CHAPTER 04

ACTURIAL
PRINCIPLES
AND
WORKING
Dr. S N Ghosh
1
 DEFINITION
• A a financial expert who applies
mathematical and statistical methods for
 assessment of financial and other risks

 relating to various contingent events and

 scientific valuation of financial products

in the fields of insurance, retirement and
other various benefits, investment and
other related areas Dr. S N Ghosh
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 ACTUARIAL VALUATION
• Premium calculated taking into
assumptions or expectations of
 Mortality
 interest and
 expenses
• Validity of these assumptions are
periodically checked to ensure business
is on sound line – process of doing so
called Actuarial Valuation
• IRDA requirement – Actuarial Valuation
to be done annually Dr. S N Ghosh
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 PROCEDURE - APPOINTMENT OF
APPOINTED ACTUARY
• Appointed Actuary- shall be appointed by IC in
India
• Qualification – Indian Resident; Fellow Member of
the Actuarial Society of India; employee of IC; not
committed any of professional misconduct; no
disciplinary action by ASCI
• Approval of IRDA – application within 30 days
• Date of appointment – date of IRDA approval
• Failure to appoint – IC cease to carry on life
insurer business

Dr. S N Ghosh
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 DUTIES AND OBLIGATION OF
ACTUARY
• Rendering actuarial advice to management
- product design, pricing, insurance contract
wording, investments and reinsurance;
• Ensuring solvency of IC - at all times;
• Proactive role - violation of any IRDA
provisions; interest of policyholders;
guidelines issued by ASCI
• Certify - Actuarial Report and Abstract and
other Returns; Solvency Margin; Assets and
Liabilities; bases of premium; valuation;
recommendation of interim bonus or bonuses;
insurance tariff (for general insurance);
Dr. S N Ghosh
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 MORTALITY RATE AND MORTALITY
TABLE
• Mortality Rate - Measure of number of
deaths, per unit time.
• Expressed in units - deaths per 1000
individuals per year
• Mortality Table - a life table (also called a
actuarial table) which shows:
a) probability of surviving -year of age
b) Remaining life expectancy
c) Proportion of original birth cohort still
alive (group of people sharing common
factors)
d) estimates of a cohort's longevity Dr. S N Ghosh 6
 PUBLISHED MORTALITY TABLE
(EFFECTIVE 01. 01. 2005)
Indian Assured Lives Mortality (1994 -96) (modified) Ult.
AGE (X) MORTALITY RATE (QX)

1 0.001630
2 0.000960
3 0.000670
4 0.000620
5 0.000470
---- ----
81 0.114992
82 0.126553
---- ----- Dr. S N Ghosh
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 UNDERWRITING
• Selection of a policyholder after recognising
and evaluating hazard, fixing a premium and
deciding all other terms and conditions
• Safeguards - against any moral, morale or
general hazard
• Limiting factors – capacity, skilled human
resources, compliance of regulatory provisions,
availability of reinsurance
• Line underwriting – Where daily underwriting
carried out; underwriters usually located in
offices of insurer
• Staff underwriting – Where underwriter helps
management in formulating and implementing
underwriting policy. They are usually located at
H.O. Dr. S N Ghosh
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 CONCEPT OF RISK
• Chance of having a loss - due to
occurrence of an event
• A condition - in which there is
possibility of an adverse deviation
from a desired outcome
• Risk always associated with loss -
word itself has the association of
`Danger of loss`
• Probability of the occurrence - an
event resulting in loss/ gain Dr. S N Ghosh
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 PERILS AND HAZARDS
• Uncertainty – a situation where outcome not certain
or unknown, its state of mind characterized by
doubt, based on lack of knowledge
CAUSES OF LOSS
(A) PERILS – immediate causes of loss
(i) General (Ex – Fire may affect building, machinery,
equipment and also human)
(ii) Specific (Ex- Collusion in automobile-financial loss)
(B) HAZARDS – conditions that increase severity of
loss/perils
(i) Physical – Property conditions (Ex- crackers stocked
in packed commercial complex)
(ii) Intangible – Moral Hazard (Ex –Fraud); Morale
Hazard (Ex – Indifference)
(iii) Societal Hazard (Ex- Legal and Cultural) 10
Dr. S N Ghosh
 HOW THE LOSS IS CAUSED?
• Loss is caused by operation of perils -
refers to the causes for the losses
 Ex - fire, explosion, flood, storm etc
• Loss potential ( extent of loss) depends on
- conditions which are favourable for the
incident to assume large proportions.
• Known as hazard or potential of the loss.
• More the potential - severe will be the extent
of loss
• PERIL (CAUSE) ------------- LOSS (EFFECT)
HAZARD
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Dr. S N Ghosh
 RISK AND MANAGEMENT
• Risk - chance of an event happening resulting
in loss/ gain
• To appreciate the need for loss prevention and
implement measures to achieve the same
• The efforts are aimed to prevent a loss
happening but also to make it manageable if it
happens
• This aspect is to be achieved in all activities of
the organization be in production, storage,
handling, transportation and distribution
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Dr. S N Ghosh
 RISK ANALYSIS & RISK
IDENTIFICATION
• Initial steps of Risk Management - Risk
identification and Risk Analysis
• Risk identification – all those events
which may bring about a deterioration in
one's present welfare for :-
a) Physical and mental well-being
b) Current income
c) Value of his assets
d) Any other event that may frustrate
fulfillment of future plans
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Dr. S N Ghosh
 RISK EVALUATION
• Involves two elements :-
a) Probabilities of loss-producing events occurring –
frequency, severity of loss; and
b) Potential losses
• Collect, collate, analyse and interpret
historical data – number and size of fire
losses suffered in last one year, data to be
shown orderly to reveal loss trends, patterns
of behaviour, relation between variables
• Highlight possible trends
• Identifying and analysing loss exposure -
probability concepts using statistical tools
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Dr. S N Ghosh
 REPRESENTATIONS AND
WARRANTIES

• Representation - Statements made by an

applicant in the application, which he
represents as being substantially true to the
best of his knowledge and belief, but which
are not warranted as exact in every detail.
• Warranties - a usually written undertaking
of the integrity of a product and of the
maker's responsibility for the repair or
replacement of defective parts

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Dr. S N Ghosh