ªa kn owledge community for the society …...t his issue of international newsrepresentsnot only...

ISSUE NO. 41

APRIL 2007

I N T E R N A T I O N A L N E W S

There is nothing like a dream to create thefuture. (Victor Hugo)

Although all character and companynames are fictitious, the story isbased on facts. It is about aspi-

rations, and how important it is tofollow them.

Ronaldo isa young actu-arial studentwho lives in aslum in SãoPaulo, Brazil,one of the fivemost populousmetropolitanareas in theworld, withjust over 19million people.

He works as a junior staff member atCorinthians Insurance Company in the city.

The contextBeing the financial and industrial

center of the fifth largest country in theworld, São Paulo contains the headquar-ters of more American companies thanany other city outside the United States.However, the city’s disproportional wealthdistribution tends to encourage thegrowth of poverty and crime rates.

In respect of the insurance industry,after 12 years of controlled inflation,economic growth and political stability,

Ronaldo and His Actuarial Careerby Horacio Motta

contents

I N T E R N AT I O N A L S E C T I O N“A KNOWLEDGE COMMUNITY FOR THE SOCIETY OF ACTUARIES”

Ronaldo and His Actuarial Careerby Horacio Motta....................................................1

Editor’s Noteby Michelle John ....................................................2

Chairperson’s Cornerby Frank Buck ........................................................3

Integrity without Bordersby Bosco L. Chan ..................................................6

Capital Efficiency Seminarby Ed Robbins and Hubert Mueller ....................8

Accounting Corner:U.S. GAAP Seminar in Hong Kongby R. Thomas Herget ..........................................10

The International Section in Chicagoby Nian-Chih Yang and Cathy Lyn ....................13

FSA, CFA, FIA, ALM or NBA?by Antoni Forgues ................................................17

Brazil: A Better Business Beatby Alda Fassbender, Michael Bayard Smith ...20

Caribbean Actuarial Association (CAA)16th Annual Conference in Surinameby Marcia Tam-Marks.........................................24

Frozen-Entry-Age Term Life Policies inBrazil: Learning to Deal with Long-TermRisk the Hard Wayby Craig Reynolds and Paulo Hirai ...................26

Feedback from SOA Members in China................................................................................29

Untapped Opportunities in the Middle Eastby Iyad Hourani and Marc Tarazi ......................30

GMXBs: The Next Generation ofGuaranteed Productsby Padraic O’Malley ............................................33

International News Announcements .......36

Country Feature Competition.....................40

continued on page 4

Exam P-1 Candidates, August 2006

Editor’s Noteby Michelle John

Iattended the Society of Actuaries (SOA) Annual Meeting in Chicago last October and came away with one sentenceringing in my ears.

Risk is opportunity.

I think this is of particular importance for actuaries oper-ating internationally. Let’s say you are an actuary in a largeNorth American firm. You have been in your current positionfor five years, you haven’t moved house for at least 10 years.You are in a relatively stable, comfortable position. You areasked to consider a secondment to your company’s startupoperation in China. The secondment is for a year (…at least tostart). Being a clear-minded actuary, you weigh both sides.

In the risk column:

• Don’t speak Mandarin

• Don’t know if the startup will crash and burn

• Your family says “you want to do what?!”

But on the other side—what a glorious opportunity!

• Tremendous self satisfaction when that start up takes off

• Looks pretty good on the old resumé

• The chance to experience a new culture, cuisine and friends.

This is just looking at one example. Actuaries who are basedinternationally and are offered a position in a company in NorthAmerica also face their own risk/opportunity trade-offs.

A number of articles in this edition illustrate that “risk isopportunity.” The lead article by Horacio Motta, winner ofInternational Section’s Country Feature competition, talksabout the challenges of becoming an actuary for a studentfrom the slums of Sao Paulo. Many of us may not have facedas many challenges as he, yet we took a risk with those yearsof exam writing for the opportunity to have a challenging andrewarding career. I hope you all think it was worth it.

Two more articles in this edition feature Brazil. In “Brazil:A Better Business Beat,” the authors tell us that the timemay be opportune for rapid growth but there are no guaran-tees so you have to take a risk to realize this payoff. PauloHirai and Craig Reynolds discuss the frozen-entry-age termlife product which was introduced more than 20 years ago inBrazil. With hindsight, this risk seems to have had only a short-term payoff.

In Iyad Hourani’s and Marc Tarazi’s article, they tell us that“The Middle-East is hot with great untapped opportunities.”Antoni Forgues tells us why there is a “booming risk manage-

International Section NewsIssue No. 41 • April 2007

International Section of the Society of Actuaries

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Expressions of opinion stated herein are, unless expressly stated to

the contrary, not the opinion or position of the Society of Actuaries,

its sections, its committees or the employers of the authors.

The SOA assumes no responsibility for statements made or opin-

ions expressed in the articles, criticisms and discussions contained

in this publication.

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([email protected]) • Phone: (847) 706-3548 • Fax: (847) 706-3598

Sofi Garcia, Project Support Specialist


Martha Sikaras, Director of International Activities, Staff Partner


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Michelle John, Newsletter Editor

Sun Life of Canada

Phone: (416) 979-4020

E-mail: [email protected]

Cathy Lyn, Features Editor


Carol Tom, Assistant Newsletter Editor

Sun Life of Canada

Phone: (416) 979-6156


2006 - 2007 Section Leadership

Frank Buck, Chairperson

Alex Kogan, Vice-Chairperson

Bosco Chan, Treasurer

Carl Hansen, Secretary

P.G. Alistair Cammidge, Web Liaison

Michelle Chong Tai-Bell, Council Member

Cathy Lyn, Council Member

David Parmee, Council Member

Jason Liang Zhang, Council Member

Copyright © 2007 Society of Actuaries. All rights reserved.

Printed in the United States of America

continued on page 3

2 | INTERNATIONAL NEWS | APRIL 2007

This issue of International News representsnot only the first issue of 2007, but alsothe first issue of my term as chairperson

of the International Section Council. As such, Ifeel it is appropriate to update the readers onsome of the recent and upcoming activities of thecouncil.

Last year, along with the Financial ReportingSection, we put on a well-received seminar inHong Kong on US GAAP accounting for interna-tional insurance companies. Needing 50participants to break even, we had 110 payingattendees, with 70 on the waiting list. Followingon from that successful event, we are planningsimilar seminars in 2007. We will repeat theseminar in Brazil in early April and hope to seemany of our Latin American colleagues there. AEuropean seminar is also in the early stages ofdevelopment. Also, because of the demand inAsia, we will host a repeat in Hong Kong duringthe summer/fall.

The section continues efforts to consolidate datato perform experience studies in various parts ofthe world. In many jurisdictions, this representsthe first serious attempt to analyze recent experi-ence there. A study for Poland is near completion.Data gathering is well under way in the Caribbean.Future studies are planned for India and Chile.

The section council is reaching out to localSOA ambassadors to make sure activity iscontinuing at the local level. Three councilmembers now serve as ambassador coordinators:Cathy Lyn for the Caribbean and Latin America,Alistair Cammidge for Europe and the MiddleEast, and, as I am now living in Hong Kong, I amlooking after Asia. We are currently seekingambassadors for a number of countries. This ispotentially an excellent program that can providea real benefit to our members overseas. Pleasecontact Martha Sikaras ([email protected]) orany International Section Council member if youhave an interest in becoming more involved withthis valuable program.

As these activities illustrate, the leadership ofthe International Section is continually strivingto meet the needs of its very diverse (both interms of geography and practice areas)constituency. Please feel free to contact me orany of the other section council members if youhave ideas to make your membership in theInternational Section more valuable.o

ment market” in the United Kingdom PadraicO’Malley discusses how the variable annuitymarket is extending to Europe via Ireland. Hesummarizes the risks in the products and givesstrategies on how to manage them.

Bosco Chan presents the business model heemployed in leading the Pacific Rim Actuaries,Club of Toronto. We have a write-up by EdRobbins and Hubert Mueller on the CapitalEfficiency Seminar held last September. Theauthors are eager to get ideas from our interna-tional audience on how this initiative can beimproved. The U.S. GAAP Seminar held lastOctober in Hong Kong is also featured. This article includes a tale of risk-taking with unfa-

miliar cuisine; for us it’s an opportunity to enjoya funny story.

We have a tell-all expose of the activities ofthe International Section in Chicago ... withpictures. The Caribbean Actuarial Associationheld their annual meeting in Suriname lastDecember and we have the scoop for you here.

Our Announcements section has grown expo-nentially and that is thanks to you, our readers.Finally we offer you a great opportunity with lowrisk, sit back, put your feet up and enjoy theApril edition of International News.o

APRIL 2007 | INTERNATIONAL NEWS | 3

Michelle John, FSA,

FCIA, FIA, is assistant

vice president and

actuary at Sun Life

Financial in Toronto,

Ontario. She can be

reached at michelle.

[email protected].

Chairperson’s Cornerby Frank Buck

Frank Buck FSA,

MAAA, FIA, is vice

president & regional

actuary at Met Life—

Asia/Pacific Region in

Hong Kong. He can

be reached at

[email protected].

Editor’s Note ... | from page 2


Ronaldo and His Actuarial Career | from page 1

the Brazilian market is the largest in Latin America and should be one of the fastestgrowing in the coming years. In 2005, the totalproperty/casualty (P/C) premium was $9.5billion USD, life insurance premium was $8.1billion USD, health insurance premium was$3.5 billion USD, and contributions to openpension plans totaled $3.1 billion USD.

Foreign players include ACE, Allianz, AIG,Assurant, Berkley, Cardif, Chubb, CNP,Generali, Hartford, HDI, HSBC, ING, LibertyMutual, Mapfre, MetLife, Mitsui Sumitomo,Principal Financial, Prudential, QBE, Royal &SunAlliance, Santander, Tokio Marine, XL,Yasuda and Zurich.

Let’s Go Back to Our StoryRonaldo wants to be a successful actuary like

his namesake Ronald, FSA, MAAA, FIA, CFA.

Ronald currently works in Rio de Janeiro(250 miles from São Paulo) as the CFO ofFlamengo Insurance Company.

Born in the Caribbean, Ronald studied actu-arial science in England. He then worked in

London in the consulting field and thereafteras chief actuary for several Caribbean insur-ance companies and then as managing directorfor Latin America of a major reinsurancecompany. He qualified as a Fellow of theInstitute of Actuaries when he was only 25.

Young Ronaldo knows, however, that inBrazil there are just a few universities thatoffer high-quality actuarial programs.Moreover, such universities offer only under-graduate programs (most of them being veryexpensive), and the professional associationsdo not have post-university examinations.

On the other hand, the FSAs who have beenbased in Brazil (which we can easily count onone hand) have earned great respect with localprofessionals. Besides that, the Society ofActuaries, a long-standing organization with ahistory of more than 100 years, is very wellknown for producing extremely well-qualified,technical professionals.

Fortunately, since Brazil has qualified for theSOA’s “Examination and Study Material FeeDiscount Program,” eligible Brazilian candidatesbenefit from this financial assistance. This makesthe costs for taking all the SOA actuarial examsless than the total cost for an actuarial programoffered by a local university.

Having said all that, why don’t any of ourcurrent 919 Brazilian actuaries have theSOA’s credentials?

First of all we should mention that untilvery recently, the only way for a Brazilian actu-ary to effectively take SOA exams was to liveabroad.

Secondly, in order to sign any official actuar-ial document in Brazil, it’s necessary to have alocal university’s BSc in Actuarial Science. TheSOA actuarial exams are presently not offi-cially recognized here.

But the main reasons for the lack of SOAcandidates are related to other aspects.

Students are not yet self-study oriented andinsurance and actuarial consulting companies inBrazil (even the multinationals) still do notprovide any regular study leave for exam prepa-ration. English language proficiency is also abarrier for most of our students. All in all a“behavioral shock” is necessary to overcomethese challenges.

Horacio Motta is an

associate at Tillinghast

in Brazil. He can be

reached at

horacio.motta@

towersperrin.com.

Ronaldo needed the confidence to challengethe status quo and not follow the crowd. Hecould see silver linings in the dark clouds.

Ronaldo and the BrazilianActuarial Study Group

Ronaldo works all day and attends hisuniversity’s courses at night. There is a verylong commute between the university and hiscompany. His academic background is basicand there are no actuarial resources at anypublic library. His foreign language skills(specifically, his English knowledge) need to beimproved. But he still has a dream: to graduatefrom Columbia’s MSc program in actuarialscience in New York City.

As well as Ronaldo, other entry-level actuar-ies were willing to undertake this newprofessional development approach. They knowthat the world is shrinking and that theyshould be prepared to compete in the globaleconomy. Also, this economic and socialphenomenon offers students possibilitiesbeyond their wildest dreams.

At the same time, Mario, another entry-level actuary, working at the São Paulo office ofa global consulting firm, was contemplatinghow to initiate the previously mentioned“behavioral shock” in his actuarial generation.Mario is one of the lucky ones in Brazil whohas the fortune of being from, what is consid-ered to be, a very privileged family in Brazil.

Mario had successfully completed the prelim-inary actuarial exams of the SOA. He had theopportunity to obtain a double major at twodifferent Brazilian universities (one in actuarialscience and the other in economics), as well asthe chance to benefit from traveling; thisincluded trips within Latin America, Europe,the United States and Canada. After meetingsome very inspiring actuaries around the world(some of them FIAs and FSAs), he decided tofight for a better study and professional devel-opment plan for students like Ronaldo.

Mario realized that the line of least resist-ance to achieve his goal would be an internalcompany course focusing on the first SOAexam. He then convinced his buddy Robinho towork with him to make it happen.

Such aspiration, combined with hard work,drive, outstanding energy and determination,

culminated with a presentation to almost 100actuaries on the SOA exams.

One of the biggest Brazilian insurancecompanies (Santos Insurance Company)decided to provide all the infrastructure neces-sary to facilitate the course. Mario andRobinho, with strong support of Santos actuar-ies, managed to communicate the launch ofthe course to many Brazilian actuaries at anintroductory presentation.

Mario realized that it was his great oppor-tunity to initiate the “behavioral shock.”Instead of designing a usual course, withtraditional lectures, he proposed the creationof study groups. Guidance would be providedthroughout the course, but emphasis wouldbe given to independent self-study. Therewould be only one weekly three-hour meetingon Saturdays during which candidates wouldexchange experiences and solve problems.Guidelines and tips would be provided byMario (who acted as the coordinator), but theformal presentation of the subject would bekept to a minimum.

The typical group session would also includea presentation of the topics that would becovered at the next group meeting. Therewould be an overview of the main topics withsome discussion on the forthcoming exam (e.g.,approved calculators, registration procedures,etc.). Based on a detailed action plan (whichincluded the exact course content to be coveredduring the week ahead), group members couldthen exercise their self-study skills. After this“homework,” the group members would meetagain to solve a list of not previouslyattempted problems.

To Mario’s surprise, the course was somuch in demand that he had to apply a pre-qualification test in order to ensure thatplaces were given to only the best preparedcandidates. Ronaldo, our hero, was one of the27 students that managed to qualify as amember of the study group. Some time there-after, Mario and Robinho decided to contactboth Actex and BPP regarding their studymaterials. They were pleased to learn thattheir study group could benefit from bulkorders and copyright agreements.

“Mario realized that

the line of least

resistance to achieve

his goal would be an

internal company

course focusing on

the first SOA exam.”

Ronaldo and His Actuarial Career

continued on page 7


Integrity without Bordersby Bosco L. Chan


The Canadian Institute of Actuaries’(CIA) Rules of Professional Conductstates the following:

“Rule 1—A member shall act honestly, withintegrity and competence, and in a manner tofulfill the profession’s responsibility to thepublic and to uphold the reputation of the actu-arial profession.”

I believe that if a behavior is righteous,we should be able to apply such behavior in allcircumstances. If we take it one step further andapply it in a business model, we develop goodcorporate culture. When the culture changes,the society changes. Over time we develop ourcharacters and create a better environment forourselves and future generations.

A theory is meaningless unless people knowhow to apply it in real life. Practice makesperfect. In this article, I show by example howI use integrity in a business model. The modelis used to lead a large actuarial club. Whatmakes life fun is that solutions differ withtime, location and people. There is no guaran-tee the model will work for you. But if you canunderstand the concept and test its practical-ity, you might be able to discover creativesolutions that may be used in your situation.

At the end of two years as the president of thePacific Rim Actuaries’ Club of Toronto, Iaddressed our members during our fall meeting.I discussed the club's new business model andthe central role integrity plays in that model. Myfirst year provided me with good learning experi-ences on managing a non-profit organization andfurther developing my leadership skills. It alsohelped me to understand the operational chal-lenges and the importance of aligning the starperformers with the right positions in order toturn the organization in a growth direction. Ourorganization has evolved quickly in the last fewyears. This can be justified from the record highenrollment and increase in corporate sponsor-ship. To ensure our organization and reputationare sustainable, it is important to review thestructure so that our operation continues to fitour objectives. The club has matured and it is anappropriate time to strengthen the infrastruc-ture in the second year of my term. A possiblebusiness model would divide the club into fourbasic functions, which are finance, marketing,development and operations.

No organization can sustain itself withoutmoney. The Pacific Rim Actuaries’ Club of Toronto does not. The annual expense ofrunning our organization is around $25,000(Canadian) which is covered from member-ship fees, event fees, job advertisementrevenue and corporate sponsorships. It isdefinitely not a small amount for this type oforganization. Good accounting, cost controland reserve management are important tous. With corporate sponsorship as a revenuechannel, our members benefit from heavilysubsidized activities.

Well established marketing strategies andcomprehensive marketing channels help us tomaintain market exposure and become evenmore well-known among the community. Moremarketing results in more sales. No market-ing results in no sales. It is very simple. Whenwe speak about sales, we cannot ignore pric-ing. Marketing can only be effective if thepricing is right.

The operation and product delivery functionis the area that requires the most resources.It includes project management, work allocationand intellectual capital centralization.The quality of our products directly affects our

Bosco L. Chan, FSA,

FCIA, FCA, M.Math., is

the treasurer of the

Society of Actuaries

International Section

Council and a

consultant at Mercer

Human Resource

Consulting in Toronto,

Ontario. He can be

reached at

bosco.chan@

mercer.com.

Graph: Business Model forPacific Rim Actuaries Club of Toronto

Investor = actuarial firmsthrough corporate sponsorship

Customer = actuarial practitionersthrough membership

Development Marketing

Finance Operations

INTEGRITY

People People

People People

Integrity without Borders


reputation and reputation determines oursuccess in the long-run.

To better service our members, we need tohave a development function. It includesstrategic market positioning, process re-engi-neering and infrastructure advancements.This is the function that establishes vision andchallenges our existing process. People wonderwhy we reform the club continuously giventhat the club has been doing so well. Yes, weare doing well but only if we continue to seekadvancements, we can then migrate from verygood to near-perfection.

A solid infrastructure is necessary but notsufficient. The survivorship of our organiza-tion relies on two extremely importantelements. They are people and integrity. Onthe people side, we regularly recruit potentialactuarial practitioners who have a passion inwanting to make a difference. We rely onresponsible individuals who want to haveownership of achievements. You can see from

the graph that I surround the four functionsby people. This is because our organization isheavily dependent on our human resource.Everything our members receive from the clubis a result of the committee members’ hardwork behind the scenes. Without their efforts,there would be no results.

In the center of the graph, you will findintegrity in the middle of the four functions.Integrity is an important virtue. By definition,integrity means honesty and the truth. Thereare many ways to achieve success so why notchoose a path that will lead to success and pride in our work. A worthy leadershipteam rarely disappoints its customers.Never underestimate the customer’s ability tomake decisions. If integrity is the key compo-nent in all that we do, our customers willapproach us.o

“On the people side,

we regularly recruit

potential actuarial

practitioners who

have a passion in

wanting to make a

difference.”

After almost one year of studying hard,including a six-week review period, 13 candi-dates took the Computer-Based Exam P/1 inAugust 2006. The results still need to bereleased, but Mario, in addition to other groupmembers, is quietly confident.

Actually, Mario and two of the groupmembers are now planning a study group forCourse 2—Financial Mathematics. Botafogoand Palmeiras may be the insurance compa-nies sponsoring the effort this time.

Mario believes that Ronaldo and his genera-tion should receive support and encouragementby their employers to participate in the SOAexams. Mario is very proud of them and feelsvery optimistic : the next generation cancomplete the exams, gain appointments aschief actuaries within multinationals and havemeaningful work experience abroad. The SOAtraining can play a significant part in advanc-ing the Brazilian financial systems includingsocial security, retirement plans and life &health insurance.

Mario dreams that Brazilian actuaries may

be more prepared than ever to have an impactin solving our country’s economic and socialproblems, because …

Ronaldo and His Actuarial Career | from page 5

Capital Efficiency Seminar by Ed Robbins and Hubert Mueller


On September 19-20, 2006 theTaxation, Financial Reporting andRisk Management Sections co-spon-

sored a seminar entit led, “IncreasingEconomic Value through Greater CapitalEfficiency.” The primary organizers of theseminar were Ed Robbins (Taxation) andHubert Mueller (Risk Management), withassistance from Charles Gilbert and DaveIngram. Other faculty members were TimGaule, Steve Blaske, Dominique Lebel, ChrisDesRochers and Kory Olsen.

This seminar was intended to be the rolloutof a new Society of Actuaries (SOA) promo-tional initiative. This capital efficiencyinitiative intends to roll up several actuarialtechnical skill sets into a coherent whole, insuch a way as to enable the company actuaryto be a valued business partner at the seniormanagement table. In that respect, it is wellaligned with the Society of Actuaries,Marketing and Market Development Programfor the profession, in its objective to increasethe influence of actuaries in their organiza-tions. Specifically, the program was intended toenable the actuary to measure capital effi-ciency, to communicate it and to assist inoptimizing it.

Capital efficiency is best defined by example,as a relative term. An alternative that providesgreater shareholder value or economic value (bysome objective measure) is more “capital effi-cient.” Shareholder value is a function of threedrivers: pre-tax cash flows, taxes and balancesheet values, and the capital efficiency initiativeconcentrates on the latter two categories. Thetools to measure capital efficiency are already inthe public actuarial domain, but in the percep-tion of the seminar coordinators those tools arenot sufficiently used in our industry in theUnited States.1 Shareholder value is of primaryimportance to senior management, as one of itsprimary objectives. Consequently, there is aneed for actuaries and financial officers to beable to measure economic value and be familiar

with the drivers of economic value, to producethe most capital-efficient courses of action fortheir organizations.

The tools covered by the seminar revolvedaround capital efficiency as measured by statu-tory accounting, not GAAP, inasmuch asstatutory accounting determines the stream ofdistributable earnings to investors.

The four components of the seminar wereembedded value, life insurance company taxa-tion, asset liability management and riskmanagement. The concept of the seminar was toroll all four topics together in a coordinatedmanner, in order to give the actuary some tools tocommunicate shareholder value and incrementsto economic value to senior management.

Traditional embedded value, together withits recent refinements, constitutes a convenientmeasuring tool for economic value of a life orhealth insurance enterprise. Not only can itgive the value of the enterprise; it can alsoprovide a metric for the incremental value of amanagement strategy—that is, whether it isaccretive or erosive to economic value.Embedded value equals the value of futuredistributable earnings from the current in-force business, plus the post-tax market valueof the free surplus of the enterprise. Futuresales are not included in embedded value.

The seminar covered traditional embeddedvalue. It discussed the limitations of tradi-tional embedded value and then went on tocover European embedded value, market-consistent embedded value (MCEV), andstochastic embedded value. European multina-tionals, including their subsidiaries in theUnited States, have published on a EuropeanEmbedded Value (EEV) basis since 2005.Increasingly, companies are showing EVresults on a market-consistent basis, usingMCEV reporting. Both EEV and MCEVrequire a stochastic calculation of the cost ofoptions and guarantees. The presenterscovered the implications of doing EV on a

Hubert Mueller, FSA,

MAAA, is a principal

with the Tillinghast

business of Towers

Perrin, located in the

Hartford office. He can

be reached at

hubert.mueller@

towersperrin.com.

SOA President Edward

L. Robbins, FSA,

MAAA, FCA, is a direc-

tor at SMART Business

Advisory and

Consulting in Chicago.

He can be reached

at erobbins@

smartgrp.com.

1 Embedded value was the metric chosen in our initiative as a metric for measuring capital efficiency. Unlikein the United States, all major insurance organizations in Western Europe publish embedded value results, andit is a required disclosure item in the United Kingdom.

Capital Efficiency Seminar

stochastic basis, and recent changes in typicalEV and EEV disclosures.

Taxation is an immensely important compo-nent of embedded value, and one that hasreceived far too little attention from the actu-arial profession, considering that tax reservesare a vitally important driver of life companytaxation. As an example, $1,000,000 post-taxeconomic value added from a tax reserve plan-ning strategy is typically not difficult toachieve in a medium-sized life insurancecompany. How much term insurance would acompany have to produce in the current envi-ronment to generate that kind of economicvalue? Chances are that in most companiesthe required amount would be far greater thanthe production of the largest sales agency inthe company.

The seminar discussed the basic rules of lifeinsurance company taxation and providedconvenient references for those who wishedmore in-depth education on this importantissue. We then gave various illustrations ofhow to evaluate the effect of a tax planningstrategy on embedded value. We also discussedthe nature of statutory deferred taxes, and howa company can optimize its admissible deferredtax assets, thereby increasing embedded value.

Asset liability management and riskmanagement are also important capital effi-ciency topics. The purpose of both topics is toreduce the volatility of the capital efficiency ofthe enterprise—at a bearable cost.

The seminar was well-attended (approxi-mately 110 attendees). The evaluation formsgave it a much better than average score, indi-cating that this initiative generated significantinterest and should be pursued.

The basic question was, “How should thisinitiative be further pursued?” The evaluation

form responses to this question varied, asexpected. However, some attendees desiredmore in-depth education on taxation, whilesome desired more in-depth education onembedded value and economic capital.

The question that this seminar begged was,“Are these four subjects sufficient for the actu-ary as a business partner?” Should we laterinclude certain non-actuarial topics thatmight also be useful in this effort?

Techniques of environmental scanningwould be a likely non-actuarial topic. The abil-ity of an economic enterprise to “look down theroad” and perceive future threats and opportu-nities is essential to its success. The ability toperceive future “inflexion points,” major regimeshifts, leading indicators, and the like, is possi-bly a teachable skill—and not a strictlyactuarial skill. As Wayne Gretzky once said,when he was asked the secret of his success: “Iskate to where the puck is going to be.”

We would be happy to hear from our readersas to how to enrich the capital efficiency initia-tive and make it a part of the insurancecompany actuary’s management tool kit. Pleasecontact Ed Robbins at [email protected],or Hubert Mueller at [email protected]

“The presenters

covered the

implications of doing

EV on a stochastic

basis, and recent

changes in typical

EV and EEV

disclosures.”


Accounting Corner:

U.S. GAAP Seminar in Hong Kongby R. Thomas Herget


The International and FinancialReporting Sections collaborated toproduce a three-day seminar on GAAP

accounting. This seminar, held in the Kowloonpart of Hong Kong, was coordinated by the Hong Kong staff office. Hats off to Pat Kum and assistants Sarah Hui andChristina Lai for running a well-organizedmeeting. The seminar took place on October24, 25 and 26 of last year.

The topics addressed were a background ofGAAP, principles of GAAP, expenses, productclassification, non-par products (life andhealth), par products, fund-based products,payout annuities, investment contracts, invest-ment accounting, shadow accounts, internalreplacements, purchase accounting, reinsur-ance accounting, SoP 03-1, SoP 05-1 andemerging issues.

The faculty comprised Frank Buck ofMetLife, Tom Herget of PolySystems, BillHorbatt of Actuarial Consortium, MichaelLockerman of PricewaterhouseCoopers and Jonathan Zhao of Ernst & Young.Assisting on the third day were Simon Walpoleof Deloitte and Cathy Lin of PwC.

The faculty lectured on their assigned topicsthe first two days, with a question and answerperiod at the end of each day. The third daywas more interactive, as the attendees split

into three groups and could devote theirenergy to addressing U.S. GAAP as it appliedto their specific company and products.

To begin the first day, Bill Horbatt introduced the concepts and evolution of generally accepted accounting principles in the United States. He discussed its origins in the early 1970s and its emphasis on revenue/expense matching. He also lectured on itssubsequent evolution, hierarchy of literatureand materiality. Bill then instructed on thecategorization and use of expenses.

Tom Herget then followed with a SFAS60discourse on traditional life and health insur-ance. He focused on how benefit reserves areestablished, looking at assumptions and formu-las. Tom also discussed expected patterns ofprofits and how to analyze earnings.

Frank Buck then addressed universal lifeand the origins of SFAS97. Frank distin-guished universal life-type, investment-typeand limited pay-type contracts. He addressedconstruction and amortization of DAC, thecomponents of revenue and the impacts of SoP03-1. Frank taught the participants aboutunearned revenue liabilities and shed light onestimated gross profits. The highlight was anilluminating example of how different histori-cal events can generate the need toprospectively unlock.

Bill returned to the podium to teachaccounting treatment for participatingcontracts. Michael Lockerman then instructedon payout annuities, differentiating betweentechniques needed for SFAS97 and SFAS91products. Michael spiced up the presentationwith interesting examples of reserve calcula-tions and earnings emergence.

Frank retrieved the microphone to enlightenthe registrants on investment accounting andshadow adjustments. He started with SFAS115and investment classification. He then went onto the impact on the earnings statement, includ-ing shadow calculations, caused by unrealizedgains and losses. Finally, he explained how theother comprehensive income account works.

Michael wrapped up day one with a presen-tation on investment contracts. He firstdiscussed the byzantine process by which to

R. Thomas Herget, FSA,

MAAA, is executive

vice president with

PolySystems, Inc. in

Chicago, Ill. He can be

reached at Therget@

polysystems.com.

Seminar Faculty

U.S. GAAP Seminar in Hong Kong

classify contracts, a very important concept.Sales inducements and loss recognition wereimportant components of the talk.

The reception at the end of day one waswell-attended and the participants got to knoweach other. One of the dignitaries attendingwas Henry Siegel, chair of the FinancialReporting Section. Of course the chair of theother co-sponsoring section, Bill Horbatt, couldbe easily seen and heard as well.

There were 110 attendees. The majoritycame from Hong Kong, while Taiwan, Thailand,Singapore, China and South Korea eachsupplied a bevy of participants. Still otherscame from Vietnam, India, Japan, Australia andthe United Kingdom. Eighty-five percent ofattendees came from multi-national companies,5 percent from local companies and the rest fromconsultants or reinsurers. Representatives fromabout 20 employers attended.

Day two kicked off with a presentation onpurchase GAAP (PGAAP). Tom Hergetinstructed on the basic principles governingPGAAP and discussed the many methods thatare used in practice. He also described the manysteps in the merger and acquisition process thatculminate in the need to do PGAAP.

Frank was next, presenting the complexitiesof SoP 05-1, accounting for internal replace-ments. Frank guided the audience through thecomplex maze of criteria to determine thecorrect accounting, including discussions of

integrated features and the definition of“substantially changed.”

SFAS113 and risk transfers were maintopics in the reinsurance accounting sessiontaught by Michael. He differentiated betweenshort-and long-term treatment as well as putthe spotlight on certain red-flag issues.

Frank presented a primer on how thebalance sheet and income statement arepresented and how they interact. Deferredtaxes and the requirements of Sarbanes-Oxley(SOX) Section 404 followed. SOX focuses onidentification of risks and evaluation of controls.Frank closed this session by educating theparticipants on SFAS133 and derivatives.

Michael then presented an in-depth analy-sis of SoP 03-1. He discussed separate accountimplications then proceeded to the valuation ofliabilities. He addressed the significance ofmortality and additional liability needs, illus-trating concepts with four examples.

He stayed at the podium to discuss emerg-ing issues. These included FASB’s fair valueproject, finite reinsurance, IASB and FASBconvergence, IAIS activity, the new SFAS141R, the new SFAS 157 and reinsurancerisk transfer. Jonathan Zhao presented themain concepts and principles underlyingIASB’s current thinking on insuranceaccounting. Michael then wrapped up theday with a comprehensive presentation oncontract classification.

“Eight-five percent of

attendees came

from multi-national

companies,

5 percent from local

companies and the

rest from consultants

or reinsurers.”

Delegates at the seminar

Cathy Lin, speaker


Even with a full schedule of technical topics,there was still time for socializing and samplingthe local culinary culture.

One participant shared the story of his intro-duction to spicy food.

I stayed over one day and unwittingly went onan ethnic eating adventure.

I was looking for lunch and went into a restau-rant where half the space was devoted to tableswhere you sit on the floor. I veered right to thefamiliar chair and table setup.

I waited for a menu, hoping they would haveEnglish or pictures. Well, there wasn’t even amenu. They only served one thing, a fixedentrée—Korean selection.

There were six workers. I watched two grandma-types scrubbing pots on the floor in theclearly-visible kitchen. One of the four waitressescame over and lit the burner on my table. Ihadn’t noticed there were little gas lines runningto every table.

Another waitress arrived with five vegetable-typedishes. She put a few into the boiling oil. I lookedat other diners and saw that the remainingdishes could be eaten cold.

I tried the first one: Kimchi or spicy cabbage.The second one: spicy scallions. The third one:peppers with garlic. The fourth one: spicy rice.Then she poured a spicy hot concoction into a bowl.

Actually, I don’t like spicy food. But it was too lateto back out. They had a liter bottle of ice water onevery table, for which I was very thankful.

I started eating. I got hot. My forehead glistened.I used a napkin to wipe off the sweat. I couldn’twipe fast enough. The sweat started to drip downmy ears, then down my neck. Soon it was cascad-ing off my forehead into the food.

I actually yelped out. All the waitresses lookedand giggled. One of the grandmas saw my state.She came to the rescue and brought out a non-spicy bowl of cabbage. That tasted like dessert.

Next time I’ll make sure they have sweet andsour pork on the menu before I go in.

Not wanting to be left out, a faculty membershared his restaurant story:

On my first day there, I wanted to try a localspecialty but didn’t want to be too adventure-some. I picked the seafood curry.

All went well until they served it without rice.I can’t eat a curry dish without rice. So I askedfor a bowl of rice. The waiter brought me salt andpepper. I said, “no, I need rice.” He then broughtme an ashtray. So I took him with me to anothertable where I found a diner eating from a bowl ofrice and pointed to it. I got my rice.

The seafood curry was good, but what looked tobe diced squid was really French fries indisguise. One fourth of my seafood curry turnedout to be French fries. Where’s the UN when youneed them?

A survey of the session attendees revealedthat the vast majority of people were there tolearn or be refreshed on U.S. GAAP and not tofulfill a professional development or continuingeducation requirement. There were another 60potential registrants that couldn’t attend due tosize constraints. We hope to get back to the areavery soon to address their needs.

The U.S. GAAP seminar is obviously fulfillinga need, so we plan to address the LatinAmerican and European markets as well.o

“Even with a full

schedule of technical

topics, there was still

time for socializing

and sampling the

local culinary culture.”


U.S. GAAP Seminar in Hong Kong

The International Section in Chicagoby Nian-Chih Yang and Cathy Lyn

The 2006 Society of Actuaries (SOA)Annual Meeting came to the WindyCity, Chicago, with about 1,600 atten-

dees. It was held at the Sheraton Hotel, anewer conference hotel right on the north bankoverlooking the Chicago River, two blocks eastof the famous Magnificent Mile. This accountwill tell International News readers about theactivities of our International Section membersat this meeting.

This was a joint meeting with the CanadianInstitute of Actuaries (CIA), covering all prac-tice areas and drawing actuaries from all partsof the globe. Countries represented outside ofNorth America included Australia, China,Cyprus, England, Germany, Ireland, Japan,Mexico and Switzerland. The Board ofGovernors, section councils and clubs take thischance to have meetings in person when mostof their committee members are gathered inone place.

The International Section sponsored or co-sponsored four sessions and held a receptionas part of the program. The sessions were LongTerm Care Insurance Outside the UnitedStates, Financial Reporting for Multinationals

from a North American Perspective,Pandemics: What You Need to Know and PostMorris Review: What Has Changed.

The key ideas at this meeting were“Principle-Based Reserving” and “Risk IsOpportunity.” There were seven sessions thathad principle-based reserving in their titles.If this proposed reserving requirement islegislated in the United States, it will havesignificant impact on valuation, pricing,experience analysis, audit, peer review andtax. Some claim this regulation wouldincrease the demand for actuaries. But atthe same time, the need for protection,through professional liability insurance, mayincrease among actuaries.

Shirley Shao, the President of the ChineseActuarial Club, had a very visible position asthe chair of the Regulatory InterfaceGovernance & Peer Review Work Group. Thiscommittee provides actuarial input to theprinciple-based reserving regulation andShirley presided over many of the sessions atthe meeting.

Nian-Chih Yang, FSA,

MAAA, is a manager at

Ernst & Young LLP, in

the Chicago office.

He can be reached

at niahchih.yang@

ey.com.

Catherine D. Lyn, FSA,

FIA, is a consulting

actuary at Duggan

Consulting Limited in

Jamaica, W.I.

She can be reached at

[email protected].


It is not clear whether the appointed actu-ary, the PBA certifying actuary, the PBAreview actuary or the auditor would have moresay in setting up the new reserves. Theproposed regulation removes the safe harbor ofsimplified reserving requirements for smallinsurers. Some delegates were not happy thatsmall companies with simple products are notexempt from this additional analysis. If smallcompanies sell products with big risks, theyshould probably adopt a PBA. The actuary candecide if a stochastic process is needed (smallrisks probably won't need it). But the imple-mentation is still at the discretion of the stateregulators. The new reserving requirementscould be passed by the end of this year.

As a result of the regulation, two layers ofindependent review would be required for eachdetermination. The reserves will be deter-mined on a best estimate basis. Generally,these reserves would be lower than the currentrequired amounts. This could result in newproduct designs, new profit margin norms andnew pricing.

International Section Receptionat the Chicago HistoryMuseum—October 16, 2006

We would like to thank our sponsors whohelped to promote this event. They were: ThePacific Rim Actuaries, Club of Toronto(PRACT), The Chinese Actuarial Club (CAC),The Caribbean Actuarial Association (CAA)and The International Association of BlackActuaries (IABA). We hope to make morecontact with more clubs and associationsoutside of North America in the coming year.

Over 50 persons signed up for the receptionand there was a record turnout in spite of therain and other events overlapping with thisfunction. Five International Section councilmembers and Michelle John, our editor, werethere to host the reception. We welcomed NickDumbreck (president of the Institute ofActuaries, United Kingdom), Shu-Yen Liu(representing the Chinese Actuarial Club andjust completing her term on the Board of

Governors), John Robinson (vice presidentIABA), Stafford Thompson (a past president ofIABA) and Bosco Chan (president of PRACT)among many others.

We had to delay announcing the winner of theCountry Feature competition. All the entrieswere very interesting, telling a story of theauthor’s homeland to an actuarial audience. Allauthors showed a talent for writing and you willsee the entries printed in International News.

At the Chicago History Museum, we sawexhibits of the Chicago fire, architecturalbuildings, a replica of Fort Dearborn and one ofthe first “L Train” passenger cars.

The Chinese Actuarial ClubIn March 2006, the Chicago chapter of the

Chinese Actuarial Club (CAC) started enthusi-astically planning a series of activities thatwould take place around the official SOAsessions. Somehow we managed to execute ourplan and all the events went smoothly despitethe busy schedule of all the volunteers. YanWang of Trustmark coordinated the profes-sional development seminar. Peter Sun ofMilliman organized the dinner reception.Jordan Ge of Towers Perrin arranged thekaraoke reception. Carol Kocher of JohnHancock secured the sponsorship for thekaraoke reception. Mike Leung of PolySystemstook charge of coordination with the SOA.Jennifer Lin of Metlife provided overall guid-ance from CAC headquarters in New York.Many other volunteers deserve thanks forhelping out at all the events.

CAC Professional Development Seminar—October 16, 2006

This is the third year that the CAC hasorganized a professional development seminarfor its members. The topic was “leadershipcustomized for Asian Americans and theadvantages of diversity in the workplace.” Weinvited Marjanne Lyn to be the seminarpresenter. She is director of quality control atNelvana Limited in Toronto, has an MBA fromRutgers University and runs similar work-


Nick Dumbreck

Symeon Williams

Shu-Yen Liu

John Robinson

Bosco Chan

ReceptionAttendees

The International Section in Chicago



shops for the Pacific Rim Actuaries’ Club ofToronto (PRACT). The discussion at the end ofthe session was candid and stimulating. TheSOA granted one PD credit for the seminar.

Marjanne has put together a report thatwill be posted on the CAC Web site. Diversityarising from different cultural backgroundsadds value by providing different perspectives.At the same time, we need to polish our deliv-ery to showcase these perspectives effectively.

CAC Dinner—October 16, 2006A grand total of 44 people showed up for

the dinner at BenPao Restaurant. Cathy Lynasked the bus driver to take a detour to therestaurant from the International SectionReception and 11 persons, representingmany other non-Asian countries, were keento try a Chinese dinner in Chicago andfollowed her. The restaurant was quick to setup two more tables.

BenPao is a popular hangout for youngprofessionals. We had our own private diningroom. The dishes were Asian American, lightyet tasty. We sat six to a table and did theusual self-introductions around the room.When the 11 guests who followed Cathycame to introduce themselves, they all foundsome Chinese connection. Some had Chinesemanagers; some had Chinese relatives; andothers talked about their work experience inChina. Frank Buck, the newly electedsection chair, had just taken a position withMetLife Hong Kong.

To keep up the tradition of having an outingafter the dinner and despite the chilling rain,Nian-Chih offered to take us on a night drive tothe Adler Planetarium. From that vantage pointyou can see the Chicago skyline as on the coverof this year’s annual meeting brochure. It wasraining hard when we got there. We took photos,and then everyone dashed back to the car.

Karaoke Reception—October 17, 2006The idea to have a karaoke event surfacedlast year at the SOA Annual Meeting in NewYork City, when the then SOA President-Elect Ed Robbins belted out song after songat the New York Actuarial Association’skaraoke reception. We sent a special invita-tion to Ed noting his singing prowess andwere very disappointed when he sent hisregrets, saying he would be on a flight toBrazil on the night of our reception.

The three recruiting firms sponsoring thisevent were S.C. International, Inc., DWSimpson and Actuarial Careers, Inc.

The karaoke reception was held in theMayfair Room of the hotel. There is a large baypicture window overlooking the Chicago River.But, there was so much excitement in the roomthat no one paid much attention to the beautifulscenery outside. To our relief, the reception waspopular, drawing a crowd with many volunteerstaking the microphones to sing.

We might have accidentally started theactuarial recruiting firms’ new singing race as

Singing along to “YMCA””Night Drive to the Adler Planetarium

many of those who sang at the reception wererecruiters. Will the recruiting firms introducesinging skills as important attributes?

The songs selected were roughly equallydistributed among Chinese, country, oldies androck ‘n’ roll. When the always-popular “YMCA”came along, you can see from the pictures,many CAC members were not familiar withthe hand movements but joyfully joined in withthe singing.

Our first singer did a beautiful rendition ofLouis Armstrong’s “What a Wonderful World.”The consensus was that Wing Wong ofMilliman (“I did it my way”) and Shu-Yen Liuof MetLife (a Chinese ballad) were the kingand queen of the night.

Other ActivitiesThe SOA/CIA Joint Reception was well

attended. We had a selection of seafood,Chinese dim sum, Italian pasta and cuttingstations. The organizers announced that theywere serving “The Actuary,” a specially blendeddrink for the SOA meeting, served in a specialcollector’s glass.

The SOA/CIA general session keynotespeaker was Gerard Baker, who made a verythought-provoking presentation. Tensionheightened during the question and answerperiod as we discussed the United States’ rolein Iraq. This subject excited even the generallymild mannered actuaries.

Chicago is an important tourist destination.Many CAC members made special arrange-ments to see the King Tut exhibit at the FieldMuseum and the architectural river cruiseamong several other attractions.

The exhibit hall was a popular destinationduring the SOA meeting. Many of theexhibitors provided plastic bags for collectinggoodies this year. PolySystems had done thisexclusively for many years. We are waiting tosee if they come up with another hit for nextyear. Ernst & Young's Beanie Bears were themost sought-after giveaway again. The orangebear had a pumpkin patch sewn on its chestand donned a pilgrim’s hat.

See you at the National Mall in D.C.next year. o

“The SOA/CIA

general session

keynote speaker

was Gerard Baker,

who made a very

thought-provoking

presentation.”



Karaoke Reception

FSA, CFA, FIA, ALM or NBA?by Antoni Forgues

It all started on Friday the 5th of March2006 in my parents’ cozy house inRepentigny, a suburb of Montreal. It was

only supposed to be a pit stop en route to myfinal destination, Stamford, another suburb,but of New York City.

I was about to transfer to the Towers PerrinStamford office following a great work experi-ence in London with the firm. After flying morethan 6,000 miles I was less than 500 milesaway from my new home. However, my destinyhad decided I was not quite ready for UncleSam’s country. That afternoon, around 2o’clock, I received an e-mail with an official joboffer sent by Miss Rocker, later to be renamedMrs. Conigliaro after her marriage.

After weeks of deliberation, including aninterview with an actuary who had a beard asonly seen in Hollywood productions, Aonoffered me a position with their ALM team. Ittook another two months of hard work to begranted full rights to work in the UnitedKingdom, the land in which I had been livingand working for the past four years.

For all my time spent working in the Britishpension market, I realized I knew little aboutwhat was really happening. In the last fewyears there had been a large number ofchanges in both legislation and practice. Withmy new work, I was about to experience, full-blown, the scope and extent of the newplayground for British pension actuaries.These changes have materially changed therole of the pension actuary.

During the 1990s, strong equity returnsallowed U.K. pension schemes to enjoy contri-bution holidays, as was the case in the UnitedStates. Things were going so well that whenGordon Brown, the U.K. chancellor, decided toabolish the exemption from tax on dividendsfor pension schemes, even actuaries had notreally complained. This decision is thought tohave cost £5 billion to pension schemes overall.It should be mentioned that this is an annualamount and that it compares with a current

balance sheet deficit for the FTSE 100 compa-nies of around £40 billion.

Ironically, this was in 1997—only a fewyears before the stock markets entered a longbearish period, which led to the pension crisisthat is now blooming over the great island. Atabout the same time actuaries woke up to thebold conclusion that the population was livingmuch longer than anticipated. This increase inlongevity is so controversial and sizeable thatit is not yet fully recognized in companyaccounts and formal actuarial valuations.

Recently the CMI (the research committeeresponsible for mortality studies across theU.K. industry) published its latest set ofmortality tables. The CMI decided to leave theprojection of improvement in mortality rates toactuarial firms. This shows how unsure theyare about future improvements. As a positive,this has created opportunities for actuarieswho are now regularly commissioned toprovide mortality studies.

The accounting profession was quick toreact to the increase in value and uncertaintiessurrounding pension obligations. To replace anoutdated and much abused SSAP24 standard,it introduced FRS17. The new standard madeit more difficult to manipulate pension liabili-ties. FRS17 is similar to FAS87, but goes a stepfurther by recognizing the full change indeficit/surplus on the balance sheet, althoughthe impact is not taken entirely through theincome statement.

For many financial directors (FDs), the newaccounting standard is to blame for worseningthe pension crisis (FDs are the equivalent ofCFOs in the United States). Despite differingopinions on FRS17, most people agree that it has been the catalyst for the creation of avery dynamic “risk management market.”If FRS17 is the father of this market, thenJohn Ralfe is certainly the mother who gavebirth to it. In 2002 John Ralfe, former FD of Boots, the U.K. retailer, orchestrated thetransaction that made him famous. He


Antoni Forgues,

FSA, CFA, FIA, is

an ALM consultant at

Aon Consulting

in London.

He can be reached at

antoni.forgues@

aon.co.uk.


FSA, CFA, FIA, ALM or NBA?

changed the entire asset allocation of thecompany scheme fund into corporate bonds.Since then he has become a public figure andan independent pension advisor.

Following Ralfe’s transaction and a strongmarketing campaign of the type ofMcDonald’s, LDI has taken off and becomesynonymous with interest rate and inflationhedging (LDI stands for Liability DrivenInvestment). Very often this is done via swapsby using complex financial instruments.However, this is only one of the techniquesthat a pension scheme can use to adopt LDI.At the risk of stating the obvious, LDI issimply a framework within which the liabili-ties drive the investment strategy.

Another source of change is the PensionAct 2005 (PA). The PA introduced a newregulator with greater powers than ever. Thenew regulator’s mandate is to get involved inreshaping the pension landscape by beingmore pro-active than its predecessor. Itsmission is to suggest, and encourage, behaviorthat is seen as beneficial for the variousstakeholders of the pension schemes.

Prior to enacting the PA, the British govern-ment introduced the Pension Protection Fund(PPF). This was done on the sly while it wasstill undergoing a public consultation onpensions in general. The PPF acts as an insur-ance net, providing security to pension schememembers across the United Kingdom (similarto the PBGC in the United States). The PPFhas created a lot of work for actuaries due toits requirement for annual PPF liability andrisk-based levy calculations.

The PA also brought about a new fundingrequirement. The newly introduced SchemeSpecific Funding (SSF) requirement is gradu-ally replacing an inadequate Minimum FundingRequirement (MFR). MFR was only introducedin 1995 following the Maxwell scandal. It couldbe argued that the SSF requirement followsfrom another scandal—the Maersk one. Maerskis a famous or infamous Scandinavian companythat decided to walk away from its pension obli-gations in the United Kingdom, only leaving theassets corresponding to the MFR reserve. Thiswas a legal action that led to benefit cuts formost members of the scheme. It has proven to

be detrimental to the image of the company, whosince then backtracked and “voluntarily”injected funds into the plan.

For the first time, a solvent employerdecided to walk away from its pension obliga-tions purely for economic motives. This madebusinesses look bad and hypocritical, especiallysince many had benefited from contributionholidays for the major part of the 1990s. Itshould be said that the Maersk affair certainlycontributed to the introduction of the PPF anda new wind-up regime mandating solventcompanies to settle liabilities at the full insur-ance buyout cost.

As for companies that became insolventbefore the PPF began, there are now around100,000 members lobbying the government toobtain compensation. This is estimated to beworth more than £2 billion. The membersargue they were misled by the government intobelieving their pensions were guaranteed andthat the MFR requirement did not protectthem appropriately. To date the governmenthas committed much of this amount.

On April 6, 2006, the government intro-duced a new simplified tax regime. This coversboth the accumulation and distribution ofpension provisions. Ironically, this has madethe life of pension administrators morecomplex, especially in managing the transition.It has, however, the merit of making thepension system clear and transparent. Alongthe same lines, the government has announcedits plans to introduce a national pension andsavings scheme of a defined contributionnature. These changes have the merit of engag-ing the population in the important process ofretirement planning.

Some of these events occurred simultane-ously. Therefore it is difficult to put a finger onthe causes of the various changes or to putthem in chronological order. However, onething is for certain: the playground in whichactuaries are playing has massively changedover the last five years. Challenging and excit-ing new opportunities will prove rewarding forthose of us who are keen.

A few of such opportunities are companymodeling and pension settlement solutionanalysis—two interrelated areas. More and

“Maersk is a famous

or infamous

Scandinavian

company that

decided to walk

away from its

pension obligations

in the United

Kingdom, only

leaving the assets

corresponding to

the MFR reserve.”

FSA, CFA, FIA, ALM or NBA?


more companies want and need to under-stand the impact of pension schemes ontheir operations. An obvious starting pointin this analysis is the balance sheet and theincome statement. At Aon we are currentlydeveloping an integrated model thatassesses the impact of pension liabilities oncompany accounts.

If companies had unlimited budgets theycould simply buy out pension liabilities withinsurers. Unfortunately, this route is veryexpensive and the insurance market in theUnited Kingdom has limited depth. However,new investors interested in taking on theseliabilities believe there is a way to structure atransaction that will be beneficial to bothparties. This requires sophisticated modeling ofasset and liability developments in the future.

To my great pleasure, these projects allowme to make good use of the skills learnedwhilst acquiring the CFA designation. If youwonder what NBA is doing in the title of anactuarial article, well, sometimes I feel mywork is similar to one of a basketball player. Inother words, I feel I am being paid for doingthe thing I love most—financial mathematics!

The new dynamic and challenging environ-ment requires a greater level of commitmentand will prove to be rewarding for those readyto rise to the challenge. At the risk of soundingalarmist, I believe that accountants, bankersand other risk mitigation experts will reap therewards if actuaries are too slow to react. Infact, it is public knowledge that U.K. invest-ment banks and fund managers have hiredmany good actuaries and are taking the lead inthis booming risk management market (worthhundreds of millions of pounds). To counteractthe trend I welcome and encourage SOA initia-tives like the creation of an Enterprise RiskManagement Section.

When I recently attended my FellowshipAdmission Course in Hong Kong, I was luckyto meet the then leader of our profession, BobBeuerlein. I was very pleased to discover that ahighly motivated and passionate individualwas taking the actuarial profession to anotherlevel. He is the kind of individual that couldmake all the difference between a highlyregarded profession and the most prestigious

and exciting profession in the world.Globalization is happening right before oureyes—let’s ensure the survival of the humanrace by taking a very active role in thisprocess. As actuaries, we are in prime positionto accomplish this! o

“The new dynamic

and challenging

environment requires

a greater level of

commitment and will

prove to be rewarding

for those ready to rise

to the challenge.”

Brazil: A Better Business Beatby Alda Fassbender and Michael Bayard Smith


Editor’s Note: This article was originallypublished in the 3rd quarter 2006 edition of theTillinghast “Emphasis” magazine. It is reprintedhere with permission.

After 10 years of controlling inflation,Brazil’s economy is poised for highgrowth—and so is the country’s insur-

ance business.

For many, Brazil calls to mind images ofCarnival—a glittery, samba beat-driven, celebra-tion of life. In fact, after many years of cripplinginflation, Brazil is now celebrating over a decadeof economic growth and political stability. As aresult, insurance markets have begun to catch upwith developed market levels of insurancepremium per capita, and insurers are enjoyingsignificant growth.

Prospects for rapid growth in the future alsolook promising. Real interest rates—which arestill high—appear to be receding, and the govern-ment is going ahead with plans to de-monopolizethe national reinsurance facility. A combination ofstrong local companies with new and existingforeign entrants is expected to introduce newproducts, more efficient operating methods andmore aggressive competition. Insurance regula-tors are working on bringing Brazil’s regulatorysystem up to global standards, including upgradesin reserving methods and solvency measures.

With so much going on in Brazil, and theprospect of more opportunities on the horizon,domestic and foreign insurers need to take stepsnow to defend and enhance their market posi-tions—or start making plans to step in.

The Largest in Latin AmericaWith a population of nearly 200 million, Brazil

is the largest Latin American economy. Despiteperiodic difficulties since the introduction ofeconomic stabilization with the Real Plan in1994, the country has made huge strides incontrolling inflation, largely due to a tough policyon interest rates.

Today, the nominal interest rate remains near15 percent, and the interest rate on the real isamong the highest in the world.

Nominal interest rates are driven in part bysignificant government budget deficits. Someexpect that even with lower inflation, the currentdeficits will keep the real interest rate around 8 percent. The projected annual growth in GDP

through 2010 is in the 3 to 4 percent range, andinflation is projected to remain at 4 to 5 percentfor the same period. Thus, we can anticipatenominal interest rates of 12 to 13 percent unlessthere’s a breakthrough on the budget front. Still,the country is continuing to attract foreigninvestment which, along with the political stabil-ity, is helping to fuel economic growth.

The Insurance MarketThe Brazilian insurance industry is the

largest in Latin America. Reinsurance is mostlycontrolled by a government monopoly reinsurerknown as the IRB (Instituto de Resseguros doBrasil). The reinsurance market is expected to beopened to private competition in the near future,although the process of legislation and regulatorychange to achieve this has had many ups anddowns in the last seven years, leaving muchuncertainty as to timing.

In 2005, the total property/casualty (P/C)premium was $9.5 billion USD (or $23.0 billionBRL, assuming an average annual 2005 exchangerate of 2.42). Automobile insurance was about 53 percent of this premium, of which about 80 percent came from auto physical damagecoverage. The remainder of the P/C premiumwas distributed among several lines of busi-ness, such as fire, marine and liability.

The 2005 life insurance premium was $8.1billion USD ($19.6 billion BRL). About 60 percentof this came from the VGBL (Vida Gerador deBenefício Livre), a flexible premium deferredannuity product launched in 2002. Given itspension characteristics, VGBL is usuallyanalyzed together with the open pension busi-ness (previdência aberta), which includes groupand individual pension products that are privatesupplements to the state social security system.

Group life premium was about $2.5 billionUSD, or 31 percent, of the life premium. Individuallife is a very small market in Brazil, reflecting lowlevels of consumer interest and low savings rates.The total 2005 premium was $0.2 billion USD.

In 2005, contributions to open pension planstotaled $3.1 billion USD. This includes $1.4billion USD in contributions to the traditionalplans. These plans, usually offering significantinvestment and mortality guarantees, were aban-doned by providers as interest rates fell. Almostall traditional plans are no longer accepting newsales but do accept additional contributions.

Alda Fassbender has

an M.S. degree in

business administration

and is a member of the

Brazilian Institute of

Actuaries. She is a

consultant in

Tillinghast’s São Paulo

office. She can be

reached at

alda.fassbender@

towersperrin.com.

Michael Bayard Smith

is a Fellow of the

Casualty Actuarial

Society and a member

of the American

Academy of Actuaries.

He is a consulting

actuary in Tillinghast’s

Atlanta Office.


michael.smith@

towersperrin.com.

Brazil: A Better Business Beat


Another $1.7 billion USD in contributions wentto PGBL (Plano Gerador de Benefício Livre), aflexible premium deferred annuity kind of prod-uct, similar to the VGBL. The distinction betweenPGBL and VGBL relates to the tax treatment ofcontributions and benefits. Contributions toPGBL products are tax deductible, up to a limit,and the benefits are taxable. VGBL contributionsare not tax deductible, but only the investmentreturn component of any benefit is taxable.

The health insurance market has a separatesupervisory agency, ANS (Agência Nacional deSaúde Suplementar), under the HealthMinistry. ANS is responsible for the privatehealth industry, which includes business frominsurance companies and health providers. The2005 premium from insurance companies was$3.5 billion USD.

Finally, there is the Capitalização business,which is also supervised by the insurance super-intendency, SUSEP (Superintendência deSeguros Privados). Capitalização is a kind oflottery business with a savings component. Itstotal 2005 premium was $2.9 billion USD.

Evolution of Insurance PremiumThe insurance market has grown more rapidly

than the economy. The exception was 2002, a diffi-cult year due to the presidential election and theconcerns about a change of ruling party. Exhibit 1shows the insurance growth above inflation andreal GDP growth. It depicts activity including andexcluding VGBL, as VGBL was launched in 2002and better fits the open pension statistics. Thehealth premium (from 2000 to 2002) was excludedfrom the amounts, as it has not been part ofSUSEP statistics since 2003.

Growth has been particularly strong in theauto and group life lines of business in 2004 and2005; in these lines of business, the market isbecoming more sophisticated in terms of pricing.Technically oriented insurers with a clear under-standing of their line-of-business and customermarket segments will benefit from the increasedregulatory scrutiny compared to more traditionalmarket-driven insurers.

Exhibit 2 shows the annual insurance directpremium and open pension contribution growthfor the past three years.

Since its introduction, VGBL has been thepreferred accumulation product. The low growthof the pension business in 2005, including theVGBL, can be partially explained by problems

the insurance industry had in communicatingchanges in the income-tax legislation tocustomers. The initial numbers for 2006 show arecovery of the growth for pension.

These growth rates are attractive to currentparticipants and should encourage interest inentering the market.

Insurance PlayersThe Brazilian insurance industry is highly

concentrated. Most of the larger players belong tobank groups. Banks such as ABN Amro, Banco doBrasil, Bradesco, Caixa Econômica, HSBC, Itau,Santander and Unibanco have very good reputa-tions and active insurance operations.

More than 60 percent of the life and non-lifeinsurance premium comes from six players:Bradesco, Itau, Porto Seguro, Sul América ING,Tokio Marine/ABN Amro and Unibanco AIG.Bradesco’s market share is greater than 20percent. About 85 percent of the premium is from15 players.

Source: SUSEP, Bacen




Ten players are responsible for about 90percent of the open pension contributions.Bradesco has almost 30 percent, followed byBrasilprev (joint venture of Banco do Brasil andPrincipal Financial), Unibanco AIG and Itau. In2005, Bradesco had 42 percent of the $20 billionUSD of open pension funds and 47 percent of the$28 billion USD of VGBL funds.

Many foreign players are also present in themarket, with or without a joint venture with localor other foreign players. Foreign players operat-ing in the country include ACE, AGF (Allianz),AIG (joint venture with Unibanco), Assurant,Berkley, Cardif, Chubb, CNP (joint venture withCaixa Econômica), Generali, Hartford (jointventure with Icatu), HDI (distribution agreementwith HSBC), HSBC, ING (joint venture with SulAmérica), Liberty Mutual, Mapfre, MetLife,Mitsui Sumitomo, Principal Financial (jointventure with Banco do Brasil), Prudential, QBE,Royal & SunAlliance, Santander, Tokio Marine(joint venture and distribution agreement withABN Amro), XL (joint venture with Itau forcommercial risks), Yasuda and Zurich. AXA hasrecently announced a commercial agreementwith Sul América for commercial risks.

Although there is high degree of marketconcentration and a number of foreign partici-pants, there is still room in the market for theright company, particularly once market condi-tions support higher growth levels.

DistributionThere are two main insurance distribution

channels in Brazil: independent brokers andbanks. Banks are the preferred choice ofconsumers wishing to acquire pension products,given the similarity of these products withmutual funds and bank savings products, as wellas simple retail products such as personal acci-dent and homeowners. With enhanced analysis ofthe customer base, there is further opportunity toincrease sales of auto insurance through banks.

Other personal P/C products and commer-cial insurance are sold through brokers.Insurer dependence on this channel hasallowed brokers to maintain high commissionrates when compared with other countries. Thecost of bank distribution is less than that forbrokers, and the reduced distribution cost canlead to lower prices for insureds or higher prof-its for insurers. Other lower-cost distributionsystems, such as affinity or employer groups,are being developed at this point.

ProfitabilityThe average administrative expense ratio has

been on the order of 19 percent (plus or minus 3 percent) for P/C predominant companies. It isimportant to determine, when analyzing admin-istrative expense ratios, if there are intergrouparrangements affecting expenses, such as in thecase of bank-related companies.

Combining a 19 percent expense ratio with aloss ratio around 70 percent and a commissionratio of 19 percent, auto insurance averagecombined ratios are approximately 108 percent.Thus, on average, an insurer can make a reason-able return only if it achieves enough investmentincome, potentially enhanced further by addi-tional return from premium financing.

Group life loss ratios range around 55 percent, but commission ratios are usuallyhigher, around 25 percent. The range of lossand commission ratios in the market is large,depending on underwriting and distributionplans. This business can be profitable forcompanies that have sufficient size to keepadministrative expenses at about 10 percent,although even companies with annual premi-ums close to $200 million BRL can haveexpense ratios close to 30 percent. For smallercompanies, the ratios can be much higher.

Personal accident is usually a very profitableline, with loss ratios below 30 percent andcommission ratios on the order of 20 percent.However, the sales of this product are usuallymore successful through banks, primarily using apush strategy. The market is not sizable.

The main fire/multirisk coverages are classi-fied by SUSEP into three categories:homeowners, condominium and small commer-cial. The 2005 total direct premium for the threelines together was $1.7 billion BRL, with home-owners accounting for 39 percent, condominium 7percent and small commercial the remaining 55percent. The best performance of these threelines is in homeowners, with an average loss ratioaround 35 percent and an average commissionratio of less than 30 percent. Given the currentprofitability of the line, and a limited tradition ofacquiring this type of insurance, there is room toreduce prices to stimulate market growth.

Loss ratios for small commercial and condo-minium have been in the 60 percent to 65percent range, with commission ratios on theorder of 30 percent. These are competitivemarkets with low profitability.

“It is important

to determine,

when analyzing

administrative

expense ratios, if

there are intergroup

arrangements

affecting expenses,

such as in the case

of bank-related

companies.”


The large commercial risks at this point arevery dependent on IRB rates; the smaller thecompany, the more its retail rates are determinedby the reinsurance rate IRB charges. The openingof the reinsurance market is expected to changethe profile of this market, but the timing andprocess are not clear at this point. Some openingis occurring in the wake of IRB permission to useexternal facultative and some treaty reinsurance.This may be the pattern of a gradual opening ofthe market.

Competition in open pension is strong andsignificantly influenced by the mutual fundinvestment market. Administrative fees need tobe reduced, and only large companies can be prof-itable in this market. This is the reason whysome foreign players with small operations in thecountry, such as Nationwide and Canada Life,left recently.

Profitability varies not only according toline of business but is also highly influenced bythe company’s size, due to expense scale gainsand the level of independence of IRB. Recently,the industry has shown profits well above theafter-tax risk-free investment rate in the coun-try, as evidenced by Exhibit 3. In 2002 and2003, the results were not as good due to politi-cal and economic instability as the countryexperienced elections and made a transition toa new party in the government. In the graph,we excluded the returns due to investment inother companies. We also assumed a 15 percentincome-tax rate for investments for all years,which is a conservative assumption.

The graph does not reflect the profits of eitherCapitalização or the health insurance business.Capitalização has been a very profitable busi-ness, given the low guarantees offered and thehigh interest rates in the country. Health insur-ance is subject to severe regulatory limits onprice adjustments. Health insurance policies soldbefore the 1998 change in legislation representthe main concern at this point.

InvestmentsCurrently, insurance investments are practi-

cally all in bonds issued by the government or inmutual funds invested in government bonds.Investments in the stock market are allowed,with restrictions, but are very limited nowadays.Lower yields on bonds will force insurers toconsider investing elsewhere, despite the risks, tooptimize their returns. The current low-risk,high-return environment is not likely to persist

much longer. Any rapid decline in real interestrates will require insurers to respond with majorchanges in their investment portfolios, as well assharp reductions in loss and expense ratios.

RegulationSUSEP has recently been very active in

improving the supervision of the market to bemore in line with global standards. Emphasis hasbeen put on the protection of consumer rights,and insurance companies are expected to providemuch more information. Although the require-ments and supervision of technical reserves havebeen improving, there is still work to be done inthis area. Improvements in this respect will favora more leveled competition. Available data ofgood quality for analysis will reward the compa-nies that have such data.

Looking ForwardThe expectation of falling interest rates in

Brazil will have profound influences on insurancemarket competition. It will provide conditions forhigher growth and will require insurers toupgrade significantly their technical abilities andto reduce loss and expense ratios. The opening ofthe reinsurance market will also give a new faceto the large risk segment. The country’s GDPgrowth, accompanied by improving social, politi-cal and economic conditions, will stimulategrowth in demand for insurance, especially insome particularly underdeveloped segments.

Given the size of the country, the level ofresources and the government’s strong commit-ment to democracy, Brazil should be one of thechief targets for foreign investors in the comingyears. The insurance industry will be one of themain growth sectors. o

“The large

commercial risks

at this point are

very dependent on

IRB rates; the

smaller the

company the more

its retail rates are

determined by the

reinsurance rate

IRB changes.”



Caribbean Actuarial Association (CAA):16th Annual Conference in Surinameby Marcia Tam-Marks


After months of planning and numerouse-mails regarding visa and flightarrangements, the Caribbean actuaries

were off to uncharted territory. The venues forthe annual Caribbean Actuarial Association(CAA) conferences for the past 15 years hadbeen Barbados, Jamaica or Trinidad andTobago. In 2006 we broke with tradition andaccepted an invitation from our Surinamecolleagues to host the 16th annual conferencein Paramaribo, Suriname on December 7-9.

A huge banner exhibiting the lush greenflora of Suriname greeted delegates at theairport. On hand to welcome the majority ofdelegates at 1 a.m. were our Surinamecolleagues Stephen Smit, Mario Merhai andRishie Parbhudayal.

The theme for this year’s conference was“Building Bridges—Facing the ChallengesTogether.” The conference was held at theTorarica Hotel and Casino located in the heartof the city centre. Conference proceedings beganon Thursday and delegates were welcomed bythe president of the CAA, Derek Osborne fromBahamas and Stephen Smit, chairman of theLocal Organizing Committee and CEO ofAssuria in Suriname. We were honored to havethe conference opened by the president ofSuriname, H.E. Drs Runaldo R. Venetiaan,whose daughter Ilemele Venetiaan is an actuaryin Suriname and who coincidentally was twodays overdue with her first child when sheattended the opening session of the conference.

The keynote speaker was Pari Kandhai fromthe Netherlands. Pari is the actuarial advisor toDSM, a global specialty chemical company. He

also serves as advisor to its Pension Board. Beingthe architect of the international DSM pensionstrategy, he is responsible for implementing,guarding and maintaining this strategy. Parigave a very interesting practical case study ofhow he goes about developing and managing thisstrategy for the DSM Pension Board.

Derek Osborne then spoke on CaribbeanSingle Market and Economy (CSME) and itspossible impact on the Caribbean’s social secu-rity systems. He illustrated how the portabilityof benefits would affect benefit and contributionlevels as well as the current funding status ofthe various Caribbean countries.

The afternoon session began with a presen-tation on the Capital Requirements for LifeCompanies in the United Kingdom, presentedby Nick Dumbreck, president of the Institute ofActuaries. This was followed by a “membersonly” session to discuss the proposed discipli-nary process and the possible paths that theCAA could follow. We had the benefit of havingNormand Gendron, the president of theCanadian Institute of Actuaries (CIA), and KenClark, a former CIA president, share theirknowledge with us. Janet Sharp, the chair ofthe CAA Disciplinary Process (DP) committee,presented the proposed process that was devel-oped and the rationale that had gone into itsdevelopment. Other members of the panel whowere part of the DP committee were AstorDuggan and Winston St. Elmo Whyte, bothfrom Jamaica.

Dinner at the Indonesian Restaurant JAWAwas delicious and we were treated to two tradi-tional Indonesian dances.

Friday morning’s session began with presen-tations on the regulation of the insuranceindustry of Jamaica, Barbados and Trinidadand Tobago, focusing mainly on life insurance.All three countries are at various stages ofregulatory review with Jamaica having alreadyimplemented new legislation a few years ago.Presentations were made by Leon Anderson ofthe Financial Services Commission (FSC) inJamaica, Simone Thompson of Barbados, andMarcia Tam-Marks spoke about the develop-ments in Trinidad.

Being in Suriname for the first time gave usan opportunity to learn about the life andpensions industry in Suriname and theNetherlands Antilles. This was articulated by

Marcia Tam-Marks,

FSA, is a consulting

actuary at Analytics

Ltd. in Trinidad, W.I.

She can be reached at

marciatammarks@

analytics.co.tt.

Rishie Parbhudayal, Petty Mahabiersingh, Stephen Smit, Mario Merhai and

Saskia Monsels-Holtuin

16th Annual Conference in Suriname


Dr. Herman Couperus who is currently theactuarial manager at ENNIA Caribe inCuracao and Dr. Arthur Lo Fo Wong, an actuaryfrom Suriname, who consults on pensions inboth the private and public sectors.

Pieter Bouwknegt from the Netherlandsspoke on the topic of fair value and asset liabil-ity modeling. Pieter heads the ALM departmentat Nationale-Nederlanden/ING in Rotterdam,Netherlands. Following on this topic, three ofour members—Neil Dingwall and MarcusBosland, both from Guardian Life of theCaribbean and Mario Merhai from Assuria inSuriname—spoke about the life insurancemarkets in Jamaica, Trinidad and Suriname,including the products, customer behavior andthe investment environment and instrumentsavailable to the companies.

Cathy Lyn presented on the topic“Professionalism within the Business Context.”Cathy, who is from Jamaica, has a special inter-est in developing the actuary’s skill sets in abusiness context and she shared her views andexpertise in this area. Cathy is the featureseditor of the SOA International News.

The final presentation for the conferencewas on “Hurricane Modelling and Pricing forGeneral Insurance in the Caribbean,” whichwas done by John Duda from the BenfieldGroup in Canada. John illustrated some of theprediction models used in catastrophe riskmodeling and how these are used in developingpricing models.

The CAA’s annual general meeting is alwaysheld on the last day of the conference and thisyear was no different. Constitutional amend-ments were adopted and the CAA’s proposeddisciplinary process was exposed for commentin the hope of adopting it at the next AGM. Wealso welcomed 12 new members to the CAA.

On Friday night we were treated to a sump-tuous dinner at the Bayside restaurant and anunforgettable performance by an ensembleplaying drums and other indigenous instru-ments. Throughout the conference we weretreated to delicious Javanese, Indian, Chinese,Indonesian and Surinamese food and lots of it!

On Saturday we took a bus ride into theinterior of Suriname to the Overbridge Resortwhere we boarded small boats carrying us toancient ruins of an old city about half an houralong the river. We had lunch at the resort andthe one and only Richard Nunez took a refresh-ing river bath (we have pictures to prove it).

Saturday night was a free night and delegatesexplored the different restaurants and nightclubs along the city centre located just outsidethe hotel.

Thanks must go to Stephen Smit and histeam in Suriname for the warm reception andwell organized conference. We also wish to saythanks to Lisa Wade and her committee inBarbados who were responsible for the confer-ence program. Thanks also to Nick Dumbreck,president of the Institute of Actuaries, andNormand Gendron, president of the CanadianInstitute of Actuaries, for giving their time andexpertise. Thanks to all the delegates formaking this conference possible.

We would also like to express our gratitudeto our sponsors without whose support thisconference would not be possible, namely, fromCanada, Munich Re Group, Swiss Re, GGY(AXIS) and Valani Consulting; from Barbados,Sagicor Life Inc; and from Suriname, AssuriaN.V., Consolidated Industries Corporation N.V.,N.V. Hotelmaatschappij Torarica, SurinameAlcohol Beverages N.V. and Telesur.

Sessions at this year’s conference were eligi-ble for Continuing Professional Development(CPD) credits from the Institute of Actuaries.An application has been made to the Society ofActuaries for credit under their ProfessionalDevelopment program.

Actuaries from around the world are invitedto the CAA’s 17th Annual Conference whichwill be held in The Bahamas, December 6-7,2007. Mark your calendars now!!

Further details may be found on our Web site—www.caa.com.bb o

“The final presentation

for the conference

was on “Hurricane

Modelling and Pricing

for General Insurance

in the Caribbean …”

Astor Duggan, Lisa Wade, Stephanie Banfield, Ryan Griffith, Shubhash Gosine, Marcus

Bosland and Neil Dingwall

Frozen-Entry-Age Term Life Policies in Brazil:

Learning to Deal with Long-Term Riskthe Hard Wayby Craig Reynolds and Paulo Hirai


Background More than 20 years ago, life insurers in

Brazil discovered an ostensibly great productto quickly increase their profits. Term life poli-cies known as “frozen-entry-age” policies wereattractive to insurers because of the appar-ently high profit margin and attractive toconsumers because of the prospect of maintain-ing a level premium throughout their lives.Brokers were also happy because the productapparently had a healthy profit margin andinsurers could afford to pay nice commissions.

Frozen-entry-age term life is a one-yearrenewable term policy, with a level premiumdetermined based on the issue age of theinsured. The only adjustment allowed is anannual premium and face amount increase tooffset the prior year’s inflation. For many yearsthe renewal was automatic, making policyhold-ers believe they had a policy for life. Withrecent changes in regulations, all term insur-ance policies can be automatically renewedonly once. The issue, however, regardless of therenewal process, is the right of the policyholderto keep renewing the policy, or the right of theinsurer to stop renewing it.

Two decades ago, there were limited regula-tory requirements for reserves, as incurred butnot reported (IBNR) liabilities were not yetrequired and the premium deficiency reserve wasonly part of the academic discussions and not yetlegally required. An actuary’s view of product riskback then was based on the assumption that theaverage policyholder age would remain stabledue to the offset of lapses and new entries. As theproduct proved to be a sales success, many otherinsurers launched similar products.

The ProblemOver the years, the population aged and the

average age of the in-force block increased.Unlike the original basic assumption, adverserisk selection occurred. Younger policyholderslapsed at a much faster rate than the oldergroups. The risk level increased sharply andsome portfolios are now deep in the red.For most companies and portfolios, futureprojections show fast profit deterioration andnegative results within a few more years.In one acute case analyzed by Milliman, the

negative present values of profits on these poli-cies were six times the company’s reported networth on a local regulatory basis!

It is difficult to estimate the total number ofoutstanding policies of this nature in themarket. According to some estimates, therewere more than 2 million four years ago andnow there are still more than 1 million policiesin force. Lapses and insurer-driven migrationsto other policies have reduced the number ofoutstanding policies.

If we assume an average insured amount ofU.S. $20,000 per policy, the total insuredamount might still be in the range of $20billion, a huge sum compared to the size of theoverall life business in Brazil.

Loss ratios for the older groups vary, but itis not uncommon to find 200 percent or even400 percent in the worst cases. Some portfolioswith this type of policy are already showingnet losses overall.

Lapse rates have dropped dramatically forhigher age policyholders, in some cases downto 2 percent per year, while the younger groupsshow double-digit lapses. This adds to the fastaging of the entire policyholder population.

Actuaries’ Point of ViewTwenty years ago, Brazil already had many

competent actuaries. However, when overwhelm-ing pressure from sales departments combinedwith top management’s desire to have a productthat was selling well at competing firms, manycompanies ended up following the same path andadopted the term life policies in question.Common thinking at the time also held that theaverage policyholder age would remain the sameover the years due to new entrants and the totalcompany risk would not change. Some actuarieseven followed this train of thought, perhaps as away to excuse themselves for accepting some-thing they knew they should not.

But even when the issue became apparent,no reserve was typically set for this product. Itis probably difficult for an outsider to under-stand the behavior of local actuaries, especiallysince the “prudent man rule” is used in theUnited Kingdom and United States. Under this

Craig Reynolds, FSA,

MAAA, is a consulting

actuary with Milliman

in Seattle, Wash. He

can be reached at

craig.reynolds@

milliman.com.

Paulo Hirai, MBA, is a

consultant with

Milliman in Sao Paulo,

Brazil. He can be

reached at paulo.hirai@

milliman.com.

Learning to Deal with Long-Term Risk the Hard Way

rule, it would be obvious that the actuaryshould create reserves, even if there were noregulatory requirement for it. However, coun-tries like Brazil are under a strong influence ofthe Napoleonic Code, and laws and regulationsare required before any action is taken, regard-less of the needs. Premium deficiency reserveis new to Brazil and the first regulatory actwas passed only five years ago.

The rules for calculating premium defi-ciency reserves allow insurers some flexibilityin their assumptions, and therefore some flexi-bility to control the level of reported reserves.Some conscientious insurers eventually startedsetting appropriate premium deficiencyreserves, while many others delayed their deci-sion and are still setting the minimumrequired by the regulations.

Brazil’s Institute of Actuaries (IBA) has ascope similar to that of the Society of Actuariesin the United States, but with far less influ-ence. Even today in Brazil, an actuary’sactivities are not well understood and actuarialduties must often compete with other unre-lated corporate objectives. IBA is developingefforts to better support its professionals, andthe national insurance regulator is also foster-ing the “Responsible Actuary” concept bypassing regulations that define actuaries’responsibilities at an insurance company.

Premium deficiency reserve is now requiredby the insurance regulator, but companies areallowed to use their lapse experience. Althoughthe lapse rate experience at most companiesclearly shows that lapse rates decline with age,some companies are using the past overallaverage rate. Typical lapses for ages above 50years are around 3 percent, while the overalllapses for all ages is still near 10 percent. Theyounger groups bring more profit but theirnumber is declining quickly, while the money-losing older groups remain loyal.

It is crucial that actuaries be respected asprofessionals and that any company forcing anypractice outside the limits of good actuarialstandards is disciplined with rigor. The afore-mentioned efforts are good news, but Brazil stillhas much to improve upon compared to theachievements in the United States and Europe.

Initial ActionsRecently, some life insurers carrying policies

with level premiums have been franticallytrying to solve the problem.

Initial attempts aimed to migrate thesepolicies to a new term life policy with premiumadjustments according to age brackets, ascurrently required by recent regulations fornew products. However, the problem is that theprice difference between the old and new policyis tremendous for older policyholders.Premiums can easily go four times higher.Companies that decided to migrate policiesregardless of the policyholders’ will are facinglawsuits. Product migrations completed up to ayear ago generated a few lawsuits, but notenough to prompt serious corporate concern.Clients felt betrayed when they were treatedso poorly, but the majority quietly swallowedthe higher premiums.

Recent DevelopmentsRecent migration movements are facing

tougher reactions. Consumer rights organiza-tions are bringing lawsuits under consumerlaw, and insurers’ initial victories under thecivil code are now being overwhelmed by theseconsumer lawsuits.

It is too early to say what the final outcomewill be, as the issue will likely be decided inthe upper courts of Brazil’s judiciary system.State attorneys are watching these casesclosely and are advising companies to halt anyforced migration attempts.

One company decided not to migrate to a newpolicy but instead to increase premium levelsregardless of the policy’s promise of a leveledpremium, dividing it in small yearly increments.The initial price increase was presented to thepolicyholders along with a good explanation ofthe problem and what was being done to solve it.As the initial small price increase alone wasinsufficient, a yearly price increase was sched-uled and communicated to the policyholders.This particular company has experienced fewlawsuits thus far, but as prices continue toincrease, new legal challenges are likely.

A second company is taking a differentapproach and is preparing to negotiate with allpolicyholders—one by one, if necessary.Existing law requires an insurance company tohave three-quarters of the clients agree to apolicy change before it is enacted. That require-ment may seem an impossible mission to many,but this company’s commitment and willing-ness to seek consensus has an undeniable meritand may set a new standard of action.

“Some conscientious

insurers eventually

started setting

appropriate premium

deficiency reserves,

while many others

delayed their decision

and are still setting

the minimum required

by the regulations.”


“Cumbersome

spreadsheets can

serve as a barrier to

effective action, and

are in many cases

the true reason for

not doing proper

analysis.”


Learning to Deal with Long-Term Risk the Hard Way

Another company decided to take fullresponsibility for the problem and set a fullpremium deficiency reserve, calculated accord-ing to the best actuarial practice. Although thedecision has much merit (at least from theconsumer point of view), it was “inspired” bythe bank that sold the insurance company’s lifeproduct to its clients.

MeritShould a company honor its obligations and

liabilities, even if this poses a risk to itssolvency? Was the product sold a de facto “wholelife” product and should a whole life reserve beset from the beginning? Was the insurancecompany a victim of a group of smart policyhold-ers that generated an adverse risk selection?

There is no easy answer.

Consciously assuming short- and long-termrisks and keeping promises are key to thefuture of the entire industry. The foundation ofthe insurance industry lies in a trusting rela-tionship with the clients. If a client startsbelieving that the insurer is not going todeliver, he will certainly stop buying.

To what extent the level premium policiesare going to harm the relationship with theconsumers will depend more on the insurancecompanies’ behavior than on the judiciary’sdecisions. Legal decisions will only recognizethat the insurers did something they shouldnot. Or, less likely, recognize that a poor pricingdecision was made in the past and that theinsurers have the right to fix it.

Implications for Insurers andActuaries

These products are bringing pain to manyinsurers but are also shedding light on thebasic foundation of the insurance business.Many insurers and executives are reviewingtheir concepts. As stated by a technical vicepresident of a life insurance company, “Beingan insurer is far more difficult than just work-ing in an insurance company.”

Many professionals must now think aboutwhat went wrong and determine what should bedone to prevent future problems and to properlyfix the current one. The conventional one-sidedapproach generates poor results because it harmsthe consumer relationship and often results innegative judiciary rulings. Any attempt to hide,disguise and selfishly pass the liability solely to

the consumer will only generate distrust, and thecourt will probably rule against the company. Inthe long run, everyone loses.

Working in the shareholder’s best interest isa worthy obligation, but the exact definition of“best interest” is not always obvious, even if arepresentative expresses the shareholder’sshort-term desires. Maximizing profit in theshort term can endanger the long-termsolvency of the company or alienate thecustomer base. Insurance is a long-term busi-ness, and insurance company managementmust recognize this and act accordingly.

Actuaries clearly need the protection to fullyexercise their profession. Even so, there arelimits on what is an acceptable actuarial prac-tice. IBA or other regulators should play a moredecisive role in protecting quality actuaries.

Actuaries are also learning that they needto have a better grasp on risk managementand need appropriate tools for long-term riskanalysis. Cumbersome spreadsheets can serveas a barrier to effective action, and are in manycases the true reason for not doing properanalysis. “What if ” analyses cannot beconveyed very well with spreadsheets.

We have worked with a number of compa-nies to develop financial models to measure thetrue embedded losses in these blocks and toanalyze options for mitigating the losses.

Regulators are learning that they need tounderstand and supervise insurance compa-nies in their long-term liabilities and also thatthe current tools and evaluation system arenot adequate for the timely identification offuture problems.

ConclusionBrazil is facing many changes in its market-

place. A few micro-economic reforms are underway as part of the country’s modernizationprocess. The insurance sector is being affectedby these reforms and is undergoing manychanges itself. The frozen-entry-age term lifeproblem, regardless of the pain it has caused,has taught a useful lesson to insurers andinsurance professionals, who are now muchmore aware of other potential liabilities thatmay appear in the future. o


Feedback from SOA Members in China

Samuel Zhou, SOA ambassador for China,carried out an informal survey of SOAmembers in China in December 2006.

The results of the survey were distributed tothe International Section council members inJanuary 2007.

SOA Members in ChinaAs of the end of 2006, there were 135

Fellows and 192 Associates of the Society ofActuaries. More than 19 universities orcolleges provide actuarial science education.

What Are Members Saying?SOA Examination Centers: The establishmentof an examination center at Dalian Universityhas been a success over the past two years. Itbodes well for the future of the actuarial andinsurance industries in China. The Fu DanUniversity center is sponsored jointly by theuniversity and by AIA Shanghai. This has alsobeen a success.

SOA Publications: Some members areconcerned about the late delivery of SOAmagazines. One member would welcome seeinga Chinese version of the North American

Actuarial Journal. This would increase read-ability for Chinese members.

Practice Committees: Given the size of themembership in China, a suggestion wasmade to establish Chinese PracticeCommittees e.g. , Life, Health, P&C,Regulatory, Education and Investment.

SOA Seminars: Given the growth in themembership, they would like to see moreseminars hosted locally. It would providemore opportunities for participation by theChinese members.

Exam Fees: Some members would like theSOA to reconsider how the exam fee discountprogram is being carried over into the newexam system. They would prefer to see a freshstart of the three times limit on the newexams. Another respondent is generallyconcerned that the high cost of SOA exams isforcing students to go into other areas. Newfinancial system exams are being introducedin China and they may attract prospectiveSOA candidates.

Impact of SOA Entry into China: There was asuggestion that the SOA, in partnership withChinese members, should collect and publishstatistics to demonstrate the impact that theSOA entry has had on the profession and theindustry over the last 10 years. More andmore people would then realize the impor-tance of this profession and understand moreabout its development. o

City Fellows AssociatesShanghai 69 88

Beijing 42 49

Shenzhen 10 14

Guangzhou 7 10

Other* 7 31

Total 135 192

EmploymentCategory Fellows Associates

Direct Insurer 113 132Reinsurer 10 4Regulator 1 3

Consultant 6 13

University 0 7

Fund 0 1

Not available 5 32

Total 135 192

*Other includes Chengdu, Dalian, Nanjing, Tianjin, Xi’an,

Zhuhai and Hangzhou.

Members by city of work:

Members by employment category:

Untapped Opportunities in the Middle Eastby Iyad Hourani and Marc Tarazi


The insurance industry is one amongstmany sectors that offers tremendousopportunities in the Middle East. Low

penetration rates, rapid population growth,significant economic development and GDPgrowth are some of the reasons why manyexperts foresee a blossoming future for thisindustry.

In recent years, the rise of compulsoryinsurance and the efforts of governments toopen the health and pension fields to privatesector involvement have also contributed to thegrowth of the insurance sector.

Many Middle Eastern countries have alsowitnessed important changes in their insuranceregulatory and supervision framework. Theregion would benefit greatly from sharing bestpractices with advanced insurance markets, inparticular with regards to supervision, reinsur-ance optimization, and actuarial expertise.

Before getting back to the insurance sector,we want to present an overview of the actuar-ial profession in this region of the world.

The Actuarial Profession in theMiddle East

According to Ibrahim E. Muhanna, currentpresident of the Lebanese Association of Actuaries(LAA), for each million of population, there areabout 16 actuaries in the Western countries,around four actuaries in developing countries,and only 0.2 of an actuary in the Arab world!

There are currently fewer than 45 actuar-ies practicing in the Middle East region(associates and fellows of local and/or interna-tional actuarial associations), many of whom

are well beyond their 60s. Of this number,around 20 are expatriates. Finally, a smallnumber of actuarial students are in theprocess of taking actuarial exams or areenrolled in local actuarial programs.

The LAA, founded in 2001, and theEgyptian Society of Actuaries, founded in 1999,are full member associations of the IAA. Threeuniversities in Lebanon, two in Egypt andrecently one in Jordan offer actuarial courseswithin their mathematics program.

There is indeed an increasing awarenessabout the role of the actuary in these economies.However, due to the extremely small size of theprofession, fresh graduates often encounter diffi-culties in finding adequate trainingopportunities that would lead them to successfulcareers and acute actuarial proficiency.

The Muhanna Foundation based in Beirut,Lebanon is a key player in promoting actuarialeducation as well as the profession itself in theregion. The foundation organizes conferences,seminars and workshops on a regular basis inthe Arab world, and runs a diploma program inactuarial science.

No specific mortality or morbidity table hasbeen built for a particular Middle Easterncountry or for the Arab world in general. Thecommon practice is to use a standard foreignmortality table subject to adequate loadings.Global reinsurers have usually filled the gapfor actuarial expertise by setting price levels inthis region characterized by relatively highreinsurance cession rates.

Booming Economies &Insurance Industry on the Move

Getting back to our subject matter…

With a few exceptions, particularly in thecase of conflict-stricken Lebanon, theeconomies of the Middle East have consistentlyposted annual GDP growth over 4 percent inrecent years, with Qatar showing GDP growthnearing the two-digit marks. See Table 1.

One of the main factors that contributed tothis rush is the surge in oil prices to recordlevels at more than $70 USD a barrel in 2006,up from an average of $26 USD in 2002. The

Iyad Hourani, FSA,

FCIA, FLAA,

is a consultant and

senior actuary at i.e.

Muhanna & Co.

(Lebanon, Middle

East). He can be

reached at

[email protected].

Marc Tarazi, M.Sc., is

an actuarial assistant at

i.e. Muhanna & Co.

(Lebanon, Middle

East). He can be

reached at marc@

muhanna.com.

important budget surpluses resulting from thishave further enabled Arabian Gulf countries,the main oil exporting players in the region, toenter into and finance major construction andinfrastructure development projects that arereshaping the Middle East economies.

Moreover, in addition to the developmentand growth of local companies and institutions,many multinational corporations are establish-ing regional offices in Dubai (UAE), Doha(Qatar), Amman (Jordan), Manama (Bahrain)and other important cities, looking to partici-pate in the blossoming of the region.

This thriving economy along with the introduc-tion of compulsory medical and TPL insurance insome countries, and other factors mentionedabove, have inevitably triggered insurancegrowth. Insurance gross written premiums(GWP) have been steadily increasing: more than18 percent between 2004 and 2005 in theKingdom of Saudi Arabia (KSA), one of the mostimportant markets in the region. See Table 2.

Each market will grow at its own pace. Butinsurance industry players around the world areunanimous in their expectations about thesustainable potential growth in the Middle East.Recent examples of important changes in theregion include the KSA, where health insurancepremiums will increase to $1.33 billion USD inthe coming year up from $266,700 USD in 2004due to the newly established compulsory privatehealth insurance for expatriate workers. We arewitnessing a slow but on-course process of privati-zation of health insurance coverage for expatriateworkers in the Gulf States, bearing in mind thatthe number of expatriates almost exceeds thenumber of nationals in these countries. Anotherarea where growth is expected is the enforcementof new compulsory liability motor coverage suchas in KSA and the UAE.

In the region, unlike in the North American orEuropean markets, the business of pension andlife insurance lags behind that of P&C. Most lifepolicies are linked to mortgage loans because ofbank requirements. That is due in part to thegenerous pension schemes in the social securitysystem, restrictive investment rules and mostimportantly because the notion of insurance (lifeinsurance in particular) is contradictory to theIslamic faith.

Many insurance companies are increasinglydeveloping Takaful products for their life insur-

ance lines of business, where such products aredesigned to be compliant with Islamic law.Takaful is an emerging part of the insurancebusiness and yet another factor of market growthin the region. Actuaries are getting more andmore involved in developing such products.

One of the reasons for the historically slowdevelopment of the Takaful sector is that it neededto be matched by the expansion of a Takaful rein-surance capacity, which remains limited. Recentlytwo major companies were launched in the region.Takaful Re based in the UAE will reinsureTakaful insurance companies; it has an author-ized capital of $500 million USD and paid-upcapital of $125 million USD. Also, Solidarity, with$100 million USD paid-up capital is gearing up tobecome the largest Takaful insurer in Bahrainand the largest Islamic insurance company in theworld. These Takaful companies capitalize onproduct innovation, overcoming social and reli-gious insurance barriers and meeting the growingdemand for this line of business.

Untapped Opportunities in the Middle East

“… insurance industry

players around the

world are unanimous

in their expectations

about the sustainable

potential growth in

the Middle East.”

2003 2004 2005

Qatar 8.6% 9.3% 8.1%

Jordan 3.7% 7.7% 7.1%

Kingdom of Saudi Arabia 3.0% 5.2% 6.5%

United Arab Emirates (UAE) 6.3% 7.4% 6.0%

Bahrain 4.9% 5.6% 5.9%

Oman 3.3% 4.5% 3.9%

Kuwait 1.6% 7.3% 3.3%

Lebanon 1.0% 6.0% 0.5%

GDP Growth

Source: Muhanna & Co. Rating Services


2004 2005 Growth

UAE 1,493 1,862 24.7%

KSA 1,408 1,667 18.4%

Lebanon 577 628 8.8%

Kuwait 393 483 22.9%

Qatar 283 406 43.5%

Jordan 273 314 15.0%

Oman 274 292 6.6%

Bahrain 243 267 10.0%

Gross Written Premium(million USD)


Country

Table 1

Table 2

Country

Insurance Regulations andMarket Challenges

Spurred on by robust global economicgrowth, financial markets witnessed favorableperformance from 2003 to 2005, although tovarying degrees across different sectors. Someregional insurance companies have thereforeinvested heavily in equities, and investmentrevenues became a significant portion of theirannual profits. Moreover, some of them builttheir business plans on the assumption ofcontinued dazzling equity market returns.When 2006 witnessed the inevitable marketcorrection, the illusions of many faded away andprofits dropped tremendously! See Table 3.

This small example, anodyne maybe, illus-trates just how important the need for

adequate and enforced insurance regulation isin this part of the world.

Don’t get me wrong! There have been impor-tant changes and major steps taken in the pastdecade in this regard. Jordan, Bahrain, Dubaiand Saudi Arabia have all put in place properinsurance laws and supervision frameworks.As examples, the Dubai Financial ServicesAuthority (DFSA) and the Bahrain MonetaryAgency (BMA) are both full members of theInternational Association of InsuranceSupervisors (IAIS). Other countries lag behindand we see many of their insurance companiesgoing about their business more as “glorifiedbrokers” than insurers.

Actuaries have been and still are involvedin drafting and implementing regulations.Their role and expertise are being increasinglyrecognized, appreciated and sought out.

Although there is an essential need fortougher regulations, higher corporate gover-nance standards, training local talent andprofiting from international experts in theindustry, things are moving forward, on theinescapable route of change.

The Middle East is hot with great untappedopportunities. o

“Jordan, Bahrain,

Dubai and Saudi

Arabia have all put

in place proper

insurance laws

and supervision

frameworks.”

Country

Oman 42% 24% 44% -1%

Bahrain 29% 33% 24% -7%

Kuwait 102% 34% 79% -13%

KSA 76% 85% 104% -21%

Jordan 54% 62% 93% -26%

Qatar 70% 65% 70% -31%

UAE 26% 82% 68% -35%

Stock Market Index Growth



Untapped Opportunities in the Middle East

2003 2004 2005 half 2006

Table 3


Recently there has been a noticeableincrease in Irish life assurance compa-nies offering GMXB products. These

products were first developed in the U.S.market and are also known as variable annu-ity products with guaranteed benefits. Themarket for this product has grown significantlyin the United States over the last 10 years(with sales of $155 billion forecast for 2006)and companies are now seriously examiningthe possibilities of selling similar products inthe European market.

Three new companies have been set up inIreland in the last year to write these productsand another established company has alsolaunched a GMXB product. This article provides an explanation of what GMXBs are,looks at the techniques that are used tomanage the underlying risks and gives anoverview of the recent surge in companies sell-ing these products from Ireland.

What Are GMXBs? GMXBs refer to the guaranteed living and

death benefits associated with variable annu-ity business in the United States. Theguarantees that are usually seen include:

It is also common to see products which offercombinations of these guarantees. Sometimesthe guarantees are offered as riders to the baseproduct but in either case the charges for theseguarantees are normally explicitly identified.The policyholder is typically given a limitedchoice of funds with varying proportionsinvested in equities (up to levels typical foraggressively managed funds). The charge willalso probably vary in line with the equityproportion. A ratchet is another feature that isoften seen on these products. If the fund valueis above the guaranteed benefit on the policyanniversary, then the ratchet would increasethe guaranteed benefit to this level.

These products are attractive to policyhold-ers as they offer the opportunity to participatein investment markets with the safety net ofthe guarantees to fall back on in the event ofmarket downturns or interest rate movements.Policyholders pay an explicit charge for theguarantees and can decide which guaranteesare valuable to them. The products are attrac-tive to the life assurance industry because theyoffer the possibility of replacing some of thetraditional guaranteed products which areincreasingly under threat either because of theintroduction of market-consistent accounting

GMXBs: The Next Generation ofGuaranteed Productsby Padraic O’Malley

Padraic O’Malley,

BAFS, FIA, FSA,

is a consulting actuary

with Life Strategies in

Dublin, Ireland.


Padraic.omalley@

lifestrategies.ie.

Guaranteed Minimum Accumulation Benefit (GMAB)

The GMAB guarantees that the policy surrender value will be a minimum amount at a given point intime. For example, the guarantee might be a roll-up rate of 2 percent per annum which can beaccessed at the 10th anniversary.

Guaranteed Minimum Income Benefit (GMIB)

The GMIB guarantees a minimum roll-up rate which can be converted into a guaranteed annuity.The policyholder might be guaranteed a minimum roll-up of 3 percent per annum and guaranteedannuity rates based on 3 percent per annum. At maturity, the policyholder can choose between theguaranteed annuity and using the fund value to purchase a market annuity.

Guaranteed Minimum Withdrawal Benefit (GMWB)

The GMWB guarantees minimum periodic withdrawals. For example, it might guarantee that thepolicyholder will receive 5 percent of their initial premium each year for the duration of their life,otherwise referred to in the U.S. market as “5 for life.”

Guaranteed Minimum Death Benefit (GMDB)

The GMDB pays a guaranteed minimum lump sum on death. This could either be a return of thepremium paid on death or a more valuable guarantee that provides a guaranteed death benefit equalto the initial premium paid rolled up at 2 percent per annum (for example), or the product might havean annual ratchet feature.


“The reinsurance that

is available will

normally contain

various restrictions

as the reinsurer

might not want to

take on risks over

which they have no

control…”

GMXBs: The Next Generation of Guaranteed Products

methodologies or because of their lack of trans-parency to policyholders, such as traditionalwith-profits business in the United Kingdom.

What Are the Risks? These guarantees expose the life company

to a range of risks. These include:

Market Risks Various market assumptions are required

to value the embedded optionality in theseproducts.

Actuarial Risks Actuarial risks include lapse rates, mortality

rates and the take-up of options. These risks cannormally not be hedged, unlike the financialmarket risks. Therefore, they can only bemanaged through prudent design, reasonableassumptions and constant monitoring/revising ofthe assumptions.

Operational Risks Depending upon the methods used to

manage these risks, operational risk can be asignificant issue.

Credit Risks There can often be significant exposures to

third parties.

Risk ManagementThere are a number of different possible

strategies for managing these risks. Theseinclude:

Taking on the Risks Naked Significant capital would be required for

this possibility and companies are increas-ingly coming under pressure by bothregulators and rating agencies to quantifyand monitor the exposure.

Reinsurance The reinsurance that is available will

normally contain various restrictions as thereinsurer might not want to take on risks overwhich they have no control such as lapse riskand the take-up rate on options. There mightalso be limits on claims or finite capacity.

Static Hedging This strategy involves purchasing long-dated

OTC options from investment banks. The lifecompany will probably be exposed to some move-ments in market conditions as it is very difficultto perfectly replicate these complex options.

Dynamic Hedging This strategy involves the use of liquid

instruments like futures, equity options,swaps and swaptions. If the hedge portfoliois sufficiently rebalanced frequently then itshould be possible to closely match the valueof the embedded options. The majority of U.S.providers use dynamic hedging to managethis business in the U.S. market.

The option value is exposed to a numberof sensitivities, often referred to as theGreeks. These are:

• Delta—the sensitivity to the underlyingprice

• Rho—the sensitivity to interest rates • Vega—the sensitivity to volatility • Gamma—the second order sensitivity

to the underlying price • Theta—the sensitivity to time

Hedging attempts to construct asset port-folios that have the same sensitivities as theoption value. By doing so, the life assurancecompany can lock in the cost of the guaran-tee. The simplest and most common form ofhedging is Delta hedging. Rho hedging isalso common depending upon the guaranteesoffered. A more sophisticated hedgingprogram will also attempt to protect againstvolatility risk by matching Vega, althoughthis is rare.

While hedging is probably the most desir-able solution, it does require sophisticatedsystems for monitoring the exposure andexecuting the hedging strategy. Hedge assetand liability values must be calculatedfrequently, the Greeks calculated and theportfolio rebalanced to ensure that the hedgeis effective.

Recent Developments inIreland

A number of major global companies haverecently set up life assurance companies inIreland in order to sell GMXBs into otherEuropean countries (the reasons for doing soapply equally to the domestic Irish market).These companies have committed significantcapital and resources to their new operations asthey see Ireland as providing an excellent basefrom which to pursue opportunities in Europe:

• Hartford Europe, sel l ing into the United Kingdom

GMXBs: The Next Generation of Guaranteed Products | from page 37

• MetLife Europe, selling into the United Kingdom

• AXA Life Europe, selling into Germany

AEGON Scottish Equitable International,an established company which is part of theAEGON group, has also recently started sell-ing a GMXB product from Ireland into theUnited Kingdom. Hartford, MetLife, AXA andAegon are among the largest providers of vari-able annuity products in the United States.

There are a number of reasons for thesecompanies choosing Ireland as their base, someof which are specific to the products in ques-tion and some more generic reasons. Thegeneric reasons are well known at this stageand include:

• An effective and responsive regulatoryregime

• A developed and efficient life assurance infrastructure

• One of the lowest rates of corporation taxrate in the world at 12.5 percent

• The availability of gross roll-up tax for policyholders

• A member of the EU.

The specific reasons include:• Ireland’s principles-based regulatory

regime • The possibility of using derivatives as

admissible assets.1

The principles-based regulatory regime isvital as, subject to certain constraints, it ispossible to allow for the impact of dynamichedging when calculating capital requirementsand reserves in Ireland. This means thatcompanies can hold a level of capital appropri-ate to the risks under consideration. Theimplementation of Solvency II should hopefullyachieve a similar result across Europe, butIreland offers this possibility in the interim. Itshould be noted that allowing for dynamichedging in calculating capital requirements isa complex process requiring stochastic-on-stochastic projections.

Summary In summary, GMXB business has grown

enormously in the United States over the last10 years and we believe that this will become amajor growth area in Europe over the next fiveto 10 years.

Ireland has already established itself as acentre of excellence for GMXB business for thegeneral reasons that have led to Irelandbecome a leading international financial serv-ices centre as well as some additional reasonsthat are pertinent to GMXB business.

Life Strategies has worked with all of theabove companies, either in the applicationprocess, product design stage or in developingthe reserving methodology for these products.o

“The implementation

of Solvency II should

hopefully achieve a

similar result across

Europe, but Ireland

offers this possibility

in the interim.”

1 Subject to certain constraints.



SOA Expands Global Risk Management Training Program

Since the first course was conducted in 2003, Asset Liability Management Techniques andPractices has received international acclaim. The 2007 edition features an expanded five-day, on-site program. Initially designed with a focus on insurance companies, the 2007 edition now offersa pension track and brings two of the world’s leading pension experts, Jeremy Gold and StuartJarvis to the faculty. The core course, “Techniques and Practices for Insurance and Pensions,”along with two new, one-day master classes on dynamic hedging and interest rate models areconducted in a classroom setting with case studies, application exercises and formal lectures,providing an intensive hands-on experience.

The ALM seminar convenes the world’s leading risk practitioners and industry experts and offersan extraordinary networking opportunity for buy-side and sell-side professionals. A five-week, e-learning course, available for early registrants, covers ALM essentials and prepares participantsfor the intense on-site experience.

ALM Techniques and Practices is presented by the Society of Actuaries (SOA) and Nexus RiskManagement and co-sponsored with Standard & Poor’s, the International Actuarial Association,the Czech Society of Actuaries and the Singapore Actuarial Association.

Register soon for these upcoming events by going to www.nexusriskmanagement.com/courses/.Course dates: Prague, April 23-27 | Singapore, Sept. 3-7 | Phoenix, Dec. 3-7

SOA Life Spring Meeting—May 9-11 Phoenix, Ariz.

SOA Life Spring Meeting will be held at the JW Marriott Desert Ridge in Phoenix, Ariz. fromMay 9-11, 2007.

The International Section will be co-hosting the following sessions at the meeting:

Update on the International Experience Study—Session 32Moderator: William Horbatt Presenters: Charles Carroll, Dieter GaubatzThe SOA Research Department and the International Section are sponsoring international experi-ence studies outside North America. The objective of these studies is the development of credibleexperience data when none existed previously. The speakers will discuss two separate initiatives,the annual compilation of worldwide embedded value financial assumptions and ongoing countryspecific mortality and persistency studies in Asia, Central Europe and Latin America. Includedwith the discussions will be a demonstration of the SOA’s international experience study tool thatis being provided to actuaries contributing to experience studies outside North America.

The Actuary’s Role in the Development of Economic Capital—Session 71Moderator/Presenter: Marc SlutzkyPresenter: Matthew P. ClarkEconomic capital is currently a hot topic in the insurance industry. It provides insurance compa-nies with valuable information with respect to the optimal uses of capital, the differentiationbetween required capital and free capital, and the pricing of insurance products. In this informa-tive session, top-notch panelists will review the latest developments in the topic of economiccapital from an insurance company perspective. Companies in the EU and other parts of the worldare developing economic capital models to enhance the effectiveness of their enterprise risk

International News Announcements International News Announcements

management processes. The panelists will address the advantages and disadvantages of variousapproaches that you can weight and integrate into your practice.

Global Products—Session 20Today’s consumers of financial services are taking increasingly global views of the world’s financialproducts. The session will provide a summary from an international perspective of current lifeinsurance and annuity product types, product trends and key opportunities for the future. Theimpacts of the various regulatory, economic and demographic differences will be explored.

Change—The Only Constant—IAAHS Colloquium, SouthAfrica, May 13-17, 2007

The Actuarial Society of South Africa (ASSA) will be hosting the second International ActuarialAssociation Health Section (IAAHS) Colloquium in Cape Town, South Africa, May 13-17, 2007. Thetheme for the event is “Change—The Only Constant.”

An organizing committee comprising ASSA members and IAAHS Committee members have takengreat care to provide a solid scientific basis for the event. Daily keynote speakers and in-depthpanel discussions and presentations will explore issues that are relevant and important to healthcare practitioners. In addition, social and cultural activities, networking opportunities and part-ners’ programs will ensure that attending the colloquium will truly be worthwhile.

The scientific program was developed in conjunction with the various IAAHS Topic Teams, butincludes discussions and presentations that will be of interest to actuaries who are not very activein the health care field. The program may be found at www.iaahs2007.com/glance.php.

State-of-the-art technology and facilities created with the end user in mind makes Cape Town’sInternational Convention Centre an ideal location for this event.

The Arabella Sheraton Hotel is linked to the Convention Centre, and accommodation in variousprice categories is available around the Centre. More details are available on the colloquiumWeb site, www.iaahs2007.com.

All of the above will happen in Cape Town, which, according to IAAHS chair Howard Bolnick, isone of the most beautiful cities on earth. So, if you haven’t registered yet, pack your bags and yourfamily—see you in Cape Town!

The Pacific Rim Actuaries’ Club of Toronto Calendar of Events

The Pacific Rim Actuaries’ Club of Toronto is an international club for actuaries to discuss finan-cial issues related to the Pacific Rim countries in Asia. The club holds two dinner meetings peryear, along with a social event in the summer. In addition, a couple of business workshops are heldeach year (in June and November) to help develop management skills for club members.

The March 2007 dinner meeting featured K.C. Chan, vice president and actuary in the corporateactuarial department at Sun Life. K.C. worked for 10 years in China and he shared with us hisexperience as an actuary in Asia. He also shared with us the different opportunities for actuariesin Asia as well as the pros and cons of relocating to Asia.

Our next event will be a barbecue in July 2007, featuring great food and a good opportunity tonetwork with other club members in a social setting.

International News Announcements



Our next dinner meeting will be in September 2007 and we plan to have a money manager fromthe investment department of Manulife Financial speak to us about investing in China and otherAsian countries.

Details of our event and workshops are announced on our Web site, www.pacificrimactuaries.com.All actuaries in Toronto or visiting Toronto are welcome to join our events.

14th Annual Meeting—International Association of BlackActuaries (IABA)

Mark your calendar!IABA is holding their 14th Annual Meeting in Chicago, Ill., August 3-4, 2007.Attendees can look forward to:Professional development workshopsNetworking sessionsNoteworthy speakersAwards and Recognition Ceremony.Look out for more details on the Web site! http://www.blackactuaries.org/.

17th Annual Conference—Caribbean Actuarial Association (CAA)

Actuaries from around the world are invited to the CAA’s 17th Annual Conference which willbe held in the Bahamas, Dec. 6-7, 2007. Mark your calendars now!! Further details may befound on our Web site—www.caa.com.bb.

Institute of Actuaries of Australia—Biennial Conference

The 2007 Biennial Convention will be held in Christchurch, New Zealand, Sept. 23-26, 2007.

This is the “must attend” event for the actuarial community. Thinking of writing a paper? Makesure you let the committee know now. Details are contained in the call for papers link below.Call for Papers Link: www.actuaries.asn.au/events/conv07deadlines?eventID=927.Event Link: www.actuaries.asn.au/Events/Conv07intro?eventID=927.

Singapore Actuarial Society—South East Asia HealthInsurance Conference

The Singapore Actuarial Society (SAS) is organizing a South East Asia Health InsuranceConference, to be held in Singapore, July 30-Aug. 3, 2007.

Theme: The Role of Health Insurance in Health Care Provision in Asia

Structure: The main conference will be held Aug. 1-3, 2007 with a two-day technical seminarpreceding it (July 30-31, 2007). The technical seminar will be provided by Howard Bolnick,FSA. The conference language will be English.

The SAS is looking to make this conference a truly regional one, with contributions from practition-ers in South East Asia and further afield.

International News Announcements International News Announcements

If you would like to share your experience and ideas with a wider audience, please respond to the SAS’scall for papers: www.actuaries.org.sg/documents/Health%20Conference%202007%20%20CALL%20FOR%20PAPERS%20final.pdf.

Upcoming Events in China

The China Society of Actuaries used to be part of the China Insurance Association. Approvalhas been granted to start on the preparatory work to set it up as a separate legal entity. Theofficial event will be marked with a celebration possibly in May/June of 2007. This shows thatthe insurance business in China is getting a great deal of attention, and has become one of theimportant players in the financial sector.

The 8th annual China Actuarial Conference will be held at the end of September as usual.

Letters

Dear International News readers,

The American University in Cairo (AUC) is looking to expand its actuarial science programwithin the mathematics department. They are seeking candidates to fill a distinguished visit-ing professor position. Appointment will be made for one or two years commencing Sept. 1,2007. Screening will start on April 1, but the position will remain open until filled.

For further information please visit http://www.aucegypt.edu/facstaff/positions/vpositions.html#actuarialor contact Ali [email protected].

This will give a big boost to the actuarial profession in Egypt!

Sincerely,

M.F. Amer

SOA Ambassador for Egypt


International News Announcements

Country Feature Competition

Thank you to all who participated in the2006 International Section CountryFeature Competition. We knew there

was talent out there, and you did not disap-point. In all, there were 15 entries. Thecountries or regions featured were:

Brazil, Central Eastern Europe, China,Egypt, Hong Kong, Jamaica, Japan, MiddleEast, New Zealand, Singapore, South Africaand the United Kingdom.

As with any competition, there must be awinner. The first prize of $2,000 USD goes toHoracio Motta who wrote “Ronaldo and hisActuarial Career.” The ambassador prize of$500 USD goes to Ronald Poon-Affat. On hear-ing of his win, Horacio said “I’d like to reinforcehow important this award is for actuaries likeme and my fellows here in Brazil. I insist: it isall about aspirations, and how important it isto follow them. Thank you very much! Thanksalso to the Society of Actuaries’ InternationalSection Council. And thanks, of course, toRonald, for being our inspiration.”

Horacio’s article is presented as our coverfeature for this edition. Some of the countryfeature articles were already published in theJuly and November 2006 editions ofInternational News. We include three entries,in addition to the winning feature, in this

edition. Just so you have something to lookforward to, we’ve held back a few to bepublished later in 2007.

This initiative was a real success and theInternational Section has agreed to run itagain. Stay tuned for more details.

Horacio Motta victory picture.

Horacio and Ronald enjoying a night out after winning the Country

Feature Competition.


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