Being the appointed actuary of a life insurer that has 17 crore policies worth Rs4.4 lakh crore ($100 billion) is not a simple job. The challenge is even greater when one has to meet the policyholder's reasonable expectations in a falling interest rate scenario, tackle artificially created solvency margin issues and deal with the company's expanding operations overseas; all at a time when in-house actuarial talent is constantly being poached by the competition.

G N Agarwal is the man in the hot seat. He's the chief (actuarial) and appointed actuary of one of Asia's largest life insurers, the Life Insurance Corporation of India (LIC). A postgraduate in mathematics from Agra University, Agarwal is also the vice president of Actuarial Society of India (ASI) and edits the Actuary India, the institute's professional magazine.

He told Ventatachari Jagannathan that merging the diversity of products, practices as well as improving upon the current system and methods to raise standards is the real challenge of the near future for LIC. Agarwal is presently spearheading a massive effort to calculate the embedded value of LIC's policies. He discusses the challenges he faces. Excerpts from an exclusive interview:

With the opening up of the life insurance sector, what are the new challenges you face?
In a competitive environment, every insurer wants to have unique products, which are not directly comparable with the products of other insurers. The sales force, on the other hand, wants to have every kind of product, so that they don't have to say 'no' to any client. This increases demands on us, particularly so in the case of LIC, which has more than 10 lakh agents.

Owing to the fall in interest rates, old products - particularly, those that have been very popular in the past owing to generous guarantees - need to be repriced. In the past three or four years, a number of such products have been repackaged.

With greater competition, the margins available in products become thinner. Making products competitive in the market and at the same time ensuring profitability is the key to financial viability. An appointed actuary needs to be proactive in such a situation. Finances need to be reviewed and experience monitored frequently.

Does LIC hire outside actuaries to design its products; if not, why?
No, for designing products we get data about client needs from our marketing force that is spread all over the country. So far as pricing is concerned, we have a strong in-house team and don't need any outside actuarial help.

With several crore policies in its portfolio, estimating their embedded value (the present value of future profits) is really a challenge. How are you going about this? Is it possible to calculate the embedded value zone-wise?
It is true that our vast and varied product range and 17 crore policies make it difficult to work out our embedded value, particularly when we are short of the requisite resources. However, we are on the job. We have grouped similar products into representative model points and modeled future cash flows to estimate future capital and profits. Zone-wise embedded value calculation is possible, and it should be very useful.

What is your view on LIC's solvency issues? Shouldn't factors like business strategy, profiles of lives covered, management competency and its risk appetite be considered while fixing the solvency margin of a life insurer, instead of just a fixed formula?
The valuation as on 31 March 2005 is not yet over. As on 31 March 2004, around 111 per cent of the required solvency margin had been provided by LIC. Insurance regulators all over the world are moving towards risk-based capital, instead of a formula approach. In India, presently, this is being discussed. Ultimately, it seems the capital requirement for insurers may be based on risk-based capital.

LIC has designed several types of insurance cover for the public. What are the challenges and pitfalls that need to be negotiated while designing such products?
The masses may not have large sums of money to invest in life policies, and their income stream is uncertain. They prefer more frequent modes of premium payment, as they are unable to invest large sums at a time. However, such policies are subject to a high rate of lapse, which may cause losses to the insurer. Managing the interests of the masses as well as that of the life insurer, and then arriving at a competitive price becomes a challenge for the pricing actuary.

As part of prudent underwriting principles, can life insurers ask a prospect for genetic information?
Presently, I feel, no. However, in certain countries, there are guidelines for this.

How do you, as a life insurer, view the AIDS threat? What steps can insurers take to protect themselves; can a life insurer exclude the risk of death due to AIDS from the policy purview?
A life insurer can exclude the risk of death due to AIDS. Some life insurers in India are probably doing this already. LIC, however, does not have such exclusion clause under its policies, though we do not provide insurance cover if a person is already suffering from AIDS at the application stage. We believe exclusion of AIDS deaths is not practical. In India, AIDS threatens mainly the lower strata of society, and many of them do not take life insurance policies. For policies above a certain sum assured, a special medical test for HIV is called for and, if the proposer is found to be HIV-positive, insurance cover is denied.

What new products and segments is LIC looking at now?
LIC tries to introduce new products for all segments, to cover their needs. Wherever we find gaps, we try to fill them quickly.