Dr R Kanan, the incoming president of the Actuarial Society of India and member of the Insurance Regulatory and Development Authority faces challenging times ahead, as he sets out to address issues facing actuaries. By V Jagannathan.

The recently appointed member (Actuarial) of the Insurance Regulatory and Development Authority (IRDA), R Kannan (55), faces challenging times ahead as he embarks on his five-year term with the insurance regulator.

For a start, the non-life sector has just been granted the freedom to price its products even as there are rumblings in the market place.

Similarly, the issue of solvency margin calculations for the life and non-life insurers is assuming greater importance as private and government owned life and non-life insurers are not able to meet these norms.

With the entry in to insurance of more battle-scarred telecom service providers who have sufficient experience in filing cases against the telecom regulator whenever its decisions were unfavourable to the industry, the same scenario could unfold in insurance.

After the passage of the Actuaries Bill 2006 by Parliament, the process to convert the Actuarial Society of India (ASI) into a statutory institute has also started.

In addition there is also a complaint against Kannan before the IRDA.

It is against this backdrop that Kannan has assumed the top post that an Indian actuary could aspire to. On the other hand, he also brings stature to his position by virtue of his qualification and experience.

Dr Kannan is on deputation to the IRDA from the Reserve Bank of India (RBI) where he served as principal advisor and head, department of research on monetary policy.

During 1994-98, he served as adviser in the International Monetary Fund, Washington, and from 1992-94, he was adviser to the governor, Bank of Mauritius, Mauritius.

As the appointed actuary of SBI Life Insurance Company Limited for several years, Kannan also has practical experience in a competitive environment. He has also chaired the five-member 'exempt-exempt-taxed' (EET) committee formed by the union government.

Kannan holds a Masters in econometrics from Madurai University, from where he also acquired an M A in economics. He did his PhD from Bombay University and in 1987-88 he worked as a post-doctoral fellow at the University of Pennsylvania, under Prof. Lawrence Klein, who won the Nobel Prize for economics in 1980.

He has written about 40 research papers and served in eight working groups relating to various aspects of money and finance and is a member of the solvency committee formed by the International Actuarial Association that studied risk-based capital for insurers. In India he heads the solvency committee formed by ASI.

Ask Kannan why he considers himself apt for the present position he would most likely say, "Life insurance is a long-term savings product. The interest rate, mortality and expenses have a bearing on the product pricing and finally on the company's solvency. Life insurers should be in a position to assume an interest rate for the next 20 years.

"Pricing a product competitively without taking the future into account is a recipe for failure. If the interest is low, the premium will be high and there will be no sale of policy. On the other hand if the interest rate is high, the price will be low and there will be high sales and bankruptcy. With my RBI and actuarial experience I can contribute a lot by balancing all the factors."

According to him the first generation of reforms in the insurance sector are over. "It is time to consolidate and pave the way for the next set of reforms."

Here he talks about his short- , medium- and long-term agenda for the insurance sector as a whole. Excerpts from an interview:

Could you compare and contrast your role at RBI and at IRDA?
In RBI, my focus was on the conduct of the monetary policies, tracking international developments and their impact on the Indian economy. I was also responsible for the publication of the annual report, foreign collaboration survey and flow of fund analysis. In IRDA the focus is only on the insurance sector. The main responsibility is product approval, monitoring the solvency level of the insurers and improving transparency.

What are the challenges before you as member (Actuarial) IRDA?
The main challenge is streamlining the product approval process. There is an impression among industry players that IRDA unduly delays the product approvals. This issue is being addressed. I assumed office on December 18, 2006.

Till now 30 products were approved. The next challenge is to enhance the role of appointed actuary who is IRDA's representatives in insurance companies.

The third challenge is to have a dynamic solvency regulation and finally, increase the transparency by having enhanced disclosure standards for insurers. As in banks, we may ask the insurers to publish their balance sheet in news papers.

What are the focus areas on your agenda from the short to the long term?
The short-term agenda is to hasten and simplify the product approval process. The medium-term goal is to examine the issues related in migrating to risk-based capital and the long-term is to tell the regulator to move towards risk- based supervision.

Insurers say that nowhere in the world do regulators approve products and say the IRDA should concern with the market conduct, solvency provisions.
It is six years since the industry was opened up. The industry has lived up to its expectations and has graduated. We may consider giving the insurers the freedom to launch products on their own.

Has the time has come to review the solvency norms? Now even private life and non-life insurers fail to meet the 150-per cent solvency ratio.
Solvency norms are another issue that I would like to focus on. I don't want to reduce the ratio by few percentage points in an ad hoc manner. Having a fixed percentage irrespective of the insurer's size is also not right.

We will the components that enable determination of the solvency ratio. When that is done, a major issue will have been resolved. It should be remembered that in the last three years the weighted solvency ratio has moved up. Further there should be an opportunity for the appointed actuary to track and maintain solvency on a continuous basis.

Lack of actuarial talent is plaguing the industry and more so the IRDA. How do you plan to correct this situation?
Developing actuarial talent is not the direct responsibility of IRDA. It is the duty of the ASI. At IRDA we are going to strengthen the actuarial team by recruiting MBAs and M.Sc graduates majoring in actuarial sciences.

It is six years since the industry opened up and non-life insurers still function with part-time appointed actuaries in contravention of the law. Doesn't this affect the growth of actuarial talent in the non-life field?
All these years, the non- life premium rates were administered and insurers did not feel the need for an actuary. But after de-tariffing non-life insurers have realised the importance of actuaries and are rapidly recruiting actuarial talent now.

In the non- life sector the role of an actuary is important, as any wrong assumption in pricing the product will show up immediately.

The price war in the non-life sector after IRDA's de-tariffing, which has made the field uneven as some insurers are allowed to reduce their rates more than others, affecting their competitiveness and, in the long run, their existence.
It is true that there are many teething issues in de-tariffing. These issues will be studied in detail and the anomalies would be effectively addressed in three months time.

The appointed actuary system is IRDA's own creation, but these appointed actuaries feel that IRDA does not respect their professional record and say IRDA's communications at times sound almost insulting.
After I joined IRDA the tone of communications has changed. Letters to insurers are properly worded. The actuarial team in IRDA has to justify the questions and cannot raise any academic or theoretical queries. I want to enhance the role of appointed actuaries who are representatives of IRDA in an insurance company.

The appointed actuary should become part and parcel of decision-making in a company. At the moment he has no freedom to take decisions.

In order that IRDA's actuarial team to acquire practical pricing experience why not depute them to insurance companies for some time?
In the banking sector the interaction between the regulator and the industry takes place regularly. There will always be an exchange of people between the regulator and the industry.

Right now we will look at the issue of deputing IRDA actuarial team members to companies on a short-term basis so that they also experience the market realities and the factors that are taken into account while designing and pricing a product.

Globally, the regulator is involved in research, which IRDA is not.
It is true that the IRDA's actuarial team is not involved in research. The 8-member team is tightly stretched just approving products. We are in the process of expanding the actuarial team and once the size of the team increases, we will focus on research.