In a first of its kind action in the sector, the Insurance Regulatory and Development Authority of India (IRDAI) has issued an order stating Manalur Sandilya, the official actuary of National Insurance Company Ltd, understated claims to the tune of Rs 4,000 crore.
The regulator has said the “under-reserving by the actuary has resulted in the shortfall of Rs 4,263 crore in the Incurred But Not Reported Claims Reserve (IBNR)” shown in the financial statements of the insurer as on March 31, 2016. It also terminated the appointment of the actuary as mentor to the appointed actuary and barred him from doing any work for United India Insurance for March 2016. IRDAI will not accept or recognise the work of Sandilya for two years.
After meetings with the insurance company and the Actuary, on August 2, 2016, IRDAI received an e-mail from the Actuary with an annexure stating that the ‘most likely’ IBNR estimate as of March 2016 would be Rs 7,293 crore. However, the Actuary, in his IBNR report, which was received by the IRDAI on August 19, 2016, certified a substantially lower amount of IBNR reserves of Rs 3,030 crore as of March 2016, it said. “The reports, certificates and any other work of the actuary shall neither be recognised nor accepted by the Authority for a period of two years from the date of this order,” IRDA said in an order.
KK Srinivasan, former Member, IRDA said: “Though this may perhaps be the first time that a regulatory authority has taken action against an actuary for omission and commission in India, there have been instances in other markets. Clause 8B of the IRDA Appointed Actuaries Regulations mandates that it is the duty of the actuary to “ensure the solvency of the insurer at all times”. An actuary can certainly be held responsible for not ensuring solvency of an insurer at all times, he said.
In the Indian insurance industry, actuaries are believed to enjoy higher pay packets than CEOs of insurance companies.
An actuary is a professional who analyses the financial costs of risk and uncertainty in the insurance sector using mathematics, statistics, and financial theory and helps companies and clients develop policies that minimise the cost of that risk.
Srinivasan said the action taken by IRDAI will hopefully have a salutary effect of the functioning of actuaries in India. “World over, inadequate reserves for claims is a major reason for insurance industry insolvencies. Unfortunately frequent and inordinate delays in appointment of CMDs in PSU insurers and operating them under make-shift leadership arrangements does have an adverse impact on the functioning of these companies,” he said.
According to the IRDAI order, the actuary cannot unilaterally decide to understate the IBNR figures in the name of “policyholders interests” without consulting the board of the insurer and the IRDAI. If the actuary had given the complete and correct picture on the IBNR reserves, it would have enabled the board of the insurer to take timely and appropriate corrective actions in consultation with the Authority for saving the interests of policyholders, it said.
IRDA said the actuary has used international practices such as fair value adjustment and discounted value of IBNR only when it resulted in huge reduction in the IBNR worth Rs 4,263 crore. He, however, has ignored the other international practices that are normally used along with fair value adjustment and discounting of IBNR such as making specific allowance for each risk (for example, data inadequacy), which would have resulted in the increase in IBNR reserves, IRDAI said.