In its first such move against an actuary for omission and commission, IRDAI has ordered the termination of the services of an actuary of state-owned non-life insurer National Insurance Company (NIC) for wrongdoing. In addition, IRDAI will not accept nor recognise the work of the actuary for two years from 1 June 2017, the date of the order.
Actuary Manalur Sandilya, in preparing the balance sheet of NIC for the financial year ended 31 March 2016, had failed to calculate correctly the amount of provisioning for incurred but not reported (IBNR) claims by around INR4,000 crore (US$622 million), said IRDAI.
The actual provisioning for motor third party commercial vehicle insurance needed at 31 March 2016 was 130%, but the actuary had provided for 46.58%, said IRDAI.
Mr Sandilya, Fellow of Casualty Actuarial Society (FCAS), USA, and Fellow of Institute of Actuaries of India (FIAI) was included in the Panel of Actuaries in 2016. He had around 16 years of post- qualification experience in the field of actuarial science at that time.
NIC had engaged Mr Sandilyahe Actuary as its Panel Actuary for the finalisation of the company's annual accounts for the financial year ended March 2016.
The IRDAI, after meetings with the insurance company and the actuary, received an e-mail on 2 August 2016 from the actuary with an annexure stating that the ‘most likely’ IBNR estimate as of March 2016 would be INR7,293 crore. However, the actuary, in his IBNR report, which was received by the IRDAI on 19 August 2016, certified a substantially lower amount of IBNR reserves of INR3,030 crore instead.
In his statement to the IRDAI, Mr Sandilya said that when he started the work at NIC in June 2016, he observed that the data condition in the motor & health (which comprised almost 82% of insurer’s business) lines of business was bad as the insurer had operational problems as it did not have a Chairman-cum-Managing Director (CMD) for two years. Also, it was not feasible to get the required data from the IT department of the insurer within a reasonable timeframe. He also submitted that had he stuck to mathematical models with the faulty data it could have resulted in under/over estimation of IBNR reserves. Hence, he prioritised protecting the interests of policyholders.
Given the circumstances, he used a range based solution based on his experience, and thus selected the lower end of the range so derived. Further, he submitted that there was around INR5,000 crores in the “fair value change account’ under equity investments available to pay for the policyholders’ claims, but which was not allowed to be used in solvency calculations. The maximum possible estimation error of around INR4,000 crores, in estimation of IBNR reserves as at 31 March 2016, would have been offset by the fair value of equity investments available within the insurer.
But the IRDAI said that 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 of 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, the regulator said.
Mr Sanath Kumar, NIC Chairman and Managing Director since February 2016, told Press Trust of India: "Shandilya, one of the most senior actuaries in India, was our panel actuary as at 31 March 2016, as we did not have a full-time appointed actuary at that point of time."
He said that interests of policyholders were never at any risk at any point of time, as NIC has a large net worth and off-balance sheet assets as well as real estate.
"National Insurance is more than sufficiently covered against all liabilities as evidenced by our asset liability management framework. We had duly factored all liabilities while taking a call to strengthen our reserves over a period of time with care that obligation to policy holders was never compromised at any cost," Mr Kumar said.