As demand for savings and annuity products increased dramatically amid falling interest rates during the pandemic, Acies, a company headquartered in India’s financial hub of Mumbai, acted quickly to help its insurance clients manage interest rate risk. It has achieved this through a wide range of strategies, processes and technologies.
Working with at least 15 of India’s largest insurers, the fledgling consultancy has demonstrated its risk management capabilities, not only as a trusted partner, but also as a standard-setter in the insurance industry. Created in 2017, Acies is present in India, Singapore, Malaysia, Mauritius and in the we.
Indian regulators have generally taken a cautious view of the country’s derivative markets, which has limited the availability of derivative products suitable for insurers to offload interest rate risk when entering into non-participating contracts. Acies has successfully bridged this gap by working with regulators and major international banks to design a specific term rate agreement product that offsets interest rate risks for insurers.
“We have worked with large banks with the intention of delivering an industry solution that would allow insurers to reduce the risk of the interest rate guarantee they offer to end users,” says Muzammil Patel, Managing Director of Acies.
The company has also engaged with banking and insurance regulators to address concerns, change product structures and enable standardized deployment across the industry to ensure responsible and sustainable growth of the forward rate agreement. (ENG) product. The work of Acies has also enabled transparency and standardization in ENG price and evaluation.
“Regulators want a very high degree of operational controls, automation and education provided to insurance companies because Indian insurers are not used to using derivatives. A big part of our job is to educate insurers and put in place all of the exposure quantification models and risk models while automating them, ”Patel explains.
“The work had a pretty big impact on the insurance industry and its ability to deliver more stable and specific rates to clients, dramatically changing the landscape of how unlisted business was. [previously] made in India, ”he adds.
Non-participating products with guaranteed returns have become more attractive in India, multiplying by 2.5 according to data from June 2020. Insurers can therefore continue to guarantee policyholders returns of between 4.5 and 5.0% per annum despite lower interest. rates. The Reserve Bank of India has left its benchmark interest rate at 4% since its last rate cut decision in May 2020.
Derivatives with a notional value of around $ 10 billion to $ 12 billion were underwritten using ENGs. That amount is expected to reach around $ 20 billion to $ 22 billion by the end of this year, according to Acies.
Acies works with participating banks to take out ENGs. “As the banks write this volume of derivatives, you will end up having capital implications. It is important that banks conduct a fully hedged transaction to avoid systemic risk, ”Patel said.
For insurance clients, Acies provides end-to-end advisory services, including the establishment of risk management and accounting frameworks, as well as a derivatives system. The derivatives system takes into account the transaction entries, the daily updates of the valuation at market price, the daily margins and, subsequently, the accounting entries to be transmitted to the accounting system. Finally, Acies’ solutions also make it possible to generate risk measures which must be submitted to regulators.
“We want to make sure that insurers are working on a fully covered basis; they will count [for] derivatives correctly and they can prove to regulators that they have the necessary offsets and risk capital, ”says Patel. “When that happens, it gives them more leeway to reduce risk across the spectrum. “
Customers value the in-depth knowledge built into Acies solutions. As a CFO of a large life insurance company in India put it: “Acies is a pure blend of technical expertise in derivatives, experience in reporting accounting results and creation of [that] in systems and controls. With these three characteristics, I was heavily dependent on Acies.
Acies’ fast service has also earned it a reputation: the implementation cycle for interest risk hedging solutions is approximately eight weeks with pre-built, plug and play features.
“Insurers don’t want to lose their competitive advantage, so our solutions need to be implemented very quickly. You must be able to convince and prove that your strategy, governance systems and technology are both flawless and [at] an industry standard, ”Patel explains.
Building on its success in India, the company is actively seeking to replicate its market solutions approach in Bangladesh, Indonesia, Malaysia and Sri Lanka, as well as some countries in East Africa, where rates of interest are reasonably high to use the ENG product.
IFRS 17 in sight
International Financial Reporting Standard (IFRS) 17, a new global accounting standard for insurance contracts, is expected to impact the areas of finance, actuarial science and systems development, in addition to product design and distribution, development revised incentives and broader remuneration policies, for example. It comes into force on January 1, 2023.
Acies seeks to become an essential partner for insurers in this space.
“We see IFRS 17 as a business play, where it will change the way products are designed and the way revenue is fundamentally recognized. We will seek to help companies manage their balance sheet and product structure rather than just in the areas of accounting and actuarial science, ”Patel said.