NAGINDAS KHANDWALA COLLEGE OF COMMERCE, ARTS AND MANAGEMENT STUDIES MALAD (WEST), MUMBAI-400064

A PROJECT ONACTUARIAL SCIENCE

SUBMITTED TO UNIVERSITY OF MUMBAI

PRESENTED BY JINAL.M.MISTRY

TYBCOM (BANKING AND INSURANCE) 2012-2013

PROJECT GUIDE PROF.RUPALI JAIN

INDEX:TOPIC NO. 1. 2. 3. 4. 5. 6. 7. NAME OF THE TOPIC Executive summary Introduction Stages of Development About Actuary Nature of work Actuarial principles How does actuary manage risk? Product pricing Mortality table Annuity & benefit Role of Actuaries in Insurance Methods of valuation Past, Present & Future Scenario Conclusion Bibliography PAGE NO. 4 6 7 11 16 19 25

8. 9. 10. 11. 12.

31 35 40 43 45

ACKNOWLEDGEMENT Any accomplishment requires efforts of many people and this project is no different. Regardless of the source, I wish to express my gratitude to those who may have contributed to this work. I gratefully express my deep appreciation to many people who have made this project possible. I would like to express my heartiest thanks to my project guide Prof. Rupali Jain for her guidance and valuable inputs during the process of this preparation of this project. I would also like to thank our co-coordinator Prof. Kavita Shah and Principal Dr. Ancy Jose as without their cheerful support and motivation this project would not have seen light of the day. Their reviews, comments and suggestions have enormously enriched my project.

EXECUTIVE SUMMARY An actuary is a person who prices future risk. Risk is an unavoidable evil that we face every day, both as individuals and as a society. In situations where risk can have financial implications, actuaries are often called upon to put a dollar value on that risk. Risk management begins at product design. Actuaries are ready to shed their green eyeshades image for a shot at the brass ring-moving up the corporate ladder to become enterprise risk manager and chief risk officer, both inside insurance industry and outside in the wider world. Nowadays Actuaries are ascending to the top spot of enterprise risk management and taking on the role of chief risk officer. For those managers now holding the risk leaders seat, whether theyre corporate insurance risk manager, auditor, accountants treasury executives or running risk trading operations at energy companies, banks, manufacturers and service companies, actuaries stepping into their shoes may sound incredible. The actuarial profession wants its members to be top risk dog. Theyre far more passionate about it, than those who were schooled in corporate insurance buying or in trading derivatives at consumer and investment banks. And the risk and insurance management society had better take note.

Unlike other professionals and their associations that traditionally have claimed the risk mantle, the two major actuarial associations are investing serious money in a multiyear campaign to change the green eyeshades reputation of actuaries. Instead, Actuary want to highlight the dynamic role actuaries play in modeling insurance and non-insurance risks and the mathematical precision and discipline they bring to anticipating and managing future risk. Their mantra? Look to the future as much as to the past. As a result, they compare their risk management skills favorably to those of other executives, such as accountants, who they say focus solely on risk avoidance and deal only with past and current risks. In the end, they say, actuaries will capture the attention and imagination of senior executives at companies, whatever their primary business may be. OBJECTIVES: As there is scarcity of actuaries in India so to be an Actuary is my ambition. To get the basic knowledge and understand Actuary as a profession. To know how actuary mange the risk in insurance sector. To get the idea of Product design and Risk Management in Insurance Sector.

INTRODUCTION The word actuary derives from the Latin word actuarius, who was the business manager of the senate of Ancient Rome. It was first applied to a mathematician of an insurance company in 1775 in the Equitable Life Insurance Society (of Landon, UK). By the middle of the nineteenth century, actuaries were active in life insurance, friendly societies, and pension schemes. As time has gone on, actuaries have also grown in importance in relation to general insurance, investment, health care, social security, and also in other financial applications such as banking, corporate finance, and financial engineering. Over the times, there have been several attempts to give a concise definition of the term actuary. No such attempted definition has succeeded in becoming universally accepted. As a starting point, reference is made to the International Actuarial Associations description of what actuaries are: Actuaries are multi-skilled strategic thinkers, trained in the theory and application of mathematics, statistics, economics, probability and finance. Using sophisticated analytical techniques, actuaries confidently make financial sense of the short term as well as the distant future by identifying, projecting and managing a spectrum of contingent and financial risks. Actuarial science applies mathematical and statistical methods to assess risk in the insurance and finance industries. Actuaries are professionals who are qualified in this field through examinations and experience.

Actuarial science includes a number of interrelating disciplines, including probability and statistics, finance, and economic. Historically, actuarial science used deterministic model in the construction .The science has gone through revolutionary changes during the last 30 years due to the prolife ran of tables and premiums of high speed computers and the synergy of stochastic actuarial models with modern financial theory.

STAGES OF DEVELOPMENT:

Pre-formalisation

Initial development

Early actuaries

Effects of technology

Pre-formalization:In the ancient world there was no room for the sick, suffering, disabled, aged, or the poor- it was not part of the cultural consciousness of societies. Early methods of protection involved charity, religious organizations or neighbors would collect for the destitute and needy. By the middle of the third century, 1500 suffering people were being supported by charitable operations in Rome. Charitable protection is still an active form of support to this very day. However, receiving charity is uncertain and is often accompanied by social stigma. Elementary mutual aid agreements and pensions did arise in antiquity. Early in the Roman Empire, associations were formed to meet the expenses of burial, cremation, and monuments- precursors to burial insurance and friendly societies. A small sum was paid into a communal fund on a weekly basis, and upon the death of a member, the fund would cover the expenses of rites and burial. However, many of these earlier forms of surety and aid would often fail due to lack of understanding and knowledge. Initial development:The seventeenth century was a period of extraordinary advances in mathematics in Germany, France and England. At the same time there was a rapidly growing desire and need to place the valuation of personal risk on a more scientific basis. Independently from each other, compound interest was studied and probability theory emerged as a well understood mathematical discipline. Another important advance came in 1662 from a London draper named John Graunt, who showed that there were predictable patterns of longevity or mortality of any one individual person. This study became the basis for the original life table. It was
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now possible to set up an insurance scheme to provide life insurance or pension for a group of people and to calculate with some degree of accuracy, how much each person in the group should contribute to a common fund assumed to earn a fixed rate of interest. The first person to demonstrate publicly how this could be done was Edmond Halley. In addition to constructing his own life table, Halley demonstrated a method of using his life table to calculate the premium or amount of money someone of a given age should pay to purchase a life annuity. Early actuaries:James Dodsons pioneering work on the level premium system led to the formation of the society for Equitable Assurances on Lives and Survivorship in London in 1762. The company still exists, though it has encountered difficulties recently. This was the first life insurance company to use premium rates which were calculated scientifically for long-term policies. Many other life insurance companies and pension funds were created over the following 200 years. It was the Society for Equitable Assurances which first used the term actuary for its chief executive officer in 1762. Previously, the use of the term had been restricted to an official who recorde3d the decisions, or acts, of ecclesiastical courts. Other companies which did not originally use such mathematical and scientific methods, most often failed, or were forced to adopt the methods pioneered by Equitable. Effects of technology:In the 18th century and 19th century, computational complexity was limited to manual calculations. The actual calculations required to compute fair insurance premiums are rather complex. The actuaries of that time developed methods to construct easily-used tables, using
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sophisticated

approximation

called

commutation functions, to facilitate timely, accurate, manual calculations of premiums. Over time actuarial organizations were founded to support and further both actuaries and actuarial science and to protect the public interest by ensuring competency and ethical standards. However, calculations remained cumbersome, and actuarial shortcuts were commonplace. Non-life actuaries followed in the footsteps of their life compatriots in the early 20th century. The 1920 revision to workers compensation rates took over two months of around the clock work by day and night teams of actuaries. In the 1930s and 1940s; however, the rigorous mathematical foundations for stochastic processes were developed. Actuaries could now begin to forecast losses using models of random events, instead of the deterministic methods they had been constrained to in the past. The introduction and development of the computer industry further revolutionized the actuarial profession. From pencil and paper to punch cards to current high speed devices, the modeling and forecasting ability of the actuary has grown exponentially, and actuaries needed to adjust to this new world.

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WHO IS AN ACTUARY? An actuary is a person who prices future risk. Risk is an unavoidable evil that we face every day, both as individuals and as a society. In situations where risk can have financial implications, actuaries are often called upon to put a dollar value on these risks. Actuaries put a price tag on risk. They are the leading professionals in finding ways to manage risk, and are experts in: Evaluating the likelihood of future events. Reducing the impact of undesirable events. Designing creative ways to reduce the likelihood of undesirable events. Actuaries apply their mathematical expertise, statistical knowledge, economic and financial analyses, and problem solving skills to a wide range of business problems. They help companies evaluate the long term financial implications of their decisions; they develop new ways to manage risk, and they estimate the costs of uncertain future events ranging from tornadoes and hurricanes to changes in life expectancy. Actuaries work in all sectors of the company, though they are more heavily represented in the financial service sector. Their work is the analytical backbone of the nations financial security programs, including insurance, social security, and Medicare.

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WHO CAN BECOME AN ACTUARY? Any person with minimum 18 years of age and having degree of aptitude for mathematics and statistics can take up this course and become an Actuary. Generally, first class graduates or postgraduates in mathematics, Statistics or econometrics will be in a better position than others to qualify as actuaries. To qualify as an actuary, a candidate has to pass all examinations in the prescribed subjects. In addition, he has to comply with other criteria such as experience requirement and attendance at a professionalism course prescribed for the purpose. Duration: There is no fixed duration to complete the course. Since all the 16 subjects prescribed are to be cleared before one is awarded the fellowship, continued and sustained efforts is necessary to complete the course. Single minded devotion, total dedication and a systematic approach to problems are the qualities that will enable a person to qualify as an actuary within a reasonable time. Education: The subjects for the examinations can be categorized in to three groups. The first group comprises of the 100 series; these involve development of theory of actuarial science and applications of mathematics and statistics to actuarial applications such as life insurance, general insurance, employee benefits, investments and other areas. Ann introduction to economics, financial economics and financial reporting is also included at this stage. Although most part of the course is somewhat theoretical, the exercise and the question in the examination
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are practical in nature as they reflect real life situations of the area of work to which the subject is applicable. The second group comprises of 200 and 300series subjects. 201 subjects is mean to develop skills of communication of technical aspects of the 100 series subjects in simple language to non-technical persons; here again the stress in examination question is demonstration of the skills of communications is real life environment. The 300 series subjects are entirely tuned to development of the practices and related principles in the respective areas of work while some part of the 100 series could be learnt either through a distance education approach or through a classroom approach, the 300 series subjects can be fully understood only in a practical work environment. The 400 series subjects involve application of knowledge and understanding of principles as well as demonstration of skills professionalism and judgment in an essentially practical situation. The actuarial education model, therefore, is ingrained with work and application and therefore substantially these educations beyond 100 series subjects take place in work environment. The success through examinations is linked to corresponding work experience and insight, thus gained. The examinations given at 100 series level take place, for most of the students in work environment. The career progress is linked to progress in examination and it is very likely that by the time a student completes 300 series, he /she would be occupying management of level of responsibilities.

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Graduates and postgraduates eligible to take up actuarial examinations are typically recruited by actuarial employers and placed as actuarial trainees. With a view to emphasizing the kind of actuarial education model, it may be stated here that it is like educating medical doctors, where education needs to take place in work environment of a hospital. WHAT TYPE OF ACTUARIES ARE THERE? About half of all actuaries work for insurance companies. Most of these work for life and health insurer, but a growing percentage are working for auto and property insurers. Actuaries who work for insurance companies perform many duties, including data research and setting premium rates. About one third of all actuaries work for consulting firms. Most of these actuaries deal with employee benefits and perform duties such as advising corporations how to manage their pension and compensation plans. There are also other consulting opportunities available, including property/casualty consulting. All companies are different, so generalization about the differences between life, casualty, and consulting positions are just that- generalization; they may not hold true for all companies. Insurance V/S consulting counterparts: In general, insurance actuaries work fewer hours and have less job stress than their consulting counterparts. Consultants usually make more money, and have interaction with clients. Life V/S casualty: it is more difficult to draw a distinction between life and casualty. Because the actuarial profession is so versatile, there are many other positions for which actuaries are good candidates. Many actuaries work for state government in a regulatory role. These actuaries often watch over the work of the insurance
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actuaries to make sure that insurance rates are not too high. The recent risk assessment craze in Washington D.C. has provided many experienced actuaries with the opportunity to perform cost-benefit analyses on both existing and proposed regulations. Some actuaries also find their way into investment banking, underwriting or education.

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NATURE OF THE WORK Actuaries are essential because they determine future risk, make price decisions, and formulate investment strategies. Some actuaries also design insurance, financial, and pension plans and ensure that these plans are maintained on a sound financial basis. Most actuaries specialize in life and health or property and casualty insurance; other work primarily in finance or employee benefits. Some use a broad knowledge of business and mathematics in investments, risk clarification, or pension planning. Regardless of specialty, actuaries assemble and analyze data to estimate probabilities of an event taking place, such as death, sickness, injury, disability, or property loss. They also address financial questions, including those involving the level of pension contribution required to produce a certain retirement income level or how a company should invest resources to maximize return on investment in light of potential risk. Moreover, actuaries may help determine company policy and sometimes explain complex technical matters to company executives, government officials, shareholder, policyholders, or the public in general. They may testify before public agencies on proposed legislation affecting their business or explain changes in contract provisions to customers. They also may help companies develop plans to enter new lines of business or new geographic markets with existing lines of business by forecasting demand in competitive settings. Most actuaries are employed in the business in the insurance industry, in which they estimate the amount a company will pay in claims. For example, property/casualty actuaries calculate the expected amount of claims resulting from automobile accidents, which varies depending on the insured persons age,
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sex, driving history, type of car, and other factors. Actuaries ensure that the price, or premium, charged for such insurance will enable the company to cover claims and other expenses. Expert fields: The traditional areas in which operates are: consultancy, investment, life and general insurance companies and pensions. Actuaries are also increasingly moving into other areas of the financial sector where their analytical skills can be employed. Investments: In the area of investment, actuaries are involved in a range of work such as, pricing financial derivatives, working in fund management or working in quantitative investment research. Often investment actuaries work in field where their understanding of insurance or pension liabilities helps them to manage the investment of the corresponding assets. Insurance: The work carried out by the insurance includes designing new insurance policies, setting premium rates, calculating a companys financial status (based on the policies already sold), and answering technical queries from policyholders. Insurance actuaries also undertake detailed investigations of different experience; such as how assets and expenses have performed and the extent of different types of claims for different types of insurance policies (e.g.: death claims for life insurance or car theft for motor insurance)

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Pensions: In the pensions field, actuaries are usually in designing and advising company pension schemes, especially where a value needs to be placed on a schemes accumulated pension promised. This could be for a formal valuation of a whole scheme, which is legally required every three years or for an individuals benefits (perhaps if they want to transfer their entitlements from one scheme to another).

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INTRODUCTION TO ACTUARIAL PRINCIPLES The subject of actuarial science is not an independent subject and is an applied science which deals with the application of principles from different sciences such as mathematics, statistics, economic, and finance. Therefore, the principles of actuarial science involve articulation of the scientific framework which underlies work of an actuary. Objectives of actuarial science: The main objective of the actuarial science is to study the financial and economic consequences of uncertain and events and develop a framework or model to quantify the effects of such events. To quantify the implications of uncertainties, an actuary depends on the past statistical data and the observation obtained through experience. This data and observation made help an actuary in devising a model. The construction of actuarial model is aimed at an assessment of economic and financial consequence of uncertain events with respect to occurrence, timing or severity.

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Basic steps involved in the construction of a model:

UNDERSTANDING PROCESS

ANTICIPATING CHANGES

EVALUATING QUALITY

MAKING JUDGEMENT

VALIDATING

ESTIMATE UNCERTAINITY

Steps involved in the construction of a model are: Understanding the conditions and processes under which the past observations were obtained. Anticipating changes in those conditions that will affect future experience. Evaluating the quality of available data. Making judgment to bear on the modeling process. Validating the work as it progresses. Making an estimate of the uncertainty involved in the modeling process itself. Principles should not be construed as instruction to guide how an actuarial work ought to be done. But they are key elements involved in observations and experiences. The principles that are applicable to actuarial science not an exclusive class and they find application elsewhere too. But the focus here would
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be on their application to actuarial practice. The statements of these principles are not absolute and adaptive. These are subjects to changes that occur from time to time. NEED FOR STANDARDS: The actuarial practice needs standard besides principles these standard are normative rules, based on the state the art and science of actuarial practice, regulatory restrictions and other external factors. The standards help actuaries to decide on the appropriate models and assumption. Even these standards are not fixed and not immutable. NEED FOR FORMULATION OF ACTUARIAL PRINCIPLES The reasons for the formulating of actuarial principles are: To describe and strengthen the intellectual foundation of the actuarial profession. To aid in strategic planning for the profession by identifying the areas of actuarial practice. To provide a foundation for extending actuarial models to new applications. To provide a basis for formulating sound and consistent standards of practice. To guide the formulation of practice-specific principles. To further actuarial education. To concentrate on research efforts.

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DIFFERENT TYPES OF PRINCIPLES UNDERLYING ACTUARIAL SCIENCE: Following are the principles of actuarial science:

STATISTICAL P R I N C I P L E S

ECONOMIC

FINANCIAL

ACTUARIAL

RISK MANAGEMENT

Actuarial articulate model to assess the financial implications of future uncertain events by combining these principles with the observations made about human events by combining these principles with the observations made about human behavior. These models can find application in risk identification, risk assessment, risk control or risk financing the latter mainly through transfer of risk to financial security system.

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PRINCIPLES AT A GLANCE Principles of actuarial science involve articulation of the scientific framework which underlies the work of an actuary. The actuarial principles help in describing and strengthen the intellectual foundation of the actuarial profession. Actuarial principles can be broadly classified into six categories: 1) Statistical principles. 2) Economics principles 3) Financial principles 4) Actuarial modeling principles 5) Risk management principles 6) Financial security systems principles. The four statistical principles are: law of large numbers, principle regarding use of a statistical model and credibility principle. The economic principles include time value of money, principle explaining the difference in the assignment of monetary value by different persons, principle describing existence of a mathematical model for estimation of monetary value and principle of economic self-interest. The financial principles comprise the principle of existence of market value, principle regarding equality of market value of a portfolio and its components, principle of continuity of market value and principle of absence of arbitrage. The actuarial principles deal with the stochastic modeling of actuarial risk and principle related to change in degree of accuracy with change in the underlying factors.

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Risk management principles state about the relation between the degrees of uncertainty associated with actuarial variables and their correlation; relationship among the failure probability of the financial parameters; degree of actuarial soundness; relationship between the economic costs and experience rates in the presence and absence of a risk management system. The financial security system principle comprises the principle of anti-selection.

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HOW DOES ACTUARY MANAGE RISKS?

The product pricing:

Commercialization

Actual development of new product

Business/Market Analysis

Concept testing

Idea Screening

Generating new product ideas

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 The first step in the ratemaking process is collection of data about incurred losses, earned premiums; the number of claims incurred, and earned exposure units. Such data are accumulated gradually over a period of time as policies and endorsement are issue and claims are reported and paid. It is up to the insurer to decide what data will be collected and the form in which the data has to be collected. One of the most accurate methods, which can be used for collecting ratemaking statistics, is the policy-year method. But it is the most expensive method and involves a longer delay than the other methods. A policy year consists of all policies issued during a year. The incurred loss consists of all the losses covered under those policies. The earned premiums include all premiums under those policies, including additional premiums under endorsements, premium audits, and retrospective rating adjustments. Thus, the incurred losses are tied to the premiums that were intended to pay them. The calendar year method is the latest accurate method of collecting ratemaking statistic. However, the statistics used in this method are quickly available and involves little additional expense as they are taken from the accounting records of the company. This method is inaccurate, primarily because incurred loses must be estimated from paid losses and loss reserves. Such estimate may be grossly inaccurate, because of changes in reserves for outstanding losses. The accident year method of collecting ratemaking statistics is a compromise between the other methods. This method preserves the accuracy advantage of the policy year method, but achieves most the speed
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and economy of the calendar year method. The incurred losses for the accident year met consist of all claims (whether open or closed) arising from insured events that occurred during the year. 1 calculation of earned premiums is done in the same manner as in the calendar year method. The statistics that is collected must be adjusted before the rates can be calculated. First, losses must develop. The purpose of this I to recognize consistent patterns in the accuracy of estimating reserves. The next step involves applying the trending process in order to project the losses to the middle of the period in which the rates will be used. Earned premiums must also be adjusted to the current level. After these adjustments have been made, the statewide average rate can be calculated, using either the ratio method or the pure premium method. The pure premium method may be preferred because of practical advantages, although both the methods have been proved to be mathematically equivalent. Pure premium method requires one additional step (the addition of an expense loading) in comparison the loss ratio method. Finally, territorial and class relativities must be determined in order to calculate the rates for the various classes and territories. Credibility procedures may be applied at different stages of the ratemaking process in order to minimize the adverse effects of random fluctuations in losses. The steps and the principle outlined above are applicable to all lines of the property-liability insurance although the details of their application may differ from one line to another.

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Mortality Tables: Mortality tables are constructed for the purpose of computing the probabilities of death and survival which would help in obtaining accurate estimates of insurers liabilities and also for the purpose of calculating the premium to be charged. The construction of mortality tables is based on two theoretical assumptions: (a) Live are observed from the starting age till all of them die, (b) there is neither any exit by any cause other than neither death nor any addition. But since these assumptions are practically impossible, so in practice a group containing live of all ages are observed for the period of investigation. The rate of mortality is then computed as a ratio of number of deaths occurring between consequent ages (say x and x+1) to the number of lives exposed to risk at that particular age (x) The process of constructing a mortality table involves various stages related to the decision about the data to be used, choice of the period of investigation, decision about the unit of investigation, decision about the method of investigation, determination of exposed to risk and enumeration of deaths, obtaining observed rates of mortality tables from the graduates rates. The data to be use should be chosen on the basis of the objective of the investigation and should be large enough in order to obtain more reliable estimates. Usually the data in respect of sub-standard lives and annuity contracts is excluded from the mortality investigation. After selecting the data, the period of investigation should be chosen in such a way that it is

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neither too long nor too short and then depending upon the requirement, lives, policies or sum assured can be taken as the units of investigation. There are basically three methods of investigation: (a) life year method, (b) calendar year method and (c) policy year method. Any method of investigation should follow the lives included in the experience through one year of age, called rate year. In contrast to these three methods, another method of investigation is the census method under which the lives included in the investigation are observed for more than one year using periodical census. After the investigation is carried out, the number of deaths and the exposed at risk are computed with the help of data cards that give information pertaining to policies under investigation. The crude observed rate of mortality are then obtained as a ratio of the number of deaths and the exposed at risk. The irregularities in these observed rates can be eliminated by the process of graduation. The graduates rates of mortality so obtained are then used for the construction of mortality tables and for deriving various commutation functions. Assurance and Annuity Benefits: Insurance policies are designed based on the principle of law of large numbers. The premiums that are to be charged on the insureds are arrived based on this assumption and some past experience. Because of this assumption, the premiums charged do not vary when the number of insureds varies given a constant mortality rate.

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 There are three main types of assurance plans, whole life assurance plans, pure endowment assurance plans and endowment assurance plans. All the other assurance plans are variants of these plans based on some special conditions. The single premium to be charged in the insured is based on the present value of benefits payable to the insured on the occurrence of a particular insured event or on any other case as per the contract. The expression for the present value of benefits under various plans is based on the probability of survival and the discount factor. The commutation functions are useful in simplifying the expression for the present value of benefits under various plans. A life annuity is a series of payments payable to a person during his life time. A temporary annuity is a series of payments made to a person for a specific time period during his survival. Other annuity plans are derived from these two basic plans. The present values of the annuity plans are derived based on the discount factor and the probability of survival of a person aged x. the expression of the present values of these benefits can be simplified by the use of commutation functions. The expressions for the assurance benefits payable under extra risk conditions and increased frequency of payments of premiums differ from those deduced under normal conditions. The extra risks should be taken into account to arrive at the values of benefits payable.

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ROLE OF ACTUARIES IN INSURANCE Actuaries are experts who perform actuarial analysis of insurance rates, rating procedures, rating plans and schedules of insurance companies. These are professionals who are experienced in reviewing and analyzing insurance operations, reserves and underwriting procedures and provide technical assistance regarding actuarial matters to policy examiners and other technical staff. In other words they are the people who ascertain in advance the uncertain events that could take place in future and come to a financial conclusion. Actuaries are involved in pricing, product design, financial management and corporate planning. They use their professional expertise in solving complication financial problems by combining their theoretical as well as practical knowledge. Actuaries also hold a legal responsibility for protecting the benefits promised by insurance companies. Their role demands the highest standards of personal integrity and application of professional skills. Actuaries balance their role in business management with responsibility for safeguarding the financial interest of the public. General Insurance: Although it is still true that only a relatively small part of the actuarial profession works in general insurance, there has been significant growth in recent years. Furthermore, although any material involvement only began about 30 years ago, actuarial contributions to general insurance go back to the first edition of journal of the institute of actuaries in 1851 which contained three papers on fire insurance.
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What type of work do general insurance actuaries do? Estimating the reserves for the future claims of Lloyds syndicate. Helping a company identify its management information requirements. Helping a motor insurer establish the relative rate levels for different rating groups. Advising a building society on the capital requirements for its captive insurance company. Advising a reinsurance company on its rates for catastrophe Excess of loss reinsurance. One area that has seen major involvement of actuaries in general insurance is the estimation of claims reserves (that is, future claims). This is not an automated procedure, as there is a significant amount of judgment involved in the estimation of general insurance reserves. The expertise of the actuaries in the area of estimation of claims reserves has recently been recognized by Lloyds of London, who has given UK actuaries their first major statutory role in general insurance. With effect from 31st December 1997, all Lloyds syndicates had to obtain an actuarial opinion on Lloyds solvency rules. The other major area of involvement is in the rating of insurance products, particularly in relation to classes such as motor and household, where there can be large volumes of data. The process generally involves analyzing the historical claims experience so as to fit statistical models that help explain the relationship between the rating factors and the claims experience.

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Management information is an example of an area that is not typically actuarial, but where a general insurance actuary has a lot to offer. By applying his or her knowledge of the various aspects of the business, an actuary can help a company to identify the key indicators that management should monitor so as to control the business. Life Insurance: Actuaries have traditionally worked in life insurance, and their role and responsibilities have evolved as life insurance itself has developed external relations. Their traditional areas of activity include designing and pricing contracts, monitoring the adequacy of ten funds to provide the promise benefits and recommending the fair rate of bonuses to be added to with profit policies. Nowadays, actuaries employed by life insurance companies may also provide expert advice on investment, planning and marketing of products, strategic risk measurement and almost any aspect of the work of the company. The life board oversees the professions concern with all actuarial matters related to life insurance business. Because of the wide range of these matters, the Board is supported by a number of committees dealing with supervision, conduct of business regulations, Education and CPD and research. The work of the continuous mortality investigation bureau is also a major contributor to actuarial practice in this area.

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Risk management in a life insurance company: Insurance companies are heavily regulated and are required to have robust risk management processes. A board member quickly becomes aware of Risk Based Supervision, minimum continuing capital and surplus requirements, the Standard of Sound Business and financial Practices and Dynamic capital Adequacy testing. And various reports on risk management and controls come to the Board on a regular basis and to a greater or lesser extent; any individual director will have an understanding of ultimately rely on management to report on compliance with regulatory requirements and so must gain confidence in the companys reporting system. Some of the obvious risks that a life insurance company faces arise from the companys insurance businesses, e.g. underwriting, mortality and morbidity or product design. Many others relate to the companys assets and liabilities and the relation between them. This includes risks such as liquidity, foreign exchange, credit and asset/liability matching. These risks can often be quantified and the companys actuaries and investment professionals are usually heavily in measuring and managing these risks. Although the Board will nit, and probably should not, get into the technical details, directors must receive reports from management that satisfy them that proper procedures are in place to understand and manage these risks within acceptable limits. A company is also faced with many other risks that are generally difficult to measure, but can have a major impact. These could include such things as risks from sales practices, outsourcing, reinsurance, acquisitions, terrorism or risks to a companys reputation. Again the Board must rely on the management to confirm
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that the various risks are understood and appropriately managed and that a good internal control system is in place. At the same time, Board should have sufficient understanding of the different risks to be comfortable with the management assurances they receive. Importantly, the board must understand that risk-free is not an option and that the company must take on certain risks to survive and grow. This requires the Board to understand the risks and rewards associated with the decision they make. As well, a good Board will be able to call on their varied experiences to ensure that risk management is not too narrowly focused on how the business has always been in the past and that any scenario testing looks very broadly at the risks the company might face in future. In performing their risk management functions, a Board is assisted by a number of independent oversight functions such as the internal and external auditors, the appointed actuary, the chief risk officer and the compliance officer. As well, from time to time, outside expertise might be enlisted either by management, the Board or a Board committee to review specific risk factors. For example, a report from a third party on Asset/Liability matching or the peer review of the appointed actuary can be very useful to the Board.

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METHODS OF VALUATION Valuation of the asset and liabilities of an insurer is done in order to ascertain the financial position of the insurer. It also helps in checking whether the investments made by the insurer are to the best advantage of the policyholders or not. The method chosen for valuation of assets should be consistent with one used for valuation of liabilities. Valuation is also necessary to ascertain the adequacy of the life fund i.e. to determine whether there is surplus or a deficit. Valuation of liabilities of an insurer is the process of arriving at the policy values of various contracts in existence on the date of valuation. There are two kinds of valuation techniques: Retrospective and Prospective method. These techniques give identical results if the mortality rates and expense provision assumed in the valuation are same as those used in premium calculations. There are four methods of valuation they are as follows:

Methods of Valuation

Net Premium

Modified net Premium

Gross Premium

Gross Premium Bonus

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The net premium valuation method takes into consideration only the net premiums for the purpose of valuation and does not account for the expense as usually the expenses incurred should not be in excess of those provided for in the premiums. This method requires the various factors involved in the computation to be based on a true mortality table combined with true interest rate of interest. Under this method, the valuation loadings (i.e. office premiums- net premiums) provide disposable surplus to the extent that they are not absorbed by actual expenses and contingencies and this loading surplus will be constant if there is no change in the valuation bases, net premiums, expenses and contingencies. The demerit of this method is that it does not take into account the heavy initial expenses of the business and it also involves prohibitive labor whenever a valuation is made. The modified net premium valuation method eliminates the demerits of the net premium valuation method as it takes into the account the heavy initial expenses of the business by assuming a higher net premium to arrive at the policy values. Under the gross premium method for without- profit policies, the office premiums after providing for the expenses are considered for arriving at policy values. The percentage kept aside for the expenses is equal to the overall expenses ratio (i.e. ratio of total expenses to total premiums). The disadvantage of this method that it overstates the liability as it adopt a lower rate of interest than that earned on the Life fund and also heavier mortality basis, because of which it denies the policyholder their due share of bonuses. The same method when applied to with- profit policies requires a further provision for bonuses,
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which achieved by keeping aside a higher percentage of the office premiums in arriving at valuation premiums. The gross premiums bonus reserve method makes a provision for the bonuses in a direct manner. Under this method the full office premiums less the deduction for expenses are taken into account for the purpose valuation and the proposed future bonus is valued as a liability. The disadvantage of this method is that treats the future bonuses as a liability and this might give the policyholder an erroneous view that they have a right to the bonuses shown in valuation. Due to the conservation future trends adopted in the valuation, the reserves brought out by the no valuation may be larger than what would be really required. The difference between the value of asset held by the office and assets actually required to meet the liability, including future bonus, is referred to as Estate. It provides a cushion against possible adverse experience in future and necessary security for payment of the basic sum assured and current level of bonuses. The insurer should distribute only the trading profit of the inter-valuation period as bonus. But changes in the valuation bases adopted can alter the trading profit and so the insurer should keep two things in mind while making the valuation: (a) Ensuring security for bonuses and sum assured and maintaining the present level of reversionary bonuses in future also and (b) Ensuring the policyholder the full return of contribution made by him to the estate. This can be achieved by declaring a terminal bonus in addition to the normal reversionary bonus.

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In India, the methods of valuation are governed by Section 13 of the Indian Insurance- Act, 1938, which requires the submission of returns to the Government of India in Form H whenever a valuation is made giving about the sum assured, bonuses, values of office premiums, etc. The data required for valuation includes the policy number, data of commencement, premium paying details about additional term, sum assured, mode of payment, details about extra premium and premium, vested bonuses, entry particulars and exist particulars. With the help of computers, the valuation can be liability can be computed for each policy and the results using different basis and methods of valuation can be easily obtained.

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PAST, PRESENT AND FUTURE OF ACTUARY The 20th century: Past The winds of liberalization sweeping through the insurance industry are fast restoring a dying breed of insurance professionals actuaries. An actuary is the guy who is specializes in the statistical estimation of various risks and their financial consequences. He plays a key role not only in designing and pricing risk covers, or policies, but also in all aspect of insurance company management such as reserving and distribution of surplus, investment, corporate re- structuring and regulation of the sector. In the pre-nationalization days, the country had large actuarial force, primarily employed in the life insurance sector. However, with nationalization the profession started withering away. The state-owned monopoly did not enthuse bright, young students to become actuaries and not much path breaking work was done in this field. Traditionally, actuaries employed in the life insurance sector have the opportunity of conducting a periodic valuation which serves two purposes: It demonstrates the solvency of a company and it helps ascertain the quantum of profits to be distributed deeming the stake holders. As the 20th century progressed, the actuarial profession did not fulfill its earlier promise in the theoretical field. In 1925 John Maynard Keynes encouraged actuaries to devote more time to studying the capital markets: it is a task well adapted to the training and mentality of actuaries, and not the less important, to the future of the insurance industry than further improvement of life tables.
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Our brief overview of actuaries, contribution poses an obvious question: why did the discoveries which were made not find their way to a more general audience? In short, the actuaries dodge all the pricing, valuation, capital allocation, and investment management problems that we would otherwise have been forced to face. Actuaries had the field to them, and tended to formulate their results solutions to insurance problems, without taking the trouble of explaining their general nature. As probability theory found other application, it was apparently easier to rediscover the results than to trace them in existing literature, where they were hidden behind clouds of insurance Jargon. So the wider world ignored journals but, equally, attention was not paid to output and demonstrate how actuarial techniques could shed light on its problems. This two way communication should have been undertaken by academic actuaries,. But not much headway has been made in the 20th century. Current Scenario: Present The insurance sector is once again walking to the significance of actuaries. LIC has already stepped up retirement and experts say it is only a matter of time before the insurance sector realizes the value of actuarial practices. Industry observers point out that although there exist virtually no general insurance actuaries in India as we follow UK model. Now that the UK has revised its approach we will have to reconsider our position too. In the context of regulation, actuaries serve as a kind of early warning system in a liberalized scenario. Actuaries are the whistle-blowers, the people who can, technically, identify any creeping signs of insolvency or other problems in a company and alert the authorities. And this virtue alone makes them an
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indispensable commodity in a country where most of the 240-odd life insurance offices that were functioning prior to nationalization went practically busts. In actuaries I learned that from the with-profits contract to maintain discretion over key contract terms like the benefits to be paid was to be widely replicated in the new areas actuaries entered into, such as pension funds or unit linked contracts. The result was that actuarial was fossilized in the cozy cocoon offered by with-profit. Finally, with the key problems facing profession being how to exercise discretion equitably, little research of a mathematical nature needed to be done. Actuarial departments withered in universities, depriving the profession of its vital link with the emerging and related, probability based modeling disciplines. One sure sign of the buoyancy returning to the actuarial profession is the enrolment of about 400-500 students into the profession this year. The next Century: Future So are we likely to punch to our true weights in the 21st century? We are beginning to adopt a different language, our education system is firmly in the 20th century and actuarial outputs in universities are re-established and deepening links with other disciplines. All these recent developments are positive, but they do not take us back to the relative position we enjoyed at the start of the last century. But let us end on a positive area. Our profession still attracts the mathematically bright and our new education system tries to exploit this. This long term advantage should not be underestimated, says Hans Buhrmann. Having defeated the optimists in the last century, let us hope that we can now defeat the pessimists.

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CONCLUSION Actuaries make financial sense of the future. Actuaries are experts in assessing the financial impact of tomorrows uncertain events. They enable financial decisions to be made with more confidence by:

Analyzing the past

Modeling the future

Assessing the risks involved

Communicating what the results

Actuaries enable more informed decisions: Actuaries add value by enabling businesses and individuals to make betterinformed decisions, with a clearer view of the likely range of financial outcomes from different events. The actuarys skills in analysis and modeling of problems in finance, risk management and product design are used extensively in the areas of insurance, pensions, investments and more recently in wider fields such as project management banking and health care. Within these industries, actuaries perform
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a wide variety of roles such as design and pricing of product, financial management and corporate planning. Actuaries are invariably involved in the overall management of insurance companies and pension, gratuity and other employee benefit funds schemes; they have statutory roles in insurance and employee benefit valuations to some extent in social insurance schemes sponsored by government. Actuarial skills are valuable for any business managing long term financial projects both in the public and private sectors. Actuaries apply professional rigour with a commercial approach to the decision making process. Actuaries Balance The Interest of All: Actuaries balance their role in business management with responsibility for safeguarding the financial interest of the public. The duty of Actuaries to consider the public interest is illustrated by their legal responsibility for protecting the benefits promised by insurance companies and pension schemes. The professions code of conduct demands the highest standards of personal integrity from its members. An actuary can make a major contribution to the board of a life insurance company through his or her knowledge of the business and its financial drivers and through an understanding of risk and risk management. An effective Board works together as a team and an actuary must be able to communicate with the rest of the Boards and must be able to help them understand the technical complexities of the business and of risk. At the same time, the actuary must avoid the temptation to get too far into the details and not cross that line between the responsibilities of Board and Management.
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BIBLIOGRAPHY: ICFAI: Actuarial principles and Practices WEBLIOGRAPHY: www.actuariesindia.org www.actuaries.org.uk www.actuaries.asn.au www.beanactuary.net www.irdaindia.org

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