Law of Insurance

LLM Batch (2017-18)

(Monsoon Semester)

Topic - “Role of Actuaries”

Submitted to - Submitted by -
Ms. Sujata Roy Harsh Pandey

PG 21714
TABLE OF CONTENTS
CHAPTER 1: SYNOPSIS ................................................................................................................................... 3
1.1 INTRODUCTION ................................................................................................................................... 3
1.2 STATEMENT OF PROBLEM .................................................................................................................. 4
1.3 RESEARCH QUESTIONS........................................................................................................................ 4
1.4 HYPOTHESIS ........................................................................................................................................ 5
1.5 OBJECTIVE OF RESEARCH .................................................................................................................... 5
1.6 SCOPE OF RESEARCH........................................................................................................................... 5
1.7 RESEARCH METHODOLOGY ................................................................................................................ 5
1.8 TENTATIVE CHAPTERISATION ............................................................................................................. 6
1. Introduction ...................................................................................................................................... 6
2.Historical and Legal aspect of the Actuaries ...................................................................................... 6
3.Responsibilities And Roles Of Actuaries............................................................................................. 6
4. Role of Actuaries in Life and General Insurance ............................................................................... 6
5. Role of Actuaries in other Sectors..................................................................................................... 6
6. Conclusion and Suggestions. ............................................................................................................. 6
CHAPTER 2: HISTORICAL AND LEGAL ASPECT OF THE ACTUARIES ............................................................... 7
2.1HISTORICAL ASPECT ............................................................................................................................. 7
2.2LEGAL ASPECT................................................................................................................................. 7
CHAPTER 3 : RESPONSIBILITIES AND ROLES OF ACTUARIES ......................................................................... 8
CHAPTER 4: ROLE OF ACTUARIES IN LIFE AND GENERAL INSURANCE........................................................ 11
4.1LIFE INSURANCE ................................................................................................................................. 11
4.1.1HOW LIFE INSURANCE WORKS ....................................................................................................... 11
4.2GENERAL INSURANCE ........................................................................................................................ 12
4.3 ON COMPARISION ........................................................................................................................ 13
CHAPTER 5 : ACTUARIES IN OTHER SECTORS ............................................................................................. 14
Enterprise risk Management (ERM)........................................................................................................ 14
Sports ...................................................................................................................................................... 14
Weather Risk Management .................................................................................................................... 15
Divorce Law ............................................................................................................................................. 15
 E-Commerce Risk .................................................................................................................................... 15
CHAPTER 6 : CONCLUSION AND SUGGESTIONS ............................................................................. 16
6.1 CONCLUSION ..................................................................................................................................... 16
6.2 SUGGESTIONS ................................................................................................................................... 17

CHAPTER 1: SYNOPSIS
1.1 INTRODUCTION
Actuaries are the persons who apply certain mathematical and analytical formula to predict
the financial solution to the uncertain and unforeseeable events, which can be both financial
and emotional. The basis of coming into the desired conclusions can be on the basis of the
Historical Behavior of the market, Business Knowledge, Experience and Various Statistical
and Analogical tools. In other words, we can say they are involved in the Pricing, Corporate
Planning, Financial Management and product designing. They use theoretical as well as
practical knowledge to come to solve the complication of the problems. This whole
phenomenon is called as Actuarial Science. Some critics even relate actuary’s role in a
company with a human brain in the body. Actuaries must be very smart when determining the
prices of policies, as if they keep the price of the polices very low, company won’t be making
much profits as it expect, and if they keep the price high then the customers won’t buy, so they
have to be near about perfect especially with respect to pricing of the polices. Further, actuaries
cannot prevent any unwanted risks to happen but at least they can guide us or give us a
protective shield in order to protect ourselves from the danger which is on our way. Nowadays,
the reach of actuaries is not only confined to the insurance field but also in numerous sectors
such as Sales, Sports, Banking and many more. So, in this Project researcher has tried to cover
every aspect of actuaries and their roles not only in insurance industries but also in various and
lucrative industries where they are attractively paid and equally treasured.
1.2 STATEMENT OF PROBLEM
Actuaries can never prevent any risks or danger. They can only predict that how it may affect
the people or they can minimize the impact of that risk, through their mathematical, analogical,
analytical formula they try to come into the conclusion for any peril or manface which can
affect the public at large. They never have a certain specific or straight jacket formula for
tackling any problem as, situations and circumstances can be different, time can be diverse,
with respect to that they have come up with certain procedures and solutions which can be
helpful to the policy holders or individuals.
Actuaries enjoy absolute privilege with respect to any function or statement carried out during
his employment. If loss is made by the company or the individual is affected by it, no one has
any legal remedy against the actuaries. Any Statement made oral, written cannot be proven
against him in any court, unless he is involved in illicit practices or corruption. The reason for
such privilege is, as at the end of the day a human only is playing a role of the actuary and
human beings are subjected to mistakes, so why actuaries should be the exception to that.
In the present scenario actuaries are not only limited to insurance sector but also in different
sector where they are paid very well. Since everywhere before taking final decisions business
people want to be hundred percent sure regarding the happening or not happening of certain
thing or an event. Thus, actuaries are the best person in this situation.
Actuaries have to analyze dissimilar conditions when they are dealing with the life insurance
or general insurance. As in life insurance the actuaries has to deal with Age, Weight,
Hereditary, Health of a person whereas in general insurance actuaries make use of the methods
of Reserving, Rating and Capital Modelling and many more so that they can come to desired
conclusion.

1.3 RESEARCH QUESTIONS

 Whether actuaries can stop or cease any risks or danger? Do they have the straight jacket
formula for every situation?
 What happens if the actuaries fail to judge any loss pertaining from the policies? Can they
be liable for any loss if their company makes, due to their negligence?
 Whether actuaries only work in Insurance Sector? Or there are any other fields as well?
  What measures actuaries take when they are dealing with life insurance and general
insurance? Are those measures same or any difference is there between two?

1.4 HYPOTHESIS

The researcher feels that actuaries and underwriters are synonymous in nature regarding their work
profile in any company. Further they can be used interchangeably when needed.

1.5 OBJECTIVE OF RESEARCH

The researcher shall be dealing with the notion of Actuarial Science and the role of Actuaries in
Insurance business. Further, the researcher will be investigating the functions and responsibilities
and duties of actuaries and the role of actuaries with reference to life insurance and general
insurance.

1.6 SCOPE OF RESEARCH

For the purpose of achieving the aforesaid objectives, the researcher has dealt with the role of
actuaries in life and general insurance and also how they perform and function when they work in
any other fields as well. Further, the researcher has also discussed the historical and legal aspects
related to actuaries.

1.7 RESEARCH METHODOLOGY

The researcher has adopted doctrinal methodology to conduct the research and has employed
analytical and critical tools of research. Researcher has relied on primary and secondary sources
of data which involves collection of data from various online and offline also the books written by
various recognized and reliable authors and articles available on different legal and non-legal
databases. Finally, researcher has used comparative method by which a comparison is drawn
between life insurance and general insurance.
1.8 TENTATIVE CHAPTERISATION
1. Introduction
This Chapter provides the Introduction, statement of problems, research questions, hypothesis,
objective of the study, scope of the study, research methodology used by the researcher and the
chapterisation.

2.Historical and Legal aspect of the Actuaries

This chapter deals with the history of actuaries how it came in force. Further, the researcher has
also dealt with the legal phenomena which governs the actuaries in India.

3.Responsibilities And Roles Of Actuaries

This chapter deals with the roles and powers which actuaries with respect to insurance sector and
how they manage a company with other important persons as well.

4. Role of Actuaries in Life and General Insurance

In this chapter, the researcher has defined life and general insurance briefly. Further, the Reacher
has compared both with respect to the function of the actuaries

5. Role of Actuaries in other Sectors

In this chapter, the researcher has discussed the role of Actuaries in different fields such as ERM,
Sports, Divorce Law , Weather Management. E-commerce risk

6. Conclusion and Suggestions.

This chapter deals with conclusion and suggestions given by the researcher. Further ,what were
the shortcomings of the actuaries and suggestions which can be implemented in relation to other
chapters.
CHAPTER 2: HISTORICAL AND LEGAL ASPECT OF THE ACTUARIES
2.1HISTORICAL ASPECT
The history of the actuarial science can be seen in the past societies of Rome as well. So, whenever
any person passes away, each member used to contribute in a certain manner for the funeral
purposes, but how much aid has to be made, was a determining factor. Subsequently, they elected
a person who will analyze and roughly calculate that how much everyone has to pay for upcoming
funerals. Later, even Haley (the Scientist who discovered Comet) calculated the population of a
small town of Germany on the basis of mortality and birth rates. Therefore, we can say that
Actuarial Science and Actuaries is not at all a new concept, it has always been there forming an
important part of our history.

The term "actuary" came from the Latin word actuaries which meant administrator or
assistant(clerk) or one who does calculations associated with insurance. If going by the past records
then we can say that, it was invented in London in 1762 by the Equitable, who first time used
scientifically designed premium rates. The Secretary of that equitable was assumed the name of
“Actuary”. Moreover, in 1775, William Morgan FRS was chosen as the Actuary of the Equitable
as he was an excellent mathematician and was good at solving the analytical calculations. Across
the years actuarial associations have been established in numerous other European countries, in
the United States, Australia and Japan and many more countries seeing the need of the Actuarial
Science.

2.2LEGAL ASPECT
On 28 August 2006, the Actuarial Society of India (ASI) offered route to the Institute of Actuaries
of India (IAI) under the support of the Actuaries Act 2006. In 1999, the main significance has been
precluded and the second has been explained upon. The Act be that as it may, gives an itemized
however extensive definition. The Actuarial Society of India was framed in September 1944 and,
in December 1982, it was formally enlisted as a Literary, Scientific and Charitable Society under
the Societies Registration Act XXI of 1860 and under the Bombay Public Trust Act, 1950. The
credit for inducing the Society to formally enlist itself goes to late R. K. Mahajan, the then
Controller of Insurance. The suggestion to offer Charter to the Actuarial Society of India was made
by the Malhotra Committee in 1994 (proposal xiii of Chapter 14). After two years, the Insurance
Regulatory and Development Authority (IRDA) started the subsequent activity and the protection
wing of the Ministry of Finance at that point assumed responsibility of the assignment. Its tireless
endeavors have finished in the present Act and the constitution of the body corporate by the name
of the Institute of Actuaries of India which will assume control over every one of the capacities,
resources and liabilities, of the Society. Moreover, Till 1989, to qualify as a Actuaries, one needed
to pass the examinations being directed by the Institute of Actuaries, London. The examinations
were held in a couple of metropolitan focuses in India. In 1989, the Society began leading its own
particular examinations in actuarial science. The syllabus took after and the investigation materials
utilized were the same as that of the London Institute and the Institute too was sufficiently caring
to allow the Society to utilize their materials. Be that as it may, the goal was to create indigenous
investigation materials throughout the following couple of years and make the Actuarial Society
of India the point of convergence of actuarial training in South East Asia. In any case, the Society
keeps on being completely subject to the London organization for its examination materials and,
intentionally or unknowingly, every one of its endeavors have been coordinated towards building
a fabulous super structure, without first laying a firm foundation. The selection of individuals from
different callings to the proposed Indian establishment's committee may bring a whiff of natural
air into the working of the Society and the designated individuals might be able to control the
recently constituted organization towards the undertaking of laying this foundation. The meaning
of the expression " Actuaries practically speaking" and the arrangement that "no organization can
rehearse as Actuaries " have put very still the contention going ahead inside the calling and aligned
us with the practices in other Asian countries. One may ponder concerning why such quite a while
was taken to set up this Act and IRDA was chosen to be the regulator.

CHAPTER 3 : RESPONSIBILITIES AND ROLES OF ACTUARIES

Actuaries have many important and crucial roles to play, which cannot be substituted or filled by
any other ordinary person in the company. As it is rightly said the actuaries can be considered as”
the Heart of the Insurance Industry,” without them the insurance industry will not survive or won’t
function effectively and positively as it does. Moreover, their presence can also be felt in the other
arenas as well, carrying out various purposes for the betterment and improvement of the company
and management.
Herein are some important roles of actuaries -

• Insurance product designing and premium pricing.

The actuaries will be designing policy and setting up the prices of the them. They have to
ensure that the prices are not too high or low as in both circumstances it can be detrimental
to the company. Therefore, these people must safeguard that the particular policy is suitable
enough with other players in the competitive market.

• Founding approximations for numerous liabilities

What happens if the policy holder who has taken the policy, defaults in the payment of the
premium, or becomes insolvent and cannot pay it anymore. Then actuaries come with
anticipated solution so that company does not have to face losses due to the unpaid claims
of the issued policies.

• Recognizing and preparing for emerging risks.

What risks can be there when they are adopting or enacting a policy. In what way, it will
affect the people and the company at large, what are the chances of its being successful.
So, all these questions must be kept in mind while moving forward with the policies.

• Estimation of risk mitigation explanations and execution of the compulsory agendas.

What solutions must be put forwarded, in what way people can be made aware of such
schemes, how programs can be planned and they can be efficaciously held and executed,
keeping each criteria and process in mind.

• Valuation and assessment of risk charge during Mergers and Acquisitions as well as
other major financial communications.

What risks are there when they are going for Mergers and Acquisitions? What are
threshold limit which should be kept in mind? Which necessary rules and regulations must
be followed? How Due diligence can be a major factor in all these cases. So, every question
has to be dealt with ease and elegance.
 • Coordination and Communication with auditors and / or credit rating agencies
instead of the company on the pertinent characteristics.

Effective dialogue and interaction must be there between the actuaries and the auditors or
rating agencies, as these are the people who can help or ruin a company status, by providing
/giving good or bad ratings or by proper auditing, giving them the financial statement of
the company and answering their queries whichever comes into their mind.

 Reinsurance Program and its Design

Actuaries can guide the companies that, whether they should go by the process of
reinsurance or not as it can contentious step if all the necessary steps are not taken into
consideration. So, actuaries must look into the various financial records and documents in
order to go ahead with reinsurance.

• Strategic Asset Management

Actuaries knows that how much a company is in debt or it is flourishing and making profits,
since they have access to every document of company be it financial or non-financial. So,
with the help of the underwriters they can help the companies in balancing the assets of the
company.

 Giving guidance to Watchdogs and Legal Representatives1

Actuaries can be a helping hand in the legal field as well, as actuaries can be expert witness
whenever any serious issue of corruption or monetary payment is to be decided. They can
come to the exact deductions as what could have been there in given circumstances.

1
Exforsys, The Role and Responsibilities of an Actuary,http://www.exforsys.com/career-center/career-tracks/the-
role-and-responsibilities-of-an-actuary.html 11/11/17.
CHAPTER 4: ROLE OF ACTUARIES IN LIFE AND GENERAL INSURANCE

4.1LIFE INSURANCE

Dying is a frightening thought for one and all , someday it will definitely occur but if life insurance
is there, we don’t have to worry every time, at least we can die peacefully.
It is commonly accepted that the life insurance business rests solely on actuarial skills and their
assistance. Life insurance is a statistics delight thing as you don’t know what will happen next,
and the actuaries in life coverage do the basic math while playing with numbers in every order
possible2.

4.1.1HOW LIFE INSURANCE WORKS

In totality, for a life insurance business must have the capacity to pay for your burial service costs,
cover your obligations and give lost wages to your family, they need some thought long you may
live. They additionally require this information to have the capacity to charge you a reasonable
premium for the life coverage scope.3

An organization likewise needs to spread out the menace required with offering protection of an
insurance. If life insurance will have clients with only cancer, they'd be bankrupt rapidly on
account of all the life coverage settlements. It isn't so much that an organization wouldn't like to
pay, it's that they chance going bankrupt or insolvent if the danger isn't overseen well. An insolvent
life insurance implies none of the clients get its benefits. Therefore, they must play their cards
effectively and smartly4.

To accomplish the risk successfully, persons are congregated into comparable classes of risk.
Actuary is the person who regulates and determines grouping of the people. It can be based on -

2
Rick Fulks, Actuarial Role in Life Insurance,
http://insurance.lovetoknow.com/Actuarial_Role_in_Life_Insurance,11/11/17.
3
By Sanchit Maini, Life Insurance And The Actuarial Profession In India—A Decade After Liberalization,
file:///C:/Users/HARSH/Downloads/act-2011-vol8-iss6-maini.pdf 12/11/17.
4
Ajay Bimbhet , Actuarial careers in general insurance,http://www.business-standard.com/article/beyond-
business/web-exclusive-actuarial-careers-in-general-insurance-109050900085_1.html, 13/11/17.
  Age

 Weight

 Habits (smoking, drinking, etc.)

 Current health status

 Ethnic group

 Parental information

To get life expectancy account of an individual, it can be done by inputting all the data into
arithmetical representations which can be an assistance to the actuary while determining to whom
they should provide life insurance policies and what premium rates is to be charged on that. By
this data and evidence, the actuary can commence the development and procedure of classifying.

4.2GENERAL INSURANCE
General insurance or non-life insurance comprises of anything other than life insurance, it is done
to prevent the parties and persons from the financial loss they experience due to the things they
buy or own. It is also called as Property and Casualty Insurance in USA.
General Insurance can be broadly defined into two-
 Personal lines
 Commercial lines

Personal lines are for the individuals or person who take insurance in their personal capacity which
includes motor insurance, creditor insurance, house hold insurance, pet insurance etc.
Commercial lines are for large legal objects which embrace public liability, business fleet,
employers and employee’s liability. Further, it can also be found in hotels, shops and restaurants
in most of the commercial aspect5.
Apart from these this industry also faces some challenges, due to certain factors such as-
 Large no of players in the market so there is cut throat competition among them.

5
G Srinivasan, The Role of Actuaries In G I
Industry,https://www.actuariesindia.org/GI/2cigi/RoleofActuariesintheGIindustry_GSrinivasan.pdf ,13/11/17
  Complexity of the products available in the market.
 Everlasting increment of the risk management practices.
 More and more stringent rules and regulations related to general insurance
 New technologies and existing regulations has to be amended every now then.

So, taking these things into apprehension, the role of actuaries has been increased due to such
leap of information technology and massive amount of data, as they just cannot bank upon the
traditional methods in order get the desired results.

They expertise in certain fields

 Reserving - Actuaries put numerical methods to judge the probable consequence of general
insurance charges and the various necessities that are looked-for reporting and writing
purposes.
 Rating – Here, actuaries measure the frequency and regular sum of claims to evaluate
premiums.
 Capital Modeling -Here, actuaries plan both the accountability and monies of insurers to
calculate creditworthiness and upcoming capital requirements6.

4.3 ON COMPARISION

In life insurance, the actuaries evaluate the accountability under the existing policy at systematic
and consistent intervals, while in the case of general insurance, a portion of the premium is taken
to make arrangement of the unexpired risk and the rest of the sum i.e. the net of cases and costs is
taken as the benefit of misfortune.

6
Lisa Clark, The Roles & Responsibilities of Actuaries in SOA’s General Insurance Track: A Qualitative Report, Society
of Actuaries.
CHAPTER 5 : ACTUARIES IN OTHER SECTORS

The reach of actuaries has been increasing rapidly their professional knowledge, mathematical
operations. This expertise not only is helping them to excel in insurance sector but also in various
other fields. They have now move out from the Traditional roles (Insurance) and are trying their
luck in other nontraditional fields as well, which can be public policy developments , banking ,
sales , managing the companies and many more7. Some of the most pertinent nontraditional fields
where actuaries are doing well are listed below-

Enterprise risk Management (ERM)

With the development of the quantity of actuaries in this field and the presentation of the CERA
(Chartered Enterprise Risk Analyst) assignment, the ERM field is never again considered by most
as a nontraditional field. There has been a rapid upsurge in the business for actuaries to be
specialists in surveying and overseeing danger that isn't restricted to protection or potentially
benefits only. With more actuaries in ERM, the aptitude and experience that actuaries have with
the risk side of the monetary record has in this way drove more actuaries into this territory of
training.

Sports
Sports Betting in India in illegal but countries such as UK, South Africa it is very much legal. For
instance, if we take an example of Cricket what would be the projected score of the team, their run
rate, their average after every 10 over or 50 overs, If, there is any possibility of falling of the
wickets. So, when these facts are considered and calculated then they come to certain conclusions.
Therefore, actuaries can be extremely helpful while analyzing these things, in the recent past, even
this theory has been applied in a game of baseball as well, where through every calculations and

7
Michael Hoffman, The Role of Actuary , THEWORLD BANK,
http://documents.worldbank.org/curated/en/158161468157173893/pdf/625020NWP0The000Box0361486B0PUB
LIC0.pdf 14/11/17.
statistical procedures club named Oak athletics topped the table, despite being having the weak
team squad. Subsequently, this is what actuaries can do if given the opportunity.

Weather Risk Management

This range is important to business whose benefits or incomes are complex to climate conditions.
Money related instruments, for instance, climate subordinates are utilized to supervise or fence the
danger from climate related exposures. Regular clients of such instruments are utility and vitality
organizations, agrarian or agricultural organizations, ski/shoreline resort administrators and green
administration organizations.

It is nothing unexpected that actuaries would be required in valuing the climate subordinates by
the utilization of experimental information. Property-setback back up plans may likewise utilize
climate related subordinates to deal with their presentation to noteworthy tempests or to
accumulations of littler occasions. These backs up plans have even issued bonds in light of
particular climate conditions to secure their books of business which has displayed the value of
fundamental approaches, regardless whether they take subsidiary positions or not.

Divorce Law
Divorce can be expensive. depending upon the parties, as most of the work is done by the lawyers
or litigators related to its legal phenomena and procedures, but in scheming and calculating the
amount of money a spouse would get, is considered by the actuaries. They analyze and examine
each and every aspect of the person’s assets and his/her property then accordingly he decides and
come to a valid inference that what share each person is entitled to.

E-Commerce Risk
E-Commerce is more like a bubble which has been increasing day by day. But a day will come
when this bubble will burst, and when this will happen the parties have no way to go but show
them that they are bankrupt or insolvent. As initially every company who is new to the market has
to give some lucrative and amazing offers so that they can increase their consumer base and profits.
But they can do this for a certain period only, from here come the role of actuaries who tell them
till which situation they can afford to play safe and what prices they can put on the product so that
in the longer run they are able to make profits, rather than being a loss bearing company8.

CHAPTER 6 : CONCLUSION AND SUGGESTIONS

6.1 CONCLUSION
In life we cannot predict what will happen in next second, we are literally clueless about what is
there for us ,but there is a science which specifically focuses on the future risks and uncertainties.
That phenomenal science is called as Actuarial Science. As there was growth in outsourcing
industry and privatization of insurance industry actuarial science is very much in demand these
days. Previously, when there was a monopoly of LIC not many players were there in the market,
till then it was dominated by the Chartered accountants, but now business houses are more
dependent on the actuaries rather than the traditional methods of judging and determining risks.

People are often confused with the work of underwriters and Actuaries. Critics argue that actuaries
will be genus and underwriters species .In other words “Actuaries tell the worth desirable for the
whole forest at large, underwriters compute the accurate value for each specific tree.” Though it is
a debatable issue still both can work harmoniously for the betterment of the insurance industry.

The role of actuaries in India has rose in both status and assortment. Now it has been mandatorily
made that every insurance company will appoint actuaries, who is legally answerable to IRDA for
any ramifications. They can not only use their excellent logical, understanding, mathematical and
public speaking skills for their company but also to take the insurance industry to new heights.
India is still in its nascent stage but seeing the reforms you never know it could be a powerhouse
of insurance industry in near future.

8
Maambo Mujala, Actuaries in Nontraditional Roles, https://www.soa.org/News-and-
Publications/Newsletters/The-Future-Actuary/2012/fall/Actuaries-in-Nontraditional-Roles.aspx, 13/11/17.
6.2 SUGGESTIONS
The researcher would like to give out certain suggestions with respect to the roles of the actuaries
-

 More often we say that actuaries and underwriters are used interchangeably or
synonymously, most people don’t even know what they do, how they function differently.
So, clear and precise definition has to be given with respect to both, so that the confusion
can be sorted out.
 There is dearth of excellence database. It can be due to not adapting the technological
advancements or people in that business don’t have that business knowledge which is
needed for the industry.
 According to the recent report there is a shortfall of 20-25% of actuaries only in insurance
sector only. Whatever reasons may be, but it need to tackle as quickly as possible or it can
be detrimental to the market.
 Actuaries carry such an important function in the insurance industry, still they lack
recognition. So, various awareness program can be carried out so that more and more
people can come forward and help the industry to grow and take them to new level.