Role of Actuaries in Life Insurance Sector

What is the role of Actuaries in Life Insurance domain? This is a question that every Actuarial aspirant tries to find an answer to, before applying to Life Insurance Actuarial Job openings. While they may have an overall idea of what Actuaries do in general, what do they exactly do in the Life Insurance sector? Let us see below!

Actuaries are professionals who apply their abundant knowledge to perform different functions across various verticals in Insurance Companies. Be it Life or Non-Life domain, they are key persons who understand working of their domain very well and perform complex calculations to keep things going!

What is role of Actuaries in Life Insurance sector?

Life Insurance is one of the largest practice areas for Actuaries. With Life Insurance, comes associated long term liability for the policies sold by the Insurer that it needs a plan or strategy for, in advance. 

Product Pricing

The first and foremost work that Actuaries do is Setting up Premiums for various Life Insurance products. 

This is also called Product Pricing or Product development. Actuaries are responsible for calculating Premiums for various products and preparing Premium Charts to be used by Underwriters for charging premiums (age-wise) to all proposers who want insurance.

For this, Actuaries use various assumptions such as Mortality rates, Life Expectancy, Inflation rates, Rates of Return on Investments, Expected number of policies to be sold, etc.

The premium rates are set such that the policyholder’s don’t feel they are overcharged for risk-transfer through insurance and the insurers expect an appropriate level of profits by selling the policies. They also have to carefully design the product to meet all the local regulations and laws as per the geography they are designing the product for.

The premiums for new products can be set up by analyzing the Industry data available or with the help of data available for similar products from the same company.

Revising Assumptions related to a Class of Product

Actuarial Assumptions can be classified into following two categories:

  1. Economics Assumptions – These include assumptions regarding expected Investment rate of return, Inflation, Salary growth, etc.
  2. Demographic Assumptions – These include assumptions regarding Males and Females present in population, Member’s Disability rates, Mortality rates, Morbidity rates, Employee Turnover rates, Married Population ratio, etc.

These assumptions have to be reviewed from time to time to keep them relevant to the changing scenario. This is a key Life Insurance Actuarial role.

For this, Actuaries perform Experience Analysis to study the expected past liabilities of the policy and the actual liabilities incurred. This study enables them to set up new assumptions that will more closely follow the actual experience of the product. Hence various Actuarial methods used while pricing the product can be changed too.

Product Pricing Review

Actuaries are also responsible for Review of Product pricing strategy from time to time. 

When new products are launched, a price is set for them. But do you think that the price will remain the same if a person buys a particular kind of life insurance policy today or if a person carrying similar risks and of same age as the former person buys the same insurance product after ten years?

No! It shouldn’t.

Why? Because over the period of time various factors that affect Pricing of Products changes. A product can’t be sold with the premium charts it was launched with for the rest of the time by the insurance companies. This is because maybe over time medical facilities improve, hence decreasing mortality risks or some new kind of risks like frequently-ocurring pandemics come into the picture, or maybe insurance penetration increases and cost of policy per person decreases.

If you charge the same price for the product as you charged before, then maybe policyholders will see insurance as a cheap deal and buy policies a lot leaving you vulnerable for losses due to bad risks.

Or policyholders may feel that your pricing strategy is too high and may not buy insurance at all, thus decreasing the insurance policyholder’s pool and affecting you adversely.

So, the product pricing needs to remain competitive as per the changing industry and risks associated with the product. So, Actuaries review the products they priced from time to time to ensure good and competitive pricing is enforced.

One more reason for review of product pricing is, that Actuaries do profit testing of different products from time to time to check the expected profits that will be made out of these products. Profit testing is an important function of Life Insurance Actuarial Role. When the level of profits is insufficient as per the expectations of the company, Product pricing strategy has to be reviewed.

Actuarial Valuation

This means evaluating the liabilities associated with a particular life insurance product by modelling the relevant input data of that product’s policyholders in such a manner, by defining relationships between different variables, and setting up assumptions, that it gives the estimates of current and future liability associated with the product.

Then Actuaries also review the Assets held by the insurer to meet those liabilities and report to the concerned authorities their findings and analytics to devise a strategy to keep that product’s finances in good health.

This strategizing of appropriate actions to be taken to keep the product in good overall condition by the Life insurance Actuaries is called Asset Liability Management.

Apart from this, Actuaries also calculate Reserves as an important part of their role in life insurance, These reserves are to be kept for a particular life insurance product based on their expectations of future liability and claims that will be made so that the insurance companies are able to pay off all their liabilities in time without becoming insolvent.

Why is Reserving essential?

Whenever a life insurance policy is sold, the probability that a claim will be made on it is low during the initial years of the contract when the life is young and healthy. But this probability increases as the period of the contract progresses, but the premiums remain the same throughout the period of the contract for most types of life insurance products, So these premiums are more than needed to cover the cost of payment of claims during initial years of the contract while they become insufficient to cover the higher cost of claims during later years of life.

That is why reserves need to be kept throughout the term of the policy so that the company’s costs are always met.

Also, the reserves are calculated for surrender values. It is the reserves kept aside on the basis of which Insurance company decides to set the Surrender value for different products.

So, now you know that the technical mind behind the functioning of Life Insurance segment of Insurance is that of Actuaries. That is why they need to have a mind capable of analytical approach and they have to be good communicators for a life insurance actuarial role to present their findings to an appropriate audience who may or may not understand the technical aspects of their work always.

Read more by the Author:

Role of Actuaries in Retirement Domain

Role of Actuaries in General Insurance Domain

Let us know in the comments section below what more would you like to read on The Actuarial Club!

Anmol Kaur
Anmol Kaur is an actuarial graduate working as a Business Analyst(Actuarial) in a leading MNC. With a quest to learn more, she is looking forward to become a fellow of both The UK Actuarial Society (IFoA) and Insurance Institute of India (III) which she believes will provide her an edge over her actuarial career in India.

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