ACS 410 ASSIGNMENT - Prof Mojekwu

THE ROLE OF ACTUARIES IN LIFE AND GENERAL INSURANCE
Introduction
An actuary is a trained professional who analyzes the financial cost of risks and
uncertainty and makes predictions on how much of a risk a venture or client may
be and how to best compensate for that risk. Actuaries usually have an
accounting, actuary or finance degree. Actuaries may work in accounting firms or
financial institutions, but they’re usually found working in insurance companies.
An actuary working for an insurance company has the duty of determining how
much of a financial risk a customer might be to the insurance companies and
what kind of premium they should be charged to cover the possible risk. 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.
Life insurance and general insurance are two different forms of insurances.
General insurance covers any other risk except for life-risk of the person injured.
This includes personal insurance, such as for homes or cars, as well as insurance
for large commercial risks. Numerous factors can affect the size and volume of
claims, so general insurance companies employ actuaries to analyse the data and
help their financial management.
Life insurance covers only the life-risk of the person injured. It is one of the
traditional and largest areas of practice for actuaries. Life insurance companies
provide life insurance, pensions and other financial services. Actuaries are
involved at all stages during the development of different life insurance products
and offer a thorough risk assessment. Their advice will influence how these
products are priced and marketed. In addition, actuaries work with individuals to
help them decide which product is right for them.
What is life insurance?

As the name suggests, life insurance covers your life. In case of policyholder’s
premature demise within the policy term, the insurance company pays the sum
assured to the nominee. One of the most essential financial instruments, life
insurance helps the beneficiary to stay financially independent.
Types of life insurance
1. Term life insurance: Term insurance is the simplest form of life insurance
available in the market. A pure protection plan, a term insurance offers a
large coverage at an affordable premium. It pays the beneficiary the sum
assured in case of the demise of the policyholder within the policy term. It
means, in case you survive the policy term, you don’t get these benefits.
2. Endowment plans: Weaving insurance and investment in a single product,
endowment plans offer life cover as well as build a corpus for essential life
goals. A certain portion of the premium goes towards the sum assured,
while the other portion is invested in low-risk avenues. In case of the
demise of the policyholder, the beneficiary gets the sum assured. In case he
survives the policy term, you get the sum assured as maturity amount along
with the accumulated bonuses. Thus, endowment plans fulfil the dual
needs of insurance and investment.
3. Whole life insurance: As the name suggests, a whole life insurance offers
you coverage for your entire life. The policy term for whole life insurance
plans extends up to 100 years and as long as the premiums are paid, the
benefits of the policy are kept intact. If the policy holder survives the policy
term, you get maturity benefits.
What is general insurance?

General insurance covers non-life assets such as home, vehicle, travel –
from floods, fire, thefts, accidents and man-made disasters.
Types of general insurance
1. Health insurance: A general health insurance plan is an indemnity plan that
pays for hospitalization expenses up to the sum insured. It prevents out-of-
pocket expenses while dealing with a medical emergency.
2. Motor insurance: Motor insurance covers your vehicles against accidents,
damage, theft, vandalism, and so on. This form of insurance comes in two
forms – comprehensive and third-party. A comprehensive motor insurance
policy provides a 360-degree cushion to your vehicle against damages
caused due to flood, fire, riot, etc. Along with this, it also offers rider a
personal accident coverage along with third-party liability.
3. Home insurance: A home insurance policy protects your home and its
belongings from the damages suffered due to man-made or natural
disaster. Some home insurance policies also provide coverage for
temporary living expenses in case you are living on rent.
4. Travel insurance: A travel insurance policy protects you against losses
suffered due to loss of baggage, delays in flight and trip cancellation. In
some cases, if you are hospitalized while travelling, a travel insurance may
also offer cashless hospitalization.
THE ROLE OF ACTUARY IN LIFE INSURANCE SECTOR
Actuaries can actually fill a number of diverse roles within the operation of
life insurance companies. For the insurance industry, they develop 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 risk into account.
The roles of an actuary in life insurance are:
1. 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 and the role of the actuary is to 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.
2. Actuarial Valuation: This involves the estimation of future liabilities like
estimates for unpaid claim liabilities, the amount kg 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 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.
3. 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.
4. 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 that actuaries use is
immunization. The aim of immunization is go look for interest rate changes
and choose such asset portfolios which provide sufficient returns to pay the
liabilities.
5. 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.

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THE ROLE OF ACTUARIES IN LIFE AND GENERAL INSURANCE

What is life insurance?

What is general insurance?

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