Bulgaria & Eastern Europe 1993 - Learning about BG Plan

Photo: Photo: Islam tower, downtown Sofia

April 13, 1993 At downtown office I meet Camelia, and surprise, the actuary professor, Dr. Yotov. It turns out we have to calculate reserves so Camelia can finish the 1992 tax report by April 15. So I gather inforce information from Krasi, and work most of night to model a reserve.

Reserve assumptions To determine reserves, normally a countries insurance laws define a minimum basis. But the new Bulgaria did not have an insurance law yet, so I had no guidance. I had much uncertainty in coming up with assumptions. Mortality I took recent population tables, smoothed the mortality rates and added additional loading at younger ages. Interest Inflation was at 50%. The Company had to invest in Bulgarian assets of which there were few long term choices. Short term accounts offered 60% interest. These rates could go higher or lower just like inflation. Since the First Plan had the hard currency clause, I could express reserve interest in relation to rates earned in hard currency accounts. Banks had such hard currency accounts with Deutsche Marks (DM) assets & they earned about 8%. So I chose reserve interest of 5% for the time being. Method Adopted a modification of US Commissioners Reserve Valuation Method. I determined reserve factors by sex and age groupings. Then applied the reserve factors to the policy inforce to get the reserves in DM. Finally, multiplied the result times the Leva/DM exchange rate to get the final reserve total.

Photo: BG Plan agent

April 14, 1993 I go over results with Dr. Yotov, and then do the TV interview. Yotov gives me a book he has written on life contingencies. Late in the day Albena informs me they want me to do two more journalist interviews next week.

BG Plan was happy with results because the large reserve total insured a 1992 net income loss, meaning no taxes would be payable. While going over the results with Dr Yotov, I noted that the derived reserve net premiums I had determined exceeded the gross premium being charged. While it was too early in the assignment to draw any conclusions, this deficiency pointed to the possibility that the product is underpriced and is unprofitable. I was a bit surprised at the lack of concern by Dr Yotov.

Photo: Sofia building with BG Plan sign