We are actuaries – General Insurance

By Saroja Gunatilleke

Who is an actuary? What do they do? The Institute and Faculty of Actuaries explains who an actuary is in the following manner:

“Actuaries are problem solvers and strategic thinkers, who use their mathematical skills to help measure the probability and risk of future events. They use these skills to predict the financial impact of these events on a business and their clients.”

“Businesses and governments increasingly depend on the skills of actuaries and analysts to help them model and plan for the future. As the world changes at an increasingly rapid pace, risk management expertise can help businesses navigate this evolving landscape.”

An actuary is a professional that estimates the financial impact of future events for a company. To arrive at the above, actuaries analyse the past historical data and estimates the likelihood of such a future event and the damage/impact of such an event if it does occur. 

The above estimations are not limited to the insurance sector. Although actuaries traditionally worked predominately in the insurance sector, given that our qualifications cover risk management, investment, analytical content we are able to work in any industry including banking, finance companies and even manufacturing and aviation. One such area that actuaries can work in is general insurance. General insurance includes all insurance covers other than life insurance. Hence, it will include certain health insurance covers as well. 

My actuarial qualification is with a specialisation in general insurance. I qualified as a fellow of the Institute and Faculty of Actuaries, UK in year 2012 becoming the only local with such a qualification working in Sri Lanka at that time. Under the UK qualification, initial stages cover not just insurance but also pensions, investment, risk management etc. and it is at the later stages that one has to specialise in a particular segment. Although, I specialised in general insurance my work experience is predominantly life insurance as general insurance companies do not adequately use actuaries in Sri Lanka. 

The actuarial qualification places us in an ideal situation to help general insurance companies to improve and sustain its business whilst delivering suitable products at an appropriate premium rate to the public. As mentioned above, unfortunately in Sri Lanka the use of actuaries in the general insurance segment is largely limited to regulatory requirement. Ideally, companies should use the necessary advisory support required to improve their business even without it being a regulatory requirement. However, I believe a regulatory guideline recommending actuarial support to be sought for functions such as pricing would be beneficial for the industry and the policyholders. Such additional regulatory requirements do exist for life insurance segment. 

The main function of an actuary, the only one currently exercised by all general insurance companies in Sri Lanka is to estimate the policy liability of the company. i.e. estimate the amount of money to set aside now to pay future claims. In order to do so, we need to estimate the claims that could arise from the policies that have already been sold by the company. This would depend on the likelihood of claim events such as fires, floods and other natural disasters. And the severity of such a disaster as worse the flood for example could lead to higher claims for the insurance company. 

In addition, given that Sri Lanka has a regulatory framework called Risk Based Capital (RBC), which estimates the capital that the insurance company needs to hold given the risk taken, risk management become even more important for the sector. Actuaries will be able to assist with establishing risk management processes and selecting risk mitigation measures for the general insurance company which may not be done to the fullest extent in Sri Lanka.

One of the main areas that actuaries should be involved in is pricing general insurance products in line with the underlying risk accepted under the policy. This is perhaps only performed by a couple of companies in Sri Lanka and even in such companies it is not believed to be performed to the fullest extent required. If such an assessment is performed, policyholders will be paying a premium based on the underlying risk and maybe able to take certain precautions in order enjoy a lower premium. 

Linked to the above pricing activities, actuaries should also be involved in looking at the profitability of products separatory for property (fire), motor, marine, workmen’s compensation etc. as well as be able to identify the unprofitable areas within the above categories. This would aid the company to align premium rates accordingly so that the worse risks pay a higher premium and the better risks enjoy a discount. 

There are many other areas that actuaries can support general insurance companies including investment and reinsurance support. To have this required support, I hope that general insurance companies in Sri Lanka engage with actuaries more in the near future. And we hope to see the regulatory framework changing to support this which will benefit not just the insurance companies but the policyholders and the country as well.