Asia Pacific Insurance

Transcription

1 Insights May, 2012 Asia Pacific Insurance Welcome to the latest issue of Insights: Asia Pacific Insurance. In this issue we visit two of the key developing Asian markets, China and India, and also take a critical look at two important topics with a high people-related content, namely the development of non-life actuarial resources and wealth management. In the first of these articles, Adrian Liu and Jessie Li, discuss a wide variety of challenges that are facing the Chinese life insurance industry and how companies have responded to these challenges. The topics covered include distribution, capital adequacy, risk management and the availability of technical resources. One particular form of technical resource that is important to both life and general insurance businesses is the actuarial team. And in our second article, we talk with Ron Kozlowski who has invested much time and effort into helping to develop the actuarial profession in Asia Pacific and elsewhere through his extra-curricular role with the Casualty Actuarial Society. In that interview, Ron candidly describes his thoughts on the current status of the profession in Asia Pacific and what he thinks employers should be doing to ensure that both they and the professional thrive going forward. In common with the market in China, the Indian life insurance market has also undergone substantial change over the past few years. As compared with the earlier review of the Chinese market however, our third article takes a more focussed view and concentrates on the sub-market for investment linked insurance plans. This has been an area where a series of regulatory moves has totally transformed the market for such products and thereby also radically altered the life insurance business overall. Rajesh Sabhlok and Vivek Jalan provide an overview of this tumultuous period and of the impacts it has had on the industry. Finally, against a background of several governments in the region giving greater attention to the advisory process, Steve Kean, explores the subject of social trends and their relevance to the selling of wealth management services and products, with a particular emphasis on the communication methods that are being deployed. I hope that you find this issue both interesting and illuminating and welcome any feedback that you wish to provide regarding the content or style of future editions. Editor Mark Birch Director Risk Consulting and Software mark.birch@towerswatson.com If there is any topic you find particularly interesting, you are most welcome to direct your comments to Cisy Yuen Head of Marketing, Asia Pacific Risk Consulting and Software cisy.yuen@towerswatson.com In This Issue 2 What s up in Asia Pacific? 4 Turn headwinds to tailwinds adjust strategies to benefit from the continued growth of the Chinese insurance industry 10 Developing non-life actuarial talent, worth the investment? 14 Life insurance industry in India Life after the game-changing unit linked regulations of September 2010 (910) 19 Is Wealth Management socially acceptable?

2 What's up in Asia Pacific? India Initial public offering (IPO) guidelines have been released, although the recently announced delay to the proposed increase in foreign investment up to 49% has put a dampener on this news for insurers. Amidst weak unit-linked and pension sales and regulatory review of life insurance products, the Union Budget for FY proposes to increase service tax on life insurance and increase minimum death cover limit for tax exemption eligibility. Thailand Vietnam According to the Association of Vietnamese Insurers, life insurance premium increased by 17% during Foreign ownership requirements were revised in February 2008 to limit foreign shareholdings to 25%, with some exceptions for grandfather rules. The Thai insurance regulator has recently responded favourably to requests from the private sector to raise the foreign shareholding limits to 49% to enable insurers to raise fresh capital, and has indicated that changing the foreign shareholding limits would be a priority once the government-backed catastrophe fund is in operation. Malaysia The regulator increased its focus in requiring insurance companies to strengthen its risk management capabilities by issuing the Guidelines on Internal Capital Adequacy Assessment Process, which will take effect from 1 September 2012, and concept paper on Guidelines on Risk Governance, as a consultation paper to the industry prior to fi nalisation. Both standards were issued in Q One of the profound impacts expected under the concept paper is for insurers to establish a CRO position and an independent risk management function. Singapore The Monetary Authority of Singapore has announced a wide-ranging review of the advisory industry under the heading of the Financial Advisory Industry Review (FAIR) that aims to: raise the competence of financial advisory representatives; raise the quality of advisory firms; make financial advice a dedicated service; lower distribution costs; and promote a culture of fair dealing. Indonesia According to Indonesia s Life Insurance Association, the industry expects total revenues will increase by 30% during 2012 to Rp143.8 trillion (approximately US$16 billion) on the back of surging premium incomes arising from the continued expansion of the middle classand a recovery in investment linked business. 2 towerswatson.com If you are interested to know more of the above snippets, contact your usual Towers Watson consultant or respective country representatives, full contact list can be found on page 26.

3 Japan China The China Insurance Regulatory Commission has indicated its intention to develop the second generation solvency regime over the next three to five years, with the overall objective of developing a more robust solvency regime that is scientific, allows for comprehensive risk assessment and management, and in accordance with international trends but taking into account the characteristics of the Chinese insurance industry. A reduction of the base corporate income tax will be introduced gradually from April 2012, reaching the final 5% reduction in Insurers balance sheet will experience temporary losses due to reduced deferred tax assets for the financial results at end-march Also, revised solvency capital rules, which will demand more capital for insurers to stay above the minimum boundary, will become effective at end-march. South Korea New pricing-cashflow-technique will be mandatorily introduced in the market from 1 April, Taiwan On the local and domestic scene, the now localised Nanshan is giving competitors a run for their money in implementing their growth strategy. On the foreign expansion and investment scene, insurers are obtaining their QFII PRC investment quota, but some unable to execute due to inability to meet the required regulatory capital. Hong Kong HSBC has disposed of its general insurance operations in four countries. In Hong Kong the HSBC and Hang Seng business have been sold to AXA and QBE respectively, with a 10-year bancassurance agreement established with each of the two insurers. Philippines The Insurance Commission plans to raise capital requirements for local insurers to improve their competitiveness in the Asia-Pacific region. This will lead to consolidation among smaller players. Australia Draft new capital standards for insurers, due to come into effect on 1 January 2013, have been released by the Australian Prudential Regulation Authority (APRA). Separate pieces of legislation have recently passed parliament, both of which faced strong opposition, to increase governance of the provision of financial advice (including banning commissions on many products), and increase the rate of compulsory employer funded retirement savings from 9% of salary to 12%. towerswatson.com 3

4 Turn headwinds to tailwinds adjust strategies to benefit from the continued growth of the Chinese insurance industry Grow larger, grow bigger has been the mantra of growth in the past decade for the Chinese life insurance industry. 10 years ago, there were only a handful of life insurance companies while there are now more than 60 life insurance entities (including pension and health companies), with more waiting for approval to commence operations. Premium income has increased more than 10-fold from RMB85 billion in 2000 to RMB1,104 billion in 2011, an annualised growth rate of 26%. The main factors contributing to this growth include the general growth of the Chinese economy over the past decade, rising per capita income, low insurance penetration and density, urbanisation, and an increase in the awareness of the needs and benefits of insurance. In 2011, a series of challenges became more prominent for the industry as a whole, causing companies to reassess their business models in the evolving environment. In his first policy speech as the new chairman of the China Insurance Regulatory Commission (CIRC) in January 2012, Xiang Junbo said that despite the good growth of the insurance industry in recent years, there are still significant inadequacies in the insurance industry relative to the expectation of society; deep-rooted issues cannot be overlooked and need to be resolved quickly. In this article, we will examine in more detail some of these challenges, including sales setbacks for both agency and bancassurance channels, unfavourable capital markets, capital adequacy and lack of suitable human resources, and their implications. We will highlight some developing trends in areas such as risk management, product and service innovation and in transaction activities. Distribution Challenges Agency Channel Since AIA China introduced the individual agency distribution model in China in 1992, this channel has become a key distribution mechanism for life insurance products. The total number of agents increased from around one million in 2001 to around three million by the end of 2010, reaching such a scale that an inevitable slow down has started, with annual growth rates of 28%, 27%, 14% and 12% in 2007, 2008, 2009 and 2010 respectively. Previously, most companies simply relied on an increasing number of agents to generate new business, and at the time, even if agents were able to sell just a few policies each, this would contribute to companies top line (which was and still is the focus for many companies). The quality of agents tended to be of secondary importance. In 2011, some of the largest companies as well as smaller companies saw their number of agents decline for the first time. Furthermore, the agency turnover rate has remained high over the last decade. It is not surprising to observe an agency retention rate of 30% (or lower) to 40% in the first year for typical life insurance companies, with very few agents able to stay on for more than three years. Poor retention is a result of the previous approach to simply recruit to increase the size of the agency force (without necessarily focusing on the quality of the agents recruited), the poor reputation of life insurance agents, increasingly onerous qualification requirements (which is ultimately good for the industry), lack of career path and the availability of relatively more attractive career options. Moving forward, a more professional agency force is starting to emerge that should better ensure business quality, focus on sales, increase in productivity and, critically, service policyholders more effectively. 4 towerswatson.com

5 Figure 1. Number of agents in the past six years Thousands 3, % 27.43% 30% 3,000 2,500 2,000 1, % % 25% 20% 15% 10% 1, % 5% 500 0% Source: China Insurance Yearbook No. of agents Growth rate Bancassurance Channel The bancassurance channel was fi rst introduced in China in the late 1990s and its importance as a life insurance distribution channel has risen rapidly. Today, this channel is still characterised by the many-to-many model whereby banks sell products from multiple life insurance companies, and life insurance companies sell their products through multiple banks. From 2005 to 2010, life insurance premium income sold through banks rose from RMB90 billion to RMB440 billion, with bancassurance s share of the total life insurance market rising from 25% to around 45%. This increasing trend was disrupted in 2011 when the China Banking Regulatory Commission (CBRC) issued a regulation requiring commercial banks to prohibit insurance companies sales people selling insurance products within bank outlets, in order to protect bank customers interests. At the same time, CBRC placed a restriction that each bank outlet can sell life insurance products from no more than three life insurance companies. In early 2011, CIRC and CBRC issued a joint regulation to further regulate bancassurance sales. Bancassurance Sales Regulations Number of Products Sales People Information Disclosure Misleading Behaviour Each commercial bank outlet can sell insurance products from no more than three life insurance companies. Sales people from insurance companies are not allowed to sell insurance products in bank outlets. Only bank staff with appropriate qualifications as insurance agents can sell insurance products at banks outlets. Sales people should fully inform customers of the characteristics, attributes and risks regarding the insurance products they are promoting. Sales people should not misleadingly sell products by means of prize giving, lucky draws, rebates, or giveaways of material objects or insurance policies. Sales people should not mix insurance products with saving products, mutual fund products or other wealth management products. Sales people should not simply compare the investment returns on insurance products to the above-mentioned products. Sales people should not overstate the returns on insurance products. Source: CIRC towerswatson.com 5

6 These regulations have had a signifi cant impact on bancassurance sales in 2011, with total new business premium dropping around 15% in 2011 compared to Moving forward, companies will need to focus on developing deeper relationships with banking partners, including training and developing bank staff for bancassurance purposes, designing tailored products and assisting banks to extend their relationships with customers. Exclusive relationships are likely to start to emerge, particularly given some banks now directly own major stakes in life insurance companies. Incentives must therefore be created for banks and insurance companies alike to work together to create win-win situations. Capital Adequacy Challenges 2011 was also a tough year for life insurance companies capital adequacy. The unfavourable capital markets caused investment yield deterioration and signifi cant unrealised (and realised) capital losses. Coupled with the capital consumption from rapid business expansion and increased competition for policyholders and distributors, many companies, including the largest ones, needed to raise capital through various means, including capital injection from shareholders, reinsurance, funding from markets and through issuing of subordinated debt. Taking subordinated debt issuance as an example, a range of companies issued subordinated debt that in aggregate exceeded RMB50 billion in 2011 alone, amid new regulations issued by CIRC to tighten the eligibility criteria for issuing such debt. This amount is signifi cantly larger than in 2009 and 2010, where the total subordinated debt issuance in the industry was around RMB5 billion and RMB10 billion respectively. With companies continuing to issue subordinated debt, life insurance companies may face signifi cant repayment pressures when these instruments mature. Capital calls on existing domestic shareholders have also become more challenging given that shareholder return expectations have often not been met, leading to their reluctance to commit further capital, and that the current economic environment might mean shareholders themselves need to conserve capital for their other businesses. Issue Date Company Term (Year) Nov 2011 China Life 10 Dec 2011 China Pacific Life 10 Sep 2011 New China Life 10 Sep 2011 Ping An Life 10 May 2011 Taikang Life 10 Aug 2011 Sino Life 10 Sep 2011 Happy Life 10 Feb 2011 AEON Life 10 Dec 2011 Guo Hua Life 10 May 2011 Sinatay Life 10 May 2011 Hua Xia Life 10 Amount (RMB million) 30,000 8,000 5,000 4,000 2,000 1, Source: CIRC Rising interest rates and equity markets In the last two years, the People s Bank of China (PBOC) (China s central bank) raised interest rates fi ve times (e.g. fi ve-year bank deposit rate was raised from 3.6%, the rate at December 2008, to 5.5% in July 2011). While this has benefi ted insurers investment performance somewhat, it has also made life insurance products relatively less attractive to bank deposits and other wealth management products, given the maximum guaranteed rate on life insurance products of 2.5%. This in turn has resulted in some companies experiencing higher than expected discontinuances as policyholders take advantage of the returns offered from alternative products. Equity market performance in 2011 was poor with the Shanghai Composite Stock Index declining by 21.7% during the year, which further exacerbated companies capital adequacy position. 6 towerswatson.com

7 Shortage of Skills Another key challenge faced by insurers is the availability (or lack thereof ) of suitably qualifi ed personnel to manage insurance companies, whether these are people in the management, fi nancial, actuarial, distribution or operational areas. As alluded to at the start of this article, the life insurance industry is still relatively young. With a plethora of new companies in the past decade or so, each of these new companies requires personnel to run and manage the operations. Virtually by defi nition, most personnel would only have 10 years or less in actual industry experience. Short of recruiting from more developed markets (where experience may not necessarily be relevant to the Chinese market), personnel skills will take time and experience to develop, and the critical shortage is a signifi cant challenge to all companies alike and likely to remain so for sometime yet. Consequentially, this poses not insignifi cant operational risks for companies. The life insurance industry certainly faced significant headwinds in However, it is important to put these challenges into perspective. With the challenges faced by the industry in 2011, many companies are continually considering adjustments to their overall business strategies. Up to now, many companies have adopted very similar business models and strategies, with little differentiation. Successful companies in the future will need to distinguish themselves through different means among these could be focus on profi tability (rather than market share), fi nding appropriate customer/ distribution segments and partnerships, specialisation in certain products with greater attention to customer-focused services, specialisation in specifi c distribution approach, geographies or demographics, expense controls, appropriate capital management and risk management or by obtaining, training and retaining quality human resources. In the rest of the article, we highlight some of the emerging trends that could help the industry to further develop on a more robust basis. Emphasis on risk management One key objective of CIRC is for the industry to manage risk scientifi cally. In late 2010, CIRC issued comprehensive risk management guidelines to ensure all life insurance companies adopt a best practice approach to managing all its risks, including investment, insurance, operational and reputational risks. Implementation of the risk management measures could potentially have implications on how companies are fundamentally managed, including in areas such as capital management, investment strategies, product pricing, sales management, etc. Successful companies in the future will need to distinguish themselves through different means. Key requirements of the comprehensive risk management guidelines Appoint a chief risk officer or risk management manager, who should not be responsible for sales or investments. Set up a risk management department, independent of finance, investment and actuarial departments. Set up a risk management committee, establish a comprehensive risk management framework and a risk management information system. Establish an asset liability management system and specify the responsibilities and roles of relevant departments. Establish a process to determine economic capital to measure overall risk position and exposure, by year end Submit annual comprehensive risk management reports. Source: CIRC towerswatson.com 7

8 Product, Distribution and Service Innovation Currently, life insurance products offered by companies are largely similar, with most products sold being savings oriented products with guaranteed returns and relatively low protection coverage. Product innovations to meet customer needs - in 2011, CIRC released interim rules for variable annuity (VA) products for qualified companies to sell these products to meet the needs of customers who are looking for some levels of guarantees together with some upside potential. Up to now, two relatively small companies, namely AXA-Minmetals and Sino-United Metlife have launched VA products while most are adopting a wait-and-see approach. In this interim form, these new rules are not likely to create a significant VA market, but are nevertheless seen as an important step towards allowing newer products in the future. The pure risk market to date has been under-penetrated. In line with CIRC s overall vision to promote protection business rather than products that are mostly savings oriented, this is one area with significant growth opportunities. Looking further ahead, given the change in China s demographics, and with rapid ageing in particular, there are also significant needs for retirement and health products, both of which are currently underdeveloped. Emerging distribution channels - in terms of distribution, companies are looking to explore alternative distribution channels such as independent insurance brokers (several large groups of insurance brokers have formed over the last few years), direct/tele-marketing, alliances (e.g. alliances between unrelated life insurance companies with property & casualty insurance companies or other non-insurance companies), group sales or internet sales (noting that some smaller life insurance companies are already generating significant proportion of their business from these emerging channels). In addition, joint ventures are also trying to better utilise their domestic partners networks. A key challenge remains as to how best to manage these emerging channels together with the traditional channels. Customer service - often overlooked in the market is how policyholders are serviced, both pre-sale and post-sale. This is one area that, with the right customer focus and proposition, companies can distinguish from their competitors and generate greater customer affinity. Servicing has become more important given the high turnover of the agency force, the prohibition of insurance sales people to sell in bank outlets, and increasingly sophisticated and knowledgeable customers. It is also becoming a focus of the regulator. These factors are all forcing companies to be more attentive to customer needs. New Players and Market Integrations With the challenges faced by distribution as well as the relatively less competitive products against other financial companies, competition further intensified in 2011 in terms of competition for distributors and policyholders alike. Other emerging competitive drivers include: Banks entering insurance sector - in recent years, large domestic banks have been keen on entering the life insurance market, and three out of the Big Four commercial banks in China have bought controlling stakes in life insurance companies. It is expected that these insurance companies will start to further utilise their parent banks extensive distribution network in their sales strategy. Newly setup regional companies - in 2010, CIRC gave the green light for the establishment of provincial/regional based life insurance companies. These are companies that are headquartered in provincial capitals and are allowed to run their businesses within that province for the first two years before they are potentially permitted to expand nationally. The companies are typically sponsored by leading provincial entities, and are likely to have some local advantages compared to national companies. Transaction activities - transaction activities among domestic shareholders of life insurance companies are becoming more prevalent. A number of drivers contribute to this trend: Dissatisfaction with the progress of life insurance companies, particularly when compared against shareholders original expectations, could lead to selected shareholders seeking to exit from their stakes. Shareholders own circumstances (partially due to domestic or international economic environment) might result in them needing capital which could be obtained through disposal of their stakes in life insurance companies. 8 towerswatson.com

9 A key lesson is to set realistic shareholder expectations and, in particular, that life insurance is a long term business and requires long term commitment. On the other hand, complete acquisition of one company by another is less likely in China as most companies are still in the developing stages and there are significant integration risks in any actual merger. Having said that, CIRC released regulations in 2011 that provided a mechanism for the transfer of business from one company to another. With some precedents, some multinationals are either considering exiting China (New York Life has already exited) or reducing their stakes (for example, Sun Life) or reassessing their business models. At the same time, there is still a range of multinationals eyeing entry opportunities, with joint venture approvals for foreign companies such as Korea Life, Prudential US, Dai-ichi Life having been provided in Conclusion The life insurance industry certainly faced significant headwinds in However, it is important to put these challenges into perspective. Compared to the last round of industry-wide challenges (the negative interest spread in the late 1990s), industry practitioners now have significantly improved their technical and managerial capabilities to address these issues and there are more ways to mitigate these challenges that were previously not available. While these challenges will remain significant in the short to medium term, the life insurance industry in China is still young and the potential is still significant due to low penetration, demographic changes, room for innovation in products and services as well as the increasingly sophisticated capital markets. Companies should consider these opportunities with a long term view, develop realistic long term business plans and take advantage of their own strengths. The new CIRC chairman emphasised that the coming year would be crucial for the development of the Chinese insurance industry. The regulator would focus more on how to improve industry image, strengthen risk control and increase overall levels of service. The Chinese economy is still in a strong growth phase, and the insurance industry is still fundamentally in a rapidly developing phase. Companies who can take advantages from lessons learned from recent challenges and adjust their strategies accordingly, will stand to benefit from the continued growth of the insurance industry. Contact Adrian Liu is the General Manager of Life Insurance Consulting, China, based in Beijing. Adrian has over 18 years of experience in the life insurance industry and has worked in a wide range of consulting assignments for clients based in China, including actuarial appraisal valuations for M&A transactions and initial public offerings; business strategy consulting including market entry assessment and analysis. Adrian Liu adrian.liu@towerswatson.com Jessie Li is a senior manager and consulting actuary of the Insurance Consulting practice, based in Beijing. Jessie joined Towers Watson in 2004, she has been actively involved in a wide range of projects for clients in China, including M&A transactions, TEV/EEV/MCEV valuations, market entry and solvency tests, etc. Jessie Li jessie.li@towerswatson.com towerswatson.com 9

10 People Developing non-life actuarial talent, worth the investment? Ron Kozlowski Ron Kozlowski, Director & Head of General Insurance Consulting, Asia Pacific, has worked in the insurance industry for over 25 years. Prior moving to Hong Kong, he was with the US insurance industry for 22 years. Ron is a Fellow of the Casualty Actuarial Society (CAS) and sits on the CAS Board of Directors. He currently serves as the CAS Asia Regional Ambassador. Ron has dedicated substantial time and efforts looking to promote best actuarial practices for the non-life insurance industry in Asia. He is a frequent speaker in insurance events and passionate in developing non-life actuarial talent. In this interview, he presented his view on the current status of non-life actuarial talent in Asia and what actions insurance companies should take in this regard, that could ultimately lead to better business performance. Mark: Ron, I m sure you agree that the actuarial profession is experiencing a trend of growth. From your dealings with many non-life insurance companies, do you think that the supply is meeting the demand? Ron: In terms of number of actuaries, Yes, but in terms of utilising the actuarial resources to meet the evolving business needs, No. Let me explain. Yes refers to the fact that there are a significant number of people taking actuarial exams, although many are having difficulties finding jobs. A year or two ago we advertised for an entry level position in our Singapore office. We had 31 applications, most who already had an exam or two. Some of these applicants had started working in other fields or were unemployed from the previous year. In India and China I think that the supply currently exceeds the demand. No refers to the fact that there is a lack of experienced practitioners. In a number of cases, companies have employed very junior actuarial students into senior actuarial roles. Many of those students have not had sufficient mentorship to help them demonstrate how the actuarial department can add value. Many actuaries are filling compliance roles rather than providing higher level assistance. If I were a CEO of a company I would be pushing my actuaries to show me how we could increase profitability and growth. In the Asian market this is definitely possible, although in mature markets it is a much more difficult feat. The work of non-life actuaries is evolving but it will be a long road to catch up to the roles that life actuaries have in Asia. 10 towerswatson.com

11 Mark: So you mean insurers can achieve more with their actuarial resources? Ron: I would believe so. Some actuaries fi ll compliance roles where the management team tells them what reserves they want to hold and then the actuary is just asked to justify those amounts. However, the actuary really needs to let management know what the reserves actually should be and help management understand the potential reserve needs at different confi dence levels. Today, many of the insurance markets are still under tariffs, or rates are based on the market rates. Actuaries should be determining what prices insurers should be charging to achieve a certain return for the investors. If the actuarial rates don t match the market rates then the company needs to develop a strategy to achieve the overall profi tability in other ways. Actuaries could also be employed in other areas of the company including underwriting, marketing, claims, reinsurance, and corporate development. Actuaries are not just number crunchers. They add value most when they understand the underlying business. I have always thought that an actuary needs to meet regularly with the underwriting and claims departments in order to do his or her job well. Mark: It sounds like you believe that actuaries in Asia should also reposition themselves from playing compliance roles to being an integral part of the growth team? Ron: Absolutely. The non-life sector has been lagging behind the life sector in terms of the level of sophistication of its actuarial practices. However a lot of the non-life markets in Asia are improving they have to. The high catastrophe losses that many insurance companies experienced in recent years have raised the importance of risk management practices in understanding the risk and monitoring the aggregation of exposures. Technological advancement has also accelerated the changes. Our reserving software, ResQ, enables actuaries to focus more on understanding and analysing the risks rather than just number crunching - it enables the actuary to help understand the story as to what is going on with frequency, severity and pure premium trends. It is then up to the actuary to explain why these trends are what they are. Rate changes? Changes in product mix? Large losses? Claim department operational changes? Similarly, our pricing software, Emblem, allows actuaries to do more sophisticated rate analyses that can be used to educate underwriters and agents to identify better risks and help the marketing department target the right client segments. Simple one-way or two-way rating analysis is considered archaic in more mature markets. But in Asia it is sometimes the desired state. CEOs that want to outperform their competitors will push their actuarial teams to develop more insight. towerswatson.com 1 1

12 In a nutshell, they should go beyond the numbers. Mark: How can actuaries contribute to the growth of the company? Ron: In a nutshell, they should go beyond the numbers. Numbers are just the means to look at the business, and discern its strengths and weaknesses. By analysing this information you should be able to translate what you have learned into a business strategy and action plans. Let s say, for example, that the actuary can help you determine that certain cars and drivers were more profi table than others. You would then develop strategies to target these risks. In more mature markets, desirable risks are defi ned by using more than just a few categories or using rating/underwriting variables that haven t been considered before - things like credit scoring, number of family members, occupation, or colour of car. Or, for example, your management team would want the underwriters and agents to focus on the business that produces the best combined ratio. The actuaries can help you to determine strategies around varying commissions such that there is encouragement to write the better risks even if the rate structure has restrictions. Actuaries can help with identifying the right questions to ask to supplement the standard underwriting or pricing questions. Often management says that they don t need to focus on pricing, as tariffs are set. That s a wrong mentality. There are lots of things that companies can do. Actuaries should be embracing technology. You ll hear about terms such as predictive modelling, generalised linear models, marketing analytics, telematics, etc. Mark: You mentioned earlier that technological advancement is also a catalyst to the changing environment, how do you see actuaries riding this trend? Ron: When I started my actuarial career 25 years ago, I didn t even have my own computer. I needed to sign up for computer time. Today the world is a different place. Actuaries should be embracing technology. You ll hear about terms such as predictive modelling, generalised linear models, marketing analytics, telematics, etc. A great example would be catastrophe modelling - 25 years ago, very few companies managed their catastrophe risk in the US. Today, companies are looking at risk aggregations on a weekly or monthly basis to understand the risks, revise their growth strategies and understand reinsurance needs. In Asia, companies are starting to embrace more sophisticated pricing and underwriting practices, exploring usage based insurance, and understanding their capital needs or risk profiles across their businesses. In Europe, companies are looking at price optimisation which not only looks at what you are doing regarding your prices but also the actions of their competitors. Think of how airlines price their fl ights or how on-line shops determine what products you might want to purchase next based on prior purchasing choices. To ride the wave of innovation we need to have open minds. 12 towerswatson.com

13 Mark: What would you recommend actuaries to do next? Ron: Actuaries should understand the business from planning to marketing, to underwriting, to expense allocations, to pricing, to claims handling, to policy renewal. They need to understand the company s goals and look for ways to enhance their understanding of the risks. Whether actuaries work in traditional roles or non-traditional roles, this added dimension will serve the company well. I often tell actuaries try to accomplish their roles in 80% of their work week and then dedicate 20% of their time to challenge the status quo, delving deeper into analyses, and understanding the big picture to consider changes that can be made to support the profi table growth of the company. Mark: Insurance companies as employers, what would you recommend them to do? Ron: In Asia, I think that management needs to understand that the actuarial talent pool is improving. There are many lessons that can be learned from other markets and from more senior actuaries. But we need to remember that Asia is different from customer attitudes to products to environmental factors. Recently we were working on an M&A assignment where the acquiring CEO looked at our reserve analysis and said that he had never seen a reserving study so detailed and insightful. We responded that reserve studies can be compliance focused or value added, or someplace in between. The value added report helps management understand impacts of changes in the mix of business, operational changes, underlying trends and other things that provide more insights into the company and its results. On another occasion, we presented an explanation of how predictive modelling could help a company s profi tability and growth. We weren t even a quarter of the way through the slides when the CEO turned to his management team and said we should have done this a year ago!. In addition, employers need actuaries that can communicate both within actuarial circles and to others throughout the company. Investing in the actuarial team developing strong written and oral communication skills always seems to pay off. Insurers want actuaries that have the technical skills but also have communication skills and business sense. Mark: So you believe that developing non-life actuarial talent is a worthwhile investment? Ron: Many international companies have actuaries staffed throughout the organisation. The learning from actuarial programs is quite intense and actuaries can apply those learnings in multiple ways. Actuarial studies often help develop skills in math, statistics, fi nance, and accounting. Many of the insurance managers I know like working with actuaries as they make good team members on strategy committees because of their ability to synthesise data and estimate potential implications. I think that developing actuarial talent offers a reasonably promising return. Ask yourself what a better book of business is worth, or how controlling your exposure aggregations can save a company from paying too much reinsurance premiums or paying huge losses post catastrophes. The value added report helps management understand impacts of changes in the mix of business, operational changes, underlying trends and other things that provide more insights into the company and its results. Investing in the actuarial team developing strong written and oral communication skills always seems to pay off. towerswatson.com 13

14 Life insurance industry in India Life after the game-changing unit linked regulations of September 2010 (910) Unit linked guidelines were first introduced in December 2005 and the first set of major changes to these guidelines were issued in 2009, when the Insurance Regulatory and Development Authority (IRDA) mandated a cap on charges on unit linked insurance plans (ULIP). This set in motion a massive industry-wide exercise of repricing the unit linked products and introducing initiatives to control costs. However, it was the ban on sale of ULIPs by the Securities and Exchange Board of India (SEBI) on the grounds that they had not been approved by SEBI that resulted in the sweeping changes introduced by IRDA by way of the revised unit linked guidelines, which came into effect from 1 September 2010 (the 910 ULIP guidelines). The industry reacted to these changes through further control on costs, overhauling their product strategy, revisiting their profit margins, making changes in their distribution strategy and, in some cases, conducting a complete and/or radical rethink of strategy and operations. On top of the 910 ULIP guidelines, IRDA issued additional guidelines in 2011 that led to a further tightening of norms for all forms of insurance intermediation, including agents, corporate agents, referral arrangements and distance marketing. All of these also contributed their share in affecting the business volumes during the past 12 months. In this article we discuss this tumultuous period for ULIPs in India and the impact it has had on the life insurance industry. Industry s reaction to the unit linked guidelines The industry s immediate reaction was to reprice the ULIP products to comply with the new guidelines. The prevalent structure of unit-linked products with higher allowances for distributor commission/expenses was no longer viable and compliance with the cap on charges specified by IRDA was eventually met by both a reduction in profit margins and distributor commission. The companies were forced to tightly control costs to increase their profit margins. Some of the actions taken by the industry are summarised in Figure 1. Impact on life insurance business As was generally expected, one year after the implementation of the 910 ULIP guidelines, the new business collections have dipped by close to 15%. However, some observers have been surprised to see that this trend of falling year-on-year new business premium has continued beyond August This could well be due to other guidelines and regulations that were introduced last year that also had a bearing on distribution of insurance. A reduction in distribution capacity by way of the further loss of agents and corporate agents last year meant that there were fewer feet on the street to sell insurance policies during 2011 when compared to 2010, thereby contributing to the overall reduction in new business premium last year. It is clear that the unit linked guidelines have significantly contributed to the decline in new business premium collections during October 2010 to September However, we also need to bear in mind the context of the prevailing economic conditions since the global financial crisis in 2008/09 that could have also contributed to the declining proportion of linked business. From its peak contribution to total individual new business premium of 86% during the fiscal year ending 31 March 2008, the contribution of unit linked business steadily declined to 60% in the fiscal year ending 31 March Furthermore, the decline in the contribution of unit linked business has continued unabated during the period 1 April 2011 to 30 September 2011 with the contribution dropping to 34% as compared to 71% in the same period in towerswatson.com

15 Figure 2. Some of the actions taken by the industry Cost control Non profitable branches shut down Excess workforce trimmed Inactive agents pruned Controls on spending increased Prudence and caution encouraged across levels Commission Commissions on unit linked products reduced significantly Overrides being paid to distributors on unit linked products rationalised Some of the actions taken by the industry Products Limited innovation focus on NAV guarantee products Charges levied on additional services provided to unit linked policyholders Focus on single premium unit linked business Minimum premium levels on unit linked products increased Regular premium unit linked pension products disappeared from the market Traditional products came into focus Distribution Agency channel severely impacted mass exodus of part timers/fence sitters Corporate agency channel also impacted focus shifted to traditional products Banks relatively less impacted though the share of traditional products in overall business increased for many banks Group business relatively less impacted registered positive growth Given that cost of guarantees was not included in the charges that had been capped as part of the unit linked guidelines, majority of the insurers came out with revised ULIPs with guaranteed net asset value (NAV), which were quite popular. However, recently IRDA has raised concerns on the sale of NAV guaranteed products, specifically on grounds of the risk of mis-selling through potentially misleading or poor communication and also the possible impact of such products on the securities markets. Given the current regulatory structure, there is very little scope for product innovation and it is the fund performance that is becoming a yardstick for the attractiveness of ULIPs. In the context of the external pressures on the industry as a whole, companies have taken a pause and have re-evaluated their business plans. Capturing market share at any price is certainly not the focus of the insurers and the companies are instead striving for profitable growth, whereas previously some players seemed to be more top-line focused. While companies are revisiting their business plans and sales strategies, the new business volumes have been lower. Selling business through agency channels is typically considered to be costlier than selling through a captive bancassurance partner, although this is not always the case in practice. In a bid to cut costs, the companies have enhanced their focus on developing their existing bancassurance relationships and acquiring new ones, while growing the agency channel continues to be a challenge. As a result, the market share of bancassurance has been steadily increasing over the years at the expense of the agency channel, especially for private insurers. With more banks wanting to enter the life insurance market, bancassurance, which contributed to one-third of the total individual new business premium collections of private insurers during the fiscal year ending 31 March 2011, is well placed to further increase its share of the new business premium and possibly emerge as the dominant distribution channel in the country over the next decade. towerswatson.com 15

16 Impact on pensions business As noted earlier, the biggest casualty of the 910 ULIP guidelines has been the individual life unit linked pensions business, which recorded a decline of close to 96% during the period October 2010 to September 2011, on a year-on-year basis. Individual pensions business had evolved over the years into a largely unit linked based business and the new requirement of offering a guaranteed return on linked pension policies saw insurers, especially private insurers, completely retracting from the market for regular premium individual pension products. This resulted in almost complete loss of revenues from that segment, which otherwise accounted for over one-third of the total new business premium collections of the industry. In comparison, other product classes in the individual life segment collectively recorded a marginal gain of approximately 4% in un-weighted new business premium collections during the said period. Interestingly, unlike the individual segment, pensions as a product class was the lone contributor to the growth in group business segment during the period under review. The linked group pensions business had very marginal variation during the said period and hence the entire growth in group pensions business was on account of growth in traditional non-participating business. This is in some way a reflection of an industry-wide phenomenon wherein new contributions to group superannuation schemes were being redirected to traditional products as against unit linked products. Recent pensions guidelines released by IRDA IRDA recognised the challenges being faced by the industry with respect to developing the unit linked pensions market and recently issued separate guidelines governing pension products, which have come into effect from 1 December We shall now consider some of the major provisions of the pensions guidelines and the associated challenges. Minimum returns to be offered on pension premiums are no longer mandated. Instead, at the time of sale, insurers need to specify an assured minimum non zero return on premium or an assured maturity/death/ surrender benefit (non zero return) on pension policies. While the removal of a mandated guaranteed minimum return on unit linked pensions policy is a welcome move, the new requirements come with their own set of challenges. When guaranteeing a rate of return on linked pension policies, companies need to ensure that the guaranteed rate is comparable to the other long term savings options available in the wider market. At the least, the policyholder would typically expect the companies to provide a minimum guarantee of the long term risk free rate of return. Likewise, the policyholder might reasonably expect the guaranteed maturity value on their pension policy to be equal to or higher than those provided by zero coupon bonds of the same tenure. At the least, the policyholder might be expecting his investment in the unit linked pension policy to provide a positive real rate of return at maturity, adjusted for inflation. While it is understandable that the regulator wishes to safeguard the interests of the policyholders money invested in ULIPs, 16 towerswatson.com

17 guarantees have tended to cause the insurers to be cautious in their investment approach and this, in the long run, will likely result in generating lower returns on these funds. The guidelines specify that the insurance company that contracted the original deferred pension policy would necessarily need to provide the annuity product to the policyholder. Currently the state-owned Life Insurance Corporation of India (LIC) sells the majority of the immediate annuity policies in the Indian market. This is believed to have resulted in a huge longevity risk being built up within LIC. Reportedly to develop the annuity market and in a bid to spread this risk with other insurers, the regulator has mandated that the insurer who sells a deferred pension policy to a policyholder would also need to issue an immediate annuity to the same policyholder at the time of annuitisation. This may not be in the best interest of the customer as he or she does not have an option at the time of vesting, surrender or death to select the annuity provider offering the best rates. However, in the long run, this provision might help in developing the annuity market in India as the private insurers will now develop and attractively price their annuity products, lest they risk losing their customers for deferred pension products. Having done so, they would still need to offer comparable returns as those being offered by LIC, which has enormous investments in high yielding assets, which might not be available for subscription currently. To counter this challenge, private insurers could rely on their fund management capabilities to deliver better returns during the accumulation stage of a deferred pensions product such that at the time of vesting, surrender or death, the funds available to the policyholder are comparatively larger. This would help them to obtain a higher monthly annuity income in absolute terms, even if the annuity rates are themselves slightly uncompetitive when compared to those of LIC. Of course, one must always appropriately take account of and allow for any asset-liability mismatch. Conclusion The period since September 2010 has been a challenging year for the industry as, in addition to declining revenue, the industry also lost a certain distribution capacity. Some of the domestic promoters of the insurance companies have openly stated their desire to sell their stake, in spite of the fact that the valuations of these companies would have suffered on account of the fall in business and prevailing market conditions. This in a way is reflective of the internal growth challenges being faced by the companies and the reluctance of promoters to continually fund the business with no break even in sight in the near term. Towards the end of 2011, IRDA published its IPO guidelines to help companies raise capital to fund their growth. But many practitioners do not foresee domestic insurers approaching the public to disinvest their stake or to raise fresh equity in the short to medium term, as the market sentiments do not appear to be conducive at present. Moreover, without a corresponding increase in FDI limits from 26% to 49%, Foreign Institutional Investors (FIIs) would not be able to subscribe to the IPOs, which could impair the price discovery process for the equity stake on offer. Without the involvement of FIIs it could possibly be a challenge to get the public issues fully subscribed as domestic investors alone might not have the required capacity to absorb the desired entire public issue. towerswatson.com 17

18 However, the silver lining has been that more companies have reported profits this year, which might encourage promoters of other companies to stay invested in this business for a little longer and drive positive sentiments in the market. The bancassurance channel, deferred pensions business and immediate annuities market could collectively emerge as the key drivers of future growth for the insurance industry in the near term. With Punjab National Bank entering into manufacturing by picking up an equity stake in MetLife India, Syndicate Bank being in the final stages of short listing its partner for life market entry and many more banks having expressed their desire to enter this business, we could see the declining trend starting to reverse during The bancassurance guidelines, which has thrown open the bancassurance market to late entrants might also prove be a shot in the arm for the industry. With the new pension guidelines coming into force, 22 pension products have been filed with IRDA for approval. This could help the industry revive the pensions business in the country, which was one of the primary causes for decline in new business collections last year. The bancassurance channel, deferred pensions business and immediate annuities market could collectively emerge as the key drivers of future growth for the insurance industry in the near term. With companies moving away from a top-line oriented approach to a bottom line focus, sales at any cost would be replaced by profitable growth as the new mantra for the industry. Enhancing sales force productivity, reducing costs, improving persistency and increasing the share of customer wallet by cross selling additional products would serve as the foundation on which companies could plan to build quality business and a strong customer base going forward. Contact Rajesh Sabhlok is a senior consultant with the Risk Consulting practice in India. Rajesh has more than a decade of experience in the Indian insurance industry and currently specialises in providing bespoke strategic consulting support to life insurance, general insurance and health insurance companies in the areas of products, markets, distribution and business strategy. Rajesh Sabhlok rajesh.sabhlok@towerswatson.com Vivek Jalan is Director - Risk Consulting at Towers Watson in India and leads the life insurance consulting practice. Vivek has over 10 years of experience in the Indian Insurance industry and has successfully lead several consulting assignments for life insurers in varied areas such as product development and pricing, business planning, actuarial appraisal valuations and business strategy. Vivek Jalan vivek.jalan@towerswatson.com 18 towerswatson.com

19 Is Wealth Management socially acceptable? A moment in time putting things into context The challenges that wealth managers face today are not radically different, in themselves, to the challenges of the past decade. The development and retention of good quality staff conundrum continues and the secret recipe for securing long term client loyalty is as elusive today as ever. What makes today s environment so much more challenging is the continuing impact that the Global Financial Crisis (GFC) is having at a time when society is experiencing radical changes in consumer buying habits as the infl uence of Generation Y increases. The GFC has made us all acutely aware of the elephant in the room, the low levels of trust that clients have, in varying degrees, with the fi nancial industry at large. Clients could accept sub-optimal service and live with a concern over their level of understanding of what they have bought/invested in when they could clearly see that they were making money. The power of a positive and growing net asset value will deal with almost any shortcomings in the client experience. But by 2012 the easy money days pre-2008 are rapidly becoming a dim and distant memory. Making money from fi nancial markets (read creating wealth for clients ) is hard and is getting harder. The major consequence of this fact is that we are all going to have to work much harder at attracting and retaining clients. In this article Steve Kean discusses some of his observations and thinking regarding a macro-level trend that will have an increasingly powerful impact on your business, the social trend. In doing so we will highlight some of the growing interconnectivity that social and technological trends are experiencing and what their combined convergence could mean for wealth management at large. Social Trends This is clearly a complex area. Much has been written about the impact of aging populations and the broader changes in demographics. Many wealth managers already have regional and country specifi c strategies either in place or under consideration that focus on the shift in client needs and the range of products required to meet them. Figure 3. How best to develop a comprehensive, all encompassing strategy? Over-arching needs Accumulation Preservation De-cumulation Products, services, distribution operating model based customer strategy? Annuity Need ($) Endowment Health MRTA Life cover CI Education Retirement income Protection Healthcare ? Lifestages Single DINKY Provider Empty Nester Enjoyer Demographics led customer strategy? towerswatson.com 19

20 We are seeing greater focus on the retirement space as a result, but there is still a significant shortage of products available to tackle the consumer needs. While accumulation products abound, there are still few de-cumulation products specifically designed for the retirement needs of the consumer. Add to that the investment challenge of delivering stable income streams in the post-gfc era, and we see opportunities for an increased share of wallet for the right product correctly positioned to address this need. Members of Generation Y may still see retirement as a too distant future that they do not yet need to consider, let alone plan for. However, as they grow closer and closer to retirement their focus will, inevitably, shift. HSBC research identified consumers recognition of increased longevity, the potential shortfall in people s retirement preparedness is again evident in our research, which suggests that people already understand that increasing longevity will put pressure on them to work longer. Longevity is increasing the need to save, faster than household budgets can accommodate that need. 1 The HSBC report further notes an increase in concerns regarding ill-health and its effects on wealth and finance during retirement. The needs of consumers will, therefore, increasingly go beyond the wealth manager s traditional focus of wealth accumulation. As HSBC notes, multiple products are and will need to be developed by financial institutions to service consumer needs around not only retirement savings accumulation, but also post-retirement income as well as long-term healthcare and wealth transfer for wealthier individuals. 1 At the same time, there is an increasing consumer expectation that their wealth managers can look beyond their traditional focus of wealth accumulation and broaden their propositions to address protection needs. Increased longevity exposes the consumer to a longer period of risk while their wealth is either insufficient for their needs and objectives, or has not been properly structured. Looking at this positively, the GFC has presented wealth management providers with an opportunity to help their clients reassess their future capital requirements in the context of the significant changes that have taken place in their circumstances. The loss of capital and the likely need for larger sums at retirement are major issues upon which customers will increasingly appreciate being engaged. There may not be an easy solution but a willingness to assist can only be positive for long-term relationship building. Why do we need to worry about Generation Y? The great social unknown is what impact this generation will have on the financial eco system as we now know it. The number of members of Generation Y entering the buying population will continue to grow in Asia, especially in the emerging markets, over the next few years. Their needs, attitudes and buying behaviours are likely to be markedly different from those of previous generations: The recent GFC and increased regulation have increased general awareness levels regarding financial products and their risks. Generation Y is generally more financially educated and its members are building a higher level of financial intelligence. Greater access to information via the internet puts more knowledge and empowerment in the hands of the customer, they are more demanding of their products and services providers. Generation Y is more tech savvy and showing a greater disposition to purchase products and services over the internet. There is less expectation that Generation Y will provide for the older age groups in the same way as previous generations; anecdotally it is less family oriented than previous generations with a more self oriented psyche. Some of these indications could lead us to deduce (speculate?) that the typical Generation Y buyer will be a less loyal consumer who is led by their own research to transact with providers who can 20 towerswatson.com Reference and Sources: 1 HSBC The Future of Retirement, The Power of Planning Global Report 2011