Actuary & You

1. Actuary& You • 10-12-2010 • N K Parikh

2. Efficient Management • Sound Underwriting • Excellent Marketing which produces results • Luck Ingredients of Success

3. Luck -external, environmental, attitudinal -political attitudes, social attitudes, client’s attitudes, market movements including competition, technological changes

4. Directors’ and Officers’ liability policy where the perils included are: • Allowing a company to continue operating in circumstances • when it should have been declared insolvent • Any act resulting in the insured being declared unfit for his • or her role • Allowing false financial statements to be published.

5. Lengthy Reports

6. Valuation affects the incidenceand quantum

7. Why Actuaries are highly paid • Supply and Demand • Wild and Sane • Slog for many years • Quality Values

8. Quality Values • Long-term thinking • Understanding of data and models • Multi-dimensional thinking • Problem-solving ability • Continuing Professional Development • Skilled in the 2 principles of actuarial science • The first working principle of Actuarial Science - what gets measured, gets managed and more importantly priced • Models – • 36-24-36

9. The second working principle - E Peretia Ratio or the use of past experience to reason solutions for future.

10. Technical Aspects • General Insurance predates Actuaries • Events overtook – • New risks with industrialisation – nuclear, satellite, terrorism, engineering, professional indemnity, LOP, • Nature of risk • magnitude of risk changed – compare World Trade Centre. • Other factors - Competition, rate cutting, investments, consumerism, PRE, high inflation, change in outlook, globalisation, regulatory restrictions. • Quantitative data, Statistical Theory, computers, storage devices • the actuary arrived on the scene. Without him, priced out of the global market?

11. Actuary in 2 packages – Consultants and In-house Actuary • Consultants - Partners-in-progress • In-house Actuary - Cause-of-progress

12. What is Insurance Insurance is a technique of sharing of risks or spreading of losses. In the words of the Elizabethan Act of 1601, “by means of which policies of assurance….. the loss lighteth rather easily upon many than heavily upon few”.

13. - Insurances of rare risks , granting of NCD & experience- rating • Rare Risks • the nails of an artist or the eyelashes of an actress, the legs of a dancer, the tongue of a taster, disappearance of a TV artiste, ‘cutting a sorry face’ insurance of a speaker or even the insurances of sputniks and satellites and the like. • NCD • Experience Rating • 60% ± 7.5%.

14. The service that insurance performs • Best of both the worlds • 400 Insurers

15. 2 problems posed

16. Risk – Actual - Expected • Cyclical Nature of Risk - Life on this planet

17. working of General Insurance • Staff

18. workingof General Insurance • Training • Motivational Literature • Counseling • To speak on - -What life has taught me -My Obituary -Underwriting considerations for rating of a rare risk, like say, ‘cutting a sorry face’ insurance of a speaker. • Programmed Learning Text-books

19. Underwriting Considerations for writing a Rare Risk - ‘cutting a sorry face’ insurance of a speaker(responses received at an earlier Training session) • Insurable Interest - Speaker or the Organisation or Both. Venue? • Open Policy or Individual – special contingency policy • Assessment of the Risk – Applause Quantified by Number of claps and hackles. • Third Party Risk – Personal Injury risk to the speaker or organisers • Past Experience • Partial Claims • Moral Hazards • Salvage • Medical Examination – Fitness Condition • Abandonment – Man made or Natural cause • Abandonment in between • Cover – Worldwide – Currency • Cancellation due to various causes • Consequential Loss – Speaker - Organisers – Venue • Clauses to be attached – drafting of the policy. • Deductibles • Extempore or prepared • Claims Minimisation – to smuggle in 5 to clap • Reinsurance • Premium – 50 per 1000? Prize * for anyone extending the List to 25 or more – put it in proper order and add some notes explaining the u/w consideration – 2 pages *FOUNDATIONS of Casualty actuarial science – Fourth Edition – Part I & II

20. workingof General Insurance cont.. • Development • Officers on the Administrative side remunerated by Salary and Profit Commission. -The officer/agents developed a stake in good business. -Quality and Quantity of business increased. -Frauds disappeared. -Policy holders dissuaded by the development officers from claiming things not payable. -Awareness increased that the insured did not pass on junk business. - Suddenly the approach changed - the development Officer assumed the role of an underwriter

21. workingof General Insurance cont.. • Miscellaneous • Credit card business and warranty businesses . • Payment of premium within 60 days. • Persistency ratio • Reinsurance expertise and reinsurance capacity • Retentions

22. Accounting • Cash Basis • Accounts on three year basis • From cash to accrual • Technical Reserves • Outstanding claims • UPR • URR /AURR - Premium Deficiency Reserve • Legal Claims • Claims Equalisation Reserves • IBNER • IBNR

23. IBNER

24. IBNER cont.

25. IBNER cont.

26. IBNR • Non-mathematical and mathematical techniques • Compare the actual past results for the last 3-5 years and take the highest percentage or draw a graph and project the trend. • Mukerjee committee Report in India based on the NEP classwise. • Public Sector Undertakings in India’s method based on the Claims Outstanding. • Triangulation/ BF /Average claim amount and Average no. of claims/ Expected loss ratio - statistical. • The emphasis has shifted from IBNER/IBNR - holistic approach - reliance is placed on Risk Management models. • If the companies close their accounts after 4 months, bulk of the IBNR would have been reported. • By not providing for IBNR every year - only difference is the error. • The various methods result into a range of values. Hence before finalizing the IBNER/IBNR, the other non-mathematical factors taken into consideration are: • Whether the Company declaring dividend for the last 3 years. • Whether the Company making U/W profit on a stand alone basis • Whether the Company be making U/W profit only after taking proportionate credit for the investments of Technical reserves. • Whether the Company be making profit after taking the credit for full investment income. • Finally the Actuary takes a middle path to finalise. – actuaries religious at heart - believe in practicing compassion - He wants a living thing to go living, he wants a going concern to keep going.

27. Outstanding Claims – General observations • Claims outstanding for more than 2 years - Claims Clearance Fortnights • Motor Accident Claims Tribunal • On the Spot Settlement System • Claims Minimisation Department - Cover for Motor Own Damage - maximum amounts for various surgical operations

28. General – additional Recommendations • Pre-payment of premium • Dividend Equalisation Reserve • Rating by an accredited international agency • Financial Condition report • 10 years’ summarised statistics in every Balance sheet

29. Actuary can help • Pricing, Reserving, modelling. • Underwriting/Administration/Development/ Expense investigations/ Investments/ Catastrophe Modelling and what not… • Ideal Risk Management • Future of General Insurance • Life Insurance - a special and much simplified case of General Insurance? • Future of Actuary

30. Prayer • To wish everyone happiness, good health, good fortune, and no suffering from pain or misery

31. Amen !

32. Link With Us At www.ka-pandit.com