study of the role of actuaries in insurance

8/12/2019 Study of the Role of Actuaries in Insurance

1/55

Study of the Role of Actuaries in Insurance

1

OBJECTIVES OF THE STUDY

1. To understand the concept of Actuarial Science and the role of Actuariesin Insurance business.

2. To analyze the powers, functions and responsibilities and duties ofactuaries.

3. To study the role of actuaries with reference to life insurance and generalinsurance.

4. To examine the current scenario of Actuarial Science in India.

SCOPE OF STUDY

The scope of study of this project extends into both, Life Insurance andGeneral Insurance and the Role of Actuaries in both these fields.

It also talks about the role of Appointed Actuaries. It talks about the Portfolio of an Actuary. The study concentrates majorly on Actuarial Science in India but also

has certain comparisons with the same abroad in certain areas.


2/55


2

LIMITATIONS

The biggest limitation or drawback that rose during the making of thisproject was the limited awareness about the topic.

Not only the general public but also many Insurance related people arenot aware of this subject.

Also, there are only around 250 Actuaries in India and contacting themwas a major difficulty.

The Actuaries refused to fill in any questionnaire as they are not allowedto fill in any Unregistered Questionnaire.

METHODOLOGY

Primary data-Primary data was collected by way of interaction with a few Actuaries.

They refused to fill in any questionnaire as they are not allowed to fillany Unregistered Questionnaire.

Secondary data-Secondary data was collected through the internet and referring to

Actuarial books.


3/55


3

WHAT IS ACTUARIAL SCIENCE?

Actuarial science is the discipline that applies mathematical and statistical

methods to assess risk in the insurance and finance industries. Actuaries are

professionals who are qualified in this field through education and experience.

In many countries, actuaries must demonstrate their competence by passing a

series of rigorous professional examinations.

Actuarial science includes a number of interrelating subjects,

includingprobability,mathematics,statistics,finance,economics,financial

economics, andcomputer programming. Historically, actuarial science used

deterministic models in the construction of tables and premiums. The science

has gone through revolutionary changes during the last 30 years due to the

proliferation of high speed computers and the union ofstochastic actuarial

models with modern financial theory. Many universities have undergraduate

and graduate degree programs in actuarial science.
http://en.wikipedia.org/wiki/Probabilityhttp://en.wikipedia.org/wiki/Mathematicshttp://en.wikipedia.org/wiki/Statisticshttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Financial_economicshttp://en.wikipedia.org/wiki/Financial_economicshttp://en.wikipedia.org/wiki/Computer_programminghttp://en.wikipedia.org/wiki/Stochastichttp://en.wikipedia.org/wiki/Stochastichttp://en.wikipedia.org/wiki/Computer_programminghttp://en.wikipedia.org/wiki/Financial_economicshttp://en.wikipedia.org/wiki/Financial_economicshttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Statisticshttp://en.wikipedia.org/wiki/Mathematicshttp://en.wikipedia.org/wiki/Probability


4/55


4

WHO IS AN ACTUARY?

Actuaries are professionals who apply mathematics to financial problems. They

evaluate the financial implications of contingent events, in other words, events

that are not certain to occur. They are often involved in managing the risks that

can arise from undesirable contingent events. Actuaries evaluate the likelihood

of future events. They also design ways to reduce the financial impact of

undesirable events that do occur. He is a technical expert studying mortality of

insuring public, evaluating financial condition of the insurer.

An actuary applies analytical, statistical and mathematical skills to financial

and business problems, especially those which involve uncertain future events,

such as in life insurance, general insurance, risk management, health care

financing, investment, corporate finance, banking, pensions and social security.

This helps individuals and businesses to safeguard their future, confidently and

at a fair price, in an ever-changing world.

Actuaries are -

acknowledged experts in the analysis and modeling of situationsinvolving financial risk and contingent events;

concerned with both the asset and liability side of the balance sheet; able to provide realistic solutions to complex problems with a long term

forward look; and

Practical, innovative and numerate.To do their work, actuaries must have a high level of technical knowledge. For

example, they need to understand the nature of insurance, the risks inherent in

different types of assets, the ways in which statistical models can be used, and


5/55


5

the legal and regulatory constraints that apply to the business. Their work often

affects many stakeholders, so they must be able to balance different interests

and observe high ethical standards in doing so.

Although the actuarial profession has existed for many years, it is not a large

profession and, therefore, is not well known by members of the general public.

In fact, there are many countries in which no actuaries reside. Actuaries have

traditionally worked primarily in the insurance and pension industries, and

mostly in countries where those industries are well established. In the insurance

industry, actuaries can be involved in all types of insurance: life or nonlife; and

direct insurance or reinsurance.

Although actuaries are often employed by insurers, many are employed by

consulting firms and provide services to more than one insurer. Some insurance

actuaries work for supervisory authorities, as either employees or consultants.

Within these organizations, actuaries can fill a wide range of positions. Many

actuaries work in technical roles, applying their skills to tasks such as

designing new insurance products, forecasting expected rates of loss, setting

premium rates, or calculating the liabilities of an insurer to its policyholders.

Others apply their knowledge and experience in management positions, with

responsibilities ranging from technical or operational departments, to product

line management, to senior executive roles.

In India, Insurance Regulatory Development Authority (IRDA) Regulations

require that there should be an Actuary for every life and non-life insurance

company. An Actuary is a person who has passed a specialized examination

conducted by the Actuarial society of India or the Institute of Actuaries,

London.


6/55


6

HISTORY OF ACTUARIAL PROFESSION.

The basis for actuarial science dates back to ancient times. The funeral

societies of Rome, wherein each member chipped in regularly to pay for the

funerary services of members when their time was up, were the first forerunner

of life insurance. And naturally, someone had to figure out how much each

member would have to pay to cover the upcoming funerals of the aged among

them. These calculations were rough, but given the small number of people in

such societies -- a few dozen to several hundred -- it was relatively easy to

estimate upcoming deaths and the associated costs.

From the fall of Rome, however, it took mathematics and business theory more

than 1,000 years to catch up to the point wherein they could be advanced

further. Edmund Halley was best known for discovering of the comet that now

bears his name. However, he also helped found modern actuarial science. In

1693, Halley made a study of the population in the German town of Breslau.

Through careful recording of births, deaths and the aging population, Halley

compiled a "mortality table." That bit of mathematics, using probability

theories developed just a few decades before, allowed Halley to accurately

predict the likelihood of a given person dying in any given year. That, in

essence, is the very foundation of the life insurance industry. By the ability to

predict life expectancy, Halley was able to determine how much to charge a

given person in premiums to cover burial costs.

A generation later, English mathematician James Dodson created an entire

framework for the creation of a mutual life insurance company, but died in

1757 -- five years before the Society for Equitable Assurances for Lives and

Survivorship was founded in London.


7/55


7

The term "actuary" was coined in London in 1762 by the Equitable, which first

used scientifically calculated premium rates. The Secretary to the Board of the

Equitable was given the title Actuary, based on the Latin actuarius, who was

the business manager of the Senate in ancient Rome, and kept the daily

verbatim record there. In 1775, William Morgan FRS was appointed as the

Actuary of the Equitable. Since he was himself an excellent mathematician, he

took over the role of premium calculation and financial manager and became

the first actuary in the sense we know it today.

Thus, the actuarial profession was formally established in 1848 with the

formation of the Institute of actuaries (London). At one point of time it was the

only institute it the world to conduct the professional exam. Over the years,

actuarial associations were established in several other European countries, in

the United States, Australia and Japan. In 1895, the first International Congress

of Actuaries was held in Brussels, and the International Actuarial Association

(IAA) was formed.


8/55


8

IN INDIA

In India, The Institute of Actuaries of India, is the sole professional body of

actuaries in India, and was formed in September 1944. It was formed by the

conversion of the Actuarial Society of India into a body corporate by virtue of

the Actuaries Act, 2006.

According to the committee of reforms in insurance sector (1994) at the time of

nationalization there were only 67 actuaries in the service of the Life insurance

company but their number eventually came down to eleven. Entry of private

companies has been allowed by the government since recent past years. Many

of these like HDFC Standard, Bajaj Allianz, Prudential, ICICI, ICICI Lombard,

Birla Sun Life, IFFCO TOKIO, MAX New York, TATA AIG, AVIVA Life,

MET Life, SBI Life, OM Kotak Mahindra, ING Vysya Reliance and Royal

Sundaram are very active in the market due to which the demand of actuaries is

sure to gain momentum, because an Actuary is the heart of the insurance

business.

Actuarial Work space

1. Health and Care Insurance

2. Life Insurance

3. General Insurance (non-life)

4. Pensions & Other Employee Benefits

5. Finance

6. Investment7. Enterprise Risk Management (ERM)

8. Academics

9. Regulatory

10. Re-insurance


9/55


9

QUALIFICATIONS TO BECOME AN ACTUARY

Some actuarial associations establish qualification standards that must be met

by individuals who wish to become members. The qualification standards often

cover areas such as education, professional knowledge, experience, and

professionalism.

Actuaries require a high level of knowledge of mathematics and statistics. Most

actuaries attain such knowledge through attendance at university. Some

universities offer degrees in actuarial science, although many actuaries have

studied at universities that do not offer such degrees, instead obtaining degrees

in mathematics or related subjects.

The approach to actuarial education varies among jurisdictions. Some place

more emphasis on university studies, while others require more self-study, with

the results tested through examinations developed by the professional

association or, in some cases, a supervisory authority. The IAA has set out a

syllabus of topics in which, at a minimum, competence must be demonstratedby individuals who seek qualification as actuaries.

In addition to meeting educational requirements and successfully completing

professional examinations, many actuarial associations require a minimum

period of practical experience, under the guidance of an experienced actuary,

before an individual can attain full professional qualification. Some

associations require participation in formal training on ethics and

professionalism, and may require the recommendations of one or more

members before an individuals applicationfor membership will be accepted.


10/55


10

Increasingly, actuarial associations require members to undertake continuing

professional development as a condition of maintaining their membership.

Such requirements are designed to ensure that actuaries are aware of evolving

best practices, changes in regulatory requirements, and relevant business

developments.

In many jurisdictions, full membership in a recognized actuarial association is

required to perform certain official tasks, such as determining the technical

provisions of an insurer. In some jurisdictions, full membership is a necessary

but not a sufficient condition to perform these tasks, with additional specialized

qualification requirements being imposed by either the professional association

or a regulator.

Only if a local actuarial association imposes requirements that cover at least the

following topics is it eligible for full membership of the IAA:

Financial mathematics

Probability and mathematical statistics

Economics

Accounting

Modeling

Statistical methods

Actuarial mathematics

Investment and asset analysis

Actuarial risk management

Professionalism.


11/55


11

Skills required

1. One must have a natural problem solving ability.2. Be able to see the situation from different vantage points.3. Develop lateral thinking4. Practical outlook5. Problem curiosity and business sense with highly developed inter

personal Communication Skills

6. An Aptitude for Mathematics7. Deep Knowledge of Statistics and Commerce.

Training institutes in India for Actuarial studies

1. Bishop Herber College, Tiruchrapalli.2. CMD School of Insurance and Actuarial Science, Uttar Pradesh.3. Amity School of Insurance and Actuarial Science, Noida.4. Insurance Institute of India, Mumbai.5. International Institute for Insurance and Finance, Andhra Pradesh.6. Institute for integrated learning in Management, New Delhi.7. Birla Institute of Management Technology, New Delhi8. RNIS college of Insurance, New Delhi.9. Jaipuria institute of Management, Lucknow.10.Institute of Insurance and Risk Management, Hyderabad.

There are 17 other colleges in India which provide Graduate courses in

Actuarial Science.


12/55


13/55


13

RisksInsurers are subject to many types of risk, not only those against which they

insure policyholders, which are called underwriting risks. Other types arecredit, market, liquidity, and operational risks. The objectives of an insurer are

to understand the nature and extent of the risks to which it is subject and to

manage those risks effectively. Actuaries are often involved in the risk

assessment process. They identify the specific risks that can affect insurers and

consider the relevance of those risks to a particular insurer. They seek to

quantify the most relevant risks, and use this information to assess the potential

effect of those risks on the insurers financial situation.

Actuaries also participate in managing the risks. For example, they may

determine how much risk an insurer can afford to retain on each policy, design

a reinsurance program to deal with excess amounts of risk, and negotiate the

terms of reinsurance contracts with the reinsurers.

In recent years, a growing number of companies in a wide range of businesses

have appointed chief risk officers and adopted an approach known as enterprise

risk management (ERM). In the insurance business, the chief risk officer is

often an actuary.

DesignInsurers seek to design products that will meet market needs. For example,

individuals might be willing to buy a product that would insure them against

the risk of unemployment, but if the insurance covered situations where an

individual quit voluntarily, it is unlikely that the risk could be managed by the

insurer. Of course, products must also be designed to in a way that they can be


14/55


14

priced appropriately, from the perspectives of both the insurer and its

policyholders.

Actuaries often play important roles in the product design process. They assist

in identifying market needs, for example, through the analysis of sales patterns,competitors products, and social and demographic trends. They work with

others, such as marketing, underwriting, and investment experts, on product

design teams. Their work can involve assessing the feasibility of product

design features suggested by others, as well as proposing alternatives for

consideration.

Actuaries are also involved in designing compensation schemes for theintermediaries that will sell the products. The compensation schemes must be

attractive to the intermediaries, affordable, and provide incentives to promote

the sale of high quality business.

PricingIf an insurer is to be successful in the long term, its products must be priced

adequately to produce profits. At the same time, prices must be competitive

with those offered by other insurers and, for some types of products, non-

insurance alternatives. Prices must be reasonable from the policyholders

perspective, being equitable among various classes of policyholders and

bearing a reasonable relationship to the benefits provided by the policy.

There are many factors that must be considered when calculating premium

rates that can be expected to produce profits. The costs of the benefits provided

by the product design must be estimated, including not only basic claims costs

but also the potential costs of any guarantees and options provided to

policyholders. Expenses must be accounted for, including commissions,


15/55


15

underwriting costs, other policy administration costs, and overhead costs. The

prices must reflect the rates of return that the insurer expects to earn on the

investment of premiums, as well as expectations about the willingness of the

policyholders to continue paying premiums and maintain their policies in force.

To the underlying cost factors mentioned above must be added the need to

produce a reasonable profit margin. In many jurisdictions, insurers are required

to maintain capital at levels that are related to the risks inherent in the policies

they have underwritten. Even in the absence of such requirements, sound

business practice dictates that insurers have adequate capital to support the

risks they have assumed.

Accordingly, the profit margins should be sufficient to provide a return on

capital that is acceptable to the insurers shareholders. Further complicating

matters, in some jurisdictions there are regulatory constraints on the pricing of

insurance products.

Actuaries are often heavily involved in the pricing process, particularly for

long term life insurance products. They develop assumptions for the various

cost factors, taking into account the design of the product, the insurers past

experience with similar products, the experience of other insurers, and

expectations of future demographic and economic conditions. Actuaries use

models to project future cash flows from the product, solving for the premium

rates that will produce the desired profit margins.

However, rarely does the actuarys job end there. The calculated premium rates

might be uncompetitive, at least for some potential policyholders, or outside of

the constraints set by regulation. In such cases, the actuary may need to adjust

the premium rates, for example, lowering them at some ages and raising them

at others, or modify features of the product design. The actuary also needs to

test the sensitivity of the profit margin to variations in the cost factors. If


16/55


16

profitability is too sensitive to certain factors, the product design may need to

be changed or an additional premium charged for the risk involved.

LiabilitiesActuaries select appropriate methods for valuing the various types of

obligations. They establish assumptions for the parameters that will affect the

value of the obligations. Economic, demographic, and business conditions

change over time, and information becomes available about the experience of

the business that an insurer has underwritten. Therefore, the assumptions used

in calculating technical provisions often differ from those used in the pricingprocess, and may change over time. Actuaries must ensure that the policy and

claims data used in the calculations is as complete and accurate as possible.

They prepare models that incorporate the methods and assumptions they have

selected and apply these models to the data to calculate the technical

provisions.

Actuaries should also test the sensitivity of technical provisions to changes in

the assumptions, to ensure that the provisions will be adequate even if future

experience differs somewhat from the assumptions. The results of this testing

may show a need to modify the methods or assumptions. Modern international

financial reporting standards actually expect the actuary to make adjustments to

the liability figures when changes in assumptions appear to be warranted.

ssetsActuaries may participate in the selection of investment managers who will be

responsible for investing some or all of the insurers assets. They can help to

establish appropriate targets for performance of the investment managers and


17/55


17

evaluate actual performance with reference to those targets. Some actuaries

work in the investment operations of insurers, selecting investments and

managing the mix of investments in the portfolio.

sset and liability managementRecognizing the importance of having an investment portfolio that is

appropriate to the nature of their obligations, a growing number of insurers

have taken steps to actively manage the relationship between assets and

liabilities on an ongoing basis. The main objective of asset and liability

management (ALM) is to reduce the risk to an insurer that exists if assets andliabilities are mismatched, for example, if a change in market conditions might

cause an increase in the value of liabilities while also causing a decrease in the

value of assets. On a more positive note, ALM can help an insurer to invest its

assets more effectively and generate higher profits. Most insurers that practice

ALM have established committees to oversee this activity. Actuaries

participate in the ALM committee together with investment managers, product

line managers, and financial officers.

Actuaries are often responsible for modeling the asset and liability cash flows,

and assessing the effects of various risk factors on the results. They develop

techniques and measurement tools that can be used in the ALM process to

reduce the effects of these risks. For example, a basic approach to ALM

involves measuring the average duration of expected liability cash flows andinvesting in a portfolio of assets that has the same average duration.

Experience analysis


18/55


18

When discussing the previous elements of the actuarial control cycle, the need

for an actuary to make assumptions about factors that will affect the future

profitability of an insurer has been mentioned several times. In setting the

assumptions, it is important to have both information about past experience

with respect to each of the factors and knowledge of changes in the

environment that might result in future experience being different than that of

the past. Analysis of past experience provides information about what has

happened, including trends that might continue into the future.

Experience analysis is useful not only in setting assumptions but also in

assessing how closely actual experience has corresponded with previousassumptions. Such assessments are essential to the identification of sources of

profits and losses of an insurer. They enable an actuary to revise the

assumptions used in calculating technical provisions to reflect changing

conditions, helping to ensure that the provisions will be adequate. The

information can also used to manage the business more effectively, for

example, by revising underwriting criteria to improve the quality of business,

targeting marketing efforts to more profitable products and consumers, and

adjusting premium rates to achieve profit objectives.

Actuaries are often responsible for conducting experience analyses. They

develop the methods of analysis, identify and prepare the necessary data, and

perform the analyses. They interpret the results, communicate this information

to appropriate members of management, and propose actions that might be

taken in response to the information.

Profitability


19/55


19

It is essential that insurers have a clear understanding of the sources of their

profits or losses. This information can be used to help identify and deal with

problems as they arise. It also aids in the identification of business

opportunities, for example, products that have been more profitable than

expected and might be more actively promoted. Some products have pricing

elements that can be adjusted, for example, premium rates, expense charges, or

interest crediting rates. Profitability analysis, along with consideration of likely

future conditions and the competitive environment, enables an insurer to make

appropriate adjustments to these elements. Some products, referred to as

participating or with-profits policies, involve the payment of premiums that are

higher than they might need to be, on the understanding that the profits will be

shared with policyholders through dividends or bonuses. In order to arrive at an

equitable basis for sharing profits with such policyholders, and to help decide

what portion of the profits to distribute to shareholders, understanding of

sources of profitability and trends in profitability is essential.

Actuaries are involved in the analysis of profitability in several ways. They can

determine the sources of profits or losses. In some cases, actuaries calculate the

present value of anticipated future profits of the insurer, referred to as

embedded value. Actuaries develop dividend and bonus scales for participating

or with-profits business, and present their recommendations to the board of

directors for approval.

On a broader scale, actuaries are often involved in developing and

implementing business strategies designed to increase the profitability of an

insurer. For example, they participate in identifying other insurers that might

be acquired or with which an insurer might merge. They assist in determining

the value of acquisition candidates. If a line of business is unprofitable,


20/55


20

actuaries can help to assess whether the business should be run off or sold to

another insurer. In such transactions, as well as situations when an insurer is

changing its form of organization from mutual to shareholder-owned or vice

versa, actuaries are often required to assess the effects of the transaction on

policyholders and provide assurance that no class of policyholders will be

disadvantaged because of the transaction.

SolvencyInsurers must remain solvent if they are to meet their obligations to

policyholders, not to mention generating a positive return on the investment oftheir owners. Most, if not all, jurisdictions impose requirements regarding the

minimum amount of capital that must be maintained by an insurer to help

ensure its solvency.

In many jurisdictions, capital adequacy requirements are proportional to the

risk inherent in an insurers business. Also, some jurisdictions require insurers

to perform stress tests, which involve projecting the effects of adverse

scenarios on the future solvency of the insurer. Insurers must maintain at least

enough capital to meet regulatory requirements, or else face the risk of being

forced to cease doing business. However, if an insurer has too much capital in

relation to the size and risk of its business, it will be very difficult for the

insurer to generate a sufficient return on capital to satisfy its shareholders.

Therefore, insurers seek to avoid holding more capital than they need to coverthe risk inherent in existing business, referred to as economic capital, and to

support expected future growth in their business.

Actuaries are often involved in the assessment of solvency and management of

capital. They can calculate the minimum capital required for regulatory


21/55


22/55


22

the industry that evaluate the effect of various forms of possibility, in the past

determining the chance of failures and working to reduce their effect.

An actuary is an enterprise professional who deals with the economical effect

of possibility and concern. Actuaries in the past evaluate the chance of

activities and evaluate the it all depends outcomes in order to reduce failures,

emotional and economical, associated with not sure unwanted activities. Since

many activities, such as death, cannot be prevented, it is helpful to take

measures to reduce their economic effect when they occur. These risks can

affect both sides of the balance sheet, and require asset administration,

obligation administration, and assessment expertise. Logical expertise,enterprise knowledge and understanding of human behavior and the vagaries of

information techniques are required to design and manage programs that

control possibility. Actuaries are employed in a number of insurance areas,

including life insurance, property insurance and control. Actuaries offer expert

examination of economic security techniques, with a focus on their

complication.

1. Designing and pricing contracts2. Monitoring the funds required to provide the benefits promised.3. Recommending the bonuses to be added to with- profit policies.

Now-a-days, actuaries may also provide expert advice on investment, get

involved in the planning and marketing of products, and advice on strategic

risk measurement- and so be involved in almost any aspect of a companys

activity.


23/55


24/55


24

relatively large legal entities. These would include workers' comp (employers

liability), public liability, product liability, commercial fleet and other general

insurance products sold in a relatively standard fashion to many organisations.

There are many companies that supply comprehensive commercial insurance

packages for a wide range of different industries, including shops, restaurants

and hotels. Personal lines products are designed to be sold in large quantities.

This would include motor insurance, household insurance, pet insurance,

creditor insurance and others.

THE ROLE OF THE ACTUARY WITH INSURANCE

BROKERS

For insurance brokerage the primary focus of the actuarys role is assisting the

broker in structuring an insurance program for the client. The broker is the

individual responsible for the solicitation of actuarial work from clients and

initiates the request to prepare an actuarial study for the client.

COMMUNICATION WITH THE BROKER

The communication between the broker and actuary is crucial in the

preliminary stage. The actuary needs to clearly identify how the client or

broker is going to use the study. The availability of a prior study may save

significant time and cost if loss and claim count development triangles have

already been prepared. The actuary needs a clear understanding of the clients

business. The clients stockholders annual statement is a good source of

information. If the client is not a publicly traded corporation, then any client

promotional information can be used. After gathering all needed information.

The actuary should send a confirmation memo to the broker outlining the

project and including the expected cost and anticipated completion date.


25/55


25

COMMUNICATIONS WITH THE CLIENT

With the large amount of data available, more emphasis can be placed on the

clients data and less on the industry data. Due to the large number of claims, it

is possible for the actuary to do more analysis that reflects the unique

experience of the client. Because of the emphasis on the clients data, the

actuary may have substantial direct contact with the client. An important use of

the actuarial study is the calculation of the appropriate accruals for the

projected period and the required reserves for prior periods.

Determining appropriate accruals and required reserves is extremely important

for large accounts. Since there is more emphasis on the accruals of the client,

there is more interaction directly with the client and the clients financial

department. Because of the increased interaction with the client on large

accounts, the actuary can play a major role in solidifying the account with the

broker. In some instances the actuary may have more contact with the clients

financial department than any other individual in the brokerage firm.

Another function that an actuary may be asked to perform is to present the

findings of the study to the clients auditors. This may be a very important role

for the actuary, because the amount of the required reserve and loss projection

can be material to the client and to the auditors evaluation of the clients

financial balance sheet.

PREPARING A LOSS PROJECTION

The ability of the actuary to analyze the clients data is a critical role. The

process begins with the actuary analyzing the most recent evaluation of

detailed data for the client. The actuary needs to ascertain whether or not


26/55


26

allocated loss adjustment expenses are included and whether the losses are

limited to some amount or unlimited.

The analysis begins by segmenting the most recent evaluation of incurred

losses into ranges. The actuary examines this data to see if the losses fit the

pattern that the actuary would anticipate for this type of client. If the study has

been prepared in the past, then the actuary can compare policy periods at like

periods of development. This is extremely important for analyzing the most

current period and any possible changes in the initial reserving philosophy. The

actuarys experience can be used to analyze the loss distribution to determine

whether the claim reporting pattern, percentage of claims, and size and numberof open claims seem reasonable. This is information that can be very important

to the client and broker, especially when a client changes claims adjustment

organizations.

The determination of appropriate loss development factors can be very difficult

and uses all the experience of the actuary. For medium sized accounts, quite

often the clients data is not fully credible to project losses or to calculaterequired reserves. The actuary must then augment the clients data with

appropriate industry data. Again, the experience of the actuary becomes very

important in determining what industry data to use and what weight to apply to

the industry data. The use of industry data is a critical issue for medium sized

accounts.

THE ACTUARY AS A RESOURCE FOR BROKERS

The actuary has the responsibility in the brokerage firm to keep the brokers

aware of changes in the actuarial environment. The medium to convey the

information can range from a phone call to a seminar. Some examples are:


27/55


27

Preparing various insurance exhibits applicable to their clients, such asloss development factors for a municipality.

Providing comment on loss data or analysis from other sourcessubmitted by the broker

Participating in or leading an internal seminar for the brokers on aspecific topic or insurance issue.

THE ROLE OF APPOINTED ACTUARIES

A more comprehensive formal involvement of the actuary in the financial

monitoring and control of the insurance business began to be achieved in the

United Kingdom through the introduction in 1974 of the Appointed Actuary

concept, which was first enacted in the Insurance Companies Act 1973.

An important distinguishing feature of this approach from what had gone on

before was the continuous nature of the appointment. The Appointed Actuaryis not just required to carry out specific tasks, such as the periodical valuation

of liabilities and the determination of surplus, but must be identified as a

named individual at all times.

The legislation requires the Appointed Actuary to carry out an annual valuation

of the liabilities of the long-term insurance business and to determine the

surplus in the long-term business fund available for distribution. The

Appointed Actuary must provide an annual certificate detailing the amount of

the required minimum solvency margin and certifying that the amount

published as reserves in respect of the liabilities of the long-term business

constitutes proper provision for those liabilities. The Appointed Actuary must


28/55


28

also certify each year that the data are adequate to support the valuation and

that the premiums charged have been adequate in relation to the corresponding

liabilities being taken on, having regard to the overall financial position of the

company.

The Appointed Actuary must be satisfied at all times that, if he or she were to

carry out a full actuarial valuation, the financial position would be satisfactory.

The formal published valuation takes place only annually, is submitted to the

supervisor six months after the date to which it relates, and may not be

analysed in detail until some weeks (or even months) after that. The Appointed

Actuary, on the other hand, is deemed to be in such a key position within thecompany that he or she should have a good idea of what the position is at any

particular moment, and not just at year-ends. In order to be satisfied on this, the

Appointed Actuary has to monitor in detail all aspects which could impinge

upon the companys financial position, in particular:

product design methods of marketing volumes of business premium rates options and guarantees surrender values and paid-up values investments held and changes in investment policy derivative exposures current and likely future level of expenses current and likely future tax basis reinsurance arrangements claims handling policy


29/55


29

any contingent liabilities.The Appointed Actuary needs to be able to model the financial behaviour of

the company between valuations, so as to be able to estimate the effects of

these various factors on the overall financial condition and, in particular, on the

companys ability to meet (and continue to meet) the minimum solvency

margin requirement.

The Appointed Actuary is clearly expected to act as a front-line controller of

prudential financial management, lessening the need for close regulatory

attention, which could never in practise give the same degree of continuous

monitoring as is required to be undertaken by the Appointed Actuary. The link

to the insurance supervisor is effected through the professional duty to blow

the whistle if the Board or the management of the company persists in

pursuing a strategy which the Appointed Actuary believes may have a serious

adverse financial impact on the company, in spite of attempts to persuade them

otherwise.

It is also recommended, that the Appointed Actuary should report regularly to

the Board of Directors on the possible future financial condition of the

company. This requires work to be carried out on a dynamic financial analysis

of the company, investigating the possible impact on the future financial

condition of a variety of plausible adverse scenarios. The idea is to help the

Board to understand the risks to which the company is most vulnerable, and to

formulate strategies for managing and controlling those risks.


30/55


30

POWERS OF APPOINTED ACTUARY:

1. An appointed actuary shall have access to all information or documentsin possession, or under control, of the insurer if such access is necessary

for the proper and effective performance of the functions and duties of

the appointed actuary.

2. The appointed actuary may seek any information for the purpose of sub-regulation of this regulation from any officer or employee of the insurer.

3. The appointed actuary shall be entitled, -- to attend all meetings of the management including the directors

of the insurer;

to speak and discuss on any matter, at such meeting,--I. that relates to the actuarial advice given to the directors;

II. that may affect the solvency of the insurer;III. that may affect the ability of the insurer to meet the

reasonable expectations of policyholders; or

IV. on which actuarial advice is necessary; to attend, --

I. any meeting of the shareholders or the policyholders of theinsurer; or


31/55


31

II. any other meeting of members of the insurer at which theinsurer's annual accounts or financial statements are to be

considered or at which any matter in connection with the

appointed actuary's duties is discussed.

DUTIES AND OBLIGATIONS OF ACTUARIES

In particular and without prejudice to the generality of the foregoing matters,

and in the interests of the insurance industry and the policyholders, the duties

and obligations of an Actuary of an insurer shall include:--

1. rendering actuarial advice to the management of the insurer, inparticular in the areas of product design and pricing, insurance contract

wording, investments and reinsurance;2. ensuring the solvency of the insurer at all times;3. complying with the provisions of the Act in regard to certification of the

assets and liabilities that have been valued in the manner required under

the said section;

4. drawing the attention of management of the insurer, to any matter onwhich he or she thinks that action is required to be taken by the insurer

to avoid--

(i) any contravention of the Act; or

(ii) prejudice to the interests of policyholders;

5. complying with the Authority's directions from time to time;


32/55


32

6. in the case of the insurer carrying on general insurance business toensure, --

(i) that the rates are fair in respect of those contracts that are governed

by the insurer's in-house tariff;

(ii) that the actuarial principles, in the determination of liabilities, have

been used in the calculation of reserves for incurred but not reported

claims (IBNR) and other reserves where actuarial advice is sought by the

Authority;

7. in the case of the insurer carrying on life insurance business,--(i) to certify the actuarial report and abstract and other returns as

required under section 13 of the Act;

(ii) to comply with the provisions of section 21 of the Act in regard tofurther information required by the Authority;

(iii) to comply with the provisions of section 40-B of the Act in regardto the bases of premium;

(iv) to comply with the provisions of the section 112 of the Act inregard to recommendation of interim bonus or bonuses payable by

life insurer to policyholders whose policies mature for payment by

reason of death or otherwise during the inter-valuation period;

(v) to ensure that all the requisite records have been made available tohim or her for the purpose of conducting actuarial valuation of

liabilities and assets of the insurer;

(vi) to ensure that the premium rates of the insurance products are fair;(vii) to certify that the mathematical reserves have been determined

taking into account the guidance notes issued by the Actuarial

Society of India and any directions given by the Authority;


33/55


34/55


34

ACTUARIAL SOCIETY OF INDIA

Institute of Actuaries of India.

The Actuarial Society of India (ASI), the only professional body of Actuaries

in India was formed in 1944 and was admitted as a member of the International

Actuarial Association (IAA), an umbrella organization to all actuarial bodies

across the world, in 1979. It was registered in 1982 under registration ofLiteracy, Scientific and Charitable Societies Act XIII of 1960. Its objectives

include the advancement of Actuarial profession in India, providing

opportunities for interaction among members of the profession, facilitating

research, arranging lectures on relevant subjects and providing facilities and

Guidance to those studying for the professional Actuarial Examination.

The Institute of Actuaries Of India (IAI or formally ASI) was initially startedas a non-examining body when Actuaries used to get qualified from Institute of

Actuaries or Faculty of Actuaries of UK. The Institute of Actuaries of India

started conducting Entrance Examinations in India for students of Institute of

Actuaries, UK, in 1975. In 1989, it started conducting examinations for its


35/55


35

Indian qualification up to Associate ship level, and in 1992, it started

conducting Fellowship level exams. The IAI has been following the UK pattern

of examinations since November 2000 with an eye to be a part of global

standards set by the International Actuarial Association (IAA).

To become an actuary one must be a Fellow of a recognized professional

examining body like the Actuarial Society of India (ASI), Mumbai or the

Institute of Actuaries, London. The work of an actuary involves a lot of

number crunching and the nature of work is quite tedious, nevertheless it offers

rewards in terms of intellectual challenge, status, job satisfaction and earnings.

As their judgment is the basis of decision making for many business activities,their career paths often lead to upper management and executive positions.

Objectives

1. Advancement of the Actuarial profession in India.2. Facilitating research, arranging lectures on relevant subjects reading

papers etc.

3. Providing facilities and guidance for those studying for ActuarialExamination.

4. To promote, uphold and develop the standards of professional education,training, knowledge, practice and conduct amongst Actuaries;

5. To regulate the practice by the Members of the profession of Actuary;6. To promote, in the public interest, knowledge and research in all the

matters relevant to Actuarial Science and its application; and


36/55


36

7. To do all such things as may be incidental or conducive to the aboveobjects or any of them. Charitable Trust Act, 1950. In 1989, the ASI

started examinations up to Associate level, and in 1991,

8. To provide a central Organization for the members of the actuarialprofession in India for the purpose of elevating the attainment and status

and for promoting the general efficiency of all who are engaged in

occupations connected with the pursuits of an actuary;

9. To extend and improve the data and methods of the Science which hasits origin in the application of the doctrine of probabilities to the affairs

of life and to consider all monetary questions involving, separately or in

combination, the mathematical doctrine of probabilities and the

principles of interest;

10.To plan, promote and provide for interaction amongst the members, toarrange facilities for the reading of papers, the delivery of lectures, the

discussion of topics and for the acquisition and dissemination by other

means of useful information and knowledge connected with Actuarial

Science and other allied subjects with special reference to Indian

conditions;

11.To promote or to conduct work or research of interest to ActuarialScience or to the practice of the Actuary;

12.To prescribe syllabus of studies and hold examinations in subjectspertaining to principles and practice of Actuarial Science with particular

reference to Indian conditions, by means of which the attainment of

adequate standard can be tested and to award certificates, diplomas and

other distinctions to successful candidates;


37/55


38/55


38

22.To arrange for the compilation and publication of statistical data and ofactuarial tables based thereon;

23.To raise funds by subscription from the members of the Society and toaccept donations and bequests for all or any of the purposes of the

Society; and

24.Generally do all such things as from time to time may be necessary toelevate the status and procure advancement of the interest of the

profession.

CURRENT SCENARIO IN INDIA

According to R. Kannan, president, Actuarial Society of India, the opening up

of the insurance sector in the country has pushed up the demand for qualified

and senior actuarial students. "About 2,000 candidates enroll with the ASI as

students every year. But the total number of actuaries available in India is only

about 225. Of these there are just 40 people in the 20-60 age group,Industry

feels there is 20-25% shortfall. " says Kannan. "On the other hand, each of the

15 life insurance and 15 non-life insurance companies needs at least two to

three qualified actuaries."

Apart from the traditional areas of life and general insurance, pension and

reinsurance, actuaries now act as consultants, investment advisers and risk

managers as well. ASI fellowships can be completed in 5-6 years' time.

Actuarial studies can be pursued alongside a full-time job. With about 6 years

of experience, a fellowship and work at a senior position, you can earn Rs 50

lakh a year. To year 2012

Actuarial Workspace


39/55


39

Insurance companies: Life (24), Non-life including Health (24). Reinsurance companies: SwissRe, MunichRe, RGA, HannoverRe,

GenRe.

Consulting: MNCs such as Tower Watson, Mercer, Milliman andsome Indian Consulting firms.

Work domain: Pensions, Life Insurance, P&C, Solvency IIOrganizations: Deloitte, WNS, Genpact, AonHewitt, Towers Watson,

Swiss Re, E&Y and others.

PREDICTING THE FUTURE ROLE OF ACTUARIES

Several shifts are underway that will result in significant changes in the way

that insurance companies use actuarial resources. An increase in qualified

actuarial resources and a need to move company actuaries into more strategic

activities will offer opportunities that have previously been unavailable. The

exact timing and pace of this change is uncertain, but the economics are so

compelling that the time would soon arrive.

First, over 10,000 people in India are currently sitting for the actuarial

exams. As the result of the growth in the knowledge worker outsourcing

industry, and the privatization of the Indian insurance industry, actuarial

studies are now much more attractive to qualified students. Scarcity will be

reduced as a result of this increasing supply of expertise.

Second, companies increasingly need to apply their internal actuarial talent to

more strategic activities such as sophisticated price modeling and risk

management. Predictive modeling and multi-tier pricing require constant

attention and monitoring. Existing regulation in Europe regarding Solvency


40/55


40

consumes increasing amounts of resource. Both of these activities are best

performed in-house.

Leading companies will recognize that the traditional insurance product pricing

process can be separated into separate activities, some of which can be

outsourced. For example, the development of loss triangles and the updating of

price indications are examples of discrete, measurable work that can be

effectively performed remotely. Once these tasks are complete, internal

actuaries can then review them and make final, proprietary pricing

decisions. Moving the tactical work offshore lowers costs, and frees company

resources to focus on higher value activities.

There are barriers to this transition. Tradition and inertia will slow adoption. It

may take seven to 10 years, but the cost advantages and a need to redirect

company talent will eventually result in a shift the norm to a multi-source,

onshore/offshore actuarial model.

R Krishnamurthy, managing director (distribution consulting), Watson Wyatt

Insurance Consulting, agrees that insurance liberalisation has exposed a big

gap in the demand and supply ratio of actuaries. "When the Life Insurance

Corporation of India was the monopoly player and general insurance was

subject to a tariff regime, opportunities were limited and there was no incentive

to qualify as actuaries," he says. "Now there is a demand for freshly qualified

actuaries, especially in the employee benefit sector. Till now, this sector was

largely handled by chartered accountants, but changes will call for professional

actuarial valuation."

The growth in the Indian financial market is the major reason for the spurt in

the demand for actuaries. Apart from the traditional areas of life and general


41/55


42/55


42

The United States has not yet introduced a full appointed actuary system. On

the life side the role has changed in recent years from evaluating the liabilities

in accordance with regulatory norms to providing an opinion as to whether the

assets are adequate to cover the liabilities. Cash -flow testing, using prescribed

investment scenarios, is required to be carried out on a quarterly basis to ensure

that, on a realistic basis, assets equal to the statutory liabilities are sufficient to

enable policy benefits to be paid out. The actuarial profession has played a

significant role in the development of risk-based capital requirements, which

have been adopted in all U.S. jurisdictions. A number of states have also

introduced the concept of an illustrations actuary to ensure that excessive

benefits are not projected at the point of sale.

European Union

Significant changes have been taking place in insurance regulation in some

continental European countries, following the move to the concept of a single

license to operate throughout the European Union (EU). The framework

directives that completed this process now prevent EU supervisory authorities

from exercising prior control on products or premium rates. This has forced a

switch from material to normative controls and has greatly increased the

responsibilities placed on actuaries in some countries.

Germany

In Germany new insurance legislation requires each life insurance company to

appoint a responsible actuary (Verantwortlicher Aktuar), who has to take

professional responsibility for ensuring the adequacy of premium rates and for

ensuring that the principles of rating and reserving which are included in the

law are observed. The responsible actuary is responsible for reporting to the


43/55


43

board of directors on proposals for bonus distribution to policyholders and has

a whistle-blowing role similar to that of the U.K. Appointed Actuary.

Italy

Italy has for some years had a requirement for an actuarial opinion on the

technical provisions of a general insurance company. This opinion has to be

provided to the auditor of the general insurance company, as part of the process

of establishing whether the accounts show a true and fair view of the financial

situation of the company. After several years of debate, it now seems that an

Appointed Actuary role will soon be introduced in respect of the life insurance

business.

Belgium and the Netherlands

Belgium has introduced its own version of the appointed actuary system, for

both life and general insurance companies. The Netherlands has a longer

tradition of actuarial professional responsibilities in the area of designing and

pricing products for life insurance and in respect of non-life reserving. The

Dutch actuarial profession (Het Actuarieel Genootschap) also has more

experience than most Continental European actuarial associations of

developing postgraduate education programs.

Japan

Japan had a tradition more closely akin to that of Germany, but has now

introduced a form of appointed actuary system (Hoken-Keirinin) as part of the

deregulatory modifications to the insurance law. The Institute of Actuaries of

Japan has issued a standard of practise which was strongly influenced by the

U.K. standard.


44/55


44

France

An important exception to the general trend towards giving company actuaries

greater professional responsibility may be observed in France, where a rather

different tradition has grown up. Although France moved away from a detailed

prior-approval system of regulation several years before Germany, it has not

considered it appropriate to give a specific role to the insurance company

actuary within the insurance law, other than a modest responsibility for

approving the use of mortality tables. Responsibility for proper pricing of

products, establishing prudent technical provisions and exercising sound and

prudent overall financial management rests with the companys ChiefExecutive and the Board of Directors.

Switzerland

Switzerland has adopted the same terminology as Germany in the German-

language version of the new insurance law. The responsible actuary role in

Switzerland is to be introduced for general insurance companies as well as life

insurers. Reinsurers will also be required to comply and, if they are composite

reinsurers, to appoint both a responsible life actuary and a responsible non-life

actuary. The actuary will be responsible for the integrity of the data needed for

pricing and for valuation purposes, as well as for calculating adequate premium

rates, prudent provisions and assessing the solvency margin requirement. He or

she will also be required to monitor all developments that could affect the

financial position.

Other Countr ies

Outside Europe and North America, Australia and South Af ri caboth have a

long-established professional role for the actuary in environments where


45/55


45

supervision has always concentrated on reserve adequacy and financial

strength.

Hong Kong, Singapore and Malaysia have appointed actuary systems and

place considerable professional responsibility on the actuary.

Other countries in East Asia do not have a strong professional role for the

actuary and rely on more prescriptive regulation. This is also the case in most

Latin Amer ican countri es and, to an extent, in the countries in transition in

Central and Eastern Europe. In most of the latter countries the actuarial

profession has recently undergone a rebirth and actuarial associations are still

at an early stage of development.

Statistics, Data Analysis and Interpretation

I.) Membership figures as on 31stMarch 2012:

Designation Number of Members

Fellow 246

Affiliate 21

Associate 134

Students 7864

Total 8265


46/55


46

Fellow- A member of the Institute of Actuaries of India, on application, is

admitted as a Fellow member subject to passing exams and relevant work

experience. He has to pass all the exams of the IAI.

Affiliate- A Fellow Member, or is a holder of membership considered

equivalent to the Fellow Membership of the IAI, of any other institution, is

admitted as an Affiliate Member

Associates- Students members who have passed all the subjects of CT series

and all CA subjects are eligible, on application, to become Associate Member

of the Institute

Student- Before a candidate start with any examinations, he must be admitted

as a student member of the Institute of Actuaries of India.

II.) Age wise bifurcation of actuaries

Age Fellow Associate Affiliate Student Total


47/55


47

III.) Actuarial Membership

IV.) Whether in a specific Actuarial role?

70%

5%

5%

10%

10%

Actuarial Membership

Institute of Actuaries(UK)

Institute of Actuaries

of India

Institute of Actuaries(Australia)

Society of Actuaries

(USA)

Others

62%

38%

yes

no


48/55


48

V.) Practice area, if in a specific Actuarial role.

VI.) If not, what type of work?

49%

12%

15%

7%

9%

8%

Life

General

Pension

Investment

RiskManagement

Others

18%

5%

3%

9%

9%

56%

IT

Engineering

Underwriting

Marketing


49/55


49

VII.) Work experience

VIII.)Efficiency of the Actuarial Society of India

63%

14%

7%

2%14%

Work Experience

0

1 to 3

4 to 5

6 to 8

9 +

7%

13%

20%

27%

33%

Efficiency of the ASI

1

2

3

4

5


50/55


50

IX.) Reporting to the Government

X.) Reporting to Professional Bodies and Society

42%

58%

Reporting to the government

yes

no


51/55


51

CONCLUSION

4%

96%

Reporting to Professional Bodies

yes

no


52/55


52

This project has attempted to describe some of the many roles an actuary plays

in an insurance firm. I believe and as shown in this project that an actuary plays

an important role in the insurance sector and that his work is indispensable. As

the market hardens the importance of the role of the actuary will increase.

An actuary is an individual who has many duties and responsibilities

concomitant to their position. If one in this job role has excellent analytical,

comprehension, mathematical and public speaking skills, they will most likely

be individuals who excel at their job and produce the highest quality work

product possible. If one has all of these aforementioned skills, the position of

actuary may be the perfect one to fill.

An actuary is the technical expert on life insurance matters studying the

mortality of the insuring public, evaluating the financial condition of the

insurer, determining the policies to be offered and the premium to be charged,

determining the policies to follow in underwriting an investments of its funds,

deciding on the bonus that can be declared on the participating policies and so

on. A good actuary is a good economist, a good statistician and a good

security analyst.

Every well-managed insurance company will have an actuary to continuously

study its operations and advice the management on the appropriateness of their

policies. The periodical valuation of a life insurance company, required to be

conducted as per the provisions of the Insurance Act, is the responsibility of the

actuary. The premium proposed to be charged by the insurer, has to be

certified by the actuary before they are submitted for the approval of the IRDA.

Annexures


53/55


53

Questionnaire

NAME OF THE ACTUARY:

NAME OF INSURANCE COMPANY:

Q Designation with respect to the Actuarial Society:-a) Student b) Fellow

c) Affiliate d) Associate

Q Present Age :-a) 45

Q Actuarial Membership with which of the following Societies?a) Institute of Actuaries, UKb) Indian Actuaries Societyc) Institute of Actuaries, Australiad) Society of Actuaries, USAe) Any other. Please Specify-Ans:

Q Are you in any specific Actuarial role?a) YES b) NO

Q If yes, which practice area do you perform in?a) Life Insurance b) General Insurance

c) Health Insurance d) Re-Insurance

e) Risk Management f) Investment

g) Pension/ Retirement Benefit h) Other. Please Specify

Ans:

Q If not, what type of work do you do? Specify.Ans:

Q Work Experience (with respect to Actuarial):-


54/55


54

a) 0 b) 1-3 years

c) 4-5 years d) 6-9 years

e) 10-15 years f) 16 +

Q Rate on a scale of 1-5 the level of efficiency of the Actuarial Society ofIndia (5 being the highest).

Ans:

Q Who/ What body may receive a copy of the Actuarial Report?a) Board of Directors/ Shareholdersb) Supervisory Authorityc) Companys Managementd) OtherAns:

Q Which statements regarding statutory reserving are signed by theAppointed Actuary?

a) Actuarial Report c) Balance Sheetb) Report on Solvency d)Annual report

Q Does the Appointed Actuary in any way directly or indirectly report tothe Government?

a) YES b) NOQ Does the Appointed actuary report in any way to the professional

bodies?

a) YES b) NOQ Are you satisfied with the current status of the Actuarial profession in

India?

a) YES b) NO

Ans: (Comments, if any)


55/55


BIBLIOGRAPHY

www.actuaries.org.uk www.actuariesindia.org www.beanactuary.org www.actuarialpost.co.uk www.worldbank.org www.insurancenetworking.com www.actuarialsociety.org www.casact.org
http://www.actuariesindia.org/http://www.actuariesindia.org/http://www.beanactuary.org/http://www.beanactuary.org/http://www.actuarialpost.co.uk/http://www.actuarialpost.co.uk/http://www.worldbank.org/http://www.worldbank.org/http://www.insurancenetworking.com/http://www.insurancenetworking.com/http://www.actuarialsociety.org/http://www.actuarialsociety.org/http://www.actuarialsociety.org/http://www.insurancenetworking.com/http://www.worldbank.org/http://www.actuarialpost.co.uk/http://www.beanactuary.org/http://www.actuariesindia.org/

study of the role of actuaries in insurance

Documents