Actuarial Valuation of Post Retirement Medical Benefit

Schemes
Issues and Challenges (including impact of Ind AS 19)

Current Environment
Top 10 PRMB liabilities in India:

Generally PRMB schemes are more

prevalent in the public sector than in the
private sector
In the private sector:

A few legacy plans exist

In some cases, schemes have been closed
to new entrants

About 30% of companies in the BSE Top

100 companies offer PRMB schemes
Liability amounting to about INR 14,000
crores as at 31 March 2015 with P/L
charge about INR 3,000 crores
Generally unfunded only 3 companies
in the BSE100 list have funded PRMB
schemes

Company

Liabilities
(INR Crores)

Oil & Natural Gas Corp Ltd

2762

Indian Oil Corp Ltd

2630

Bharat Heavy Electricals Ltd

1530

Tata Steel Ltd

1067

Coal India Ltd

910

Steel Authority of India Ltd

846

NTPC Ltd

730

Bharat Petroleum Corp Ltd

670

NHPC Ltd

519

Hindustan Petroleum Corp Ltd

505

Post Retirement Medical

Benefit

Own or Authorized
Hospitals (reimbursement
of actual expenses)

Hospitalization
Group Mediclaim through
Insurance Company
(annual limit)

PRMB
Domiciliary

Fixed annual ceiling

amount or reimbursement
of actual expenses

PRMB - Typical Design:

Hospitalization Benefit

Medical expenses incurred due to care and treatment at a hospital

Coverage generally to retirees and spouse
There is usually a limit on the total amount per annum. This is typically covered through a group
mediclaim family floater policy from an insurance company

Domiciliary Benefit

Medical expenses reimbursed in case the retired employees avail the out-patient services
including the medical cost whilst confined at home. This includes prescription drugs, dental,
vision etc.
Generally subject to an annual ceiling
Ceiling generally remains constant but may be reviewed from time to time

Some public sector companies have more generous schemes where coverage may not be restricted to an

annual maximum, both in respect of hospitalization and domiciliary benefits

Some companies may also run their own hospitals where cover is either free of cost or heavily subsidized
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Valuation methodology
Creates an obligation on the entity thus placing actuarial risk on the entity - Cost is
material and measurable
Actuarial Cost Method : Projected Unit Credit
Actuarial liability is calculated for active and retired employees

For retired employees:

Present value of expected future payouts

For active employees:

Present value of expected future payouts post-retirement:

Cost spread uniformly over employees service period:
Until such time when further service will lead to no material amount of further
benefits
Spread till eligibility age or normal retirement age

Key assumptions
Financial:

Discount rate
Insurance Premium rate
Claims cost (including claim handling costs)
Medical inflation rate

Demographic:

Mortality (pre and post retirement)

Attrition
Early Retirement/ill health retirement/Disability
% married, spouse Age difference
Participation rate
Cap/Limit on benefit

Basis for choosing financial assumptions

Financial assumptions should be based on market expectations for the period over which the
obligation are to be settled.

Financial
Discount rate

Market yield on government bonds that matches duration of liabilities

(Corporate bonds under IND AS for foreign subsidiaries for countries
with deep market)
Duration can be longer than other lump sum schemes as the benefit
is payable till the retiree/beneficiary is alive

Premium rate
(Hospitalization Benefits)

Applicable for insured medical schemes:

Usually based on latest premiums paid by the company
May need to be smoothed as sometimes premium rates could
fluctuate due to change in insurance company or discounts offered.
Companies who report a high claim ratio also report a rise in
premium charged by insurance companies. Due to this there is a
need to monitor past claims ratio as this has a bearing on
premiums in the future.

Basis for choosing financial assumptions

Financial
Claims cost
(self-insured/authorized
hospitals/ own hospitals)

Medical inflation rate

Applicable for self-insured medical schemes:

Detailed claims analysis (utilization and cost) based on past data may
be required to determine claims cost
Need to collect data on past claims experience of a company as well
as rates of other similar entities, which can be a major challenge
Average cost per day consists of 2 components (a) the room rate (b)
medical, drugs and surgical costs
Claims ageing study may be considered for large schemes
Level and frequency of future claims - sensitive to age, health status,
sex (self and dependents)
This is a very critical assumption which is often understated by
companies
Future changes in the cost of medical services due to technological
advances
May need to assume different rates of inflation for room rate and for
medical, drugs and surgical costs.
Medical, drugs and surgical costs would escalate at a higher rate
than room rate inflation
In the recent past, the cost of insurance cover has been increasing
faster than general inflation

Basis for choosing demographic assumptions

Demographic
Mortality

Both pre retirement and post retirement mortality is used

Post retirement mortality is a significant assumption
Generally standard LIC table (96-98) annuitant mortality is used
for post retirement and IALM (2006-08) modified ultimate
mortality is used for pre retirement.
Increase in life expectancy due to various factors should be
incorporated in the mortality tables over a period of time as this
can have significant impact on liability.

Attrition

Another critical assumption as many schemes only offer PRMB on

normal retirement, and therefore benefit vests only at 58 or 60

% married and
Spouse age difference

Participation rate

Ideally obtain exact spouse date of birth often not readily

available.
In the retiree medical benefit context, any assumption around
dependent coverage can significantly influence the cost of the
plan.
Important assumption for schemes that have optional membership

IND AS 19 impact
Overall, same impact as other Post Employment Defined Benefit Schemes

OCI impact

Actuarial gains and losses are to be recognized immediately through the Other
Comprehensive Income (OCI) statement. This is expected to provide some level
of stability to the P/L.
Reasons for Gain/Loss - Can have significant actuarial gains and losses if
assumptions are not in line with experience, especially claim cost and medical
inflation. Therefore, assumption setting is key to minimize gains and losses.
There may be more scrutiny of assumptions from auditors and other
stakeholders since now Actuarial Gains and Losses will be appearing as a
separate item in OCI and will not flow directly through P/L

Net interest cost:

Interest cost and expected return on plan assets are replaced with net interest
income/cost on the net asset or liability recognized on the balance sheet. This net
interest income or cost is measured based on the plan's discount rate.
Minimal impact as most schemes are unfunded
More clarity on assumption setting: Para 96. Assumptions about medical costs shall

take account of estimated future changes in the cost of medical services, resulting
from both inflation and specific changes in medical costs.

Requirement of additional disclosures

IND AS 19 impact additional disclosures

Explanation of plan characteristics and associated risks
Unusual, company- and plan-specific risks
Significant concentration of risks
Approach to risk management
Amount, timing and uncertainty of future cash flows:
Sensitivity analysis of significant assumptions
For PRMB scheme, should generally include discount rate, medical inflation, premium /
claims
costs, post-retirement mortality and attrition rates
Maturity profile of obligations: duration and / or cash flow
Other:
Split of liability into actives, deferred and retirees
Split of liability into vested and unvested
Split of actuarial gain/loss due to demographic and financial assumptions.
If scheme is funded, detailed disclosures relating to the fair value of assets including
disaggregation of fair value of plan assets into asset classes based on nature and risks

Summing up: Major issues and challenges

Assumption setting:

Like all valuations, assumption setting process is critical

Liabilities highly sensitive to a number of assumptions, e.g. premium rates, claims
costs, medical inflation, post retirement mortality, attrition
Medical inflation rates current being used in the industry may be on the lower side
and may not adequately build in factors like medical technology advancement and
premium increases in the long term
Medical costs increasing greater than inflation, making assumption for this increase is
difficult
Improvement in longevity may not be appropriately allowed for in the valuations
Using current premium rates can be misleading as sometimes this could fluctuate due
to change in insurance company and may not appropriately factor in claims ratio

Claims data and analysis

More scientific approach required for studying past claims data and determining
claims costs and utilization, especially for schemes where benefit is uncapped
Reliable past claims data need to be available to enable such detailed analyses
Claims cost by age and due to medical inflation may need to be analyzed separately
Data may need to be analyzed separately for claims in respect of in-service and
retired employees
Such data is often not available from employers:
Difficult to get data on the dependence of medical costs on age and gender

Summing up: Major issues and challenges

Risks
Material risks given the nature of the benefit, e.g.
Longevity Risk the risk that pensioners may live longer than expected
Inflation Risk Healthcare cost increases are higher than assumed
Investment Risk availability of the required cash flows, and an appropriate
investment strategy to offset the impact of the liability
Operational Risk the risk that overpayments are made to the medical scheme in
respect of pensioners who have passed away, as well as the administrative
burden and expenses incurred
Morbidity Risk actual experience different from assumed
Generally unfunded liabilities - have to bear brunt of volatile cost
Liabilities can be significant and are expected to grow rapidly
Ind AS 19 Transition
Impact on OCI can be significant if assumptions not appropriate
Additional disclosure requirements, especially on risks associated and amount and
uncertainty of future cash flows