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					Actuarial Society of South Africa Convention 2004




          Actuarial Responsibility to
   Current Issues in the Life Product Market




       Colin Dutkiewicz, FIA, FASSA, FPI
           Actuarial Society of South Africa Convention 2004

                          Actuarial Responsibility to
                   Current Issues in the Life Product Market


                          Colin Dutkiewicz, FIA, FASSA, FPI


1      Introduction ............................................................................................................ 1
    1.1     Objective ........................................................................................................ 1
    1.2     Background .................................................................................................... 1
    1.3     Acknowledgements ........................................................................................ 2
2      Actuarial Responsibility......................................................................................... 3
    2.1     Policyholder Reasonable Expectations .......................................................... 3
    2.2     To the Intermediary........................................................................................ 4
    2.3     To the Company ............................................................................................. 4
    2.4     To the Shareholders ....................................................................................... 5
    2.5     To the Industry ............................................................................................... 6
    2.6     Ombudsman for Life Insurance ..................................................................... 6
    2.7     Financial Press ............................................................................................... 8
    2.8     To Society ...................................................................................................... 9
3      Current Issues in Product Design ......................................................................... 10
    3.1     Commission ................................................................................................. 10
    3.2     Universal Life Premium Reviews ................................................................ 11
    3.3     Impairment/Disability Benefits .................................................................... 12
    3.4     Benefit Illustration Agreement (BIA) .......................................................... 13
    3.5     Access to Financial Services ........................................................................ 14
4      Conclusion ........................................................................................................... 15
5      References ............................................................................................................ 16
1 Introduction

1.1 Objective

The objective of this paper is to further stimulate debate on actuarial input into the
current trends in individual life assurance products in South Africa. This subject was
the topic of debate at a panel discussion at the 2003 Actuarial Convention. However
on that occasion the document behind the discussion had not been circulated by the
organization committee before the convention – this resulted in a poor discussion.
This paper therefore presents the issues in a somewhat confrontational manner to
stimulate debate.

This objective was also addressed by the paper entitled ‘Jaguars and Jalopies” by
Mike McDougall, presented at the Actuarial Society convention of 2001. Over the
past 10-year’s there have been several similar papers to question the then
conventional wisdom on product design. However few of them have questioned the
actuarial profession’s responsibility to these issues.

In particular this paper looks at the responsibility placed on the actuary within the life
office, in the context of the key debates and product changes. This issue is important
as the product structures of the last 20 years are being found wanting. Press and
intermediary pressure exists to get clients to switch from the previous universal life
product structure to ‘new-generation’ risk only policies. There seems to be an
inherent problem in the product development process where products are designed for
durations of up to 50 years, but it is in the client’s interest to switch product types
long before that. This might be because of changing public sentiment to the features
and benefits required.

The actuary we are talking about is primarily the Statutory Actuary and the Product
Development Actuary. It also extends to other senior actuaries in the organization,
that are obliged to support both the organization and the other actuary in dealing with
actuarial related issues.


1.2 Background

The content of this paper is based on my experience as a Product Development
Actuary. I have spent 10 years in product development, including group, individual,
risk and investment products. My current position at a reinsurer has further improved
my insight into the generalized issues of Product Development Actuaries in the
industry

I have also discussed many of these issues with a number of Product Development
Actuaries of major life offices, and I will refer to their comments at times.



ASSA Convention 2004                          1                                 August 2004
1.3 Acknowledgements

Thanks are extended to those who volunteered their time to discuss some of the topics
addressed, including Mark van Der Watt, Carl Coutts-Trotter, Petrie Marx, Philip du
Preez, Anthea Tomkyns, Nicky Patchett, Gary Palser and Julie Valentini.

The views expressed in this document are the authors and do not necessarily represent
the opinions of the author’s employer or the profession.




ASSA Convention 2004                       2                               August 2004
2 Actuarial Responsibility

2.1 Policyholder Reasonable Expectations

ASSA Professional Guidance Note PGN1061 (2003 version) was strongly built
around the following:


             “Itis incumbent upon all statutory actuaries to
             ensure, so far as is within their authority, that the
             long-term business of the company is operated on
             sound financial lines and with regard to its
             policyholders’ reasonable expectations” PGN106

However the 2004 version of PGN106 has removed this. While there are still several
references to policyholder reasonable expectations, the duty of the Statutory Actuary
has been altered to have policyholder reasonable expectations born in mind when
doing his reporting. Further he or she must advise the insurer of his or her
interpretation of policyholder reasonable expectations. But it does not require him to
look after the policyholder reasonable expectations.

So the Statutory Actuary must certainly have regard for the products being sold and
the policyholders’ reasonable expectations with regard to the benefits promised. This
concept is emphasized in the corresponding Institute and Faculty of Actuaries
guidance notes, as well as in the actuarial qualification examination syllabus.

In my discussions with Product Development Actuaries, it was clear that they have all
taken to heart the concept of concern for the creation of policyholder reasonable
expectations. However only one or two of these actuaries commented on the need to
worry about the changes in policyholder reasonable expectations of existing
policyholders. We will deal with this in some of the examples in Section 3 below.

For instance, the tightening up of claims management in respect of disability claims
would be appropriate business practice and not involve Statutory Actuary approval.
However it may materially change the policyholder’s reasonable expectations. In the
context of dread disease policies, where the dread definitions have not been
guaranteed, there would be a concern that a change in the definitions would materially
change the policyholder’s reasonable expectations. I would argue that the actuaries
involved should have a professional responsibility to draw attention to this, because
ultimately it will impact on the image of the life insurance industry.




1
    PGN106 (2003). There is also a PGN106 (2004) and a draft revised PGN106 in circulation.

ASSA Convention 2004                                3                                     August 2004
2.2 To the Intermediary

Some controversy surrounds the Life Offices Associations’ (LOA) decision to change
the status quo with regards the Replacement Code. It can be fairly argued by a
broker, that it is in his client’s interest to surrender one policy and effect a new policy,
if the policyholder is in a better position now or in the future. I have heard it argued2
that a universal life policy should be surrendered (accepting a surrender penalty),
because the value of that policy going forward is lower than the value of the replacing
pure risk and pure investment policy. This may be because of new features and
benefits such as new investment funds and switching. If the policyholder passes the
new underwriting then this may well be the case where the new policy has a more
comprehensive list of dread diseases for instance.

So what does this mean to the Product Development Actuary? Is there an onus on this
actuary to worry about the implications on existing policyholders of introducing
newer risk products? I suggest that this actuary should concern him or herself with
providing a migration path for existing policyholders that reduces their loss of money
or benefits. An actuary who tries to do this is in an unenviable position of providing
his or her own thoughts on which benefits are more or less valuable on an actuarial or
subjective basis. The only likely result is to have some brokers agree and others
disagree.


2.3 To the Company

As an employee of an insurance company, the Product Development Actuary is
required to develop products that the company can sell, that are profitable within the
requirements of its shareholders and to do this with both a short term and long term
view.

It has often been said that there is a shortage of actuaries in South Africa. And it is
my experience that organizations in the UK and USA have far more experienced
actuaries doing product development work than in South Africa. Some information
on local experience levels3:

             Position Title                Average        Average post            Average experience
                                            Age           qualification             in current role
                                                        experience (years)              (years)
Chief Actuary/Company
Valuator/Corporate Actuary/Head                42                 9                             6
of Actuarial Services
Senior Actuary                                 40                 11                            4
Actuary                                        30                  2                            3
Senior Actuarial student                       30                  0                            3
Intermediate Actuarial Student                 27                  0                            3
Junior Actuarial Student                       25                  0                            2

2
    Discovery Life conference, Lord Charles Hotel, 2003
3
    Sample of SA companies conducted by 21st Century Business and Pay Solutions, October 2003

ASSA Convention 2004                                4                                    August 2004
It is interesting to note that big jump in experience from Actuary to Senior Actuary
and the decrease in experience to Chief Actuary. The Product Development Actuaries
interviewed for this paper were typically in the ‘Actuary’ category –with the addition
of 2 years across each measure.

To what extent are the onerous responsibilities of balancing market pressures with
policyholder reasonable expectations thrust on inexperienced actuaries, or more often
actuarial students? I suggest that most insurers do not supply enough actuarial and
ethical support to the battling young Product Development Actuary. From personal
experience of my own product development and my involvement with other
companies’ developments, it is not uncommon that the Statutory Actuary does not
provide sufficient technical, experiential and political support to the Product
Development Actuary. Comments made by other Product Development Actuaries
indicates that Sometimes the Statutory Actuary does not have sufficient political
strength in the organization to significantly influence product design direction. This is
not surprising in a strongly distribution dominated company.

McDougall in his ASSA Convention paper of 20014 identified four types of actuary:
The Crusader, the Technician, the Trustee actuary and the Company Man. Is it
possible that the current or past generation of Product Development Actuaries can
only possibly be the Company Man or the Technician by virtue of their relative lack
of experience and lack of seniority and influence in the company?


2.4 To the Shareholders

The share analyst is interested in the likely profit stream and risks undertaken by the
life office. Once these are understood the analyst and shareholder can analyze the
future expected earnings of the company to determine a fair price for the shares.

Between 2001 and 2003 most major insurance companies launched new risk products,
with some closing their existing universal life products. This is somewhat outside of
my experience, but from the small amount of analyst’s literature I have read, it does
not seem that the company has adequately informed its shareholders of the impact of
this change in policy type.

For instance:
    Investment Risk: This risk was transferred mostly to the policyholder under a
        universal life policy, now it is the insurers problem at least until the end of the
        guarantee period. Many offices priced their guaranteed terms for universal life
        using 4% interest, at times when interest rates were 12-15%. Now pricing of
        term products is done with interest rates around 10% when interest rates are
        falling significantly.

         Mortality Risk: again this was transferred to the policyholder under a universal
          life policy since increasing the risk charge to the policy without restriction
          could protect against mortality deterioration on a portfolio. The insurer would

4
    McDougall, M, “Jaguars and Jalopies”, ASSA Convention 2001

ASSA Convention 2004                              5                              August 2004
       only be at an increased risk of the policy fund decreasing to zero before the
       guarantee period was up. Under new term products this risk is the insurers
       without much ability to make changes until the end of the guarantee period.
       This risk now needs to be protected against by conservative mortality pricing
       or reinsurance.

      Expense Risk: similarly the universal life policy charged a changeable price to
       the policy fund, while the term policy provides its priced expense margin with
       no chance to change it until the end of the policy or guarantee term.

      Benefit Risk: where insurers are experimenting with new benefits, e.g.
       impairment benefits, there is a risk that, due to a combination of improper
       marketing and public sentiment, these may become unprofitable. This may be
       because of receiving more claims than anticipated due to extending the
       coverage rather than narrowing it. This is The company is unable to change
       these definitions or its pricing for the duration of the guarantee period.
       Changing rates thereafter is one issue, changing definitions can lead to a whole
       different financial press and intermediary backlash.

To the extent that a material number of new risk products are sold, the balance of risk
bearing between policyholder and insurer in general would tip away from the
policyholder over a number of years as the new portfolio built up. However with
‘valid’ switching into the new risk products because of new benefits and ‘better’
guarantees, this balance could switch even quicker. Is the share analyst and
shareholder community aware of this?


2.5 To the Industry

Products that do not live up to the public’s expectations tarnish the industry’s
credibility, fragile as it may be. Actuaries working in the field have a duty to assist in
protecting against this. To what extent does this duty extend beyond their duty to
their own company to develop and market appropriate products? For instance I
suggest that an actuary who truly believes that impairment products in general are
being marketed inappropriately as replacements for occupational disability products,
should pursue the subject with the life office concerned, with the LOA or via the
financial press.

It is true that several Product Development Actuaries serve on the LOA committees
that address the relevant issues. Is this sufficient to discharge their actuarial duty, or
should they pursue issues through the ASSA committees?


2.6 Ombudsman for Life Insurance

The industry is influenced by the opinion of the Ombudsman, and by the financial
press’ reaction to the Ombudsman’s opinions and rulings.

The role of the Ombudsman is best reviewed from the mission statement:

ASSA Convention 2004                          6                                 August 2004
The mission of the Ombudsman for Long-Term Insurance is to mediate in disputes
between the subscribing members of the industry and policyholders. In doing so, the
Ombudsman will seek to ensure that:
    He acts independently and objectively in advising on any complaint received
       and takes no instructions from anybody regarding the exercise of his
       authority.
    The subscribing members of the industry act with fairness and with due regard
       to both the letter and spirit of the contract between the parties and render an
       efficient service to those with whom they contract;
    He keeps the scale in balance between the rights of the policyholders on the
       one hand and the rights of the subscribing members on the other; and
    Due weight is accorded to considerations of equity.

References to actuarial input in the 2002 Ombudsman’s report include a comment in
connection with the functioning of the Ombudsman’s office, ‘Specialist legal and
actuarial advice is sought from time to time’. There are therefore pressures on such
consulting actuaries to provide objective professional advice to the Ombudsman, for
or against an offending life office. What happens if this actuary analyses a situation
and picks up an area of conflict between policyholders and life offices that may have
general implications? It would be useful for the industry if this sort of case was
published and an industry solution sought.

Judge Nienaber, the current Ombudsman for Long-term Insurance points out5 that the
Ombudsman’s office reacts to complaints, but does not proactively pursue
commonality in cases to find underlying causes, e.g. product design. It would be
useful for the actuarial profession to conduct an analysis on the sources of complaint
to identify policyholder reasonable expectation issues, specifically with regard to
product design to better aid the industry.

In particular Judge Nienaber identified contradictions between extravagant advertising
and service reality as a common source of complaint. This ought to be the Product
Development or Statutory Actuaries greatest source of concern.

A key observation from Judge Nienaber is that ‘changed future expectations should
be communicated’ to policyholders. Judge Nienaber followed this comment very
shortly with the comment that he did ‘not want to venture where actuaries roam’. If
the Ombudsman does not, and the actuarial professional will not take up this
communication, then it is unlikely that anyone will.

The following list of risk products issues were mentioned in the 2002 Ombudsman’s
report:
 Dread Disease wording, in particular organ donation benefits to specifically state
   that these cover recipients, not donors. (And I have heard stories of needing to
   make sure this refers to human organs only).
 Disability definitions, particularly marketing literature vs. policy document.
 Death benefit fraud, particularly suspicious death claims in Ghana and Uganda
   without adequate evidence.

5
    Address to the LOA Convention, 2004

ASSA Convention 2004                        7                               August 2004
   Non-disclosure repudiation: the key issue here is ensuring material non-disclosure,
    rather than merely procedural non-disclosure. Luckily this is an area that is
    getting much airtime in the financial press.
   ‘New era disability products’: Specific reference was made to the dispute in the
    industry between ‘certain members of the long-term insurance industry and an
    insurer that offered a ‘new era’ disability product’. The Ombudsman’s office has
    declined to provide comment or opinion on the likely future implications of this
    style of product. It did note with concern that even an insurance broker selling the
    new type of product had not understood its impact on his or her own future
    claiming ability and closed with the statement ‘A failure to understand this and
    communicate it to a proposer for insurance can be tantamount to mis-selling’.

The mission of the Ombudsman extends to the ‘spirit of the contract’. Thus the
Product Development Actuary would need to ensure that the fine print of the policy
that is designed to protect his pricing does not deviate from the ‘spirit of the contract’.
However the spirit of the contract depends to a large degree on the advertising, the
marketing material and the sales process and explanation of the product to the
policyholder. The classic example would be the dread disease policy that is marketed
as paying out when you have a heart attack. Now a study of standard definitions will
show that only a certain type of heart attack is covered, and that survival for a period
of time is also required. Does this mean that the spirit of the contract is not going to
be upheld at claims stage? Remember at the end of the day, the Ombudsman operates
on the contra proferentem rule, i.e. the decision goes against the party responsible for
drafting the documentation.

Since the ruling of the Ombudsman became binding, the implications of the
Ombudsman’s opinion are now a critical requirement in evaluating the
appropriateness of a policy design. This may well be a consideration in arguing that
functional impairment disability cover is ‘better’ than occupational disability benefits.
This is because the Ombudsman will have no choice but to agree with the decision of
the life office on the basis of clinical evidence for the impairment, but may have cause
for conflict with the ‘subjectiveness’ of an occupational disability assessment.

I suggest that this requirement puts a greater pressure on the Product Development
Actuary to check the adequacy of policy wording and claim administration to ensure
that the policy will be maintained in accordance with the ‘spirit’ of the contract.


2.7 Financial Press

Many actuaries will see themselves as understanding the complexity of life products
very well. They are in a strong position to provide education to others on the current
and future implications of these products. Thus it is likely that the financial press
would be interested in hearing the views of actuaries on current product trends. The
credibility that the financial press places on these views depends on the actuary’s
ability to deliver them clearly. It will also be influenced by the lack of bias in the
actuary’s views despite the strong propensity to bias depending on the actuary’s
employer. The individual actuary or the insurer may build up a track record of being
accurate in their predictions of what may happen.


ASSA Convention 2004                          8                                  August 2004
2.8 To Society

It could be argued, particularly within the transitional society of South Africa, that
professionals with skill, financial resources and influence, such as actuaries, have a
duty to assist the society in transition. Rather than just providing products and
services that are currently demanded, it would be useful for the society if these
professionals applied their minds to providing appropriate solutions.

In the context of the South Africa risk market, it is thus appropriate that actuaries
apply their minds to providing solutions to pressing current and future social issues.
Professional Guidance Note PGN106 includes “The essence of a profession lies in
upholding its standards, technical and ethical, in the public interest”.

Discrimination is a societal issue. The actuarial profession has applied its collective
mind to this topic, both with convention papers (Tom Moultrie 1996) and formal
studies (CSI Committee, ASSA Task Group Paper 2002).




ASSA Convention 2004                        9                                August 2004
3 Current Issues in Product Design
In this section we will look at a sample of the product issues that face the industry at
present. These can be split into those issues relating to policies in force, and those
relating to potential issues from current product sales. This sample is presented based
on the results of a survey of several product development actuaries, with additional
comment by the author.

According to McDougall (2001)6, “Life assurance actuaries pricing risk products
operate in a market where, as a general rule:
 Clients do not understand the financial consequences of risk events;
 Clients do not understand the products they purchase;
 The consequences of current pricing decisions are not apparent to the consumers
   for many years;
 The product is intangible at the point of sale;
 The complexity and intricacy of products is such that few, if any, consumer
   champions and journalists are able to fully comprehend them, or explain them to
   the general public;
 The core marketing channel for these long-term products is through
   intermediaries whose incentives and rewards are strictly short-term.”


3.1 Commission

A common argument on commission of regular premium business is as that the
current maximum commission regulation is inappropriate since commission is paid on
a policy life span of 27 years (whole life policy) when in reality it is not going last
more than 7 years as this is the average duration of a policy.

Now I believe this argument can be challenged as follows:
 Just because the formula that is used to calculate commission uses a term of 27
  years, doesn’t imply that anyone from the policyholder to the broker to the insurer
  presumes that this is the intended term. Indeed with no disclosure, or disclosure
  of merely the amount of commission paid, it is evident that the intermediary is
  being paid Rx in cash for getting the case on the books.
 I believe a reasonable expectation of the policyholder is that the intermediary is
  being fairly paid for his work. The policyholder can then either reasonably
  anticipate that that intermediary will be around for some time to maintain the
  policy, or that that policy doesn’t require maintenance. The needs analysis has
  been done, it has been put in place for its purpose and will just continue until
  needed. I believe this argument held when universal life policies were sold and a
  portfolio such as smooth bonus was chosen and there was no anticipation of
  portfolio switching. It also holds true for a pure risk product where the
  contingencies insured have been costed, understood (even if not with full medical
  understanding) and chosen.

6
    McDougall, M, “Jaguars and Jalopies”, ASSA Convention 2001

ASSA Convention 2004                              10                          August 2004
So I contend that the current commission calculation mechanism is not against
policyholder reasonable expectations. It is reasonable that the policyholder will:
     accept the advice given, and
     assume the policy sold is the correct one, and
     expect some after sales support for a few years after the sale, but
     would then expect the salesman to either stop giving support, or to be trying to
       sell them something else.

However should the reader believe otherwise, then I would ask what the actuarial
profession has done about it? If there is a key cost and incentive element of the
product sale process that is creating a serious mismatch of reasonable policyholder
expectations from reality, then the actuarial profession should be putting some weight
behind changing it.


3.2 Universal Life Premium Reviews

A number of industry spokesmen have commented on the possible premium increases
likely on old universal life policies. The Product Development Actuary who priced
the product 15 years ago knew that he was pricing for a guarantee that the policy
would survive with some value until the end of the guarantee term. Thereafter there
wasn’t much to worry about as the fund value then would more than likely be
sufficient. He also knew that it would take increasing expense charges or far lower
investment returns to make this guarantee cost money for the insurer. However it is
not clear whether he anticipated that if the policy got close to the guarantee biting,
that this would also mean a significant premium increase to cover the then appropriate
expenses and mortality charges.

What did the policyholder reasonably expect? Besides expecting to get the great
returns indicated by the policy value projections, he or she probably also expected that
at worst, after the guarantee period, the premiums may have to be adjusted 10%,
maybe 20%, up if things had gone really badly for the insurer.

One assumes that the Product Development Actuary at the time applied his or her
mind to the problem adequately. What is not so clear is whether the Statutory
Actuary or the Product Development Actuary did what they should have when it
became apparent that there was a divergence between policyholder reasonable
expectations and reality. Again McDougall wrote about this at the ASSA convention
in 2001, and there has been financial press attention to the issue. Has there been an
actuarial professional response in general, or a response to manage policyholder
reasonable expectations by any particular company?

Comment from one Product Development Actuary was that this situation was not so
bad where the original universal life policy had been priced as a whole life policy
since the reason for this sudden change was due to adverse experience. However
where the universal life policy had been priced on a shorter term, then this was
negligent on the part of the company concerned. It was his contention that some
companies had done this.


ASSA Convention 2004                        11                                August 2004
I am aware of several companies that have looked at migration paths from their old
universal life policies to new risk and investment policies, but I am not aware of any
success in this process. At least one office has not had success with this because of
reduced commission on the replacing policy, since the intermediary can just churn the
policy unofficially and get full commission.


3.3 Impairment/Disability Benefits

There seems to be a growing concern amongst Product Development Actuaries about
the increasing level of complexity of individual life rider benefits. In particular with
the new ‘Impairment’ products where the list of contingencies that will result in a
benefit payment are several pages of medical conditions. Publicly this was
commented on by Anton Gildenhuys of Sanlam at the 2004 LOA Convention7.
Gildenhuys refers to ‘overheating innovation’ where the innovation speed and
complexity exceeds that that can be coped with. In particular he refers to the ability
of the intermediary community to adequately incorporate this into their best advice.
Now some would argue that this is a little arrogant of the actuarial profession to
underestimate the insight of experienced qualified intermediaries, but most of the
Product Development Actuaries I have spoken to shared this sentiment.

A key issue raised by Product Development Actuaries is the issue that on these riders,
the actuary needs to rely far more heavily on other specialists then in the past.
Certainly critical illness products required medical input, but eventually everyone was
familiar (or thought they were) with standard Heart Attack definitions. The new
impairment lists leaves every actuary accepting that their understanding of the
contingencies being insured, and the source of statistics to price this, is far from
perfect.

A related issue in terms of policyholder reasonable expectations is that the branding
and marketing of these products should be consistent with their intention and
operation. There are two debates here:
 Product naming: is the company’s product brand name and short description
   consistent with its practice?
 Scare marketing: is it appropriate to market products on contingencies that are
   rare, e.g. marketing a critical illness product using the scare of Alzheimer’s
   disease were the incidence is very low?

There can be not debating that it is the Statutory Actuary’s role to ensure that the
insurer is aware of the resulting policyholder reasonable expectations. While all the
Product Development Actuaries I talked to had concern in this regard, none of them
seem to be taking any sort of stand to limit the problem. This leads us back to the
political power of the Product Development Actuary within the organization, and the
support or responsibility of the Statutory Actuary in this regard. One actuary stated
that this issue could only be solved by industry standardization of products.

A further comment is that insurers have proliferated these products, but it has taken
the introduction of FAIS to get the intermediary worried about deciding which benefit

7
    LOA Convention, Arabella, August 2004

ASSA Convention 2004                        12                                August 2004
to sell as most appropriate. Each Product Development Actuary I spoke to alluded to
the need for their product range to be well marketed to identify which benefit was
appropriate in which circumstance. Not many admitted that they were ensuring that
this was being done, or had any part in verifying that it was been done. At least one
actuary admitted that it was ultimately the actuarial departments responsibility to do
this.


3.4 Benefit Illustration Agreement (BIA)

The BIA was introduced in the 1970’s. According to Desmond Smith, one of the
initial drafters of the agreement, it was required to counter intermediaries making
outlandish projections of possible policy values that would certainly create unrealistic
benefit expectations. This appears to be a sensible reaction to the then market
conditions to protect from the divergence of reality and policyholder reasonable
expectations. However when inflation and likely investment returns decreased, the
BIA interest rates failed to drop as quickly as the rates did. Thus to return to Judge
Nienaber’s comments, the industry failed to communicate changed future
expectations to the policyholder.

Was the actuarial profession in general, and the Statutory Actuary in particular
negligent in not ensuring that the reasonable policyholder expectations were changed?
There are two questions here:
   1) Are maturity value expectations being inappropriately set in nominal and not
       real terms?
   2) Should the professional requirement to ensure the company is aware of the
       Statutory Actuary’s interpretation of policyholder reasonable expectations
       have the reverse requirement to manage policyholder reasonable expectations
       in line with the operation of the company. This is particularly where changing
       environmental issues will lead to a policy benefit change that may not be
       obvious to the public (in this case falling inflation).

I would suggest that the answers to these questions are:
   1) Yes maturity values set in nominal terms are a problem, but the issue for
       insurers wanting to remedy the situation is the values illustrated by competing
       bank and unit trust products.
   2) Yes the profession should take a stand and instruct its members to advise the
       insurer of required communication to its policyholders to manage
       expectations.




ASSA Convention 2004                        13                                August 2004
3.5 Access to Financial Services

Given that the actuarial profession has a core requirement to promote the public
interest, and that a current hot topic is the provision of financial services to previously
un-serviced communities, what should be done?

It seems that in some quarters, the comment is that the industry has not applied itself
to supplying services adequately. The opponents of this argument would say that the
considerable brainpower and resources of the insurance and intermediary industry
have certainly addressed this issue. If there were a way to do this profitably then it
would have been developed and implemented. However, in an environment of
increased compliance costs, smaller policy size distribution (whether intermediated or
dis-intermediated) is not viable. This argument concludes that there are certain
barriers to the success of this. Legislative removal of these barriers (e.g. reduced
compliance requirements), or provision of incentives (e.g. tax breaks), would then
release the creative and entrepreneur spirit of South Africa’s sales force.

The reality of this debate is beyond my experience, but my question is the extent of
energy applied to this from the actuarial profession. Certainly actuaries are involved
in the attempts to find solutions through their employers and the LOA committees, but
very little from the profession itself. This is either the logical conclusion of ‘too few
hands on deck’, or a major strategic fault of the profession.




ASSA Convention 2004                         14                                  August 2004
4 Conclusion
From the discussion in Section 2, I believe it is clear that the actuarial profession has a
duty to consider policyholder reasonable expectations. Practically it is better that this
extends to informing the insurer of consequences, but this is a reduction from the
onerous position of having to manage policyholder reasonable expectations. In
addition the profession has a duty to be proactive in identifying and fixing issues of
public interest. While this is statutorily and professionally regulated to apply to the
Statutory Actuary, I believe it is clear that a large amount of this onus expands to
include other senior actuaries within the insurer, in particular the Product
Development Actuary.

From the examples in Section 3 I believe there are 2 sources of concern:

   1. New products: actuarial product development is politically driven by
      distribution factors within most companies. Where these developments are
      going to lead to unacceptable market conditions, the actuarial voice is not
      strong enough to avert problems.

   2. Existing products: inadequate professional attention and action is expanded on
      managing policyholder reasonable expectations. When it is evident that
      circumstances have changed and the policyholder reasonable expectations that
      have been built up are no longer appropriate, the policyholder needs to be
      informed. This is generally due to the vastly changing nature of the economic
      and industry environment beyond what could reasonably be anticipated at the
      time of the original product development.




ASSA Convention 2004                         15                                  August 2004
5 References

   The Ombudsman for Long-term Insurance, Annual Report 2000, 2001 and 2002
   Professional Conduct Standards (PCS) of the Institute and Faculty of Actuaries
   Actuarial Society of South Africa, Professional Guidance Note 106 (PGN106)
   McDougall, M, “Jaguars and Jalopies”, ASSA Convention Paper 2001




ASSA Convention 2004                      16                               August 2004

				
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