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CONTENTS

" FROM THE PRESIDENT 4 " THE HEALTH INSURANCE INDUSTRY IN INDIA AND ITS GROWING POTENTIAL 17-18
WALTER DE OUDE AND RAJAGOPALAN KRISHNAMURTHY EXPLAIN THE STATE OF HEALTH INSURANCE INDUSTRY IN INDIA.

PRESIDENT R KANNAN DEPICTS SOME INTERESTING DEVELOPMENTS OCCURRED IN THE ACTUARIAL FIELD GLOBALLY

"

FROM THE CHIEF EDITOR

K P NARASIMHAN WRITES ABOUT A REGULAR FEATURE IN ACTUARY AUSTRALIA MAGAZINE, WHICH IS REPORT ON SURVEYS, CONDUCTED EVERY MONTH ON CURRENT ISSUES.

"

ACTUARIAL ASPECTS OF HEATH INSURANCE PRICING 19-20


HERBERT MEIZER DETAILS VARIOUS CRUCIAL ASPECTS ABOUT HEALTH INSURANCE PRICING.

"

INDIAN HEALTH ACTUARIES IN A CHANGING ENVIRONMENT 7-11


RICHARD KIPP AND RONALD G HARRIS WRITE ABOUT INDIAN HEALTH INSURANCE INDUSTRY.

" " "

ANNOUNCEMENT

21

SEMINAR ON CURRENT ISSUES IN RETIREMENT BENEFITS (CIRB), MUMBAI, 23-24 DECEMBER 2005.

CURRENT HAPPENINGS THE GROWTH OF PRIVATE INSURANCE MARKET IN JAPAN

21 MEDICAL 22-27

"

PRESS RELEASE

11

INSTITUTE OF ACTUARIES ANNOUNCES NEW PRESIDENTELECT.

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TAIWANS NATIONAL HEALTH INSURANCE AN INTEGRATED APPROACH TO SOME ISSUES 12-14


CHIU-CHENG CHANG GIVES INTRODUCTION ABOUT THE TAIWANS NATIONAL HEALTH INSURANCE (NHI) PROGRAM

TAKAHITO OTOMO ENLIGHTENS ABOUT THE GROWTH OF PRIVATE MEDICAL INSURANCE MARKET IN JAPAN

" "

ANNOUNCEMENT

21

INDIA FELLOWSHIP SEMINAR ON 15-17 DECEMBER, 2005 AT HOTEL SEA PRINCESS, MUMBAI

8TH GCA

28

"

INTERVIEW MYTHS DECODED

15-16 " "

BEYOND THE KNOWN LANDING YOUR FIRST ACTUARIAL JOB

OFFICE ORDERS ABOUT CONSTITUTION OF 8 TH GCA STEERING COMMITTEE AND 8 TH GCA PROGRAMME COMMITTEE.

"

UPDATE- HEATH INSURANCE BOARD

16

PUZZLE CORNER WEB COLOUMN AND WORLD VIEW

29 30

P A BALASUBRAMANIAM, CHAIRMAN HEATH INSURANCE BOARD REPORTS ABOUT VARIOUS ACTIVITIES OF THE BOARD

LETS BE INFORMED ABOUT WHATS HAPPENING ON THE NET!

the

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Editorial Board Liyaquat Khan, Chairperson Liyaquat.khan@watsonwyatt.com Members: K P Narasimhan anjaliarv@hotmail.com Heerak Basu Heerak.Basu@tata-aig.com G N Agarwal chief_actuarial@licindia.com Sunil Sharma Sunil_Sharma@swissre.com Shilpa Mainekar shilpa.mainekar@kotak.com Varsha Joshi library@actuariesindia.org V Jagannathan v_jagannathan@yahoo.com Sitanshu Swain Sitanshu@vsnl.com Chief Editor Narasimhan, K P Tel + 91 44 26433669 E-mail anjaliarv@hotmail.com Managing Editor Agarwal, G N Fax + 91 22 22028321 E-mail agarwalgn@rediffmail.com Deputy Managing Editor Joshi, Varsha Madhav Tel +91 22 2269 1051 (Ext. 209) Fax +91 22 2269 1052 E-mail library@actuariesindia.org Features Editor Basu, Heerak Tel + 91 22 55060304 Fax + 91 22 56492106/07 E-mail heerak.basu@tata-aig.com News Editor Sharma, Sunil Tel + 91 22 56612160 Fax + 91 22 56612123 E-mail sunil_sharma@swissre.com Puzzles Editor Mainekar, Shilpa Tel +91 22 56635082 Fax +91 22 56635111 E-mail shilpa.mainekar@kotak.com COUNTRY REPORTS De Oude, Walter Singapore, Malaysia & South East Asia E-mail walter.de.Oude@WatsonWyatt.com Batliwalla, Minoo R Australia E-mail mubarak@ozemail.com.au Smith, John Laurence New Zealand E-mail johns@fidelitylife.co.nz Burra, Pravin African Continent E-mail pburra@bw-deloitte.com Chakraborty, Dilip C European Union (EU) E-mail dilip.chakraborty@canadalife.co.uk Chung, Phuong Ba Taiwan, Hong Kong & Japan E-mail Phuong.Chung@aig.com Akers, Peter China (Mainland) E-mail Peter.Akers@sleb.cn Wason, Stuart Canada E-mail stuart.wason@sympatico.ca Ali, Syed Asad USA E-mail SAli@smlny.com Cheema, Nauman Pakistan E-mail nauman02@lhr.comsats.net.pk Guerard, Yves Indonesia E-mail Yves.Guerard@id.ey.com Iyer, Subramaniam N Switzerland E-mail sniyer_geneva@yahoo.co.uk Published Monthly By: Actuarial Society of India 302, Indian Globe Chambers, 142, Fort Street, Off D N Road, Near CST (VT) station, Mumbai 400001 Tel +91 22 2269 1051 Fax +91 22 2269 1052 E-mail actsoc@vsnl.com Website www.actuariesindia.org For circulation to members, connected individuals and organizations only. Disclaimer The Actuarial Society of India or any of the Editors are not responsible for opinions put forward in this Magazine. The contents of the advertisements published in the magazine are entirely of the advertisers and the Actuary India does not own any responsibility for it or any consequences arising out of it.

Indian

Actuarial

Profession

Serving the Cause of Public Interest

the Actuary India December 2005


!

FROM THE PRESIDENT


The 8th Global Conference is scheduled on March 10 and 11, 2006 at Mumbai. You all know well that this is an important event for all of us. During the recent IAA meeting at Rio-De-Janeiro, Brazil I invited Presidents and other executives of various actuarial associations and also experts in various fields for this conference. I have also requested many of the subject specialists to present papers. Although I agree with you that this conference is used as a forum for exposing ourselves to the developments abroad, we should also consider this as an opportunity to review our own policies and practices from the actuarial angle. This will help policy makers to take decisions and improve wherever required. Hence I request all of you and in particular chief actuaries / appointed actuaries and senior actuarial students to present focused papers for this conference. I give below some of the developments abroad which are of interest to us. Almost all developed countries have moved towards risk based capital. In this context the adherence of solvency ratio is tested on a continuous basis and both the companies and the regulators take proactive view on economic capital, regulatory capital and the actual capital available. Experience of various countries had clearly demonstrated that moving towards risk based capital is a time consuming one and one has to prepare for this at least 3/5 years. Many European countries have introduced fair value accounting in 2002. According to these rules, life insurance provisions may not be smaller than the liabilities measured at best estimate plus a market value margin. The market value margin (MVM) is extra charge added to the expected value of the liabilities which an acquirer of the companys insurance portfolio would demand as a payment to take on the risk inherent in the uncertainty in the estimation of the sizes and / or dates of the payments except for the uncertainty which can be diversified by having a large portfolio. The MVM depends on the specific portfolio and the guaranteed benefits of the policies in this portfolio and not on other circumstances in the company. It is thus portfolio dependent and company dependent. When the fair value accounting rules were introduced, a method to calculate the MVM was not prescribed, but a simple rule was accepted. According to this simple rule the interest rate used for discounting could be multiplied by 0.95 and the extra provision which was a result by this was the MVM. Now many regulators expressed their concerns and they no longer accept this simple rule without specific justification based on the portfolio in question. The MVM is in principle a market price. Lack of a market for decomposed policies (policies stripped of the bonus obligations) makes it necessary to find a substitution and then different methods must be applied to calculate the MVM. Which models / methods can be applied? Various methods can be applied. The report identifies four groups of methods: 1. A margin is added to/ subtracted from the elements in the calculation basis. The simple rule with a 5% deduction in the discount rate is an example. The report suggests that it might be better to have a margin on the mortality and morbidity. A margin is added to the cash flows. A percentile on the proper probability distribution is used. The cost of the necessary capital is used.

2. 3. 4.

Two important developments in the pension sector are worth noting. Many corporates in USA and also in Europe feel that actuaries do not have an effective role in defined contribution schemes and financial economists have an important role to play in managing the funds in these schemes. It is somewhat unfortunate that the role of actuaries in defined contribution schemes is not well known to the public and it is the responsibility of the profession to inform how actuaries are equally important in running defined contribution schemes also. Secondly the funding of deficit and the companys asset liability management issues are becoming prominent recently and actuaries have to evolve a sustained funding of the deficit by taking into account implementable asset liability management techniques. In this issue, many aspects of health insurance are discussed in detail. Regarding general insurance I will outline some of the crucial issues, in my next column. In my last column I had requested senior students regarding their requirement for conducting coaching classes in SA/ST subjects. I have not received even a single reply for this. Shall I presume that senior students are not in need of any coaching classes? So far the Actuarial Society of India has not conducted any seminar/workshop exclusively for students, except the one for education strategy. As a beginning we are planning to conduct one day seminar for students in selected five metro centers so that students will be exposed to the latest developments in our field, various changes brought out in the educational strategy etc, including the performance of students in recent years. This seminar will also help ASI to understand better the expectation of students so that we in the ASI can serve them better to their fullest satisfaction.

the Actuary India December 2005

Thank you

R. Kannan
Indian Actuarial Profession
Serving the Cause of Public Interest

"

FROM THE CHIEF EDITOR


I continue with material from issues of Actuary Australia that I had drawn on for my earlier piece. Another regular feature in the magazine is a report on surveys conducted every month on issues current as they could seem, with the respondents being members of IA&A. In fact, members are even invited to indicate questions on which they would like general opinion to be elicited. A series comes under the head Actuarial Pulse. I have been a little more selective this time in picking on the surveys and the particular questions posed, to remain of some relevance and interest to our readers. The May 2005 issue has three questions on the proposed requirement for general insurance actuaries in Australia to prepare Financial Condition Reports (FCR) for their Boards. The FCR will be to inform the insurer boards of risks to solvency and profit. The questions and responses have been as under: a. Do you believe that actuaries are well-placed to do this? Choice Yes No Count 244 18 % answering 93.1 6.9 thought that FCR should comment more broadly on the insurers business rather than the traditional actuarial risk areas. Leading naturally to the question of the extent to which the training that actuaries receive prepare them to report on broad issues, the response level of 66% did indicate a level of equipment to perform the duties required. The comment, in a further analysis of the 34% negative response, saw the issue as less around training and examinations and more around the experience requirements. A strong view was noted that there should be strengthening of CPD requirements, peer review, etc., to make sure that the appropriate skilled professionals are involved in these assignments. In our context, how do we see the perceptions of Australian actuaries and the need however fast be the process to move to the wide responsibilities spelt out as such for appointed actuaries under the IRDA regulations? What could be measures to be taken in ASI, IRDA, et al. to have actuaries in the numbers required who could confidently take to their larger role in general insurance companies? Apart from arranging to have added CPD programmes for the existing actuaries in general insurance, what do we do to bring up the numbers newly qualifying with general insurance specialization and, more seriously, to be induced to take the subject at the ST level instead of avoiding it in the choice that is now available? How do we target in the meanwhile on those who have passed subject 303 under the earlier syllabus? The next issue I have drawn from is the one from June 2005. The survey questions here are addressed in the context of a revision being made to the Code of Professional Conduct. There are some differences apparently between the present code in Australia and what we have adopted to apply to us. Some of the questions posed have been as under with responses also being given alongwith: a. Currently actuaries are not required to comply with Professional Standards. It is proposed that non-compliance with a professional standard be considered actionable conduct. There will be no exceptions. Do you agree with this change? Choice Yes No, why not Count 107 61 % answering 63.7 36.3

Choice Broad scope Limited scope

Count 206 54

% answering 79.2 20.8

c. Do you think actuarial education and training equip us to prepare this report? Choice Yes No Count 171 87 % answering 66.3 33.7

The comments in the Australian context were that the issue investigated was around the breadth of actuarial opinion and the responses sent a clear message to the nay-sayers, with more than 90% considering actuaries well-placed to provide the required FCR, the primary reason having been seen to be that actuaries are the only professionals with skills to do it. While some thought that actuaries did not have all the skills required at this stage, by a process of elimination there was no one better. What was considered even more reassuring was that almost 80% had
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b. Currently the Code of Conduct requires that all actuarial advice must be unbiased and that any constraints on the independence must be disclosed. It is proposed to drop the requirement for independence given the well-defined concept of independence following recent legislative and corporate governance requirements in Australia and overseas. The focus in the code will therefore be on unbiased advice. Do you agree with this change?

Serving the Cause of Public Interest

the Actuary India December 2005


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b. Do you think that actuaries should comment broadly on the insurers business or just limit our comments to issues around actuarial pricing and reserving?

Choice Yes No, why not

Count 121 46

% answering 72.5 27.5

Judgement is key, spirit not letter should be applied The actuarial profession is OVER-REGULATED as it is

Quite a few of our members may well agree with the averments quoted above in relation to mandating professional standards. The comment on second question was that the respondents had not generally understood the subtlety of the issue and felt that it would be best to retain the independence tag. In our own understanding of the English language I believe that we would like any actuarial advice to be independently given and to be unbiased, however we see the distinctness of the requirements. On the third question it was noted that the majority of respondents had considered it appropriate to breach confidentiality where this was in the broader public good. Specific responses against the other choice included: 38 22.8 68 61 40.7 36.5 Use discretion and judgement, that is, dont take on the job Should breach confidentiality when actuarial advice is being misused Only if illegal actions are proposed/undertaken Not breach confidentiality but DECLINE WORK IF UNETHICAL

c. The existing code requires that the advice be in the public interest. One of the issues is that there is potential for obligations to conflict with the commercial interests of employers or clients. In effect, when do the interests of third parties override the interests of employers or clients? Do you think that: Actuaries should never breach client/employer confidentiality Actuaries should breach confidentiality if third parties are materially affected by actuarial advice that is used contrary to the Institutes standards Other Choice Actuaries should never breach client/employer confidentiality Actuary should breach confidentiality if third parties are materially affected by actuarial advice Other (please specify) Count % answering

the Actuary India December 2005

d. It is proposed that the new code exempt the Senior Actuary from personal responsibility for a professional conduct of members of the firm. The Senior Actuarys role is to be more a liaison point with the Institute and provide professional guidance. Do you agree with this change? Choice Yes No, why not Count 140 28 % answering 83.3 16.7

The proportion standing out for strict confidentiality could seem significant. The varied responses do not however indicate anything different from the range of thinking amongst us. On the fourth question, the comment was to note the clear result favouring a change in the code to absolve responsibility of the Senior Actuary personally for the conduct of the members of the firm, the main reason being given otherwise to hold the Senior Actuary liable being if they knew that there was a case of misconduct and did not intervene. In our case, an actuary in doubt is advised to consult a Senior Actuary and what the Senior Actuary does could be seen to be providing professional guidance and suggesting, if need be, a reference to the ASI. As an issue that could arise, do we likewise consider the actuary concerned, who consults the Senior Actuary, responsible for any action that he takes as arising out of his own judgement in the utilization of whatever guidance he may have received from the Senior Actuary? A general caveat about the surveys covered is that response level, varied as it has been, was never near the full membership sought to be covered. This is so with any survey exercise, and with fairly large numbers still responding, any possible bias from the level of nonresponse could need to be kept in mind. For us, the results such as they are from the IAA surveys, should still be interesting and possibly confirming many of us in our respective views, however we differ amongst ourselves.

The comments, it may again be noted, have been made in the context in which the survey was conducted, of provisions as they stand today in Australia and the amendments proposed therein. In relation to the first of the questions, the numbers supporting change were expected to be larger since the change is considered fundamental to the proposals generally on review of the Code of Professional Conduct, as providing unambiguous to the Council to discipline members who do not comply with professional standards. Importance was also seen in the regulator noting that the Institute is serious about quality control. While enforceability of the PCS is not a issue with us, it is interesting to note some of the responses against requiring strict compliance. A PS can be outdated or irrelevant to the task at hand. Far better to require an explanation of departure May limit/restrict peoples legitimate ability to think for themselves. It would be okay if the standards set out principles and not methods

K P Narasimhan
Indian Actuarial Profession
Serving the Cause of Public Interest

HEALTH INSURANCE

Indian Health Actuaries in a Changing Environment


For the last several years the Indian government has been working to expand the insurance industry. Each insurance field has felt the force of change, perhaps none of them any more than Health insurance. Today Health insurance is provided through various mechanisms governmental schemes and private plans. It is the private market for individual and employer group insurance that we have been tracking with greatest interest. With changes in start-up capital requirements, the foreign direct investment percentage, tariffs for nonlife insurance and data availability on the horizon, the role of the actuary in health insurance is about to undergo a dramatic transformation. While Health insurance may have been a second thought for many of todays non-life insurers, this can not continue. In addition, once stand-alone health insurance companies enter the market with their single focus on health products, change will be accelerated. So what will be the new role for the actuary in this changing environment? What will companies need in the way of actuarial analysis to help them compete profitably in this newly enlivened market? We will explore these responsibilities in the discussion below. At the Senior Level of Management In most insurance organizations around the world, you will find an actuary, if not in the CEO seat, at a seat nearby. It is essential for risk-bearing organizations to have the advice and counsel of an actuary to assist them in formulating their understanding of the companys performance, as well as to help develop their expectations for the future. Actuaries help companies selling and underwriting health insurance to determine trends in the cost and use of health benefits that underlie the market at both a macro and micro level. Marketing functions rely heavily on them to set reasonable prices for current products as well as price new products. At the senior level this is usually done in an advisory capacity because the detailed analytical work is performed by specialists trained in the specifics of their functions. The senior level actuary serves as interpreter. There may be no more important role in an insurer offering health insurance than the seasoned health actuary. When questions arise about capital needs, it should be the actuary that advises. When Marketing wants to know the impact on the portfolios performance of introducing a new product, the actuary needs to be consulted. If the Finance department is asked to provide management with a five-year forecast, the actuary must play an important role because the largest element of the forecast with the greatest uncertainty is the cost of claims. Whether it is strategic planning at the highest business level, or simply assisting with the establishment of the estimated liabilities of the company at the most detailed technical level, the health actuary is involved. At the Functional Level Indian health actuaries will be at a disadvantage initially in the countrys emerging market due to a lack of historical claims experience. Nonetheless, they will be responsible for the same tasks as they would if data were available. The general categories of tasks include: Rating Risk Assessment Financial Reporting, Operations and Management Provider Analysis
Profession

General Data Analysis Within these categories there are many actuarial tools, techniques and approaches that can be used to accomplish the required tasks. Some of them may be new to the Indian health insurance industry, and others may already be in place. We will discuss some of these below. Rating Basic Approaches A role of crucial importance for the health actuary is establishing a reasonable approach for setting premium rates for a companys various major groups and blocks of business. Rate setting is where risk selection and actuarial evaluation come together driving the companys profitability. Here is also where the policyholder meets the actuarys work product. If profitable but competitive rates for a given set of benefits are not offered to the market, the insurer will quickly lose either money or its policyholders. The basic situations in which the health actuary has to establish and maintain rating approaches are initial (new business) and renewal (continuing business) rating. In situations where reliable, credible experience data applicable to the group or block of business is available, the actuary is likely to conclude that such experience data is an appropriate basis from which to develop premium rates. Where this is not the case, heavier reliance on manual rates (or internal tariffs as they are sometime termed) would likely form the foundation for calculating premium rates, with appropriate adjustments to reflect the actuarys judgment as to the particular risk characteristics present. The basic actuarial formula for calculating a renewal premium rate increase factor for a group or block of business with reliable, credible experience data available can be stated in general terms as follows: Where, GCE is the group claims experience for some experience period for the group or block of business being rated (typically covering at least a year), PRI is the present rate income for exposure during the same experience period, T is a trend factor, and DLR is the desired loss ratio. The product of this calculation is then GRAF, which is the group rate adjustment factor that can be used to change the present premium rate for the group or block of business to the renewal rate level. Alternatively, this generalized formula can be expressed in terms of a group experience-based premium rate level, instead of a premium rate adjustment factor, as follows: [(GCE/GE) x T]/DLR = GER Where, GE is the group exposure during the experience period, and GER is the group (or block of business) experience-based premium rate. If reliable experience data is not available, then premium rates must normally be based on the insurers actuarial rate manual or internal tariff schedule, making adjustments for known and anticipated risk characteristics of the group or block of business to be rated. The basic actuarial formula for calculating the premium rate level for a group or block of business under these circumstances can be stated generally as: [(MCC x BAF x T) x (DF x OF)]/DLR = GMR Where, MCC is the manual claims cost per exposure unit, and BAF is a benefit adjustment factor one would use to reflect any necessary adjustment due to the benefits sold not matching those underlying the manual. DF is the demographic factor which would reflect the cost difference expected due to demographics of the group, and the OF is a catch-all other factor for any

Richard Kipp, MAAA & Ronald G. Harris, FSA, MAAA

Richard Kipp
Milliman, Wayne richard.kipp@milliman.com

Indian

Actuarial

Serving the Cause of Public Interest

the Actuary India December 2005


%

[(GCE/PRI) x T]/DLR = GRAF

other necessary adjustments to reflect risk or other characteristics. The product of this calculation is the group-adjusted manual rate, GMR. The equations become more complicated in situations where the insurer has experience for the group or block, but for any of various reasons it is determined not to be fully credible. In that case a credibility factor is commonly employed to address the situation. One example of a generalized credibility-based formula is shown below. [(GER x Z) + (GMR x (1-Z))] = GCR Where, Z is the credibility percentage that is assigned to the groups experience based rate calculation, and the complement is the percentage assigned to the groups manual rate calculation. The other terms are defined as they were above. This credibility-based formula may also be expressed as: GMR x [(EF 1) x Z + 1] = GCR Where, the experience factor EF, is simply the ratio (GER/GMR). This is similar conceptually to the basic equation for a group or block of business GMR, except that some use of experience data is incorporated explicitly. There are many other considerations the actuary must address which further complicate the actual calculations, such as the handling of large claims, benefit changes during the experience period, demographic and health status changes, and the like. If a group is being taken over, that is, moving from one health insurer to another, the same general formulas apply if experience is provided, but the experience would be from another insurer. The analysis undertaken in this situation is referred to as a Transferred Business Analysis (TBA). The TBA is made more complex by the fact that in working with another insurers experience the actuary never knows for sure how to deal with claim lag for the prior insurer, differences in reimbursement due to discounts or the providers in the respective networks, and potentially different claim paying policies.

used in rating. Senior management, after adopting its financial forecast, usually has a target for the earnings it needs to produce in order to protect its solvency and keep its owners or shareholders satisfied. The actuary needs to have an understanding of the entire companys functions and how they all fit together. He needs to understand how claims are paid and how providers are reimbursed. He needs to understand treatment costs by disease and be able to determine when those costs look out of line. Most importantly the actuary needs to be fearless in asking questions and searching for answers. Before premium rates are assigned to a particular individual or employer, a risk assessment needs to be undertaken by an underwriter. The actuary typically helps the underwriter in this regard by arming the underwriter with tools to evaluate the risks that present themselves. We talk briefly about this function below. Risk Assessment Risk assessment is generally the day to day responsibility of the underwriter. It involves both an identification process and an evaluation process. Risk assessment is undertaken on an individual basis for individual product lines and an overall group basis for group lines. Individual risk assessment is becoming more scientific as better data sources become available. Today, in addition to Underwriting Guidelines that an underwriter may have as a risk assessment tool, information about a persons prescription treatments can be used to reveal probable existing conditions that need to be considered by the underwriter in developing individual premium rates. There are also a number of risk adjustor tools that provide an underwriter with relative values of the cost of various diseases. These risk adjustors, while improving with more research, are still in their infancy. As more patient information is digitalized these tools will be able to improve even further. The following is an example of a Medical Underwriting Guideline that might be used to identify the risk level of an individual: Appendicitis
An inflammation of the appendix. Usually occurs on an acute basis. Occasionally may be chronic with abdominal pain intermittently for many years. Development 1. When was appendix removed? Any complications? Explain. Rating Un-operated Operated No complications Complications <1 year >1 year STD SA STD Points 200 Riders 0903 Points w/Riders 50

the Actuary India December 2005

Setting premium rates for groups that are too small to use their own experience as the rating basis is done in a similar method to that described for the rating of a large group from the manual. The rates from the manual would be adjusted to reflect any differences in benefits and in risk characteristics such as demographics and health status. There are a number of ways that health benefits can be financed. The one of primary interest here is prospective premium rating. In that case premium rates are established in advance of the rate effective period and sold on the basis that the policyholder transfers the full risk for the insured events to the insurer, in return for a premium. It is not uncommon for large employers to essentially underwrite their own claim risk, in whole or part. These alternative forms of financing usually allow the group to control the claim reserve and derive the benefit from any favorable experience that develops. In trade for that privilege, the group may pay a lower risk or profit charge, but it takes on more of the claim risk. Depending on the structure of the financing arrangement, however risk or profit charges can actually be greater than those built into prospective premium rates because annual settlements may be done making the settlement risk to the insurer greater than it would be under a prospective premium arrangement. As can be seen from the formulas described above, the actuary would be responsible for evaluating any experience that was available, including estimating the unpaid claim liability, referred to most often as IBNR (incurred but not reported). The actuary develops the trend assumption and the manual rate schedule, and usually is heavily involved in developing the DLR. The DLR, or the desired loss ratio, is essentially defined to be the loss ratio an insurer needs to produce adequate revenue to cover administrative expenses (including commissions) and produce the desired level of profit. Typically the actuary works with the Finance function to develop an understanding of the administrative expenses and how to express them in a factor that can be

From this you can see several things. First there is a brief layperson definition of the disease. Next is the beginning set of questions an underwriter would ask to the applicant about the conditions he may have. Depending on the answers the underwriter assigns points to the case. These points reflect the relative cost of this condition to that of a healthy individual, remembering that even a healthy person generally has some health conditions and associated costs in a year. Other terms that appear in this Guideline are STD which indicates a Standard Risk, or one that needs no rating up, and SA which indicates that this may be the symptom of another disease. When that determination is made by the underwriter, it is wise to involve a Medical Director to review the case before assigning the risk level. The notion of an exclusionary rider is also mentioned here. In this case one tool the underwriter may have available is an exclusionary rider which would be used to eliminate the risk to the Insurer that comes from complications of the specified condition. That has the effect of reducing the points assigned to this case. The actuarys role in underwriting is to first help with the determination of the
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appropriate number of points to assign to a condition at its various stages, and to price the impact of riders on the risk. Then the actuary would help design a system for using the underwriting points as a modifier to a manual (or adjusted manual) premium rate that would otherwise have applied to a policyholder in this block of business. Naturally, the actuary would have set the starting rate for the block as well. For small groups where individual medical underwriting is employed, the employer groups rate would reflect the average risk of the individuals that are employed. A similar enrollment application would be used to collect the condition information, and the same Guidelines would be used to establish the relative risk of the members covered under the group policy. For group risk assessment, the underwriter may also use a number of noncondition related measures to help determine the risk a given employer represents to the Insurer. Some of those measures would involve the credit rating of the group, the premium rate history of the group, the industry, the employer contribution level, the number and percent of participating employees, etc. The actuary would help establish the relative risk of the presence of each factor and determine a rating structure or formula for the underwriter to use to systematically calculate the group rate based on the factor values. Once the rating factors and methods have been established, the actuary would help establish monitoring mechanisms to determine that the rating systems are working appropriately, producing the desired financial results. Part of that analysis will involve helping to determine if adverse selection has occurred in any of the insurers blocks of business. The notion of adverse selection is an important one. The underwriter uses tools to help ensure that a cross section of risk is underwritten. There is no guarantee that this will occur, so constant vigilance must be used in monitoring the actual versus expected results. Financial Reporting, Operations and Management At the heart of any well run Insurance organization is a team of people that analyze financial experience, pull together the necessary monitoring reports, both internal and external, and prepare forecasts of future operations and capital needs. The actuary is an essential part of that team. We wont explore all of the details of these tasks. One task that is core to all of the experience analysis that will be done by the actuaries and other analysts is the calculation of the claim reserve. The claim reserve is also often referred to as Incurred But Not Reported (IBNR) claims, Unpaid Claim Liability (UCL or Outstanding Claim Liability OCL) and lastly and perhaps most appropriately Incurred But Not Paid (IBNP) claims. This liability amount usually represents the largest single liability on the balance sheet of a stand-alone health insurance company. The actuary may use one or more of several techniques to estimate the IBNR. The technique most often used involves analyzing the lag pattern of the claims and using historical patterns to develop factors that can be applied to complete the claims to a full incurred basis. The actuary should also draw on information such as claims inventory statistics, Claims Department staffing patterns, number of work days, data regarding trends, enrollment growth and benefit changes to help establish the IBNR. More sophisticated models such as a general linear model are also used by some to make the estimate of IBNR. The starting point for all of this analysis is the lag table or triangle. A sample table is shown below.

The table above displays columns that contain the Total Paid Claims for each month and the incurred and paid claims for the months of October 2004 through September 2005. For each incurred month, this table shows the dollars paid by the month in which it was paid. At the bottom of the chart, we show total dollars, exposure (enrollment, shown as member months) and certain calculated values such as claims amount per member per month (PMPM). These statistics are by-products of the lag factor analysis. The lag factors are shown on the next chart and are calculated as ratios of incurred and paid amounts to date to the estimated ultimate incurred amount at the various durations. Having a systematic way of calculating these factors is extremely important. By having such a system, the actuary can quickly test the impact of various scenarios of payment patterns and the impact of different underlying trend assumptions.

Ultimate Incurred Amounts The lag factors shown above are developed by examining the historical pattern of payments and calculating the ratio of incurred and paid amounts through the various durations to the ultimate incurred amount for the period. So, for example, if all payments have been made for the incurred month October 2004, the ratio of claims paid at various points in time in October 2004 to the ultimate incurred amount for October could be used to complete the amount paid to date for more recent incurred months. Note that for the very most recent months the incurred amounts per member per month trends are generally analyzed and used instead of lag factors to project the incurred amounts per member month. This approach is generally used when the completion factors are under some benchmark level, such as .70-.80. There are other methods for calculating lag factors which involve other ratios of paid amounts. One such method is referred to in the literature as the Multiplicative method. It involves calculating ratios of amounts, at each duration, and multiplying the ratios together to reflect the appropriate number of paid months for the incurred month that is to be completed. Understanding claim payment patterns, and what the root causes are for the actual patterns that are observed, is part of the actuarys responsibility. A direct by-product of the lag analysis is the IBNR, which will be needed for financial statement purposes. As mentioned earlier, this same analysis produces information that would be used in the rating process. Lets say, for example, that a block of business was being renewed and the twelve month experience period coincided with our example above. The completion factor we would need to complete the groups claims would be the sum of the incurred and paid for the twelve months divided by the sum of the ultimate incurred claims for the same twelve months. In our case, the lag table data would indicate that payments to date were about 93% complete. Other responsibilities for the actuary fall under the Financial Reporting, Operations and Management heading. They would typically include development of financial forecasts and monitoring of actual versus expected results. Also included would be the tracking of capital needs and statutory requirements for surplus. These tasks are very involved and extremely important for any insurance company; therefore, actuaries in the new health

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insurance environment need to understand the nuances of the Indian health system and how that will give rise to the risks insurers in India will face. One such aspect of the Indian health system that actuaries will need to fully appreciate involves provider costs and practice patterns, and the public/private infra-structure that exists. We discuss these briefly below. Provider Analysis For health actuaries, it is important to find ways of drawing distinctions between and among various providers of healthcare services. The typical way of doing so usually starts with the way the billing for the services is handled. Hospitals will usually bill for services rendered at their facilities and physicians and other practitioners may bill directly for the services that they provide. The insurance policy will specify which services are covered and under what circumstances. It is then very important for the actuary to understand at a very detailed level what the cost of the various services might be and how they vary among providers both across type of provider and within type of provider. Another important aspect of provider practice is how efficient they are when working with their patients. This might manifest itself in the type and cost of the treatment one physician may select to help a person with a given condition versus what another physician may choose. Last, but not least, is the notion of effectiveness and how effective one practitioner might be versus another in delivering the same service to a patient. This latter aspect also has a quality element to it. Not all patients are the same, so patient severity must be accounted for; and not all parts of the country cost the same, so area differences should be accounted for in any analysis. Assuming all of these things could be known, what would the actuary do with the information? There are numerous things that come from this analysis. One important question to address is which practitioners should be contracted with to provide service to an insurers patients. Another important question concerns the amount that should be paid to the practitioner and how that amount should change over time? Data like this could also be used to enable policyholders to better select the practitioner they may want to help them.

care for a minor cardiac procedure. The information is also displayed for 4 levels of severity which are part of the All Patient Related Diagnostic Related Group coding system. The percentages of avoidable days are determined by comparing the given hospitals data to benchmarks that have determined from a separate statistical analysis. The benchmarks themselves are for a group of hospitals that have been determined to be behaving in a Best Practice manner from an efficiency perspective. This type of analysis opens a window into the practice patterns of the hospitals in a market and can be used to encourage different behavior at a hospital as well as give insight to the actuary that is setting product prices for that market. In a similar fashion, quality indicators can be used to monitor the outcomes of a given hospital. Those outcome differences could be used to modify payment levels for a given hospital. An example of some of the types of patient safety indicators (a small subset of the overall set of quality indicators) are shown below:

Postoperative hemorrhage, or hematoma Postoperative hip fracture Postoperative physiologic and metabolic derangement Postoperative pulmonary embolism and deep vein thrombosis Postoperative respiratory failure Postoperative sepsis

The figure below displays how the postoperative hip fracture patient safety statistic is determined.
Outcome Population at Risk Discharges with ICD-9-CM code for fracture in any secondary diagnosis field per 1,000 surgical discharges. All surgical discharges defined by specific DRGs. Exclude all patients with diseases and disorders of the musculoskeletal system and connective tissue (MDC 8). Exclude patients with principal diagnosis codes for seizure, syncope, stroke, coma, cardiac arrest, anoxic brain injury, poisoning, delirium or other psychoses, trauma. Exclude patients with any diagnosis of metastatic cancer, lymphoid malignancy, bone malignancy or self-inflicted injury. Exclude obstetrical patients in MDC 14.

the Actuary India December 2005

The actuary can play a central role in helping to organize and analyze this data. The actuary also needs the same sort of information to undertake trend and pricing analyses. Because the actuary is involved in so many other aspects of the financial workings of the insurer, it is crucial for him to have a deep understanding of how changes in use patterns and the mix of services provided to patients will affect the price of the insurance product. The actuary will often be involved in developing reimbursement levels for providers and may help develop the benchmarks by which providers are measured. Such is the nature of the information that is displayed below.

Although involvement with efficiency and quality information is not usually thought to be the domain of the actuary, it is easy to see why the actuary should be involved in its analysis. These data help the actuary understand underlying costs and usage patterns, which are useful when setting product premiums, determining trends, and assisting with provider reimbursement mechanisms. General Data Analysis It is not uncommon for the actuary to receive a very large data set and be expected to make sense of it. We have mentioned numerous analyses for which the actuary would typically be responsible. These tend to be ongoing daily activities. The actuary is also often expected to assist in special studies that are needed to help management make various decisions. In order for the actuary to do his analysis well, several things must be true. They include:
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The figure above displays statistics about the efficiency of a hospital in the United States with regard to its Medicare program. The data is for calendar year 2002 and shows the number of potentially avoidable days of inpatient



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Internal data sources must be known and understood Certain tabulation standards must be followed External data should be obtained and used for comparison purposes Communication skills must be finely tuned

insurance industry evolves and the government and the regulators work to improve the health care system, much more information should become available. Until that time, Indian actuaries will need to find external sources to complement their companys data by looking to private organizations that specialize in data and data analysis. Communication One of the most important skills the actuary can possess is the ability to communicate complex mathematical/actuarial notions to non-technical audiences. The actuary may work with large volumes of data and produce large amounts of analysis, but this could well be ignored unless it can be translated into understandable information. To help senior management with its responsibilities, summary reports sometimes called dashboard reports can and should be created to provide important statistics at a glance. More detailed reports and explanation can be provided once the summary information has been reviewed. Final Thoughts As can be seen from the discussion above, health actuarial work can and should be very involved. Health insurance markets can move quickly, and the actuary plays an important role in the overall financial success of his organization. Taking the time to learn the Indian health system from the inside out will make it easier for the actuary to provide the valuable insights insurers will need to be successful and profitable. Having access to data will be essential. The actuarys role will be to Assist senior management in evaluating its corporate strategies Work with marketing/sales and underwriting to establish proper pricing for all products Work with the finance function to evaluate the companys liabilities for financial reporting Assist the provider contracting function in establishing fair yet competitive fees to pay providers

Internal Sources
The internal data that the actuary will need to conduct analysis is, for the most part, the by-product of operational processes. Access to claims data, exposure information, demographics, provider payment levels, premium revenues, group information, and operating expense information is essential for the actuary to provide the support to the organization that it needs. A good way for the actuary to find out what data exists within the organization and how it can be used is to spend time in each functional area talking to the people that create the data. This people-networking is not a one-time endeavor, but rather is a dialogue that needs to occur continuously. Two essential consequences sought from these relationships are (1) getting detailed descriptions of all data set variables and their meaning, and (2) being informed when any changes occur in the data or the systems that produce the data. The tracking of changes is very important because changes can totally alter the interpretation one might have of the meaning of the data. Once the data is known and understood, then the actuary can consider how best to capture and analyze the data. In this age of IT, that solution usually involves setting up a data warehouse. Having a warehouse that can be accessed by the actuary and other Departments within the company helps to make the analyses done by the various departments consistent. Tabulation Standards To deal with the fact that multiple actuaries and analysts will be working with the companys data, it is generally wise to establish a set of tabulation standards. Those standards would include (1) balancing and reconciling the data to other sources, (2) using control totals to establish overall data integrity, (3) documentation of the analytical process, (4) detailed checking of tabulations, (5) overall reasonableness checking, and lastly (6) using replication of results, as needed, to prove accuracy of the process and methods. External Sources A very important function of the actuary is to test the results of any analysis for reasonableness. One of the ways that is done is to use alternative external sources of data, especially when the internal data source may not be fully reliable or credible. In India at this point in time, it will be difficult to obtain external data, but that is all the more reason its needed. So little health data is available now, and what is available has been so little used, that special efforts must be made to find data to use for these purposes. As the health

This is no small task, but one that has not generally been perceived as needed in the health insurance industry until recently in India. The reform of the insurance industry is making actuaries lives much more interesting and challenging. For non-life and stand-alone health insurers, a much greater focus will be on health insurance products going forward. Health actuaries will help bring rationality to this market that will be greatly needed as it expands.

Press release
Institute of Actuaries announces new President-Elect The Institute of Actuaries has today announced that Nick Dumbreck will be its next President. Mr Dumbreck, who will take up the Presidency in July 2006 and who will serve a term of two years, joined the Profession in 1976. He qualified as a Fellow of the Institute in 1982. He was a member of the Council of the Institute of Actuaries from 1993-98 and from 1999 to 2005, acting as Vice President to the Institute from 2003-05. He was Chairman of the Professions Education and Continuing Professional Development (CPD) Board from 2002-04 and served as Honorary Secretary of the Institute from 1996-98. Mr Dumbreck has been a member of the Education Committee of the International Actuarial Association and the Groupe Consultatif Actuariel Europen since 2002. He also chaired the Staple Inn Actuarial Society (SIAS) between 2002 and 2004.
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Nick Dumbreck President-Elect, IoA

the Actuary India December 2005




Understand all available data and be able to transform that data into usable information for all levels of management and all functional areas within the insurer

HEALTH INSURANCE

TAIWANS NATIONAL HEALTH INSURANCE AN INTEGRATED APPROACH TO SOME ISSUES


Chiu-Cheng Chang, PH D, FSA, FCIA, FAIRC, CLU, CHFC, MAAA
Approach In this article, I first introduce Taiwans National Health Insurance (NHI) program briefly and its problems extensively. NHIs approaches to its own problems are then described and their shortcomings and failures are noted. Taiwans new pension regulations are then introduced and the integrated strategy for solving Taiwans NHI problems by combining NHI into individual retirement account is described with reasons. This strategy is expected to succeed because it will make free market work in the health care industry by fundamentally changing the behavior of both consumers/patients and medical service providers. Much of the content of this article is based on a paper on the same subject presented to the 13th East Asian Actuarial Conference held in Bali, Indonesia in Sept. 2005. Introduction Since its inception in 1995, Taiwans NHI program has been the focus of many research projects conducted by actuaries, medical economists, public health specialists, and health care professionals and these are in public domain. It is intended that issues discussed in this article will be of interest to not only Taiwan but many other jurisdictions which face similar issues. Taiwans NHI Program Before the establishment of NHI in 1995, Taiwan had thirteen different public insurance systems, each covering a particular group of the population. These systems include Labor Insurance (1950), Government Employees Insurance (1958), Farmers Insurance (1985), Low-Income Household Insurance (1990), and some others. Together these programs covered about 59 percent of Taiwans population. This left over eight million mainly childred under Age 14 and aged over 65 uninsured, a segment whose health care needs no emphasis. NHI began operations on March 1, 1995, two months after the establishment of the Bureau of National Health Insurance (BNHI). NHI is a government-run, single-payer national health insurance program, financed through a mix of premiums and taxes, that compensates a mixed public and private delivery system predominantly on a fee-for-service basis. To ensure sufficient risk pooling and a broad-based collection of funds, NHI enrollment is mandatory covering more than 97 percent of Taiwans population. Premium Income The NHI is financed on a pay-as-you-go basis with the premiums being based on income. Individual families, employers, and government all pay a share of premiums. Currently, 40 percent of the NHIs total premium revenue come from insured, 33 percent from employers, and 27 percent from government. The share of the premiums paid by the insured, employers, and government varies greatly within the six categories of population groups. For employees of public or private enterprises, for example, government pays 10 percent of the premium, the employer 60 percent, and the employee 30 percent. The self-employed professionals pay 100 percent of their income-based premium without any government subsidy. For military personnel and their dependents, and low-income families, the government subsidizes 100 percent of the premium. The premium for an individual varies with the number of dependents (for whom premiums are levied on a per capita basis), which is capped at three. Benefits The NHIs benefits include inpatient care, ambulatory care, lab tests, diagnostic imaging, prescription and certain OTC drugs, most dental care, traditional Chinese medicine, limited home health care, and certain preventive medicine. Expensive treatment for HIV/AIDS and organ transplants are also covered. Freedom of Choice More than 90 percent of Taiwans health care providers contract with the BNHI. Unlike many managed care models is other countries, the NHI offers the insured complete freedom of choice among providers and treatments. Unlike UK and Canada, there is no rationing of care, and there are no queues for care. The failure of a referral system and the completely free choice of providers means that patients can go doctor shopping. For example, they can seek care at medical centers without regard to the nature or severity of their illness. Utilization of Health Services Overall, the volume of health services delivered has greatly increased since the inception of the NHI. In fact, the increase is far greater than what may be justified by population growth. With the exception of certain costly high-tech treatments such as heart, lung, liver, and bone marrow transplants for which prior BNHI authorization is required, there are effectively no ceilings on utilization in the NHI. This has resulted in high health care utilization rates, especially outpatient care. Taiwans outpatient visits have averaged around 15 per capita and are comparable with Japans. Both are by far the highest in the world. Payment System Out-of-pocket spending by households represents services not covered by the NHI, such as orthodontics, prosthodontics, Lab tests that are not medically necessary, extra charges for non-NHI beds, special nurses, and physicians requested by patients other than those routinely assigned by the hospital, long-term care, and nursing home care. It also includes user fees and copayments for NHI-covered ambulatory care, inpatient care, and pharmaceuticals. User fees are levied per contact with the provider. Copayments are levied on each component of a treatment. Exceptions are made for major illness or injury, deliveries, certain preventive services and alike. Moreover, copayments vary by
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Chiu-Cheng Chang
Professor, Graduate Institute of Management, Chang Gung University, Taiwan chiucheng@mail.cgu.edu.tw

type of provider. They are highest for outpatient care at medical centers and lowest for local clinics. Payment of Providers The Health Care providers obtain their revenues from three sources: (1) payments by the NHI, (2) patient user fees and copayments, and (3) proceeds from the sale of products and services not covered by the NHI. The NHI pays providers on a classic fee-for-service (FFS) basis at uniform, national fee schedules. In recent years the BNHI has experimented with other payment methods, such as diagnosis-related groups (DRGs) for hospitals, primary care capitation for certain population groups and even payments linked to clinical outcomes, in an attempt to control costs and improve quality. However, the ultimate cost control measure has been the imposition of global budgets, phased in sector by sector. NHI Problems As a consequence of the design of NHI as described above, it has encountered numerous problems: NHI fee schedule tends to be too low peceived artificial, and arbitrary Unlike the fee schedules used by the U.S. Medicare program, Taiwans fee schedules are not based on the estimated relative resource costs of providing the services in the schedules. Instead, the NHI simply adopted the relative value scales of the fee schedules used by the Labor Insurance and government Employees Insurance in place prior to 1995. Note that these relative value scales are neither based on resource costs nor updated. Moreover, they tend to be at least somewhat artificial and arbitrary. Providers respond by expanding volume of services, reducing resources for each unit of service, and profiting from sale of products and services not covered by NHI These responses from providers facing the low fee schedules which tend to be artificial and arbitrary are to be expected. Provider-induced demand for services, many of which are not medically necessary Just as all open-ended health insurance systems relying on fee-forservice payment of providers, Taiwans NHI has experienced rapid increases in the volume of services which, in turn, has led to charges of supplier-induced demand for services, many of which may not have been medically necessary. Fee-driven practice may lead to misdiagnosis, improper treatment, or delays in proper treatment Former BNHIs CEO once remarked that Taiwans doctors are well paid. But they work very, very hard to use volume to make up for the low fees. Taiwans doctors are notorious for their extremely shortened visit length with patients. All this fee-driven practice style may lead to misdiagnosis, improper treatment, delays in proper treatment, or medical malpractice suits which have become more and more prevalent. As a result Doctor-patient relationships have been deteriorating Professional Fee (PF) system compensates doctors on the basis of their revenue productivity
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Under the NHI, more and more hospitals have evolved to adopt the professional fee system. This system compensates doctors mainly on the basis of their revenue productivity: the number of patients seen, procedures performed, lab tests ordered, along with academic and professional papers published, speeches given, and even articles written in newspapers. The higher the service volume a doctor or a hospital delivers, the greater will be the hospitals revenue and the doctors pay. Such a reward system can trigger physician-induced care that may not be clinically indicated. Overuse and misuse of health care may constitute up to a third of the NHIs total expenditure This view has been widely shared. Many people also decry the commercialization of medicine in Taiwan and the profit-driven motives of Taiwans providers. Drug price black hole leads to serious overmedication of patients, including that with antibiotics In fact, Taiwans antibiotic resistance in streptococci pneumonia is probably the highest in the world. Poor health care quality When patients in Taiwan are faced with life-threatening illness, the probability of losing their lives is several times greater than it is in the U.S. For Example, survival for all cancers in Taiwan is half the rate in the U.S., deaths from anesthesia is eight times that of the U.S., deaths from tuberculosis is ten times that of the U.S. Clearly, NHIs low cost insurance with prices frozen, which resulted in fast-food health care, has negatively impacted the quality of health care seriously. Lack of family physician system Unlike the U.S., Taiwan does not have the family physician system. As a result, Taiwan places far more emphasis on diseases than prevention. The failure of the referral system Under the NHI, the referral system has completely failed. As a result, Taiwan places far more emphasis on specialists than general practitioners. NHI has been financially insolvent NHIS Approaches To Its Problems To counter worsening revenue shortfall As expected, NHI has tried to increase premiums but has encountered great difficulties due to the public and political resistance. NHI has also increased copayments, reduced drug prices, introduced reasonable outpatient volume policy, and payment reforms, all with limited effects. Borrowing from the Canadian and German experience, NHI has used global budgeting trying to control the costs. The evidence so far is that global budgeting has had its intended effect only in the short run. It is expected to fail in the long run. To counter deteriorating health care quality As expected, NHI has initiated a variety of quality monitoring and assurance programs to move providers toward greater accountability for quality. An example is the so-called fee-for-outcomes (FFO) approach. Another example is the construction of hospital quality indicators. In 2002, NHI introduced IC-card which contains important

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clinical and personal information on its holder. It will function as a communication tool between the NHI and providers and, once fully implemented, will also make it possible to electronically transfer medical records among providers. This sharing of clinical information may help reduce the waste of duplicative services and curb doctor shopping activities. All these approaches are of limited value, all things being considered, since they are reactive, and of short-term nature. In particular, they ignore that social insurance programs can easily fall victim to the Tragedy of the Commons, in which commonly owned properties face the risk of depletion from overuse by individuals seeking to maximize their own well-being without regard for the common good. An approach to solve NHIs problems as described below is to transfer all funds (contributed to NHI) to each patients (individual retirement) account. New Pension Regulations The new pension regulations as passed by the Legislative on June 11, 2004 for implementation effecive July 1, 2005. Although a dual system consisting of individual account scheme and annuity scheme is promulgated under the new pension regulations, most, if not all, Taiwanese employees will be covered under individual account scheme. Each month employers must contribute six percent of employees monthly salary into their individual accounts under this scheme. Those employees who choose individual account scheme may contribute six percent of their monthly salary tax free to their own accounts. Clearly, this individual account scheme is very similar, if not identical, to all those individual retirement accounts (IRAs) of, say, Singapores Central Provident Fund, Malaysias Mandatory Provident Fund, and Hong Kongs Compulsory Provident Fund.

put in all the NHIs original premiums (from employees, employers, and the government). Conceptually, we can further illustrate this integrated approach in the following graph: Under this integrated approach, all the medical expenses incurred by each individual, whether small or large, from doctors visit, hospital stay, all the way to major surgery, must be paid from that individuals Medical . Just like all other sub-accounts, this Medical sub-account is cumulative in that if an individual is so healthy as to stay away from using medical services, he will be accumulating the fund in his Medical sub-account. At the very least, medical service consumers behavior will thus be fundamentally changed; they will no longer utilize medical services deemed unnecessary! The accumulated balance in the Medical sub-account once reaches a certain amount, the excess may be withdrawn or deposited into other sub-accounts.

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Bases on our observation of evolutions of IRAs internationally, we expect Taiwans individual account scheme will be undergoing similar evolution. For example, most countries vary employer and employee contributions according to macro-economic conditions. Also, most countries subdivide the IRA into, say, ordinary account, medical account, long-term care account and emergent account with a mandatory minimum amount (which changes over time) specified for the ordinary account (the bona fide retirement account). The Integrated Strategy For Solving NHI Problems NHI, after only ten years operation, has encountered numerous serious and difficult problems for which the governments solutions have proven of limited value at most. Many academic papers have offered ideas to solve the problems but they have either failed to attract NHIs attention or have proven of very short-term or limited value once adopted by NHI. This is because none of the ideas and approaches have dealt with the Tragedy of the Commons directly. In other words, all the ideas and approaches have encountered the same difficulty that free market mechanism does not work in the health care industry without being able to overcome it. Our approach to solve NHI problems is to make free market mechanism work in the health care industry. To do so, we merge NHI into Taiwans new pension system so the within each individual account we create a medical into which all the original NHI premiums are deposited. Each individual account may evolve and become subdivided into ordinary retirement subaccount, long-term care sub-account, emergent subaccount, and medical sub-account. It is this medical sub-account we

Knowing that each patient is spending his own money from his Medical sub-account to pay for his medial services received, all medical providers behavior will thus be fundamentally changed too. Medical providers know all too well now under our integrated approach that patients are no longer taking advantage of the Tragedy of the Commons prevailing under a social insurance program. To do well in this new environment, providers must offer much better medical services in order to attract and keep the patients. In fact, the best providers could easily charge the highest fees and still attract enough patients. The worst providers could be wiped out of the market. It is clear that free market mechanism will be working in the health care market in Taiwan under this approach. In order to cope with potential health disasters, Medical sub-account holders could use their funds to buy such health insurance as Hospital & Surgical, Major Medical, Dread Diseases, Cancer Insurance, etc. Since these health insurance policies are privately owned, commercially available, they will not affect the workings of free market mechanism in the health care industry. In fact, they will provide ever better protection while making free market work better in the health care industry. Conclusion Our integrated approach to solve Taiwans NHI problems is to empower consumers/patients so as to fundamentally change medical providers behavior. In doing so, consumers/ patients will no longer take advantage of the Tragedy of the Commons enabling free market mechanism to work in the health care industry. Since Internet has provided ample health information, information asymmetry in the health care industry has been greatly lessened. This in turn enhances the power of consumers/patients and increases competition in the supply of medical care. We believe that health care is too important NOT to be exposed to the market and only through free market mechanism can we make health care affordable at great quality.
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INTERVIEW MYTHS DECODED

Beyond the known landing your first actuarial job


Akash Gupta & Robert Johnsen, FASI
With the Indian Non-Life Insurance Industry on the verge of detarrification whats inevitable is the importance of Actuaries in the industry. Enough has been said about that. What else? Shrinking margins, higher claims disbursement, and increasing competition in recent years in the global insurance markets; more than 1500 General Insurance companies and 1300 health insurance companies in the US alone; hefty cost of actuarial expertise in the west; 4000, and a still increasing number of aspiring actuaries in India and ASIs admirably growing initiatives on mutual recognitions with actuarial societies worldwide - the Actuarial profession in India is all set to scale new heights. But, is clearing exams sufficient for actuarial students to meet the recruiters expectations? Gone are the days when there was an acute shortage of actuarial students and a few exams were sufficient to get through a job opening. Not to infer that exam focus is not important, but more is needed. An increasing number of junior actuarial students are frustrated about the fact that they are not able to find a job. Why cant I get a job? I have cleared three exams! Unfortunately, 3-exam clearance is becoming a commodity for employers and is often not sufficient to get a job. If you find yourself in this situation, here are a few traits that would add to your actuarial expertise and improve your chances of landing your first job in the actuarial field. Excellent Analytical Skills: No matter how proficient you are in remembering complex probability distribution functions, their moments, and generating functions; no matter how instantly you recollect what the Chapman-Kolmogorov equation is what actually matters is the application. Given a real life situation, how good are you in using your knowledge is what finally matters. In real life, you would just open your books and pick out the probability density if that is what you need the application part is finding out which density for which situation. Good Communication Skills: Theoretically, technical expertise should speak of what you can do. But, unless you are able to communicate it, how will the world know what
Akash & Robert interviewing Surabhi

you are capable of? Further, English is the international insurance language. The lack of ability to express yourself in English is often a reason for declining a person for a job. This is unfortunate because students who are otherwise very talented get rejected for this very reason. Written and spoken English skills, therefore, are essential and a must-have. IT Skills: There was a time when IT skills where a nice addition to your resume. Today, it is almost a mandate to have some IT exposure and a perfect combo if you have proper expertise. But remember, if you had a course where someone explained C++ to you and you never actually did any programming yourself, then the learning is limited. You need to have hands-on experience before claiming to know the skill. If you have recently landed your first actuarial job, here are few things that the employer would be looking for.

Robert Johnsen
Managing Actuary GE Insurance Solutions, Gurgaon robert.johnsen1@ge.com

Akash Gupta
Reinsurance-Pricing Analyst, GE Insurance Solutions, Gurgaon akash.gupta1@ge.com

Akash interviewing Surabhi

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Sincerity on Work Front and Exam Focus: First and foremost, sincere execution of a given job responsibilities is minimal requirement on the part of any employee. The best way to demonstrate that you are ready for the next level is to ace your current responsibilities. Moreover, for an actuarial student cum employee, whats equally important is the undeviating exam focus. Unwavering efforts towards attainment of the actuarial designation and demonstration of skills acquired are keys to growth. Long-term Vision: The initial phase of almost all technical jobs is not the very high-end stuff. But, only by understanding a process in details can one become an expert. It is the same for the actuarial field. The initial phase of an actuarial career begins with the basics. If you thought that you were going to use your high-end statistical knowledge from day one, you will probably be disappointed. Whats vital is to have a long-term vision with the organization and a fair amount of patience. Your hard work will surely reap returns. Establishing your credibility with the organization is the key to move to

the next level. Most experienced students would probably be able to switch jobs and earn a little more. Frequent job shifts may be a good strategy in the short term, but you have got to realize that it takes time to build expertise. Two years in a company will not make you an expert. If you feel that way, there is most likely something you have missed. Just scratching the surface is not who we are. We are experts in the deep complexities of the business. Remember, it is the job of any employer to select and promote the best candidate for an open position. If you could not make it through Dont take it personally. Request feedback to improve yourself. Unsuccessful interviews are just point estimates in your long and exciting career as an actuary. They are not permanent thumps down for any future actuarial openings. Get back in the game, be persistent and improve your market value by clearing exams and following some of the advice above. Good luck.

Purpose:

the Actuary India December 2005

P. A. Balasubramanian
Chairperson, Health Insurance Board, ASI pabalas@irdaonline.org

5. Identifying the areas where guidance notes are warranted and to take action The purpose of the Health Insurance Board in accordance with Due Process. is to promote the Professions involvement in Health Insurance issues of public interest and The Constitution of the Board is as under: to promote the use of actuarial skills in the 1. P A Balasubramanian - Chairperson health-sector. In achieving this purpose the 2. D Sai Srinivas - Member, process will include: Secy. to the Board 1. Promoting and facilitating exchange of views, advice, research and practical 3. Venkatesh Chakravarty - Member information among actuaries involved with 4. Herbert Meister - Member public and private health issues such as policy and programme design, research 5. Alok Gupta - Member and planning etc., 6. Richard Kipp - Member 2. Developing educational standards and providing education particularly with reference to the subject at the Specialist Technical and Application level of health and care 3. Engaging in activities that promote the use and activities of health actuaries within and outside the profession, support formal ASI activities with the health content and interact with Health Committees of the other Actuarial Bodies, Government and the Regulator. 4. Contribute to the development of public policy 6. Edgar Balbin - Member Monish Bawaskar of ASI Secretariat will work as Executive Assistant to the Board. As part of the activities on actuarial education in Health Insurance, ASI has decided to conduct a programme on Health Insurance Actuarial & Underwriting Workshop jointly organized by ASI, Milliman, Bearing Point and NIA. The details of the programme including outside faculty to conduct the programme are being worked out. The programme is likely to be scheduled in early 2006. More details will follow after the programme is finalized.
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Health Insurance Board

HEALTH INSURANCE

THE HEALTH INSURANCE INDUSTRY IN INDIA AND ITS GROWING POTENTIAL


Walter de Oude, FFA; FASI & Rajagopalan Krishnamurthy
Background The Indian constitution lays the principal responsibility for public health at the doors of the individual state governments. The central Government provides about 15 per cent of the funding needs mostly for national health programmes. Given the paltry state of finances, it is not that surprising that public health Currently, less than 15 per cent of the Indian population has some kind of health insurance cover. This includes those covered under the Central Government Health Scheme (4 million beneficiaries), the Railways Health Scheme (1.2 million) and the Employees State Insurance Scheme (0.3 million). The robust growth of the Indian economy at more than 6 per cent every year, together with a rapid rise in personal incomes, has led to this gap in healthcare spending being increasingly met by private health expenditure. On average, every family spends up to 10 per cent of annual household consumption towards healthcare needs. Health insurance Health insurance remains vastly under-developed in India. The regulations only permit general insurance companies to offer stand-alone health insurance products, while life insurers are allowed to offer riders such as critical illness cover attached to basic life policies although subject to certain restrictions. Health cover premiums, however, account for less than 1 per cent for life insurers and 10 per cent for general insurers of total premiums. Health insurance premium collections in 2004/2005 amounted to Rs 2,000 crore (Rs 1 crore is equivalent to around US$250,000) which, in comparison with the total healthcare spend at around Rs 60,000 crore, pales into insignificance. The health insurance market is dominated by the four public sector general insurance companies that have launched what is popularly known as the mediclaim policy an indemnity benefit arrangement covering in-hospital expenses. While they hold about 80 per cent of the health insurance market, they face increasing consumer dissatisfaction and serious issues on product profitability.

expenditure is far below the requirement for the huge population of 1,030 million about 16 per cent of the world total. The family planning and healthcare initiatives of the Government have however been effective in reducing birth rates and improving mortality rates from historic levels. The crude birth rate declined to 25 per thousand in 2002 from 39.9 per thousand in 1951 and the infant mortality rate registered a dramatic decline in two decades from 134 per thousand live births in 1981 to 66 Walter de Oude per thousand live births in 1999. Life expectancy Senior Consultant at birth has increased by about 35 years, from Watson Wyatt,Singapore. walter.deoude@watsonwyatt.com 31 years in 1947 to 66 years in 2002, a vast and dramatic improvement. As Figure 1 shows, Government expenditure on healthcare in India is far below that of other developing countries. According to the World Health Organisation Report published in 2002, India ranked thirteenth from the bottom in terms of public spending on health. The role of private health expenditure Although Indias public spending is low, overall health spending is improved due to higher private spending. In 2002, private spending on health was estimated to be 4.8 per cent of GDP, over three times public spending. As a result, Indias overall expenditure on health in 2002 was 6.1 per cent of GDP and, as Figure 2 shows, compares well with other developing countries.

Figure 3 shows the market share of private and public sector non-life insurance companies in terms of new business premiums from the health segment. The combined new business health premiums of the four public sector companies accounted for 82 per cent of the total new business health insurance premiums collected by the non-life insurance industry in the 2004/2005 financial year. The private sector companies increased their combined market share in the health segment to around 18 per cent in 2004/2005 financial year from around 10 per cent in the previous year. The state owned companies have had little focus upon this developing line of business on a systematic and profitable basis. They have mainly attempted to market health insurance cover on a discounted basis to employer groups

Rajagopalan Krishnamurthy
Head of distribution consulting Watson Wyatt, India;
rajagopalan.krishnamurthy@watsonwyatt.com

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as an accommodation, primarily to gain access to the profitable lines of the employers insurance portfolio, such as property cover, which are subject to state regulated tariffs that are generally considered to contain significant margins. The success of this strategy means that group health insurance constitutes about 35 per cent of the total health insurance business. Historically, the public sector companies have also not paid attention to developing proper underwriting criteria and they are not required to declare the operating results of this product line separately. Despite years of experience, they have not built proper databases and do not carry out systematic analysis of amongst other things, disease patterns, regional variations, age-related healthcare spending and/or claim distribution costs.

While TPAs attempt to prescribe uniform fees and standards of service to avoid costly duplication in diagnostic and other customer care aspects, the service providers are resisting such moves and tend to form cartels. They have also begun to adopt dual fee schedules: a higher rate for customers preferring to get treatment under cashless schemes administered through the TPAs and a lower one for direct settlement and possible reimbursement by the insurer. There are also suggestions of significant delays in settlement of bills by TPAs to healthcare providers. Future scenario Despite the above teething problems, the Indian economy is showing signs of liberalization in many areas. Further, the Government and the insurance regulator seem keen to encourage health insurance. The obvious solution is to encourage competition by lowering the entry barrier for new players and to recognise the potential of health insurance as a stand-alone business. A working group, set up by the insurance regulator to suggest specific measures to improve the state of affairs in health insurance, has recently submitted its report. One of its major recommendations is to license exclusive health insurance companies with a lower minimum capital requirement of Rs.250 million (about US$5 million), one-quarter of the minimum capital required for life and non-life insurance companies. The group also favoured the introduction of a risk-based capital model for healthcare companies to encourage efficiency in capital allocation and a higher level of tax benefit for health insurance premium payment for individuals. A key need to allow a higher equity holding for foreign firms is also being recognised, with the group favouring foreign ownership of health insurance companies of up to 51 per cent (compared to the current limit of 26 per cent for insurance companies). This would require an amendment to the Insurance Act, which is a long process, unless the Government chooses to use its emergency ordinance powers to intervene more rapidly. At the same time, there are signs of cooperation between some of the healthcare providers to subject themselves to a stricter price structure. The major TPAs have developed a database of the most common surgeries such as heart, cataract, tonsilectomy, appendectomy and hysterectomy covering the average treatment cost across the primary, secondary and tertiary level hospitals. Since there is no accreditation body in the country for hospitals, the National Centre for Quality Management has agreed to work out a further classification of hospitals from the data collected by the TPAs. The exercise is carried out in a phased way and already about 200 hospitals have signed contracts. Health insurance provides the important benefit of risk pooling to consumers, particularly once insurers have achieved both scale and size. Such coordinated moves amongst healthcare players are therefore essential to spread the benefit of health insurance among the whole population. A study by the Indian Planning Commission has, however, indicated that the lowest earning 20 per cent of the population spend about a fifth of that of the highest earning 20 per cent of the population on healthcare, whereas the difference in disposable incomes is far greater. Furthermore, the bulk of the healthcare spending by the lower earners is met by raising borrowings or selling family assets. Only a purposeful and time bound plan could therefore bring relief to every segment of the population, enabling access to vital healthcare cover. As a result, there is a significant opportunity in India for insurers if they can proactively contribute to Government initiatives to achieve better and more widespread healthcare provision and funding.

the Actuary India December 2005

The health portfolio that had a loss ratio of about 78 per cent in 2003 deteriorated to 98 per cent in the following year. These deteriorating loss ratios, as well as the competition from new private players, are pressuring these companies to more actively manage their portfolios. Since public sector insurance firms regard health insurance as a loss leader to gain footholds in other more profitable lines, they have also not invested adequately in their customer service proposition. An indication of the low level of satisfaction is the large number of complaints from customers. According to figures published by the 12 Insurance Ombudsmen in the country, 70 per cent of customer complaints relate to health insurance, the most common point of contention being clauses related to pre-existing illnesses. The introduction of new private general insurance companies is, however, beginning to make some difference. Five of the new private non-life insurance companies sell stand-alone health insurance products. These new companies have introduced a few innovations, such as direct tie-ups with healthcare providers, providing cashless settlement as an option, the provision of preand post-hospitalisation benefits and coverage for pre-existing illnesses. Both state owned and private companies have also tied up with Third Party Administrators (TPAs) who are licensed by the insurance regulator. Currently, there are nine TPAs who handle the bulk of the business, with most serving more than one insurance company. The regulations require a TPA to be exclusively engaged for the purpose, with minimum capital of Rs.10 million (about US$200,000). At least one director of a TPA should be a qualified medical practitioner. The use of TPAs has, however, given rise to some tension between the healthcare providers and the health insurance companies. Due to the lack of standards and regulations in India to govern hospitals, nursing homes and other healthcare providers, there are substantial differences in the delivery and cost of healthcare services across India and amongst service providers.

[Acknowledgement : Healthcare Market Review October 2005 issue]


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HEALTH INSURANCE

Actuarial Aspects of Health Insurance Pricing


Health Insurance pricing is not always recognized as a complex actuarial domain and the basics and principals are relatively unknown to people outside the healthcare community. This article should give an overview about the basic principles of the health insurance premium calculation and the complex factors influencing health insurance risk. At the outset it is necessary to familiarize the reader with two fundamentally different calculation principles on which health insurance business can be based: 1. The principle of solidarity, which for example can mean that the premiums depend on the income of the insured persons, rather than purely on risk factors influencing the probability of claim and claim size. In general, the total premium for a given class of insured people (e.g. income group), varies significantly from the total claim this class has to expect. Applying the solidarity principle usually means that social factors (such as income, family status etc.) are more significant in determining the premium than pure risk factors such as health status or age. Statutory health insurance is often based on this principle frequently the premium is determined as percentage of income. 2. The principle of equivalence, which means that over the entire period of insurance the total premium of a given category of equivalent risks, matches the total of claims, including expenses for underwriting and administration, for that particular risk class. In this case it is necessary to calculate a risk premium, i.e. the premium is calculated strictly according to risk factors and categories. Private health insurance products are mainly calculated on the principle of equivalence. Sometimes both principles are applied as a mixture: For example, family discounts granted for a typical private health insurance product provides for some solidarity element, but these discounts may not reflect the actual risks; such product features may be introduced for marketing reasons. Given a clear definition of the insured events, i.e. defining the potential liability, it is the actuarys job to determine relevant risk factors which have to be taken into account in the premium calculation, e.g. the age of the insured person, sex, etc. Different approaches can be used in the calculation. Such approaches depend on the statistics available, as well as of the characteristics of the product design. However, it is necessary to note that the risk factor considerations within the premium calculation are distinct from individual risk assessment in the underwriting process. By underwriting we mean a process by which risk factors of individuals or groups are compared with the premium calculation assumptions, and if necessary to load the individual or group premium with a risk loading or even to exclude certain illnesses/events. The following roughly describes the important steps of private health insurance premium calculations. The first step of the premium calculation is the calculation of the risk premium taking into consideration the various risk factors. For the next step from the risk premium to the net premium, we have to distinguish between individual and group insurance business. In group business, the net premium is usually simply the risk premium with a safety loading. As concerns individual business, we have basically three Herbert Meister Senior Underwiter alternatives to calculate the net premium: Divisional Unit Health - risk premium + safety loading (like in group Munich Re, Munich business) hmeister@munichre.com
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Herbert Meister, FGAA; FASI

Chart 1: Risk Factor Age

the Actuary India December 2005


'

level premium (including a reserve for increasing risks due to age) solidarity premium Why can it be useful to have a reserve? Generally young people generate very much lower healthcare costs than older ones. For example, experience in India has shown that claims of a60 year old insured are 2.3 times higher than those of a 30 year old insured. To avoid having older insureds pay exorbitant premiums, it is possible to have young insured pay an ageing reserve for future liabilities as an addition to their risk premium, which is then used to moderate future premiums when the insured surpasses a certain age. By this method of level premium calculation, the premium can be kept theoretically constant on an as if basis (during the lifetime of the insured person). Although we are talking of a level premium, we cannot guarantee a constant premium over the lifetime, because of increasing costs of medical treatment, advanced medical technology, new treatment procedures, new diseases that change life expectancy etc. Usually a level premium is only used in individual health insurance, because in group business the life-long character of the group is not very determinable, since the composition of the group is often changing. In principle, premiums are calculated in accordance with risk factors; however, from a marketing point of view, it is sometimes advisable to cross-subsidize high risk factor categories with lower risk factor categories. In this case we would quote a solidarity premium. Example: The coverage of maternity claims. The premium for men between 20 and 40 is usually made higher to compensate the maternity costs of women in this age group. If done so, it is essential that the underwriting process ensures that the actual gender mix be close to the assumed mix of cross subsidized risks, in order to avoid anti-selection. In our example, it would mean to pay attention that the number of insured men and women between 20 and 40 years is balanced and matching with the assumptions made. In group business, the homogeneity of the group is a very important factor. Furthermore, the underwriting and administration costs for group policies are lower than in individual business. This should be considered when it comes to the calculation of the gross premium, which consists in general of the net premium plus the costs for underwriting and administration and profit loading. To calculate the insurance premium based on the equivalency principle, it is necessary to estimate the risk the insured represents. So criteria must be identified to enable us to estimate which costs the individual insured or the community of insureds will occur in the next year. These criteria are called

risk factors. Risk factors such as age and sex influence the claims frequency and the size of the costs of claims. The diagram shown highlights the impact of the risk factor age. It shows the development of inpatient costs (without maternity costs) in India depending on age: Another important risk factor can be the occupation of the insured persons. There are some professions with a very much higher health risk than others as the table below proofs: Table 1 Profession Claim per capita in relation to the claims per capita of the whole portfolio of insureds between the age 55-64 Office employees 101 Teachers 99 Pharmacists 80 Shop owners 96 Sportsmen 117 House wives 121 Please note: Such claims figures are very specific for each country, because they depend on the work ethic and other social factors of the respective country. The figures above are from Germany. In large countries like India, the medical supply and the cost of medical treatment substantially differ by region. The table below shows certain regional differences in India: Table 2 Region of Claim per capita in relation to the claims per capita of the whole portfolio of insureds between the ages 55-64 1.3 0.9

In group business, we have to consider some particular risk factors: the size of the group: not only does the group size as such play an important rule but so does the size of classes of insureds within the group. If the portfolio is not large enough -we speak in this context of critical size- individual group rating becomes impossible. the composition of the group in terms of age distribution, distribution of gender, etc. the branch of the group (industry, trade, services, etc.) and composition of occupations.

There are many additional factors influencing the risk premium in a more complex and not easy measurable way, like: The type of cover and the nature of benefits determine the extent of having a high or low possibility of a claim, e.g. does the product invite anti-selection or not? For instance, it makes a difference in pricing if an outpatient benefit is offered as a stand-alone coverage or only in combination with comprehensive inpatient coverage. The level of cover is generally determined by limits and deductibles and/or coinsurance. Any such feature is recuces the exposure. Selection/Anti-selection is characterized by the question of how quickly and with what purpose an insured can substantially benefit from the policy. The underwriting process is crucial to avoid anti-selection and is basically supported by a proper design of the policy terms and conditions and the right combination of benefits. For example, in the case of products with maternity coverage, it is necessary to avoid insuring persons only for the period of maternity. The risk of moral hazard is higher than in many other domains of personal insurance especially higher than in life insurance- since insureds can claim several times during the term of insurance and there is the additional complication of the involvement of third parties like medical providers. A general assessment of possible moral hazard must be considered in the calculation factors, i.e. assumptions for premium loading independent of having the capability to enforce claims control. The style of policy and claims underwriting plays an important rule when it comes to pricing. It is important in how far medical underwriting is to be introduced to the whole or just parts of the portfolio, like only to insureds above the age of 45. The efficiency of claims underwriting depends a lot on the medical provider sector, which type of contractual relationship exists between provider and claims underwriter, and how the medical provider sector is regulated and supervised. General exclusions of certain diseases and events (like war and epidemics) as well as dangerous activities (like mountain climbing, parachuting, etc.) are in principle not insurable under one year policy contracts and are therefore often generally excluded. Incentive features like no-claims bonus can reduce the risk of moral hazard and have usually a positive effect on the selection of risks for both new and renewed business. By this measure, the relation between premium and claims is improved. However, when it comes to pricing it must be considered as a surplus cost-factor. Medical inflation is the overall and foreseeable increase in medical costs during a certain period of time. Medical inflation must be considered in the calculation of the premium, this premium being paid to cover future health care expenses in the forthcoming policy period. Jurisdiction can be a limiting factor in the definition of products and hence it can have impact on the pricing, e.g. some countries do not allow (or only hardly allow) that the insurance company terminate a health insurance policy, or permit premium adjustment only under certain circumstances. By classifying the impact of these additional risk factors on the premium calculation, we obtain the table below:
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Metro Non-Metros

the Actuary India December 2005

Other risk factors can consist of the following: medical history of insureds can be roughly categorized as a standard risk category or increased risk category A,B,C, etc., the higher the category the more severe is the expected impact on the health insurance risk habits like smoking, drinking, nutrition activities such as sports and occupational activities socio-economic class can go along with different habits to consult doctors, different medical knowledge level and different possibilities to get medical treatment climate and living conditions vary significantly in a large country like India; considering these differences, it is expected that diseases are more or less frequent depending on climate and living conditions The impact of risk factors on the premium calculation can generally be classified as the following: Table 3 risk factors sex age occupation medical history activities habits socio-economic class region climate and living conditions impact high high middle middle high low low low middle low - middle

Table 4 risk factors type of cover level of cover, limits selection/anti-selection moral hazard form of underwriting general exclusions impact high high middle middle high high

deductible/co-insurance no-claims bonus Medical inflation jurisdiction

high high high low

The above shows that in order to be able to select the right pricing model for a certain product in a certain market, it is absolutely essential that the actuary not only understands the basic calculation principles but also the various risk factors and their potential impacts. As a next step, various pricing models could be introduced and discussed.

Announcement

CURRENT ISSUES IN RETIREMENT BENEFITS (CIRB)


Venue : Hotel Ramee Guest Line, 462, A B Nair Road, Near Hare Rama Hare Krishna Temple, Juhu, Mumbai 400 049 Tel Nos. 5690 5555/5693 5555 Mobile:- 9820729938 Date / s Venue Contact point Programme 23(Friday) 24(Saturday), December 2005 Hotel Ramee Guestline, Juhu Beach, Mumbai 400 049 Gururaj Nayak in ASI office at gururaj@actuariesindia.org Non-residential However, we have got competitive rates from Hotel Ramee Guestline at Rs.3600/- + Tax which would includes complementary breakfast, Dinner and airport pick-up and drop. For booking, please give us advance intimation. Dress Code Programme Schedule Smart Casuals 23 12 2005 09.15 a. m. to 05.15 p. m. followed by at 7.30 p. m. Pre-Dinner address, cocktail and Dinner 24 12 2005 09.15 a. m. to 01.30 p. m. Participation fee Rs.5,000/- (Rs. Five thousand only) Who are expected to attend CPD credit to ASI members Officials working in Group & Pensions business Registration of Life Insurers Officials working in Re-insurance Companies. Objectives ASI members practicing in retirement and other Employee benefit areas. ASI members working in consultancy entities. ASI members working in NIA, IRDA, EPFO and other Government/Public Sector organisations. Academics interested in the subject of Retirement Benefit Provisions Special invitees; actuaries and non-actuaries The Objective of the Seminar in particular is; To achieve greater level of commonality of understanding in actuarial and other aspects of actuaries work in Retirement Benefit areas. To deliberate on GNs under due processes To deliberate on GN 26: Actuarial Reports required under AS 15 (Revised, 2005) and AS 15 (Revised 2005) and firm up views on changes if any required in the same. To deliberate on issues relating to recent development in IAS 19 (Revised 2004) To deliberate on Professional conduct compliance and monitoring issues Discussion on Group Insurance Products; Life, Non-Life and Health Insurance 7 hours to apply for retirement & other Employee benefit actuarial work and work of actuary in Life Insurance. Latest by 15 12 2005 Participation is restricted to 40 persons. Registration on first-come-first served basis

Pensions & Social Security Board Announces Seminar On

CURRENT HAPPENINGS
Seminar on Issues Relating to Detariffing of General Insurance Business on 14 th December 2005 at Hotel Ramee Guestline, Mumbai arranged by General Insurance Board Workshop on GN7 - Appointed Actuary (AA) and Principles for determining Margins for Adverse Deviation (MAD) in Life Insurance Liabilities on 14 th December 2005 at Hotel Sea Princess, Mumbai arranged by Life Insurance Board
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HEALTH INSURANCE

THE GROWTH OF PRIVATE MEDICAL INSURANCE MARKET IN JAPAN Takahito Otomo,


Member of Institute of Actuaries of Japan
1 Introduction

Figure 2. Population composition by age group

In Japan, aging of population is progressing rapidly, due to rising longevity by the improvement of living condition and medical technology, and birthrate decline by the change of lifestyle. Therefore, public medical insurance system has been in an extremely severe financial situation, and recently system reform for improvement was implemented, which included the increase in the portion of individually paid medical expense. Against a background of such a social environment, peoples uneasiness for public medical insurance system and consciousness of the need to prepare for the future economic burdens, such as cost of living / medical cost, are growing, which is followed by the expectation for private medical insurance.
Source: Population Statistics of Japan (National Institute of Population and Social Security Research) (Note) Figures for 2005 and beyond are projections.

Figure 3. Main types of insurance

Figure 1. Birthrate and average life expectancies

Figure 4. Number of new life insurance policies

the Actuary India December 2005

Sources: Demographic Survey results and Life Tables (Ministry of Health, Labour and Welfare)

As for medical insurance, both life insurance companies and non-life insurance companies are permitted to sell this type of insurance product. Medical insurance is therefore deemed to belong to an sector called the Third Sector, as distinct from the First Sector (the sector specific to life insurance) and the Second Sector (the sector specific to non-life insurance).
Takahito Otomo
Mitsui Sumitomo Insurance Company Limited, Tokyo, Japan takahito.ootomo@ms-ins.com

Source: Policies in Force by Type (The Life Insurance Association of Japan) (Note) Medical insurance figures for fiscal 2001 and beyond combine medical insurance and cancer insurance.

by life insurance companies and non-life insurance companies. But, all regulations governing the sale of insurance products in the Third Sector were abolished in 2001. After that, insurance companies have been developing various kinds of products with their originality and creativity, and the private medical insurance market is expanding greatly. 2 Characteristics of private medical insurance products

However, regulations had long been in existence to limit the variety of insurance products actually sold in the Third Sector

Private medical insurance mainly covers hospitalization and surgery.


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Typical coverage can be summarized as follows:


Hospitalization - An insurance benefit is paid if a bodily injury or illness causes the insured to be hospitalized. - The insurance benefit is calculated as follows: [Amount of hospitalization benefit per day] [Days of hospital treatment] - The hospitalization benefit is paid irrespective of the medical expenses actually incurred. - An insurance benefit is paid if a bodily injury or illness causes the insured to undergo one of the surgical operations listed in the insurance policy. - The insurance benefit is calculated as follows: [Hospitalization benefit above] [Multiplying factor specified for each surgical operation] - A multiplying factor of 10, 20, or 40 is used according to the nature of the surgical operation.

b. Reduction in the maximum number of days of hospitalization covered c. The maximum number of days covered in respect of a single instance of hospitalization is reduced to 60.

No return of premium for cancellation Usually, if an insurance policy is cancelled at some point during the policy period, an amount equivalent to the policy reserves accumulated by the time of the cancellation is refunded. An increasing number of products do not offer such a refund, but instead charge lower insurance premiums. *Refer to the Appendix at the end of this paper for actuarial details.

Surgery

To add to the basic coverage above, each insurance company is developing very well-thought-out products. Such products are mainly characterized by the following three factors: (1) Improved coverage a. Increase in the maximum number of days of hospitalization covered Previously, the period was usually 120 days. Longer periods are currently offered. Examples include 365 days (one year), 730 days (two years), and 1,095 days (three years). b. Reduction in the period of hospitalization without coverage Previously, the period was usually four days (in which case, an insurance benefit only becomes payable when hospitalization of five or more days is required) or seven days. However, the period has been reduced to such an extent that many of the products currently available cover hospitalization irrespective of its duration. c. Additional coverage for specific diseases Additional coverage is provided for specific diseases including cancer or the three major killer diseases (cancer, acute myocardial infarction, and cerebral apoplexy). For example, an increased sum is paid as a hospitalization benefit, or the usual limit on the number of days of hospitalization covered is waived. (2) Lower insurance premiums a. Coverage limited to specific diseases Coverage is limited to specific diseases, such as cancer only or the three major killer diseases.
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(3) Simplified underwriting methods a. Non-medical application A type of insurance policy application where no medical examination by a physician is required. The proposed insured is asked to answer several questions on his or her state of health and medical history. On the basis of the answers provided, approval or disapproval is given. If approval is given, underwriting conditions are set accordingly. -

b. Guaranteed issue All applicants are allowed to buy an insurance policy without having to undergo a medical examination by a physician or to disclose their state of health. This type of insurance is intended to be sold to the middleaged and elderly, many of whom are prevented from taking out common types of insurance. However, to ensure risk control the following adjustments are made in terms of product design and undertaking conditions: (a) Insurance premiums are considerably higher than those charged under common types of medical insurance. (b) The maximum limit of liability is kept at a lower level. (c) No coverage is provided for any illness manifesting itself during a certain period (for example, 90 days) after the effective date of a policy.

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A large number of non-life insurance companies have adopted this approach because they do not have many physicians in their employ.

(d) No coverage is provided for any illness manifesting itself before the effective date of a policy. 3 Development of private medical insurance products and management of the risks involved This section mainly discusses tasks performed by actuaries in relation to insurance companies development of medical insurance products and management of the risks involved. (1) Premium rate calculation Long policy periods entail an extremely important and difficult issue, which is how best to incorporate future uncertainties into premium rates. Earnings from medical insurance fluctuate because of the following factors, which are hard to predict:

a. Advances in medical technology A higher survival rate leads to a longer treatment period, which increases benefit payments. Technological advances enabling earlier detection of cancer or other diseases bring about a greater number of patients and a longer treatment period, thereby increasing benefit payments. b. Increase in average life expectancy If the expected mortality rate of insured persons is incorporated into insurance premium calculations, an increase in average life expectancy means a higher-thanexpected number of insured persons surviving. In this situation, even if the hospitalization rate remains unchanged, insurance benefit payments increase. c. Changes in population structure If the aging of Japans population continues, the average morbidity rate of the population as a whole rises, increasing benefit payments. However, this does not pose much of a problem if premium rates are graded by age group. d. Unknown diseases No statistical data cover unknown diseases. Therefore, an unknown disease with severe symptoms leads to unexpected benefit payments.

Figure 5. Five-year survival rates of newly diagnosed and hospitalized cancer patients
Male

the Actuary India December 2005

Figure 6. Number of hospital beds and inpatient care rate (per 100,000 people)

Female

Source: Medical Facility Survey and Patient Survey results (Ministry of Health, Labour and Welfare)

Figure 7. Average number of days of hospital treatment

Source: Data collected by the National Cancer Center Hospital and published in Cancer Statistics in Japan 2003 (National Cancer Center)

Source: Patient Survey results (Ministry of Health, Labour and Welfare) Indian Actuarial Profession

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e. State of affairs surrounding the public medical insurance system Japan has a national policy of regulating the number of hospital beds. The policy limits the number of hospital beds available in each area. This means that even if the morbidity rate rises, only a limited number of beds are available. Additionally, medical insurance policies do not pay an insurance benefit unless hospitalization is required. For these reasons, benefit payments do not exceed a certain level. However, if the regulation mentioned above is relaxed or abolished at some future point, the number of inpatients may rise dramatically, leading to an increase in benefit payments. In reality, a certain safety loading factor is applied to each premium rate to cater for the above-mentioned future uncertainties.

(3) Follow-up assessment In Japan, no generally agreed rules exist to govern risk management related to medical insurance. Basically, each insurance company is managing risks according to its own rules. Commonly used risk control methods include:

a. Paying from catastrophic loss reserves (or contingency reserves) b. Setting aside additional reserves c. Changing insurance premiums charged under new policies d. Changing the details of coverage provided by new policies (setting a period without coverage, excluding specific diseases from coverage, etc.) e. Changing the conditions for undertaking new policies (changing the maximum limit of liability etc.) f. Changing the customer segments targeted by new policies (limiting by age, limiting sales channels, etc.) With long-term medical insurance, another option exists, namely that of exercising the right to change the basic rates applicable to existing policies. The use of this option relies on a provision included in insurance policies, in advance. Under the provision, each policyholders consent is obtained to allow the insurer to change the applicable insurance premium during the policy period if the need arises. Typically, the cause of this change would be defined as a rise or fall in benefit payments, or an increase in average life expectancy. If the insurer wishes to actually change the insurance premium, it does so with the approval of the competent authorities. However, it should be noted that the right to change basic rates has never actually been exercised thus far.

Figure 8. Conceptual diagram of policy reserves

g. Suspending new policy sales

(2) Policy reserves In Japan, the following types of policy reserves are required in respect of medical insurance: 4 Reserves held to cover benefit payments arising from risks that are usually predictable. Reserves held additionally in cases where the premium reserves described in a above are deemed insufficient to cover future benefit payments. An example would be a case where one of the basic rates used for calculating the above-mentioned premium reserves is considered to have changed.

a. Premium reserves -

Conclusions Private medical insurance involves uncertainties that may lead to future fluctuations in the degree of risk. Specifically, such uncertainties arise from factors including external changes (those reflecting advances in medical technology, the state of affairs surrounding the public medical insurance system, and so forth) and the current lack of sufficient statistics. We actuaries must endeavor to hone our professional actuarial skills. Doing so is essential to product development and risk management based on an accurate evaluation of the above uncertain risk factors, and to insurance companies profitability and financial soundness.

b. Additional reserves -

c.

Catastrophic loss reserves (or contingency reserves) Reserves held in addition to the reserves described in a and b above to cover benefit payments arising from risks beyond those that are usually predictable.
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APPENDIX
Earnings structure of a product incorporating a surrender ratio for premium calculation purposes 1. Insurance premium <Conditions> - Policy period: Whole of life - Hospitalization benefit: 10,000 yen per day - The maximum number of days covered in respect of a single instance of hospitalization: 120days - Premium payment method: Annual payment - Insureds gender: Male

PxA =

v
t =0

t t

p xA N x + t Tx +t
t t

v
t =0 t -1 k =0

1 + = 

A x

pxA = 1 - q x + k 

p xA = 1

<Symbols>

q x : Expected mortality rate at age x wx : Expected surrender ratio at age x N x : Expected hospitalization rate at age x Tx : Average number of days of hospital treatment at
age x

Figure 10. Effect of hospitalization rate variations on earnings

v=

1 1+ i

i : Assumed interest rate (= 1.5%)

= : Safety loading applied to premium (= 0.2)


A B Px , Px : Premiums at entry age x

Years elapsed (years)

10 -1,546 1,546 3,091 4,637 7,728

20 -1,904 1,904 3,809 5,713

30 -2,278 2,278 4,556 6,834

40 -2,070 2,070 4,140 6,209

50 -866 866 1,731 2,597 4,328

(Note) Statistics published by a public organization were used to calculate q x , N x and Tx .

the Actuary India December 2005

Premiums Product A: Product not incorporating a surrender ratio (= with a return of premium for cancellation)

> > > > >

= 0.3 = 0.1 =0 = -0.1 = -0.3

9,521 11,390 10,349

Figure 9. Premium

Figure 11. Effect of mortality rate variations on earnings

Entry age (years old)

20

30

40

50

60

Years elapsed (years)

10 3,310 3,164 3,091 3,018 2,870

20 4,533 4,054 3,809 3,559 3,047


Indian

30 6,088 5,092 4,556 3,994 2,787

40 5,898 4,814 4,140 3,365 1,480

50 2,042 1,933 1,731 1,387 95

P P P

A x B x B x B x

38,639 46,861 58,273 76,056 101,864

wx = 1%  wx = 3%  wx = 5% 

32,449 40,655 52,197 70,614 23,773 31,307 42,352 61,323 18,786 25,303 35,221 54,004

97,391 89,417 82,682

C C C C C

= 0. 3 = 0. 1 =0 = -0.1 = -0.3

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Figure 11. Effect of mortality rate variations on earnings

B 1 t p x =  - q x + k - wx + k  k =0

t -1

p xB = 1

2. -

The higher the expected surrender ratio, the lower the premium becomes. Earnings simulation

Product B in 1 (with an entry age of 40 and an expected surrender ratio of 3%) was simulated as follows: (1) Hospitalization rate variations

N x = 1 + > N x N x : Actual hospitalization rate


Years elapsed (years) 10 6,306 4,873 3,091 912 -1,717 20 6,925 5,791 3,809 681 -3,968 30 5,714 5,563 4,556 2,135 -2,526 40 3,292 3,865 4,140 3,683 1,725 50 854 1,238 1,731 2,301 2,828

w x w x w x w x w x

= 5% = 4% = 3% = 2% = 1%

Earnings fall if the hospitalization rate rises. Including a safety loading in the premium is effective to some extent in coping with an increase in the hospitalization rate.

(2) Mortality rate variations

q = 1 + C q x q : Actual mortality rate x x


A decline in the mortality rate causes the number of surviving insured persons to exceed the originally expected level. Therefore, earnings fall even if the hospitalization rate remains unchanged.

Product B: Product incorporating a surrender ratio (= without a return of premium for cancellation)

PxB =

v
t =0

t t

B p x N x + t Tx + t t t B x

(3) Surrender ratio variations

v
t =0

1 + = 

w : Actual surrender ratio x


A decline in the surrender ratio causes the number of surviving insured persons to exceed the originally expected level. Therefore, earnings fall even if the hospitalization rate remains unchanged.

Announcement

4th INDIA FELLOWSHIP SEMINAR


DATES VENUE : 15th, 16th and 17th December, 2005 : Hotel Sea Princess, Juhu Beach, Mumbai 400 049 Tel no.022-26611111 : Latest by 9.30 a.m. on 15th December, 2005 : Non-Residential Programme However, we have got competitive rates from Hotel Sea Princess at Rs.4350/- + Tax which would include complementary breakfast and airport pick-up. For booking, please give us advance intimation. : 12 hours Rs.10,000/(Indian Rupees Ten Thousand Only)
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: The programme is open to all ASI Members prominently; 1. Student Members who have passed all the examinations required for Fellowship. 2. Appointed Actuaries as per the requirement of CoP 3. Affiliate Members who have atleast one year of India Resident Experience. 4. Student Members who are left with one or two subjects. : With Ms. Shernaz Daruwala in ASI Office at president@actuariesindia.org latest by 30 th November, 2005. : Smart Casuals

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8th GCA
(Dr.) R Kannan President

OFFICE ORDER
Re: 8th GCA Steering Committee constitution of Pursuant to the decision of the Executive Committee in its meeting held on 17 09 2005 to constitute 8th GCA Steering Committee to oversea the conduct of 8th GCA, The Steering Committee and its Sub-committees are announced as under; 8th GCA Steering Committee 1. Dr. R Kannan, President - Chairperson 2. G N Agarwal, Vice-President Member 3. K S Gopalakrishnan, Hon. Secretary and Chair, WCB, Member 4. S Madhusudhanan, Hon. Treasurer & Jt. Hon. Secretary - Member 5. K P Narasimhan, EC Member and Chair, EB Member 6. P A Balasubramanian, EC Member and Chair PAB & HIB, Member 7. N M Govardhan, EC Member and Chair, LIB Member 8. Liyaquat Khan, EC Member and Chair IRB & PSB Member 9. R Hemamalini, EC Member Member 10. Dr. K Sriram, EC Member Member 11. Heerak Basu, EC Member Member 12. G L N Sarma, EC Member Member 13. D R Iyer, Chair, GIB - Member Sub-Committees reporting to the Steering Committee; Reception Sub-Committee Function: To be responsible for invitation to and reception arrangements for within India and Overseas guests. 1. Dr. R Kannan, President Chairperson 2. Liyaquat Khan, EC Member and Chair, IRB - Vice-Chairperson 3. Heerak Basu, EC Member and Secretary, IRB Secretary 4. G N Agarwal, EC Member Member 5. K S Gopalakrishnan, EC Member Member 6. S Madhusudhanan, EC Member Member (Dr.) R Kannan President 7. K P Narasimhan, EC Member Member 8. P A Balasubramanian, EC Member Member 9. N M Govardhan, EC Member Member 10. R Hemamalini, EC Member Member 11. Dr. K Sriram, EC Member Member 12. G L N Sarma, EC Member Member Sponsorship Sub-Committee Function: Responsible for resourcing sponsorships 1. Dr. R Kannan, President Chairperson 2. Liyaquat Khan, Chair, IRB - Vice-Chairperson 3. Heerak Basu, Secretary, IRB Secretary 4. G N Agarwal, Member 5. K S Gopalakrishnan Member 6. Venkatesh Chakravarti - Member 7. Sandeep Ashthana Member Recognition, Award & Prizes (RAP) Sub-Committee

14 11 2005

Function: Responsible for organizing the 10th March Dinner function for Recognition, Awards and Prizes. 1. Dr. R Kannan, President Chairperson 2. Liyaquat Khan, Chair, IRB - Vice-Chairperson 3. Heerak Basu, Secretary, IRB Secretary 4. S P Subhedar Member 5. S Madhusudhanan Member The constitution of 8th GCA Programme Committee under Chairmanship of Chairperson IRB as decided by the EC, is being announced separately.

Dr. R Kannan

14 11 2005
OFFICE ORDER
1. K S Gopalakrishnan Chairperson 2. S Madhusudhanan - Member 3. Varsha Joshi Member Sessions Sub-Committee Function: Responsible structuring of Sessions and related matters 1. Dr. R Kannan, Chairperson 2. Liyaquat Khan, Member 3. V Rajagopalan, Member Media & P R Sub-Committee Function: To organize media contacts, publicity and address PR issues relating to the 8th GCA 1. Dr. R Kannan, Chairperson 2. Liyaquat Khan, Member 3. V Jagannanthan, Member 4. Sitanshu Swain, Member Special Papers Selection Sub-Committee Function: To select Papers from 7th GCA for G C A Papers for i) G S Diwan Memorial Prizes and ii) Special Paper for Presidents Award 1. K P Narasimhan, Chairperson 2. Liyaquat Khan, Member 3. N M Govardhan, Member 4. P A Balasubramanian, Member 5. A V Ganapathy, Member Watson Wyatt Paper written from Students category Sub-Committee Function: To select Paper/s for award instituted by Watson Wyatt IFC from students category out of 7th GCA Papers. 1. P A Balasubramanian, Chairperson 2. Richard Holloway, Member 3. Liyaquat Khan, Member

Re: 8th GCA Programme Committee constitution of

the Actuary India December 2005

Pursuant to the decision of the Executive Committee in its meeting held on 17 09 2005 to constitute 8th GCA Programme Committee under Chairmanship of Liyaquat Khan, Chairperson International Relations Board (IRB), to oversea the conduct of 8th GCA programmes, the Programme Committee and its Sub-Committees are constituted, in consultation with Liyaquat Khan, as under; 8th GCA Programme Committee 1. Liyaquat Khan, Chairperson, IRB Chairperson 2. S P Subhedar, Member 3. J S Salunkhe, Member 4. V Rajagopalan, Member 5. A Venkatasubramanian, Member 6. Heerak Basu, Member, Secretary IRB Secretary to the Committee 7. A R Prabhu, Member 8. G N Agarwal, Member 9. K S Gopalakrishnan, Member 10. S Madhusudhanan, Member 11. S Rajesh, Member 12. Nick Taket, Member 13. Azim Mithani, Member 14. Sanket Kawatkar, Member 15. G L N Sarma, Member 16. D Saisrinivas, Member Sub-Committees reporting to the Programme Committee; Paper Selection Sub-Committee Function: To select Papers for publication and/or deliberations 1. S P Subhedar Chairperson 2. Dr. R Kannan, Member 3. Heerak Basu, Member Paper publications Sub-Committee Function: Responsible for printing and publication of publication consisting of Papers selected by the Papers selection Sub-Committee

Dr. R Kannan

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PUZZLE CORNER
Puzzle No 41: On a certain day, a parking lot accommodated 999 cars, no two of which have the same three-digit license number. The cars start leaving after 5 p.m. What is the probability that the license numbers of the first four cars to leave the parking lot are in increasing order of magnitude? Puzzle No 42: The algebra teacher wrote on the blackboard a quadratic equation of the form x^2 A*x + B = 0. In copying this, a careless student erroneously transposed the two digits of B as well as the plus and minus signs. However, one of the roots was the same. What was this root? (Assume both A and B are integers). Note: Above puzzles are contributed by Mr.U.J.Nerurkar Correct solutions were received from: Answers to Puzzles:

Puzzle No 37: Number of apples eaten: Alonso 1,Bertrand 2,George 3,Kurt 5. Puzzle No 38: Chance that the dropped coin was a dime : 4/9.

Puzzle No 37: 1. Parshva Shah 2. Savita Gandhi 3. Nikhil Gupta

Puzzle No 38: 1. Parshva Shah 2. Nikhil Gupta 3. P.Chandrasekhar

Shilpa Mainekar, E-mail your solutions at shilpa.mainekar@kotak.com

The Funny Actuary


There was this actuary who was searching for his friends home with his email address.

[Courtesy: Venkatachari Jagannathan]

On Science and Nature


Science is always at its most arid when sequestered. It reaches greater and greater heights of refinement on greater and greater trivialities. The lifeblood of science comes from outside itself. Frank Redington MA; FIA [1906-1984]

BIRTHDAY GREETINGS

Many Happy Returns of the Day


the Actuary India wishes many more years of healthy life to the following fellow members whose Birthday fall in December 2005.
IYER, RAMAKRISHNA DEVARAJA JAMBUSARIA, N.N. MODI, C.S. MULGUND, S.P. NARAYANAN, S.V. SABHARWAL, Y.P

[the Actuary India will be publishing Birthday greetings for Fellow members who have attained 60 years of age.]
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WEB COLUMN & WORLD VIEW


Web Column lets be well informed on whats happening on the net!
Log and update yourself on the latest events of actuarial world
Date: 14th Nov, 2005 L List of candidates who have cleared 3 subjects in June 2005 Examination Diet http://www.actuariesindia.org/news/LC_3Subj_Jun05.PDF L Academic Excellence award for scoring highest marks in June 2005 Examination Diet http://www.actuariesindia.org/news/ A c a d e m i c % 2 0 E x c e l l e n c e % 2 0 Awards_June%202005%20Exam.PDF L Annual Subscription notice (Year 2005 - 06) http://www.actuariesindia.org/Dates/annual%20subscription2005-06.PDF Examinations syllabus 2005 http://www.actuariesindia.org/graphics/syllabus.jpg L June 2005 exam papers and indicative solutions http://www.actuariesindia.org/June05/June%202005.html L Examination Time Table for 2005 http://www.actuariesindia.org/news/ASI_Examination%20 Timetable_Nov%202005.doc Regular features Indian Actuarial Journal http://www.actuariesindia.org/souvenir/IAJ.zip The Actuary India magazine January 2005 to November 2005 issues http://www.actuariesindia.org/souvenir/souvenir.html Index of feature articles published in the Actuary India magazine L Titlewise http://www.actuariesindia.org/souvenir/ Titlewise_feature%20article%20index.htm L Author wise http://www.actuariesindia.org/souvenir/ Authorwise_feature%20article%20index.htm Index of papers presented in the conference GCA wise list of papers presented in the previous conferences. Now upto 7th GCA. The 7th GCA papers have also been uploaded. http://www.actuariesindia.org/publication/Papersof_GCA.xls http://www.actuariesindia.org/6gcapaper.html Published Mortality Tables Indian Assured Lives Mortality (1994 -96) (modified) Ult. [effective 01/01/2005] http://www.actuariesindia.org/publication/mort_eff_05.html

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2nd Global Symposium on Pensions - 18-19, November 2005 http://www.actuariesindia.org 2nd%20Global%20Symposium % 20on%20Pension_Nov.%202005.pdf 2nd Current Issues in Retirement Benefits (CIRB) Seminar 23-24, Dec. 2005, Mumbai http://www.actuariesindia.org/ASI_PSB_2nd%20CIRB_2324%20Dec05.pdf Paper on Indian Actuarial Profession - Lesley Traverso, Managing Director, DW Simpson (Asia Pacific) Pty Ltd http://www.actuariesindia.org/13th%20EAACBali_Paper% 20on%20Indian%20Actuarial%20Profession.pdf Guidance Notes GN7 - Appointed Actuary and Principles for determining Margins for Adverse Deviations (MAD) in Life Insurance liabilities (Ver. 1.0/ 05 03 05) GN13 - Investigations of Retirement Benefit Schemes : The Actuarial Valuations required under FAS 87, FAS 88 AND FAS 132 (Ver. 1.0/01 04 2005) GN14 - Illustration of Defined Contribution Pension Scheme Benefits (Ver. 1.0/01 04 2005) GN18 - Retirement Benefit Schemes - Actuarial Reports (Ver. 1.0/01 04 2005) GN20 - Actuarial Practice for Social Security Programmes (Ver. 1.0/01 04 2005) GN9 - Continuing Professional Development (CPD) and the Actuary (Ver. 1.0/01 04 2005) http://www.actuariesindia.org/graphics/guidance.jpg Education Related News L Prizes for Scoring Highest Marks in June 2005 Examination Diet http://www.actuariesindia.org/news/ Prizes_highest%20mks_June%202005%20exam.PDF

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World View - updates on the websites of other actuarial bodies


q

Institute of Actuaries, UK Strategy Review of Actuarial Profession in UK As a result of the Morris Review, technical actuarial standards in future will be set by a new independent Board for Actuarial Standards under the Financial Reporting Council who will also oversee the Professions broader regulatory responsibilities. This creates the need, and opportunity, to review the role of the Professional Body in the post-Morris world. The key issues faced by the Profession are : Restoring confidence in the Profession Increasing the market share of talent leaving University Increasing the value added by actuaries and their influence Leveraging global capabilities http://www.actuaries.org.uk/files/pdf/news/ strategyreview20050915.pdf

GN47: Stochastic modelling for life insurance reserving and capital assessment http://www.actuaries.org.uk/Display_Page.cgi?url=/life_insurance/ lb_news_0510_gn47.html Stochastic models are likely to be used in two distinct ways for the purposes covered by this GN. The first is to obtain a marketconsistent value of a liability. The second is to establish an amount of assets that will enable the firm to meet its liabilities to a desired probability level. The key issues faced by the Profession are : http://www.actuaries.org.uk/files/pdf/news/ Gautam Kakar strategyreview20050915.pdf
gautam_kakar@hotmail.com

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