Actuaries Role in the fixation of Premium in Insurance Business

Akshatha B.G.*
Department of PG Studies and Research in Commerce

Kuvempu University

Abstract

This paper provides a platform to understand the role of actuaries in insurance sector. Actuaries

are acknowledged experts in the analysis and modeling of situations involving financial risk and

contingent events and concerned with both the asset and liability side of the balance sheet and

able to provide realistic solutions to complex problems with a long term forward look and

practical, innovative and numerate. 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 perform actuarial analysis of expenses, score techniques, score plans, and plans

of insurance companies. These are experts who are experienced in examining and assessing

insurance functions, stocks and underwriting techniques and offer complex assistance regarding

actuarial matters to policy investigators and other complex staff.

Key Words: Actuary, Financial risk, General insurance, Life insurance, Risk management etc

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 1.1 Introduction The actuary helps in designing

insurance plans and then evaluates the

The opening of the insurance sector
financial risk of the company which it takes
has also thrown a great challenge to the
while selling an insurance policy. The
actuarial profession in India. The demand
responsibilities as an actuary include making
for actuarial skills and knowledge is
sure that the company properly defines and
growing up exponentially and the actuarial
carefully evaluates the insurance risk;
profession in India is gearing up its activities
charge a fair price to suit the risk; and has an
to meet this demand.
efficient system to pay claims and expenses
The actuary is a specialist who
as and when they occur. Actuaries must
combines an understanding of risks and
understand the entire operation of insurance
mathematical technique to develop financial
field because their evaluations often
products to manage these risks (insurance
influence organization policies and
policies), price these product (calculate
practices. In fact, actuaries calculations and
insurance premium rates) and compute
judgment can commit organizations
reserves to be held for liabilities of
financially sound for future years. Because
companies undertaking these financial risks.
of many phases of organizations business
An actuary may also be described as an
such as general management, marketing,
applied mathematician responsible for the
research, investments, accounting,
financial mathematics in insurance policies.
underwriting, administration and long-range
In a broader sense, actuaries have been
planning, the actuaries have great role to
described as the professionals to call
play in the insurance industry.
whenever money and probability interact.

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1.2 Appointed Actuary in India A person who has not committed any

breach of professional conduct;

An insurance company has to take
A person against whom no
the assistance of an actuary in conducting
disciplinary action by the Actuarial
the business of insurance. The IRDA in
Society of India or any disciplinary
consultation with the Insurance Advisory
action pending with any other
Committee has made regulations for
actuarial professional body;
appointment of actuary. Regulations 5 of the
Not an appointed actuary of another
IRDA (Appointed Actuary) Regulations,
insurer;
2000 provides that a life insurer shall not
A person who possesses a certificate
carry on business of insurance without an
of practice issued by the Actuarial
appointed actuary. The term appointed
society of India; and
actuary is a designation.
Not over the age of seventy years.
Eligibility: A person shall be
1.3 Powers of Appointed Actuary
eligible to be appointed as an appointed
The appointed actuary has been
actuary for an insurer, if he or she shall be:
vested with substantial powers; the powers
Ordinarily resident in India;
having enormous significance in insurance
Fellow member of the actuarial
business are listed below:
society of India:
1. An appointed actuary shall have
An employee of the insurer or a
access to all information or
consulting actuary in case of general
documents in possession, or under
insurance business;
control of the insurer if such access
An employee of life insurer in case
is necessary for the proper and
of life insurance business;
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 effective performance of functions any matter in connection with the

and duties of the appointed actuary; appointed actuarys duties.

2. He may seek any information for the 1.4 Duties and Obligations of an Actuary

purpose of fulfilling his duties of an

The duties and obligations of an
appointed actuary from any officer
actuary shall include;
or employee of the insurer;
1. Rendering actuarial advice to the
3. He is entitled to attend all meeting of
management of the insurer, in
the management including that of the
particular in the areas of product
directors of the insurer;
design and pricing, insurance
4. He is empowered to speak and
contract wording, investments and
discuss matter relating to the
reinsurance;
actuarial advice given to the
2. Ensuring the solvency of the insurer
directors, matters affecting solvency
at all times;
of the insurer, matters that may
3. Complying with the provisions of
affect the ability of the insurer to
Section 64V of the Act, 1938 in
meet the reasonable expectations of
regard to certification of assets,
policyholders; and
liabilities that have been valued
5. He may attend any meeting of the
accordingly.
shareholders or the policyholders of
4. Complying with the provisions of
the insurer or any other meeting of
Section 64VA of the Act, 1938 in
members of the insurer at which the
regard to maintenance of required
insurers annual accounts or at which
solvency margin in the manner

required under that provision;

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5. Drawing the attention
management of the insurer, to any
matter on which he/she thinks that
action is required to be taken by the
insurer to avoid any contravention of
the Act, 1938 or prejudice to the
interests of the policyholders;
6. Complying with the Authoritys
directions from time to time:
7. Ensuring in general insurance
business:
(a) That the rates are fair in respect
of those contracts that are
governed by the insurers in-
house tariff: and
(b) That the actuarial principles, in
the determination of liabilities
have been used in the calculation
or reserves for incurred but not
reported(IBNR)and other
reserves where actuarial advice
is sought by the Authority;
of 8. Informing the Authority in writing of
opinion, within a reasonable, time,
whether;
(a) The insurer has contravened the
Insurance Act, 1938 or other
related statutes;
(b) The contravention is of such a
nature that may affect
significantly the interests of the
owners or beneficiaries of
policies issued by the insurer;
(c) The directors of the insurer have
failed to take such action as is
reasonable necessary to enable
him to exercise his or her duties
and obligations; or
An officer or employee of the insurer
has engaged in conduct calculated to
prevent him/her exercising his/her
duties and obligations.
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1.5 Functions status. Life actuaries determine risk

assessment based on costs, since they use

Actuaries are business professionals
numbers to calculate premiums and predict
who use mathematics and statistics to
future insurance loss.
evaluate risks. These risk professionals are

required to pass a series of examinations. As Consulting Services

these professional examinations are

Another role for actuaries is consulting
completed, actuaries can explore different
services. Actuaries can testify in a court
jobs, such as working as a life insurance
cases about the value of potential lifetime
actuary.
earning of a person. This court testimony is

Determine Premium Amounts used when a person is killed in an accident.

An actuarial role is to determine Potential

premium amounts. Actuaries calculate how

The potential for actuaries to advance is
much companies should charge for
based on job performance and the number of
premiums. This helps companies remain
completed actuarial examinations. Some
competitive with other insurance companies
actuaries enter into roles as a chief risk
and maintain company profits.
officer or become independent actuarial

Risks Assessments consultants.

Actuaries are responsible for performing 1.6 Role of Actuary in Life Insurance

risk assessments. Risks assessments are Company

based on different factors. Some of these The actuarial profession has its

factors include a person's age and health foundations in life insurance. Actuaries

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work in life insurance. Apart from their Development Act stipulate that every Life

traditional roles, actuaries can be found in Insurance and General Insurance Company

many other positions within life insurance, must have an Appointed Actuary. The role

including dominant roles in executive of Actuary is thus a Statutory Role and

management. Life Insurance Companies actuarial function is key function in

enter into long-term assurance contracts and operation of any insurance company. In fact

they are faced with various uncertain factors role of Actuary is not confined to merely to

like Mortality Rates, Yield on Investments, calculation of premium and declaration of

future levels of expenses and possibility of bonus but it extends to all facets of

discontinuance of policies. Actuary operations of a life insurance company such

calculates the premium or price for benefits as Product Design, Pricing, Investments and

offered under a Life Insurance Policy. He Asset Liability Modeling. The role of

also works out at the end of every year, the Actuary in a life insurance company is like

solvency of the Insurance Company by the role of a financial controller.

means of an actuarial valuation. Funds are

Life insurance is a numbers game,
compared with present value of future
and the actuarial role in life insurance is to
liabilities.
crunch the numbers. There are many
In a Life Insurance Company which
variables that factor into your life
deals with uncertain future events, the day-
expectancy. So, the first job of the life
to-day involvement of actuary is so high that
insurance company is to collect information
most of the companies have full-time
such as:
actuary and supporting actuarial staff. In

India, Insurance Regulatory and

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 Age reported even after the expiry of the

Weight contract. Actuary is involved in Product

Habits (smoking, drinking, etc.) pricing as well as reserving for unexpired

Current health status risk, outstanding claims and claims Incurred

Ethnic group But Not Reported (IBNR). With advances in

Parental information information technology, an Actuary is

increasingly called upon to undertake

With all of this information, the
technical work in General Insurance field
actuary can then begin the process of
using sophisticated techniques like claims
grouping people by life expectancy. This is
modeling.
done by feeding all the data into statistical
Health Insurance: Actuaries are
models that help the actuary determine who
playing a useful role in design of
to offer to and what to charge.
Health Insurance Products with the

1.7 Role of Actuary in General Insurance help of morbidity tables. Critical

Companies Illness cover is also offered as an

General Insurance Companies offer a extension of Life Insurance Policy.

wide variety of contracts such as Marine,

Fire and miscellaneous insurance. General Role of Actuary vis-s-vis

Insurance business is based on past Retirement Benefit Scheme:

statistical data and simulation of claims Employers provide benefits like

experience using statistical techniques. Pensions, Gratuity and Encashment

Generally the contract is for one year but of leave. The benefits again depend

every contract leads to claims which may be on uncertain events like mortality,

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longevity, withdrawal rates and 2. Employees Pension Scheme,

retirement age. It is also necessary to 1995 which provides Defined

take a view about likely yield on Pensions to Industrial

investment, long-term rate of interest workers.

and long term rate of salary growth. 3. State Governments also

Accounting Standards require that utilize actuarial services for

liability under retirement benefit design and implementation of

schemes must be actuarially Group Insurance-cum-

calculated and disclosed in the savings Scheme.

Balance Sheet. An Actuary has to 4. Postal Life Insurance

play a crucial role in financial Scheme: This Scheme run by

evaluation of benefits and liabilities the Government of India also

under Defined Benefit Retirement needs actuarial services for

Schemes. premium calculation and

Role of Actuary in Social Security periodic actuarial valuations.

Scheme: Actuaries are also required 5. Life Insurance Corporation

to determine benefit structure and of India and private Life

contributions in respect of Social Offices: They are major users

Security Schemes being operated for of actuarial services and

organized industrial workers such as: actuaries are responsible for

continued financial viability

1. Employees State Insurance
of these Institutions.
Scheme providing sickness

benefit to workers.

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1.8 Skills required for Actuaries 1.9 Typical work activities

It normally takes six years to qualify as an

Actuaries apply financial and statistical
actuary. An Actuary receives formal training theories to assess the likelihood of a
in: particular event occurring and the possible

Quantitative methods financial costs.

Finance (mathematical, statistical

Specific tasks vary but work may include:
and general finance projections)

Economics analyzing statistical data in order to

Probability and risk calculate, for example, accident rates

for particular groups of people;

Sensitivity analysis
using mathematical modeling
Risk identification and assessment
techniques and statistical concepts to
Understanding of complex financial
determine probability and assess
exposures
risks, such as analyzing pension
An Actuary has the following strengths:
scheme liabilities, to price

Problem solving skills commercial insurance;

Advanced mathematical and monitoring risk within trading

statistical skills positions in investment banking to

Logical and clear thinking ensure excessive risks are not taken

Attention to detail during the fast pace of trading;

presenting reports, explaining their

implications to managers and

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 directors, and advising on risk conducting valuations of assets and

limitation; liabilities;

advising on issues such as the advising on investment strategies and

selection of investment managers or assessing the profitability of an

the administration of pensions and investments portfolio;

benefits; calculating funding rates and

working with IT professionals to considering assumptions for pension

develop systems to ensure scheme liabilities;

compliance with the requirements of analyzing risks related to locations

regulatory bodies; for catastrophe claims;

communicating with clients and measuring, monitoring and

carrying out relationship mitigating portfolio and enterprise

management, including with risks;

investment managers, financial overseeing asset and liability

directors and external stakeholders; modeling, product development and

supervising staff; profit testing;

working with mergers and preparing presentations, reports,

acquisitions on some occasions. valuations and quarterly updates.

Specifically, actuaries in their day-to-day Actuaries may also be involved with the

work may be responsible for the following: acceptance of proposals for new policies,

with legal and taxation matters affecting life

developing new financial products;
assurance, or with the investment of funds.

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1.10 Conclusions which nevertheless must have a sound

theoretical basis. The actuarys day-to-day

In todays business world companies
tasks involve fixing premium rates and
are presented with many uncertainties and
surrender values for policies and designing
pressures. There is an increasing need for
new types of policies. Actuaries have to
businesses to perform competitively while at
make calculations also such as what funds
the same time respecting the interests of
will be needed to cover the companys long-
customers, legislation and the economy in
term liabilities and advice on how profits
which it operates. Actuaries are the
should be distributed to policyholders and
backbone of the insurance companies. They
shareholders.
apply mathematical, statistical and economic

analysis to a wide range of practical

problems in insurance, investment, financial

planning and management. They are

disciplined problem-solvers. A creative

aspect of the work of actuaries is forecasting

of future contingent events.

Most actuaries working in insurance

sector are mainly in life insurance. They are

often found in high responsible management

positions making decisions that are vital to

the companys success. Insurance is a highly

competitive business and actuaries are

constantly making commercial decisions,

30
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Insurance Underwriting. Stamford: Cengage Learning India Pvt. Ltd.

4. Neelam and Gulati, C (2007, 1 st Edition). Principles of Insurance Management. New

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