IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area
Aarav, an appointed actuary at an Indian life insurer, notices that a new non-participating savings product has guaranteed returns well above what the available long-dated government bonds can support. Management wants to launch it next month. Which is the most appropriate first professional response?
Aarav should quantify the interest-rate and reinvestment risk of the guarantees, report it to management and the board, and advise against launching unless the design or pricing changes. Silence or approval would neglect his professional duty, and a non-participating product has no bonus pool to absorb losses.
- AQuantify the interest-rate and reinvestment risk of the guarantees, report it to management and the board, and advise against launch unless the design or pricing is changedCorrect
- BApprove the product because guarantees help sales and any shortfall can be met from policyholders' bonus pools
- CStay silent because product pricing is solely a marketing decision
- DResign immediately without communicating the concern to anyone
- Release the product and revise the guarantee only after claims arise
Explanation
The guarantee exceeds supportable asset yields, which creates an asset-liability mismatch and reinvestment risk. The actuary should assess and communicate the risk clearly and advise on changes. Staying silent or deferring the problem breaches the duty to act with integrity and competence.
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