertise in analyzing data and identifying actionable information f Tools, methods and resources that facilitate accurate and speedy analysis Can C apply l i insights i ht f from comparisons i t to:
Own reinsurance block Other companies (across markets) Industry studies and other R&D efforts
A client asked RGA to perform an experience analysis on a block of medical reimbursement business to answer the following questions
1. Is there any difference in claims experience between the manually and automatically underwritten businesses? 2. Are our substandard loadings reasonable? 3. The underwriting was done branch offices until 4 years ago at which time these operations were moved to the head office. Did this impact claims experience? 4. Is there a good way to identify the agents with poor experience to assist underwriters? 5 Can RGA provide us with the ability to break out attributes for each branch and/or city? 5. 6. Can RGA provide us with the ability to analyze Length of Stay and Average Cost by Hospital?
Solution
Received data from client covering 760,000 policies and 150,000 150 000 claims Deployed global RGA resources to perform analysis
Joint effort between experience study experts and local office representatives Worked with client to scrub data and ensure accuracy Calculated results using RGA experience study system Reviewed client questions and additional findings
Translated results to clients native language and presented findings
Results
Client extremely happy with work product P id d i Provided in d depth h experience i analysis l i report Answered all of the client questions Provided additional insights to better manage their business
1. 2. 3. 4. 5. Female claims are for higher average amounts than males Split of length of stay in hospital by cause of claim Occupation rating has a material impact on claims experience Experience has been improving over time directly related to improved claims management and underwriting practices Isolated average claim size over time to provide indication of inflation cost
Why y Electronic Underwriting? g

Increased I d Sales Improved Analytics y MoreEfficient Processing Underwriting
DecisionsmovedclosertoPOS Simplifyprocesstoa transaction Virtuouscycleofrule development Targetmarketandbranding Growthwithbaselinestaff Quickertimetomarketfor decisions Morepredicabledecisions Useofratingsandexclusions Managescarceresources
Competitive Proposition
A virtual company that provides insurance solutions for mortgage brokers and non-bank mortgage lenders across Canada Too many applications were held up in underwriting waiting for the information to be received from the applicants or the doctors On average it was taking 20 20+ days to process any application that required underwriting
Solution
A business case that eliminates declines and improves Not Proceeded With rates to reduce the underwriting time and decrease third party medical expenses Built straight through processing with automated underwriting gp process with AURA Uses AURA for tele-underwriting for cases that require additional information Uses AURA to automatically underwrite electronic laboratory results for clients
Loansofficermeetswithclientand completes1pageapplication ApplicationisFAXedtoBenesure Server OCRreadsapplicationand makesroutingdecision
TPCallCentrereceives casedetailsandcallsclient within24hrs. Require q Teleinterview
OrderBlood Profile CallCentre ConductsQuestionnaire Avgtime1518minutes
CleanCase Automatic Issue
B
70%Issued
September 06, 2011
A
Reflexive questions submittedto RulesEngine
Blood/ U i Tests Urine T t
Referred toUnderwriting
Accepted
Issuance
Results
70% issued without further underwriting 85% of remainder issued after tele tele-underwriting underwriting Average time to issue declined from 18 to 4 days Third Party y Medical expenses p declined by y 60% Ability to offer ratings and exclusions means more accepted cases Issuing I i an accident id t only l policy li t to d declines li means everyone i is offered a product Mortality y experience p has been better than expected p Sales up from 10,000 per year to 40,000 in 3 years
Conclusions
Access to services is a key motivation for using reinsurance, notably in Asia Reinsurers add value through:
Their global view within and across markets Technical expertise Additional resources and ideas Risk sharing partnership
Services cover broad areas related to:

Controls and back office support Risk evaluation Portfolio optimization through product development, experience analytics R&D Training & education
Australian School of Business A t li S Australian School h l of fB Business i
The Future Actuary y and Role of Actuarial Education

Michael Sherris
CEPAR, School of Risk and Actuarial Studies University of New South Wales Wales, Sydney AUSTRALIA
17 February 2013 IAI Students EVENT
Overview
What is an actuary? Actuaries as Innovators Learning from Related Disciplines The Future Actuary Actuarial Education and Research
Definition of Actuary
actuary [ ktr]n pl -aries aries(Business / Professions) a person qualified to calculate commercial risks and probabilities involving uncertain future events, esp in such contexts as life assurance[C16 (meaning: registrar): from Latin cturius one who keeps accounts, from actum public business, and acta documents, deeds. See ACT, -ARY] actuarial [ kt rl] adj Collins English Dictionary Complete and Unabridged HarperCollins Publishers 1991, 1994, 1998, 2000, 2003 actuary t A specialist in the mathematics of risk, especially as it relates to insurance calculations such as premiums, reserves, dividends, and insurance and annuity rates. They work for insurance companies to evaluate applications based on risk. Read more: http://www.investorwords.com/96/actuary.html#ixzz2JnSU2wCj
Actuaries Institute (Australia)
What is an Actuary? Actuaries are among the brightest people in the business world. They apply their mathematical expertise, statistical knowledge, economic and financial analysis and problem solving skills to a wide range of practical business problems. Actuaries help organisations to understand the long-term financial implications of f their th i d decisions, i i many of f which hi h can affect ff t i individuals di id l as well ll as th the wider id community. What do they do? Actuaries apply their skills in a variety of areas including: Measuring and managing risk and uncertainty Designing financial contracts Advising on investments Measuring demographic influences on financial arrangements Ad i i on a wide Advising id range of f fi financial i l and d statistical t ti ti l problems. bl
Actuaries as Innovators
Pioneers:
Survival models: the life table: application to life insurance Fi Financial i l mathematics: th ti annuities, iti b bonds, d i insurance Stochastic Processes and risk models: application to nonlife insurance and solvency Multiple state/risk models: application to pension funds, health and long term care insurance Asset management: asset and liability matching Risk sharing and contract design: profit sharing and participating insurance
Learning from Related Disciplines

Demography Epidemiology Applied Statistics Probability and Stochastic Processes Mathematical Finance Insurance Economics A li d Fi Applied Finance Financial Economics Ri k M Risk Management t
The Future Actuary
Strong quantitative skills increased use of data analytics (data mining), individual data analysis (panel data) Strong understanding of probability models and estimation Markov multiple state models, continuous and discrete state and continuous time models (jump, diffusion processes) Strong understanding of financial economics valuation of contingent claims, stochastic calculus, hedging Strong understanding of insurance economics motivations ti ti of f risk i k management t (frictional (f i ti l costs), t ) design d i of risk sharing contracts, policyholder behaviour (adverse selection, selection moral hazard)
The (Past, Present and) Future Actuary

Understanding of broad business applications Interpretation of model results and analysis Understanding model limitations P ti l recommendations Practical d ti C Communication i ti
Actuarial Success
Strong interest and ability in mathematics and applications to business Problem solving and general reasoning Commerce and business ability Communication skills Dedication and motivation to succeed Building g a track record of success
Role of Actuarial Education

Universities:
Basic and Advanced education syllabus innovation, postgraduate coursework R Research h fundamental f d t l and d applied, li d PhD
Profession:
Practice areas and codes of conduct practice areas Recognising more advanced university education in developing areas Risk Management
Industry
Work experience while studying - internships
Individual skills and CPD

Life long learning, learning taking risks Postgraduate education MBA, MBA Masters Research degree - PhD
P ti l skills Practical kill computing, ti technology, t h l d data, t management t E Experience i consulting, lti corporate, t i insurance, fi finance
The Future Actuary

Technically strong Being recognised as good at what we do
Keeping up with technology and other related disciplines I Innovation ti in i modelling d lli and d managing i risk i k A i ti f Aspiration for leadership l d hi
Thank you very much!

Michael Sherris m.sherris@unsw.edu.au
Reference: Sherris, M. (2006), Actuarial Education and Research: A Perspective From Down Under, Under Editorial, Editorial ASTIN Bulletin, Bulletin Vol 36 36, 1 1, 1-3 1 3.
13
15thGlobalConferenceofActuaries PlenarySession ActuarialFrontiers

17TH19THFEBRUARY FEBRUARY,2013ATHOTELGRANDHYATT(Santacruz East), East) MUMBAI
ModellingandManagingLongevityRisks
MichaelSherris
CEPAR, ,AIPAR SchoolofRiskandActuarialStudies AustralianSchoolofBusiness UNSW
Coverage
GlobalPensionsandLongevityRisk LongevityRiskModellingandManagementFrontiers ResearchprojectsinCEPARandSchoolofRiskandActuarialStudiesatUNSW Areas:
consistentframeworkforstochasticmortality ageperiodcohortmodels longitudinalmortalityriskfactorsandNorwegianmortality modellingcauseofdeathandcauseelimination regulationandcapitalrequirementsforlifeannuitiesinaninsurervaluemaximisation framework residentialhousepriceriskmodellingandapplications healthriskandfinancinglongtermcareincludingreversemortgages
PensionSystemsAsiaPacific
PredominantlyPublicDBandDCschemes PrivatemandatedDCschemes Australia
CoverageofMandatoryPension Schemes
Pakistan India Vietnam Indonesia Philippines China Thailand SriLanka Malaysia Korea Singapore g p HongKong Italy France OECD34 Germany Australia Canada UnitedStates UnitedKingdom NewZealand J Japan 0 10 20 Populationaged15to64
Relativelylow coveragein Asia/Pacific countries Potential future increasesin coverageand funding implications
30 40 50 60 70 80 90 100
Source:PENSIONSATAGLANCEASIA/PACIFIC2011OECD2012WorldBankPensionDatabase
PopulationAgeing Asia
Projected percentage of population aged 65 and over (Asian economies) 35
CHN
30
IND IDN MYS
Ageing acrossthe region Implications forretirement andlongterm careand healthcosts
25 Perce entage
20
PAK PHL SGP
15
10
LKA
THA VNM
0 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 Year
Source:PENSIONSATAGLANCEASIA/PACIFIC2011OECD2012
ConsistentDynamicMortalityModel
Survivorcurve Multiple p factors Swedishmortality1910to2007 ages50to100

6
Age Period CohortModels

Trendmodels birthyearorcohorteffecta significant i ifi ttrend t dfactor f t Periodeffectslesssignificant(Spanishflu) LinkstoLeeCarter
LongitudinalAnalysis HRSand NorwegianData

Paneldataand logisticmodels Mortalityrisk factorsatan individuallevel
CausalMortalityModelling
Simultaneously modelledperiodic mortalitytrendsby causeofdeath.
Thei Th impact tonlif lifeexpectancy t undercauseelimination. Inherentdependenciesamong competingcausesisaccountedfor!
PwCMercerPensionerData
Pensioners by cohorts (Relevant ages)
0.3 0.25
Smoo othed x
C1: born 1915-24 C2: born 1925-34
Hazard Ratios (Cox PH model)

Males Pension sizes: Low Average (ref.) High Specific f schemes: Federal-CSS (ref.) Federal-PSS NSW-SSS NSW-SASS NSW-PSS NSW-EISS Victoria-SSS Victoria-ESSS South Aust-SASS Tasmania-RBF Tasmania RBF Western Aust-GESB Queensland-SS Queensland-PS Grouped schemes # subjects Chi-squared df Adjusted R2 1.23*** 1.00 0.64*** Females 1.13*** 1.00 0.77***
0.2
C3: born 1935-44
0.15
C4 born C4: b 1945 1945-54 54
0.1 0.05 0 55 60 65 70 75 80 85 90 95 100

Age
As a proporti ion of General Pop. mort tality rates
1.4 12 1.2 1.0 0.8 0.6 04 0.4 0.2 0.0 55
Extent of Longevity Selection Risk
1.00 0.71*** NA(b) NA(b) NA(b) NA(b) NA(b) 1.01 NA(b) 1.00 1.07** NA(b) 1.38 1.03** 111,257 1,162 8 3.2%
1.00 0.84 1.05 0.90 NA(a) NA(a) NA(b) 0.86 NA(b) 1.01 1.16** 0.97 NA(a) 1.13*** 47,350 102 10 1.1%
60
65
70
75
80
85
90
95
100
105
Age
Our estimates/ALT
Mercer's estimates/ALT
10
RetirementIncomeProductPortfolios
ImportanceofGSA ( t lrisk (mutual i ksharing) h i ) whenguarantee productsinclude loadings(capital costs) Indexedannuities dominate
Phasedwithdrawals (bequestmotive)and deferredannuity
Hanewald,PiggottandSherris(2011),IndividualPostRetirementLongevityRiskManagementUnder SystematicMortalityRisk.
11
SolvencyandPricingforLifeAnnuities
Differentdefaultlevels:optimal loadingthatmaximisesEVA Sensitivitytosolvencyhas importantimpactonvalue
12
LifeInsurerLongevityRiskManagement
Amulti ltiperiod i dstochastic t h ti model d lfor f an annuityproviderfacingsystematicand idiosyncraticlongevityrisk Capital,premiumloading,longevity swap,longevitybond Frictionalcostsvs.costsfortransferring longevity g yrisk
SurvivalcurveforecastbasedonAffine TermStructureModelinBlackburnand Sherris(2012)
13
Thankyou MichaelSherris CEPAR,SchoolofRiskandActuarial Studies AustralianSchoolofBusiness UNSW

m.sherris@unsw.edu.au http://www.cepar.edu.au/ p // p /
AustralianResearchCouncilLinkageGrant
ARC CLinkage i k Project j 2008LP0883398 0883398 ManagingRiskwithInsuranceandSuperannuation asIndividuals I di id l Age A (20092013)
IndustryPartners:PwC,APRA,WorldBank Longevity Risk Models
Models to quantify risks related to longevity and morbidity
Product Risk Management and Residential Housing

Pricing, solvency, risk management and regulatory requirements for the prudential operation of longevity markets and institutions
Policy y and Regulation g

Prudential and policy implications of new product innovations in both retail and wholesale financial markets
15
ARC Centre of Excellence in Population p Ageing Research (CEPAR)

http://www.cepar.edu.au/ Collaborating universities: UNSW, The University of Sydney and th A the Australian t li N National ti lU University i it (ANU) The ARC Centre of Excellence in Population Ageing Research brings together g researchers, ,g government and industry y to address one of the major social challenges of the twenty first century. It will establish Australia as a world leader in the field of population ageing research through a unique combination of high level, cross-disciplinary cross disciplinary expertise drawn from Economics, Psychology, Sociology, Epidemiology, Actuarial Science and Demography Science, Demography.
16

2009and2010 S.WillsandM.Sherris:IntegratingFinancialandDemographicLongevityRiskModels (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1139724) S.WillsandM.Sherris:Securitization,StructuringandPricingofLongevityRisk(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1139726) Y.Choi andC.Kim:SecuritizationofLongevityRisksusingPercentileTrancheMethods (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1349398) C.N.NjengaandM.Sherris:LongevityRiskandtheEconometricAnalysisofMortalityTrendsandVolatility (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1458084) A.Ngai andM.Sherris:LongevityRiskManagementforLifeandVariableAnnuities (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1587890) J.EvansandM.Sherris:LongevityRiskManagementandtheDevelopmentofaLifeAnnuityMarketinAustralia (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1585563) D.SunandM.Sherris:RiskBasedCapitalandPricingforReverseMortgagesRevisited (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1588342) A.TangandM.Sherris:SpatialVariabilityinMortalityandSocioeconomicFactorsforAustralianMortality (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1594522) S.Gaille ill and dM.Sherris: h i AgePatternsand dTrends d in i Mortality li by b Causeof fDeath hand dImplications li i for f Modeling d li Longevity i Risk i k (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1694272) S.Gaille andM.Sherris:Modeling LongRunCauseofDeathMortalityTrends(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1705696) SGaille andM.Sherris:ImprovingLongevityandMortalityRiskModelswithCommonStochasticLongRunTrends (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1702029) J. J R. R Piggott Pi ttand dH. H Bateman: B t Too T Much M hRi Risk kt toI Insure? ?The Th Australian A t li (Non (N )Market M k tfor f A Annuities iti (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1706900) C.S.Kumru andJ.R.Piggott:ShouldPublicretirementProvisionbeMeanstested? (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1417763) R.SaneandJ.R.Piggott:ElderlymobilityandTradedownsinAustralia
2011 M.SherrisandS.Su:HeterogeneityofAustralianPopulationMortalityandImplicationsforaViableLifeAnnuity Market(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1779442) C.N.NjengaandM.Sherris:Modeling MortalitywithaBayesianVectorAutoregression (htt // (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1776532) / l3/ f ? b t t id 1776532) C.QiaoandM.Sherris:ManagingSystematicMortalityRiskwithGroupSelfPoolingandAnnuitisation Schemes (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1791162) C.BlackburnandM.Sherris:ConsistentDynamicAffineMortalityModelsforLongevityRiskApplications (htt // (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1832014) / l3/ f ? b t t id 1832014) D.H.AlaiandM.Sherris:RethinkingAgePeriodCohortMortalityTrendModels (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1838805) K.Hanewald,J.R.Piggott,andMichaelSherris:IndividualPostRetirementLongevityRiskManagementUnder S t Systematic ti Mortality M t lit Ri Risk k(htt (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1910961) // / l3/ f ? b t t id 1910961) K.HanewaldandM.Sherris:HousePriceRiskModelsforBankingandInsuranceApplications (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1961402) D.P.Blake,C.Courbage,R.D.MacMinnandM.Sherris:LongevityRisksandCapitalMarkets:The20102011 U d t (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1964636) Update (htt // / l3/ f ? b t t id 1964636)
2012 J.Ziveyi,C.Blackburn,andM.Sherris:PricingEuropeanOptionsonDeferredInsuranceContracts (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2005461) H.Chen,M.Sherris,T.SunandW.Zhu:LivingwithAmbiguity:PricingMortalityLinkedSecuritieswithSmooth A bi it Preferences Ambiguity P f (htt (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2007342) // / l3/ f ? b t t id 2007342) M.SherrisandD.TPHoQuang:PortfolioSelectionforInsuranceLinkedSecurities:AnApplicationofMultiple CriteriaDecisionMaking(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2020712) M.SherrisandE.Veprauskaite:AnAnalysisofReinsuranceOptimisationinLifeInsurance (htt // (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029314) / l3/ f ? b t t id 2029314) D.H.Alai,Z.LandsmanandM.Sherris:LifetimeDependenceModellingUsingtheTruncatedMultivariate GammaDistribution(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2033454) M.Nirmalendran,M.SherrisandK.Hanewald:SolvencyCapital,PricingandCapitalizationStrategiesofLife A Annuity it P Providers id (htt (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2069594) // / l3/ f ? b t t id 2069594) J.HY.Fong,J.PiggottandM.Sherris:PublicSectorPensionFundsinAustralia:LongevitySelectionandLiabilities (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078683)
WI ITH BEST COMP PLI IMENTS F FROM
INSURAN NCE INSTITUTE EO OF I INDIA

G Block, Plot No. C-46, Bandra-Kurla Complex, Bandra (E), Mumbai - 400 051 Website: insuranceinstituteofindia.com
Gavin R. Maistry, FSA, CERA, FSAS, CFA Chief Actuary & CRO, Munich Re, Life APAC, Singapore
Session 10: Reinsurance: A Tool for Risk Management Gavin R. Maistry Chief Actuary & CRO Munich Re Re, Life APAC

Reinsurance: A Tool for Risk Management...
Avoid not accept the risk - e.g. exit the business Accept accept the level of risk and take no further action to minimize it further Transfer transfer the risk - e.g. to a reinsurer or the capital markets (securitization) Mitigate take action to manage risk through natural hedges or other controls
The Life Reinsurance Space...
Reinsurance vs. Capital Market Solutions
Reinsurance ILS Credit risk Will depend on rating of the Cat bonds avoid credit risk to the reinsurer issuer Basis risk None as reinsurance is based on Significant as insurer pays own companys company s actual portfolio losses but receives payoff on index Moral Hazard Primary firm may be lax in uw Defining ILS on index controls moral g interests hazard reinsurer needs to align Size & Costs Could be done for smaller deals & Need to be of a certain size to be y basis. economically y viable. Costly. y on a less costly Capacity Limited capacity Independent capacity Price Dependency p y Prices may y depend p on market cycle y Limited dependency p y on insurance market cycle
4
The 3 Cs of Reinsurance
Motivation is to get reinsurers consulting service
Consulting Service
CAPACITY
Motivation is risk transfer
Capital Management
Motivation is to improve balance sheet or finance growth

5
Cession Rates market maturity & regulation impact cession rates
Cession Rates & Growth Outlook.
US Cession Rates
US Life Reinsurance Structures.
The Decomposition of Biometric Risk.

Process
1,5 1,4 1,3 1,2 1,1 1,0 0,9 0,8 2007 2012 2017 2022 2007 2012 2017 2022 2007 2012 2017 2007 2012 2017 2022 2022
Calamity
Basis
Trend
Total
2007
2012
2017
2022
10
Trend Risk e.g. Longevity Risk
11
Calamity Risk e.g. Extreme Weather or Pandemic Risk
12
Calamity Risk Mortality Shocks
13
Calamity Risk e.g. Pandemic Risk
14
Basis Risk LTC Case Study
15
Basis Risk LTC US Case Study
16
17

1 Products heavily reinsured but 1. capacity now limited. 2. importance of having rates flexibility i.e. cannot g guarantee LTC p premium rates 3. lower lapses for lapse supported p products 4. importance of dementia claims and dynamics around this (uw; trends; etc.) 5. importance p of mortality y assumptions p for Active & Disabled Lives 6. market dynamics and competition can result in irrational behavior 7. pricing actuaries must be on the same page as the underwriters & claim managers 8. future trends are not to be underestimated
18
Basis Risk Australian DI Case Study

Commonwealth bank continuing adverse experience in disability products
D 2011 P Dec Profit fit release l
Asteron unfavourable disability claims experience

J 2011 annual Jun l report t
Munich Re reserve strengthening for Australian disability business of

Sept 2011
AMP AXA Australian income protection book was put into loss recognition p losses recognised g on with capital merger
Dec 2011 Investor report Jul 2011 Update
Hannover l i experience i f from A Australian t li claims disability annuity business was unusual additional expenditure in the lo low-double-digit do ble digit million e euros ros was as incurred
19
Basis Risk Australian DI Case Study

Disability income products have been popular in Australia Individual disability (IDI) covers were more popular than Group disability Lenient definition worsening over time Generous benefit features like agreed value high maximum per month benefits high replacement ratios & boosters lifetime benefits generous indexation benefits (over and above CPI) ) Lenient underwriting Increasing NMLs and simplistic occupational rating Poor claims management Reinsurance alignment of interests & capacity may be limited.
20
Basis Risk US IDI Survey
Source: Munich Re America Life 2012 IDI Survey
21
Process Risk Large g Fac Cases Increased need in market for capacity High Net Worth (HNW) Market Insurers seeking g capacity from their key reinsurers Insurers looking for one stop shop
22
Process Risk High Face Amounts
23
Summary Reinsurance a tool for risk management
Process
1,5 1,4 1,3 1,2 1,1 1,0 0,9 0,8
Calamity
Basis
Trend
Total
Trad Re YRT / Coinsur
Large Fac C Cases
Cat XL
Large QS Deals
Longevity
2007
2012
2017
2022
2007
2012
2017
2022
2007
2012
2017
2007
2012
2017
2022
24
2022
2007
2012
2017
2022
India a global destination for service delivery Bala Viswanathan

CEO India & Group Director Business Process Management

Factors that drive off shoring g

Attractiveness of a location for offshoring is driven by four factors people and financial attractiveness are the key
key differentiators that combine to allow India to be the most preferred IT and off-shore destination
2
2012 a milestone year y

IT-BPO industry-aggregate revenues cross the USD 100 billion mark exports at USD 69 billion mark,
The industry continues to be a net employment generator - added 230,000 jobs in FY2012 Providing direct employment to about 2 2.8 8 million million, and indirectly employing 8.9 million people Of the US$ 69 million revenues, IT services i accounts t for f 58 per cent, t BPO is nearly 23 per cent and ER&D and Software Products account for 19 per cent IT-BPO contributes to 25% of Indias export
Emerging g g /emerged g locations

Emerging locations are gearing to replicate the India story ... Global firms rapidly embracing multi-location delivery
The road ahead what works

While sourcing arena has expanded to newer geographies India remains the preferred sourcing destination
1 Abundant Talent
Graduate outturn > 4 million annually (across all disciplines), India accounts approx. > 28% of total suitable talent pool available in offshore locations Age profile over 50% of India below the age of 25 years Talent suitability concerns addressed through a combination of govt./ academia/ industry led initiatives Indian continues to deliver cost savings of 30% - 50%
Sustained Cost Contrary to concerns of Indias eroding cost competitiveness, leading players Competitiveness continue to report profitable, above-average growth 3 Emphasis on Quality & I f Info. Security
Indian based units account for highest number of quality certified delivery centers in the world Continued focus on quality and demonstrated expertise in global service delivery has established strong consumer confidence I India di is i committed itt d to t extend t d its it unmatched t h d reputation t ti i in quality lit t to i information f ti security (highest number of ISO 27000 organisations amongst offshore destinations)
5
The road ahead what works

While sourcing arena has expanded to newer geographies India remains the preferred sourcing destination contd. contd
4 Growth in Business Infrastructure Rapid growth in key business infrastructure has ensured unhindered expansion and growth Telecom and Commercial Real Estate is well in place Improving other supporting infrastructure is a key priority for the government
5 Growing G i domestic business
Strong growth in domestic industry is providing further support and scale Greater availability of trained talent
The road ahead what doesnt

While sourcing arena has expanded to newer geographies India remains the preferred sourcing destination
1 People Factors Continued high attrition rates across verticals. Inhibitor for high end work which requires extensive training to be offshored Lack of sufficient number of appropriately trained individuals Lack of relevant curriculum despite initiatives such as NASSCOM Assessment of Competence Transfer pricing most litigated tax issue EVER! End of tax holidays and incentives making India less competitive Single window clearance most abused clich Industry competitiveness highly influenced by foreign exchange movements poor supply pp y side management g driving g cost of Sustained inflation due to p operations
7
2 Regulatory Factors
3 Cost Factors
India still the preferred destination

irrespective of how one slices the data, India is the most advantageous destination for offshoring
Significant Financial Efficiency 9 40-50% savings g
1.4 2.3 1.4 2 2.3 13 1.3 2.8 1.6 1.2 1.5 1.8 18 1.6 15 1.5 2.6 2.3 2.3 1.7 09 0.9 Malaysia M Australia A India Brazil Mexico China Thailand T 1.5 0.4 Ireland Phi ilippines 3.3 2.1 08 0.8 Canada 1.3 1.2 2.3
9 Low capital expenditure 9 Savings from process re-engineering Environment 9 Domestic demand 9 Cultural Alignment 9 Geographic proximity g p p y 9 Robust Technology Support 9 Favourable Time Zone Displacement p People 9 Large pool of skilled workforce 9 Process experience 9 Education level of work force 9 Employee retention 8
3.2
2.9
3.2
2.6
Cost Advantage
Skilled Environment
Skilled Workforce
S Source : AT Kearney K Global Gl b l S Services i L Location ti Index I d
Thank ThankYou You
Challenges in Actuarial Services Delivery from India Ankur Agrawal, FIA, FIAI
Head Actuarial Services Head, Services, AXA Business Services

Table of Content
A. Motivation For Outsourcing
B. Indias Story So Far
C. Challenges in Actuarial Services Delivery from India
E. Cost Arbitrage Intellectual Arbitrage
F. The Way Forward
Contents
Motivation for Outsourcing g

Cost and Labor Arbitrage: Ongoing O i market k t competition titi and d pressure on fi financial i l results, lt making ki process efficiency ffi i i imperative ti The need to manage costs is ever increasing due to global economic environment Access to Additional Talent Pool: Larger talent pool Access to unique q skillset Exposure to different thought patterns Transition T iti Existing E i ti Resources R to t New N Skill Skillsets: t May result in higher value work-streams domestically Provides an opportunity for greater management focus on core competencies and business expansion Readily Available Infrastructure: Almost all major j g global p players y have an offshoring g setup p( (captive p and / or third p party) y) for IT / other business processes Opportunity to leverage the investment of these setups in technology, people, and methodologies
Indias Story y So Far ( (1/2) )

Key Highlights: Actuarial activities from all major domains being executed from India with Life, Non-life, and Pensions being largest p with all major j g geographies g p including g US, UK, Europe, p Middle East, and SE Asia Global market exposure being serviced from India for a wide spectrum of services Growing number of off-shoring units from small size (1-10 employees) to large units (> 300 employees) and many of them servicing more than one geographies Actuarial off-shoring units in multiple tier I and tier II locations, with very mobile talent pool across the country
Key Lowlights: Low-end, non-core functions continue to be the biggest piece of the outsourced activities to India There are lessons to be learnt from some not so successful outsourcing ventures Wide gap between number of student resources and qualified actuaries, indicating slow transition
Indias Story y So Far ( (2/2) )
Source: Off-shored Actuarial Work in India A Survey Report (IAI November 2012)
Challenges in Actuarial Services Delivery from India

Reducing Cost Arbitrage:
Reducing cost arbitrage due to wage inflation Lack of momentum to move up the value chain
Increasing Competition From Other Outsourcing Destinations:

Philippines, South Africa, Latin America, and Eastern European countries are fast catching up with India in terms of both cost advantages and growing talent pool Clients have an incentive to outsource to newer destinations to manage g the supplier pp concentration risk
Scarcity of Experienced Resources:

Scarcity of highly experienced resources to deliver on high-end complex projects Large pool of less experienced / student level resources resources, which are more suited for repetitive process process-oriented oriented work Long journey time from student to fellowship
Changing Customer Requirements:

Customers looking for flexible sourcing strategies (focus on smaller size projects) Increased customer focus on quality of delivery and enhanced value propositions Customer perception that high-end complex actuarial work is not suited for outsourcing
Challenges in Actuarial Services Delivery from India

100,000 80,000 60,000 40,000 20,000
Costs Reducing Gaps

I di A India Analyst l t US A Analyst l t
Resources Well placed but increasing competition
Average Costs per FTE

Billed Amount per FTE Estimated Training and T/L Benefits
Costs Competition
Changing g g Customer Requirements q
Source: Everest Group and Letsema Consulting Study on South Africas capabilities in the financial services sector Outsourcing Actuarial Work A Discussion (Paper by Steve Marco in Southwestern Actuaries Conference June 2009)
Drivers For Growth

Global talent shortage Skills Skill are i in shortage h t i internationally, t ti ll more so f for GI specialists i li t (about ( b t a fifth of f th the t total t l actuarial t i l profession) Highly competitive market, lots of employers competing for small talent pool Economic slowdown increasing pressure to optimize costs Regulatory changes like Solvency II and Healthcare reforms, creating more demand India is still relatively well placed for both cost and talent pool as an actuarial outsourcing destination
Source: Everest Group and Letsema Consulting Study on South Africas capabilities in the financial services sector Juggling Uncertainty The Actuarys Part To Play - GIRO Conference and Exhibition 2012
Cost Arbitrage Intellectual Arbitrage

Why change the approach > Cost advantages may erode over time
Challenges
Reducing cost arbitrage Increasing competition from other Desinations Scarcity of experienced resources Changing customer requirements Perception management and confidence development of onshore counterparts for engagement in complex work
Drivers for Growth

Global economic slowdown putting pressure on companies to optimize costs Focus on risk based management, Solvency II and US health reforms requirements Global resource shortage and sizeable resource pool in India (can be upskilled for high-end work) Matured ITES / BPO destination
Ti Time t to shift hift gears change h th the approach hf from cost t arbitrage bit to t intellectual i t ll t l arbitrage bit
The Way y Forward

Know Your Customer (one approach doesnt fit all):
Understand U d t d your customers t specific ifi business b i needs d and d limitations li it ti t to offer ff custom-fit t fit solutions l ti Position your strategy based on nature of your customers work / objective (is it a recurrent activity like model updation/reporting for cost optimization or revising pricing strategy for increased value proposition details next slide) Invest in dedicated teams team s to research clients clients markets - to anticipate changes and proactively propose solutions solutions, besides gaining domain expertise on a particular market Work on providing an end-to-end solution to your customer by leveraging knowledge from the complete spectrum of outsourced services including including, analytics analytics, operations operations, IT, IT actuarial etc. etc
Have Buy-in from Senior Management:

Manage M perception ti that th t high-end hi h d complex l actuarial t i l work ki is not t suited it d f for outsourcing t i Manage anti-outsourcing sentiments (especially around complex work)
Manage Skill Gaps

Be specific in discussing the service offerings with your clients in terms of existing skills / skill gaps to avoid any expectation mismatch Invest in training by having a structured program for f up-skilling of f resources Increase knowledge sharing through frequent interactions with onsite counterparts; creating cross teams between onshore and offshore location for managing complex projects, employee exchange programs, etc.
The Way y Forward

Domain of repetitive processes aimed at cost optimization: Identify opportunities to automate to help improve process efficiency (both time and quality), reduce / optimize cost (reinstate the cost arbitrage) Be flexible in utilizing g non-actuarial resources for simple p manpower-intensive p tasks, , with a comprehensive p review process from your actuarial resources Document your processes thoroughly for knowledge retention and make them independent of people Domain of higher-end complex work aimed at creating value proposition: Adopt a consulting approach as projects of these nature require a high-degree of actuarial judgment Establish Centers of Excellence to build specialized competencies (like pricing, reserving, modeling, etc.) required for managing complex projects across geographies Actively yp participate p with g global communities to keep p abreast of market changes, g , new technologies, g , casestudies, etc., as knowledge gained from these exposures will enable solving problems of a varied nature Implement management policies to create a congenial work environment required for nurturing a specialized actuarial unit (e (e.g., g infrastructure infrastructure, flexi flexi-timings, timings study support programs programs, etc etc.) )
Become a trusted advisor for your customers
Support pp from IAI

Training Resources To Make Them Industry Ready: Arrange more seminars, workshops, internship programs, etc. to increase industry exposure for students Possibility of introducing skill-based certification exams (like the IT industry has Cisco or MCSE certification the actuarial industry could have its own certifications certification, certifications, say an Emblem or Prophet certified professional) Continue to reform the examination process to reduce the imbalance between number of students and qualified lifi d actuaries t i Be The Brand Ambassador and Promote India (both within and outside India): Help promote the actuarial career through other industry bodies like NASSCOM, CII, etc. Promote India as an outsourcing destination by participating in international forums, publishing case studies and success stories Facilitate forums for offshoring units to deliberate on industry issues, analyze not so successful stories, and drive change
Opportunities for Indian Actuaries

Opportunities to learn global best practices with involvement in large global
projects
Develop understanding of both matured and emerging markets Exposure to actuarial roles in broader functions Knowledge of regulatory framework in global markets Gain international exposure with opportunities to travel globally for work and
training
Opportunity to leverage the global experience and prepare for a challenging

Indian market of tomorrow
Thank ThankYou You
23
Remote view of why off-shored actuarial work within India Tassos Anastasiou RSA Emerging Markets Actuary

Which size?
?
Va alue Addition
Challenges g
Growth Stage
Stability Stage

A few thoughts g
Thank ThankYou You
30
Questions?
The material in this presentation is for information only and is not intended to be actuarial, financial, legal, underwriting, or any type of professional advice. Numerical data shown are for illustration only.
Ghali Boukfaoui USA
Session S i 8 Economic Scenario Generators and Model Risk
Ghali Boukfaoui Vice President, President Client Solutions Group Group. Numerix


- An ESG will generate multiple scenarios reflecting the risk factors tight to a Currency Currency.
Engine
Risk Factors
Index Modeled
S&P500
ALM Engine ASS SETS PR ROJECT TIONS
EquityRisk FXRisk
Russell2000 000 Other

USDAratedComposite p Index USDBBBratedComposite Index
ESG
CreditRisk InterestRates Risk InflationRisk
CPIIndex
Themodeledindicesareusedasproxiestomodeltheassetsbackingthe liabilitiesorbackingthefreesurplus; TheALMEnginecangofromasimplespreadsheettoanfullactuarial projectionsoftware; InmostcasesInterestRateRiskrequirestomodelthefullYieldCurveat futuretimestepsinordertoreflectliabilityvaluesineachfuturedate.

Scenarios Scenario1 t= ZCB1 ZCB2 ZCB600 ZCB1 ZCB2 ZCB600 0 1 2 0.999297 0.999297 0.999297 0.999252 0.999222 0.999277 0.103746 0.151337 0.166203 0.998612 0.998549 0.998633 0.998434 0.998553 0.998615 0.103746 0.151337 0.166203 48 49 50 0.998509 0.998728 0.998661 0.998423 0.998748 0.998567 0.129762 0.15942 0.135007
InterestRates Risk
Scenario1000
0.998875 0.998875 0.998875 0.998684 0.998899 0.998835 0.129762 0.15942 0.135007
Model risk in the Risk Neutral World:

Risk Neutral is the measure that captures optionality in the Assets and Liabilities; The model should be set to be market consistent, this i achieved is hi d through h h model d l C Calibration; lib i The closer we get to market prices, the more market consistent o our r scenarios are and the more market consistent our results are; Model Risk appears when the model is not adequate or calibration not performed adequately
Example3:MarketConsistencyforaSingleIRModel, theHullandWhite2factors;
5ySwaptionSkewCalibration HW 2F
60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0 0% 0.0%
MarketVolatility
Model Volatility
Example p 3:MarketConsistency yforaSingle g IRModel, , theLiborMarketModel2Factors;

5ySwaptionSkewCalibration LMM2F
50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10 0% 10.0% 5.0% 0.0%
MarketVolatility
Model Volatility
Example1:MarketConsistencyforaSingleEquity Model,theBlackScholesTermStructureCase.
l kTermStructureModel d l Black Implied Volatilitiesfor differentMaturitiesandStrikes
25.00% 20.00% 15.00% 10.00% 5.00% 0 00% 0.00%
95% 100% 105% 3m
95% 100% 105% 6m
95% 100% 105% 12m
95% 100% 105% 18m
95% 100% 105% 24m
Black Implied Volatilities
Market Implied Volatilities
Example p 2:MarketConsistency yforaSingle g Equity q y Model,theHestonStochasticVolatilityCase.

HESTONModel Implied Volatilitiesfor differentMaturitiesandStrikes
25.00% 20.00% 15.00% 10.00% 5.00% 0.00%
95% 100% 105% 3m
95% 100% 105% 6m
95% 100% 105% 12m
95% 100% 105% 18m
95% 100% 105% 24m
p Black Implied Volatilities
p Market Implied Volatilities
Example p 5:Whataboutcombining gIRmodelandEquity q y Model? Volatilityofratesbleedsintheoptionprices,therefore jointcalibrationbecomesnecessarytoperformJoint Calibration. OtherIssuestoconsider: Does D myactuarial t i lmodel d laccept tnegative ti rates? t ? Whatmaximumratedoesmymodelaccept? Myguaranteesaresensitivetobothratesand equities,theyaresensitivetotheRateEquity correlation;
ModelRiskintheContextofEconomicScenarios:
Riskofusingamodelthatispoorlycalibratedtomarketdata: Leadstomisscalculatedmarketconsistentvalue; Riskofcombiningmultiplestochasticmodelswithoutjoint calibration; Risk kof fusingscenariosthat h arenotRisk kNeutral l enough h( (cf, f martingaletests); Riskofmodifyingthestructuralintegrityofeconomic scenariostocontaintherestrictionsofanactuarialmodel;
Thank you
Ghali Gh li B Boukfaoui kf i g gboukfao@numerix.com @
SessionC1.1 C1 1 DataandStandards Standards, Fraud&AbuseManagement

AlamSingh AssistantManagingDirector Healthpractice Milliman,India

Agenda
Part1 IntroductiontodatainIndia Datastandards Part2 Fraudandabusemanagement
Agenda
DatainIndia(Overview)
Although g farfromoptimum, p ,dataquality q yinIndiaisimproved p steadily yinp past34 years.Significantdifferenceinclaimsdataqualityofinhouse,top35TPAsand rest. MainissuescaneasilyberemediedthruminorITimprovements,financial incentives&educationofdataentrystaff(agesof150+plus,dateofadmission priortopolicystart, start etc.). etc ) Insurersatvaryinglevelofanalyticscapacity.Oldschoolinsurersstillthinkin t terms of fMISand dquery.Progressive P i insurers i creating ti data d t warehouses, h in i house h analyticalteams,predictivemodelsetc.
Dataquality(QualityIssues)
LackoffocusonproperICDcoding: allapplicableICDcodesfrequentlylistedrandomly notinorderofprimary ailment/otherorexistingailment(i.e.diabetes/fractureoffemuretc.), ICDcodesappliedrandomly(i.e.jointreplacement&removalofimplant codedsamebuthugecostdifference), procedurecodesusuallymissing. Functionalprocessesinfluencedata: patterns paiddatesinfluencedbyfloatthusskewingclaimpaymentpatterns, taggingoffraudclaimsnotdonebyTPA/insurerbecauseitcreatesnew paperworkrequirements.
DatainIndia(RegulatoryAspect)
TableA, A B&Cformatiscomprehensivebutitneedstocontinuouslyevolveto meetindustrychanges.Structuralimprovementandlongtermvision,i.e.create uniquecustomeridentifier(tofacilitatelongitudinaldataanalysisorportability analysis)canenhancevaluesignificantly. significantly IRDAseeksmuchmoredatathanotherregulatorsinSouthEastAsia,noneseek similar i il levels l l of fgranularity. l i IIBrepository i rich i hdata d source,verywell llpositioned ii d thruitsuniquemandate.Needtoleverageforcommondataservicei.e.: declinedlivesdatabaseforhealth, requiredcheckforportability, facilitytoindependentlyverifyacorporatesclaimexperienceetc. IRDAcurrentlyseekingvendortoimplementfraudanalyticsolution
Agenda
DataStandards
Variousindustry ygroups g p havedeliberatedissue, ,multip prong gapproach. pp Encouragealignmentbetweenpayor &providersystems.Eventualgoalisseamless EDI. CreateacollaborativeenvironmentsoITvendorscanjoinhandsanddevelop/ adoptcommonstandardsfordatacapture,storage&transmission. Encourageallexistingdataexchangeplatformstobecomestandardcompliant& interoperable EngagedwithNADHOandNICtoassesswhatexistingstandardsandother resourcescanbeleveraged EnsureoutputisalignedtoTableABandC,otherinitiativeslikeMoH&FW(EMR) andAcord initiativeunderwayatIRDA GoalistoencouragetheITvendorstocreateandabidebystandards,industrygroups canassistbutnotcreatestandards.Standardsevolvesoadurableandongoing approachneeded.
DataStandards
Wayforward Identificationofdataelements,definingdatatypes&size,standardizingdata elements Standardizekey yforms&formats:p proposal, p ,enrolment, ,policy, p y,claim, ,cashless authorizationrequest,cashlessapproval,dischargesummary,finalhospitalbill. Mainmastersrequiredforfirstroundofstandardization.Somealreadyinuse.
Agenda
Fraud&abusemanagement
Definingfraud&abuse Fraud iswillfulanddeliberate,involvesfinancialgain,doneunderfalsepretenseand isillegal. g HealthCareAntiFraudAssociationdefinesfraudas:intentionaldeceptionor misrepresentationthattheindividualorentitymakes,knowingthatthe misrepresentationcouldresultinsomeunauthorizedbenefittotheindividual,orthe entity,ortoanotherparty Abuse generallyfailstometoneormoreoftheseabovecriteria,subtledifference. Treatmentthatisnotausualmedicalpracticeorofmarginalutilityisabuse.Ifitis medicallynecessary,itshouldbesupportedbycasenotes.
Examplesoffraud: Customer:claimsforahospitalizationwhichneverhappened,non disclosure,impersonationorcollusionduringPPC,claimingfrommultiplecoverage's etc. Provider:unnecessarysurgery(ie:hysterectomy),billingforservicesnot provided, d d inflating fl costof fservicesorconsumables, bl consultations l by b unrelated l d specialists,unbundling,upcoding etc. Di Distribution t ib ti :broker b k misrepresenting i ti groupexperience, i f fabricating b i ti groups,agent tnot t forwardingpremiumtoinsurer,facilitatingnondisclosure,creatingfactiouspeopleetc. Examplesofabuse: Provider:excessivediagnostictests,extendedLoS,conversionofdayprocedureto overnightadmission, admission admissionlimitedtodiagnosticinvestigationsetc
Estimatesoffraud US Sestimates i rangewidely, id l reasonable bl estimate i at6%orUSD S 120 20billi billionoutof fUSD S 2 trillionannualhealthcareexpenditure.Certainsegments,suchasMedicaremorefraud prone.Canbehighlysophisticated,largerscamsconductedbyorganizedcrimerings,ie: 115people, l 9cities, iti USD240million illi in i false f l billings billi 91people,8cities,USD290millioninfalsebilling I InI India, di HIf fraud dnot treally ll regarded d dasacriminal i i lact, t moret tolerated l t dsocially. i ll N Nostrong t deterrentforabuseeither.Variouspeopleestimateimpactinthe1012%range. Commonmethodsofdetectingpotentialfraud Distribution:multiplepoliciesfromsingleaddress,vagueaddress,income/premium inappropriateness,selectivepurchaseinfamily,agentwithtrackrecordoffraud Claim:sitevisitraisessuspicion,reimbursementclaimsfromaninnetwork hospital,distancebetweenpolicyholder&hospital,suspiciousdocuments(ie:MSWord printedbills, bills nolabreportsorsurgicalnotes, notes notelephonenumberforhospital hospital,same handwritingonallbills,etc),repeatedadmissions/admissionsinsamefamily,claimin lastmonthofpolicyetc
Whatcanyoudo
Distribution Di t ib ti &underwriting d iti Profileagentsbymonitoringindividualportfolios Identifyfraudhotzonesformorerigorousmonitoringofproposals MonitorlabswhoconductPPCs PPC s Regularlyanalysisunderwritingimpactandrefineunderwritingrules/guidelines Providercontracting&claims Strengthencontractingandlimitprovidernetwork.Shifttopackagerates Claimprocessingsystemshouldhaveinbuiltadministrativeandclinicalalerts Investintraining,shiftfromdetectionbyintuitiontodetectionthruprocesses Otherthoughts yagents g oremployees p y Createzerotoleranceenvironmentforfraudorabusefacilitatedby Dedicateteamtoinvestigatefraudsandtoassistlawenforcementinprosecution.
Wayforward
Whatcanainsurerdo: Createainternalcultureofinformationsharingsoprocessesandguidelinesevolve Provideregulartrainingtosales,underwritingandclaimsemployees Invest I in i data d analysis l i Offerwhistleblowerrewards Whatcantheindustrydo: Shouldhaveamechanismtosharecasestudies,toolsandtraining y ,ie:unique q provider p code Shouldcreatedatastandardsthatfacilitateanalytics, Shouldcollaborateindataanalysis Collectivelyengagepolicymakersandconsumerbodies,illustrateimpactonconsumers Collaboratewithmediatoincreasepublicawarenessthatfraudwillnotbetolerated Demandtougherlawsandfacilitateprosecution C ll b Collaborate, it i is i everyones problem. bl
Thankyou
alam.singh@milliman.com
Click to add Session number and presentation title Tassos Anastasiou RSA Emerging Markets Actuary

Which size?
?
Va alue Addition
Challenges g
Growth Stage
Stability Stage

A few thoughts g
ZheeChong Koh Singapore
Data Analytics & Portfolio Management for Medical Insurance ZheeChong Koh, FSA, MAAA Medical Product Actuary Actuary, Asia Swiss Reinsurance Company Limited

Context
"We We have sold tons of medical insurance policies, and have built a sizable medical portfolio, now what?" Answer:
Monitor Analyze Investigate Action
Essentially portfolio management, through data reporting and analytics. Agenda for today:
Discuss key elements for each of the 4 steps above Sample reports: Management, Claims, Actuarial Market practice vs. best practice
Challenges to Medical Insurance in Asia

Quantity & quality of data (limited, non credible) Cross-subsidization very common young vs. old, life vs. health, individual vs. group, new business vs. in-force Inability to increase premiums as truly needed needed, due to competition Guaranteed premiums prevent the insurers from re-rating on demand Lack of "managed" care Large loss occurrences in small portfolio Low awareness and high anti-selection Moral hazards (frauds and abuses) Low disclosure rates Underwriting cycles occur and unpredictable underwriting gains/losses A ti portfolio Active tf li monitoring it i of f emerging i trend t d not t a practice ti norm
Actuarial Control Cycle
Market info/ Competitors

Assumptions Revised assumptions
Product design and pricing
Experience monitoring
Marketing and sales
PORTFOLIO MANAGEMENT
Claims management Underwriting
Experience Monitoring
Why monitor experience?
to measure actual results against expected to act as an early warning mechanism to highlight areas for concern and improvement to assist in management reporting to help in decision making to determine profit by category (age/gender/occupation/benefit level) to assess rate adequacy to assist in future pricing and product designrefine best estimates
What to monitor?
Exposure (know your sales performance and customers!)
No. of lives No. of live live-years years No. of group No. of policy Distribution by demographics (age/gender) Distribution by socioeconomic class Distribution by geography Distribution by group size Renewal p pattern by y Month by Calendar Year by UW Year
Premium (who pays you, how much, where?)

Written premium ("Sales") Earned premium Variance analysis vs Plan/Budget Gross vs Net by Product Type by Plan Level by Month by Quarter by Calendar year by UW year
What to monitor?
Claim (Who are you paying, how much, why, where?)
No. of claim No. of admission (hospitalization) Length of stay Amount of settled claim Amount of pended claim Quality of claim (TAT, (TAT payment accuracy) by Product Type / Plan Level by Month / Quarter / Calendar year / UW year by Age & Gender, Gender Geography (the common rating factors for medical insurance) by MSP (hospital / clinic / physician) by Diagnosis / Procedures (i.e. ICD-10 at different level, Schedule 13) by Benefit item (at different hierarchy)
Considerations in Monitoring Framework

Frequency of reports: monthly, quarterly, semi-annually, semi annually, annually? Responsibilities: Actuarial, Claims, Underwriting, IT, Marketing? Target recipients of reports I li ti Implications on b business i d decisions i i b based d on reports t fi findings di Challenges faced:
Limited IT system capabilities Inconsistent diagnosis/procedures coding practice by providers Missing pharmacy/medication details Missing COB details Metrics reported inaccurately Long lag time between valuation date and reporting date
Data Analytics General Principles

Five general rules to data analytics: Data driven decision making Go where the money is Start St t at t the th top t and d drill d ill d down Convert analytics into opportunities via a plan Take action, monitor impact and feed back into plan Three general tenets Parkinson's Parkinson s law: Most people spend way too much time on trivial things Pareto's 80/20 law: 80% of problems caused by 20% of insured lives 1st law of cybernetics: The more responses you have available in the system th more likely the lik l it will ill survive i
Types of Analysis
"Eight levels" of analytics

inc creasing in value to o a company
8 Optimization 7 Predictive modeling 6 Forecasting 5 Statistical analysis 4 Alerts 3 Q 3. Query & drill down 2. Ad hoc reports 1. Standard reports
Multivariate analysis (GLM etc)
Real time risk management and claim adjudication, concurrent claim reviews MIS reporting, dashboard, 1 1way analysis, l i monitoring it i
increasing complexity
Reporting Management, Claim, Actuarial

3 Broad Categories of Reports Management, Claim, Actuarial Management reports
High level level, aggregate premium vs. vs claim amount By month/quarter Variance analysis against plan
Claim Cl i reports: t
Chronic disease summary (DM opportunities assessment) Top 50 100 most expensive claimants (catastrophic cases, CM opportunities assessment) t) Length of Stays Summary (focus on very short and very long stays) Top providers/specialties (assess concentration of type of services, or specific doctor/hospital/clinic) Readmission Summary Fraud and abuse reports (e.g. procedures not aligning with diagnosis/condition, high medication cost without OP and/or IP visit, visit high admission/readmission rates, MSP consistently charging over UCR level, etc) Ancillary services analysis (by provider/location/condition)
Reporting Management, Claim, Actuarial

3 Broad Categories of Reports Management, Claim, Actuarial Actuarial reports
Loss ratios by age/gender/plan level (to assess rate adequacy by rating cells, any cross subsidization) Claims PMPY/Loss Ratio by deductible/co-insurance/copay level Actuarial cost report (high level metrics by major service category (IP, OP, PH, Rx) and minor service category (surgical, medical, ER, etc.), compares against benchmark and historical experience if available) Duration study (to assess durational impact, indication of potential anti-selection or inadequate underwriting guidelines) Claims PMPY by benefit type (understand under/over utilization and assess adequacy of assumptions used during pricing) Loss ratios by group sizes/industry/location for group business (to assess renewal/manual rate quotation process)
Sample Reports
Inpatient Top Cost Drivers
ID(top 25) 120104350413603 Total 120104310310601 Total 120103600706321 Total 120104510319602 Total 120104330527603 Total 120104450930434 Total 120104192201036016 Total 120104480210604 Total 120104500419601 Total 120104260721601 Total 120102540818106 Total 610113551017004 Total 120104440516603 Total 120104300422603 Total 120101195611072022 Total 120104381127604 Total 120104351221601 Total 120104410918603 Total 120104351024603 Total 120104310809603 Total 120104193702186041 Total 220105710515261 Total 650108430928001 Total 120103500228071 Total 140202197704075032 Total Total Settled Amount 35839.98 23453.27 23064.75 16345.91 15118.34 15001.47 12814.73 10785.21 10623.90 10616.15 8929.70 8798.85 8376.53 8264.39 7202.96 6482.65 6277.88 6025.75 5922 26 5922.26 5624.11 5477.04 5038.13 4894.33 4722 47 4722.47 4609.33 270310.09 Total Settled Amount 548,267.06 % of Top 25 49.30% Total Claimants 234
Findings/Recommendations The top 25 members account for almost 49.3% of total i inpatient ti t settled ttl d costs. t 10 members cost in excess of 10,000 RMB. These 10 members in aggregate account for approximately 31.67% of the total inpatient spend. A small number of members account for a disproportionate amount of costs. Early identification of these members and potential case management may help reduce these costs.
Sample Reports
Pharmacy Spend By Individual Physician Hospital X Department Dr's Name Number of Bill Total Amount ENT Dr.Zhao 503 40,547.73 Obstetrics and Gynecology Department Dr.LI 323 20,219.91 Dr.Zhang 75 1,218.43 D Dr.Zhu Zh 135 2 039 07 2,039.07 St Stomatology t l Department D t t Dr.Wang 14 400.06 OPD of Physical Therapy Dr.Jin Dr.Dai Dr.Huang Dr.Liu Dr.Ren Dr.Yu Dr.Hua Dr.Dong Dr.Zhen Dr.Su Dr.Qiao Dr.Ma Dr.Yang Dr.Kui Dr.Xian 183 763 1617 2874 2794 3355 2002 512 712 7 442 1239 6 4126 3097 20,097.69 38,805.59 243,805.69 269,406.66 251,508.96 343,839.82 169,194.62 22,413.91 124,528.46 571.79 73,831.16 101,997.28 683.50 , 451,540.52 343,231.56
Avg per Bill 80.61 62.60 16.25 15 10 15.10 28.58 109.82 50.86 150.78 93.74 90.02 102.49 84.51 43.78 174.90 81.68 167.04 82.32 113.92 109.44 110.83
STD 152.40 69.27 12.50 14 61 14.61 17.54 99.16 65.47 156.45 112.37 112.04 133.08 108.40 65.71 233.02 68.46 212.71 92.39 96.39 108.25 100.44
CV 1.89 1.11 0.77 0 97 0.97 0.61 0.90 1.29 1.04 1.20 1.24 1.30 1.28 1.50 1.33 0.84 1.27 1.12 0.85 0.99 0.91
OPD of Internal Medicine
Dermatology Department
Community Service Department OPD of Surgery OPD of Psychology Service p Traditional Chinese Department
Sample Reports
Example: Inpatient only product

Status Quo 1500 admits/year Hospital A Hospital B Hospital C 500 * 500 * 500 * 10,000/stay 8,500/stay 12,500/stay = 5,000,000 = 4,250,000 = 6,250,000 15,500,000
Total inpatient costs:
Assuming 50% redirection: Hospital A Hospital B Hospital C 250 * 1000 * 250 * 10,000/stay 8,500/stay 12,500/stay = 2,500,000 = 8,500,000 = 3,125,000 14,125,000
Total inpatient costs:
Sample Reports
Inpatient Cost Drill Down
ICD Code ICD
I25 Z98 C34 N18 C83 I63 C18 I71 I61 C84 J18 C15 C50
ICD Description ICD

Chronic ischemic heart disease Other post surgical states Malignant neoplasm of bronchus and lung Chronic renal failure Diffuse non-Hodgkin's lymphoma Cerebral infarction Malignant neoplasm of colon Aortic aneurysm and dissection Intracerebral haemorrhage Peripheral T-cell lymphoma T Pneumonia, organism unspecified Malignant neoplasm of oesophagus Malignant neoplasm of breast Respiratory failure, not elsewhere classified
Count of claims
85 46 29 15 2 40 13 4 6 2 11 5 11
% of Count
11.52 6.23 3.93 2.03 0.27 5.42 1.76 0.54 0.81 0.27 1.49 0.68 1.49
Value of Claims('000)
1,822.19 1,102.34 975.66 615.95 554.53 547.12 534.97 389.00 386.22 265.76 231.59 221.26 220.12
% of Value
11.91 7.20 6.37 4.02 3.62 3.57 3.50 2.54 2.52 1.74 1.51 1.45 1.44
Avg Value / Claims('000)

21.44 23.96 33.64 41.06 277.27 13.68 41.15 97.25 64.37 132.88 21.05 44.25 20.01
What does this tell us?
Chronic heart disease should be an area of focus High cost claims may not contribute significantly to PMPM costs Cataracts are an OP procedure in many markets; opportunity?
Actions to consider

Costs by hospital Disease management programs Case management g Obtain benchmark information
J96 H25 Others Total:
Senile cataract
3 26 440 738
0.41 3.52 59.62 100.00%
214.09 193.33 7,031.22 15,305.36 ,
1.40 1.26 45.94 100.00%
71.36 7.44 15.98 20.74
Sample Reports
Item wise Breakup of Claim Expenses-OP and SOP
Account Head
Aggregate Ambulance Consumables Doctors Drugs ICU Key Investigations Lab Tests Nursing Other Costs Other Radiology Investigations Package Costs Physiotherapy Prostheses Room and Board Surgeons Costs Therapeutic or Diagnostic Procedures Theatre Costs Total:
Incurred Amount
900,663.21 10,034.00 71,753.42
% Value
4.30% 0.05% 0.34%
SHI Paid Amount

610,267.48 .00 18,720.13
% Value
17.10% 0.00% 0.52%
Outside SHI Scope % Value

22,162.34 5,714.00 4,531.84 2.53% 0.65% 0.52%
Policy Disallowance
3,900.00 4,175.00 4,411.59
% Value
0.41% 0.44% 0.46%
Outpatient Cost Drill Down
302,052.74
1.44%
18,760.08
0.53%
78,871.20
9.00%
640.70
0.07%
16,027,122.84 396.40 307,786.06
76.48% 0.00% 1.47%
2,324,448.93 .00 12,387.27
65.13% 0.00% 0.35%
455,126.49 20.00 20,090.65
51.92% 0.00% 2.29%
722,469.49 .00 12,985.81
75.36% 0.00% 1.35%
52% is national comparison.
762,521.93 634.33 143 147 05 143,147.05
3.64% 0.00% 0 68% 0.68%
61,098.08 16.20 5 788 98 5,788.98
1.71% 0.00% 0 16% 0.16%
27,139.19 32.20 74 374 03 74,374.03
3.10% 0.00% 8 48% 8.48%
60,823.29 14.50 9 072 89 9,072.89
6.34% 0.00% 0 95% 0.95%
623,475.79 3,522.80 126 00 126.00
2.98% 0.02% 0 00% 0.00%
28,526.98 799.02 .00 00
0.80% 0.02% 0 00% 0.00%
81,554.54 .00 .00 00
9.30% 0.00% 0 00% 0.00%
47,258.96 .00 .00 00
4.93% 0.00% 0 00% 0.00%
943.86 24,136.65 118,156.40
0.00% 0.12% 0.56%
.00 86.40 .00
0.00% 0.00% 0.00%
46.76 233.48 3,259.70
0.01% 0.03% 0.37%
198.25 1,646.50 5,267.47
0.02% 0.17% 0.55%
1,644,304.04 16,207.60 20,956,985.12
7.85% 0.08% 100.00%
487,854.04 371.45 3,569,125.04
13.67% 0.01% 100.00%
102,320.94 1,153.00
11.67% 0.13%
82,546.88 3,247.50 958,658.83
8.61% 0.34% 100.00%
876,630.36 100.00%
What are the Actions?

Revise pricing assumptions Redesign product/benefit Tighten policy wording Ti ht UW practices Tighten ti Recognize "good" policyholders - Reward them to enhance loyalty (persistency ratio), e.g. premium holiday Recognize "bad" policyholders - Necessitate proper rating, introduce case/disease management Improve claims management g ( (see next few slides) )
Action: Managing Medical Expense

Population Conditions Needs Services
Pre-authorization Pre-certification
Fee
Medical Expense p
Case Management MSP network and network management MSP profiling Claim adjudication j system y and p protocols Disease management Prevention and Wellness programs On-site On site clinics/gatekeeper Medical advise/Nursing hotline Second Opinion Programs P di ti modelling Predictive d lli Pharmacy benefit management Contracting/Pricing methodologies Underwriting Product Design Data Analytics
Action: Demand, Utilization Management

Demand Management
To influence future demand of medical care Provide access to preventive services Operate at convenient hours Disseminate advice manuals for home use 24/7 nurse advice lines
Utilization Management
Prospective utilization review (PUR) Concurrent utilization review (CUR) Retrospective utilization review (RUR) Drug utilization review (DUR)
Action: Case Management

Case Management
Employ RN as case managers Deliver "personalized" personalized service to individual to improve his health; help navigate choices of care; coordinate components of care; emotional support to family 4 steps Sc Screening ee g for o ta target get population popu at o for o case management a age e t Plan & deliver care per standard guidelines Evaluate plan's effectiveness Evaluate program's program s effectiveness Common case management programs Catastrophic Transitional Maternity
Action: Disease Management

Disease Management
Chronic illnesses targeted (e.g. diabetes, asthma, heart diseases) Behavior coaching by DM manager to ensure adherence to medication diet exercise risk prevention/avoidance (e.g. smoking) Collaborative, multi-disciplinary approach among patient, physician, support-services Patient self-management self management education Extensive use of IT capabilities for tracking, monitoring, reporting Delivered through phone calls, SMS, visits, education materials/talks
Q Questions? ti ?
Persistency - Voice of Customer

Chirag Rathod
Appointed Actuary & Director Actuarial, Products & Strategy Canara HSBC OBC Life
Persistency Everyone has a view
But have we asked customers?...Or are we speaking on their behalf? Is it leading to identification of wrong problemshence wrong solutions?
Agenda
Common thoughts on Persistency And the Voice of Customer ?
Are we listening to the customer?
Persistency - Common Thoughts
Thought #1
Lapsed Customers mis-sold and so not willing to pay
Voice of Customer
An array of reasons influence non-payment of renewals
In a latest customer feedback program it was found that majority of the customers did not pay renewals due to reasons other than perceived mis-selling
Customer Says
I was told to pay only for 3 years
My money isnt growing, so I wont pay any longer
I have a deep financial constraint, so wont continue
I was sold forcefully and bought it under obligation
I will not pay renewal because of poor services
I am going through a temporary financial problem need flexibility
Voice of Customer
Lapsed customers have varying level of willingness to pay renewal
A recently conducted study on lapsed customers identified three major propensity segments
Forgot to Pay
Customer was not contactable e.g. went out of town, changed address etc.
Cant Pay
Medical Emergency Marriage Unemployment Seasonal/ Insufficient Income
Wont Pay
1. Misled (e.g. product sold as 3yr pay/ as a FD) 2. Poor Fund performance 3. Unhappy with services 4. Switched on recommendation
Customer was busy

Collection process not smooth No one reminded to pay renewal premium
High
Willingness to pay
Low
Personal Reflections
People lapse for a variety of reasons Do we ask customers and do we listen to customers carefully to understand more ? Framing the problems as customer insights forgot to pay, cant pay , wont pay -- helps?
Thought #2
Customers only chase returns
Market moves dont impact core needs
Sorry son, I cant afford to send you to college when youre older the markets fell by 10% this year !
Voice of Customer
Strong emotional connect hugely impacts strength and length of bond with customers
Analysis confirms that policies with clear Need based pitch like Child Plans are less likely to lapse also if the customer bought from a Trusted Advisor/Banker - a stronger emotional bond
According to a recent study emotionally engaged customers are atleast
3x
More likely to re-purchase
3x
More likely to recommend
45%
Such customers said they rarely shop around
Gold and Real Estate are also relevant examples of emotional connection - where the value may go down temporarily but the customers still hold on to them.
Do customers understand what they have bought and why? Is the customer pitch based on returns or fulfillment of a long term need? Are we setting the right expectations at point of sale?
Do we keep the customer at the core?

If I were a customer, would I like this experience?
Thought #3
The Persistency team is best equipped to chase customers for renewal premium
Common Solutions
Should we?
Service call
Early pre-due
Outsource renewal calling to experts Throw more warm bodies on it / do more calls per customer Send more SMS
SMS
Recovery
Pre-due
Face-2Face chase up Notice E-mail
Increase variety of contacts (email, mailers etc.)

Sweeten the collection process e.g. waive medical costs, discount for paying promptly, waive late payment fees?
Lapse
Distributor follow-up
Due
Manual Calling & IVR
Voice of Customer
Continuous engagement needed during the customer life cycle
Findings of a customer research verify that customers expect Insurers to recurrently engage with them and customers also rated regular update on renewal as most vital information
Customer Says
You only contact me when you want me to pay premium
I could have arranged for the premium if you had reminded me earlier
75%
Customers expect constant engagement
45%
Customers said renewal info - most vital
Engagement - Customer Life Cycle

Reinforce trust & commitment
Delivery of Benefits
Customer Prospecting
Genuine Need Assessment
Explain customers Why renewals are important
Renewal Collection
Customer Engagement for Persistency
Customer Acquisition
Pitching right Product & Benefit
Create memorable customer experience
Ongoing Service
On-boarding
Validate & Reinforce customers decision
Engage with Customers across Customer life-cycle
Personal Reflections Customers are buying

Peace of Mind and hence need regular re-assurance that theyve made the right decision a service (advice) and not just a product a long term product and expect a long term relationship
Thought #4
Persistency Only impacts financials
The impact is much broader

Persistency depicts a companys ability to retain its customers so it is the best measure to gauge a companys credibility
Lapsed customers send wrong message which adversely impacts reputation of the company & industry
Analysts & strategic
Reputational risk for
investors closely assess the source & quality of

profitsnot just the quantum of profits
distributors if denied renewal of license due

to poor persistency
Think Customer 1st and

Actuary 2nd !
Thanks Question & Answers
C3: Concurrent Sessions on Life Insurance
Round Table: Persistency various facets and impacts Persistency, Persistency the case for best practice

Topics for discussion
What is a normal level of persistency? What are the root causes of lapse and surrender? What is the best practice to improve persistency?
India 13th month persistency
80% Sep'11 Sep'12 66% 66% 64% 64% 55% 53% 54% 49% 72% 67% 73% 77% 76% 74% 73%
82%81% 74% 72%
Wide range of first year persistency rates between companies, from 50% to 80%.
India Conservation ratio

Jan-Sep'11 Jan-Sep'12
74% 70% 63% 58% 59% 56% 59% 59% 63% 66% 79% 70% 72% 72% 67% 60% 73% 74%76% 86% 80% 79% 66% 67% 84% 78%
Bajaj Allianz
Reliance Birla ICICI Pru Tata AIA SBI Life Life Sunlife
Kotak Life
MetLife
Canara HSBC
HDFC Life
Max Life
Top private players
LIC
Again, a wide range of persistency results between companies, from 60% to 80%. Mixed development over time.
Definition: Renewal premium of current year / (Renewal premium of corresponding period of last year + new business corresponding period of last year) Individual non-single premium business.
US - Total individual life insurance
F Face Amount A t Lapse L Rates R t
Source: U.S. Individual Life Insurance Persistency, Society of Actuaries and LIMRA, 2012
In the past 15 years, significant improvement in the lapse rates, with a reduction of around 50%. Overall, for the observation period 2007-09, lapse rates averaged 5.7% annually, up from 5.2% in the 2005 2007 study. 20052007 t d
5
US - Variable Universal Life only

Lapse Rates (observation period 2007-09)
Source: U.S. Individual Life Insurance Persistency, y, Society y of Actuaries and LIMRA, , 2012
Face amount lapse rates were 6.9% annually, up from 5.0% in 20052007
Likely to have been contributed by poor economy, including the 2008 stock market drop.
Lapse rates for VUL plans generally exhibit a different trend compared to other permanent products:
First year lapse rates are lower than those in the second and third year. Another difference in VUL is the elevated lapse rates in the first ten or more policy years. During this period, lapse rates for other permanent products typically begin to decline.
6
Australia Individual life insurance

Annual discontinuance rate
Source: Gen-Re Risk Insights 2011
Since 2006, 2006 increasing trend from 11.5% 11 5% to 15% p p.a. a Causes of lapse, as per customer survey: (source: experience of OnePath)
35% for financial reasons, e.g. budget, reduced employment 35% recommended by advisors 30% for f other th reasons, e.g. changed h d circumstances, i t do d not t see point i t of f cover, no contact t t with ith advisor d i
Definition: Terminations = (Inforce annual premium at start of period) - (Inforce Annual Premium at end of period) + (New Annual Premium over period) Termination Rate = Terminations / (Average Inforce Annual Premium over period)
Key drivers of lapse and surrender in India
Source:ServiceExpectationsResearch2011onActiveCustomerBase MarketResearchConductedbyACNeilson&Co 9
10
Market conduct
Compulsory tools to assess customer needs

Needs analysis Benefit illustrations, with specific acknowledgement of key features like premium paying term Key Information Document (KID) short, non-technical and critical policy information
Strict consequence management for mis-selling by agents

Identify and manage the specific people / offices causing high lapse rates Frequent communication with Office Head and salesforces about it being an offence Clear Consequence Management Actions across all distribution channels: misrepresentation of facts deserves a warning letter (not a letter of education). Repetitive offences deserve a termination letter.
Persistency goal as part of the Sales Office Dashboard

What gets measured ... gets done: New Business and Persistency targets
Raise industry attractiveness to attract and retain quality sales forces

N dt Need to rebuild b ild t trust ti in th the viability i bilit of f lif life i insurance products d t
11
Customer management
Preventive measures during tenure of the policy Independent welcome calls to customers, to confirm their understanding of key product features Annual client review by distributors, with special efforts on high-propensityto-surrender customers, to review their insurance needs Targeted campaigns to reinforce the benefits of staying invested Special team to handle orphan policies
Proactive measures at the time of receiving the surrender request Discussion between customer and a representative from the life insurance company
12
Product considerations
Distributors
Compensation to be better aligned to the Long Term Savings & Protection proposition, with an increasing scale based on the premium paying term Greater incentives to sales-force to service policyholders e.g. trail commission based on AUM additional AUM, dditi l compensation ti b based d on persistency i t
Customers
Better calibration of customers returns throughout policy duration Implement loyalty or terminal bonus to better reflect customers asset shares Increase the partial withdrawal limit to meet customers need for additional cash
Shareholders
Profit margin should increase with better persistency
13
Conclusion
Product philosophy
Life insurance is about Long Term Savings and Protection, not short term investment. Returns to be aligned between all stakeholders: Customers, Distributors and Shareholders.
Financial advisors / sales forces

Must be effectively y equipped q pp to p provide value added whole-of-life solutions to customers. Should be given financial incentives and rewards to promote persistency.
Customers: Truly being a partner for life

Treat Customers Fairly by listening & responding to their needs, servicing them and giving them fair financial protection.
14
What would Indias lapse rates be in years to come? What is your companys company s aspiration and what will it take to get there?
Duration (years) India Today Lapse rate 20% - 50% 15% - 35% 15% - 35% 15% % - 35% % 15% - 35% 5% - 30% n/a India Tomorrow ? Lapse rate 10% 9% 8% 7% % 6% 5% 5%
1 2 3 4 5 6 10 10 and above
Conservation ratio
60% - 80%
Over 90%
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M Karunanidhi President

M. Karunanidhi President Institute of actuaries of India

Disability Income Insurance

The Claim Trigger

whether to cover the inability of the life assured to earn:

The Claim Trigger

where, Material Duties are defined as:

The Benefit Amount

the maximum monthly amount that is to be provided:

The Benefit Amount

the treatment of:

the start and end of the benefit period

The Benefit Amount

The Benefit Amount

where, Earned Income is defined as:

Key Success Factors

Key Success Factors

Key Success Factors

Key Success Factors

Key Success Factors

Speaker Name Speaker Country Organization Logo (Optional)

Waves of ReformsOceans of Opportunities

17th 19th Feb, 2013 | Mumbai, India

Disability y Income Insurance

The Claim Trigger gg

whether to cover the inability of the life assured to earn:

The Claim Trigger gg

where, Material Duties are defined as:

The Claim Trigger gg

where, Material Duties are defined as:

The Benefit Amount

the maximum monthly amount that is to be provided:

The Benefit Amount

the treatment of:

the start and end of the benefit period

The Benefit Amount

The Benefit Amount

where, Earned Income is defined as:

Key y Success Factors

Key y Success Factors

Key y Success Factors

Key y Success Factors

Key y Success Factors

THE ROLE OF REINSURERS IN HEALTH INSURANCE MANAGEMENT

THE ROLE OF REINSURERS IN HEALTH INSURANCE MANAGEMENT

Alan Watts RGA VP Health Insurance

Waves of ReformsOceans of Opportunities

17th 19th Feb, 2013 | Mumbai, India

Role of the Regulator g

Role of the Regulator g

What a Regulator should be doing for Insurers

Duplicate / Double cover

Health Insurance & current situation

Regulation from around the world

Health Insurance, heavily or lightly regulated??? USA

- Part of Health Authority

Regulation from around the world Abu Dhabi

Regulation from around the world Abu Dhabi

+ Have implemented: Electronic Submission of Claims Introduced DRGs 15

Regulation from around the world - Brazil

Regulation from around the world South Africa

Regulation can help some companies:

Regulation from around the world - Mexico