Anticipatory Mathematics: The Backbone of Insurance and Financial Security
In simple terms, the eagerness or excitement about a future event is called "anticipation." This term reflects an emotional aspect of looking forward to what is to come. When this anticipation is based on past experiences or evidence, without necessarily involving emotions, it is termed "prediction."
Mathematics, when applied to understand the laws of nature-such as gravity in physics-becomes tangible and finds applications across various facets of the modern world. The financial sector is one such area where mathematics is extensively utilised. Examples include stock markets, risk management, banking, investments, futures, derivatives, and insurance.
Actuarial science is a specialised branch of mathe-matics that plays a crucial role in pricing insurance products, calculating long-term pension liabilities, and managing risk. In Marathi, actuarial science is roughly translated as "Estimative Mathematics," which is emp-loyed to predict the future based on historical data.
When the last Mughal emperor Bahadur Shah Zafar penned the line, "What happens, happens; then why should one venture into the business of fortune-telling?" he likely had little understanding of anticipatory mathematics. This branch of mathematics, which originated in the West, has collaborated with the insurance industry to address business challenges and mitigate risks.
The application of mathematics, now popularly known as actuarial science, is currently utilised in insurance, investments, risk management, ban-king, and other financial sectors. In India, actuarial science saw significant growth when the insurance sector was opened to private players about a quarter-century ago. The technical support extended by joint venture partners to these new private insurance companies further bolstered this growth. Since then, actuarial science in India has gained new momentum. Although still low compared to developed nations, there are around six hundred qualified actuaries in India, with about eight thousand students on the path to qualification.
Actuarial science revolves around the intersections of mathematics, statistics, economics, and finance. Students and working professionals typically take about five years to qualify as actuaries, with perseverance being the key to success. The Institute of
Actuaries of India (IAI) is the statutory body established under an act of Parliament to promote and develop standards of professional education, training, knowledge, practice, and conduct among actuaries in India. Candidates must pass thirteen exams, yet the demand for actuaries continues to rise.
Path to Qualification
To become an actuary, the journey begins with the Actuarial Common Entrance Test (ACET) and joining the IAI as a student member. Certain candidates may be exempt from taking the ACET based on their qualifications. As a student member, individuals can order study materials from the institute and start preparing for the exams, which are divided into four stages:
• Stage 1: Core Principles
• Stage 2: Core Practices
• Stage 3: Specialist Principles
• Stage 4: Specialist Advanced (Any Two)
Stage 1 Stage 2 Stage 3 Stage 4
Core Principles Core Practices Specialist Principles Specialist Advanced
CS1-Actuarial CP1-Actuarial Practice SP1-Health & Care SA1-Health & Care
CS2-Risk Modelling and Survival Analysis CP2-Modeling Practice SP2-Life Insurance SA2-Life Insurance
CM1-Actuarial Mathematics CP3-Communication Practice SP4-Pension & Other Benefits SA3-General Insurance
CM2-Financial Engineering and Loss Reserving
SP5-Investment & Finance SA4-Pension & Other Benefits
CB1- Business Finance SP6-Financial Derivatives SA7-Investment & Finance
CB2-Business Economics SA7-General Insurance Reserving & Capital Modeling
CB3-Business Management SP8-General Insurance Pricing
SP9-Enterprise Risk
Management
Source: Institute of Actuaries of India (https://actuariesindia.org)
On average, a student dedicates about 150 hours of study to each "Core Principles" subject, engaging in theory learning, problem-solving, and practicing previous exam papers. Students must solidify their foundational knowledge and explore concepts from multiple dimensions, cultivating independent thinking. This process is akin to a singer discovering their inner melody, resonating with their audience.
Typically, student members secure jobs in the insurance, pension, or consulting sectors after passing the stage 1 exams. The second stage focusses on grooming students into actuaries, while the third and fourth stages lead to specialisation. The selected papers determine whether one qualifies as a Health, Life, General Insurance, Pension, or Investment Actuary.
Certain traits are essential in the educational journey of an actuary. Patience is the first virtue, followed by structured thinking and a commitment to achieving accuracy in learning. Persistence is necessary for ongoing learning and professional growth. The path to qualification primarily involves self-study, although degrees from institutes that incorporate actuarial subjects into their curriculum can be beneficial. An actuary must think creatively to address business problems using their knowledge, skills, and experience.
Life Insurance: A Long-Standing Relationship with Anticipatory Mathematics
You will find more actuaries in life insurance companies than in any other sector. Life insurance is a long-term business that requires an actuarial mind to accurately predict the future performance of ongoing business operations. The primary task is to protect the interests of policyholders and ensure the payment of promised benefits when they are due.
There are three main aspects of an insurance company: product development, reserving, and capital modelling.
1. Product Development: Insurance companies design various products based on market demand and scope. A life insurance product is essentially a long-term contract that addresses customers' protection needs at an affordable price known as a premium. Each feature of the product has a cost, and one of the actuary's main responsibilities is to calculate that premium. Balancing the company's profitability while fulfilling promises made to policyholders is indeed a challenge.
2. Determination of Reserves: Reserves are amounts set aside by insurance companies to cover claims when they arise. In a long-term business like life insurance, the policyholder typically pays premiums during their lifetime to receive a benefit upon death or maturity. Therefore, calculating the "present value of future cash flows" is a crucial metric that actuaries must determine. This involves predicting future uncertainties such as mortality rates and fluctuations in interest rates.
3. Capital Modelling: Insurance is a capital-intensive business. An insurance company assumes and manages risks on behalf of its policyholders. The greater the risk faced by an insurer, the higher the need for capital. In a business environment, capital is a scarce resource that must be managed effectively to meet investors' expectations. An actuary's expertise plays a vital role in modelling capital requirements and managing these resources to optimise returns for investors.
Many life insurance companies are publicly listed. Therefore, ensuring profitability while meeting policyholder expectations is crucial. Unlike other businesses, policyholders pay premiums based on certain assumptions for benefits that are fixed in amount but vary over time. Consequently, effective risk management is essential. An actuary has been a trusted partner of the life insurance business since its inception.
General Insurance and Flowing Claims
In life insurance, benefits are typically fixed in amount and vary over time. In contrast, general insurance, or non-life insurance, involves more variable amounts. General insurance is a short-term business, usually renewed annually. Unlike life insurance, multiple claims can be made within the same contract in a single year. For instance, a policyholder may be hospitalised multiple times or experience several accidents with the same insured vehicle. Thus, calculating the probability, frequency, and average size of claims is a key aspect of general insurance. While actuaries perform similar tasks in both fields, the fundamental challenges differ.
1. Product Development: In non-life insurance, designing products to insure a wide array of items presents a challenge. Actuarial expertise is crucial for pricing these complex products and adjudicating claims. A single natural disaster can trigger claims across multiple products, such as a flood affecting vehicles, agriculture, marine vessels, and even health insurance claims. Accidental deaths, bodily injuries, and permanent disabilities may lead to litigations that take years to resolve. Therefore, fitting statistical distributions to historical data is key to pricing these products.
Catastrophic events like floods and earthquakes are significant perils, low in probability but with substantial claim payments. Actuaries model such catastrophes using complex proprietary models to predict future events and assess their impact on insured assets. The use of artificial intelligence is a new development in this area.
2. Determination of Reserves: Similar to life insurance, non-life insurance companies must also analyse their liabilities and set reserves on their books. The short, medium, and long-term nature of non-life insurance products poses challenges for reserve calculation. Different methods must be applied to various classes of business.
3. Capital Modelling: Capital is the lifeblood of the insurance business, and managing it is just as critical in non-life insurance as it is in life insurance. Capital is often denoted in terms of an insurer's solvency, which indicates the insurer's ability to pay claims.
General insurance products and services are continually evolving, taking on new forms. Parametric insurance is a new concept that general insurance companies use to manage risk, driven by the availability of extensive data sets and processing power through modern techniques like data science, artificial intelligence, and machine learning. Other in-demand products include cyber insurance, flood insurance, and specialised coverage.
A practitioner of anticipatory mathematics, or an actuary equipped with cutting-edge skills, will always be in demand.
Evaluation of Employee Benefits and Pension Schemes
Actuaries evaluate employee benefits and pension schemes, helping employers in effective management. A pension is a long-term plan that requires actuarial knowledge to ensure that retirement savings are adequate and sustainable.
In a defined benefit plan, the employer promises a specific monthly benefit upon retirement, calculated based on the employee's salary and years of service. Here, the actuary's role is to calculate the liabilities of the employer towards its employees, ensuring the plan remains funded adequately to fulfill its commitments.
A defined contribution plan involves the employer and employee contributing to a fund during the employee's working years, which will grow and provide benefits at retirement. Here, the actuary assesses investment risks and the impact of market fluctuations on the fund.
Conclusion
The future holds vast potential for actuaries. Emerging areas of actuarial work, such as climate change, health economics, and technology, present opportunities for growth and advancement. Actuarial science continues to evolve, reflecting changes in society, risk perception, and economic landscapes. With their unique blend of skills in mathematics, statistics, finance, and economics, actuaries remain indispensable in navigating the complexities of a rapidly changing world.
(The article has been contributed by the Institute of Actuaries of India (IAI). Feedback on this article can be sent to feedback.employmentnews@gmail.com). Views expressed are personal.
List of Institutions Offering Courses in Actuarial Science:
1. University of Delhi
2. Indian Statistical Institute, West Bengal, Kolkata
3. Symbosis International University, Maharashtra. Pune
4. Indian Institute of Technology Delhi, Haryana, Delhi
5. IMS Unison University, Uttarakhand, Dehradun
6. Amity University, Uttar Pradesh, Noida
7. Christ University, Karnataka, Bangalore
8. Indian Institute of Technology Kharagpur, West Bengal, Kharagpur
9. Manipal Academy of Higher Education, Karnataka, Manipal
10. University of Calcutta, West Bengal, Kolkata
The best cities of study Actuarial Science in India based on the number of universities and their rank are Delhi, Kolkata, Pune, and Dehradun
(The article has been contributed by the Institute of Actuaries of India (IAI). Feedback on this article can be sent to feedback.employmentnews@gmail.com). Views expressed are personal.