INDEX

SR. NO.
1. 2. 3. 4. 5. 6. 7.

CONTENTS
RESEARCH DESIGN INTRODUCTION EVALUTION OF ACTUARIAL PROFESSION ROLE OF ACTUARY IN INSURANCE ACTURIAL INSURANCE IN INDIA ACTUARIAL SOCIETY OF INDIA GLOBAL INSURANCE SCENARIO & CHALLENGES FOR ACTUARY RISK AND ACTUARIAL SCIENCE CONCLUSION

8. 9.

1. RESEARCH DESIGN
"Actuary in Insurance" was for the first time came to be noticed in Insurance magazine's article a few months back. When the topic was opened for discussion with couple of persons associated with insurance industry, the canvass and importance of the subject was immediately noticed. This was the ignition point which prompted to undertake the study of "Actuary in Insurance" as a project. An actuary is a combination of business executive,

mathematician, financier, sociologist, and investment manager. Actuaries are the analytical backbone of our society's financial security programs. The hypothesis of the study of 'Actuary in Insurance' as with the advent of this new profession in Insurance industry would competent to minimize risk in superior way. The nature of study was decided to be of exploratory nature. The objective of the study was to document detailed information on Actuary in insurance so that the project report could serve as the multi dimensional. The geographical limit for the study was 'Mumbai' only. The information was sourced from various articles on Actuary in Insurance sector which appeared in insurance journals published by Actuarial society of India and IFCI university press, both being the premiere institutes in India in the field of actuarial insurance. Besides having collected the data from various books, journals and internet sites, an interview with insurance officials and corporate have added the practical flair mainly to know the onsite implications and procedural difficulties.

2. INTRODUCTION
Actuaries are the analytical backbone of our society's financial security programs. They are the brains behind the financial safeguards we have implemented in our personal lives, so we can go about our daily lives without worrying too much about what the future may hold for us.^ These are the safeguards that protect us from life's catastrophes. The insight into risk that actuaries have also helps to ensure that our savings are working hard for us, so that everything we love and cherish can grow and flourish. Actuarial science applies mathematical and statistical

methods to finance and insurance, particularly to risk assessment. Actuaries are professionals who are qualified in this field through highly competitive examinations and experience. It includes a number of interrelating disciplines, including probability and statistics, finance, and economics. Historically, actuarial science used deterministic models in the construction of tables and premiums. The science has gone through revolutionary changes during the last 30 years due to the proliferation of high speed computers and the synergy of stochastic actuarial models with modern financial theory. Actuarial science became a formal mathematical discipline in the late 17th century with the increased demand for long-term insurance coverages such as Burial, Life insurance, and Annuities. These long term coverages required that money be set aside to pay future benefits, such as annuity and death benefits many

years into the future. This requires estimating future contingent events, such as the rates of mortality by age, as well as the development of mathematical techniques for discounting the value of funds set aside and invested. This led to the development of an important actuarial concept, referred to as the Present value of a future sum. Pensions and healthcare emerged in the early 20th century as a result of collective bargaining. Certain aspects of the actuarial methods for discounting pension funds have come under criticism from modern financial economics. Actuaries describe their work as challenging and interesting and generally enjoy a good working environment. The Jobs Rated Almanac has consistently rated "Actuary" as one of the top two or three jobs on a variety of factors. According to several studies, the profession is more; open than others to women and members of under-represented minority groups. Actuaries are in high demand, with starting salaries ranging from $45,000 to $55,000. In 2002, a Wall Street Journal survey on the best jobs in the United States listed actuary as the second best job, while in previous editions of the list, actuaries had been the top rated job.

3. EVOLUTION OF ACTUARIAL PROFESSION

The actuarial profession has a rich and varied history dating back to the seventeenth century when John Graunt, a London draper, demonstrated that there were regularities to the patterns of life and death in a group of people, despite uncertainty about the future life-span of a single individual. 3.1 Risk gives birth... The basic requirements of communal interests gave rise to risk sharing since the dawn of civilization. In the ancient world there was no room for the sick, suffering, disabled, aged, or the poor these were largely not part of the cultural consciousness of societies. The need for insurance and pension arrangements comes from personal risk and uncertainty. If you go on a journey or voyage, there is the risk of losing any goods entrusted to you, or your own possessions, or even your life. Your house may catch fire and leave you and your family without a roof over your heads. If you are a breadwinner, you run the risk of dying too soon and leaving your family to starve. You may be unable to get a loan, if the lender is worried about repayment in the event of your death. Alternatively, you may live too long after retirement, so that your savings become exhausted. 3.2 Initiate by the charity... These risks existed from the earliest times, when the usual method of relieving poverty was by charity. Destitute people

used to beg on the streets. Nearby monasteries might have provided them with left-over food and drink, or the monks' cast-off clothing. Under this method of protection; religious organizations or neighbors would collect for the destitute and needy. However, charity was never very satisfactory, because it provided inadequate and uncertain relief, with a social stigma. Hence people tried to protect themselves financially against the risks of life and death. They developed elementary insurancetype arrangements, which often failed because of a lack of knowledge and understanding. Pensions were granted even in ancient Greece, and burial societies were formed in both Greece and Rome to meet members' funeral expenses. In England in the Middle Ages it was sometimes possible to pay a lump sum to a monastery and receive board and lodging (known as a 'corrody') there for the rest of your life. 3.3 Development of theory... The 17th century was a period of extraordinary advances in mathematics Li 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. Compound interest was studied, which was important later in establishing how much investment income could be earned by the assets of insurance and pension funds. Probability theory emerged with a publication in 1657 by the Dutch mathematician, Christian Huygens. He showed that, in order to have p chances of

obtaining a sum of money A and q chances o: obtaining a sum of money B, it is worth paying a sum equal to (pA+qB) divided by (p+q). Another important advance came in 1662 from a surprising source, a London draper called John Graunt who showed that there were predictable patterns of longevity and death in a defined group, or cohort, of people, despite the uncertainty about the future longevity or mortality of any one individual person. This study became the basis for the original life table. It was nowpossible to set up an insurance scheme to provide life insurance or pensions, 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. His great achievement was to show the regularities of the patterns of life and death in a group of people, despile uncertainty about the future lifetime of only one person. He had the original idea of making a statistical analysis of the London Bills of Mortality. These had been published for many years, week by week, to warn wealthy householders when the plague was increasing, so that they could leave London in time. Although the age at death was not recorded in the Bills Graunt analyzed, every Bill did record the number of people dying from each cause of death. Since some causes of death applied mainly to young children, he deduced that about 36% of the total number of deaths related to children dying before age six. This was the starting point for his famous 'life table', which showed how many of every 100 babies survived until ages 6, 16, 26, 36, 46 ... etc.

Unfortunately the table did not give a realistic representation of true survival rates, because the figures for ages after 6 had to be guessed. Graunt also estimated the population of London, which was often said to run into millions, as 384,000. This is thought nowadays to have been quite accurate -another remarkable achievement. 3.4 Creation of actuarial science... It now became possible for the first time to envisage setting up an insurance scheme providing life assurance or pensions for a group of people, where it could be worked out how much money 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, the famous mathematician and astronomer, after whom the comet is named. The Royal Society in London asked Halley to analyze some data collected by Caspar Neumann, a clergyman of Breslau in Germany, relating to the births and deaths in that city between 1687 and 1691. Unlike the London data, the Breslau data were classified by age, and this enabled more accurate survival rates at each age to be obtained. Halley used the data in 1693 to construct his own life table (for individual ages, not just age groups), which was found to give a reasonably accurate picture of survival and became well known throughout Europe. Most important, however, was the method which Halley demonstrated of using his life table to work out how much money

someone of a given age should pay to purchase a life-annuity. Halley examined each future annual installment of the annuity separately and used his life table to estimate the probability that the person would survive to receive that installment. The resulting probability was multiplied by the sum (obtained from a compound interest table at a specified rate of interest) which would need to be invested now in order to pay for that installment if one were certain to receive it. Halley then went on to do likewise for the next installment, and so on. Summing these present values for all future installments up to the end of life then gave the value of the whole annuity. Actuarial science had been created. 3.5 Early actuaries... The first life assurance company to use premium rates which were calculated scientifically for long-term life policies was The Equitable, founded in 1762. The techniques used to calculate these premiums were developed from Halley's method by James Dodson, a London mathematician. Janes Dodson's pioneering work on the level premium system led to the formation of the Society for Equitable Assurances on Lives and Survivorship (now commonly known as Equitable Life) in London in 1762. After Dodson's death, Edward Rowe Mores took over the leadership of the group that eventually became the Society for Equitable Assurances in 1762. It was he who specified that the chief official should be called an 'actuary'. Previously, the use of the term had been restricted to an official who recorded the decisions, or 'acts', of ecclesiastical courts, in ancient times originally the secretary of the Roman senate, responsible for compiling the Acta Senatus. 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. Many other life assurance companies and pension funds were created over the following 200 years. It was The Equitable which first used the term 'actuary' for its chief executive officer in 1762. 3.6Development of the modern profession... In the eighteenth and nineteenth centuries, 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 sophisticated approximations 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. In 1848 the actuaries of a number of life assurance companies established the Institute of Actuaries. Its objects were stated to be the development and improvement of the mathematical theories upon which the practice of life insurance is based, and the collection and arrangement of data connected with the subjects of duration of life, health and finance. Another object was the improvement and diffusion of knowledge, and the establishment of correct principles relating to subjects involving monetary considerations and probability. Thus even so long ago, the

Institute's objectives were by no means confined to life assurance. It was clearly envisaged that actuarial science would have wider applications, as has proved to be the case. Non-life actuaries followed in the footsteps of their life compatriots in "he early twentieth century. The 1920 revision to workers compensation rates took over two months of around-theclock work by day and night teams of actuaries. In the 1930s and 1940s, however, rigorous mathematical foundations for stochastic processes were developed. Actuaries could now begin to forecast losses using models of random events instead of deterministic methods. Computers further revolutionized the actuarial profession. From pencil-and-paper to punchcards to microcomputers, tie modeling and forecasting ability of the actuary has grown exponentially. Another modern development is the convergence of modem financial theory with actuarial science. In the early twentieth century, actuaries were developing many techniques that can be found in modem financial theory, but for various historical reasons, these developments did not achieve much recognition. However, in the late 1980s and early 1990s, there was a distinct effort for actuaries to combine financial theory and stochastic methods into their established models. Today, the profession, both in practice and in the educational syllabi of many actuarial organizations, combines tables, loss models, stochastic methods, and financial theory, but is still not completely aligned with modern financial economics.

4. ROLE OF ACTUARY IN INSURANCE

Most actuaries are employed in the insurance industry, specializing in life and health insurance or property and casualty insurance. About two-thirds of actuaries work for life, health, and property / casualty insurance companies. At this time, the majority of actuaries work in careers that are associated with the insurance industry, though growing numbers work in other fields. They are heavily involved in insurance because that is society's most powerful answer for managing risk. Each type of business assumes financial risks for people and pays their claims as incurred. Actuarial responsibilities in these fields will generally include making sure that one's company properly defines and carefully evaluates the insurance risk; charges a fair price to assume the risk; and has an efficient system to pay claims and expenses as they occur while operating profitably as a business. These responsibilities are important because when the actuary calculates the cost of insurance contracts for his company, he is committing it financially for many years. This commitment is why a Company's financial solvency depends to a large extent on the actuary's calculations and judgment. Thus, One of the main functions of actuaries is to help businesses assess the risk of certain events occurring and to formulate policies that minimize the cost of that risk. For this reason, actuaries are essential to the insurance industry. Actuaries assemble and analyze data to estimate the probability

and likely cost of the occurrence of an event such as death, sickness, injury, disability, or loss of property. Actuaries also address financial questions, including those involving the level of pension contributions required to produce a certain retirement income and the way in which a company should invest resources to maximize its return on investments in light of potential risk. Using their broad knowledge of statistics, finance, and business, actuaries help design insurance policies, pension plans, and other financial strategies in a manner which will help ensure that the plans are maintained on a sound financial basis. Actuaries play a key role to design insurance plans, determine the premium, monitor the profitability of insurance companies and recommend corrective action when appropriate. Actuaries are involved in pricing, product design, financial management and corporate planning. Actuaries working in insurance companies also ensure that insurance companies have set aside enough funds to pay claims and provide advice on how to invest tie insurance companies' assets. They use their professional expertise in solving complication financial problems by combining their theoretical as well as practical knowledge. Actuaries produce probability tables which determine the likelihood that a potential future event will generate a claim. From these tables, they estimate the amount a company can expect to pay in claims. For example, property and casualty actuaries calculates the expected amount payable in claims resulting from automobile accidents, an amount that varies with the insured person's age, 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. The premium must be profitable, yet competitive with other insurance companies. Within the 1ife and health insurance fields, actuaries are helping to develop long-term-care insurance and annuity policies, the latter a growing investment tool for many individuals.

Actuaries are not only experts who perform actuarial analysis of insurance rates, rating procedures, rating plans, and schedules of insurance companies but also 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 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 interests of the public. Actuaries' insurance discipline may be classified as life insurance, health social insurance, welfare pensions; programs, annuities, property asset management, insurance,

casualty insurance, liability insurance, general insurance; and reinsurance. Life, health, and pension actuaries deal with mortality

risk, morbidity, and consumer choice regarding the ongoing utilization of drugs and medical services risk, and investment risk. Products prominent in their work include life insurance, annuities, pensions, mortgage and credit insurance, short and long term disability, and medical, dental, health savings accounts and long term care insurance. In addition to these risks, social insurance programs are greatly influenced by public opinion, politics, budget constraints, changing demographics and other factors such as medical technology, inflation and cost of living considerations. Whereas casualty actuaries, also known as non-life or general insurance actuaries, deal with catastrophic unnatural risks that can occur to people or property. Products prominent in their work include auto insurance, homeowners insurance, commercial property insurance, workers' compensation, title insurance, malpractice insurance, products liability insurance, directors and officers liability insurance, environmental and marine insurance, terrorism insurance and other types of liability insurance. Reinsurance products have to accommodate all of the previously mentioned products, and in addition have to properly reflect the increasing long term risks associated with climate change, cultural litigiousness, acts of war, terrorism and politics. On both the life and casualty sides, the classical function of actuaries is to calculate premiums and reserves for insurance policies covering various risks. Premiums are the amount of money the insurer needs to collect from the policyholder in order to cover the expected losses, expenses, and a provision for profit. Reserves are provisions for future liabilities and indicate how much

4.1

Actuary in 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 the funds to provide the promised benefits and recommending the fair rate of bonuses to be added to with-profit policies. While the main function of an actuary in life insurance has remained the same, viz. assessment and valuation of mortality risk apart from other risks. In life insurance, actuarial science focuses on the analysis of mortality, the production of life tables, and the application of compound interest to produce life insurance, annuities and endowment policies. Contemporary life insurance programs have been extended to include credit and mortgage insurance, key man insurance for small businesses, long term care insurance and health savings accounts. 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 profession's 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 Regulation,

Education and CPD, and Research. The work of the Continuous Mortality Investigation Bureau is also a major contributor to actuarial practice in this area.

Duties of an actuary in life insurance business...

In case of the insurer carrying life insurance business the actuary shall perform the following duties... returns;

Certify the actuarial report, abstracts and other Comply with provisions of section 112 of the Act,

1938 in regard to further information required by the authority and recommendation of interim bonus or bonuses payable by life insurer to policyholders whose policies mature for payment by reason of death or otherwise during the inter-valuation period;

Comply with provisions of section 40B of the Act, Ensure that premium rates of insurance products are Certify that the mathematical reserves have been

1938 in regard to the bases of premium; fair;

determined taxing into account the guidance not issued by the Actuarial Society of India and any directions given by the Authority;

Ensure and

that

the of

policyholders to the

reasonable participating

expectations have been considered in the matter of valuation of liabilities distribution surplus policyholders who are entitled for a snare of surplus; and Submit the actuarial advice in the interests of the insurance industry and the policyholders.

4.2

Actuary in Health Insurance

In health insurance, including insurance provided directly by employers, and social insurance, actuarial science focuses on the analyses of rates of disability, morbidity, mortality, fertility and other contingencies. The effects of consumer choice and the geographical distribution of the utilization of medical services and procedures, and the utilization of drugs and therapies, is also of great importance. Actuarial science also aids in the design of benefit structures, reimbursement standards, and the effects of proposed government standards on the cost of healthcare.Health insurance sector offers the most exciting opportunities and yet poses the biggest problems for the actuaries in India. This is because... > The country has very little experience of his own in this field to rely upon, except in the case of medical insurance sold by GJC subsidiaries; and > The types of covers provided under this generic term in western countries is quite large, viz. private medical insurance (PMI), critical illness cover (CIC), long term care insurance (LTCI) and permanent health insurance (PHI). Even within each type the variety of terms and benefits can be large, leading to different rating methods, valuation assumptions, solvency margins, investment strategy, etc. So, where do the actuaries look for the designing health covers suitable for Indian conditions? As far as medical insurance and public health insurance (PHI) are concerned, the experience of

GIC and Employee State Insurance Scheme (ESIS) respectively can provide useful initial guide. We can draw on the long experience of the US health business in general. The US economy spends 15 per cent of its GDP on health care. With the persistent weakening of joint family system in urban areas and growing proportion of aged population, the need for insurance for the elderly is likely to grow. Hence, the insurers and the actuaries must prepare themselves well in advance to exploit this potential demand. The first challenge to actuaries in this field will be designing of different types of health covers, keeping in view the objectives of...

A need-based approach; Simplicity of benefits and administration, and Avoidance of fraud and anti-selection.

Their role would also include collection and analysis of morality data and advising the government on an effective regulatory mechanism, so as to protect the interests of the policyholders.

4.3

Actuary in Non Life Insurance...

Although it is still true that only a relatively small part of the actuarial profession works in general insurance, there has been a significant growth in recent years. The role of actuary in non-life insurance is as follows... Estimating the reserves for the future claims of. 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 in automated procedure, as there is a significant amount of judgment involved in the estimation of general insurance reserves. 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, -in actuary can help a company to identify

the key indicators that management should monitor so as to control the business. Actuarial science is also applied to short term forms of insurance, referred to as Property & Casualty or Liability insurance, or General insurance. In these forms of insurance, coverage is generally provided on a renewable annual period, (such as a yearly contract to provide homeowners insurance policy covering damage to a house and its contents for one year). Coverage can ~)e cancelled at the end of the period by either party. In the property & casualty insurance fields, companies tend to specialize because of the complexity and diversity of risks. A convenient division is to organize around personal and commercial lines of insurance. Personal lines of insurance include the familiar fire, auto, homeowners, theft and umbrella coverages. Commercial lines would include business continuation, product liability, fleet insurance, workers compensation, fidelity & surety, D&3 insurance and a great variety of coverages required for businesses. . Actuaries do not always attempt to predict aggregate future events. Often, their work may relate to determining the cost of financial liabilities that have already occurred, called retrospective reinsurance or the development or re-pricing of new products.

Actuaries also design and maintain products and systems. They are involved in financial reporting of companies' assets and liabilities. They must communicate complex concepts to clients who may not share their language or depth of knowledge. Actuaries work under a strict code of ethics that covers their

communications and work products, but their clients may not adhere to thoses same standards when interpreting the data or using it within different kinds of businesses.

Beyond these, the industry needs to provide catastrophe insurance for weather related risks, earthquakes, patent infringement and other forms of corporate espionage, terrorism and all its implications, and finally coverage for the most unusual risks sometimes associated with Lloyds of London. In all of these ventures, actuarial science has to bring data collection, measurement, estimating, forecasting, and valuation tools to provide financial and underwriting data for management to assess marketing opportunities and the degree of risk taking that is required. Actuarial science needs to operate at two levels...

At the product level to facilitate politically correct

equitable pricing and reserving; and

At the corporate level to assess the overall risk to the

enterprise from catastrophic events in relation to its underwriting capacity or surplus Actuaries, usually working in a multidisciplinary team must help answer management issues...

Is the risk insurable; Does the company have effective claims Does the company have sufficient claims

administration to determine damages;

handling to cover catastrophic events;

And the vulnerability of the enterprise to uncontrollable risks such as inflation, adverse political outcomes; unfavorable legal outcomes such as excess punitive damage awards, and international turmoil.

4.4

Actuary in general insurance business

With the growing complexity of business operations and increasing technological development, individuals and companies are coming face to face with newer and greater risks, e.g. risks of computer breakdowns, satellite communication failures, financial losses suffered by professionals from client litigation, etc. these risks provide increased opportunities of profitable business for insurance companies and thus open up additional career avenues for actuaries.

Risk management has become an important managerial function in large business houses, where a professional risk manager assesses the nature and extent of the company's exposure to a specific mix of risks and decides whether to retain the risk in house or to transfer it to an insurance company. Nevertheless, even in case of risk retention, companies do seek other services such as underwriting, actuarial and risk management advice from insurers. It is here that the general insurance actuary has to demonstrate his competence not only in accurate risk appraisal, but also in understanding the needs of the

business manager, so as to build up a mutually beneficial ind long lasting relationship between the insurers and the business community.

4.5 Actuary in Reinsurance

In the reinsurance fields, actuarial science is used to design and price reinsurance and retro-reinsurance schemes, and to establish reserve funds for known claims and future claims and catastrophes. Retro-reinsurance, also known as retrocession occurs when a reinsurance company reinsures risks with yet another reinsurance company.

Reinsurance can be used to spread the risk, to smooth earnings and cash flow, to reduce reserve requirements and improve the quality of surplus, Reinsurance creates arbitrage situations, and retro-reinsurance arbitrage can create Spirals which can lead to financial instability and bankruptcies A spiral occurs (as an example) when a reinsurer accepts a retrocession which unknowingly contains risks that were previously reinsured. Some reported cases of arbitrage and spirals have been found to be illegal. The Equity Funding scam was built on the abusive use of financial reinsurance to transfer capital funds from the reinsurance carrier to Equity Funding. In the broadest sense of the word, reinsurance takes many forms... Declining a risk; Requiring the insured to self insure part of the

contingent or investment risk; Limiting the coverage through deductibles,

coinsurance

or exclusionary policy language;

Placing a policy in a risk pool with a cohort of Ceding or transferring a percentage of each

competitors to achieve a social objective;

policy to another insurance company (i.e. the reinsure);

Ceding or transferring excess amounts or excess

coverages to the reinsure;

Purchasing stop loss insurance; Purchasing umbrella coverages for a basket of risks; Purchasing catastrophe insurance for specific

contingent events.

Reinsurance is complex. Company management and their actuaries need to deal with all the known insurable contingent events, as well as underwrite the quality of their cadent companies, and maintain the information tools and auditing practices to identify arbitrage and spirals.

4.6 Actuary in Investment Policies...

Actuaries need to be closely associated with framing of investment policies of insurance companies, since better than average investment return is often the biggest source of surplus, particularly in life insurance. It is also the unique selling proposition in unit-linked business, which is growing in popularity worldwide, in relation to the traditional life insurance policies. The basic objective of investment policy in an insurance company remains unchanged, viz. to match the cash flows (both in terms of timing and amount from assets to those from liabilities, i.e. insurance contracts, so as to minimize the 'actuarial risk', i.e. the probability of not being able to meet the liabilities when due, and subject to the above goal, to maximize the return on assets, especially in the long-term.

However, it is the balance between these two objectives of risk and return and the precise methods of achieving the goal that is undergoing a radical change, with the evolution of ever-new investment products.

5. ACTURIAL INSURANCE IN INDIA

The opening of the insurance sector has also thrown a great challenge to the actuarial profession in India. The demand for actuarial skills and knowledge is growing up exponentially and the actuarial profession in India is gearing up its activities to meet this demand.

The actuary is a specialist who combines an understanding of risks and mathematical technique to develop financial products to manage these risks (insurance policies), price these product (calculate insurance premium rates) and compute reserves to be held for liabilities of companies undertaking these financial risks. An actuary may also be described as an applied mathematician responsible for the financial mathematics in insurance policies. In a broader sense, actuaries have been described as the professionals to call whenever money and probability interact.

The actuary helps in designing insurance plans and then evaluates the financial risk of the company which it takes while selling an insurance policy. The responsibilities as an actuary include making sure that the company properly defines and carefully evaluates the insurance risk; charge a fair price to suit

the risk; and has an efficient system to pay claims and expenses as and when they occur. Actuaries must understand the entire operation of insurance field because their evaluations often influence organization policies and practices. In fact, actuaries' calculations and judgment can commit organizations financially sound for future years. Because of many phases of organization's business such as general management, marketing, research, investments, accounting, underwriting, administration and long range planning, the actuaries gave great role to play in the insurance industry. Most actuaries working in insurance sector are mainly in life insurance. They are found in high responsible management positions making decisions that are vital to the company's success. Insurance is a highly competitive business and actuaries are constantly making commercial decisions, which nevertheless must have a sound theoretical basis. The actuary's day-to-day tasks involve fixing premium rates and surrender values for policies and designing new types of policies. Actuaries have to make calculations also such as what funds will be needed to cover the company's long-term liabilities and advice on how profits should be distributed to policyholders and shareholders.

5.1 Appointed Actuary in India...

An insurance company has to take the assistance of an actuary in conducting the business of insurance. The IRDA in consultation with the Insurance Advisory Committee has made regulations for appointment of actuary. Regulation 5 of the IRDA

(appointed actuary) Regulations, 2000 provides that a life insurer shall not carry on business of insurance without an appointed actuary. The term 'appointed actuary' is a designation.

5.2 Eligibility...
A person shall be eligible to be appointed as an appointed actuary for an insurer, if he or she shall be...

Ordinarily resident in India; Fellow member of the actuarial society of India; An employee of the insurer or a consulting actuary in case

of general insurance business:

An employee of life insurer in case of life insurance business; A person who has not committed any breach of

professional misconduct;

A person against whom no disciplinary action by the Actuarial

Society of India or any disciplinary action pending with any other actuarial professional body:

Not an appointed actuary of another insurer; A person who possesses a certificate of practice

issued by the Actuarial Society of India; and Not over the age of seventy years

5.3 Approval of IRDA...

An insurer shall seek the approval of the Authority for the appointment of appointed actuary by submitting the application in prescribed Form IRDA-AA-1. The authority shall, within thirty days of the receipt of such application either, accept or reject the same, however, before rejection of the application the authority (IRDA) shall give the insurer an opportunity of being heard. Where an insurer does not receive approval within thirty days of the receipt of such application by the Authority, the insurer shall deem that the approval has been granted by the Authority.

5.4 Relaxation of Qualification of Actuary..

Where an insurer is unable to appoint an actuary in accordance with the regulations prescribed for qualifications of an appointed actuary (sub-regulation (2) of regulation 3 of IRDA (appointed Actuary) regulations, 2000) he may make an application to the Authority in writing for relaxation of one or more conditions mentioned therein. The Authority shall on receipt of the application communicate its decision to the insurer within 30 days of receipt. The appointment of an appointed actuary shall take effect from the date of approval by the Authority.

5.5 Cessation of Appointment of Appointed Actuary...

An appointed actuary shall cease to be so, if he or she has been given notice of withdrawal of approval by the Authority on the following grounds...

That he/she ceases to be eligible in accordance with the sub 2000 (sub-regulation (3) prescribes the

regulation (2) of regulation 3 of IRDA (appointed actuary) regulations, qualifications for an appointed actuary) or

That he/she has in the opinion of the Authority, failed to

perform adequately and properly the duties and obligations of an appointed actuary. The Authority shall give an appointed actuary a reasonable opportunity of being heard, if given a notice of withdrawal of approval. If a person ceases to be an appointed actuary otherwise than on grounds of ineligibility or failure to perform duties, the insurer and appointed actuary is required to inform the Authority the reasons thereof within fifteen days of such a cassata

5.6 Powers of Appointed Actuary...

The appointed actuary has been vested with substantial powers; the powers having enormous significance in insurance business are listed below...

An

appointed

actuary

shall

have

access

to

all

information or documents in possession, or under control of the insurer if such access is necessary for the proper and effective performance of functions and duties of the appointed actuary;

He may seek any information for the purpose of fulfilling his

duties of an appointed actuary from any officer or employee of the insurer

He is entitled to attend all meeting of the management

including that of the directors of the insurer;

He is empowered to speak and discuss matter relating to the that may affects the ability of the

actuarial advice given to the directors, matters affecting solvency of the insurer, matters insurer to meet the reasonable expectations of policyholders; and He may attend any meeting of the shareholders or the policyholders of the insurer or any other meeting of members of the insurer at which the insurers' annual accounts or financial statements are to be considered or at which in connection with the appointed actuary's dutie

5.7 Duties and Obligations of an Actuary...

The duties and obligations of an actuary shall include...
Rendering

actuarial

advice

to the wording

management , investments

of the and

insurer, in particular in the areas of the product design and pricing, insurance contract reinsurance; Ensuring the solvency of the insurer at all times; Complying with the provisions of section 64VA of the Act, 1938 in regard to certification of assets, liabilities that have been valued accordingly and maintenance of required solvency margin in the manner required under that provisions;

Drawing the attention of management of the insurer, to any

matter on which he/she thinks that action is required to be taken prejudice to the interests of the policyholders; Complying with the Authority's directions from time to time; Ensuring in general insurance business...

That the rates are fair in respect of those contracts that are

governed by the insurer's in-house tariff; and

That the actuarial principles, in the determination of

liabilities, have been used in the calculation or reserves for incurred but not reported (IBNR) and other reserves where actuarial advice is sought by the Authority;

Informing

the

Authority

in

writing

of

opinion,

within

reasonable time, whether... The insurer has contravened the insurance act, 1938 or other related statutes; The contravention is of such a nature that may affect significantly the interests of the owners or beneficiaries of policies issued by the insurer; The directors of the insurer have failed to take such action as is reasonable necessary to enable him to exercise his or her duties and obligations; or An officer or employee of the insurer has engaged in conduct calculated to prevent him/her exercising his/her duties and obligations.

5.8 Absolute Privilege of Appointed Actuary

The appointed actuary shall enjoy absolute privilege to make any statement, oral or written for the purpose of performance of his functions as appointed actuary. This is, in addition, to any other privilege conferred upon an appointed actuary under any other regulations framed by the IRDA. Any provision in the letter of appointment of the appointed actuary which restricts or prevents his duties, obligations and privileges shall have no effect.

Effects of rejection of the application: the insurer shall, within four weeks of rejection of the application referred to under regulation 3, apply to the authority for the appointment of a person other than the one rejected by it under regulation 3 as an appointed

6. ACTUARIAL SOCIETY OF INDIA

The Actuarial Society of India, known as the ASI, is the sole professional body of actuaries in India. The Actuarial Society of India was established in 1944 to provide a central organization for members of the actuarial profession in India for the purpose of elevating the attainment and status as also promoting the general efficiency of all who are engaged in the pursuits of an Actuary. It is the Indian counterpart of the Institute of Actuaries, London. Any person with a high degree of aptitude for mathematics and statistics can become an Actuary. Generally, first class graduates or postgraduates in mathematics or statistics or those who had Actuarial Science as an optional subject at the degree level will be in a better position to qualify as Actuaries. To become a full-fledged Actuary, one has to clear, through self-study, a series of examinations by the Actuarial Society of India, Mumbai.

Since almost all actuaries in India qualified from Institute of Actuaries, London, the bond between the London Institute and Indian Society became stronger day-by-day. The Institute of Actuaries, London always lends full support to the Actuarial Society of India.

The traditional field for actuaries was life insurance. But actuaries gradually entered into wider fields like pension, general

insurance, health insurance and investment. The basic subjects taught in the actuarial courses are mathematics, statistics and finance. At the higher level, particularly at fellowship level, a student has to learn and master application of the basic actuarial techniques. The method of training helps an actuarial student to acquire skill for analyzing any type of complex problems. To become an actuary one must obtain a fellowship by completing the examinations through one of the following professional bodies...

Institute if actuaries of England and Wales

Institute of actuaries of Australia

Societies of actuaries of north America

Faculty of actuaries of Scotland

6.1 Registration of the ASI

In 1979, it was admitted to the International Actuarial Association as a member. On 14th December 1982, it was formally registered under Registration of Literary, Scientific and Charitable Societies Act XXI of 1960. A certificate of registration of the ASI under section XII AA of Income Tax Act was received on the 14th March 1984. ASI is also registered under Public Charitable Trust Act 1950.

6.2 Educational and Ethical Goals of the ASI

To prepare "actuaries of tomorrow" who are adequately To keep the level of competence on a continuing basis

qualified and competent in the global context.

for fully qualified Actuaries at a high in the global context through CPD (Continuing Professional Development) and other programs.

To serve the cause of public interest through Professional

Code of Conduct and Disciplinary Procedures

6.3 Objectives

Advancement of the Actuarial profession in India. Providing opportunities for interaction among members Facilitating research, arranging lectures on relevant subjects Providing facilities and guidance to those studying for the

of the profession.

Actuarial exams.

6.4 History
The ASI was initially started as a non-examining .body when Actuaries used to get qualified from Institute of Actuaries or Faculty of Actuaries of the United Kingdom. The actuarial

profession in India saw a downward trend in the early years of nationalization of the Indian insurance industry. This had to a reduction of actuarial input in both life insurance and general insurance management, and insignificant input in other areas such as pensions, insurance regulations, and academics. The downward trend resulted ii a reduction of number of students taking actuarial exams. In the last few years, the actuarial profession in India has experienced tremendous growth. The ASI has grown as well with around 3,000 student members joining the society. The current president of ASI is Mr. Kannan; who is also the appointed actuary of SBI Life.

6.5 International Relationships

ASI is founding member of the International Actuarial Association, the umbrella organization for all actuarial bodies across the world. The ASI is actively involved in the formulation of future education strategy of International Actuarial Association.

6.6 Become an Actuary

ASI has stipulated minimum standards to be met before a person can become its student member. These include graduation in statistics or mathematics, CA, ICWA, MBA etc. Also, any person with 85 or more marks in Mathematics at 10+2 level can also apply to become a student. Any person with minimum 18 years of age and having a high 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.

6.7Qualification in India
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.

6.8 Duration of the Course of Study

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 effort 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.

6.9 Actuarial Educational Model in India

The subjects for the examinations can be categorized in to four groups. The first group Comprises of the CT ( Core Technical) 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, investment and other areas. An 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 are practical in nature as they reflect real life situations of the area of work to which the subject is applicable. There are in total 8 CT series papers and all are compulsory. The second group comprises of CA (Core Applications) series subjects. CA3 subject is mean to develop skills of communication of technical aspect of the CT series subjects in simple language to non-technical persons; here again the stress in examination question is demonstration of the skills of communications in real life environment. CA1 deals with the ideas underlying assets, liabilities and asset-liability management. Also there is a modelling course CA2. This is a practical course and hence does not involve written examination. CA series subjects are also compulsory. On completing CT and CA series students can get title of AASI. Next up are ST (Specialist Technical) series examinations. Here, students can opt for any 2 of the 6 subjects being offered. The aim is to ensure that the students gain expertise in their related fields. Finally, there is one SA (Specialist Application) series subject to be taken. Here again, there are 6 subjects to choose from. The actuarial education model, therefore, is ingrained with work and application and therefore substantially this education beyond CT series subjects takes place in work environment. The success through examinations is linked to corresponding work experience

and insight, thus gained. The examinations given at CT series level take place, for most of the students in work environment.

7. GLOBAL INSURANCE SCENARIO AND CHALLENGES FOR THE ACTUARY

An actuary is a financial-cum-mathematic expert who specializes in the statistical estimation of various risks and their financial consequences. He thus plays a key role not only in designing and pricing of risk covers, i.e. insurance policies, but also in all aspects of insurance company management including reserving and distribution of surplus, investment of finds, corporate restructuring and mergers and also regulation of insurance sector. The insurance industry in India till the year 2000 being a state monopoly, its history of the past few decades has been one of the stable and rather uneventful growths. However, one cannot ignore the fact that the insurance business is only one of the many interrelated financial services, and hence it can no longer remain unaffected by the vast changes sweeping the entire financial sector, both in India and abroad. The most important and interesting development on the financial scene that we have been witnessing in recent times is a distinct trend towards integration or convergence of various financial services into a single business entity that may be referred to as "a financial super market". In our country this trend is signaled by disappearance of the dividing line between long-term project finance and short terms loans, as banks like SBI have

entered in a big way into term lending business while long-term financial institutions like IDBI, ICICI and IFCI are making forays into working capital funds and commercial banking sector. At the global level, this blurring of the distinctions among various financial businesses is even more prominent and radical, as evident from the emergence of concepts like Bane-assurance, where banking giants have started companies network to so as sell to capitalize acquiring or life insurance while their extensive branch products,

protection-cum-saving

insurance companies are setting up their own banks and mutual funds. So much so that even retail chain stores that have always sold only tangible consumer goods so far, are embarking on insurance marketing, merely to cash on their competitive edge in marketing and special rapport with the consumer. What are the implications of these financial upheavals for the future of insurance industry in India and for the actuarial profession, whose development is closely aligned with the prosperity of this industry? As the Indian Government has permitted entry of private firms in insurance business, one thing is certain that all professionals including actuaries responsible for the blooming of this industry and its future growth will have to draw heavily upon the vast experience of insurance industries in developed countries of the US and Europe and also learn a few significant lessons from the fortunes and failures of those in other developing countries in South East Asia. It is quite appropriate and desirable, that for the Indian actuaries to take a hard look at some of the latest issues that

are becoming centre-stage in the insurance debates and are exercising the minds of actuaries all over the world. The most significant impact of this growing synergy among financial services on actuaries will be an inevitable move towards closer co-operation with other related professions such as accountants, engineers, lawyers, marketing specialists, bankers, investment analysis and so on. As things stand today, a lack of understanding of what actuary is and what he or she can do is not only confined to the so-called laymen but also pervades even 'experts' engaged in these related professions. The greatest challenge before an actuary today is how to reach out to those whose decisions will matter a lot to his own professional success, how to accept and incorporate their 'nonactuarial' viewpoints into his actuarial principles, theories and models, and thus be accepted as a useful and pragmatic decision-maker in the overall management of financial services. 7.1 Strengthening the future role of actuaries... Other changes, for all life insurers, include replacing the role currently fulfilled by the Appointed Actuary. Two distinct actuarial roles, also requiring FSA pre-approval, will be introduced to ensure that boards obtain actuarial advice on key aspects of their business. For with-profits business specifically, there will be a with-profits actuary whose role it is to provide technical advice to the board focused on the fair treatment of policyholders. He/she could not be a member of the board. All

companies undertaking long-term insurance business will be obliged to have an actuary (actuarial function) to provide technical advice to the board on issues such as the valuation of policyholder liabilities.

8. RISK AND ACTUARIAL SCIENCE

The future is full of uncertainty. Some of the events that can happen are undesirable. "Risk" is the possibility that an undesirable event will occur. Actuaries are experts in... 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. Actuaries are the leading professionals in finding ways to manage risk. It takes a combination of strong analytical skills, business knowledge and understanding of human behavior to design and manage programs that control risk. Every person and organization faces risk, and it comes in many forms. As experts in measuring and managing risk, actuaries fill a significant need in our society. Their contribution to society's psychological, physical and economic well-being is immense. If the risk management programs actuaries develop don't exist, our economic growth would be greatly impacted. There are many ways to manage risk. While, there are some well-established techniques to manage risk. Some popular techniques include...

8.1 Focus on catastrophic risks... Mathematical theory shows that the greatest relief from risk (and consequently, the greatest increase in peace of mind) comes from eliminating the consequences of events that are very unlikely, but result in very big losses. Thus, families should think about what might happen if the breadwinner dies, their house burns down, or they lose all of their savings. They should then implement solutions that reduce the likelihood of these events, as well as manage their financial impact. This might involve purchasing a life insurance policy or investing the savings in many different stocks, to reduce the exposure to any one company's fortunes. Generally, a few simple measures taken to address catastrophic risks have a great impact on our well-being. 8.2 Offsetting one risk with another... Under certain circumstances, two harmful events might possess the characteristic that when the likelihood of one goes up, the likelihood of the other goes down. Thus, if we know that when coffee prices go up, soda prices go down, we might want to invest in both coffee and soda stocks, to manage our risk

8.3 Risk is a matter of perspective... What might be harmful to one party might be good for another. For example, when the value of the dollar goes down against the French franc, which might be bad for an American business but favorable for a French business. By trading off the consequences of an undesirable event with another party who is affected favorably, both parties are made better off.

8.4 Diversify... It is better to take on many small risks than face one big risk. Many small risks generally average out, to give an outcome that is not too extreme in one direction or another. Results become more predictable. Thus, diversification is an important tool in managing risk. Actuaries may always have been associated with insurance, but, their skills are in demand elsewhere as the regulation revolution continues. It is commonly observed that "what gets measured gets managed". But historically many organizations assessed risk on a subjective or qualitative basis rather than by using quantitative disciplines.

8.5 Need of actuaries in risk management... Today, risk management has become core to good corporate governance. The understanding and management of risk using both quantitative and qualitative measures is increasingly recognized as a means of achieving strong performance against financial, social and environmental business objectives. The actuarial profession has its origins in risk quantification. The traditional role of actuaries involves quantifying risk to set adequate insurance premiums. This role has developed over the years into providing high quality analysis for management and boards of varying financial services organizations - and also for regulators. More recently, actuaries have become involved in other activities where the demand for better financial risk management has been increasing, including banking, funds management, and project

finance and in the utilities and the resources industries. Actuaries are relied upon through their professional education and affiliation to ensure their advice is unbiased and candid. The insurance business is the business of absorbing risk, both short and long term. That risk would otherwise be borne by individual people or businesses, and is often accompanied by considerable volatility. It is, therefore, not surprising to find some of the most sophisticated risk frameworks and methodologies in place within insurance companies. 8.6 Determine risk exposure in banks under Basel II... From 2007, banks will be required to determine capital requirements to meet operational risk exposure under Basel II. Under the advanced measurement approach (AMA), banks will be able to determine their own approach to the assessment of exposure to operational risk subject to the approval of the regulator. The method taken must be comprehensive and systematic and have demonstrable integrity. Actuaries are working with other professionals to develop methodologies for the measurement of risk in banking, which is especially important in an environment where there are data limitations and the need to find solutions that balance statistical rigor with a thorough understanding of operational conditions. The new Basel II framework is intended to reward stronger and more accurate risk management and to align the capital requirements of a bank to its risk appetite. The AMA will mean that capital better reflects the organization's own risk profile with the benefit of reinforcing the inter-connectedness of risk, capital and management behavior. Heightened demand for risk management signals a significant step

up for the actuarial profession, as it requires actuaries to be knowledgeable across the whole business, covering all risk management functions, reinsurance arrangements, liability management and product pricing. Involvement in Basel II provisions open up areas of credit risk, market risk and operational risk, and new opportunities to develop strategies and quantitative techniques for original risk measurement and modeling. Moving from its asset and

base in insurance and superannuation, and more recently into banking, the actuarial profession is continuing to apply its training and expertise across areas such as economic capital, project finance, real options analysis, and environmental finance and energy markets trading. The quantification and measurement of risk, and an assessment of its impact across business lines, is a crucial tool within the enterprise reward that risk management all framework that allows planning an and organization to balance the necessary tension between risk and underlies strategic business management. The actuarial profession is increasingly recognized as a guardian of the organization's risk appetite by balancing growth with the capacity to finance it and to cope with its attendant risks. This role makes the actuary the C3O's valued ally in achieving sustainable growth and the superior shareholder value it generates.

9. CONCLUSION

Actuaries are the backbone of the insurance companies. They apply mathematical, statistical and economic analysis to a wide range of practical problems in insurance, investment, financial planning and management. In short, they are disciplined problemsolvers. A creative aspect of the work of actuaries is forecasting of future contingent events. The actuarial profession has a rich and varied history dating back to the seventeenth century Actuaries use skills in mathematics, economics, finance, probability and statistics, and business to help businesses assess the risk of certain events occurring, and to formulate policies that minimize the cost of that risk. For this reason, actuaries are essential to the insurance and reinsurance industry, as staff employees or as consultants, as well as to government agencies such as the Government Actuary's Department in the UK or the Social Security Administration in the US. Actuaries also address financial questions, including those involving the level of pension contributions required to produce a

certain retirement income and the way in which a company should invest resources to maximize its return on investments in light of potential risk. Using their broad knowledge, actuaries help design and prices insurance policies, pension plans, and other financial strategies in a manner which will help ensure that the plans are maintained on a sound financial basis. Actuaries play a key role to design insurance plans, determine the premium, monitor the profitability of insurance companies and recommend corrective action when appropriate. Actuaries are involved in pricing, product design, financial management and corporate planning. Actuaries working in insurance companies also ensure that insurance companies have set aside enough funds to pay claims and provide advice on how to invest the insurance companies' assets. They use their professional expertise in solving complication financial problemsby combining their theoretical as well as practical knowledge. An insurance company has to take the assistance of an actuary in conducting the business of insurance. The IRDA in consultation with the Insurance Advisory Committee has made regulations for appointment of actuary. Regulation 5 of the 'IRDA (appointed actuary) Regulations, 2000' provides that a life insurer shall not carry on business of insurance without an appointed actuary. As things stand today, a lack of understanding of what actuary is and what he or she can do is not only confined to the so-called laymen but also pervades even 'experts' engaged in these related professions. Thus the greatest challenge before an

actuary today is how to reach out to those whose decisions will matter a lot to his own professional success, how to accept and incorporate their 'non-actuarial' viewpoints into his actuarial principles, theories and models, and thus be accepted as a useful and pragmatic decision-maker in the overall management of financial services.

BIBLIOGRAPHY

SR. NO.

SOURCE

AUTHOR

Internal sources
1 Insurance Fundamental : Environment and Procedures Insurance Insurance and Risk Management Magazine: Insurance Chronicle B. S.Bodla, M.C.Garg and K. P. Singh Julia Holyahe and William Weipers Dr. P. K. Gupta The ICFAI University Press

2 3 4

External sources
1 2 Internet search Visit to Actuarial Society of India

Mumbai