Actuary India Jan 2011

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Published between 10th 15th of every month Posted between 15th 25th of every month

For Private Circulation O

VOL III ISSUE 1, JANUARY 20

Rs.

JAN

UARY

2011

EMERGING RISKS... DARING SOLUTIONS

WPP License No. MR/Tech/WPP-36/South/09-11


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The Actuary IndiaJanuary 2011

Indian Actuarial Profession Serving the Cause of Public Interest

FROM THE CHIEF EDITOR 4NICK TAKET TALKS ABOUT IMPACT OF THE NEW IRDA

(TREATMENT OF DISCONTINUED LINKED INSURANCEPOLICIES) REGULATIONS, 2010, AND NEW UNIT LINKEDGUIDELINES ON LIFE INSURNCE COMPANIES.

FROM THE PRESIDENT 5

LIYAQUAT KHAN WRITES ABOUT 13TH GCA,MEMBER TRACKING SYSTEM AND THE FIRSTCOUNCIL HELD IN NEW DELHI ON 28 DECEMBER, 2010.

FROM THE PRESS

l STRENGTHEN ACTURIAL DEPARTMENTS, 6SAYS INSURANCE REGULATOR

l

IANS - EXPERT ACTUARIES WHO ASSESS 7INSURANCE RISK GETTING YOUNGER

l ECONOMIC TIMES ON PMO ADVICE, 8CORPORATE MINISTRY TO CONSULTCOMPANIES AGAIN ON IFRS

CONTENTS l IAA IAA FUND MEETING IN KAZAKHSTAN 9

l IAA IAA ADMITS CHINA ASSOCIATION OF 9ACTUARIES AS FULL MEMBER

l IAA ELECTION RESULTS FOR 2011 10

l SIGMA STUDY NEW SWISS RE SIGMA STUDY 11HIGHLIGHTS THE SIGNIFICANCE AND POTENTIALOF MICROINSURANCE IN SUPPORTING SOCIO-ECONOMIC DEVELOPMENT IN EMERGING MARKETS

REPORTAGE : 6TH CILA 13

BY SANJEEB KUMAR

SWEDISH PENSIONS UNDER STRESS 17

BY K G SCHERMAN

PUZZLE CORNER 26

CAREER OPPORTUNITY 27

Editor

Taket, Nick

Tel: +91/22/6740-3333

Email: [email protected]

Manager (Library and Publishing)

Rautela, Binita

Tel: +91 22 6784 3325


News Editor

Sharma, Sunil


Puzzle EditorMainekar, Shilpa


COUNTRY REPORTERS

Smith, John Laurence

New ZealandEmail: [email protected]

Burra, Pravin

African Continent


Kakar, Gautam

European Union (EU)


Chung, Phuong Ba

Taiwan, Hong Kong & Japan


Ali, Syed Asad

USA


Cheema, Nauman

Pakistan


Leung , Andrew

Thailand


Disclaimer

Responsibility for authenticity of the contents or opinionsexpressed in any material published in this Magazineis solely of its author and the Institute of Actuaries ofIndia, any of its editors, the staff working on it or "theActuary India" is in no way holds responsibility therefor. In respect of the advertisements, the advertisersare solely responsible for contents and legality of such

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Printed and Published monthly by Gururaj Nayak,Administrative Ofcer, Institute of Actuaries of india at

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For circulation to members, connected individuals andorganizations only.

CORRECTION

Kindly note the correction in the email id of Mr. Denis Plouffe [email protected] in December 2010 issue.


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The IRDA (Treatment of DiscontinuedLinked Insurance Policies) Regulations,

2010, notied on 1st July 2010,and new unit linked guidelines thatbecame effective on 1st September2010, have caused most life insurancecompanies to review their businessmodels and make signicant changes

aimed at increasing productivity whileat the same time cutting costs. Thesechanges have been made across allfunctions within the insurers but with aparticular focus on distribution.

The other impact of the new regulations and guidelines has been to

signicantly raise the prole of lapse and surrender risk amongst the manyrisks to which life insurers are exposed. It is not that this is a new risk; itis just that the new unit linked regulations and guidelines severely limitthe ability of insurers to manage this risk by a combination of adjustingthe pace of charging and surrender penalties. Commission claw back,when practiced, has had limited utility especially at the longer durationsin force.

The emergence of lapse risk as an important risk factor poses a numberof problems to actuaries currently involved in pricing unit linked productsand in the future it will cause difculties for the calculation of embedded

values where there is a signicant amount of unit linked business written

under the new regulations and guidelines.

As with other types of risk, an insurer can protect itself from the uctuations

of lapse and surrender experience about the mean by accepting alarge number of independent risks. However, such an approach cannotprotect the insurer from a change in the mean risk itself, on the contrary,accepting a large number of such risks will only lead to a large loss if themean experience changes adversely.

As an example of this we only have to look at annuities in some overseasmarkets to see the nancial strain that has been caused by systematic

improvements in mortality rates. This strain has been produced bya reasonably gradual improvement in mortality rates that has beensustained over a long period of time.

A more dramatic example would be the losses incurred on mortgagebacked securities. While the US property market was stable the largenumber of mortgages pooled in these securities smoothed out theuctuations in default experience of individual mortgages. But once the

US property market turned down there was a systemic rise in mortgagedefault rates leading to the nancial consequences that are only too well

known to us all.

In the case of lapse and surrender risk it is not difcult to think of a number

of external events outside the control of the insurer that would lead to asystemic change in the mean lapse and surrender rates, for example,

a change in the economic outlook, or a change in the availability ofalternative nancial products, or a change in the tax treatment of nancial

products.

For any risk, a systemic change in the mean experience can have aparticularly dangerous aspect. Just because there might be a change inthe mean experience does not necessarily mean that there will be such achange. Sometimes, the complete reverse happens, the mean experiencecan be stable for a number of years lulling everybody into a false senseof security, and only then is there a change in mean experience. Suchbehavior was exhibited by the default of mortgage backed securities;initially this was a small niche market for specialists, with the largecompanies staying out of the market having concluded that it was toorisky. Over time as nothing went wrong and the small players appearedto be making a lot of money in this market, the big players entered and

it was only when they had a large exposure that the mean default ratesincreased. The possibility of the same sequence of events happening in

respect of lapse and surrender risk is worrying.

A nal troubling aspect of the current concern about lapse and surrender

risk is that it comes at a time when insurers are trying to increasedistribution productivity and cut distribution costs. Past experiencesuggests that when there is management pressure on these distributionmeasures then lapse and surrender rates can deteriorate. Data onchanges in productivity and costs are available almost immediately, butdata on lapse and surrender rates will only emerge slowly over a numberof years. This imbalance in availability of data may cause management tofocus on productivity and costs and not give enough attention to lapses

and surrenders.

When faced with any risk, an insurer has the option to transfer the risk toa third party, or to avoid the risk or to manage the risk.

Historically, re-insurers have not been keen to accept more than whatthey would deem their fair share of lapse risk, and after the recent historyof mortgage backed securities it could be some time before the capitalmarkets are willing to underwrite the lapse and surrender risk on unitlinked life insurance policies.

Unit linked life policies have occupied a dominant position in the lifeinsurance market for a number of years because of their transparentmarket participation and exible features. Consequently, most insurers

will nd the option of avoiding lapse and surrender risk by not writing unitlinked business to be unpalatable.

The most desirable alternative would seem to be a new approach tomanaging lapse and surrender risk. I do not know how this might beachieved, perhaps by an innovative product design, perhaps we need tounderwrite for lapse and surrender risk, but actuaries with their knowledgeand experience of risk should be actively involved in this process.

Nick Taket

FROM THE CHIEF EDITOR


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13th GCA is just around: 20 - 22, Feb. 2011. In December 2010issue I talked about it and gave some avour of the things to

come.Things are really happening.

K Ganesans (of L I C of India) award winning entry of the 13thGCA theme: Emerging Risks... Daring Solutions, did catch theimagination in number of ways.

The idea of a Global Round Table (GRT) immediately after theInaugural ceremony emerged out of it. Fifteen global leaders fromdifferent areas of risk management, sitting together and debatingvarious global issues around risk management is aimed at leadingto global dialogue and of course daring solutions. We can lookat all these leaders on the website www.actuariesindia.org (click

13th GCA and on Speakers at the right hand side). The GRT andeight Plenary sessions have around 40+ speakers and along withconcurrent sessions will make an army of some 55+, a formidablenumber to discuss, debate and share ideas. The eight plenarysessions together create an umbrella covering all specic areasof application specically the life insurance, non-life insurance,Health & Care insurance and Pension, Employee Benets & SocialSecurity. No application sits in isolation and hence all the sessionsare of importance to all.

N Rangachari, rst Chairperson of the IRDA had started it all the GCA, rst two were in fact managed from his ofce by actuarial

team around there lead by K Subrahmanyam. Rangachari desiredsound and global debate around issues that were expected to beaddressed through IRDA Regulations. This happened. A whole lotof people were involved in shaping the regulations and ideas aroundthese came to fruition through debate and dialogue in the earlyGCAs particularly the rst two. Thirteen years down the line thingshave changed - lesser global participation and more gathering ofbludgeoning Indian actuarial students, full of hope and aspirations.India has capacity to absorb such hopes and aspirations but islimited by various issues plaguing the insurance sector and non-existence of regulatory mechanism for the Pensions and SocialSecurity. Ten years of open insurance market is hardly a time spanfor the sector to mature; it is just in its juvenility. Why should itbe plagued by (perceived or real) regulatory malnourishments?For variety of right reasons the GCA should go global again andbecome platform for debate and dialogue not only for needs ofIndia but for the globe. The Indian economy is global and so isthe insurance sector. India has potential to become global hub foractuarial and risk solutions. The GCAs have to become platformfor global debate and dialogue so as to provide daring solutions forthe global emerging risks.

Beginning with NO END: 13th GCA, in some way, is a beginning inthis direction. The website: www.actuariesindia.org (13th GCA TAB)

was on stream on 24th December2010 and at the moment of writing

this piece (11:54 am, 10th

Jan. 2011)as many as 1,563 unique visitorshad browsed it from 31 countries.The rst ten: India 1,276, TheUnited Kingdom 65, US 44, HongKong 29, Singapore -26, Australia 24, Germany 20, Japan 12,Bangladesh 10 and Canada 6.

We are going global indeed and its abeginning with NO END.

Some initiatives within the HOME: The Member Tracker

System (MTS) for management of the member data and servicedelivery is on track though about a month behind self-imposedschedule. We expect to be fully on stream by Jan. 2011 end.The Website revamp project is on stream. Vendor engagementcontract for Phase 1 development was signed off on 9 th Jan. 2011for completion within 30 days to be followed by phase 2.

The st Council (after my taking over as President on 4th Sept.2010) met on 28th December 2010 in New Delhi and clearednumber of initiatives;

Mutual Recognition Agreements with Casualty ActuarialSociety and the Society of Actuaries in US.

Off shored Actuarial work in India - Issues and opportunity, aninitiative lead by M Karunanidhi.

Strategy Initiative lead by Anil K Singh and Dr. K Sriram.

CERA Treaty signing and qualication an initiative lead bySanchit Maini.

Review of entry requirement of students, an initiative lead byVarun Gupta.

Position of Marketing Manager for executing number ofmarketing and development initiatives of the Institute.

Certainly lot of things to look forward to, however, in the immediate

let us register for the 13 th GCA and jointly make it a great event.

Regards,

FROM THE PRESIDENT

Liyaquat Khan


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Chennai, Dec 23 (IANS) The Insurance Regulatory andDevelopment Authority (IRDA), the industry watchdog, has askedthe 24 non-life insurance companies to strengthen their actuarialdepartment and have it manned by full-timers.

The authority has asked the non-life insurers to spell their plan ofaction in this regard.

Actuaries are experts in assessing the nancial impact of future

events. They enable nancial decisions by analysing the past,modeling the future, assessing the risks and communicating whatthe results mean in nancial terms.

Speaking to IANS, R.Kannan, member (actuary) at the IRDA,said: The actuarial work for non-life insurers is on the rise. Forexample, from March 2011 onwards insurers have to calculateeconomic capital (sufcient surplus to cover potential losses overa specied time). It involves a lot of actuarial calculations, andwork has to start at least three months before next March. Theinsurers are sending their replies to our letter.

As per IRDA regulations, every life and non-life insurer shouldhave an appointed actuary. While life insurers should have a

permanent ofcial, non-life companies can have a part-timer.Further, appointed actuaries are IRDAs representatives in theinsurance companies and cannot be hired or red without theregulators consent.

Strengthen actuarial departmentS,

SayS inSurance regulator

FROM THE PRESS

Ten years back when the sector was opened up, there was adearth of qualied actuaries in general and specially for the non-life sector.

There are 24 non-life insurers - six of them government owned,four non-life, one agriculture insurance company and one ExportCredit Guarantee Corporation - in India.

IRDA is also considering to scrap the system of part-timeappointed actuaries in non-life sector, Kannan said. But we arenot sure about the adequate supply of actuaries for the non-lifesector, he added.

Kannan agreed only four non-life insures have full-time appointedactuaries and others have part-timers, many of them over 70years of age.

The Institute of Actuaries of India (IAI) - the professional bodygoverning the actuarial profession - is frowning at IRDA forpermitting non-life insurers to hire professionals over 70 years ofage as appointed actuaries.

There is sufcient supply of young actuaries for the non-life sector.The upper age limit for a person to be hired and appointed actuary

as per regulations is 70 years and IRDA is granting exemptions tosome actuaries, IAI president Liyaquat Khan told IANS.

According to IAI, 87 of the 170 actuaries in India as on March 31,2010, are in the age bracket of 26-45.

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FROM THE PRESS

Chennai, Dec 28 (IANS) By V. Jagannathan

Once considered the exclusive preserve of venerable middle-aged

executives, the ofce actuaries -- experts who scientically review the

risks in the life and non-life insurance business -- is getting younger by

the year.

Earlier, Indian actuaries in the age bracket of around 45 years were

hired to head the ofces, said G.L.N. Sarma, the managing director of

Hannover Re Consulting Services India, speaking about these expertswho assess the nancial impact of future events.

But in the recent times the age of recruits for the top post has come

down to around 35 years, Sarma, who in 2007 was himself named

actuary at Bharti Axa Life Insurance at the age of 36, told IANS.

As per Insurance Regulatory and Development Authoritys (IRDA)

regulations, every life and non-life insurer should have an appointed

actuary. While life insurers should have a permanent ofcial, non-life

companies can have a part timer.

Currently, there are 24 non-life insurance companies in India, six of

which are state-run, and 23 life insurers, one of which is owned by the

government -- Life Insurance Corp.

Against this, there are just 216 qualied actuaries who are members of

the Institute of Actuatries of India and practise within the country, 76 of

whom are under the age of 40. In addition, there are 46 other fellows in

all age group who are overseas.

R. Kannan, member-actuary, at the regulatory authority, said only four non-

life insures have full-time appointed actuaries and others have part-timers,

many of them over 70 years of age. But the situation is changing now.

Some of the recent additions to the growing young-appointed or chief

actuaries club are Tania Chakrabarti at the Royal Sundaram Alliance

General Insurance Company, Sharon D Costa at the SBI GeneralInsurance and Abhay Tewari at Edelweiss Tokio Life Insurance.

In terms of pay packets, appointed actuaries are highly paid professionals

commanding an annual price of around Rs.5-7 million on the life side

and slightly lower in the general insurance sector. Expat actuaries

command premium price.

Further, appointed actuaries are IRDAs representatives in the insurance

companies and hence cant be hired or red without the regulators

consent. One of the youngest in the insurance industry is 30-year-old

science graduate Sharon DCosta of SBI General.

I found actuarial science interesting and decided to pursue the course

and complete it in ve years, DCosta told IANS.

On the other hand, 35-year-old Tania Chakrabarti, who holds a masters

in quantitative economics from Indian Statistical Institute, Kolkata, and

working with the Murugappa group, found actuarial science a logical

progression.

Clearing the exams in 2009, she became the appointed actuary of Royal

Sundaram Alliance General Insurance Company in June 2010. Some ofthe other young actuaries are Anil Kumar Singh of Bajaj Allianz Life and

Ashley Edward Rebello of HDFC Standard Life.

According to the institute, it takes at least four years to complete the

course as some subjects are practical-oriented, needing actual work

experience.

With not many new life insurers on the Indian horizon and the existing

ones downsizing their actuarial departments, the non-life insurance

sector is now turning lucrative for the young actuaries, say industry

ofcials.

Non-life companies are becoming more aware of the value that fulltime actuaries with a strong actuarial department can bring to the

organisation in product development, pricing, nancial planning and

portfolio performance analysis, Chakrabarti said.

IRDA has over the last few years strengthened the statutory reporting

requirement from appointed actuaries in non-life industry bringing it

closer to that of life segment. It will become increasingly difcult for a

part-time actuary to cope with the pressures.

Ajay Bimbhet, managing director of Royal Sundaram, agreed and said

there is the need for greater statutory reporting, and scrapping of state-

determined pricing in the motor and commercial business; only a full-

time actuary can improve protability.

Non-life offers more challenge to actuaries as the products have to be

priced based on risks. The market is more evolving now and there are

more regulatory requirements, SBI Generals DCosta added.

According to the Institute of Actuaries of India (IAI) - the professional

body for actuaries - 87 of the 170 actuaries in India as on March 31,

2010, are in the age bracket of 26-45 years.

(V. Jagannathan can be reached at [email protected] and biz@

ians.in)

expert actuarieS who aSSeSS inSurance

riSk getting younger


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on pmo advice, corporate miniStry to

conSult companieS again on iFrS

FROM THE PRESS

Economic Times 14 Dec, 2010, 0438 hrs

IST, Souvik Sanyal & Dheeraj Tiwari,

NEW DELHI: Less than four months before the big

companies switch over to the global accounting

format, the government has called for a fresh round

of deliberation , creating uncertainty about the roll

out of the new global rules of nancial reporting.

The ministry of corporate affairs has called for

comments from the more than 300 companies that

are required to prepare their accounts according

to the International Financial Reporting Standards

(IFRS).

These companies can raise any regulatory concerns

they may have with respect to the new standards

that are to roll out from April next year.

The fresh round of consultations follow a missive

from the Prime Ministers Ofce asking the ministry

to hold further consultations with the companies that

will be affected.

This is the last leg of consultation with the

stakeholders before the converged standards are

notied, an ofcial in the know of development told

ET.

The directive from the prime ministers ofce isin response to the ministrys cabinet note on the

Companies (Amendment) Bill, 2010.

It also calls for nalising taxation issues arising due

to the convergence process in consultation with the

department of revenue.

In our view most of the 300 entities which have

to implement the norms are almost ready, said

Amarjit Chopra, president, Institute of Chartered

Accountants of India ICAI.

The Companies (Amendment) Bill is key to a smooth

shift to the new standard as certain provisions in

the present Companies Act of 1956 will have to be

changed for the transition to take place.

The prime ministers ofce also asked the ministry

to examine the issues raised by the Public accounts

committee chairman Murli Manohar Joshi in a letter

to the prime minister, asking for delaying the new

standards.

We should focus our attention on ... the areas where

Indian accounting standards differ with IFRS, so that

by 2013 or by 2015, the stabilised IFRS can take

into account the concerns of Indian accountants and

Indian companies, Mr Joshi said in the letter.

Countries such as US and Japan have

already deferred IFRS implementation to

2015, the veteran parliamentarian wrote.

The government has already agreed to dilute many

provisions of IFRS, particularly those relating to

notional losses or prots arising out of market

valuation of assets and liabilities.

The convergence requires preparedness not just at

the level of companies that follow it, but also from

the government in respect of regulatory policies.

Some of the regulations that are yet to be aligned

for the convergence include taxation laws, existing

Company law provisions. There need to be specic

provisions provided for under the tax code which

would permit adjustments, said Rajshree Sabnavis,

partner corporate tax practices, BMR Advisors.


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iaa Fund meeting in kazakhStan

iaa admitS china aSSociation oF actuarieS aS Full member

FROM THE PRESS

IAA 2 December, 2010

The IAA Fund supported the Third Actuarial School in Kazakhstan

on Insurance and Pension Research: International Experience.

This event was held in conjunction with the 2nd CIS (Commonwealth

of Independent States) Congress of Actuaries, including a

Professionalism Course, from October 25-30, 2010, in Almaty,

Kazakhstan. The Actuarial Society of Kazakhstan was founded in

2001, ten years after Kazakhstan became an independent state,

and is working hard to establish the actuarial profession in thisrapidly developing country of 17 million people in central Asia.

The previous IAA Fund meeting for Central and Eastern Europe

took place in Moscow, Russia on November 27-29, 2008, at the

invitation of the Russian Guild of Actuaries.

Lecturers in Almaty included David Ingram, incoming Chairperson

of the IAA Enterprise and Financial Risk Committee, on the subject

of CARE (Comprehensive Actuarial Risk Evaluation) and Esko

Kivisaari, Chairperson of the IAA Pensions and Employee Benets

Committee, who spoke on capital requirements for pensions, ERM

for pensions and pensions accounting issues. A third speaker was

IAA 22 December, 2010

The International Actuarial Association (IAA) is pleased to announce

that it has admitted the China Association of Actuaries (CAA) as

its 63rd Full Member association with effect from December 14,

2010. Only three years after it was established, the CAA, whose

President is Mr. Wei Yingning, has a membership comprising 390

fully qualied actuaries, 269 Associates and 1600 students.

Admission as a Full Member association of the IAA follows

a rigorous process that includes reviewing the education

program and ensuring that the applicant association has a

Asta Zviniene from the World Bank. Tarmo Koll represented the IAA

Advice & Assistance Committee as the incoming Chairperson and

spoke about the IAA and the international actuarial profession, as

well as leading a discussion at which representatives of the different

CIS countries shared news and information about the development

of the actuarial profession in their respective countries. The week

ended with a one and half day professionalism course led by IAA

Fund Chief Executive, Chris Daykin.

The IAA Fund provided bursaries for six (6) participants from six(6) different countries in the region other than Kazakhstan and

representatives from three (3) other countries also attended.

Apart from speakers, a total of 47 people attended the 2nd CIS

Congress of Actuaries, 38 of whom were from Kazakhstan. A total

of 59 people attended the Professionalism Course, with 52 of them

being from Kazakhstan.

The IAA owes sincere thanks to the Actuarial Society of Kazakhstan

for hosting the meeting and for the support provided.

To learn more about the work of the IAA Fund, contact the IAA

Secretariat, care of the Chief Executive of the Fund.

Code of Professional Conduct, a formal discipline process,

and a formal process for the adoption of standards of practice,

where applicable. The IAA Accreditation Committee reviewseach of these documents to ensure compliance with IAA set

requirements. The IAA Education Committee ensures that the

associations education programme meets the criteria set out

in the IAA Education Guidelines and Syllabus and that all the

actuaries that will be recognised as attaining fully qualied status

will be required to have successfully completed this programme.

To learn more about membership in the IAA, contact the IAA

Secretariat.


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Armed with so many enthusiastic volunteers from 50 plus

countries and, supported by a dedicated Secretariat, the IAA

can look forward with optimism to contributing to the well-being

of society as a whole.As

the new SG, I share that

goal and I invite you to join

us in pursuit of that noble

objective. Together we can

make a difference.

To learn more about the

work of the IAA, contact the

IAA Secretariat.

IAA 5, January 2011

The International Actuarial Association (IAA) is pleased to

announce that, at its meeting on October 12, 2010 in Vienna,

the Council of the IAA elected the following individuals to

serve as Ofcers of the IAA effective January 1, 2011.

Cecil Bykerk, President (one-year term ending December

31, 2011)

Jean-Louis Mass, Secretary General (four-year term ending

December 31, 2014)

Desmond Smith, President-Elect (one-year term ending

December 31, 2011)

Paul Thornton, Immediate Past President (one-year term

ending December 31, 2011)

Cecil, a resident of the United States, is the Penultimate

President of the Society of Actuaries and a past member

of the Board of Trustees of the American Academy of

Actuaries. He is past chairman of The Actuarial Foundation,

currently serving on its Board. He was appointed to the

Actuarial Standards Board in 2003 moving up to Chair

at the beginning of 2006. Over the years, he has served

iaa election reSultS For 2011

FROM THE PRESS

Jean-Louis, a resident of Canada, is a Past President of the IAA

(2006) and of the Canadian Institute of Actuaries (2001-2002). He

has also served on several IAA committees as a member, and

Chaired several committees within the IAA, namely the Committee

on Professionalism (2003-04), the Executive Committee (2006),

the Strategic Planning Task Force (2005), the Nominations

Committee (2007), the Task Force on Sections of the MemberServices Committee (2008), and the Task Force on Advice and

Assistance and on Actuaries Without Borders (2010).

January 1st is also the beginning of the term of ofce for the

Secretary General. Yves Gurard retired on December 31, 2010

after serving as the 1st SG of the IAA for more than 13 years. It

will be a challenge to follow in his footsteps, but it is an honour

and privilege to have been elected by my peers to serve in this

capacity.

on several IAA committees as a member, and Chaired the

Education Committee (1999-2004) and the Strategic Planning

Subcommittee of the Executive Committee (2010).

As I look forward into 2011, I am excited about continuing the

legacy of my IAA Presidential predecessors. Through his tireless

efforts, 2010 President Paul Thornton launched several initiatives,

several of which were accomplished during his term of ofce, but

much remains to be done. The IAAs ve strategic objectives

give us a clear path to follow. Important decisions remain to be

made with respect to ournew governance processes

and major transition needs

to take place with respect

to the newly formulated

standards setting process.

I pledge to help direct this in a

transparent and democratic

manner and look forward to

your continued support as

I move forward on the IAAs

agenda.


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FROM THE PRESS

15 December 2010

Zurich

Swiss Res latest sigma study Microinsurance - risk protection for

4 billion people emphasises the relevance of microinsurance as

an effective and viable risk management solution for low-income

individuals. Microinsurance, which has the potential to cover up

to 4 billion people, concentrates on few risks today, but its scope

is broadening. The interest of insurers in microinsurance lies very

much in its future potential.

Microinsurance refers to insurance products especially designed

for low-income individuals. The premiums and coverage are

kept at a low level in order to make the products affordable

and attractive to those policy holders, yet remain commercially

sustainable. Currently, the risks covered by microinsurance are

heavily tilted towards credit life insurance, but the market couldexpand to cover areas such as health, agricultural insurance, term

life insurance, affordable pension products and other savings

products.

Microinsurance supports socio-economic development and

insurance growth in emerging markets

By reaching many individuals who were formerly excluded from

insurance, and thereby reducing the vulnerability of low-income

individuals and protecting their income streams, microinsurance

helps to improve social stability and supports broad-basedeconomic development.

Amit Kalra, author of the new sigma study stated: For insurers,

microinsurance creates an opportunity to tap into new markets

and build a strong brand value that can be used for selling

conventional insurance products in the future. Kalra added: It is

a win-win situation: Insurers help those who urgently need access

to insurance. This in turn supports the long-term economic goals

of insurers.

Huge untapped market potential at the bottom of the

pyramid

The microinsurance market could generate premiums of up to

USD 40 billion. Over the last decade, insurers, NGOs, mutuals

and community organisations have launched microinsurance

programmes across product lines and major markets. The keydrivers supporting this activitys growth have been increasing

micronance penetration (in particular microcredit), the active

involvement of government in certain markets and need-based

product offerings.

Kalra said: The Asia-Pacic region is the fastest growing and

the largest microinsurance market. Microinsurance has also

grown considerably in African and Latin American countries

despite these being relatively smaller microinsurance markets at

present.

As the microinsurance industry expands, organisations mustincreasingly cope with rising risk exposure and risk accumulation.

This will lead to additional needs for capital and reinsurance

solutions that leverage both traditional products and tailor-made

innovative solutions. The latter includes, for example, weather

derivatives and parametric nat cat solutions.

Market potential and challenges

While credit life, a mortality cover bundled with microcredit, is

the largest selling microinsurance product, there is a strong need

for a higher and broader level of protection that can be met withsavings/term life, health and agriculture microinsurance.

Some of the challenges that microinsurance faces are: Insufcient

infrastructure, the absence of specic regulatory provisions for

microinsurance, and the lack of exposure and risk data. Insurers

must also nd suitable partners for distribution and claims

management. Products must be adapted to client needs as well

as the cultural background of the prospective microinsurance

buyers.

new SwiSS re Sigma Study highlightS the SigniFicance and

potential oF microinSurance in Supporting

Socio-economic development in emerging marketS


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12



Governments can foster the development of microinsurance

through favourable regulations and public private

partnerships

The key objectives for governments and policymakers in this

regard should be:

improving access to nancial services for the low-income1.

population;

the development of a sound regulatory framework;2.

lowering of barriers and developing efcient markets; and3.

increasing awareness and ensuring consumer protection.4.

Kalra further said: Policymakers can deploy multiple approaches

to develop the sector, including adopting specic microinsurance

regulations, providing nancial support and sponsoring insurance

schemes targeted to the extremely poor population.

Governments in partnership with private players can offer

effective alternatives

For the extremely poor population or markets which otherwise

are not commercially viable, governments through public private

partnerships (PPP) can effectively channel subsidies through

microinsurance programmes by fully funding or subsidising

premiums. Kalra added: The governments contribute to

developing comprehensive natural disaster solutions and

formulate collaborative approaches such as PPPs toeffectively deal with the nancial consequences of large-scale

natural disasters on the low-income population.

Kalra added: NGOs, international developmental organisations

and donors have played an instrumental role in aiding the

development of the microinsurance sector. The contribution of

social-minded entrepreneurs in the eld of micronance and

microinsurance has also been inuential in encouraging privateplayers to participate in the socially-driven businesses and

thereby create new market opportunities for the bottom of the

pyramid population.

Notes to editors

Swiss Reinsurance Company Ltd

Swiss Re is a leading and highly diversied global reinsurer. The

company operates through ofces in more than 20 countries.

Founded in Zurich, Switzerland, in 1863, Swiss Re offers

nancial services products that enable risk-taking essential toenterprise and progress. The companys traditional reinsurance

products and related services for property and casualty, as well

as the life and health business are complemented by insurance-

based corporate nance solutions and supplementary services

for comprehensive risk management. Swiss Re is rated A+ by

Standard & Poors, A1 by Moodys and A by A.M. Best.

How to order this sigma study:

The English, German, French and Spanish versions of the sigma

study No 6/2010, Microinsurance risk protection for 4 billion

people are available electronically on our sigma section. The

versions in Chinese and Japanese will appear in the near future.

This media information is also distributed by e-mail. To receive

your copy, please contact [email protected]

OBITUARYMr. N S Sastry, 68, a fellow member of

the Institute expired on 12th Dec, 2010in Hyderabad. He had been ailing forsome time and had a long career withLIC of India. Post retirement from LIC,he served with Shriram Life InsuranceCompany.

Mr. N S Sastry is survived by his wife,two daughters and a son. Actuary India condoles his death andexpress deep condolences to his family members and friends.We also pray that his soul rests in peace.

Figure 1: Potential market estimates of the global

microinsurance market


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The Actuary India January 2011

13

Indian Actuarial ProfessionServing the Cause of Public Interest

rEPORTagE

6th cila reportage

Sanjeeb [email protected]

Liyaquat Khan, President, IAI, giving inaugural addressThe Institute of Actuaries of India (IAI) held the 6 th seminar on CurrentIssues in Life Assurance (CILA) on 22nd and 23rd of November, 2010,in Mumbai. The Seminar commenced with a welcome address by AvijitChatterjee, Chair, Life Insurance Advisory Group. The President, IAI, inhis inaugural address stated that the life insurance industry has faced awide variety of issues even within the rst 10 years of opening to privateplayers. He proposed that the Institute should engage in debate on thefuture development of the industry.

G N Bajpaigiving key note address on internal and external issues

The key note address was delivered by Mr G N Bajpai, past chairman ofSEBI and of LIC. In his address he presented both an insiders and anoutsiders perspective. He noted in particular that

The industry faces both internal as well as external issues.

On internal issues:o As a consequence of a low level of nancial literacy,

mis-selling will remain a risk.

o There have been responses to this from the Regulator.However, these responses have put a considerable burdenon insurance companies.

o There is a shortage of skills in the industry and it is not doingenough to address this shortage.

On external issues:

o India is geography with large market potential and the economyis likely to grow in double digit after couple of years.

o However, high ination is a serious issue in India and isstructural in nature, just not a cyclical one.

He concluded his address with the quote learn to live with the presentuntil you learn to live with the future.

Below is a short summary of the sessions held in the Seminar, copiesof these presentations can be accessed at http://www.actuariesindia.org/Presentations/CILA/CILA%202010/CILA6.htm

Session 1: Assured lives Mortality & Morbidity Experience - Findingsof the investigations conducted by the MMIC by Mr. K.P.Sarma

K.P.Sharma presented paper on Assured lives Mortality & MorbidityExperience -Findings of the investigations conducted by the MMIC

The rst session of the conference was on the results of the mortalityinvestigation conducted by the MMIC. Data for the investigation hadbeen supplied by almost all life insurance companies and covered athree year period. Because of problems with the data in respect of unitlinked policies, the investigation had been limited to other than unitlinked plans.

The investigation was done for the usual groups like male/female,medically underwritten or not, geographic origin. The investigationrevealed that the crude rates follow a rapid decline at early ages followedby a hump around young adult ages and generally increasing with age.However, there was a second hump which was observed at around age53. The investigation conrmed the effect of selection on mortality forabout 2 years, and also there was some evidence to suggest that the

selection lasted for 3 years.

Session 2: Issues & Opportunities in writing Conventional &Unitized-with-prot (UWP) business in India by Mr. Ashley Rebello

This session explored various aspects of selling Unitised With Prot(UWP) contracts in the Indian market. The presentation gave a briefoverview of UWP contracts and how they differ from conventional with-prots business, underlining the increased transparency and exibility ofUWP business. This was followed by analysis of recent events in theIndian market that have increased the relative attractiveness of UWPbusiness, both to consumers as well as the insurers. The presentation


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14 Indian Actuarial ProfessionServing the Cause of Public Interest

then focused on some of the issues that need to be addressed to makepar business more viable, highlighting corporate governance and productstructure issues in particular

Ashley Rebellogiving presentation on various aspects of selling Unitised With

Prot (UWP) contracts in the Indian market

Session 3: The Future of ULIPs Round Table

Panel Discussion from Left Richard Holloway, T R Ramachandran,Sanjeev Bajaj, V Jagannathan

Richard Holloway chaired a panel session to discuss the future

of ULIPs. The panel comprised of Mr. T R Ramachandran,MD, Aviva Life Insurance; Mr Sanjeev Bajaj, MD, BajajCapital and Mr. V Jagannathan of Indo Asian News Service.Richard started by making a presentation which highlighted therecent regulatory changes to ULIPs. He expressed a view thatthe real issue may be mis-selling, and he questioned if therewere alternative approaches that could be taken by the regulator/industry to enhance selling practices, as opposed to placingsignicant restrictions on the product that is being mis-sold. The panel highlighted the importance of balancing the needs of theconsumer, distributors and the insurance company, and questioned ifthe recent changes to ULIPs really benet the consumers (as a popularproduct may be withdrawn), or distributors (as commission levelswill fall), or the company (as protability and sales may be affected).Subsequent discussion highlighted that companies had focused toomuch on top line growth, rather than bottom line protability and that thismay have led to mis-selling ULIPs. A view was expressed that ULIPsdo not need to be backed by equities, and that if equity movementsare behind possible mis-selling, other xed income investment fundsshould not be penalized.

Session 4: Operational Risk (OR) Management in Life Insurance byGeoffrey Au and Keith Walter

The two presentations in this topic introduced frameworks onOperational Risk (OR) management. Mr. Au presented on OR, in

particular, the types of losses, risk event categories that should bemonitored and economic capital guiding principles. The presentationhighlighted the data challenges in calibration as well as challengesin generation of scenarios for OR. He briey touched upon differentapproaches of OR quantication including the European Commissionsregulatory approach.

GeofferyAu giving presentation on the data challenges in calibration as well aschallenges in generation of scenarios for OR.

Keith Waltersstalked about the increased role of ERM and companies use of

risk appetite in a recent survey

Mr Keith Walterss presentation started by highlighting the September

2008 crisis and how lack of ERM (including OR management) may havecontributed to certain of these failures. The increased role of ERM andcompanies use of risk appetite in a recent survey were highlighted. Thepresentation also touched upon the following issues:

What issues should be addressed by an organization in dening,quantifying, measuring and managing of risk at enterprise level?

The requirement for a risk assessment framework by anorganization

Guidance on OR from consultation paper 33 of CEIOPS

Session 5: Direct Tax Code Potential implications for Life insurancebusiness by Samit Sawant

Samit SawantShared views on current tax provisions and the draft Direct Tax

Code (DTC) applicable for life insurance area


15/28


15

Indian Actuarial ProfessionServing the Cause of Public Interest

This session covered the current tax provisions and draft Direct Tax Code(DTC) applicable for life insurance area. The focus of the presentationwas how introduction of DTC will affect the life insurance companiesand the policyholders. Under the DTC, policyholders account wouldbe exempt from tax and prots as per shareholders account would bedeemed as income from life insurance business. Companies would betaxed at the general corporate tax rate, income from pension businesswould continue to be exempt from tax and losses could be carried forwardindenitely. Applicability of MAT (20% of adjusted book prots) is notclear. Another feature of DTC is that there is no grandfathering provisionfor past policies. If this is not rectied, then the industry may see masswithdrawals before 1st April 2012.

Session 6: IFRS Implementation in Life Insurance in India: ActuarialAspects by K S Gopalakrishnan

K S Gopalakrishnantalked aboutIFRS Phase 1

This presentation focused on IFRS Phase 1 which makes limited changesto accounting by insurers for insurance contracts while requiring increaseddisclosures. IFRS Phase 1 allows current approaches to continue subjectto certain minimum requirements, however insurers would need to

additionally follow certain IFRS principles. Mr Gopalakrishnan mentionedthat certain areas such as unit pricing and amortisation in the context ofinvestment contracts require action from IRDA and have been highlightedin the Informal Working Groups report to the Authority. Mr Gopalakrishnanalso suggested that the Institute of Actuaries of India should considerissuing the practical guidelines similar to the guidelines issued by theInternational Actuarial Association. Finally, he briey touched upon thekey features of the Exposure Draft on insurance contracts issued by theIASB in July 2010.

Session 7: Universal Life Business by Mr. John Poole

John Poole specically focused on IRDAs draft Guidelines for Variable

Insurance Products

In this session Mr. John Poole introduced Universal Life contracts inthe form they are currently being sold in North America. He noted thatUniversal Life contracts are the most signicant form of business beingsold in North America in the present day.

The later part of the presentation focused on how Universal Life type of

contracts t in with the current Indian regulatory regime. The presentationspecically focused on IRDAs draft Guidelines for Variable InsuranceProducts and how those guidelines can affect viability of offeringNorth American style Universal Life products in India. The presentationsuggested that Indian consumers should indeed have the choice of NorthAmerican style Universal Life products.

Session 8: CPPI strategies and guarantees on ULIPs by Dr AvijitChatterjee

Dr Avijit Chatterjee discusses market consistent valuation of embedded

derivatives

This presentation started with a simple example of the dynamichedging strategy known as CPPI, and of the policyholder propositionthat it enables. The risks arising from the strategy and the policyholderproposition were discussed, with particular reference to PRE, Mass

discontinuance and Systemic risks in capital markets. After a briefdiscussion of more sophisticated algorithms, the presentation turned toreserving for guarantees. It was noted that systemic risks that could arisefrom the widespread use of such liability measures.

Session 9: Need and ability to write protection business by Mr JugParmar

Jug Parmarfocused on the scope of protection business in India

This session focused on the scope of protection business in India with MrJug Parmar giving a refresh of popular protection-oriented products fromaround the world. This included an overview of risks and challenges insuch product types, product differentiation within each product types aswell as recent developments in those areas.


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INTERNSHIP (ONE YEAR CONTRACT)Actuarial students having cleared 3 CT paperwith no experience can apply for internship.

Actuarial team

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ACTUARIAL EXECUTIVE (FULL TIME EMPLOYEE)

Huma Tariq

Phone: +91-8056000884,Email: [email protected]


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Over the years I have been engaged, nationally, as Director General ofthe National Social Insurance board as well as internationally, in ISSA,

the International Social Security Association, with matters relating to

pension systems and pension reform. i

In Sweden during the 1980-ties I worked hard to explain to Swedish

politicians that a reform of the Swedish pension system was necessary.

In the rst half of the 1990s work was dominated by efforts, together

with colleagues at the board, to contribute to the design of a good

reform. At the time I thought this had been successful, with a reform that

aimed to strike a balance between the need for adequate pensions and

nancial sustainability. Consequently I presented the Swedish reform to

other countriesii.

Later I discovered that some features of the reform, as it nally came

out towards the end of the 1990s, were not that sound. There had been

a gradual shift of focus from 1994 when the principles of the reform

were formulated, a shift that lost sight of the need for a proper balance

between the level of pensions, pension age and nancial constraints.

The shift was gradual and not that easy to trace. And early warnings

have been ignored.

For instance, the inexibility of the reform in meeting changes in the

demographic and economic environment has been observed only when

they have occurred, and even then it has not been recognized by those

responsible, be they politicians or public authorities. The so-called

automatic balancing mechanism (ABM) was not contemplated in 1994.

It was not even part of the enactment of the new system that passed

Parliament in 1998. Moreover, the funded part as envisaged in 1994 was

quite different from what was enacted in 1998. And even in 1994 there

were features of the reform that deserved criticism. In several reports

to international fora and in articles in Swedish morning newspapers and

periodicals as well as books, I have tried to identify the problems iii.

Swedish ofcials naturally tend to focus on the strengths of the reform,

i.e. its nancial sustainability1

, as do representatives of nance ministriesthroughout the world. But there is much more to say. A nuanced, in

depth, international debate is badly needed. Only then can the true

nature of this reform be made clear, and a development of its strengths

be brought about while re-establishing a proper balance between the

1 See for example Settergren: Impact of the nancial and economic crises on

the Swedish pension system, in the ISSA Social Security Observer that can befound at http://news.issa.int/eng/newsletter/newsletter_repository/observer/en/social_security_observer_10/(article)/4547

basic needs and constraints, a balance that is a prerequisite for a reformthat is sustainable not only nancially but also socially and politically.

The need for a broad and nuanced knowledge is especially important

when it comes to a pension model, like the Swedish one, that is widely

observed throughout the world. Some of the features of this model, i.e.

the so-called notional dened contribution (NDC) sub scheme have

been introduced in Italy, Latvia and Poland, and automatic adjustments

of various sorts have been introduced elsewhere. The model has been

contemplated in the reform debate in the USA and it has also been part of

the discussion about pension reform in France. It is recommended by the

World Bank as a viable reform model and i t is referred to by the European

Union as containing a key type of innovation2.

Following this, there is a need to sort out what the new Swedish pension

system really is, and to realize that it contains a whole range of different

features, many of them fundamentally different from what Swedish

welfare arrangements have traditionally stood for. And to realize that

the NDC system is only one part of the Swedish reform.

In this brief article3, I hope to clarify the consequences of the NDC

principles in Sweden, in particular when it has come under intense

nancial stress, as well as the development of other parts of the overall

Swedish pension system, i.e. the minimum pension and the individual

account scheme, and thereby contribute to a debate about the truenature of the Swedish pension model and what is needed for a positive

development of this model. Such a debate most probably is of value for

judging to what extent the Swedish pension model is a viable reform

model.

As a background I begin with a short repetition of core features of the

new Swedish pension system and some further elaborations on the true

nature of the NDC concept.

I hope all this will be of interest to you

With my best regards

KG Scherman

2 A recent publication is a Green Paper on Pensions 2010-07-07 now out forcomment all over EU. The publication can be found at http://ec.europa.eu/social/main.jsp?langId=en&catId=89&newsId=839&furtherNews=yes. Ananalysis forming a starting point for the Green paper is an Interim Joint EPC-SPC Report on Pensions 2010-05-31 that can be found at http://europa.eu/epc/publications/index_en.htm3 I thank Bernard Casey, Jan Hagberg, Warren McGillivray, Larry Thompson,John Turner and Ellis Wohlner for valuable comments to an early draft of thispaper.

By KG Scherman

SWEDISH PENSIONS UNDER STRESS


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The Swedish pension system: a short description

There are many reasons to observe the Swedish reform

The Swedish reform contains a range of features, both from a pension

system point of view and when it comes to pension policy that together

can explain why it has been so much observed.

From a pension system point of view there are the following

features:

v A completely changed PAYG scheme, ending up in the notional

dened contribution (NDC) model; including

Life-time contributions as the basis for the level of retirement

pension;

Abolishing the normal pension age;

Taking increasing life expectancy into account in the

calculation of pensions, thereby steadily raising the agewhen a person can retire with an adequate pension.

v The introduction of a funded pension component alongside the

PAYG part;

vA successive phasing out of the minimum pension in the face of

economic growth.

From the point of view of pension politics, other features come to the

fore:

vThere was a broad political consensus behind a reform that

effectively reduces pensions and pension expenditure;

vThere is a stated policy that the contribution rate to the public

earnings related pension system should be unchanged into the

indenite future.

v There was no public opposition despite reductions in future

pensions.

vSwedens reputation as an advanced welfare state makes it useful

for politicians elsewhere to refer to their reform proposals as

following the Swedish model.

As can be seen, the NDC system is only one part of the Swedish reform.

All parts taken together, including the successive phasing out of theminimum pension and the introduction of a funded component, must

be taken into account, alongside with the NDC sub scheme, in order

to see what has happened and what will be the result for current and

future pensioners.

The rules

The new old-age pension system contains an earnings-related part

and, in addition, it offers protection to those who have no, or only a low,

earnings-related pension.

It contains a minimum pension, guaranteed by the state for all residents

in Sweden. In addition, there are various supplements available for

those who have no, or only a low, pension. The guarantee is indexed

according to the cost of living, regardless of the development of wages.

Hence, in the long run, its relative value will diminish in the face of real

growth of wages. This is the stated policy of the government.

The public earnings-related scheme consists of two parts: a fully funded,

savings scheme, called the PPM-scheme and a pay-as-you-go scheme.

A core idea in the new system is to retain a stable contribution rate of

18,5% of covered earnings into the indenite future. The contribution is

split between the PPM scheme and the pay-as-you-go scheme. Certain

periods (while receiving social security benets, periods of child care,

military service and higher education) give pension rights for which the

individual and the state pay the contributions in full.

The fully funded savings scheme is new. The contribution to thatpart is 2.5 percentage points and it pays for life annuities based on

insurance principles. It is administered separately from the pay-as-

you-go earnings-related scheme. Private and public fund managers

are available. The rest of the administration and the insurance function

of this sub-system is a public responsibility.

The pay-as-you-go scheme is completely redesigned. It has become

a notional dened-contribution (NDC) scheme. This redesign has been

much commented upon in the international debate. One of its principal

intentions is to maintain a stable contribution rate into the indenite

future. This scheme has the following features.

vThe benet formula is tightened up and benets are based on all

contributions over an individuals full working career.

vIndexation rules are linked to average wage development:

pension rights being indexed to average wage growth,

pensions in payment being indexed to average wage growth

reduced by 1.6 percent per year (exible indexation with the

norm 1,6 %) 4.

vBenets are made dependent on life expectancy, meaning that

a benet drawn at a certain age by an individual belonging to

one cohort will be lower than that for the preceding cohort, if life

expectancy has increased.

The PAYG part is nanced by a contribution of 16.0 percentage points.

4 The norm used comes into the annuity factor as an imputed real rate ofreturn. Its function is to rearrange the time prole of pension payments over an

individuals time in retirement, making rst years pension larger than it would

otherwise have been. A reason for this approach was the political wish to offer arst years pension that was of the same magnitude as in the old system. It has no

connection to any projections of presumed increases of real wages.


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The PAYG system contains two other important features. The rst is a

special fund, called the buffer fund. All contributions are paid into this

fund and all pensions are paid out of it. As a consequence, the buffer

fund accumulates capital in certain periods, for example if large cohorts

reach working age, and, consequently, the labour force expands, or if

labour force participation increases. The surplus generated under such

periods will be used to counter nancial strains on the system in other

periods. Such strains will emerge when the baby boom generation

reaches pension age. At the outset of the new system, most of the

pension fund that had been accumulated under the old ATP pension

system was transferred to the buffer fund, where it serves as a sort of

start up capital.

The second special feature is an automatic balancing mechanism

(ABM)5. New calculation methods have been established to make it

possible to estimate the assets and liabilities of the PAYG scheme.

If the estimated liabilities of the system exceed its assets, the yearlyrevaluation of pension rights and pensions in payment will be reduced

enough to enable pension liabilities to grow at the same rate as the

systems assets. Obviously, such a mechanism makes the system

nancially stable. Whatever happens, it reduces current and future

pensions by as much as needed in order to restore nancial equilibrium

to the system.

About the general NDC concept

There are some misunderstandings about core features of the NDC

system. For instance, even international experts from time to time statethat dened benet schemes in general as well as the so-called point

systems can be made to mimic the general NDC model6.

This statement is true under the condition that the parameters, such

as those enumerated above, (see page 3), built into a NDC scheme

are enough for keeping the scheme in nancial balance under various

developments of the environment, i.e. demography and economy,

without a need to increase the rate of contributions. Under such

circumstances a traditional DB (point) scheme, given the appropriate

parameters, can function exactly as the NDC-scheme, when it comes

to accumulation of pension rights and pensions in payment. The NDC

scheme then functions as if life time contributions, that are the basis

for pension rights accumulations in all NDC schemes, were equivalent

5 This mechanism was at rst named the Brake a name still

widely used6 Se for instance Whitehouse: Decomposing National Dened-Contribution

Pensions in OECD Social, Employment and Migration Working papers No 109that can be found athttp://www.oecd-ilibrary.org/social-issues-migration-health/decomposing-national-defined-contribution-pensions_5km68fw0t60w-en

to life time earnings. But this is true only provided that the scheme

does not come under nancial stress7.

Now, it must be observed that every pension system trying to retain benet

and contribution rules unchanged comes under nancial stress following

demographic developments and other changed circumstances, as soonas dedicated reserves or buffer funds that might have been available at

some point in time, are depleted. And when nancial stress occurs, there

are fundamental differences between these types of schemes.

Under nancial stress a traditional DB scheme becomes subject to

a review, where benet levels, pension age and contributions all are

discussed. Basically, what happens is a political process aiming at

striking a new balance between these factors. Such a reaction is not

feasible in a NDC scheme, where, as we have seen, the contributions

themselves are the basis for the accumulation of pension rights.

Consequently, in a NDC scheme it is not advisable to try to help to solve

current nancial problems by increasing the contribution rate, as such

an increase would create new pension rights and hence risks to create

new nancial problems in the future.

In NDC schemes, the desire to stabilise contributions has been

transferred into a basic principle; contribution rates are intended to

remain unchanged into the indenite future.

The consequence is that there is no way to change the NDC part of a

pension system in the face of changes in external conditions with a view

to attain a new balance between social goals and nancial constraints.

Instead all adjustments must be made on the benet side, either in the

accumulation phase or for pensions in payment or both.

Only the Swedish system contains a mechanism that makes the basic

denition of the NDC concept to a consistent design. This feature is

the automatic balancing mechanism(ABM) that operates directly based

on the nancial balance. Whatever happens, the ABM reduces current

and future pensions by as much as is necessary in order to maintain

the stability of the systems nancing. But it is important to realise, that

as soon as the basic NDC approach is applied, i.e. the contribution

themselves form the basis for accumulation of pension rights, the

outcome must be the same; all adjustments must be made on the

benet side. The alternative is to abandon the NDC principle.

7 In the international debate life time earnings are sometime used as thebasis for pension rights accumulation in the denition of the basic NDC concept,

reserving the strict dependence on contributions to the Swedish system, withits automatic balancing mechanism. But then, the whole concept becomesmeaningless, being in fact nothing but a certain form of a parametric reform oftraditional DB schemes. And it is a fact that all the countries that are said to useNDC, i.e. Italy, Sweden, Latvia and Poland use contributions as the basis foraccumulation of pension rights. As do the original proponents of the model, i.e. MrPalmer in Sweden and Mr Holzmann at the World Bank.


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20



Here, it must be stressed that abandoning the NDC principle only

refer to the need to abandon the inseparable and automatic connection

between contributions and benets that is the basis for that concept.

As soon as this step is taken, by introducing some sort of contributions

that does not give rise to pension rights, such as the solidarity

contributions introduced in France or by abandoning all together the

contributions as the basis for pension rights, the NDC system has

been transformed into a traditional DB-scheme with interesting new

features. As already pointed out, such a scheme can contain all other

features nowadays and by some experts solely attributed to the NDC

concept.

The signicant difference that remains after abandoning the NDC

principle then is that politicians once again resume responsibility for

monitoring the generational contract in order to strike a fair balance

between social goals and nancial constraints. And, after all, the

sooner this need is realised, the better. Already after the nancialcrises during the last couple of years we have seen that politicians

have intervened or voiced plans to mitigate the effect of the crises on

pensions in all four countries (i.e. Italy, Sweden, Latvia and Poland)

that usually are mentioned as those applying NDC8. This is a good

and valuable proof that the belief that it should be possible to relieve

politicians of the responsibility for continually monitoring the public

pension arrangements was out of touch with reality already from

the start.

Much needs to be done, an in-depth debate and analyses are of vital

importance

Pensions in focus in election campaign, but that is not enough

Sweden had a general election in September 2010. The main

combatants were two blocks that stood against each other. It was the

Alliance, consisting of the parties forming the current government,

Conservatives, Liberals, Center and Christian Democrats, and the

red-greens consisting of the Social Democrats, the Left party and the

Green party9. Both blocks promised that the time has now come to

prioritize pensioners. Improvements in various respects, such as health

care, care for the elderly and related matters, are imminent. But the

pension system should not be changed. The pension agreement, i.e.

the agreement from 1994 between the present four parties in the current

8 About this see: Cho-Domiczak A., D. Franco & E. Palmer, 2011. The First

Wave of NDC Taking Stock Ten Years Plus Down the Road in Holzmann, R.

& Palmer E. (eds.) Non-nancial Dened Contribution (NDC) Pension Systems:

Progress and New Frontiers in a Changing Pension World. Forthcoming publicationof the World Bank. A draft can be found at http://www.forsakringskassan.se/omfk/ndc_pension_conferens9 The election result was that the Alliance received more seats in Parliamentthan the red-greens, but did not obtain an absolute majority. A new party reached20 seats, which is more than the difference between the two big blocks.

government and the Social Democrats about a new pension system, will

remain in force10.

Most probably, this will not be so. And in addressing the problems it is

not enough to do as last year. What happened then is the following.

In late 2008 it was realised that the ABM braking, mechanism in the

national pension system would, if nothing was done, reduce pensions,

both new pensions and pensions in payment 11, by about four percent

in 2010. Representatives of the political parties behind the system

quickly met to seek solutions. The outcome of their deliberations was to

propose a revision of the calculations that determine how the braking

mechanism functions. Instead of a pension reduction of around four

percent, or about 500 kronor per month for a typical pension, the

reduction in 2010 should become about less than half as much, or 200

kronor per month.

The Swedish Pensions Authority12

was given a few weeks to investigateand elaborate on the technicalities of the politicians proposal, and

the few weeks of consideration that then followed resulted in most

groups rejecting the proposal. The day after the consideration period

had expired, the political parties in cahoots met and agreed to anyhow

proceed with the proposal. Despite the Pensions Authority writing: The

Pensions Authority rejects the proposal since it does not lead to the

more even development of pension levels that was desired.

This harsh statement didnt inuence the politicians. What was ignored,

or perhaps not understood, was that the Pension Authoritys investigation

showed that the new rules would result in the Brake continuing to apply,

and even more severely, during the following years.

Instead of such cosmetic reforms, in addressing the real problems,

politicians have to recognize that pension systems are very much about

pension adequacy, not only about nancial sustainability. And a long

range of failed forecasts must also be taken into account.

The reform, as designed, was not intended and not suited for

automation

10 Interestingly enough, the Left party and the Greens accepted that thisagreement remained untouched by the new coalition between them and the

Social Democrats11 The accumulation of pension rights are also affected. But losses canbe recovered, should the future be characterised by a positive nancial

development. That is a complicated matter which is not dealt with here.12 Over the last ten years the authority in charge of public pensions has changednames several times. Up until 2004 it was the National Social Insurance Board.Between 2005 and 2010 it was the Social Insurance Agency. In parallel for acouple of years there was also The Premium Pension Authority, in charge ofthe individual account subscheme. Today it is the Swedish Pensions Agencythat is resposible for all parts of the Swedish public pension. To avoid confusioninthis paper the term The Pensions Autority is used regardless of which of theseauthorities it is that have been in charge at each particular time.


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The agreement on principles for a pension reform was concluded by ve

parties in parliament in the middle of the 1990s. From the agreement

it follows, among other things, that pensions shall be dependant on the

development of the economy. That is a good feature of the system. But

the principles did not contain either a Brake - the mechanism that now

has been activated to reduce pension payments - or any investment of

the pension buffer fund in the stock market, or an individual account

part, the so-called PPM system, with the scope and design that it was

ultimately given. Nor was it envisaged that taxes on pensions would

become higher than on wages, which, as we will see in the following,

has over the last four years become a reality.

In fact, already back in 1999 it was possible to see that something was

going wrong. In my 1999 report for the ILO, I wrote by way of a closing

remark the following: My concluding opinion is that Sweden is in the

process of building a new pension system that is sustainable and,

generally speaking, fair. The approach chosen for the reform design

makes it difcult to see which the differences between the old and the

new systems are. The general public is still to be informed. Whether

the reform will be sustainable in the long range will to a considerable

extent depend on how still not decided questions are settled and on

how the political parties in the future will handle the dialogue with the

general public.

Alas, in 2010 it must be concluded that among the still not decided

questions was what ultimately became a complete automation of the

pension system, preventing a sound approach to the need to continually

monitor the system in the light of new projections and new knowledge,and a transfer of funds to the state budget that was too large (see

below).

In retrospect it is easy to see that the decisions back in 1994 were

based on assumptions and forecasts that have not materialized. Those

assumptions were then locked into the system for all eternity by the

automatic balancing mechanism. Among such failed beliefs about

coming years that have proved to be wrong are forecasts about life

expectancy and about the development of real wages.

The Pensions Authority, responsible for the calculations that formed the

basis for the new pension system, anticipated a modest increase in lifeexpectancy and, consequently, a need to increase the pension age with

less than one year in the long run. Today we know otherwise. Already

today the life expectancy exceeds what was anticipated for the long run

in 1994 and todays projection for further development of life expectancy

ends up in young people having to anticipate working until 68 or 69 to

get a decent pension.

The same inability to look into the future inuenced the discussion

around the development of real wages. At the beginning of the 1990s

the Swedish society had had more than ten years of stagnating or

even falling real wages. As a result, no one considered what would

happen if real wages should begin to grow during the implementation

period of the new system. But that was what really happened. During

the last half of the 1990s and the beginning of 2000 there was a steep

increase in real wages. Pensions, on the other hand, began to follow

wages only from 2002 onwards. Compared to wages, the pension for

an individual that had retired 1994 or earlier declined by more than

30% as a result.

The nancial prospects of the pension system itself were also

misinterpreted. The nancial constraints, or more accurately the

absence of nancial constraints, were formulated in the discussion

about a payment from the buffer fund to the state budget of monies to

compensate for some of the extra burdens that it would incur as a result

of the reform. The terms of the original documents are worth citing.

After having described the proposed compensation, the text reads: Ofcourse these proposals affect, as has been described above, only the

nancial side. Neither the successive phasing in of the contributions,

nor the transitional use of the buffer fund for other then old-age pension

payments, affect the benet side, that is obvious. But reality soon

proved differently.

Instead of pausing to take into account all these changes in the

foundations of the reform in order to nd out what they really meant, the

politicians proceeded with the design and implementation of a totally

automatic balancing mechanism and with plans to transfer large sums

of money from the pension buffer fund to the state budget. To make

this possible, and in addition to other restrictive measures, including a

need for an effective pension age13 of 68 or 69 for younger generations

(should todays forecasts about the development of life expectancy for

those generations come true), a Brake was added that always reduce

pensions and accumulated pension entitlements further and as much

as is needed in order to restore nancial balance After this automatic

system was put in place, the politicians seem to cease concerning

themselves with social justice and a proper balance between the active

and the retired population. Everything had been completely thought

through.

What is needed now is to address the problems in a constructivemanner. This observation applies not only to the current visible and

acute problems, i.e. what has happened with the level of pensions in

payment, but also to the problematic situation of younger generations.

13 Pension age here used as the age up to which a person belonging to a certainbirth year cohort needs to work, in order to receive a pension of the same size as

a person born 1940, with an equivalent earnings history. This is the concept used

in the yearly ofcial report on the performance of the public pension system. See

more about this on page 16 ff in the following and the quotation, page 15, from an

ofcial report that the Swedish government has submitted to the EU.


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There is an urgent need for a discussion about how the labour market

functions and what employment opportunities are available, as well

as for renewed analyses and discussion about the individual account

(PPM) system and what contributions to the public pension system are

needed to make it possible to offer decent pensions.

More about the parts of the pension system

The minimum pension

The minimum pension, i.e. the guarantee of a minimum amount to be

received as a public pension, is indexed to the cost-of-living, and as

real wages increase the minimum pension will gradually decline as a

proportion of average wages. Since 1998, when the new pension system

was enacted, this reduction in the minimum pension has amounted to

20%. Diagram 1 illustrates this.

Diagram 1. Minimum pension is indexed to cost of living, not to

wages. Comparison of development 1998-2009 of the sum 6 500/

month

Source: Authors own calculations

Note: See footnote 14, page 11 for the exchange rate.

Even when one takes into account that Swedish pensioners with low

incomes have access to a housing supplement, there still is a large

reduction.

An increase in the minimum pension was discussed a few years ago.

Minister of Finance, Anders Borg, replied that there is an agreement

how this should be dealt with (referring to the original 5-party

agreement), nothing should be changed, and as far as he knew there

was no one proposing any change. A rather interesting observation

since it demonstrates an unwillingness to listen. Several parties had

in fact declared that the minimum pension ought to be raised. More

importantly, the old agreement gives the Minister and anyone else who

was part of the agreement veto in this and all other pension issues.

The Minister of Finance views his standpoint as reasonable, and subject

to political will. But there are many who say otherwise.

For several years the Pensions Authority wrote in its annual report on

the pension system, (the Orange Report), that the minimum pension

would remain constant in real monetary terms, but with the addendumthat The realism in this assumption can be questioned. This comment

is found on page 33 in the report for 2008.

The Ministry of Finances Expert Group for Studies in National Economy

(ESS), wrote in Generation analyses; redistribution between generations

in a welfare state that despite current regulations one counted on

subsidies and transfers being adjusted upward in accordance with

wages. Otherwise the welfare state will become smaller and smaller in

the future (See page 50).

The OECD publishes reports on pension systems throughout the world.

Its June 2007 report contains the same opinion as the ESS report.Statements from both Sweden and Great Britain that the countries

intend to leave minimum pensions unchanged in real monetary terms

are noted. The OECD remarks that over a 40-50 year period this would

lead to unrealistically low living standards for poor people and would be

politically unsustainable. Therefore, the report assumes that there will

be an indexing to average wages.

Having said this it is possible that Borgs standpoint may reect

Actuary India Jan 2011

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