Role of Actuaries & Exclusion of Perils

Presentation by

Jasmeet Kaur Jyotsna Panwar Punit Yadav Shubham Arora

Actuary
Professional who will ascertain in advance the uncertain events that could take place in future and come to financial conclusions. An individual who will analyze important data such as mortality, sickness, injury and disability. Responsible for collecting the data to forecast future risk and see hoe these predictions will affect various aspects of insurance. Expert in reviewing and analyzing insurance operations, reserves and underwriting procedures.

Legal mandate
IRDA mandated appointment of actuaries to be known as appointed actuaries to certify certain operations of the insurance companies. Regulation which talk about such legal requirements are: 1. IRDA(Appointed Actuary) Regulations, 2000 2. IRDA(Assets, liabilities and solvency margins of insurer) Regulations, 2000

Role of Actuaries
Actuarial expertise can be used in the following : Claim Reserving Designing a product Pricing of a product Determination of solvency margins Risk Management

Claim Reserving
Its required in the case of: Claim reported but not fully settled Claim remaining unreported The expenses associated with handling and discharging such claims Claims and expenses of unexpired policies presently in the books Actuary does the reserving based on statistical techniques and his experience and judgment. Some methods employed are: Average cost per claim method Loss ratio methods Blends (combination of two or more methods) Besides technical methods judgment finds important place in claim reserving as certain amount of assumptions is required in taking the final decision.

Designing a product
Product must be designed in a way that they can be priced appropriately from perspective of both insurer and insured. Actuaries assist in identifying market needs, competitors product and social and demographic trends. Their job involves assessing the feasibility of product design features , and compensation schemes.

Pricing a product
Actuaries play key role in determination of prices which are competitive and reasonable taking into considerations factors like: Cost of the benefits by product design need to be estimated Expenses involved in commissions, underwriting costs and other policy administration costs and overhead cost Prices must reflect the rate of return insurer expects to earn.

Determination of solvency margin

Claims are the biggest liability of an insurance company thus solvency margin is important so as to protect the policyholders interest and ensure the health of the industry. Appointed actuary is liable to monitor the solvency margin of the companies on regular basis and to certify the outstanding claims provisions relating to IBNR. In case of breach of the solvency margin the actuary is duty bound to inform the same to IRDA

Risk management
Insurer is exposed to different types of risks such as underwriting risk, credit risk, liquidity risk and operational risk. Actuary identify specific risk and consider and quantify their relevance to business. They often design a reinsurance program to deal with excess amount of risk, and negotiate the terms of such contracts

Functions of Actuaries
Pricing and product design Safeguarding Policyholders interest Establishing aggregate policy and claim liabilities Determining appropriate capital Direct responsibility to board and regulators

Exclusion of Perils

A peril, is defined as the actual cause of the damage resulting in financial loss. Excluded perils can generally (but not always) be remedied either by an exception to the exclusion, an endorsement or the purchase of a separate policy. When viewed in the light of reason, policy exclusions are not unreasonable as without many of the exclusions contained in property and liability policies, premiums would be prohibitively high and fewer viable carriers would be available to accept the risk.

Main reasons of exclusion of peril The peril is better covered elsewhere The loss or damage is catastrophic in nature The loss or damage is not accidental or unforeseen The insurance carrier is willing to provide coverage; they just want more information and more premium The insurance carrier wants to control the amount of coverage granted The loss results from a speculative or business risk.

The peril is better covered elsewhere

Some exclusions exist because there is a more appropriate coverage form available to provide the needed protection. Example : Money loss is excluded in the commercial property form because this exposure is better covered under a crime policy

The loss or damage is catastrophic in nature

Insurance was not designed to respond to community disasters, only to individual disasters. Certain perils have the potential to result in wide-spread damage the industry is not structured to handle Example: Earthquake

The loss or damage is not accidental or unforeseen

An insurable loss is one that is accidental, unforeseen, definite in time and place and is measurable Intentional acts of the insured are excluded in nearly every insurance policy Also falling outside the definition of insurable loss are losses that are likely to or will happen, damage specifically controllable by the insured and known events. Example: Wear and tear to property is going to happen, failure to care for the property.

The insurance carrier is willing to provide coverage; they just want more information and more premium Endorsements are available to remove or narrow the breadth of some policy exclusions, allowing the insured to customize coverage to fit its needs Before granting extended coverage insurance carriers often want more information about the insured plus some additional premium

The insurance carrier wants to control the amount of coverage granted

Excluding coverage and giving some of it back allows the insurance carrier to dictate the exact amount of coverage they are willing to offer. They control the breadth of coverage. Taking coverage away and giving it back in predetermined amounts makes far more sense and reduces the potential for confusion.

The loss results from a speculative or business risk

Speculative risk or business risk involves the chance of loss, of no change or gain. Insurance is not designed to protect the insured from a bad investment or bad business decision. Example: Product recall exclusion (which can be covered by endorsement) and the commercial property policys special cause of loss exclusions voluntary parting and delay, loss of use or loss of market.