Along with changing customer needs, expanded datasets and increasing digitisation, the specialized skillset of actuaries is also paving the way for new age personalised and embedded products. Enabled by modern techniques, including machine learning and predictive modelling, actuaries can increasingly identify and allow for more granular risk segmentation, ensuring that premiums better reflect individual risk profiles in competitive markets

Bhavna Verma, Chief & Appointed Actuary. IndiaFirst Life Insurance

Actuarial principles and techniques are the backbone of life insurance, given life insurance product design and pricing, valuation, liability provisioning all involve forecasting risk over a very long term, as high as entire lifetime of individuals.

Using analysis of past data, expert judgement, and regular monitoring of emerging experience, actuaries price, innovate and continuously refine life insurance products through the “Actuarial Control Cycle” – to create a resilient life insurance ecosystem.

For any long-term product design and to determine premiums, actuaries use sophisticated tools and statistical techniques to estimate expected experience on various operating and economic parameters including claims, policyholder behaviour, expenses, future investment performance, inflation among others. Such estimation requires a healthy mix of analysis of experience and industry data as available, with adjustments for expected future experience on the specific pool of lives.

Extensive sensitivity testing is carried out to assess the impact of possible variances in experience against estimates to drive strategic decision making and develop risk tested products.

Mortality is a key rating factor for life insurance products and actuarial bodies in various life insurance markets publish mortality studies of insured lives periodically which provides the starting point for death claims estimation.Mortality studies may be available separately for assured lives and pensioner lives, whilst actuaries at reinsurers’ offices may be able to provide the intelligence for morbidity claims where data is sparse.

With changing customer needs, expanded datasets and increasing digitisation, the specialized skillset of actuaries is also paving the way for new age personalised and embedded products. Enabled by modern techniques, including machine learning and predictive modelling, actuaries can increasingly identify and allow for more granular risk segmentation, ensuring that premiums better reflect individual risk profiles in competitive markets.

As an example, there are insurance products bundled with wellness incentives providing benefits / lower premiums for demonstration of healthy behaviours through wearables. With the support of reinsurers who benefit from access to global data pools, insurers are also able to offer products with premiums based on the quality of life predicted using self-learning
models.

Beyond product pricing, actuaries are also using data science techniques to build models such as fraud prediction and propensity to pay renewal premiums which enable superior product performance and optimised pricing.

Beyond pricing, which is typically fixed at outset, ongoing risk management for each product category is critical in life insurance given the long-tailed nature of the products and peculiarity of risks.

A good example of this would be the liability driven nature of asset management in life insurance. For each product or a pool of products, actuaries typically recommend the asset liability management to manage the financial risks and embed risk management instruments such as interest rate derivatives in product pricing and overall risk management strategy.

Life insurance, by definition, is a risk business, therefore provisioning and capital standards for life insurance globally are based on prudential norms to ensure policyholder interests are always protected. It is actuaries who are entrusted with the responsibility of keeping appropriate provisions through probabilistic assessments (both deterministic and stochastic) to ensure long-term policyholder commitments are protected.

Actuaries have led the way in the transition to bottom-up risk-based capital frameworks and to IFRS17 accounting standards in life insurance. Risk-based capital assessments determine capital needs basis the inherent source of risk for each company to ensure companies are adequately capitalised for stress scenarios including extreme events such as pandemics. The new IFRS17 accounting standards in life insurance are aimed at providing an accounting view aligned with the long-term profit realization in life insurance business.

Actuaries therefore also play a key role in evolving and accurately representing financial metrics in life insurance, at the heart of which remains customer fairness and policyholder protection.

Application of actuarial techniques is all encompassing in life insurance, and actuarial insights and direction are fundamental to driving strategic decisions and the financial engine of life insurance companies.