The Role of Actuary in Life Insurance Sector

When you buy an insurance policy, you pay the premiums and everything seems so simple. But do you know what the background story behind the product is? How the amount of premium is calculated and how insurance companies survive? Here in this article, we will discuss the role of Actuary in Life Insurance Sector.

Well, actuaries are there to play the backstage role. An actuary is a professional valuer who compiles and analyses statistics and uses them to calculate insurance risks and premiums.

Actuarial Science is applicable in any situation where risk and uncertainty are present.
Life Insurance is one of the traditional and largest areas of practice for actuaries.

Actuaries can fill a number of diverse roles within the operation of life insurance companies. For the insurance industry, they develop, price, and manage insurance products. Not only that, but they also give advice to insurance companies, review contracts, plans and policies to ensure that the policies have taken the risks into account.

The job of an actuary can be extremely complex and challenging but of course demanding! Coming to the basics, it emphasizes the application of probabilities, time value of money, mortality rates through models that are designed for projection and analysis of a particular situation.

Let’s take a look at the daily job of an actuary in Life Insurance Company:

Pricing and Designing of Policies

Pricing is the method of determining the price of various insurance products. Pricing involves complexity especially when it comes to insurance. How? Let’s take an example! When you sell a pen, the costs of producing it is relatively known. You know how much you paid for the raw material, labor cost and other expenses.

Hence you determine the selling price by taking into account all these costs and the amount of profit you want to make. But this is not the case in the insurance business. Insurance businesses involve a large magnitude of uncertainties and so, the cost of the coverage is unknown. That’s where the role of actuary comes in. They calculate the premium based on some underlying assumptions regarding mortality, interest rates, and expenses and make sure that the company makes an adequate amount of profit.

Actuarial Valuation

Actuarial valuation involves the estimation of future liabilities like estimates for unpaid claim liabilities, the amount of sum assured surrender value calculations. They monitor the funds required to pay the benefits promised to the policyholders, and suggest the bonuses to be added to with-profit contracts. Valuation also includes Reserving.  

Reserves are basically the amount that the company needs to set aside in order to meet future liabilities. Premiums are usually paid in advance. In the early years, the premiums received are more than enough to pay the claims that may arise in those years, but in later years the premiums are too small to pay the claims. To solve this problem, actuaries invest the premiums received in early years and also set an appropriate amount of reserves to meet the future liabilities.

Profit Testing

Pricing and reserving would be meaningless if the company fails to make profits on its products. Profit is necessary for any business to survive. For life insurance companies, actuaries estimate the future profits based on expected inflows and outgoes. And these expected figures are calculated using some assumptions regarding probabilities, interest rates, and life expectancy.

Asset-Liability Management (ALM)

Asset-Liability management is one of the fundamental elements of life insurance operations. ALM is important because the mismatching of assets and liabilities can lead to financial instability. ALM is the practice of creating business strategies related to assets and liabilities of the company to achieve the financial goals for a given set of risks.

One of these strategies is Immunization which you might have studied in CT1 (now in CM1). The aim of Immunization is to look for interest rate changes and choose such asset portfolios which provide sufficient returns to pay the liabilities.

Experience Analysis and Reporting

Actuaries are also responsible for experience analysis. It is basically a comparison between the past and future. Experience analysis is looking closely whether the actual experience has corresponded with the assumptions they previously made. They revise the assumptions and review the actuarial methods to make sure that they are appropriate for the changing conditions, to do the future analysis more effectively.

Reviewing the assumptions is very important because a flaw in the model’s assumptions may lead to the mispricing of products or underestimation of the frequency of an event. For instance, actuaries compare the expected deaths with the actual deaths and see whether they need to change the life tables they are using for prediction.

Finally, they make a report and interpret the results for the members of management and propound actions that can be taken in response to the information.

Apart from these, actuaries can also work in predictive analysis, where they can predict future claims based on the past experience.

Life insurance is one of the earliest fields where actuaries have been working, and their involvement is expected to grow with the recent expansion of actuaries into the field of data science.

I hope this article helped you in understanding the role of Life Insurance Actuary!

You might also like More from author