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Or Loss of Property, Are To Happen, and Tells Insurance Companies How Much They Should Charge Their Customers
Or Loss of Property, Are To Happen, and Tells Insurance Companies How Much They Should Charge Their Customers
One of these strategies is Immunization which you might have studied in CT1 (now in CM1).
The aim of Immunization is to look for interest rate changes and choose such asset portfolios
which provide sufficient returns to pay the liabilities.
Reviewing the assumptions is very important because a flaw in the model’s assumptions may
lead to the mispricing of products or underestimation of the frequency of an event. For instance,
actuaries compare the expected deaths with the actual deaths and see whether they need to
change the life tables they are using for prediction.
3. Profit Testing
Pricing and reserving would be meaningless if the company fails to make profits on its products.
Profit is necessary for any business to survive. For life insurance companies, actuaries estimate
the future profits based on expected inflows and outgoes. And these expected figures are
calculated using some assumptions regarding probabilities, interest rates, and life expectancy.
Hence you determine the selling price by taking into account all these costs and the amount of
profit you want to make. But this is not the case in the insurance business. Insurance businesses
involve a large magnitude of uncertainties and so, the cost of the coverage is unknown. That’s
where the role of actuary comes in. They calculate the premium based on some underlying
assumptions regarding mortality, interest rates, and expenses and make sure that the company
makes an adequate amount of profit.