DECEMBER 2011

`20

VOL. III ISSUE 12

Draft IAI VISION
IAI to be a globally well recognized professional organization developing enduring
thought leadership in managing uncertainty of future financial outcomes.

The Leader........... WHO ?

MARK YOUR DATES

14th Global Conference of Actuaries
Meeting the Challenges of Change
February 19-21, 2012
Renaissance Mumbai Convention Centre
Powai, Mumbai
For Private Circulation Only
 c o NT E NT S

CONTENTS
www.actuariesindia.org

Chief Editor
Taket, Nick 4 FROM THE CHIEF EDITOR
NICK TAKET discusses the changes in the
25 FROM THE PRESS
Business Standard - Among the least
Tel: +91/22/6740-3333 profession profitable across Asia
Email: nick.taket@idbifederal.com

Editor
5 FROM THE PRESIDENT
Liyaquat khan deliberates on leadership,
26 FROM THE DESK OF
Chairperson - Advisory Group on
Sharma, Sunil responsibility and accountability to members. Accounting and Solvency -
Insurance and Pension Funds -
Email: sharma.sunil@iciciprulife.com
KS Gopalakrishnan

6 REPOTAGE
Puzzle Editor
Mainekar, Shilpa
7th Seminar on Current Issues in Life Assurance
(CILA) by Hardik Thakkar 28 Disciplinary Proceedings
Case of Other Misconduct in Relation to
Member of the Institute Generally
Email: shilpa_vm@hotmail.com
C. R. THAKORE (Complainant) Vs
8 Features
• Repo rate: is flawless antidote to manage
NALIN KAPADIA (Defendant)

Manager (Library and Publishing) inflation?

Rautela, Binita
Tel: +91 22 6784 3325
by R Muthukumar and Nitya Nand Tripathi 29 BOOK REVIEW
Reliability Engineering and Risk Analysis:
• Unit pricing: Concepts and Challenges
Email: library@actuariesindia.org A Practical Guide by Mohammed Modarres,
by Shamit Gupta and Sanket Kawatkar
Mark Kaminskiy and Vasily Krivtsov;
• New structure for professionalism Mercel Dekker, Inc. 1999
courses introduced by IFA, UK Reviewed by Peuli Das
COUNTRY REPORTERS by Gautam Kakar
Smith, John Laurence
New Zealand
30 SHILPA'S PUZZLES
Email: Johns@fidelitylife.co.nz
16 Meena Sidhwani
• Appeal for donation –Meena Sidhwani Career Corner
Kakar, Gautam Memorial Education Award Fund
14 Vacancies for Actuarial students at
European Union (EU) • Meena Sidhwani Memorial awardees– TATA AIG Life
Email: kakar.gautam@gmail.com the best and bright ones
Peuli Das 25 Account Executive at Gen Re
Kunj Maheshwari
Chung, Phuong Ba
Taiwan, Hong Kong & Japan
18 Students Column Errata - page 30: Review of the
Email: phuongchung1971@yahoo.com book titled “ Stochastic Modeling –
General Insurance: a firmer footing on Theory and Reality from an actuarial
shaky ground by Jonathan Nicholls, PwC, perspective” was wrongly attributed to
Sharma, Rajendra Prasad Jing (Annie) Luo, AMI Samreen Asif in November 2011 issue
USA of Magazine. It was written by Megha
Email: rpsharma0617@yahoo.com Agarwal.

Cheema, Nauman
Pakistan
Disclaimer : Responsibility for authenticity of the contents or opinions expressed in any material published in this Magazine is solely of its
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there for. In respect of the advertisements, the advertisers are solely responsible for contents and legality of such advertisements and
implications of the same.
Leung, Andrew The tariff rates for advertisement in the Actuary India are as under:
Thailand
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Indian Actuarial Profession Serving the Cause of Public Interest The Actuary India December 2011 3
THE CHIEF EDITOR
FROM THE CHIEF EDITOR
i
recently attended the 7th Seminar on Current Issues in Life Assurance, and was struck by a number of changes
from similar events in earlier years.

First, there was the programme. In previous seminars I have always felt a bit sorry for the organisers who have
had to come up with a topical agenda when at times there was little new happening on the life assurance front.
However, this year the organisers’ task of setting the agenda had already been done for them by the sheer number
of changes that were happening to the life industry. There were sessions on

• the changes in product design brought about by the latest Unit Linked Guidelines;
FROM

• participating business, which has been given a new lease of life by the above mentioned
guidelines;

• the latest pension product circular;

• the new Direct Tax Code.

These issues were not so much “current” as “urgent”. Although, having listened to all of these
sessions, the presentation on the new IPO norms became perhaps a little less urgent than it
might otherwise have been!

Second, comparing this seminar with some of the very earliest seminars I attended when the
industry had just opened to private companies, I was struck by how youthful the participants are now. Perhaps
this is just me showing my age, but I think it is more than this. There has been a huge change in the profile of
the membership of our Institute. It is great that so many members, who were in 2000 just starting out in our
profession, have so rapidly progressed to be senior members of our profession and also senior members of their
employers’ organisations. Now they are not only attending these programmes, they are presenting at them and
sharing their experiences with each other and with a new generation of members. This is a tribute to their abilities
and it also reflects the great strides that the Institute has made.

With so much talent within the profession the Institute needs to redouble its efforts to ensure that there are
sufficient opportunities to allow that talent to blossom.

It is good news to see that the UK government’s Migration Advisory Committee has added the actuarial profession
to its list of occupations for which there is a shortage. This will make actuarial opportunities in the UK more easily
available to overseas actuaries.

However, most members of our Institute would prefer to be able to exercise their professional skills here at home
in India.

The actuarial professions in other countries have sought to increase the opportunities for their members by looking
for other, non-traditional fields in which actuaries can apply their skills.

This approach can surely be applied in India, but our re-invigorated profession is relatively young and not well known
in other fields, so it may take some time before we can look to generate significant employment opportunities
through wider fields.

I think we need to re-examine the more traditional fields and ask whether there are sufficient fellows, associates
and students employed in these.

Times are difficult for most of the companies within these traditional fields, and so companies are naturally looking
to limit their salary bills.

However, I would argue that it is exactly at these times that the skills that we offer can be of greatest value. This
may sound surprising, but when times are tough it is far more important to understand what is creating value in
your business. In the good times it is possible to carry some excess baggage, but now is the time to really make
sure that you have enough of the right resources to measure exactly what is going on in your company, to highlight
those areas to focus on, and to get rid of those activities that are not adding value or are even destroying value.

I believe the onus lies with the senior members of our Institute to ensure that they are strongly selling the value
of our profession in their own organisations, and ensuring opportunities are created for the more junior members
who will follow in their footsteps in years to come.

Nick Taket

4 The Actuary India December 2011 Indian Actuarial Profession Serving the Cause of Public Interest
FROM THE PRESIDENT

THE PRESIDENT
C
hild is the father of man, the saying goes thus. Those having responsibility to manage the affairs of IAI,
particularly the elected Council members and the three officers: President, Vice President, Hon. Secretary,
hold responsibility for and thus the accountability to not only the present generation of members but
more so the future. It is a responsibility, which has a depth that is hardly realised in dealing with day-to-day
affairs. Sometimes drivers of decision making motives get hidden under the carpet of seemingly relevant issues
and we end up doing damage to the “future” members. Such damage manifests itself in a number of ways
for example; many get lured by attractions of a good and rewarding career without realising
whether they possess the necessary skills and aptitude required. Why do these things
happen? One reason is the gateway to the membership which is now called ACET. ACET is

FROM
not a new idea at all, details apart. Actuarial Society of India (ASI), the predecessor to IAI
used entry exams for student memberships. It was working well, in the sense that those who
passed through this gate, at least knew the hurdles that were awaiting them on the road to
becoming an actuary. On some unfortunate date in August, 2001 and in a time span of some
minutes the entry exam was abolished and thus came the hurdle of 10+ 2 with minimum of
85% in Mathematics. The 85% was further diluted to 75% some day in the year 2008/2009
without such a decision having been put up on the website, thus the advantage going to only
those who were personally known to some of the leadership collegiums. Decisions of this and
other kinds taken with maturity of thought and motives that drive concern for the “child”, do
go wrong, looking back in retrospect, corrective actions are being taken. This is the job of leaders who take
voluntary leadership responsibilities driven by inner motivations to “serve the cause of public interest” and
strengthen the “professionalism” of the profession that they belong to. It is not enough to take appropriate
corrective actions such as ACET, but important to examine the real driver motivations behind decisions of the
past. As a result of year 2001/02 decision of the 10+2, 85% criteria, we have had about 30,000 persons taking
the student membership, out of whom only about 11,000 remain. IAI has to worry about those who have left,
as having left and certainly disappointed, they are unlikely to be friends of the actuarial profession. The IAI must
feel accountable and should now peep into the past and own up the true motivations then, so that anyone
having such an orientation has very little chance of getting into leadership position.
Meanwhile ACET registration started on 10th November, 2011 and will close at the end of the day on
25th December 2011. Driven by Strategy Initiative exercises and converging thought process that led to draft
Vision, Mission and Values statement, we decided to facilitate this opportunity to all parts of India. The ACET
exam will be conducted in 48 cities including in J&K and North East. The paid registrations as on date have
exceeded 1,500 and we hope to cross 2,000 by 25th December, 2011. I have no doubt that ACET has the
potential of changing face of the Indian actuarial profession. In the context of the earlier part of this column I
am deeply influenced by the Values statement and particularly the very first one, INTEGRITY;
The Values:
• Integrity
• Respect for others’ views
• Accountability
• Continuing learning/Research oriented learning
• Transparency
• Be responsive/ sensitive
What is INTEGRITY? “Doing the right thing, even when no one is watching” a quote from What Do You Think?
preparing for the Questions that all clients ask By Bradley M. Smith, Chairman of Milliman. A book just in 112
pages captures the essence of everything that an actuary, upholding “The Values” should posses and be proud
of. Get one to read if you wish – IAI Library. - B-11144
Coming back to the “child”: who really is the leader? ...Think.... and to assist us in this thought process, look
deeply at the cover page, put in so thoughtfully by Binita. Our VISION is to develop “enduring thought leadership”.
Regards

Liyaquat Khan

Indian Actuarial Profession Serving the Cause of Public Interest The Actuary India December 2011 5
 7th Seminar on Current Issues In Life Assurance (CILA)
REPORTAGE
Organised by : Life Insurance Advisory group
Held at : Hotel Grand Sarovar, Goregaon
Date : 24 & 25th November 2011
T he 7th Seminar on Current Issues
in Life Assurance (7th CILA) was
held in Mumbai on 24th and 25th of
November 2011. The seminar attended
by 123 IAI members and industry
professionals proved to be a very
effective medium for the exchange of
ideas on number of key current issues
that were listed for deliberations.
Avijit Chatterjee
Avijit Chatterjee, Chair of Advisory
Group of Life Assurance, kicked off the
seminar by giving the participants a brief
overview of the business environment
that the life insurance companies are
currently operating in and he set the
context for the topics to be discussed
over the next two days.
This was followed by the inaugural
address by Liyaquat Khan, President
of Institute of Actuaries of India. He
spoke about several important issues
relating to the profession in his speech,
this included his comments on the
draft regulations on the new eligibility
criteria for Appointed Actuaries as well
as recent implementation of Actuarial
Common Entrance Test (ACET) by IAI.
He also highlighted the participation
of the Institute of Actuaries of India in
the regulatory process by the way of
publishing comments and the success
thereof as evidenced in the IPO norms.
The first session, the keynote address,
was by Mr. Ashwin Parekh from Ernst
& Young. He traced back the growth
of life insurance industry from its
early days and then spoke about the
current environment that the industry is
6 The Actuary India December 2011
By Hardik Thakkar
Variable Insurance Products (VIP) not
taking off as a product category were
also discussed. It was followed by a
healthy discussion where people across
the industry spectrum expressed their
views on this topic.
Ashwin Parekh
operating in and the inherent challenges.
He underlined hindrances to growth on
account of frequent regulatory changes.
He also highlighted on the transparency
in the process of designing , drafting
and implementing regulations which
Richard Payne
assist in developing the market by
offering clarity to participants as to its The third session was “Solvency II:
purpose and intentions. Practical Implementation” by Richard
Payne of PCA. The session was kicked
He cited the example of the process
off by a brief introduction to Solvency
adopted by the RBI in the last three
II, emphasizing potential usage of the
years in bringing about a higher order
framework as a decision making tool.
of participation and transparency in
Mr. Payne followed this by some of the
the formulation of regulations. Some
possible approaches towards Solvency II
of the examples in how well RBI has
implementation. This was followed by a
implemented Basel II norms in the
bird’s eye view of the processes followed
country and the development of an
at PCA wherein Mr.Payne shared some
enabling environment in financial
of his experiences in implementing the
inclusion were cases to the point.
Solvency II regime.
Mr. Parekh also said that non-availability
Continuing on the theme of regime
of financial assets, in particular of longer
change the next session was on the
terms, would continue to be a problem.
implications of Direct Tax Code for life
If the Government appreciated the
insurers. There were two presenters:
life insurance industry’s need for long
Satyan Jambunathan from ICICI
term assets, the sector could provide
Prudential and Heerak Basu from TATA
more of the funding required for the
AIG Life. Mr. Jambunathan outlined
development of infrastructure.
the proposed changes in DTC, which is
This was followed by a session titled
“Trends in product design and
distribution strategies after the Cap
on Charges” by Andrew Cartwright
from Kotak Life. He covered the
regulatory changes affecting the pricing
and product design. Statistics on the
fall in overall new business premiums
after these regulatory changes as
well as change in product mix were
shared by him, including increase in
the proportion of non-linked business
Satyan Jambunathan
across the industry. Reasons for
Indian Actuarial Profession Serving the Cause of Public Interest
scheduled for implementation in 2012.
He contrasted the proposed changes
with the current tax regime as well as
between the two drafts that have been
circulated till now.
Mr.Basu covered the potential business
impact on the insurance companies
based on the relative attractiveness
of the insurance products, given the
proposed changes. He considered in
detail the effects on policyholder and on
life office tax.
The final session for the first day
was on participating business titled
“Participating business: Best practice
and desirable regulatory changes” by
Sanchit Maini of Max New York Life. He
advocated the concept of a Principles
Sanchit Maini
and Practices of Financial Management
(PPFM) document covering the
various aspects of governance of the
participating business such as surplus
allocation to various cohorts, use
of estate, allocation of expenses to
participating fund, etc. He emphasized
that alignment of benefit illustrations
with asset share calculations and
customer communication in the form
of a consumer friendly version of the
PPFM are some of the practices that are
synonymous with treating customers
fairly in the UK and ensuring that
policyholders’ reasonable expectations
are met.
James Creedon
Indian Actuarial Profession Serving the Cause of Public Interest
period and potential confusion due
REPORTAGE
to having to give illustrations on up to
four different projected rates. A highly
debated topic was removal of portability
of annuity once the accumulation phase
was completed; this topic revealed
conflicting views of various stakeholders.
The final session of the seminar was
on the modelling of life expectancy by
Tushar Chatterjee of Towers Watson.
He talked about how current models
Mark Saunders
The sixth session of the CILA seminar
and first on the second day was
“Implications of IPO Norms” by Mark
Saunders and James Creedon of
Towers Watson. Mr.Saunders started off
the session with a summary of various
stages involved when company goes for
an IPO, mentioning that pre-IPO project
is undoubtedly very important but that
the post-IPO part is often forgotten by
companies. He then gave the audience Tushar Chatterjee
a brief overview of recent insurance
fall short when projecting mortality
companies’ IPOs. He commented on the
improvements. In his opinion a risk
discount to EV at which some European
factor based multi-state Markov model
insurers were trading and on details of
allows for better predicting of mortality
the relative success of Chinese IPOs
improvements which in turn could
compared to Korean ones.
improve pricing and reserving for
Mr.Creedon talked about the role of annuities. He also said that capturing
the Actuary in IPO. This was followed by information at the underwriting stage
an analysis of the draft IPO Guidelines on risk factors that affect mortality
issued on 21st June 2011. Mr.Creedon could help in building up information
went on to talk about the standard for improving mortality improvement
reporting pack followed during IPOs projections.
of Asian insurers and how the Indian
All in all, the event ending with vote
insurers can improve from this
of thanks by Nelius Bezuidenhout,
experience.
Secretary to the Advisory Group on Life
The seventh session was an analysis Insurance was a grand success with
of the guidelines on pension products everyone coming out of it with more food
issued by IRDA by Sanket Kawatkar for thought on each of the important
of Milliman. He gave a comprehensive issues that were debated.
summary of the draft guidelines. He
also highlighted
About the Auother
some potential
issues from Hardik Thakkar works in the Actuarial
the insurers’ Department of ICICI Prudential Life
perspective. Insurance Company as Senior Manager
These included
problems with
implementing
the rules on
group products
where “Assured
Sanket Kawatkar Benefit” applied
on the entire fund but the individuals
hardik.t@iciciprulife.com
would continue to be governed by
scheme rules, ambiguity of “lock-in”
The Actuary India December 2011 7
 REPO RATE: IS FLAWLESS ANTIDOTE To MANAGE INFLATION?
FEATURES
o n July 26, 2011, Duvvuri
Subbarao (Subbarao), Governor
of RBI, declared 50 basis points hike
in Repurchase rate (Repo rate) to
grapple against the inflation. Repo rate
became 8% after the rise. Many of the
economists and entrepreneurs were
not contented with this hike and they
commented it would affect adversely
the Indian economy. Many experts and
economic academicians said that thay
would call it (rate hike) madness. They
are worried that it will kill industry and
investments.On the other side after
analyzing the quarterly monetary policy
on overall growth and inflation on the
Indian economy on July 26, 2011,
Subbarao commented, “Considering the
overall growth and inflation scenario,
there is a need to persevere with the
anti-inflationary stance. A change in
stance will be motivated only by signs
of a sustainable downturn in inflation.”
This news influenced grimly which
tumbled the Sensex by 353 points
(1.4%) to 18,605.18 points on July 26,
2011.
This was the eleventh time when RBI
increased the policy rates since March
2010 (Refer to Exhibit I for Movements
in Key Policy Rates in India from April
26, 2008 to July 26, 2011). RBI hike
repo rate several times with the aim to
tight the liquidity in system and control
the rising inflation rate in economy.
However, many of the market watchers,
industrialists, and economists have
criticized about the decision. They
commented that it would not be
adequate to decrease the inflation rate.
They also commented that directly or
indirectly it would adversely affect the
entire system. Chandrajit Banerjee,
director general of Confederation of
Indian Industry, commented, “The
continued monetary tightening without
any movement on structural reforms
to address supply-side bottlenecks
will have an added impact on capacity
creation and expansion.” But during
same time Pranab Mukherjee, Finance
Minister of India, supported the hike
indicating the effects of inflation and
said, “The rate rise will send a strong
signal to check price-rise expectations
8 The Actuary India December 2011
By R Muthukumar and Nitya Nand Tripathi
and that inflation must be brought
down to support economic growth in the About the Authors
medium term. The Indian government R Muthukumar, is currently working as
has been wracked by a series of a Case Publishing Manager with IBS,
corruption scandals in the past year, and Hyderabad.
high inflation—which disproportionately
affects the poor—threatens to erode its
political support further.”
During the mid July 2011 a poll was
conducted by The Economics Times with
muthu.r.kumar@gmail.com
23 analysts. From the poll results it was
found that none of them expected such
Nitya Nand Tripathi, CFA, is currently
type of aggressive hike, moreover nine of
them anticipated a break into sequence working as a Faculty Associate with
of rising. However, 14 analysts were in IBS, Hyderabad.
favor to increase of 25 basis points on
July 26, 2011. Experts opined that the
rate hike would have impact on demand
conditions, slow down purchase of
new housing and consumer durables
and dampen consumer sentiment. It nityanand18@gmail.com
would affect the Corporate by trimming
working capital downwards in terms of
increase in Reverse repo rate can cause
inventories and outstanding. Thereby,
the banks to transfer more funds to RBI
there will be an adverse impact on
due to the attractive interest rates. It
corporate bottom lines too.
can cause the money to be drawn out of
But before we analyze the impacts, we the banking system.
will see what Repo is and what Reverse
Repurchase (Repo) and Reserve
Repo is in the following section.
Repurchase Order was introduced
REPURCHASE AND RESERVE in June 2000 by RBI to maintain the
REPURCHASE ORDER Liquidity Adjustment Facility (LAF) in
the economy. Repos are changing from
Repo Rate, or Repurchase rate, is the
time to time under monetary policy
rate at which RBI lends to banks for
system. The government introduced
short periods. The repo represents a
this instrument in order to manage the
collateralized short-term loan, where
excess of liquidity in the economy, and
the collateral may be a treasury security,
also used to measure the interest rates
money market instrument, federal
in the call/notice money market.
agency security, or mortgage-backed
security. This is done by RBI buying Repo transactions to maintain the
government bonds from banks with an liquidity are carried out through auction
agreement to sell them back at a fixed market, which is conducted by the RBI
rate. If the RBI wants to make it more at predetermined date.
expensive for banks to borrow money,
RBI acts as banker for other national and
it increases the repo rate. Similarly, if
private banks. Whenever Banks are in a
it wants to make it cheaper for banks
cash shortfall or a need for liquidity on
to borrow money, RBI reduces the repo
a daily basis, RBI becomes the lender.
rate. When RBI reduces the Repo Rate,
The Repo system is a formal system
the banks can borrow more at a lower
through which the lending process is
cost. This contributes to lowering of the
guided through which banks borrow
rates. Repo Rate used for controlling the
from RBI. The repo rate is determined
amount of money in the market.
by the Reserve Bank at each meeting
Reverse Repo rate is the rate at which of its Monetary Policy Committee. It is
RBI borrows money from banks. An expressed as a rate per annum.
Indian Actuarial Profession Serving the Cause of Public Interest
.
Significance of Repo System
The repo rate becomes a benchmark
for the level of short-term interest rates.
For example, if the repo rate increases,
banks have to pay more for repo funds.
Consequently, to retain their existing
profit margins, banks raise the interest
rates at which they take deposits from
and lend money to their customers. This
causes a rise in interest rates or the
cost of holding money, thereby helps to
control inflation by reducing the demand
for credit to be spent on the purchase
of goods and services. The actions of
RBI are known as the formulation and
implementation of monetary policy.
When setting monetary policy the
RBI decides on the level of short-term
interest rates necessary to meet the
inflation target. The Policy decisions
influence the overall lending policies
of the banks, and also the demand for
money and credit in the economy.
The way in which changes in the repo
rate affect inflation and the rest of
the economy is explained in the below
Diagram:
Some have a more or less direct impact
on inflation while others take longer to
have an effect. Genrally it is considered
that a change in the repo rate would
have its greatest impact on inflation.
Banks’ lending rates and market
interest rates on securities are affected
by both the actual and expected repo
Indian Actuarial Profession Serving the Cause of Public Interest
rate change. If a raise in the repo rate
is fully expected, market rates begin to
rise. Then, when the repo rate is actually
raised, there will not be any further
effect on market rates and it merely
confirms market expectations. Repo
Rate change decision thus has an effect
on the interest rates the consumers face
and thereby also on the total demand
and total supply in the economy. This
would help in lower inflation. (Refer to
Exhibit II for details of Inflation % from
January 2008 to July 2011)
During the period October 2008 to
April 2009, Central bank used this
instrument to manage the financial
crisis by reducing the repo rate by 425
base points and reserve repo rate by
275 base points when all the markets
were moving downwards. As mentioned
in RBI 2009-2010 annual report, when
the liquidity position in the economy
globally were under crisis, the reduced
repo rate led to improve the liquidity
position into the system by ` 5600
billion or equivalent of about 9% of GDP.
Since 2010, the RBI used this instrument
to suck to liquidity from system to
control the inflation. On July 26, 2011,
RBI raised repo and reserve repo rate by
50 bps. During the calendar year 2011
and 2010, this was the eleventh time
when, frequently, repo and reserve repo
rate were raised. RBI took this decision
to control the inflation in the economy
(Refer to Exhibit III for Movement of
Inflation from 2000 to 30 June 2011).
FEATURES
However, the raising of repo had
affected adversely the other rate
sensitive sectors such as automobiles
manufacturers, real estates and
banks, the growth rate of the economy
and credit growth. On July 27, 2011,
corporate condemned this repo rate
hike and said that this stiff dose will
dampen corporate sentiment and affect
investment climate. Sectors, which
are most leveraged like infrastructure,
real estate, and finance, will be most
impacted. Some analysts opined that
it would reduce the profitability and
growth of the major sectors of the
economy. Most affected sector was
Real estate. New buyers of the houses
also deferred their plans due to high
interest rate and steep rise on the cost
of dwellings. On this alarming situation,
Real-estate developers and property
consultants termed the RBI hiking key
rates as harsh. It would increase the
woes of the sector reeling under high
input cost and poor sales. Experts
are on the view that unless certain
measures are taken to improve supply
system, the increase by RBI will have
only a minimal effect on inflation. This
would make cost of funds expensive for
both developers and buyers, thereby
making the business environment very
complex across industries.
The bankers claimed that all types of
loan would be costlier because of this
rise. According to experts, the home loan
rates will move up again. The cumulative
increase over the past year will affect
the loan borrowers. Banks just pass on
the rate hike to home loan borrowers.
For example, for a ` 1,000,000 home
loan over a 15-year period, your EMI will
go up by ` 300. Moreover, the rate hike
will also reduce the eligible loan amount
for new home loan applicants.
The builders were also worried about
their projects. Their cost of project
significantly increased due to high cost
of borrowing. For instance, construction
cost (steel, brick, labour and cement)
increased by 18% from 2009 to 2011.
The other major hurdle for the real estate
is that RBI laid down strict eligibility
conditions for banks in disbursing loans
to the real estate sector.
The other sector would have adverse
effect is automobile manufacturing.
Obviously end user of this sector is too
affected. This sector also influenced
The Actuary India December 2011 9
 .

from two sides: First one, rise in interest

Exhibit I: Movements in Key Policy Rates in India from
FEATURES
rate, which declined the sales of
April 26, 2008 to July 26, 2011
passenger vehicle due to high financial
cost and other one is increase in cost
of raw materials. According to the
Economic Times (July 27. 2011), the
growth rate of the passenger vehicle
sales has dropped to 9% in the June
2011 quarter from 33% a year ago,
largely due to the successive increase
in the interest rates.
Road Ahead
On July 26, 2011, after announcing
monetary policy, RBI indicated that it
Source: www.rbi.org.in would continue this hard decision until
Exhibit II : Percentage of Inflation Rate from January 2008 to July 2011 there is a fall in price levels. RBI said,
“Although the impact of past monetary-
policy actions is still getting transmitted,
considering the overall growth and
inflation scenario, there is a need to
persevere with the anti-inflationary
stance.” Moody’s, a renowned credit
rating agency argued that the frequent
rate hike doesn’t change India’s rating
outlook, but any harm to the economy’s
long-term growth prospects or risks in
achieving its fiscal deficit aim would
be of concern. Though many of the
analysts’ perceptions were negative,
Source: www.rbi.org.in however, the governor and finance
minister defended that the hike was
Exhibit III : Movement of Inflation from 2000 to 30 June 2011 required to control the inflation and
better stability for sustainable growth.
Global monetary tightening and rising
domestic inflation would lead the RBI to
raise interest rates.
RBI Governor D Subbarao said that
inflation will continue to be the guiding
factor for monetary policy decisions. He
further added, “I want to reassure all of
you that growth is never far away from
our policy radar screen. We are always
concerned about it. But we have to
weigh the balance between growth and
inflation.”

Source: www.indexmundi.com and www.in.finance.yahoo.com

Heartiest Congratulations
14th GCA Theme Contest Winner- Amrita Kaur
“Meeting the Challenges of Change”
Amrita Kaur is a life insurance actuary based in Mumbai.
She is a Fellow of the Institute of Actuaries of India.

10 The Actuary India December 2011 Indian Actuarial Profession Serving the Cause of Public Interest
 Unit pricing: Concepts and Challenges
U nit pricing refers to the process
used to calculate the price of each
unit (commonly known as Net Asset
Value, or “NAV”), in a unit linked fund.It
is important for life insurance companies
to have robust unit pricing processes to
avoid the risk of unit pricing errors which
could potentially cause the companies
to pay out large compensation to the
affected policyholders.
Indeed, Guidance Note 1 (“GN1”) issued
by the Institute of Actuaries of India,
recognises such situations by mentioning
that Appointed Actuaries are required to
be satisfied that the procedures used to
calculate the unit price and to determine
the compensation to policyholders due
to any material errors in unit-pricing, are
equitable to policyholders that may be
affected either directly or indirectly.
The Insurance Regulatory and
Development Authority (IRDA) has
recently made changes to its earlier
guidelines covering the unit pricing
process to be followed by the industry.
In this article, we examine some of the
concepts underlying the unit pricing
process, particularly in relation to the
importance of allowance for “transaction
costs” and “cut-off timing”. In addition,
we will consider some practices that
might possibly lead to unit pricing errors.
Allowance for transaction costs
Insurance companies incur transaction
costs in buying and selling underlying
investments within a unit-linked fund.
These may include expenses such as
brokerage and stamp duty. The quantum
of these costs varies based on the type
of assets transacted, and is typically in
the range of 30 bps to 50 bps. These
transaction costs should ideally be
reflected in the calculation of unit prices,
in order to maintain equity amongst
different generations of policyholders.
In 2005, the IRDA released guidelines
for unit-linked products which covered,
amongst other things, a requirement to
follow the ‘appropriation / expropriation’
unit pricing methodology to allow for
these transaction costs. In August 2011,
the IRDA released another circular
superseding these earlier guidelines,
which did away with the ‘appropriation
/ expropriation’ methodology of unit
pricing. In the following paragraphs, we
Indian Actuarial Profession Serving the Cause of Public Interest
discuss the issue of ‘equity’ amongst
different generations of policyholders
under these two approaches of unit
pricing.
IRDA’s 2005 guidelines (CIR No. 32/
IRDA/Actl/Dec-2005)
The 2005 guidelines had rightly stated
the ‘basic equity principle’ to be
followed in unit pricing, i.e. “the interests
of policyholders who have purchased
units in a certain fund and not involved in
a unit transaction should be unaffected
by the transaction”.
It follows from this basic equity principle
that since transaction costs are incurred
only when unit transactions take place
(i.e. when the actual sale / purchase
of investments are required), only
those policyholders who request for a
unit transaction should reasonably be
paying for the transaction costs and the
remaining policyholders’ interests in the
unit fund should remain unaffected. This
was achieved by using the ‘appropriation
/ expropriation’ unit pricing methodology.
In a unit-linked fund open to new
business, on any given day, there will be
some transactions that would require
investments to be sold (e.g. redemptions
/ surrenders or partial withdrawals) and
some other transactions that would
require investments to be purchased
(e.g. new premium allocations).
If on a particular day, the total unit
allocations (requiring purchase
of investments) exceed the total
unit redemptions (requiring sale of
investments), the unit fund will be a
net purchaser of investments from the
market. In this scenario, the unit price
is required to be derived using the
“appropriation price”.
On the contrary, if on a given day, the
total unit redemptions exceed the total
unit allocations, the unit fund will be a
net seller of investments in the market.
In this scenario, the unit price is required
to be derived using the “expropriation
price”.
The IRDA’s 2005 guidelines required
these two prices to be calculated as
follows:
• Appropriation price: Market value of
investment in the fund + transaction
costs + current assets + accrued
FEATURES
By Shamit Gupta and Sanket Kawatkar
About the Authors
Shamit Gupta is an Actuarial Associate
in Milliman’s life insurance practice in
Mumbai.
shamit.gupta@milliman.com
Sanket Kawatkar is the Practice Leader
of Milliman’s life insurance practice in
Mumbai.
sanket.kawatkar@milliman.com
income net of fund management
charges - current liabilities - any
provisions.
• Expropriation price: Market value of
investment in the fund - transaction
costs + current assets + accrued
income net of fund management
charges - current liabilities - any
provisions.
The main difference between these
two methods is that while transaction
costs are added in the case of the
“appropriation price”, they are subtracted
in the case of the “expropriation price”.
This is intuitively logical, as in a scenario
where we use the appropriation price
(i.e. where the fund would have been a
net purchaser of investments from the
market), in order to protect the interest
of the existing / remaining unit-holders
(not involved in the transaction), the
amount of money that should be put into
the fund should be equal to the value of
investments to be purchased plus any
transaction costs that may need to be
paid out subsequently.
Similarly, in a scenario that we use
the expropriation price (i.e. where the
fund would have been a net seller of
investments in the market), in order
to protect the interest of the existing /
remaining unit-holders (not involved in the
The Actuary India December 2011 11
 transaction), the amount of money that Allowing for transaction costs as per Day
FEATURES
should be taken out from the fund should 2005 IRDA circular 1 2 3 4 5
be equal to the value of investments to (x) of
Value of existing investments (i) = 20,000 29,900 34,850 32,325 31,315
be sold less any transaction costs that previous day
Number of units in force before (xiii) of
may need to be paid out subsequently. transaction
(ii) =
previous day
2,000 2,990 3,485 3,233 3,132

Although the actual transaction costs Net policyholder transaction

(iii) = Input 10,000 5,000 -2,500 -1,000 10,000
requests
will be based on the actual amount Allowance for transaction costs in (i)*TC*if((iii)
(iv) = 200 299 -349 -323 313
of the transaction (i.e. actual amount unit price <0,-1,1)
Adjusted value of existing
of investments sold / purchased), the (v) = (i) + (iv) 20,200 30,199 34,502 32,002 31,628
investments
allowance for transaction costs in this ‘Unit price’ before transaction (vi) = (v)/(ii) 10.100 10.100 9.900 9.900 10.100
IRDA formula is required to be made
New units allocated (vii) = (iii)/(vi) 990 495 -253 -101 990
based on the total market value of New value of investments (before
investments at the time of carrying (viii) = (i) + (iii) 30,000 34,900 32,350 31,325 41,315
incurring actual transaction costs)
out the unit-pricing. It is only when Actual transaction costs incurred (ix) = ABS((iii)*TC) 100 50 25 10 100
transaction costs are allowed for in the New value of investments (after
(x) = (viii) - (ix) 29,900 34,850 32,325 31,315 41,215
incurring actual transaction costs)
calculated price in this manner that the Notional transaction costs on total (x)*TC*if((iii)
(xi) = 299 349 -323 -313 412
investments <0,-1,1)
basic equity principle is met. New value of investments
The simple example below illustrates (including notional transaction (xii) = (x) + (xi) 30,199 35,199 32,002 31,002 41,627
costs)
the working of the ‘appropriation / Number of units in force after
(xiii) = (ii)+(vii) 2,990 3,485 3,233 3,132 4,122
expropriation’ price methodology, transaction
assuming: ‘Unit price’ after transaction (xiv) = (xii)/(xiii) 10.100 10.100 9.900 9.900 10.099
• All the investments in the fund are
in equities in the 2005 guidelines. The unit pricing (i.e. on the transactions that are being
• The market value of the equities formula now reads: processed following the calculation
does not change over a five day • Unit price: Market value of of unit prices) rather than to allow for
period investment in fund + current assets - the transaction costs in a manner as
• The transaction costs (“TC”) are current liabilities and any provisions. implied in IRDA’s 2005 circular.
1% (purposely assumed to be high, The example below reflects these
Although the “provisions” in the above
for illustrative purposes) of the transaction costs as such (i.e. by
formula are meant to include the amount
transaction value including under ‘provisions’ the
of transaction costs, it is interpreted to
As can be seen from the example above, reflect only the transaction cost payable transaction costs that may be incurred
the unit prices “before” and “after” a on the transactions to be carried out on pending transactions):
transaction remain largely unchanged
(thereby ensuring that the interests Allowing for transaction costs as per 2011 IRDA Day
of policyholders not involved in the circular 1 2 3 4 5
transactions are unaffected) by allowing (x) of
Value of existing investments (i) = 20,000 29,900 34,850 32,325 31,315
for the transaction costs in the manner previous day
specified. Number of units in force before (xiii) of
(ii) = 2,000 3,005 3,508 3,257 3,156
transaction previous day
In addition, in this example, given that Net policyholder transaction
(iii) = Input 10,000 5,000 -2,500 -1,000 10,000
the market value of equities is assumed requests
not to change, the ratio of the market Allowance for transaction costs in (iii)*TC*if
(iv) = 100 50 25 10 100
unit price ((iii) <0,-1,1)
value of investments over the number of
Adjusted value of existing
units (i.e. ratio of rows (i) and (ii) in the (v) = (i) - (iv) 19,900 29,850 34,825 32,315 31,215
investments
table above) is also unchanged (at 10) ‘Unit price’ before transaction (vi) = (v)/(ii) 9.950 9.933 9.926 9.923 9.891
throughout the period. This indicates
New units allocated (vii) = (iii)/(vi) 1,005 503 - 252 - 101 1,011
that the market value of units does not
New value of investments (before
change as a result of any transaction (viii) = (i) + (iii) 30,000 34,900 32,350 31,325 41,315
incurring actual transaction costs)
and thus ensures that the interests of Actual transaction costs incurred (ix) = ABS((iii)*TC) 100 50 25 10 100
the policyholders not involved in the New value of investments (after
(x) = (viii) - (ix) 29,900 34,850 32,325 31,315 41,215
transaction remain unaffected. incurring actual transaction costs)
Number of units in force after
IRDA’s 2011 guidelines (No. IRDA/F&I/ (xi) = (ii) + (vii) 3,005 3,508 3,257 3,156 4,167
transaction
CIR/INV/173/08/2011)
‘Unit price’ after transaction (xii) = (x)/(xi) 9.950 9.933 9.926 9.923 9.891
The recently released guidelines abolish
the practice of using ‘appropriation and
In this example, the unit prices ‘before’ that the market value of equities remain
expropriation’ prices for unit pricing. and ‘after’ the transactions remain unchanged, the ratio of market value
Under the new guidelines, transaction unchanged, therefore providing comfort of investments over the number of
costs are not required to be reflected that the basic equity principle is met. units (i.e. ratio of rows (i) and (ii) in the
in the unit pricing in a manner implied However, although the example assumes table above) changes every day. This

12 The Actuary India December 2011 Indian Actuarial Profession Serving the Cause of Public Interest
means that the value of each unit held
by the policyholders not involved in any
transaction changes everyday, thereby
implying that the interests of such
policyholders are actually compromised.
Also, at the time of calculation of the unit
price, the insurer would not “know” the
exact amount of pending transactions
(which are yet to be processed) and
hence, the allowance in unit price for the
transaction costs that may be incurred
on such pending transaction may not be
accurate.
In reality, the transaction costs will be
lower than the one percent that we have
assumed in our examples above (given
the bulk deals insurance companies
may have with the intermediaries) and
the impact on existing policyholders’
interests in the fund will be lower on
a day to day basis, as compared to
that shown in our examples above.
However, over the tenure of a contract
(which could extend well beyond 10 -
20 years), not allowing for transaction
costs through the ‘appropriation /
expropriation’ methodology may have a
significant impact on the interest of the
policyholders that remain invested in the
fund throughout.
The new methodology proposed by the
IRDA is meant to address the perceived
complexities of ‘appropriation’ /
‘expropriation’ unit pricing methodology.
However, it could contravene the basic
equity principle and could be seen to be
unfair to those policyholders that are not
involved in a transaction.
Cut-off timing
The IRDA has stipulated that companies
need to follow the “forward-pricing”
approach, i.e. the unit price at which
any transaction takes place is calculated
after the request for such a transaction
is received from the policyholder. The
IRDA has specified a ‘cut off’ time for
receipt of requests for such transactions
that are required to be processed on
unit prices derived based on the value of
investments on a particular day.
As per the 2005 guidelines, in cases
of allocation or redemption requests
received before 4.15pm on any day,
the unit price calculated as at the end
of the day is applicable. If the request
is received post 4.15pm, the unit price
calculated as at the end of the next day
1
Source: News report: http://www.telegraph.co.uk/finance/personalfinance/savings/8446266/Prudential-admits-4m-mistake-affects-39000-savers.html
2
Source: News report: http://www.telegraph.co.uk/finance/personalfinance/pensions/3416226/Norwich-Union-pension-customers-to-get-refunds-totalling-11m.html
3
Source: News report: http://www.guardian.co.uk/business/2006/nov/28/5
Indian Actuarial Profession Serving the Cause of Public Interest
is applicable.
The stock markets in India close at
3.30pm. Thus, with the cut-off timing
for receipt of transaction requests set at
4.15pm, the insurer faces the risk that
the policyholder can select against it.
Gap between timing of unit pricing and
that of the actual act of investments /
redemptions
There is another (perhaps more serious)
issue pertaining to the current approach.
The insurer should aim to reduce the
risk of adverse market movements, by
ensuring that the time lag between the
valuation of investments / derivation of
unit prices and the actual act of buying or
selling the backing assets in the market,
is minimised.
Based on the current approach adopted
by several companies in the industry,
the unit price for transaction requests
received during the day is calculated
in the evening, based on the value
of investments as on that day, and
the actual transactions (to buy / sell
investments) are (at best) carried out
only the following working day. This
exposes the insurance companies to
adverse market movements between the
market prices on the previous day (based
on which the unit prices are derived) and
the price at which the buying / selling of
investments will actually take place the
following day.
Perhaps this may be addressed if the
“cut-off” time for receipt of transaction
requests is actually brought forward to
earlier in the day (e.g. by noon) and all
the following tasks such as valuation of
investments, unit-pricing as well as the
actual processing of transaction and
buying / selling of investments happen
on the same day before the markets
close, based on the mid-day (or closing)
prices in the market.
Unit pricing errors
Unit pricing errors can lead to significant
financial and reputational risks for
insurers, but these can be avoided by
developing a robust unit pricing process
with appropriate checks and controls at
all stages. Many companies around the
world have had to payout large sums of
money in compensation for unit pricing
errors. Some examples are given below:
• In April 2011, Prudential UK revealed
a tax related unit pricing error in
FEATURES
its unit-linked pension business.
This error is expected to impact 39
thousand policyholders and cost
about £4 million.1
• Norwich Union had been incorrectly
charging its stakeholder pensions
customers and had to compensate
them to the tune of £11 million in
2008. 2
• In 2006, Clerical Medical found unit
pricing related data input errors
totalling around £17 million that
affected 140,000 policies and led to
large compensation payments. 3
Although the regulations regarding
compensation for unit pricing errors
in India are not as evolved as those in
other countries, companies would still
be required to compensate policyholders
in case errors are found in the unit
pricing mechanism. The financial and
reputational loss that would occur in
such a scenario could be significant.
Other challenges / issues in unit pricing
Apart from the equity related issues
arising due to non-allowance for
‘transaction costs’ in unit pricing, some
other potential causes of errors are given
below: Incorrect asset valuation: For
example, some of the investments are
not valued at the ‘correct’ market price or
some of the assets are missed out from /
wrongly included in the valuation.
• Incorrect allowances for tax
applicable on the fund: For
example, not allowing for the tax
deducted at source in the valuation
of investments of the fund.
Depending on how the income /
capital gains tax landscape develops
in India, insurance companies may
need to pay special attention to
the allowance for tax on unrealised
gains and losses in the unit-pricing.
• Charges that impact unit price:
Some charges, like the fund
management charge (FMC), are
reflected in the unit price of the fund.
If there are any errors in the amount
or type of the charge deducted,
there will be unit pricing errors. One
typical error is not taking physical
funds out of the unit-fund for FMCs,
thereby overstating the subsequent
unit-prices.
The Actuary India December 2011 13
 • Errors in policy administration carries out specific journal entries before any further transactions
FEATURES
systems and data input errors: (to either put in or withdraw money are processed. However, this may
Simple errors in the policy from the fund) when reflecting not always be practical. A delay in
administration systems or manual each of these transactions, the reflecting any corrective action may
errors in data entry, such as incorrect “basic equity principle” would be further aggravate the magnitude of
transaction details or incorrect fund compromised and it would lead to unit pricing related errors.
splits etc, could lead to unit pricing unit-pricing errors. Examples of such Conclusion
errors. transactions include:
Unit pricing is a complex area and it is
• Wrong unit-balances used in unit  Giving past unit price for important to have a robust process in
pricing: Either some units are not transaction requests which were place to avoid / minimize the risk of
captured correctly in the system missed out by the company’s costly errors. In our view, to date it has
or correct unit balances are not data-entry staff not been given the amount of attention
included in the calculation of unit  Correction of past data entry that it deserves. In this article, we have
prices. errors (e.g. wrong fund allocation), sought to shed light on some of the
• Transactions processed at a price requiring reversal of the original concepts and issues underlying this
other than the current price: Many entry and re-submitting of the area and to help raise the profile of unit
a times, companies carry out certain ‘correct’ entry etc. pricing as an important issue.
transactions in the unit fund at a • Delay in error corrections: If a The views expressed in this article are
unit price that is different from the company finds an error in its system authors’ personal views and not of the
“currently applicable” unit price / unit pricing, it will need to carry employer they represent.
for that fund. Unless the company out the corrective action ideally

vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy

Vacancies for Actuarial

vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy

vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy
We have several vacancies for Actuarial Students at entry level in our Actuarial
Department covering a wide range of roles including product design and development,
statutory valuation, reinsurance, shareholder reporting and business planning.
The Department is engaged in many innovative and challenging tasks and provides a
sound platform for an actuarial student seeking to broaden his/her horizons both
professionally and technically.
We would expect the following from applicants:
Academic Qualification: Bachelors/ Masters in Statistics/ Mathematics/ Science from a
reputed institute
Professional qualifications: Student of Institute of Actuaries of India/IFA/SoA. Nearing
completion of CT Series in IAI/IFA or equivalent in SoA.
Other requirement: Strong analytical and IT skills (including proficiency in MS Office
software) coupled with good communication skills.
If you feel you can add value to our organization and to your own career
please send your updated CV to careers.life@tata-aig.com
vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy vacancy

Actuarial Common Entrance Test (ACET)

Due to overwhelming response from all over India and on request the
last date for registration has been extended to
25th December 2011. No further extension will be done.
14 The Actuary India December 2011 Indian Actuarial Profession Serving the Cause of Public Interest
New Structure for Professionalism
Courses introduced by IFA, UK
T he UK Actuarial Profession has
developed a new regime of
professionalism courses which aims at a
holistic approach, covering all members,
to ensure that the professionalism
training benefits members continuously
throughout their careers. Since the
launch of the principles-based Actuaries’
Code in 2009, the UK Actuarial
Profession has endeavoured to embed
the principles (Integrity, Competence
and care, Impartiality, Compliance and
Open Communication) of the Code in its
education and training.
There will be three stages of training
within the new professional skills regime.
1. Online Professional Awareness Test
The first stage of the new professional
skills curriculum is designed to assist
student members to understand their
duties under the Profession’s regulatory
structure; that is, the Bye-Laws, the Rules
and Regulations and the Actuaries’ Code.
A new mandatory Online Professional
Awareness Test is being introduced for
all students who join the Profession from
1 March 2012. Students will be required
to sit and pass the test before they are
able to apply for the Business Awareness
exam (CT9). As well as testing knowledge
of the Actuaries’ Code, scenarios will
be presented in a storyboard format
and students will be required to answer
multiple choice questions based on the
ethical dilemmas presented. Students
will be required to apply the principles
of the Actuaries’ Code in order to answer
the questions posed.
2. Professional Skills Course
The next stage of the new curriculum
will be the Professional Skills Course.
Members will be required to complete
the course:
• within one year of qualification; or
• between the fourth and sixth
anniversaries of their admission to the
UK Profession, whichever comes first.
The course is designed to build upon
the Online Professional Awareness Test
while recognising the increasing levels of
responsibility placed upon members at
this stage in their careers. Members will
be expected to be equipped to manage
the ethical dilemmas which may arise
and to make appropriate decisions to
resolve them.
The format of this course will be a choice
of:
(i) a one day face-to-face event where,
in addition to other features,
participants will work through ‘case-
Indian Actuarial Profession Serving the Cause of Public Interest
By Gautam Kakar
lets’ (mini case studies) both generic
and practice specific in nature; or
(ii) a web-based version of the case-
lets, which members will be able to
undertake in modules.
The course will be introduced from
February 2012 (web-based version from
June 2012) and replaces the current one
day Associate Course and two day New
Fellows course. Transitional arrangements
will be publicised in due course.
3. Professional Skills for Experienced
Members
After completing the Professional Skills
Course, members will move to the
final stage of the new professionalism
curriculum: Professional Skills for
Experienced Members. The previous
regime of mandatory 10 year
Professionalism Events for Experienced
Actuaries finished with three additional
events laid on in October and November
2011. The Profession is developing a
suite of professional skills events and
web-based modules in partnership with
Leeds University’s Inter Disciplinary
Applied Ethics Centre with a view to
re-introducing a revised mandatory
requirement for experienced members
by June 2013.
Professional Skills Training conducted
by Institute of Actuaries of India
IAI conducts India Fellowship Seminar
(IFS). The key highlights are :
IFS is mandated as one of the
requirements for admission as Fellow
Member and hence students who have
passed all subjects of the actuarial
examination or have a few subjects left
and Affiliate Members are expected to
attend
- IFS is essentially based
Professionalism Course as prescribed
by the Institute and Faculty of Actuaries
(IFA), UK for their requirement and
which is applicable to students of the
IFA resident in India and/or who are
also members of IAI. IFA has agreed
to recognize this Programme as
equivalent to their Professionalism
course.
- The IFS, however, also provides
inputs on India specific regulatory
and legislative environment including
governing structure of IAI.
- The seminar consists of presentations
and case studies by participants
themselves.
- All the participants for admission as
FIAI are subject to assessment by
Assessment Committee
FEATURES
About the Author
Gautam is a qualified actuary with
experience in life, pensions and
health. He is based in London.
kakar.gautam@gmail.com
It is important that IAI’s Professional
course is similar to that of the UK
Institute’s professionalism course
considering the mutual recognition
agreement and also in order to provide
IAI members training at par with global
standards, although adjusted for local
environment.
The possible changes that may be
introduced in IAI’s professionalism
training regime are :
- Make professional skills training as
ongoing requirement for all category
of members. The frequency of
training can be linked to the category
of members e.g. after qualification,
professionalism training is require at
least once 3 years
- Develop an Actuaries Code based
upon Professional Conduct Standards
and Actuaries Act so that it becomes a
guiding principle for all members
- Introduce web based training option
similar to that of UK institute. This
would be cost effective in terms of
registration cost and would not incur
travelling costs
- Currently, IFS is mandated as one of
the requirements for admission as
Fellow Member of IAI. This may not be
necessary if student members need
to pass professional awareness test.
on
However a seminar or an exam to cover
India specific legislation / industry would
be useful before admission as FIAI
Professionalism skills of our members
are very important in today’s complex
work environment where there are
multiple stakeholders with paramount
responsibility towards public interest.
At IAI, we should aim to provide our
members best possible training so that
they are well equipped to take decisions
when faced with ethical dilemmas or
situations which present conflict of
interest.
The views expressed are his personal.
Some of the content of the article is
based on information available from IAI
and IFA.
The Actuary India December 2011 15
ANNOUNCEMENT

Appeal for Donation...

Meena Sidhwani
Memorial Education Award Fund
Late Meena Sidhwani
(1959-2001)

This appeal is for donation so as to have enough funding on ongoing basis for awarding the “BEST & BRIGHT” ones
of the Indian Actuarial Profession.
The Award: Cash and personalized Silver Shield - was first instituted out of donation of ` 50,000/- by Meena’s
mother in the year 2003 with first Award given during 7th GCA in February, 2005. Till 13th GCA there have been seven
Awardees with one of them qualifying in as less a duration as three years and nine months.
The fund has depleted and needs top up.
Objective: To perpetuate memory of Meena Sidhwani (1959-2001) who was one of the two first fellows (1997) of the
Actuarial Society of India, the predecessor to the IAI. Meena was physically challenged, could walk with difficulty
and lost her life on 6th June, 2001 while serving as Chief Actuary of ING Vysya Life Ins.co. Ltd in India.
The Rules for selection of Awardees: The rules as under have been effective from beginning of the institution of the
Award in the year 2003/2004.
Criteria for the selection of Awardees
1. Student who clears all subjects including exemptions leading to fellowship within a span of 5 years from
the date of admission as a student in IAI or the actuarial body for which exams exemption have been
obtained.
2. In case there is more than one student, the selection will be done on the following basis.
• Shortest time limit taken.
• Highest mark in SA Series (earlier 400 series) subject.
In case if equality still persists, then the prize will be shared equally.
This appeal is to all IAI members to donate. Donation cheque should be drawn in favour of the Institute of Actuaries
of India and send to Gururaj Nayak, Administrative Officer.

Liyaquat Khan
President

Meena Sidhwani Memorial Awardees

the best and bright ones Winners
GCA Year Name
Time taken leading to
fellowship never quit
7th
8th
Feb. 2005 Gautam Kakar
March. 2006 Rajesh Dalmia
4 years 4 months
4 years
and
9th
10th
Feb. 2007
Feb. 2008
Vibha Bagaria
Peuli Das
4 years 1 months
4 years
quitters
11th
12th
Feb. 2009
Feb. 2010
Gautam Shah
Kamlesh Gupta
4 years and 6 months
4 years and 9 months
never win.
-Vince Lombardi
13th Feb. 2011 Kunj Behari Maheshwari 3 years and 9 months

16 The Actuary India December 2011 Indian Actuarial Profession Serving the Cause of Public Interest
 and bright ones
Meena Sidhwani Memorial Awardees - the best and bright ones
- Binita Rautela asks some questions
Peuli Das
Educational Background
I majored in Economics and completed MS in Quantitative Economics from Indian Statistical Institute,
Kolkata. From there, I chose Actuarial Science as a career path and eventually cleared all the exams of
IAI in 2007.

the best
How did you get to being an actuary
I grew up listening about actuaries from my father who worked with LIC throughout his career. That’s
why, even though it used to be a road seldom taken in those days, I always had an eye towards having a career in this field.
Eventually, opportunities presented themselves while I was studying at ISI Kolkata. It was the early 2000’s - the market was
opening up to the private players and they were actively recruiting from the campuses. It was with one of them that I started
my journey towards an actuarial career. Few years of hard work, perseverance and discipline ultimately led to the Fellowship.
Career Path so far
My career started as an actuarial trainee in HDFC Standard Life Insurance Company in Mumbai in 2003. After a year, I
migrated to USA and started working with Deutsche bank as a Business Analyst for their investment team, helping them to set
up platforms for calculating returns for different asset classes. Meanwhile I still kept alive the motivation and determination
to write and clear actuarial exams from New York. It was during my days with Deutsche Bank that I completed my final exam
with IAI and decided about switching back to core actuarial again with New York Life Insurance Company. My involvement
was mostly with their JV partner Max New York Life doing US GAAP valuation, business planning and actuarial economic
valuation. After almost 7 years I returned back to India in early 2011 and since then have been working with ING Life
Insurance in Bangalore heading the valuation team.
Pleasure of being an actuary
To me, the pleasure of having a life and career as an actuary is no better described than by the words of the poet Samuel
Johnson: “Life affords no higher pleasure than that of surmounting difficulties, passing from one step of success to another,
forming new wishes and seeing them gratified.”
For an actuary, there are challenges in every step of the way – immense responsibilities, a continuous need to reinvent
oneself and prove oneself worthy of a wonderful group of peers and colleagues. But all that pales in comparison to the
satisfaction of providing solutions to everyday business problems that are rigorous, rational, practical and effective; solutions
that have very real consequences for the business and the industry at large. In today’s world, there are probably not too
many other career options that would provide that and I am glad that I chose to be on the right side of the fence.

Kunj Maheshwari
Educational Background
An alumini of The Doon School, I graduated in Economics from Shri Ram College of Commerce, Delhi University.I
sat for my first actuarial exam after joining Towers Watson (then Watson Wyatt) in 2006 and completed my
papers “by the time of commonwealth games” in 2010, a milestone I wished to achieve when I had first joined
the profession. 
How did you get to being an actuary
The first time I had heard of actuarial science was back in school, when a career counselor advised of possible
ideas for the future. The formal  aptitude  report had then concluded that I should find a career related to
“economics, statistics and modelling”. I think subconsciously, the idea got stuck from there though I never actively revisited the
possibility of being an actuary until I attended a talk by Watson Wyatt whilst in college on graduate opportunities in the firm. I
applied for a position in my final year and started taking exams once I joined work with Watson.
Career Path so far
Having joined Watson Wyatt as a graduate in 2006, I have been involved in various consulting roles and I am still in my first job! As
I have progressed through my career, I have had the opportunity to work not only within the Indian life insurance market, but also in
Spain, where I worked for six months, Hong Kong and Singapore. I am currently working out of Manchester, UK.
Pleasure of being an actuary
One of the greatest things about being an actuary is the transferability of our skills across the globe - which reminds me of how
fundamentally important the skills of an actuary are since the same principles are applied across the globe. This also makes me
very proud of being an actuary and being part of such a global network of highly qualified individuals, whose work makes so much
difference to all people’s well being, yet they carry it out mostly unnoticed (such that most people don’t even know what an actuary
is!), reminding me of the humility within our profession.

Indian Actuarial Profession Serving the Cause of Public Interest The Actuary India December 2011 17
 General Insurance:
COLUMN

A Firmer Footing on Shaky Ground

Prepared by Jonathan Nicholls, PwC
Jing (Annie) Luo, AMI

We are glad to print papers given to us by the New Zealand Society of Actuaries courtesy John Smith for the benefit of IAI
students and younger actuaries. These papers were presented at the future pathways meetings held on 15th / 16th March
STUDENTS

at centres of New Zealand Society of Actuaries and were targeted at senior students to provide background on topical issues
that could be useful for those studying for the final exams. The recently qualified actuaries and senior students were asked to
author papers in different practice areas. The one General Insurance: A Firmer Footing on Shaky Ground by Jonathan Nicholls,
PwC Jing (Annie) Luo, AMI - is reproduced for the benefit of our readers.

A bstract
It has been an eventful time for the
finds the discussion of such matters as
the cost sharing and claims management
Canterbury earthquake has been
ranked globally as the fourth most costly
of value. earthquake ever for insurers between
New Zealand General Insurance
1970 and 2010 according to Earthquake
industry, with a major earthquake in Section One: Shaky Ground
data published. It is New Zealand’s
Canterbury on 4th September 2010, a
New Zealand’s biggest earthquake largest single insurance event ever
fundamental shift in the regulatory
since 1931 hit 40 km west of recorded.
framework, and significant
Christchurch city, and throughout the
developments at ACC. This paper Sharing the Cost
Canterbury region at 4:35 am, 4
outlines these key recent developments
September 2010. The 7.1 magnitude The losses from this quake are shared
and explores the likely impact on the
quake, and the thousands of aftershocks between the EQC, insurance companies
New Zealand General Insurance
that followed, have caused widespread and reinsurers. To cover the cost,
industry. The paper contains the
damage: chimneys falling, houses insurance companies pass a 5 cent
following three sections:
cracking, pipes breaking, and extensive disaster insurance premium per $100
1) Shaky Ground – the 7.1 magnitude sinking .Christchurch suddenly became sum insured value (also known as the
earthquake that hit Canterbury on
4th September 2010 has had a
significant impact on New Zealand’s
personal lines insurers as they strive
to cope with the impact
2) A Firmer Footing – the establishment
of Prudential Supervision for the
industry through the Insurance
(Prudential Supervision) Act 2010,
and
3) Developments at ACC – a look at the
recent changes to NZ’s accident
compensation scheme, as it strives
to put the sustainability of the
scheme on firmer footing.
It should be noted that the paper was
finalised just a few hours before the 6.3
magnitude earthquake in Christchurch Earthquake damage at Manchester Street and corner of Worcester Street, Christchurch2
on 22nd February, 2011. This quake renowned as the "shaking city". ‘EQC levy’) to the EQC since 1993 on
has resulted in large loss of life, and a Unsurprisingly, the quake has resulted every house and contents policy they
financial cost which is estimated at the in many claims to insurance companies. underwrite. The levies have accumulated
time of writing to be “at least double” By 10 February 2011 the Earthquake to $6 billion in funds since the EQC was
the initial September quake1. Despite Commission (EQC), New Zealand’s established in 1945. The fund comprises
this, the authors believe that the primary residential property provider of $250 million in cash, $1.75b in
publishing of this paper is still natural disaster insurance, had received managed global equities and $4b in
worthwhile, and hope that the reader a total of 179,171 claims. The government bonds3. This fund is used to

1 ‘Businesses go for it to survive’, http://www.stuff.co.nz/business/industries/4706556/Businesses-go-for-it-to- survive

2 Photo from :http://www.lunch.com/Reviews/d/2010_Canterbury_Earthquake-Photos-1607013-2010_Canterbury_Earthquake- 422457.html?pid=0
3 www.eqc.govt.nz

18 The Actuary India December 2011 Indian Actuarial Profession Serving the Cause of Public Interest
insure residential dwellings, personal
contents and the land within certain
limits against "earthquake, natural
landslip, volcanic eruption, hydrothermal
activity and tsunami" types of natural
disasters4. Similarly, most insurance
companies charge a special catastrophe
insurance premium to cover the extent
of any loss above the EQC cap and to
arrange their own reinsurance
programme to cover the losses in any
events. The diagram below illustrates
how policyholder premiums are
allocated between insurance
companies, the EQC and reinsurers.
When a disaster happens, like this
Canterbury earthquake, the EQC pays
the first $100,000 + GST for losses in
residential dwellings and the first
$20,000 + GST for personal contents5.
The private insurance companies
contribute the balance of the
replacement value. Both the EQC and
insurance companies have reinsurance
arrangements to cover the total claims
cost over a certain retained amount, as
shown in the following diagram.
4 ‘EQC Insurance’, http://eqc.govt.nz/insurance.aspx
5 ‘EQC Insurance’, http://eqc.govt.nz/insurance.aspx
6 EQC defines zone C as ‘the area most affected by land damage and will require wide-scale coordinated land repair, or additional protection work such as underground
retaining walls before any rebuilding can take place in the serious damaged zones’.
Indian Actuarial Profession Serving the Cause of Public Interest
The Reaction
The Canterbury Earthquake rocked
many houses and roads, but failed to
shake insurance companies.
Immediately after the quake, the EQC
and insurance companies quickly
responded to their customers’ needs.
Both the EQC and insurance companies
allocated a lot of extra resources to
respond to quake inquires. The EQC has
set up three office centres across
Canterbury, an 0800 number and a
direct line for Kaiapoi. Their staff
increased from 22 people prior to the
earthquake to 280 call centre staff
which includes special dedicated staff
to zone C6. State created four special
mobile claims van centres that moved
around Christchurch streets to assist
State, NZI, ASB, etc. customers lodge
claims. Tower and AMI flew additional
assessors from other parts of New
Zealand to cope with the massive
sudden increase in claims. Most
insurance companies published a range
of information through the media to
help and remind customers about
lodging claims and how to lodge claims.
Some insurance companies broadened
their existing policy coverage to assist
COLUMN
customers due to the extensive
earthquake damage. AMI extended its
temporary accommodation cover to
twelve months.
Most insurance companies have applied
restrictions when underwriting new
policies within the Canterbury region
since the quake. AMI did not underwrite
STUDENTS
new home or contents policies and
offered limited cover for existing
customers who moved to another
house. AA did not insure houses in
Canterbury, except for a change of
ownership of a house currently insured
by AA. State and Tower both applied a
21 day stand down period for earthquake
damage unless a structural engineer’s
report was provided, declaring the
house not to be structurally damaged.
Just before the 4.9 magnitude Boxing
Day aftershock, most insurance
companies had relaxed their additional
underwriting conditions. Restrictions
have however been applied again
subsequently.
Claims Management
The EQC Act imposes a three month
claims deadline for each earthquake.
The EQC therefore treated some of the
Canterbury aftershocks as separate
events. This has led to the claims
lodgements (to the EQC and insurance
companies) slowing down in recent
weeks. But assessing and settling all
these claims will take time. Good claims
management will be critical for the EQC
and insurance companies. There has
been a lot of similarity between the EQC
and insurance companies on how to
respond and settle claims (for example,
adding staff resource, assigning project
management teams). What is more, the
EQC and insurance companies have had
to work together closely to maximize
claims efficiency, e.g. sharing the claims
data between the EQC and other
insurance companies allow all parties to
understand the earthquake damage
better and plan remedial action
accordingly.
As of 4 February 2011, the EQC had
completed assessments for 59 percent
of all claims received so far and aimed
The Actuary India December 2011 19
 to complete all assessments by late ranged from $1.5 billion to $6 billion. was established in 1998 and had its
March7. The EQC is settling all claims $2 billion was initially estimated for the regulations “substantially strengthened”
COLUMN

under
$10,000 in cash, and plans to manage
the claims between $10,000 and
$100,000 through their appointed
project management team, Fletcher
Construction8. Insurance companies are
settling any additional claims that are
not covered by the EQC with their own
STUDENTS
EQC and insurance companies plus
their reinsurers with a further $2 billion
estimated for commercial insurance
companies. The EQC revised its initial
claims cost estimate of $1-2 billion
(made in late September) to be between
$2.75 billion and $3.5 billion at the end
of December10. Given the complexity of
in 2001 in the wake of the collapse of
HIH14.
However the last year saw a major
change in the New Zealand insurance
sector, when the Insurance (Prudential
Supervision) Act received the royal
assent on 7th September 201015. The
Act’s purpose is to “promote the

assessing teams and contracted project
managers. For example, AMI signed
Arrow as its project manager and State
signed Hawkins to look after claims
assessment and reconstruction. There
is debate on how best to settle the badly
damaged properties. This is an issue
that must be coordinated well between
the EQC, insurance companies,
customers and lenders, especially for
houses that need to be rebuilt. Given
this kind of complexity and the huge
number of claims, there is obviously a
long way to go to resolve everything.
Uncertain Future
It has been several months since the 4
September Canterbury earthquake. The
aftershocks seem to be settling down
now, but experts suggest that
aftershocks may last for many months.
The future is still uncertain.
The rebuilding process of zone C (the
area most affected by land damage)
claims settlement and the uncertain
future aftershocks, it is difficult to get an
accurate estimate of the Canterbury
quake claims cost at this stage.
Neither the EQC, insurance companies
nor reinsurers are certain about the
losses. This has been one of the most
expensive events for the insurance
industry ever. To recover this large claims
cost, Insurance Council New Zealand
Chief Executive (ICNZ), Chris Ryan,
predicted that “Premium rises are likely
to impact on New Zealand as a whole,
not just the Canterbury region. The size
of increases is very hard to predict as
there are forces driving premiums down
as well as up“11. But certainly, this will
present a challenge as they renew their
reinsurance programs and review their
premium structure.
The 7.1 Canterbury Earthquake has now
been ranked the third most costly
insurance loss worldwide in 2010. The
EQC and insurance companies have put
maintenance of a sound and efficient
insurance sector … (and) promote public
confidence in the insurance sector”16
and is designed to bring “the regulation
of insurers into line with established
international benchmarks and
expectations”. 17
What the regulatory framework does
Under the new regulatory framework, all
insurers are required to be licensed by
the Reserve Bank18. The Reserve Bank
is tasked with undertaking prudential
supervision and taking “appropriate
action” if licensed insurers are “likely to
fail to comply” with the Act or are in
“financial or other difficulties”.19 As part
of the licensing requirements insurers
need to:
• Maintain a fit and proper policy for
directors and relevant officers20
• Meet issued solvency standards,
including minimum capital
requirements 21

might have a three-year wait due to the a firm foot into this shaky ground. Even
• Have a current financial strength
building of underground dams and new though the future is still uncertain,
rating given by an approved rating
infrastructure9. The insurance together they will help this ‘shaking city’
agency22
companies’ temporary accommodation to get through the quake with optimism.
allowance will run out for those • Maintain and comply with a risk
householders still away home. The Section Two: A Firmer Footing management programme23
potential shortage of engineers and New Zealand has been described as • Have an appointed actuary who
technical professionals could push out having “one of the least regulated reports to the Reserve Bank on the
the timeframe and cost of the repair insurance markets in the world”.12 The appropriateness of the actuarial
process. These and similar issues make market was “lightly regulated” with information in the financial
it difficult to estimate the full extent of “minimal prudential and market conduct statements and the solvency
the Earthquake loss. requirements”.13 It certainly has margin24
So far, the estimate of insured losses of compared unfavourably with Australia, • Report to the Reserve Bank “as soon
this quake from various sources has where the prudential regulator APRA as is reasonably practicable” if it has
7 source: ‘Canterbury Earthquake – General update at 4 February’, www.eqc.govt.nz
8 ‘Issues raised at Christchurch City Council’ – Community meeting in November 2010
9 ‘Three-year wait likely after quake’ by Ben Heather, www.stuff.co.nz
10 ‘Canterbury Earthquake – General update at 4 February’, www.eqc.govt.nz
11 ‘The Canterbury earthquake is now the largest single insurance event in the history of New Zealand’ http://www.icnz.org.nz/news/291010.php
12 The regulatory environment, ICNZ website (http://www.icnz.org.nz/regulation/index.php)
13 Burrowes, The End of the Wild Wild West – Legislative Developments Affecting Insurance, NZSA Conference,November 2010
14 Peter Costello, Australian Minister of Finance, Press Release – Report of the HIH Royal Commission [No. 020]
15 Insurance (Prudential Supervision) Bill, NZ House of Representatives website
16 Part 1, section 3(1) Insurance (Prudential Supervision) Act 2010
17 Bill English, NZ Minister of Finance, at the first reading of the Insurance (Prudential Supervision) Bill (SeeHansard, Volume:659;Page:8313)
18 Part 2, section 15 Insurance (Prudential Supervision) Act 2010
19 Part 1, section 12 Insurance (Prudential Supervision) Act 2010
20 Part 2, section 34 Insurance (Prudential Supervision) Act 2010
21 Part 2, section 57 Insurance (Prudential Supervision) Act 2010
22 Part 2, section 60 Insurance (Prudential Supervision) Act 2010
23 Part 2, section 73 Insurance (Prudential Supervision) Act 2010
24 Part 2, section 76-78 Insurance (Prudential Supervision) Act 2010
20 The Actuary India December 2011 Indian Actuarial Profession Serving the Cause of Public Interest
 “reasonable grounds to believe that
a failure to maintain a solvency

COLUMN
margin is likely to occur at any time
within the next 3 years.”25
• Follow any directions given by the
Reserve Bank under part 4 of the
Act, including:
• preparing a recovery plan
• replacing a director, auditor or

actuary
• liquidation or
management.
The solvency standard has been
described as following an APRA-lite
model26 and being “strongly influenced”
by the Australian standards27. This
appears logical, as the New Zealand
general insurance market is dominated
by Australian-owned insurers such as
Suncorp (Vero), IAG (State, NZI), Lumley
and QBE.
The solvency standard requires the
appointed actuary to prepare a Financial
Condition Report (FCR) which, as the
name suggests, looks at the overall
financial condition of the insurer,
including the solvency position and the
key risks affecting the insurer.28 This is
not a new concept for the Australian-
owned insurers as an annual FCR is
required under APRA’s Prudential
Standard GPS 31029.
The solvency standard also outlines how
to calculate the insurer’s minimum
solvency capital, and uses similar
principles and details to the ARPA
Prudential Standards. The following
picture illustrates the NZ solvency
capital requirement30:
The Actual Solvency Capital is made up
of Tier 1 Capital, including ordinary
shares, retained earnings and some
reserves. Deductions need to be made
for future tax benefits, related party
equity/loans and intangibles such as
goodwill. Values must come from NZ
GAAP financial statements.31
The Minimum Solvency Capital is
calculated by summing a series of risk-
statutory
based capital charges, subject to a
minimum of $3m (or $1m for a captive
insurer). The capital charges are as
follows32:
Insurance risk capital charge – a factor
is applied to the Premium & Outstanding
Claims Liability by class of business.
The factor is higher for the more volatile
and uncertain business classes (e.g.
the factor applied to the domestic
property premium liability is 14%, while
liability classes attract a factor of 22%)
• Catastrophe risk capital charge – for
insurers with significant property
exposure, the charge is set to the
net cost of a one in 250 year event
plus the cost of one reinstatement of
the full catastrophe reinsurance
program. If there isn’t significant
property exposure, the charge is set
to two times the largest per risk
retention plus the cost of one
reinstatement.
• Asset risk capital charge – this
reflects credit risk by applying a
factor to investments by asset class
(e.g. the factor applied to cash is
0.5%, listed equity is 25%). There
are also limits for each asset class
(as a % of total assets) which if
exceeded attract a concentration
charge.
STUDENTS
• Foreign currency risk capital charge
– 22% is applied to a net open
foreign exchange position.
• Interest rate capital charge –
allowance for a 1.75% change in all
interest rates used to value or
discount the insurer’s fixed interest
assets and liabilities.
• Reinsurance recovery risk capital
charge – allowance for losses from
failure to recover on reinsurance
contracts. The factor applied to the
reinsurance recoverable is higher for
lower- rated reinsurers.
The Solvency Ratio is defined as the
Actual solvency capital divided by the
Minimum Solvency capital. The insurer
is required to disclose this ratio in its
financial statements and on its website,
along with a comparison with the
Reserve Bank’s recommended solvency
ratio guideline33.
Support for the regulatory framework
The I(PS) Bill received very broad
support in Parliament, with unanimous
cross-party support through the
parliamentary process34, culminating in
its third & final reading on 24th August
201035. The Act was also strongly
supported by the Industry:

25 Part 2, section 24(1) Insurance (Prudential Supervision) Act 2010

26 Rhodes, New Zealand’s General Insurance Solvency Standard, NZSA GI Seminar, October 2009
27 Weight & Collings, The Dynamics of New Zealand’s Solvency Reforms, NZSA Conference, November 2010
28 Section 5.3, Reserve Bank of NZ Policy Position Paper: Solvency Standard For Non-life Insurance Business
29 This requirement was recommended by the Royal Commission of Inquiry into HIH
30 Rhodes, New Zealand’s General Insurance Solvency Standard, NZSA GI Seminar, October 2009
31 Section 2, Reserve Bank of NZ Policy Position Paper: Solvency Standard For Non-life Insurance Business
32 Section 3, Reserve Bank of NZ Policy Position Paper: Solvency Standard For Non-life Insurance Business
33 Section 4.6, Reserve Bank of NZ Policy Position Paper: Solvency Standard For Non-life Insurance Business
34 Dean, Insurance (Prudential Supervision) Act - A Post-Enactment Assessment, NZSA Conference, November 2010
35 Insurance (Prudential Supervision) Bill, NZ House of Representatives website

Indian Actuarial Profession Serving the Cause of Public Interest The Actuary India December 2011 21
 • The NZ Society of Actuaries submitted mentality” 41. This can be particularly Reserve Bank if the insurer is likely to
that the NZSA “supports the overall seen in two areas: fail to maintain a solvency margin at any
COLUMN

objectives of the Bill … (and)
commend the high level of both
practicality and effectiveness that is
being sought in this legislation.”36
• Insurance Brokers Association of NZ
CEO Gary Young stated that the
legislation provides “a sound basis
for supervising insurers”.37
STUDENTS
1) Insurers who were operating prior to
8th September 2010, and friendly
societies, are exempt from
compliance with parts of the act
(including the minimum capital
requirements and financial strength
ratings) if their annual gross premium
income is less than $1.5 million42.
time within the next 3 years, is in serious
financial difficulties, or has been
operating fraudulently or recklessly.45
These “whistleblower” provisions are a
tremendous responsibility.
Section Three: Developments at ACC
Background

• Insurance Council of NZ CEO Chris
Ryan said that the new legislation is
a “positive move”, “a good thing for
the industry” and observed that the
legislation had “been implemented
with a lot of consultation on the way
through and overall will lift the level
of regulation in NZ.” 38
The proposed General Insurance
solvency standard was also widely
supported, with the NZSA stating that
the Society is “supportive of mandatory
solvency standards (and) agrees with
and supports the structure and
principles of the standard.”39
Implications
There is a three year “transitional path to
compliance” 40. Insurers are required to
have already notified the Reserve Bank
whether they intend to continue to carry
on insurance business in New Zealand
under the new regulatory framework.
Existing insurers will be given a
provisional license. A provisional license
is available to new insurers if there is
“evidence of satisfactory compliance
with initial requirements”. All insurers
are required to have at least a provisional
license by 7th March 2012. The
provisional license outlines “conditions
detailing their required path to full
compliance” with the Act. Insurers must
2) Insurers under the jurisdiction of the
United Kingdom or Australian
prudential regulation are exempt
from certain requirements as the
home regulator coverage is deemed
sufficient.43
However it is fair to say that the new
regulatory framework will lead to
significant change in the general
insurance sector, particularly when it
comes to the role of actuaries. As the
NZSA said in its submission on the Bill,
“the Reserve Bank is placing a heavy
reliance on actuaries to provide
professional guidance to directors
concerning the ongoing financial
strength of insurers. The profession
welcomes this opportunity to provide
support to insurers in the financial
protection of policyholders, in line with
best practice overseas.”44
Actuaries will form a central part of an
insurer’s risk management programme,
with the annual FCR identifying the key
risks and giving an opinion on the steps
taken to mitigate those risks.
Additionally, the Act requires the
appointed actuary to report to the
Account InjuryCoverage
Work All work-related injuries
Earners’ Non-work injuries to earners
ACC is a NZ Crown Entity providing
“comprehensive, no-fault personal
injury cover for all New Zealand
residents and visitors to New Zealand”
46, under the Accident Compensation
Act 2001. It is the fifth largest financial
institution in New Zealand47.
Its role is to prevent injuries (e.g. through
safety campaigns), to make sure people
can get treatment for injury, and help
people get back to everyday life48. In
exchange for this universal coverage, the
right to sue for personal injury in New
Zealand is forfeited.49 The New Zealand
situation is rightly described as unique50.
ACC was established in 1974 in the
wake of the report of the 1967 Royal
Commission of Inquiry into
Compensation for Personal Injury led by
Sir Owen Woodhouse (“the Woodhouse
Report”). It has been subject to regular
adjustments by successive
governments, including major reviews
in 1979, 1986-7, 1991, the late
1990’s51 and the 2009-10 Stocktake
(see ‘Future Changes’ section).
ACC’s claims are separated into the
following Accounts:
Funding Source
Levies paid by employers and the self-employed
Earners’ levies (via PAYE) plus levies on earnings
of the self employed

be fully licensed by 7th September 2013. Motor All personal injuries involving Petrol excise duty and a levy
Vehicle motor vehicles on public roads collected with the motor vehicle license fee
The regulatory framework is designed to
Treatment Injuries arising from Earners’ and Non-Earners’
be “light-handed”, with the aim of Injury medical treatment Accounts
ensuring that the regulation “does not
Non-Earners’ Injuries to people not in the paid The Crown (i.e. general taxation) workforce
mire the industry in a compliance
36 NZSA, Submission on Insurance (Prudential Supervision) Bill, 10 February 2010
37 InsuranceNEWS.com.au, NZ Insurance Act passed, 6 September 2010
38 InsuranceNEWS.com.au, NZ Insurance Act passed, 6 September 2010
39 NZSA, Comments on Solvency Standard for Non-Life Insurance, 26 March 2010
40 All quotes in this paragraph are from Dean, Bringing financial stability legislation to the insurance industry –the Insurance (Prudential Supervision) Act 2010, RBNZ Bulletin,
Vol. 73, No. 4, December 2010
41 Bill English, NZ Minister of Finance, at the first reading of the Insurance (Prudential Supervision) Bill (See Hansard, Volume:659;Page:8313)
42 Regulations 9 to 13, Insurance (Prudential Supervision) Regulations 2010 expanding Part 5, section 238 of the Insurance (Prudential Supervision) Act 2010
43 Regulation 5, Insurance (Prudential Supervision) Regulations 2010
44 NZSA, Submission on Insurance (Prudential Supervision) Bill, 10 February 2010
45 Part 3, section 127, Insurance (Prudential Supervision) Act 2010
46 ACC website
47 Pg. 10, ‘Accident Compensation Services in New Zealand: The Performance of the ACC Scheme and Opportunities for Improvement’ by the Steering Group for the Stocktake
of ACC Accounts (the ‘Stocktake Steering Group report’)
48 ‘Introduction to ACC’, ACC website
49 Pg. 21, ‘Next Steps on ACC’ Cabinet paper
50 Regulatory Impact Statement – Response to the recommendations of the ACC Stocktake (for example)
51 Pg. 23, Stocktake Steering Group report

22 The Actuary India December 2011 Indian Actuarial Profession Serving the Cause of Public Interest

Financial History
The Net Central Estimate of the
Outstanding Claims Liability (the
‘Liability’) for all benefit types grew
rapidly from 2004 to 2010. From $9.3
billion in June 2004 the Liability grew to
$21.1 billion at June 2009, a growth
rate of 23% per annum.
A large proportion of this increase has
arisen due to the continued maturity of
the scheme and other factors outside
the control of management such as
changes to accounting standards,
discount rates and the scope of
entitlements. However 40% is due to
unanticipated cost increases52, driven
by factors such as:
• Growth in use of the scheme.
“Beginning in 2005 … the rate of new
injuries/claims rapidly increased,
claims from prior years reactivated,
and recovery rates began to
deteriorate.”53
For example, the rate of clients
returning to work within 3 months
dropped from 69% in June 2004 to
62.5% in June 2009.54
• Superimposed inflation. “Inflationary
pressures on the cost of medical
services has exceeded the rise in
normal inflation for decades due to
the cost of improvements in medical
technology; an increasing demand for
medical services that continues to
exceed the supply (labour shortages);
and the cost of frequent changes in
the administration and regulations of
the healthcare system”.55 This
52 Pg. 3, Stocktake Steering Group report
53 Pg. 7 ‘ACC Financial Condition Report 2010’ by de Santis
54 Pg. 10, ‘Monitoring Framework for the ACC’ by Taylor & Fuller
55 Pg. 8 ‘ACC Financial Condition Report 2010’ by de Santis
56 Pg. 10, ‘Monitoring Framework for the ACC’ by Taylor & Fuller
57 ‘ ACC’s direction and performance’, ACC website
58 ‘ ACC Valuation of Outstanding Claims Liabilities as at 30 June 2008’ by Latham, Gifford & Rhodes
Indian Actuarial Profession Serving the Cause of Public Interest
superimposed inflation can
particularly be seen with the Elective
Surgery benefit (7% p.a. between
2004 and 2009) and radiology costs
(11% p.a. between 2004 and 2009).
The growth in the Liability has not been
matched by ACC’s assets, meaning that
the deficit (the gap between assets and
liabilities) has been steadily increasing,
rising from $4.2 billion in 2005 to $12.7
billion in 200956. Legislation requiring
ACC to be fully funded by 2014 has been
changed, with a new target of 2019.
Recent Changes
Concerned by the Liability growth, ACC
has stated that it needs to “refocus (its)
approach to … become even more
business-like”. Management has
determined that the culture needs to
shift away from welfare and towards
“being cost-efficient and operating like a
prudent insurer”57
To assist in this, there have been a
number of legislative and operational
changes, with the aim of increasing
scheme sustainability. Some changes
are outlined in the following paragraphs.
1. Increased rigour of claims to ensure
they meet the criteria set out by
legislation
Treatment, and in particular Elective
Surgery, that may have been previously
accepted is now being declined on the
grounds that the injury is predominantly
due to historical pre-existing conditions
or age-based degeneration, rather than
caused by an accident. The increased
rigour has resulted in a significant
amount of negative media coverage,
COLUMN
including the following cartoon from the
NZ Herald in December 2010:
STUDENTS
2. Claim monitoring
The two largest contributors to the
outstanding claims liability are the non-
fatal weekly compensation benefit ($6.0
billion at 30 June 2010) and the serious
injury social rehabilitation benefit ($8.0
billion at 30 June 2010). ACC has
established two teams whose focus is
analysing, managing and monitoring
these two benefit types.
• The Recover for Independence
Service (RIS) team have analysed
those claimants who have been
receiving non-fatal weekly
compensation for several years to
ensure that they are receiving
appropriate support and to return to
work where possible. This has
reduced the number of active claims
receiving weekly compensation.
• The National Serious Injury Service
(NSIS) team was established to “to
gain greater control over the cost of
serious injury claims, as well as
improving outcomes for seriously
injured clients”58 through having a
centralised specialist group dealing
with complex clients and injuries
rather than spread across the
branch network. Their work has
included improved profiling of
claims, monitoring actual care hours
against the amount approved, and
establishing community based care
options.
3. Provider contracts
ACC has a large number of contracts
with health providers outlining specified
The Actuary India December 2011 23
 costs for various services. Some of
these contracts have been re-negotiated
COLUMN
at a lower rate:
• payments to radiologists for high
tech imaging such as MRI’s have
been reduced by 20% in the last year
• contract rates with physiotherapists
have been reduced by 30%, with
physiotherapists now able to charge
clients a co-payment for their
STUDENTS
services.
4. Legislation
The Government has passed an
Amendment bill modifying the services
that ACC is required to provide, thus
reducing costs. Examples include:
• Changing the Loss of Potential
Earnings entitlements for injured
minors from 100% to 80% of the
minimum wage, reversing a change
made in the 2007 amendments.
• Removing entitlement to weekly
compensation from those who can
work more than 30 hours a week
(previously set at 35 hours).
• Reducing the costs that ACC pays for
hearing aids by requiring assessment
of the proportion of hearing loss that
is injury-related and then
apportioning the cost of hearing aids
between ACC and the Ministry of
Health.59
These initiatives, alongside levy
increases in 2009, are starting to have
an effect. The deficit fell to $10.3 billion
in 2010.
Future changes
The National Party had announced prior
to the 2008 election its intention to
59 ‘ Hearing Aid costs to be apportioned’, Media Statement by the Minister for ACC
60 Pg. 1 ‘Next Steps on ACC’ cabinet paper
61 Pg. 42, Stocktake Steering Group report
62 Pg. 1 Stocktake Steering Group report
63 Pg. 7, Stocktake Steering Group report
64 Pg. 121, Stocktake Steering Group report
65 The following paragraphs are from Pg. 8-10, ‘Next Steps on ACC’, Cabinet paper
66 Pg. 21, ‘Next Steps on ACC’, Cabinet paper
The final test of a leader is
that he leaves behind in others the conviction and
will to carry on.
24 The Actuary India December 2011
“investigate the introduction
competition into the ACC Work account”,
and “conduct a full stocktake of the
various components of the ACC
scheme”60.The Steering Group for the
stocktake was chaired by former cabinet
minister David Caygill and presented its
final report to Dr Nick Smith, the Minister
for ACC, on 30 June 2010. This report
was released to the public in December
2010.
The Steering Group stated that it
believed the Woodhouse Report
“contained fundamental flaws” and that
the approach taken to implementing it
had “introduced a range of inefficiencies
into the New Zealand insurance
market”61 It noted that the “history of
the ACC Scheme to date is one of
recurring crises resulting from rapid and
unaffordable expansion of the claims
liabilities of the Scheme followed by
periods of greater focus on claims
management and rehabilitation” and
put forward that in its view “only
significant structural reform can ensure
the sustainability of the ACC Scheme in
the medium and long term”62
The Steering Group recommended that
the Work, Earners; and Motor Vehicle
Accounts should be taken over by the
private sector insurance industry, and
that the ACC should not be allowed to
operate in the competitive markets.63 It
also recommended “introducing risk
and experience rating consistent with
the practices of the private insurance
industry”64 for setting levies.
The Minister for ACC published his
recommendations in December 201065.
He has proposed introducing
competition to the Work Account,
Indian Actuarial Profession Serving the Cause of Public Interest
of expecting benefits that include:
REPORTAGE
• Increased choice for all employers –
including price, quality of service,
risk sharing arrangements and risk
management services
• Improved pricing of risk
• More focus on injury prevention
• More convenience for employers
from the bundling of workplace
accident insurance with other
insurance products.
However, the Minister has recommended
that ACC be allowed to compete, as in
his view:
• Competitive pressure in one account
will likely spill over and improve
ACC’s performance in other accounts
• Employers will retain the choice of
continuing with their existing
arrangements
• Implementation will be simpler and
less risky
• Market management will be simpler,
with ACC as a default insurer.
While the dominant position of ACC
means that it is likely to retain a large
market share, the Minister cites
Kiwibank as an example of a small
market challenger which has had a
significant impact on the overall
performance of the market.
Finally, the Minister emphasizes that
the fundamentals of the Scheme remain
intact, stating that the changes “only
concern the delivery of the Scheme,
rather than the principles underlying
it.”66
- Walter Lippman
 Announcement for members of IAI
The Actuary India: Scheme of Awards for best articles for the Calendar year 2011
The objectives: recognition of the efforts put in and encourages members to write for the Actuary India magazine.
Process of selection: Three member committee will be appointed in Dec. 2011 to set parameters for selection and recommend best
two Articles in order of merit.
The Awards and recognition: Based on the Committee’s recommendations, the following rules shall apply;
a) The awards will be given by the President during the GCA held immediately after the end of the calendar year 2011. The awards will
be in the form of cash prize and recognition plaque.
b) The three member committee will send its recommendation by January each year based on editions published in a calendar year
2011. Every member of the selection Committee will come out with his own list of best five articles. Thereafter, the committee will
meet in the second week of January and come out with a commonly agreed best two. In the event there is no unanimity the com-
mittee will decide on how to select the best two (e.g. going by majority view, draw of lots from the five best drawn by each). This list,
along with justifications, will be sent to the President well in time for him to announce this at the 14th GCA.
c) The first best will receive a prize of ` 7,500/- and the next best will receive ` 5,000/-.
d) In order to qualify each article should meet the following minimum criteria;
1) at least 500 words
2) should not be direct reportage of events
3) should not be reproduced from articles elsewhere (while sending the article the author should give a declaration to this effect
and we trust the author; if it is a reproduction - in full or substantial part - it is disqualified)
4) Should be written by a member of the IAI (in the case of joint authors, all should be members of the IAI) at the time the article
is published.
e) The award winning authors along with the Committees’ key points on selection will be published in the March 2011 issue of the
Actuary India.

Liyaquat Khan

carEer opportunity

Gen Re is one of the leading reinsurance companies in the world and is represented globally by a network of more than 45
branch and subsidiary offices in key reinsurance markets. Standard & Poor’s rating for Gen Re is AA+.
Gen Re’s Asia-Pacific Life Health Division is looking to fill the following vacancy in its Mumbai Liaison Office.

Account Executive
Your role: Your qualifications:
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Country Manager qualification.
• You are responsible for maintaining, improving and • At least 5 years experience at an insurance or reinsurance
extending the quality of business written in India by company, with thorough knowledge of the Indian Life (re)
managing marketing activities, client contacts, identifying insurance market.
and developing business opportunities.
• Previous work experience in the product development
• You have account manager responsibility for assigned area is an advantage.
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Your key responsibilities: business opportunities, achieving win-win solutions and
• Follow market trends and client requirements to identify communicating complex issues to a varied audience.
new business opportunities.
The India team works closely with the Singapore Life Health
• Develop and build strong client relationships. team and being part of the larger Asia Pacific and International
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More information on the Gen Re Group is available at http://www.genre.com
THE PRESS
FROM

Among the least profitable across Asia

business standard
Niladri Bhattacharya / Mumbai November 24, 2011, 0:40 IST

A t a time when the country’s life

insurance industry is facing a
downturn in premium collection, it has
Therefore, it is not surprising that a few of
the 22 private life insurance companies
operating in India have been able to
of branch network, agency force and
distribution network, to cut cost and
preserve capital.
earned itself a dubious distinction of achieve their break-even targets set out The report expects the current slowdown
being one of the “least” profitable market in their original business plan. in premium collection in the Indian
across Asia. Till March 31, only three private life life insurance industry to continue for
According to a study by McKinsey, the insurers have registered accounting another 12-18 months, as insurers are
returns and profit margins in India are profits for five years of their operation looking to adapt their business model in
one of the lowest in the region. The study while a further four players have accordance with the regulatory changes.
shows, the return on reserves from the registered profits in three years of their However, it indicated, in the medium to
life insurance sector in the country is the operations. short-term prospects for the Indian life
lowest, at — 27 basis points, whereas it “In the early years there tended to be a insurance sector remain attractive. It
is 110 basis points in China. Similarly, land grab, and we went into second, third, is estimated a growth rate of 13-14 per
the profit margins or the new business fourth tier cities. Everyone was trying to cent on a cumulative basis over 2010-
adjusted profit (NBAP) margins are at 18 build a scale. So, the new regulation was 2015, taking the total industry gross
per cent, faring poorly with China, where just a pull back of that earlier land grab written premium at $110 billion.
the NBAP in the same period stood at 30- strategy where we did build some scale, Since the new regulatory norms were
60 per cent. but didnit get the value. What we are introduced in September 2010, the
“In the past decade, ending 2010-11, the seeing in India is a natural transition,” sector has been witnessing a drop in
total capital invested by private sector life Mark Tucker, group chief executive and the premium collection. During October-
insurers was over $7.5 billion, of which president, AIA, recently said during an September last year the first year
50 per cent or close to $4 billion was interview with Business Standard. premium collection for the industry was
invested to fund accumulated losses, Accordingly, most private life insurance down by seven per cent.
which have largely been incurred to companies have dropped their This slide continued in the first six
create distribution capacity,” the report expansion drive and and adopted months of the financial year as well,
said. various rationalisation exercises in terms when insurers witnessed a 21.35 per
cent drop in premium collection. Given
WHERE WE STAND
the changes in the regulatory stance,
GWP Estimated Share of NBAP ROR McKinsey expects that the Indian life
(in bn $) CAGR global GDP margins (2004-09) insurers will shift their focus towards
GWP in % growth in % in basis desigining products providing long term
(2010-15) (2010-15) points savings and protection for the economy.
Japan 378 -1 2.8 NA 25 “The current low levels of protection in
India indicates that the upside for growth
China 114 18 28.3 30-60 118 in the industry remains significant.
Taiwan 64 2 1.1 18 5 This will entail a significant shift in
the proposition of the industry — from
South Korea 52 5 2.8 20-44 74
deriving short-term investment linked
Australia 33 5 1.7 10 166 products to increased focus on meeting
India 57 13-14 10.3 18 -27 the long term savings and protection
objectives of the economy,” the report
GWP: Gross written premium till 2010 NBAP: New business adjusted profit
ROR: Return on reserves Net profit divided by statutory reserves Source: McKinsey said.

26 The Actuary India December 2011 Indian Actuarial Profession Serving the Cause of Public Interest
From the Desk of
CHAIRPERSON -
Advisory Group on
Accounting and
Solvency - Insurance
and Pension Funds -
K S Gopalakrishnan
ks.Gopalakrishnan@aegonreligare.com
F ormed in September 2010, the
functions of the Group include
addressing issues related to accounting,
financial reporting and solvency in
pension funds and insurance. Ours is
perhaps not a well known group because
we do not necessarily deal with current
burning issues.
One of the key tasks the Group undertook
was to provide IAI’s views on the
Exposure Draft on Insurance Contracts.
The International Accounting Standards
Board, in 2001, started a project to
develop principles based standards that
can be applied across the globe. The
intent is to make financial statements
consistent between geographical
boundaries. Whilst significant progress
has been made with several financial
reporting standards, the one relating
to insurance is turning out to be a little
complex to resolve quickly. The objective
of the Exposure Draft on Insurance
Contracts is to develop a high quality
standard addressing the recognition,
measurement, presentation and
disclosure requirements for insurance
contracts. The IAI’s submission to the
IASB is available on the websites of IAI
and IFRS (www.ifrs.org).
The Group followed up its activities with
respect to IFRS by hosting a seminar
‘IFRS in Insurance and Pensions’ on
17 October 2011. This was a well
attended event with eminent speakers.
Presentations are available on the IAI
website.
International developments in areas of
financial reporting (IFRS), shareholder
value reporting (Market Consistent
VNB and Market Consistent VNB) and
regulatory solvency (Solvency II in
Europe) will have significant impact
in the way we view and understand
insurance and pension businesses.
Our Group has lot more work to do and
I hope to see us developing papers for
the IAI.
Associated with these international
Indian Actuarial Profession Serving the Cause of Public Interest
developments, which will certainly have
a bearing on us in India, we need to
plan ahead for creating the right skill
sets for actuaries, through developing
reading material and conducting regular
workshops for gaining practical insights.
This could emerge as a big employment
opportunity, as we are already
witnessing in some European countries.
I welcome ideas from the readers as to
how our Group can play an active role
here.
As part of the well thought initiative of
our President, our Group articulated
its vision, mission and strategic plan to
achieve these.
The Vision of the Group is to make the
Indian actuarial profession the globally
recognized leaders in the management
of financial and other measurable risks.
Mission statement of the Group – As the
Advisory Group of the IAI in matters of
solvency and accounting, the Group will
a. Develop the expertise and skills of
members in the areas of measuring
risk based capital and financial
reporting
b. Harness the expertise of the members
and other experts to establish
the Indian actuarial profession as
thought leaders in the area of risk
based capital at global level
c. Contribute in public debates via
participation at various forums at
domestic and international levels
to put across the profession’s
views as well as build a strong and
vibrant brand of the Indian actuarial
profession.
The strategic plan to achieve the
above includes:
a. Short Term (next 12 months)
i.
Stay updated on IFRS
developments, prepare IAI
response and create awareness
amongst members of the
profession
THE DESK OF
FROM
ii.
Stay updated on global
developments in solvency and
risk management, and create
awareness amongst members of
the profession
iii.
Conduct seminars with wider
participation (actuaries,
accountants and other
practitioners in the areas of
financial reporting and risk
management) and steer quality
papers at GCA
iv.
Establish relationship with
relevant structures within the
ICAI
b. Medium/Long Term (beyond next
12 months)
i. Help IAI create the profession
as a brand that stands for
“high quality work and thought
leadership in measuring capital
adequacy”.
ii. Conduct workshops / round-
tables with cross section of
experts (e.g. CFOs, CROs,
Appointed/Chief Actuaries) from
insurance and pensions.
iii. Ride on the branding to expand
scope for members to work in
areas beyond conventional work
streams through role models,
engagement with employers and
regular publication of research
work.
iv.
Ongoing engagement with
regulators and professional
organizations to be maintained,
and developed deeper, so that
the actuarial profession achieves
the ‘top of the mind’ position as
experts for consultation.
v. Provide inputs into the education
course curriculum so as to review
the relevance and importance of
advanced tools for measuring
risk based capital and financial
reporting.
There is a lot more for our Group to do!
The Actuary India December 2011 27
 Case of Other Misconduct in Relation to Member of
Matters
the Institute Generally
C. R. THAKORE (Complainant) V/s NALIN KAPADIA (Defendant)
Disciplinary Proceedings
This matter is being publicized in accordance with the decision of the Executive Committee of the Actuarial Society of India
(predecessor to the Institute of Actuaries of India (IAI)) in its meeting held on 4th March 2003 applicable to all such cases and
keeping in view IAI’s membership requirements of the International Actuarial Association.
Disciplinary
A llegations:
Mr. C. R. Thakore (membership
no 00189) vide his complaint dated
22nd July 2010 and his letter dated
26th August 2010 had alleged that Mr.
Nalin Kapadia (membership no 00093),
during the period that he was President
of Actuarial Society of India during 2001-
02, visited office of the then Actuarial
Society daily, or almost daily consequent
of which the total conveyance expenses
shot up to ` 7822.00 (` 782.20 +
` 7,039.80) during 2001-02, as against
`2,839.50 (` 284.00 + `2,555.50)
incurred during 2000-01.
Mr. C. R. Thakore had earlier sent
his letters dt. 18th September 2007,
7th May 2010, 27th June 2010 and
9th August 2010 in this connection.
The Prosecution Director wrote to the
complainant on 13th August 2010 that
unless the complainant sends a fresh
format of the complaint duly filled in
and also his specific complaints in one
letter (i.e. instead of referring to various
letters including those written in 2007)
the Prosecution Director would decline to
register his complaint in terms of Rule 5
(b) of the Actuaries (Procedure for Enquiry
of Professional and other Misconduct)
Rules, 2008.The complainant thereafter
consolidated all his complaints in his
letter dt. 26th August 2010.
Investigation
The Prosecution Director wrote to
Mr. C. R. Thakore on 6th September 2010
asking him to give specific evidence to
show that the conveyance expenses
referred to in his complaint were actually
claimed and paid to Mr. Nalin Kapadia
during 2001-02 for travelling from his
residence at Borivali to ASI office at D N
Road, Mumbai 400 001 on various days
or almost daily as alleged.
Mr. C R Thakore vide his letter dt. 13th
September 2010 replied by stating that
specific evidence of the payments made
to Mr. Nalin Kapadia would be found in the
records of the Actuarial Society of India.
The Prosecution Director wrote to
Mr. Nalin Kapadia, the defendant on
17th September 2010 conveying the
allegations made by Mr. C R Thakore
along with a copy of letter dt. 26th August
2010 and the complaint in the format
under Rule 3(1) dt. 26th August 2010,
along with photo copies of Schedule i
and j of the Annual Report of Actuarial
28 The Actuary India December 2011
Society of India for the year 2001-02 and
requested the Defendant to submit his
written statement within 21 days from
the date of receipt of the letter.
Mr. Nalin Kapadia, the defendant filed
his written statement dt. 5th October
2010 which inter alia stated as under.
Neither the Disciplinary Committee nor
the Council has jurisdiction to enquire
into the alleged misconduct concerning
the administration of the erstwhile
Actuarial Society of India.
the alleged misconduct occurred 9-10
years ago and as such the same is
barred by limitation under Rule 12 of
the Actuaries (Procedure for Enquiry
of Professional and other Misconduct)
Rules 2008.
Mr. Nalin Kapadia quoted his letter dt.
15th June 2009 wherein he mentioned
categorically that he never claimed
conveyance expenses as alleged. He
had his own car, driver and used his own
petrol for travelling from Borivali to office
of the Society, and
The complainant has not produced a
single voucher or copy thereof showing
the claim of conveyance charges by Mr.
Nalin Kapadia.
Subsequently the Written Statement
dated 5th October 2010 received from
Mr. Nalin Kapadia, was sent to Mr. C.
R. Thakore by the Prosecution Director
on 19th October 2010, asking for his
Rejoinder within 21 days from the date of
receipt of the letter.
Mr. C. R. Thakore, the Complainant vide
his Rejoinder dt. 26th October 2010
mentioned that he had nothing further to
add in the matter.
Mr. Nalin Kapadia, the Defendant vide his
letter dt. 5th November 2010 has inter
alia, reiterated that the Complainant has
not produced any evidence in support of
his allegation.
There was no direct evidence by the
Complainant. And there was a general
denial by the Defendant. At Prosecution
Director’s request, the Accountant
of the Institute of Actuaries looked
into the Annual Report of 2001-02
and the details of the conveyance
expenses incurred during this period.
He submitted a list of payments made
during 2001-02 towards conveyance
expenses in excel sheet running to
5 pages. The lowest paid amount was
` 6/- (` Six Only) and the highest
Indian Actuarial Profession Serving the Cause of Public Interest
` 302/-(Three Hundred and Two only.). It
was observed that not a single payment
out of these was made to Mr. Nalin
Kapadia towards conveyance expenses.
Report of Prosecution Director
The Prosecution Director vide his Prima
Facie opinion dt 25th January 2011
opined that there is no truth in the
allegations made by Mr. C. R. Thakore
and that Mr. Nalin Kapadia is not guilty
of misconduct in terms of clause A (2)
of Part IV of the SCHEDULE (OTHER
MISCONDUCT IN RELATION TO MEMBER
OF THE INSTITUTE GENERALLY) read with
S 31 (Professional or other Misconduct
Defined) of the Actuaries Act,2006.
Opinion formed by Disciplinary
Committee
The Disciplinary Committee in their
meeting held on 12th February 2011
deliberated on the matter and agreed
with the Prima facie opinion of the
Prosecution Director.
The Disciplinary committee was of the
view that the Defendant was not guilty
of misconduct in terms of clause A (2)
of part IV of the SCHEDULE (OTHER
MISCONDUCT IN RELATION TO MEMBER
OF THE INSTITUTE GENERALLY) read with
S 31 (Professional or other Misconduct
Defined) of the Actuaries Act,2006.
Accordingly, in terms of the provisions
of Rule 9(6) of the Actuaries (Procedure
for Enquiry of Professional and Other
Misconduct) Rule 2008 the matter was
referred to the Council for the closure of
the case.
Decision of the Council
On consideration of report dated
7th March 2011 of the Disciplinary
Committee, the Council in their meeting
held on 12th June 2011 held that there
is no truth in the allegations made by
Mr. C R Thakore and Mr. N R Kapadia is
not guilty of misconduct in terms of clause
A(2) of Part IV of the Schedule (Other
misconduct in relation to Member of the
Institute Generally) read with section
31 (Professional and Other Misconduct
Defined) of the Actuaries Act, 2006.
Hence, the complaint was treated as
closed and Complainant and Defendant
were informed accordingly.
Authorised by the President on 21st
November, 2011 to be published in the
Actuary India, December 2011 issue.
 Reliability Engineering and Risk Analysis:
A Practical Guide
By Mohammed Modarres, Mark Kaminskiy and
Vasily Krivtsov; Mercel Dekker, Inc. 1999
Book Number : B13072
Status : Available at IAI Library
Reviewed by Peuli Das
Peuli.das@gmail.com
T he book by Mohammad Modarres,
Mark Kaminskiy and Vasiliy Krivtsov
is a comprehensive treatment of the
subject of reliability and risk analysis,
providing the reader a detailed insight
into both the theoretical and applied
aspects of the subject. While the
applications of the subject can be wide
and varied, and the book may appear to
be a little generic in its definitions of
systems and processes, failure
mechanisms, risk identifications and
methods of risk mitigation, often
borrowing examples from manufacturing
and engineering domains, the content
still remains relevant for every student
and practitioner in the actuarial domain
– whether she is trying to ascertain the
risk exposure in a life insurance portfolio
of individuals in an earthquake prone
zone by applying specific survival
models for the region, or estimate risks
on coverage of automatic car
transmissions for a general insurance
portfolio by investigating its failure
modes or likelihoods, or simply trying to
streamline a reporting process by
eliminating redundancies and limiting
dependencies. In a sense the myriad
concepts and applications caters to the
core of financial and operational risk
management.
The authors themselves point out at the
outset that the treatment of the subject
is guided in a big way by what a university
student would essentially require from a
book like this. Modarres is a faculty in
the University of Maryland whereas
Kaminskiy and Krivtsov are in the
frontline of the subject of applied
reliability and risk analysis in the
industry. Together, they have written
close to 200 professional papers and
Indian Actuarial Profession Serving the Cause of Public Interest
book chapters, and here they use all
their experience and expertise to come
up with a very broad perspective of the
subject, without losing out on the
details. The language is lucid and the
pace easy going. The development of
concepts is adequately supported
through exercises at the end of the
chapters. For the benefit of the reader a
solution book is also available.
The contents have been presented in 8
chapters. However, the book can be
broadly split into two sections. The first
part, spanning chapter 1 to chapter 3,
covers basic definitions of risk and
reliability, laws of probability, standard
probability distributions and estimation
and testing procedures, provide the
reader with the theoretical background
that forms the backbone of the
subsequent chapters. In fact, it comes
complete with all the basic statistical
distribution tables, provided as an
appendix. Here, the authors have wisely
avoided the common pitfall of being too
brief in this matter; many a book
requires the reader to have a parallel
study of the theoretical basics to
supplement the core discussions.
The second part - Chapter 4 onwards, is
where the reader is formally taken into
the world of risk and reliability analysis.
Chapter 4 introduces the concept of
reliability analysis through various
modelling schemes including the block
diagram method, the fault tree, the
success tree and the event tree methods
as also a brief overview of logic diagrams
and FMEA (Fault Mode and Effect
Analysis). Chapter 5 deals with the
analysis of repairable systems while
introducing the concept of availability of
repairable systems. Chapters 6 and 7
BOOK REVIEW
delve deeper into the modelling and
data analysis aspects of system
reliability, where the authors have
touched upon a wide array of concepts
and methodologies, starting from
modelling of software and human
reliability, measures of importance of
the components within a system,
accelerated life models measuring time-
to-failure as a function of stress factors,
to probabilistic estimations of failure
rates and uncertainties within the
system. In spite of the content being
highly theoretical the authors have tried
to make it less overbearing for the
reader by including detailed examples
as well appropriate notes on history of
development of the subject. Finally,
chapter 8 brings together the theoretical
and conceptual developments in the
prior chapters to provide a holistic view
of risk analysis for a system, including
identification of hazards, their risk
assessments, investigating all possible
scenarios that may arise, and the
resulting failure data analysis.
The authors have developed a tool
named RARE (Reliability Analysis and
Rick Evaluator) meant to support
analysis of reliability data and assist the
reader in working out the problems sets
provided in the book. The installation
CD comes attached with the book, and a
user manual is provided in an appendix.
All in all, the book comes across as a
useful read for anyone who is either
planning to learn the subject from
scratch, or simply have a quick brush up
of the basic concepts and would be a
good addition to one’s library.
The Actuary India December 2011 29
SHILPA'S PUZZLES
Puzzle No 164:
If 733 is divided by 10, what will the
remainder be? You may get the wrong
answer if you try to solve this on some
calculators.
Solutions
Puzzle No 159: 17 minutes
Let A, B, C, D have walking speed 1 min,
2 min, 5 min and 10 min respectively.
A + B cross the river : 2 min
A comes back: 1 min
C + D cross the river : 10 min
B comes back : 2 min
11.Sejal Chhatriwala, 12.Jayant Kaul
13. Mitsu Shah, 14. Binita Bhimani
15. Vikas Rathi, 16.Akshara Ravishankar
Puzzle No 160:
1. Rohit Singhal, 2. Sateesh Bhat
3. Superrn Agarwal, 4. Azim Sikandar
5. Ekta Katyayana, 6. Dhruti Dalal
7. Sudhanshu Kalsotra, 8.Gurpreet Singh
9. Ajit Kumar Jha, 10. Manish Kumar
11.Aishwarya R,. 12.Jayant Kaul
13. Sejal Chhatriwala, 14. Mitsu Shah
15. Binita Bhimani, 16. Ganesh Sridhara
17. Pravendra Rajput

Shilpa's Puzzles
Puzzle No 163:
Imagine that you have four kings and
three queens from an ordinary deck of
playing cards.
The object of the game is to arrange
the seven cards in an order that will
result in an alternating pattern of K, Q,
K, Q, K, Q, K. The seven cards must be
held facedown. Move every other card,
beginning with the first, to the bottom
of the deck. Beginning with the second
card, place every other card faceup on
the table to reach the desired alternating
pattern.
Remember, the first card goes to the
bottom of the facedown pile, the second
card goes faceup on the table, the third
card goes to the bottom, the fourth card
goes faceup, etc., until all seven are on
the table.
What is the beginning arrangement of
the cards?
A + B cross the river : 2 min Puzzle No 161:
Puzzle No 160: 1. Sushant Jain, 2. Ajit Kumar Jha
3. Shweta Seth, 4. Superrn Agarwal
17 as the digits of the code are in
5. V. Parasurambabu,
alphabetical order.
6. Prasham Rambhia
Puzzle No 161: Puzzle No 162:
2 ^ (13 – 1) = 4096 ways 1. Suresh Sindhi, 2. Shilpi Jain
3. Sushant Jain, 4. Ajit Kumar Jha
Puzzle No 162:
5. Shreya Chheda, 6. Deepak Trivedi
Writing a three-digit number twice is 7. Superrn Agarwal, 8. Diwakar Kumar
the same as multiplying it by 1,001. 9. H. K. Eswar Kumar, 10. Mahesh Chand
This number has the factors 7, 11 and 11. Ashish Agarwal, 12. Aishvarya R.
13, so writing the chosen number twice 13. V.Parashurambabu,
is equivalent to multiplying it by 7, 11 14.Prasham Rambhia.
and 13. Naturally when the product is
successively divided by these same three
numbers, the final remainder will be the
original number.
Correct solutions were received from:
Puzzle No 159:
1. Abhay Kumar, 2. Rohit Singhal
3. Swaminathan V., 4. Anubhav Adlakha
5. Suparrn Agarwal, 6. Ekta Katyayana
7. Dhruti Dalal, 8. Ajit Kumar Jha shilpa_vm@hotmail.com
9 Manish Kumar, 10.Aishwarya R.

Quotable Quotes
Management
is doing
things right;
leadership Many Happy Returns of the day
the Actuary India wishes many more years of healthy life to the
following fellow members whose Birthday fall in December 2011
is doing
Ramakrishna Devaraja Iyer C. S. Modi
the right things N. N. Jambusaria S. P. Mulgund
S. V. Narayanan Y. P. Sabharwal
T. Bhargava
-Peter F. Drucker (Birthday greetings to fellow members who have attained 60 years of age)

30 The Actuary India December 2011 Indian Actuarial Profession Serving the Cause of Public Interest
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