1 The roles of actuaries & general operating environment

What is an actuary Basic actuarial concepts Areas of actuarial work Ensuring the quality of actuarial work

What is an actuary Professionals who apply mathematics to solve financial problems. Evaluate the financial implications of “undesirable” contingent events [events that are not certain to occur.] Actuaries evaluate the likelihood of future events and design ways to reduce the financial impact of undesirable events that do occur.

High level of technical knowledge Actuaries must have: High level of technical knowledge For example, understand the nature of insurance the risks inherent in different types of assets; the ways in which statistical models can be used; and the legal and regulatory constraints that apply to the business. Good business sense Problem solving skills Ability to communicate effectively with others High ethical standards Ability to balance different interests Why is each of these important?

Distinguish between Technical and Management role Within insurance firms actuaries can fill a wide range of positions. Technical roles: Designing new insurance products Forecasting expected rates of loss Setting premium rates Calculating the liabilities of an insurer to its policyholders. Management positions: Technical or operational departments Product line management Senior executive roles.

Basic actuarial concepts Probabilities Time value of money Actuarial models

1 Probabilities Pooling Extent of loss Likelihood of loss Law of large numbers Deterministic versus Stochastic approaches

3 Actuarial models Some models are very simple perhaps consisting of only one mathematical formula. Other models such as those used to price insurance products or test the capability of an insurer to withstand a range of adverse scenarios can be extremely complex. TIA

Elements of actuarial models. Involve a methodology - an approach used by the actuary to analyze the situation. Mathematical equations incorporated in the model consistent with the problem in question. Require that assumptions be made about the various parameters that are reflected in the equations. Use data about the situation in the calculations. The data may be actual information or hypothetical (simulated) information. Models may also be stochastic or deterministic Difference?

Areas of actuarial work What is an actuary Basic actuarial concepts Areas of actuarial work Ensuring the quality of actuarial work

Areas of actuarial work Life Pensions General Healthcare Finance and investment

Each in turn [mainly for insurance but applicable also to pension] Risks Design Pricing Liabilities Assets Asset and liability management Experience analysis Profitability Solvency

1 Risks Include: Underwriting risks Credit Market Liquidity Operational risks Actuaries are often involved in the risk assessment process Identify risks that are insurable since providing this insurance is your core function. Identify the specific risks that can affect insurers and consider the relevance of those risks to a particular insurer. Determine how much risk an insurer can afford to retain on each policy; design a reinsurance program to deal with excess amounts of risk.

Actuaries often play important roles in the product design process Design products that will meet market needs and whose risks are ‘insurable’ Actuaries often play important roles in the product design process Identify precise market needs Analysis of sales patterns; competitors’ products; and social and demographic trends. Work with others, such as marketing, underwriting, and investment experts, on product design teams. Assess the feasibility of product design features suggested by others. Designing compensation schemes for the intermediaries that will sell the products.

3 Pricing considerations Prices must be competitive with those offered by other insurers and, for some types of products, non-insurance alternatives Prices must also provide a reasonable profit margin (return on capital) but at the same time the business underwritten must be such that it can be supported by the capital available capital!

3 Pricing [Actuarial role] Devlp assumptions for the various cost factors, taking into account: the design of the product, the insurer’s past experience with similar products, the experience of other insurers, and expectations of future demographic and economic conditions. Use models to project future cash flows from the product, solving for the premium rates that will produce the desired profit margins.

4 Liabilities “liabilities for future benefits are typically the largest item in an insurer’s balance sheet”

4 Liabilities Various! Amounts under insured policies Deposits under administration Outstanding claims IBNR Unearned premiums Level premium life policies whose premiums are greater than ‘death-cost’ in the early years and lower in the later years. Actuarial role: Calculate Technical provisions – or Reserves Also carry out Sensitivity analysis of the technical provisions to ensure that reserves will still be adequate even if experience differs from expectations!

5 Assets Insurer must also have sufficient and appropriate assets to back up these provisions, so that it can meet its obligations when they come due Important: There must be sufficient cash and liquid assets to meet potential short-term needs without having to dispose of longer-term investments during a period when market values might be depressed. The returns on invested assets should be sufficient to meet the assumptions made in the pricing process, otherwise profitability targets are unlikely to be achieved

6 Asset and liability management The main objective is to reduce the risk to an insurer that exists if assets and liabilities are mismatched: e.g. if a change in market conditions might cause an increase in the value of liabilities while also causing a decrease in the value of assets Immunisation!

7 Experience analysis The experience is not following the model assumptions problem!

8 Profitability What product lines are most profitable so should be retained? Analysis of surplus Determine profit sharing Embedded value calculations

9 Solvency Risk based capital determination.

Ensuring the quality of actuarial work What is an actuary Basic actuarial concepts Areas of actuarial work Ensuring the quality of actuarial work

Ensuring the quality of actuarial work Qualification Professional standards Regulation and supervision