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Abstract
insurance company. But there is lack of awareness and appreciation of this fact even
amongst the staff and officers of the insurance companies. This calls for change. This
article throws light on the role of “Appointed Actuary” as per the regulations of IRDA
and goes beyond to examine other areas in general insurance operation where the services
Introduction
The Insurance Act 1938 is the basic law that governs the transaction of insurance
business in India. This act has been amended from time to time to bring about required
changes in the insurance sector as also to push the government agenda. The latest
amendment was made in 2000 which created IRDA and vested power with it to issue
regulations from time to time to regulate the market and to protect the policyholders
interest. This amendment opened up the insurance market in India to private players. This
meant a more proactive role for the regulator to ensure the overall health of the sector as
also to maintain a strict vigil on the conduct of companies. This amendment will have far
reaching consequences. To further liberalise the market and to bring in some more
changes, the act is going to be further amended. The draft bill is pending with the
parliament.
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This latest amendment of 2000 brought in its wake for the first time the concept of
His role has been defined in the regulations issued by IRDA. While the appointed actuary
will receive his remuneration from the company, he will also be reporting to IRDA direct
on certain matters which are critical and may require immediate IRDA intervention.
Why has actuary suddenly become so important in general insurance companies? Why
was he not so important earlier? What are the areas where requirement of his services are
mandatory? What are the other areas where he can be of help and his services can be
Actuary – Who?
First let us examine who is an actuary and what core function does he perform and why is
companies are concerned, he has been there from the very beginning, unlike the general
• Someone whose job is to advise insurance companies on how much to charge for
• An expert in statistics and probability specially one who calculates insurance risks
and premium.
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An actuary is a professional who has passed the examination conducted by Institute of
Actuaries of India and who is a Fellow of the Institute of Actuaries. He must also posses
In today’s world, an actuary performs many functions but at the core of all these
But for these, he needs to have sufficient credible past data. But how accurate is the
prediction made and how likely is this prediction to fall within a defined range need to be
There are reasons why services of an actuary were not being utilized earlier and why
these are now being increasingly utilized. Unlike life insurance, general insurance
contracts are mostly for one year. The feeling amongst the insurance community was
that, if the experience turns out to be bad, there is always an opportunity to rectify the
situation at next renewal. For the simple risk, this approach worked well. But with rising
complexity of risk and very high value associated with it, there was a need felt to assess
the risk on more scientific and logical methods rather than leaving it to the judgment and
more strict regulatory framework further compounded the situation. Pricing suddenly
became very important for survival. Fortunately for insurance community in general
insurance, there were parallel developments in the field of computers and statistics /
actuarial science. This made it possible to have huge storage capacities and to
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manipulate data. The actuarial principle made it possible to use these data to draw
The service of an actuary is being utilized in the following areas of general insurance
business.
• Pricing
• Claim reserving
• Reinsurance
• Investment
But first let’s us examine the areas where actuaries are mandatorily required (under
IRDA (Appointed Actuary) regulation clearly mentions the power that the Appointed
Actuary will enjoy. It also mentions the duties and obligations of the Appointed Actuary.
According to this regulation. Appointed Actuary shall have access to all information or
documents in possession of the insurer. He also has the right to attend the meeting of the
management including Board meeting and can speak on and discuss matters concerning
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solvency, actuarial advice, etc. Amongst his duties and obligations the following needs
mention.
Let’s now discuss each in detail and first start with solvency margin which is basically
the difference between the values of assets and liabilities. The claims are the biggest
liability of a general insurance company and obviously the solvency margin is a good
index to measure the ability of the company to pay claims. The regulators worldwide are
concerned about the survival of the insurance companies as also their ability to pay
claims. This is essential to protect the policyholder’s interest and ensure the health of the
industry. But the valuation of assets and liabilities pose problems e.g. whether to value
the assets as book value or as current market value. Liabilities i.e. claims are also based
on estimate of future occurrence. Different approaches both for valuation of assets and
liabilities will alter the net worth or the solvency margin. There is therefore a need to
have a defined valuation method which is to be followed by every company and that this
needs to be certified by an independent professional in the field. This became all the more
important when the monopoly of the government general insurance companies ended
with the liberalization process. Private players came in the picture and tariffs were
gradually withdrawn. Under these circumstances IRDA felt and rightly so to have
“appointed actuary” to monitor the solvency margin of the companies on a regular basis
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and to certify the outstanding claims provisions relating to IBNR (incurred but not
reported) and IBNER (incurred but not enough reported) as on the date of closing the
account. In case of breach of solvency margin at any point of time, the appointed actuary
is duty bound to inform the same to IRDA and the company concerned so that corrective
The method for working out outstanding claims inclusive of IBNR and IBNER has been
spelt out in IRDA regulation mentioned (2) above. In the past in UK most of the
should be appreciated that both higher or lower claims reserve have serious implications
underwriting profit became almost impossible but because of the buoyant market
conditions, companies were in a position to make good investment profits and an overall
profits as well. But with the down turn and financial melt-down, investment income is
very badly affected. Making profit in such a scenario is very very difficult. Obviously
these are challenging times for insurance companies as well as for the regulator. It is in
A few words on risk based, stochastic models being used by actuaries for making
prediction about claims cost which ultimately help in pricing the product. Claims costs
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are difficult to estimate and price adequacy is dependent upon how accurately this cost
has been worked out. Actuary make two predictions based on past data:
By multiplying the two, we get the likely claim cost. It should be appreciated that in
general insurance, there may not be any claim in a policy and there can be many claims
also in a policy. Again the severity of claims may vary. This makes the task all the more
difficult.
There are theoretical stochastic models for estimating (1) & (2) above. Which model to
be used in a particular situation depends upon the past data available, the trend exhibited
by the available data and other peculiarities of claim e.g. low severity high frequency
claims or high severity low frequency claims. Since most of the stochastic models are
based on assumptions, the actuary is the best judge which model to use in particular case.
It should be appreciated that if premium takes care of all future claims and all other
expenses i.e. if there is price adequacy, there will be no strain on solvency margin.
Therefore, the actuaries ensure that the claim cost, inflation, margin for adverse
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In the file and use system, the actuary is required to justify the premium part of new
products. This again calls for professional acumen, more so if the product is of very new
kind and for which no past data is available. Terms, conditions & deductibles also play
important role in deciding the rate. In case of review of existing products, again the
Actuary has to certify that suggested changes are based on the experience and are
actuarially justified.
Conclusion:
In conclusion we can say that actuarial techniques provide powerful tools to better
manage and regulate the affairs of a general insurance company. This fact is now
recognized by IRDA. Prudent regulations help all the stakeholders. Though not
mandatorily required, Actuaries are also used for reviewing / framing reinsurance
arrangement. They also help in the analysis of the effect of policy excess and