International Actuarial Association Building up the Actuarial Profession in Africa The Actuarial...

International Actuarial Association Building up the Actuarial Profession in Africa

The Actuarial Profession in Kenya

Sundeep K Raichura

Presented at 3rd International Meeting of Leaders of the Actuarial Profession in Africa

8 June 2007

Agenda

About The Actuarial Society of Kenya History Objectives Structure

The actuarial profession in Kenya Numbers and areas of practice Actuarial education Statutory roles Pensions and insurance sectors in Kenya

Challenges facing the actuarial profession in Kenya and industry issues

Update on some relevant TASK initiatives

About TASK

The Actuarial Society of Kenya

Registered 1993 Launched in 2005 Brings together qualified and trainee actuaries in

professional, educational and research organisations with an aim of promoting the actuarial profession in Kenya and E Africa

TASK functions through its governing Council and Committees (functional, administrative and ad hoc)

Work on three year Strategic Plan in progress

TASK Vision

“To position the Actuarial Profession in Kenya and the region as the leading profession in the areas of modeling and management of financial risks and contingent events”

Key TASK Objectives

– To develop and strengthen the actuarial profession in Kenya– To create a forum for members of the actuarial profession to meet

and exchange ideas– To support and protect members and present common

professional interests to Government and policymakers – To play an active role in actuarial education and the development

of local actuarial expertise, professional standards and guidance– To encourage research in the development of actuarial ideas– To improve the education of financial consumers and raise public

interest issues– To broaden the scope of the actuarial profession and promote our

contribution in wider fields– To establish links with other professional associations in Kenya

and internationally with similar objects

TASK Progress to Date

Revised constitution still in draft– Considerable time spent on membership categorisation– Strong pressure to include special Associate categorisation for non-

statutory work

Intent to become full member of IAA by end 2007 – Committee working on professional code of conduct, which includes

IAA common principles of GCAE– And Disciplinary process– Formal process for adoption of standards of practice– Borrowing heavily from other actuarial associations for code of

conduct and guidance notes

TASK Progress to Date

No of working committees – Membership & PR, Retirement and other Employee Benefits,

Insurance and Health Care, Professionalism, Education and Research, Investments and Wider Fields, Secretarial Finance and Fund Raising

– Disciplinary and Appeals– Performance erratic

Strategic Plan – needs wider input

The Actuarial Profession in Kenya

Numbers

4 qualified actuaries – 3 Fellows of the Institute of Actuaries– 1 Associate of the Society of Actuaries

40 partly qualified currently working in field– Excludes those who have graduated from local Unis with actuarial science

degrees – Many have given up on actuarial examinations– Good number has dropped actuarial examinations for CFA

• Over 500 actuarial students at three local Unis:– UoN - started 2000, currently about 240 students, intake of 60 per year, 60ish

already graduated– JKUAT - started 2002, currently over 500, intake of 200 – Maseno – started 2006, first intake of 30 students

Actuarial Education

Degree programmes aim to teach full core technical subjects excluding ACC

– Programme attracting brightest and talented students– But still need to assess minimum entry standards– Large streams – Academic staff likely to be strained– Bigger issue of capacity of market to absorb actuarial graduates in traditional

fields (life insurance companies and consulting firms)– Uni programmes not accredited– Also undergrads seem not to be able to register with IoA and do IoA exams

whilst in college

TASK committed to supporting local Uni programmes– Resource and time constraint – Two qualified actuaries have offered to teach – & Participate in course reviews and examination marking

Areas of employment

Actuarial work as employee of:– Life insurers : 19– Health care organisations : 3– General insurers None– National social security schemes : None– Complementary pensions : None– Investment company : 3– Regulator or Govt Departments : 6– Banks : 15

Consulting actuary working mainly in:– Life insurance : 3– Heath care : 2 (part of time)– General insurance : Not much– Social security 2 (part of time)– Pensions : 12– Investment : 3

Statutory Roles & Issues – Insurance

Insurance Act Cap 487– Actuarial certification of long term insurance premium rates– Annual statutory actuarial valuations of life funds– Independent actuary report on mergers, acquisitions– Actuary defined a FIA or FFA or such other as approved by

Commissioner– Note Dept upgraded as Insurance Regulatory Authority from 1

May 2007– Full review of Insurance Act underway – RBC and RB solvency

margins

– No statutory actuarial role for non-life or health care currently– Position paper lobbying for actuarial certifications of technical

provisions and of insurer financial condition submitted– TASK hopes to play key role in review of Insurance Act

Statutory Roles & Issues – Pensions

Retirement Benefit Act No 3 of 1997– Triennial actuarial valuations of DB schemes– Minimum funding actuarial valuations (no prescribed basis) and statutory

remedial plans– Actuarial certifications of amendments effecting financial health– Actuarial evaluation on winding up– Actuarial certifications of transfer values and commutation terms– Initial statutory requirement for actuarial reviews of DC schemes dropped in 2004– Regulations on scheme conversions being prepared– Actuary defined as person recognised as such by IoA, FoA, SoA, CIA, AIA, JIA

– Some provisions in Income Tax Rules on treatment of actuarial surpluses and deficits

Snapshot of Insurance Industry in Kenya

46 companies of which 23 transact life Most life companies composite Estimated total annual premium 2007 of K Shs 40bn (US$ )

comprising:– Life K Shs 12bn (US$ )– Non –life K Shs 28bn (US$ )

Estimated total assets of K Shs 100bn (US$ )– Life K Shs 55bn (US$ )– Non-life K Shs 45bn (US$ )

Total aggregate share capital 2005 estimated at K Shs 30bn with total disclosed profit of K Shs 4bn

No company has resident qualified actuary and only a handful have actuarial departments

Snapshot of Retirement Industry in Kenya

Sector comprises:– Unfunded PAYG PSSA– NSSF – DC provident fund (K Shs 60bn est)– Occupational schemes (K Shs 170bn est)

Legislation has focused on enhancing protection of members’ benefits and improving governance of schemes

Pronounced trend to DC – particular concerns re contribution rates, distribution and equity of allocation of returns to member accounts, conservative investment strategies, member communication

Re-engineering of public service schemes Dichotomy of debate re pensions reform National Pensions Policy proposed with co-ordinated strategy

– Studies to introduce universal zero pillar social assistance programme– Reform of NSSF– Proposed conversion of PSSA to NDC for new entrants

Challenges facing Actuarial Profession in Kenya

Lack of understanding and hence appreciation by industry and regulators of the whole set of services that actuaries can offer

Most life insurance companies will only call actuaries to undertake yearly actuarial valuations and certify rates for new life products

Trend to DC limiting traditional DB actuarial role Perceived high cost of actuarial services Effective implementation of actuarial recommendations Actuarial education, resource and capacity constraints and lack of accreditation Capacity of market to absorb actuarial science graduates in traditional fields –

frustration and disillusionment of actuarial graduates Challenge from other courses – CFA Mentoring and training of students Wider fields not happening and hard sell, but some individual actuarial graduates

have done well in banks, investment houses and IT

Challenges facing Insurance and Pension Sectors in Kenya

Insurance Industry – Low level of penetration of insurance particularly life insurance– Customer focus, marketing and distribution strategies, product innovation– Trained man-power across the insurance value chain– IT and processes – Operational, financial and risk management strategies– Pricing and reserving – Lack of data and statistics– Fierce competition and rate under-cutting– Insolvencies and financial distress of insurers and HMOs– Move to fair value accounting and risk based capital– Insurance company taxation

Challenges facing Pension Sectors in Kenya

Low coverage Move to DC and associated challenges Public sector scheme actuarial deficits Pensions policy dichotomy

Challenges can in fact be opportunities for actuarial profession in Kenya

Update on some relevant TASK initiatives

Strategic Plan IAA membership – code of conduct etc Formal internship programmes Actuaries to volunteer to teach at local Uni programmes Proposal to regulate role of actuarial profession in Kenya and TASK as

statutory professional body Forum for regulators and policy makers Forum for CEOs of insurance companies Work done by actuarial firms on developing mortality tables for insured

lives and testing of motor insurance rates for Association of Kenya Insurers

Project ideas and sponsorships for students Project on comparison of international insurance and pensions regulations Two position papers to date to Ministry of Finance Actuarial appreciation course in the local insurance syllabus Need for more member meetings and forums – two monthly forums Professionalism course for actuarial practitioners

TASK Vision 2010

Achieve full IAA membership – 2008 Vibrant and dynamic actuarial profession Strengthen statutory roles in traditional fields Local universities accreditation – 2010 Participate actively in International Congress of

Actuaries in SA 2010 Help we need and suggestions

– Collaboration with IAA and African actuarial associations– IAA assistance on education strategy– Regular interaction with peers in Africa and other countries

INSURANCE INSTITUTE OF KENYA 20th ANNUAL CONFERENCE

Paradigm Shift : Managing for High PerformanceRedefining our Core Business: An Underwriters Perspective

Sundeep K Raichura18 Nov 2005

How do we define high performance How do we define high performance from an insurer’s perspective?from an insurer’s perspective?

Paradigm Shift:Paradigm Shift: Managing for High Managing for High PerformancePerformance


Questions to a ‘high performing’ composite insurer:– What was increase in gross premiums?– To what extent did increase in gross premium translate to increase in profitability?– What was relative performance of life/non-life business?– What was underlying profitability of individual products? Lines of business? Which

areas did well? Which did not? Why? Which products are adding value? Which products are being subsidised?

– What was relative performance of ‘offices’?– Were actual premiums consistent with pricing basis?– Was profit underwriting, investment, other? By class? If underwriting, source?– What was expense ratio? Expense overruns? Were profits due to lapses?– Trade-off between profitability v solvency? – What was year on year return on shareholders’ equity? Did it meet shareholders’

hurdle rate?– How was profitability measured? Statutory? Realistic?– Is the capital adequate given the level of business? Etc etc etc– Insurance business a complex business; multi-faceted, multi-risk carrier

TABULATED PRÉCIS OF THE INSURANCE INDUSTRY

YEAR 1997 1998 1999 2000 2001 2002 2003AMOUNT K sh '000' K sh '000' K sh '000' K sh '000' K sh '000' K sh '000' K sh '000'Shareholders' funds 13,203,059.0 21,067,241.0 20,747,543.0 21,026,280.0 20,281,561.0 20,332,880.0 26,923,695.0

Assets 56,417,196.0 62,399,429.0 64,932,378.0 67,624,928.0 66,352,084.0 72,350,428.0 87,157,032.0

Gross Direct Premium written 18,398,461.0 19,380,748.0 21,032,191.0 20,867,645.0 23,195,308.0 25,912,418.0 29,215,744.0

Net Direct Premium written 11,850,795.0 13,141,135.0 14,923,299.0 15,647,198.0 16,799,511.0 18,597,906.0 21,236,698.0

Invested assets 47,644,311.0 49,632,790.0 51,133,519.0 53,551,478.0 53,320,718.0 59,000,385.0 70,714,150.0

Investment income 5,214,426.0 6,454,448.0 5,016,847.0 4,400,794.0 4,587,193.0 4,883,535.0 2,455,714.0

Claims incurred (Non-life business) 8,285,791.0 8,437,786.0 8,073,543.0 8,939,723.0 7,044,033.0 765,510.0 7,933,129.0

Expenses of management 3,887,820.0 4,439,161.0 5,330,223.0 5,380,743.0 5,654,857.0 5,999,316.0 7,009,998.0

Commissions 2,232,782.0 2,331,290.0 2,499,853.0 2,591,675.0 2,422,253.0 2,620,406.0 3,201,677.0

Expense ratio (by NP) 0.52 0.52 0.52 0.51 0.48 0.46 0.48

Operating profit/loss 1,623,178.0 1,938,458.0 1,180,117.0 1,433,121.0 1,654,413.0 1,951,719.0 2,843,659.0

Underwriting results (Non-life business) (576,398.0) (113,494.0) (136,608.0) (579,835.0) 218,669.0 296,520.0 250,842.0

.

Market penetration (I.e gross premiums to GDP has remained around 3% for the last five years

Source : Report of the Commissioner of Insurance for y/e 31 Dec 2003

3,581,574 4,321,770 4,978,063 5,682,596 7,072,594 7,236,900 8,520,01514,816,887 15,058,978 16,054,131 15,185,049 16,123,814 18,675,518 20,695,727

Total Average41,393,512 5,913,359

116,610,104 16,658,586

LIFE INSURANCENON-LIFE INSURANCE

LIFE INSURANCENON-LIFE INSURANCE

LIFE VS NON LIFE PREMIUM INCOME

LIFE INSURANCE

NON-LIFE INSURANCE

Average life : non-life premium ratio : 1:4

Life insurance penetration : 0.7%cf SA approx 16%; Zim 2%; UK/US 10%

When was the last time we When was the last time we sharpened our axe as an industry?sharpened our axe as an industry?

Challenges Facing the Insurance Industry (1)

Increasing level of penetration, but huge potential Are customer needs being met? Customer focus, marketing and distribution strategies, product innovation Trained man-power across the insurance value chain As well as appropriate KPI IT and processes Operational, financial and risk management strategies Pricing and reserving Lack of data and statistics Fierce competition and rate under-cutting Underwriters vs intermediaries ought to have synergistic relationship – is there? Fraud (ambulance chasers, collusion, malpractices) Professionalism across the insurance value chain

Challenges Facing the Insurance Industry (2)

Insolvencies and financial distress of insurers and HMOs Image Review of Insurance Act and regulation Move to fair value accounting and risk based capital Insurance company taxation Economic growth and wealth Conservatism vs innovation (bancassurance) – are we too steeped in

tradition? Do we see the big picture?

Some external, but most internal Challenges are in fact opportunities for managing for high

performance and paradigm shift

If necessity is the mother of invention,If necessity is the mother of invention,

discontent is the father of progressdiscontent is the father of progressDavid Rockfeller, American businessmanDavid Rockfeller, American businessman


Insurance is all about undertaking riskInsurance is all about undertaking riskIsn’t risk our raison d’etre?Isn’t risk our raison d’etre?

But do we understand the true nature of the risks we But do we understand the true nature of the risks we face?face?

Do we understand the true nature of our business?Do we understand the true nature of our business?What level of risk is acceptable? What level of risk is acceptable?

Redefining Our Core Redefining Our Core ObjectiveObjective


The word is ERM - Enterprise Risk Management

“The discipline by which an organisation (in any industry) assessed, controls, exploits, finances and monitors risk from all sources for the purpose of increasing the organisation’s short and long term value to its stakeholders”

Casualty Actuarial Society

Risk management is as much about identifying opportunities as avoiding or mitigating losses

ASNZS 4360 –1995

Implementing ERM Implementing ERM – Internal Environment– Internal Environment

– Internal environment is the context within which the enterprise functions:

Governance structure Effective and dynamic leadership Reporting structure Assignment of authority Management style Ethical values Risk culture

– This foundation and culture will set the course for how risk will be handled across the enterprise

– The independence and involvement of the Board and the tone set by management have a critical influence on the internal environment

– The Board and senior management must determine their risk objectives, risk appetite, risk tolerances and agree on risk management roles and responsibilities

Enterprise Risk Management Specialty Guide Society of Actuaries

Insurance RisksUnderwriting risk

Underwriting process riskPricing riskProduct design riskClaims riskEconomic environment riskNet retention riskPolicyholder behaviour risk

Credit riskBusiness credit riskInvested asset riskPolitical riskCounterparty riskSovereign risk

Market riskInterest rate riskEquity and property riskCurrency riskBasis riskReinvestment riskConcentration riskAsset/liability mgt riskOff-balance sheet riskLiquidity risk

Operational riskHuman capital riskManagement control riskSystem risksStrategic risksLegal risk

Eg Underwriting Risk Underwriting process risk – eg financial loss related to selection and approval of risks to be insured

Pricing risk – eg financial loss due to insufficient premium charged for a risk undertaken

Product design risk – eg exposure to events not anticipated in the design and pricing of a product

Claims risk – eg more than/higher than expect claims Economic environment – eg adverse effect on the company due

to changes in socio-economic conditions Net retention risk – eg losses due to catastrophic or concentrated

claims experience due to higher risk retention Policyholder behaviour risk – eg unanticipated behaviours of

policyholders adversely effecting company Reserving risk – eg inadequate provision in company accounts

for policy liabilities

Risk Management Strategy (1)

Identify all risks– Formal consideration of all facets of business – How and Why risk can occur?– “What if” considerations?

Quantify the risk– Source– Consequence and severity– Likelihood– Sensitivity analysis

Risk Management Strategy (2)

Evaluate the risk– Rating – qualitative and quantitative analysis– Consider controls or treatment

Risk treatment – weigh up the risk and– Retain– Avoid– Reduce likelihood of occurrence– Reduce the consequences– Transfer the risk (eg reinsure)

Establish controls

Risk Management Strategy (3) In respect of risks retained:– Ensure capital is provided to cover risk

If no capital, then don’t accept the risk– Price properly for the risk

Be wary of strategies aimed at improving policy returns where shareholders have to put up capital without extra reward

If the market cannot bear the price, avoid the risk Scenario test Be wary of combinations of events Be wary of undercutting without appreciating impact on overall

business

Ensure all parties are aware of risks being undertaken Ensure coordination between all parts of business Continually review Integrated approach is key to successful ERM

Paradigm Shift: Paradigm Shift: Planning mindset

Consider following key questions as part of insurance business planning and review to add focus to all areas of insurer’s business, all new initiatives or ventures:

– How much capital is required and what is timing of these capital requirements?

– What are the options for funding (debt, equity,o/d)?– What impact does undertaking this have on our P&L?– What are the potential returns under the different funding options?– What risks does undertaking this impose on the company?– Is the return consistent with the risk and the shareholders’ hurdle return?– Where and how will this create value?– How does this fit strategically with the company’s existing business; how

does this contribute to the company’s vision and goals?– Are there non-financial benefits to the company?

Paradigm Shift:Paradigm Shift:Marketing

– Who are our customers?– How are we going to sell to them and service them?– What are we going to sell them?

– Product is the final element since insurance “sold and not bought”

Paradigm Shift:Paradigm Shift: Marketing

Who are our customers?– Analyse the population and its insurance needs– Analysis of current and potential customers critical– Divide into groups which have different characteristics

Same product need or group of product needs Distribution channel Population segments

– Consider whether any competitive advantage over others – Have we thought of crop insurance, rural population needs,

cooperatives, AIDS/HIV solutions


How do we reach them- Distribution channels?– Brokers– Tied agents– Direct sales force– Other direct sales routes– Telemarketing and call centres– Other innovative structures

– Internet?


Products and product development– What products appropriate?– How does this compare with current offering?– Any niche?– Any unfilled needs?– Level of awareness of potential customers– Innovation– Yet simplicity

Paradigm Shift:Paradigm Shift: Competition Competition

Wave of competition - fierce under-cutting Competition not always on price alone Alternative strategies:

– Better customer focus and products which fit customer needs – Servicing, particularly after sales service– Customer retention strategies– Brand and brand awareness– Claims settlement – Niche marketing– Financial strength– Technology– Distribution channels– Better underwriting and controls– Investment performance– Efficient processes– Loyalty rewards CSR etc etc

Paradigm Shift: Paradigm Shift: Trained Manpower

Holds key to managing for high performance Training and education, with IT skills Provide information and exposure CPD Proper KPIs Get right people in right places And incentive structures – align interests of your

manpower with your business Internal environment Coherent team Communication

Paradigm Shift: Paradigm Shift: IT is the name of the game

No compromise on real-time online IT system Capturing all processes of the company Efficiency, integrity of information Checks, balances through system control Mitigates and guards against fraud and malpractices

But no good unless critically analyse information Don’t overlook potential of data mining to your business Monitor, analyse, trend, dissect data and information for all

processes Develop risk models, scenario tests Actuaries key here Invaluable tool for high performance!

Paradigm Shift: Paradigm Shift: Importance of the Actuarial Profession

Currently narrow utilisation in life insurance with some exceptions

Largely statutory valuation role and limited product pricing

Myth: Actuaries necessary evil in life, not needed in non-life, other parts of business and for risk management

Many of the issues addressed in this presentation look non-actuarial in nature

Myth: Actuaries too expensive– Do cost benefit analysis

Paradigm Shift: Paradigm Shift: Importance of the Actuarial Profession

Truth: Actuarial technical training/skill/approach/rigour/skillset is crucial in making a robust business case

Actuary/actuarial resource should be central to the planning process and should be key player in business planning, development, strategies for growth

– Can play crucial role in ERM process even if limited implementation– Actuary can assess and understand the complex interactions of insurance business

across all areas and communicate these to all parties, board, management, shareholders and regulators

– Can help evaluate implications of courses of action and hence enable more informed decisions

– Can make contribution in helping insurers to avoid making potentially costly mistakes No claim on monopoly on wisdom, but can contribute managerially and

technically as part of multi-disciplinary team Available and growing actuarial resource in Kenya The Actuarial Society of Kenya (TASK) will be doing its part Use this valuable resource to turn risk into opportunity!!!


Will all this help?– Beating the odds through a disciplined, rigorous approach to

insurance business management based on a proper understanding of the business

– Risk/reward optimisation– Risk preparedness– Effective enterprise culture – Competitive advantage

– Isn’t this what our core business all about?– Isn’t this what high performance is all about?

))))

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Paradigm Shift : Managing for High Performance

Selected References

The Actuaries Role in Non-life Risk Management Issues, Jerry Miccolis, FCAS, MAAA, CAS Committee on Enterprise Risk Management

Overview of Enterprise Risk Management (2004), Casualty Actuarial Society Enterprise Risk Management Specialty Guide, Society of Actuaries Understanding Actuarial Management: the actuarial control cycle, Australian

Institute of Actuaries Risk Management for insurance companies and pension funds, Stuart Wason,

Stuart Wason Consulting Limited, 3rd Contractual Savings Conference, Washingon 2005

Risk Mangement in a Deregulated Environment, Peter Beck 2000 Life Insurance Business Planning, Andrew Brown, 2000, FICCI Conference Business planning by Stuart Wason, Edouard Merette and John Whitworth, 2000,

FICCI Conference,

Questions and AnswersThank You

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