Risk management consultant of the year: Acies

Asia Risk Awards 2024

Harshit Gupta, Acies

Acies, a Mumbai-headquartered consultancy, has a strong track record in helping insurance clients manage interest rate risks. Last year, the firm started working with its biggest insurer client yet – the Life Insurance Corporation of India, which selected Acies to help it design and implement its interest rate risk management framework.

Annuity products with guaranteed incomes have become ever more popular in India over the past decade as domestic interest rates declined. But fixing, at inception, the rate at which this regular income is paid out to policy-holders over the lifetime of the product gives rise to interest rate risks that life insurance companies need to manage. Acies now advises 18 of the 24 public life insurance companies in India offering these types of annuity products on the management of the interest rate risks associated with the products. But LIC, which has a roughly 60% share of assets under management across India’s life insurance industry, is the largest of all the clients that Acies has taken on, by some distance.

“The entire risks from an insurance perspective are to be able to offer a guaranteed return in the next 20 years or 30 years, but considering how markets perform currently, the interest rates are entirely unpredictable,” says Harshit Gupta, consulting leader at Acies.

Ten years ago, the Reserve Bank of India’s benchmark policy rate was 8%, but declined steadily thereafter to a low of 4% after the onset of the Covid-19 pandemic. Following a series of incremental hikes between 2022 and 2023, the rate is now at 6.5%.

One project that Acies has been working closely on with four banks in India is the roll-out of forward rate agreements (FRAs), an instrument that insurers can use to manage these risks.

Gupta explains that life insurance companies receive premium inflows from underwritten policies with liabilities against such policies arising in future years, usually above a period of 10 years. In addition, the investment of such inflows into bonds leads to income generated in terms of interest and redemption cashflows. Insurers need to ensure that they can generate the minimum required rate of return from their investments to ensure that they can pay the liabilities generated by the underwritten business while generating adequate profits.

For this purpose, insurance companies will aim to lock in the rate of return expected on their staggered investments from future cashflows and locks in the interest rates till payout, Gupta notes. Meanwhile, FRA transactions enable life insurance companies to ‘lock in the yield’ on the government security and thereby mitigate the guarantee and reinvestment risk in their annuity businesses.

But when an insurer the size of LIC begins to offer annuities with guaranteed incomes, the derivatives market ecosystem needs to be ready to handle the additional hedging demand.

“As soon as the largest insurance companies enter the market, they can bring significant volumes in the product, given their distribution prowess. So, it’s important that counterparties in the entire ecosystem are ready to be able to adopt such flows,” says Gupta.

“That’s something we are really proud of because this requires working collaboratively across the ecosystem to cover various aspects – from establishing the infrastructure to providing the technology … to enable this entire derivatives lifecycle interest rate risk management to be automated.”

In addition, the service also includes consulting with clients to build their own skill sets, getting them through their regulatory obligations, accounting obligations, helping them model their cashflows, among other things.

An integrated offering

Having an integrated consulting and technology offering is another aspect of Acies’ business that makes the firm stand out among its peers.

Arindam Banerjee, Acies

Arindam Banerjee, head of business development at Acies, points out that the firm possesses the functional depth necessary for designing robust frameworks, ranging from risk management and treasury operations to product pricing, International Financial Reporting Standards, and hedge accounting, as well as possessing the software products that “automate these frameworks” thereby reducing operational uncertainties.

Moreover, the company’s star product – Kore Derivatives, a derivatives lifecycle management tool – is used by most Indian life insurers. Over the past year, it has undergone a number of enhancements. New products have been added so that the platform now covers all derivatives products that are permissible by the Insurance Regulatory and Development Authority of India. Acies has also introduced various upgrades to accounting management workflows, as well as advanced analytics for value-at-risk and PV01 monitoring.

“Interest rate risk management is a great example of how we blended advisory and our own software products to completely transform the non-par business undertaken by life insurers in India. We’re now also working back with some of the global banks to take the same solution across other countries in the Asean [Association of Southeast Asian Nations] region,” says Banerjee.