IRDA member (actuary) P A Balasubramanian discusses the roles and challenges the actuarial supervisor has to take into account
Chennai: "The role of an actuary in a regulator's office is two-fold - protecting the policyholders by ensuring the insurer's solvency, and equitably treating all policyholders," says P A Balasubramanian, member (actuary), Insurance Regulatory and Development Authority (IRDA).
Balasubramanian says the insurer's solvency is ensured through the mechanism of minimum solvency margin - the difference between the value of assets owned by a life insurer and the value of all its liabilities - calculated by a factor-based formula. As to the equitable treatment of policyholders, the actuarial aim is to achieve a broad equity among the different classes and groups of policies by controls while minimising unintended cross-subsidies.
Starting his insurance career as an assistant administrative officer with Life Insurance Corporation of India (LIC) in 1965, Balasubramanian steadily rose to the level of appointed actuary and executive director before joining IRDA.
"In a public sector one cannot expect geometric progression," says this statistics graduate, who an Actuarial Society of India (ASI) fellow and an Institute of Actuaries, London, associate.
At present he assists the IRDA chairman in regulating and promoting the orderly growth of the Indian insurance industry (primary and reinsurance) through various regulations and monitoring the insurers.
So how does this sixty-year-old professional feel about his new role - scaling the summit? "Learning never ends in the actuarial field. But career-wise I reached the peak when I became LIC's appointed actuary; this is just an extension of that."
At LIC he dealt with all aspects of actuarial functions - product pricing, valuation of life business, related actuarial investigations, reinsurance and investment management. This has enabled him to understand and have a deep insight into actuarial and investment management of an insurance company - both at the micro and macro level.
In an interview with domain-b, he talks about the challenges an actuarial supervisor normally faces. Excerpts:
How does the actuarial supervision differ from a well-developed insurance market with that of an evolving market like ours?
In a well-developed insurance market, the actuarial supervision systems and procedures are well established. Specialist actuaries focus on specific areas like life, non-life, pensions and health insurance. Compliance may not raise significant issues needing different treatment between insurers. But in an evolving market like ours, there is a dearth of adequately trained actuaries with the regulator. The actuary is forced to cope with a larger area, covering all classes of insurance, and areas of supervision have to be prioritised.
At the same time, complexities of a developed market are not found here. Besides, the big difference in size and the state of stability between existing companies and the new companies need to be recognised; the application of the regulation needs balancing between the two.
What are the challenges here and how do you overcome them?
Regulations to enable a smooth running of insurance companies - including registration of insurers, disclosure requirements, periodical returns for review of working and solvency of insurers, and valuation of liabilities and assets system to monitor and supervise through offsite and onsite inspection - have been put in place.
The challenge, now, is to ensure adherence or compliance to regulations and guard the interest of policyholders. An 'actuarial review panel' has been set up to look into the actuarial returns and to take care of adherence to provisions of legislations and guidance notes as well as to develop better appreciation of the regulator's views by CEOs of companies and appointed actuaries.
In the non-life area the availability of actuarial expertise itself is a challenge. The involvement of the actuary at present is limited to certifying the provision of reserves for 'incurred but not reported' (IBNR) claims and certifying the premium rate with respect to non-tariff products.
In reinsurance the challenge is to enforce compliance of regulations while balancing the requirement of individual companies and the interest of the nation with regard to the retention of a maximum cover within the country.
Should we not consider factors like business strategy, profiles of lives covered, management competency and their risk appetite while fixing the solvency margin of a life insurer instead of just a fixed formula?
Insurance regulators across the world agree that the approach to evaluating risk and determining the capital must be changed as the existing approach of using static ratios do not work in today's complex environment. There is an agreement that a new approach must be developed to relate the capital requirements directly to the specific risks and risk management processes of an individual company.
But, the following practical issues need to be considered:
1. The new approach calls for use of statistical modelling and it raises issues related to quality and ease of use of models.
2. Necessary data of exposure may not be available as increasing complexity of the model involves increasing data requirement and higher costs.
3. It requires a high degree of judgement, both in assumptions made and in interpretations of results.
A reliable database is important for the regulator for effective supervision. Is IRDA equipped with that?
Today, life insurance companies are capturing relevant data through their information technology systems. On the non-life side, the Tariff Advisory Committee compiles some data from what it receives from the four government companies. But the insurers have a long way to go in capturing every data in a needed format not only for determining their premium rates but also for provisioning.
IRDA has initiated a project connected with motor insurance and road and vehicle safety. The plan is to collect and analyse the data on road accidents and motor insurance from various stakeholders for use to make our roads a safer place. But there remains the issue of organising healthcare information for the development of health insurance.