IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area
A unit-linked insurer in India guarantees a minimum maturity value on a fund invested largely in equities. Markets fall sharply, and the fund value is well below the guaranteed amount for many policies. The appointed actuary is asked to advise the board. Which course of action is most consistent with professional responsibility?
The actuary should report the guarantee exposure, recommend adequate provisions and review hedging and investment strategy, even if profit falls. The guarantee has a present cost when fund values are below it, and professional duty requires honest, complete advice rather than deferral or concealment.
- ADefer any reserve for the guarantee until the policies actually mature, as no loss has yet crystallised
- BReport the guarantee shortfall exposure, recommend adequate provisions and review hedging and fund strategy, even if this reduces reported profitCorrect
- CAdvise shareholders privately but omit the issue from board papers to avoid market panic
- DRecommend moving policyholder funds to equities to recover the shortfall quickly
- Assume markets will recover and leave reserves unchanged
Explanation
The guarantee is an option written by the insurer and has a current economic cost when the fund is under the guarantee. The actuary must give honest, complete advice to the board, and recommend provisions and risk management. Deferring or concealing breaches the duty to act with integrity and in policyholders' interests; chasing equities increases risk.
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