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What do Actuaries do?

a) Actuaries Make Financial Sense of the Future

Actuaries are experts in assessing the financial impact of tomorrow's uncertain events. They enable financial decisions to be made with more confidence by: Analyzing the past Modelling the future Assessing the risks involved, and Communicating what the results mean in financial terms. b) Actuaries Enable More Informed Decisions: Actuaries add value by enabling businesses and individuals to make better-informed decisions, with a clearer view of the likely range of financial outcomes from different future events. The actuary's skills in analysis and modelling of problems in finance, risk management and product design are used extensively in the areas of insurance, pensions, investment and more recently in wider fields such as project management, banking and health care. Within these industries, actuaries perform 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 combined with a commercial approach to the decision -making process. c) Actuaries Balance the Interests of All Actuaries balance their role in business management with responsibility for safeguarding the financial interests 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 profession's code of conduct demands the highest standards of personal integrity from its members.

1 THE ROLE OF ACTUARY IN GENERAL INSURANCE BUSINESS IN INDIA - R.Qaiser, Professor, NIA, Pune Abstract Actuarial techniques now find practical application in the operation of a general 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 of Actuaries can be utilized. 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. 2 This latest amendment of 2000 brought in its wake for the first time the concept of

appointed Actuary in general insurance companies operating in India. Every general insurance companies, must now is necessarily required to have an appointed actuary. 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 utilized with advantage? Actuary Who? First let us examine who is an actuary and what core function does he perform and why is he relevant to the functioning of general insurance companies? As far as life insurance companies are concerned, he has been there from the very beginning, unlike the general insurance where his entry is of recent origin. The dictionary meaning of the word Actuary is Someone whose job is to advise insurance companies on how much to charge for insurance after calculating risk. An expert in statistics and probability specially one who calculates insurance risks and premium. 3 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 a certificate of practice issued by Institute of Actuaries of India. In todays world, an actuary performs many functions but at the core of all these functions is his ability to make predictions of future outcomes in situations of uncertainty. 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 looked into before placing any trust in the prediction made.

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 skill of individual underwriters. High inflation, cutthroat competition, consumerism 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 4 manipulate data. The actuarial principle made it possible to use these data to draw meaningful inferences for taking informed decisions. The service of an actuary is being utilized in the following areas of general insurance business. Pricing Claim reserving Reinsurance Investment IRDA mandated role for appointed actuary But first lets us examine the areas where actuaries are mandatorily required (under IRDA regulations) to certify certain operations of the companies as appointed Actuary. The following regulations / circulars need a mention here: 1. IRDA (Appointed Actuary) Regulations, 2000 2. IRDA (Asset, Liabilities and solvency margins of insurer) Regulations, 2000 3. File and Use System

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 5 solvency, actuarial advice, etc. Amongst his duties and obligations the following needs mention. a. rendering actuarial advice to the management of the insurer, in particular in the areas of product design and pricing, insurance contract wording, investments and reinsurance; b. ensuring the solvency of the insurer at all times Lets 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 policyholders 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

6 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 measures may be taken in time. 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 bankruptcies in insurance company has taken place because of inadequate provision. It should be appreciated that both higher or lower claims reserve have serious implications on profitability and hence IRDAs concern. Generating profit is important for insurance companies, they being commercial organizations. Because of withdrawal of tariff and resulting price war, making 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 the interest of everybody to guard against Creative Accounting to generate profit. 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 7 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: 1. Likely number of claims to be reported in a particular segment 2. Likely average claim cost of the segment. 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 deviation, management expenses, cost of acquisition, margin of profits, reinsurance cost etc. are factored into the pricing. 8 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 bonus/malus. They can help in predicting investment outcomes. e_4-RoleoftheActuaryinInsurance/$FILE/04_RoleoftheActuaryinInsurance_Hafeman.pdf

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Role of acturies in insurance 1. WHO IS AN ACTUARY ? 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 analysing insurance operations, reserves and underwriting procedures and provide technical assistance regarding actuarial matters to policy examiners and other technical staff. 2. THEIR MAIN ACTIVITIES Product pricing Product Design Financial management Corporate planning 3. WHERE DO ACTUARIES WORK? Actuaries work for Life insurance Pension funds General insurance Health insurance Investments Government Academics 4. ROLE OF ACTUARIES IN INSURANCE Evaluating the likelihood of future events Designing creative ways to reduce the likelihood of undesirable events Decreasing the impact of undesirable events that do occur. undesirable events can be both: emotional financial. Gathering analytical skills, business knowledge and understanding of human behavior to design and manage programs that control risk. RISK = UNCERTINITY Actuaries engage in risk management programs

5. ANSWERS THE FOLLOWING QUESTIONS Would as many people be willing to own a home if fire insurance did not exist? Would a company build a factory that could be destroyed in an earthquake if it were not protected by insurance? Would people spend money today and still be confident about their future if there were no retirement programs or social security? 6. Would parents enjoy risky and adventurous recreational activities such as rock climbing or skiing if their children faced financial disaster in the event of an accident? Would the banks (and the money deposited in them) be safe if their assets and liabilities were not carefully managed to control financial risk? SO WE NEED ACTUARIES IN ANY WAY 7. TECHNIQUES TO CONTROL RISK Offsetting one risk with another Risk is a matter of perspective Focus on catastrophic risks 8. INDIAN ACTUARIES ROAD AHEAD IRDA (The Insurance Regulatory and Development Authority of India) has stated We have reached a situation where the role of appointed actuaries has to be enhanced significantly so that general insurers are in a position to cope with public demand for nonlife products and at the same time ensure the availability of solvency on a continuous basis.

The Role and Responsibilities of an Actuary The daily job duties which an actuary must complete are quite vast and varied. This individual wears many hats and must be adept with completing various tasks on a daily basis. Although many individuals may be unaware of the responsibilities which an actuary takes on in their job role, the position of actuary is one of an important nature. What Is An Actuary? An actuary deals with the business of insurance and is responsible for many areas under the broad category of insurance. The actuary is an individual who will analyze important data such as mortality, sickness, injury and disability rates and use that information to aid those involved with insurance. An actuary is responsible for collecting the data to forecast future risks and see how these predictions will affect various aspects of insurance. General Responsibilities of an Actuary One who accepts the role of actuary is responsible for a multitude of items. They will review statistical information relating to rates dealing with mortality, sickness, accidents, disability and retirement. They will take the information that they obtain from reviewing statistical data and relay the information to individuals who need such items to successfully pursue insurance-related interests. The general role of the actuary is to compile the data which they collect in such a manner that it helps companies deal with payment and coverage issues. Specific Duties of an Actuary There are a variety of specific duties which an actuary must carry out on a daily basis. The first duty which an actuary must undertake in their job role is to review a variety of documents. These documents relate to statistical information, insurance plans, annuity plans, pension plans, contracts and company policies. The overall goal in reviewing these various document is to construct guidelines for which the companies can follow with their customers and employees. Once the actuary has reviewed all of the pertinent documents, the individual must then construct concise tables evidencing the results of the intense document review. The tables will diagram the statistical evidence as well as highlight the recommended route to pursue with regard to disbursements, premiums and retirement funds. An additional specific duty of an actuary is to determine company policy and explain such policy and its aspects to those who will benefit from it. The actuary may also work on the policy so that it adequately works to benefit those affected by the policy. An actuary may also do consulting work and help various companies with their statistical needs and company policy construction. One who is an actuary may work for a specific corporation or many different companies and corporations. Actuaries may also be asked to testify as expert witnesses in various forms of litigation. Their testimony most often relates to the lifetime earnings an individual would have seen based on a variety of factors. One who fulfills the role of an actuary may also have to testify before public agencies with regard to new or revised legislation affecting the companies and corporations which it works for. This frequently occurs when a new law is about to be passed or the company wishes a particular piece of legislation to become law. The actuary is also the go to individual for any questions relating to their job responsibilities asked by the

customers of the company. If the questions are best answered by the actuary, then he/she will do so in order to present straightforward information to the public. An actuary must also develop mathematical ideas and formulas so that the proper data can be assessed. The actuary must use his/her mathematical abilities to format equations which will aid in the resolution of an issue. Traits Which All Actuaries Should Possess There are many beneficial traits which an actuary should possess. First and foremost, an actuary needs to possess wonderful mathematical skills. Since they will be dealing a great deal with statistical equations and data, having such mathematical skills will help them to excel in their job responsibilities. Good analytical skills are another important trait which an actuary should possess as it will help them in their job role. As they will need to analyze a variety of documents, having analytical skills which are more than adequate will greatly benefit them in the long run. An actuary is an individual who should possess good public speaking skills as well. In their daily job duties, not only will they need to analyze documents and data but they will also have to report such data results to company officials and members of the public. Therefore, in order to best get their opinions and conclusions across in a straightforward, easy to understand manner, good public speaking skills should be a prerequisite to taking on the role of actuary. Creativity is something which actuaries should possess. From time to time, they will need to aid company officials in the drafting of company policy and make changes to the policy. With a little bit of creativity, an actuary will be able to take the documentation and put such a spin on it that it is formed into a proper and valid policy. One who is an actuary should also have wonderful research skills. Since many of the documents that they need to analyze will not just pop into their laps, it is important that actuaries can do good research and find out what they need to know with regard to statistics and pertinent documents in an efficient and expedient manner. An actuary should also have good working computer skills. Since much of their work will involve computers, it is important that the actuary not only be familiar with computers but know how to maneuver around with them as well. Comprehension skills are also a necessary component for all actuaries to possess. The actuary is an individual who in their job role will need to analyze and interpret often-complex documents and laws as well. If one has excellent comprehension skills they will be able to do their job that much better. Conclusion 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. resentation check this url