EY Indonesia GPV Survey Apr2017_Final (min size)

The better the question. The better the answer.

Indonesia Industry GPV

Survey Result

Indonesian Actuaries Summit

Contents

1. Introduction

2. Survey Results



Assumptions



Methodology



Resources

3. Conclusions

4. Appendix

Introduction

1 1 26 4 4 4

CFO / CEO / CRO

Technical Director

Appointed Actuary

Department Head

Other

Life Insurance General Insurance

Life Insurance

80%

General Insurance 20%

The survey is predominated by respondents from Life. Most of the respondents are Appointed Actuaries, represented by 30 people. Other respondents who also participated in the survey are CFO, Technical Director, Department Head, and Actuarial managers or staffs.

Breakdown of

respondents’ job title

Respondents’ Profile

► The purpose of the survey was to get the picture of

the current actuarial practices, especially

regarding the Gross Premium Valuation (“GPV”)

which has been compulsory to be implemented by the regulation since year 2013.

► The survey questionnaires was sent out to all members of Society of Actuaries Indonesia

(“Persatuan AktuarisIndonesia/PAI”) with Fellow of Society of Actuaries Indonesia (FSAI) and Certified Non Life Analyst (CNLA) certifications. ► The survey was open on March 21st_{2017 and}

when the survey was closed on April 5th_2017, There are 32 respondents from Life Insurance companies(“Life”) and 8 respondents from General Insurance companies (“General”) have

completed the survey.

► The survey was created in an online format as well as in excel file with 29 questions in total, touching the areas of assumptions, methodology and resources.

► We allowed respondents to select more than one option or to skip the questions. Therefore the percentage (%) of Life (32) or General (8)

Survey Assessment Areas

Structure Reference

Basis

Differentiation/ setting

Expense Overrun DAC

Number of employees Reporting lines

Actuarial Software Exam rules Reinsurance

UL Reserve

IBNR LT Reserve

Reserve checking

Assumptions

–

Discount Rate

The Term Structure of Interest used in GPV

Highlights

How the Cash Flows are discounted?

• Most respondents from Life use flat discount rate instead of yield curve (spot rate/forward rate) in the GPV reserving for statutory financial statement purposes, either based on Government accounting standard (Standar Akuntansi Pemerintahan/SAP) or based on financial accounting standard (Standar Akuntansi Keuangan/SAK).

• Meanwhile, most respondents from General use the yield curve, which is Spot Rate, for both SAP and SAK.

EY Insights

• Flat rate approach is common in Indonesia possibly due to interpretation on the regulation, but fairly less common elsewhere as it is more difficult to capture the convexity of CFs with a single rate.

• Ideally cash flow is discounted using entire yield curve. Adopting a Forward Rate approach has some modelling speed and theoretical advantages

(expectation hypothesis) for future projections. However, at t=0 forward and spot rate produce the same results. Key Results 38% 50% 0% 38% 50% 0%

F L A T R A T E S P O T R A T E F O R W A R D R A T E G E N E R A L

SAP SAK

59%

16% 25% 50%

25% 25%

F L A T R A T E S P O T R A T E F O R W A R D R A T E L I F E

Assumptions

–

Discount Rate

The Reference of the Risk Free Rate

Highlights

The regulation (PER-9/2012) prescribes the use of benchmark series of government bond. In practice, some companies use other references. Based on the survey:

• The majority (both Life and GI) refer to the yield rate of government bonds as published by the Indonesia Bond Pricing Agency (IBPA) as the discount rates.

• It’s only 16% of Life respondents that use the

benchmark series Government bonds as written on the letter which has been circulated regularly by the

regulator (“OJK”)

EY Insights

• IBPA appears to be the most popular bond source in Indonesia, followed by Bloomberg / Reuters, possibly as these sources are updated on a monthly basis and can generate more updated information.

• Ideally, these different sources should not generate significantly different data

Key Results 50% 34% 16% 0% 53% 31% 16% 0%

0% 20% 40% 60%

IBPA Bloomberg / Reuters Government bond benchmark series Other LIFE SAK SAP 88% 0% 0% 13% 88% 0% 0% 13%

0% 50% 100%

IBPA Bloomberg / Reuters Government bond benchmark series Other GENERAL

Assumptions

–

Discount Rate

The Basis in Setting the Discount Rates

Highlights

It is prescribed in the regulation (PER-9/2012) to use the average of the last 3 years of year-end discount

rates. However it’s implicitly prescribed in the SAK to

use the latest discount rates. Based on the survey:

• The majority use what is prescribed in the regulation;  For Life: 38% for SAK and 50% for SAP

 For General: 50% for both SAP and SAK

EY Insights

• Some companies in Indonesia use different rate between SAK and SAP where the SAK is calculated based on some form of market yield as of valuation date.

• There are also some companies that use the

minimum between the average of the last 3 years of year-end discount rates and the current discount rate for conservatism purposes.

Key Results 19% 59% 0% 6% 16% 0% 16% 38% 13% 16% 19% 0%

Average last 36 months risk free rate

Average of last 3 years of Dec RFR Current market Zero Coupon Rate Current market Yield to Maturity Minimum between the average and

current Other LIFE SAK SAP 13% 50% 25% 0% 0% 13% 13% 50% 25% 0% 0% 13%

Average last 36 months risk free rate Average of last 3 years of Dec RFR Current market Zero Coupon Rate Current market Yield to Maturity

Minimum between the average and…

Other

GENERAL

Assumptions

–

Discount Rate

The Extrapolation Beyond The Longest Available Term

Highlights

Currently, the benchmark series of government bond are only available for tenure up to 30 years. Since GPV requires long horizon projection, the actuaries need to assume the yield after the latest available yield. Based on the survey:

• The majority from Life assume the discount rate is flat (88% for SAK and 91% for SAP).

• Meanwhile, those from General mostly extrapolate toward the ultimate forward rate (75% for both SAK and SAP).

EY Insights

This is especially important for long dated, guaranteed products (such as the traditional products) which is very sensitive towards this assumption.

Common practices elsewhere would be:

• SG: Long Term Risk Free Rate, e.g. weighted average after year 20,

• MY: Flat rate after final duration 15 years with no adjustments,

• Solvency-II: Ultimate Forward Rate of 3.2/4.2/5.2%

Key Results 91% 3% 3% 88% 6% 3%

0% 50% 100% Flat following latest available yield

Linear extrapolation toward ultimate forward rate

Other LIFE SAK SAP 13% 75% 0% 13% 75% 0%

0% 20% 40% 60% 80% Flat following latest available

yield

Linear extrapolation toward ultimate forward rate

Other

GENERAL

Assumption

–

Expenses

How The Assumption is Set and Derived

Highlights

• Most of respondents from Life set the expense assumptions differently by product and distribution channel (65.6%). The assumptions are mostly derived from the internal expense study (75%).

• For General respondents, mostly have the expense assumptions similar for all products and channel (62.5%) which is based on the internal expense study (37.5%) and actual expenses (37.5%).

EY Insights

• Expense assumptions between acquisition and maintenance expenses have a huge impact on the level of reserves held, and are areas of subjective measures.

• Elsewhere, where Fund/Asset segregation is already in place, the asset allocation between Par / Non Par is a particularly sensitive topic. Regulators are very alert to ensure the Par fund is not overcharged.

Key Results 15.6% 12.5% 65.6% 3.1% 25.0% 0.0% 12.5% 62.5%

Differentiated by product Differentiated by distribution

channel

Differentiated by product and channel

Same for all products and channels

EXPENSE ASSUMPTIONS SETTING

General Life 75.0% 12.5% 15.6% 9.4% 6.3% 37.5% 12.5% 12.5% 37.5% 0.0%

Internal expense study Follow industry practice Expert judgement Based on actual expenses Other

HOW EXPENSE ASSUMPTIONS ARE DERIVED

Assumption

–

Expenses

Expense Overrun

Highlights

If your company is in Expense Overrun position, what approach will be taken?

• 78% of the respondents from Life hold the expense overrun reserve. Most of the respondents gross up the expense assumptions based on the historical expenses (34.4%).

• For General, mostly do not hold an expense overrun reserve (62.5%).

EY Insights

While there is general actuarial consensus that an expense overrun should be held, there is a variety of approaches to calculating the expense overrun.

Key Results 34.4% 12.5% 21.9% 21.9% 9.4% 25.0% 0.0% 12.5% 62.5% 0.0%

Gross Up Expense Assumptions (based on Historical expenses) Gross Up Expense Assumptions

(based on Projected Future expenses)

Explicitly hold expense overrun reserve = Projected Expenses

-Expense Loadings Do not hold an expense overrun

reserve

Other

Assumption

–

Mortality & Morbidity

The Assumption Setting

Highlights

• The majority have the mortality assumptions

differentiated by product type (46.5%) and by underwriting method (32.6%). And 56.3% of the respondents do not apply the Mortality Improvement (56.3%).

• The Table which is mostly used is TMI 3 (TMI

Year 2011) (41.9%) and the reinsurance rate (27.9%).

• 90.6% of the respondents use the reinsurance

rate as the morbidity assumptions.

EY Insights

• There is a variety of practices in setting the mortality assumptions. Some areas, such as the grouping used can have an effect on the GPV results.

• Mortality improvements (such as Q(x) improvement of 1% per year) elsewhere is common for annuity, but within ASEAN, less common for protection products. In the UK, more sophisticated modelling including mortality improvements are allowed for.

Key Results 46.5% 32.6% 14.0% 4.7% 9.3% 2.3% 2.3%

By product type By underwriting method By distribution channel By smoker/non-smoker Single mortality assumption All of the above Other Mortality Differentiation 43.8% 56.3% Mortality Improvement Yes No 90.6% 3.1% 9.4% Reinsurance Rate

% of Mortality Table Other Morbidity Rate 41.9% 4.7% 20.9% 27.9% 9.3% Mortality Rate

Assumption

–

Provision for Adverse Deviation (PAD)

How the assumption is set and derived

Highlights

How PAD is categorized?

• Most of the Life respondents apply the same PADs for all products (56.3%). Meanwhile for General, the majority have it various by product type (75%). How PAD is derived?

• The majority (40.6% Life and 62.5% General) have conducted statistical study of past experience to determine the PADs.

• Meanwhile other still refer to industry practice with expert adjustment (46.9% Life and 25% General) .

EY Insights

• There is a variety of practices globally in setting the PADs for the reserves/risk charges. There is a lot of subjectivity in the assumptions, and this is generally true globally.

• The S-II approach is to have prescribed “Standard

Formula” stresses, including mortality stress for the

SCR (Risk Charge) calculation, but insurers can have

“internal models” if they want to set their own PADs.

Key Results 56.3% 31.3% 3.1% 6.3% 3.1% 12.5% 75.0% 12.5% 0.0% 0.0%

Same for all products Varies by product type Varies for each individual

product

Varies by product and policy year Other HO W P A D I S C A T E G O R IZ E D General Life 25.0% 21.9% 15.6% 18.8% 40.6% 0.0% 12.5% 12.5% 0.0% 0.0% 62.5% 12.5% Industry survey Expert judgment Reference to other countries Sensitivity test Statistical study of past…

Other HO W P A D I S D E R IV E D General Life

63%

13% 63%

13%

Assumption

–

Provision for Adverse Deviation (PAD)

The Common Practice

Highlights

The majority of PADs used by the respondents:

EY Insights

The range of PADs (75% CL) from other countries as observed by EY:

Life General 75% CL 95% CL 75% CL 95% CL

Mortality 10% - 19.99% 20% - 29.99% Morbidity 10% - 19.99% 20% - 29.99%

Expense 10% - 19.99% 10% - 19.99% 10% - 19.99% 10% - 19.99% Lapse 10% - 19.99% 10% - 19.99% 0% - 9.99% 0% - 9.99%

Key Results

16% 22% 63% 19% 13% 44% 0% 13%

0% - 9.99% 10% - 19.99% 20% - 29.99% >30%

MORTALITY PAD

75% CL 95% CL

19% 19% 50% 16% 16% 38% 0% 16%

0% - 9.99% 10% - 19.99% 20% - 29.99% >30%

MORBIDITY PAD

75% CL 95% CL

25% _16% 47% 31% _19% 28% _19%

0% - 9.99% 10% - 19.99% 20% - 29.99% >30%

LAPSE PAD 75% 13% 38% 13% 13% 31% 47% 9% _3%

22% 38% 28%

9%

0% - 9.99% 10% - 19.99% 20% - 29.99% >30%

EXPENSE PAD

75%CL (GI) 75%CL (GI) 75%CL (LI) 75%CL (LI) 75% CL Thailand Malaysia Singapore

Mortality 17% 10% - 25% 25% - 40% Morbidity 17% 10% - 25% 25% - 40%

Expense 5% 5% 5%

Deferred Acquisition Costs (DAC) on Back-end loaded UL

and Reinsurance CFs in GPV Calculation

Highlights

Based on POJK 71/2016, the insurance companies are allowed to set-up DAC on back-end loaded UL. Based on the survey:

• There’s only 6.3%of the respondents from Life that have implemented the DAC on UL back-end Loaded products, but 21.9% of the respondents are planning to implement

it in the near future. (note: those who answered “other”

mentioned that they don’t have UL products)

• Most of the respondents from Life don’t allow for

reinsurance in GPV calculation (50%). On the contrary, the majority from General allow it in the GPV Calculation (50%).

EY Insights

• DAC will spread expenses to future years, which allows

for better matching against future income.

• DAC rules elsewhere (eg US GAAP) typically specify that

only directly traceable expenses, such as commissions can be deferred. Indirect expenses, eg product

development and general marketing cannot be DAC-ed.

• As an intangible asset, the DAC must be tested for

recoverability on an annual basis against future charges.

• IFRS would require a separate Reinsurance assets, and

reserves held on a gross of reinsurance basis

Key Results

Yes, 6.3%

No, 53.1% Not currently

but planning to in the near future, 21.9% Other, 18.8% DAC Implementation 31.3% 50.0% 50.0% 37.5% 12.5% 6.3% Life General

Reinsurance Calculation in GPV

Other

Not currently but planning to in the near future No

UL Reserves and IBNR Reserve on Long Term

Products

Highlights

UL Reserve

• For Unit-link products, the majority of Life respondents calculate the Unit Reserve (88%) and Un-earned Premium Reserve of Riders and Cost of Insurance (CoI) (84%). And 38% of the respondents calculate the Sterling reserve for future Cash-flows.

• Some of those who calculate the sterling reserve

mentioned that sterling reserve is set aside to capture the reserve required to meet loyalty bonus. Meanwhile other hold the sterling reserve for liability adequacy purposes.

IBNR Reserves for Long-Term Product

• Almost 60% of the respondents from Life hold the IBNR Reserve on Long-term products.

• For General, those who hold the IBNR Reserve on Long-term products is equal with those who do not hold it (37.5%).

EY Insights

• Currently, the calculation of sterling reserves is limited in Indonesia. Globally though, it is quite common practice to calculate sterling reserves especially if there are

guarantees in the UL.

• Similar to elsewhere, there is no general consensus on life insurance IBNR.

• However on GI, IBNR reserves is a very common practice.

Key Results 88% 6% _3% 84% 3% 6% 38% 44% 3%

Yes No Not currently

but planning to in the near

future

UL Reserve _Unit

Reserve

UPR on the Riders & COI Sterling Reserves for future Cashflows 56.3% 37.5% 43.8% 37.5% 0.0% 12.5% Life General IBNR Reserve Yes No Not currently but planning to in the near future

Reserve Checking and The Period of

Experience Study

Highlights Reserve Checking

• The majority of the respondents from Life use reserve movement analysis on and Policy Data movement analysis when checking the reserve.

• Meanwhile for General, spot checking against the Policy Admin System is more common

Experience Study

• On experience study, most of the respondents have it annually, while some of them have it when needed.

EY Insights

The 5 checks we described above are areas where EY feels are important as checks against the GPV results, and we would encourage PAI members to incorporate them in the valuation processes.

Key Results 56.3% 56.3% 78.1% 50.0% 87.5% 62.5% 0.0% 0.0% 12.5% 37.5%

Spot check against Policy Admin Systems

Independent Model Point Check Policy Data movement analysis Reserve Ratio Checks Reserve Movement Analysis

R e s e rv e C h e ck in g General Life 9.4% 84.4%

6.3% 15.6% _3.1% 50.0% 62.5%

12.5% Monthly Annually Every 3

years

Ad-hoc Never Other

The Period of Experience Study

Experience Study:

Mortality, Lapse, Expense Study

Highlights

• Most respondents from Life carried out experience studies last year (2016) using data size of 3.8 years on average.

o Lapse (4.3 years), mortality (4.4years),

expense (2.5 years).

• The majority from General also carried out

experience studies in year 2016 using data size of 4.2 years on average.

o Lapse (4.3 years), expense (4.1 years).

EY Insights

• For Lapse study, the data size is ideally shorter than data for mortality study (up to 3 years) because lapse depends on the economic condition. Therefore it would better to use the latest data.

• Meanwhile for mortality study, as the experience is more stable, the larger the data the better the result.

Key Results 2013 2014 2015 2016 2017 2018

0 5 10 15

Ye a r o f L a s t St u d y

Size of Data Mortality Lapse Expense

2013 2014 2015 2016 2017 2018

0 1 2 3 4 5 6

Ye a r o f L a s t St u d y

Size of Data

Lapse Expense _GENERAL

Actuarial Resources:

Pricing and Reporting

Highlights

• For Life, on average there are 13 actuarial resources (8 for Reporting and 6 for Pricing). And 90.6% of the respondents have the actuarial exam benefit in place.

• For General, on average there are 4 actuarial resources ( 3 for Reporting and 2 for Pricing). And 75% of the respondents have the exam rules in place.

Note: The Reporting team is including actuarial staff for Reinsurance, Business Plan and Actuarial Modelling. The Pricing team is including those in-charge for product development and experience study.

• Most of the Chief Actuary (CAs) or Appointed Actuary (AAs) reports to CFO/Finance Director.

• None of them repots to CRO

EY Insights

Similar situation in other countries. In the past, there are more CAs who reported to the CEO. But now there more to CFOs

Key Results -5 0 5 10 15 20 25 30

0 10 20 30 40

T o ta l P ric in g T e a m

Total Reporting Team Life General 90.6% 75.0% 9.4% 25.0% Life General Exam Benefit No Yes Life General 15.6% 25.0% 62.5% 37.5% 15.6% 37.5% 3.1% 0.0% Reporting Line Other Technical Director CMO CRO

Actuarial Software

Highlights

• All of the respondents (Life and General) use the actuarial software for reserving. Many of them use more than one software.

• Most of the respondents from Life use Prophet (59.4%) and Excel/Macro (40.6%).

• 100% in General use Excel/Macro with additional software (12.5%), such as SAS and Tableau.

EY Insights

Prophet is clearly the most used software in Indonesia, followed by MoSes and AXIS. This is quite a common trend in Indonesia.

In our work helping clients implement and review Prophet models, key areas to focus include:

1) Control purposes – use “table driven” approach, avoid hard coding, good basic design

2) Run Time Speed

3) Training actuaries to use and to model Prophet

Key Results

L I F E

G E N E R A L 59.4%

18.8% 40.6%

100.0%

6.3%

3.1% 12.5%

Thank You!

For more information please contact:

Kelvin Yap

Associate Director,

Actuarial Services

Kelvin.Yap@sg.ey.com

+65 6309 6203

Ponno Jonatan

Senior Manager,

Performance Improvement

Ponno.Jonatan@id.ey.com

+62 21 5289 5307

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actuarial practice in ASEAN

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1

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working in over 70 offices.

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We have the largest actuarial team in ASEAN

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© 2017 PT Ernst & Young Indonesia.

A member firm of Ernst & Young Global Limited. All Rights Reserved.

In line with EY’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content.

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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EY |

Assurance | Tax | Transactions | Advisory

About EY

EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

© 2017 PT Ernst & Young Indonesia.

A member firm of Ernst & Young Global Limited. All Rights Reserved.

In line with EY’s commitment to minimize its impact on the environment, this

document has been printed on paper with a high recycled content.

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.