Have you ever wondered how insurance companies arrive at the premium rate for your life policy? One of the major exercises before companies do this is to ascertain the risk to your life. And depending on the quantum of risk you face, based on factors such as your health and profession, the insurance company can reduce or increase the premium amount.
To ascertain this risk, insurance companies have experts who specialise in assessing the risk to an individual. These experts are called actuaries.
In a recent regulation, the Insurance Regulatory Authority of India (IRDAI) reviewed the rules governing the appointment of insurance actuaries. According to the draft IRDAI guidelines, an actuary must have access to all the necessary information and documents in possession of the insurer for the effective execution of the functions and duties of the appointed actuary. It stated that the actuary should seek any information for Regulation 7(A) of the rules from any employee of the insurer.
Let’s understand who an actuary is and how the entity helps decide the life insurance policy premiums.
An insurance actuary is an expert who deals with the measurement and management of risk and uncertainty in the insurance company. “The actuary broadly works on two domains: pricing of insurance contracts and estimating financial reserves for future liability. They are also involved in areas like risk, underwriting, financial planning, solvency, and data science. An appointed actuary is a key position in an insurance company, approved by the regulator,” says T.A. Ramalingam, chief technical officer of Bajaj Allianz General Insurance.
Insurance companies agree to undertake a degree of risk whenever a policy is issued to a customer in lieu of the premium received. An insurer’s profitability is based on charging an adequate premium in lieu of the risks it undertakes. Therefore, understanding the risk types and associated costs to underwrite is the most critical part of insurance operations. This is where the role of an insurance actuary comes into the picture.
An actuary plays one of the most critical roles in issuing an insurance policy. An actuary deploys their knowledge of advanced analytical and statistical skills and uses different financial and mathematical models to determine the risks associated with each insurance proposal. “These factors, in turn, form the decision-making on whether a particular risk should be written by the insurer and helps determine the underlying cost of such risks. This analysis helps the insurer arrive at an accurate premium amount,” says Nikhil Kamdar, appointed actuary, Digit Insurance.
According to the IRDAI, insurance companies must appoint an actuary. The appointed actuary is responsible for ensuring that all company records are in place to conduct an actuarial valuation of the liabilities and assets of the insurance company. They are also responsible for rendering actuarial advice to the company's management, especially in product designing and pricing, reinsurance arrangements, and effective implementation of risk management systems. The appointed actuary also ensures that the company complies with the solvency requirements stipulated by the regulator and pays due regard to generally accepted actuarial principles while carrying out any task.
In most businesses, companies generally know the cost of the product they are selling in advance, albeit with some uncertainties of variable expenses. "However, the underlying cost of any insurance product is known later after a policy is sold basis the emerging claim experience. The insurance actuary plays a critical role here and helps in determining the right price for the products and helps in ensuring that the insurance companies remain solvent to pay claims and manage its operating expenses," says Kamdar.
Also, he adds that an insurance company is not instantly made aware of the claim as soon as the event occurs. There are typically delays in claims reported to insurance companies by the policyholders, and sometimes investigations, if any, also lead to more time to settle the final claim amount. Therefore, it is vital to provision for these claims, which may have already taken place but have yet to be reported to insurance companies or for claims not eventually settled. Actuaries play a critical role in determining the adequate provisioning for such claims.
While an insurance actuary is vital for the survival of an insurance company, the role of an actuary is also crucial for the consumer. As mentioned, an insurance actuary decides on the policy's premium, considering various risk factors. "They also play a key role in designing and managing insurance products. While working on these, the actuary ensures that PRE (policyholder reasonable expectations) are met. Apart from this, an actuary estimates the solvency of the insurance company. The actuary reports the financial reserves and financial condition of the company to the board of the company and the regulator," says Ramalingam.
