Actuarial Principles & Premium Setting

ACTUARIAL PRINCIPLES &
PREMIUM SETTING
MEANING- ACTUARIAL PRINCIPLES
• Actuarial principles define how earnings-related pension providers calculate

insurance contributions, technical provisions, pension liabilities, and
common interest rates
• Actuarial principles are fundamental to the insurance industry, as they form
the basis for assessing risk, setting premiums, and ensuring the financial
stability of insurance companies.
PRINCIPLES
• In insurance, there are 7 basic principles that should be upheld, i.e.

• Insurable interest
• Utmost good faith
• Proximate cause
• Indemnity
• Subrogation
• Contribution and
• Loss of minimization
1. PRINCIPLE OF UTMOST GOOD FAITH
• This is a primary principle of insurance. According to this principle, you

have to disclose all the information that is related to the risk, to the insurance
company truthfully.
• You must not hide any facts that can have an effect on the policy from the
insurer. If some fact is disclosed later on, then your policy can be cancelled.
On the other hand, the insurer must also disclose all the features of a life
insurance policy.
2. PRINCIPLE OF INSURABLE INTEREST
• According to this principle, you must have an insurable interest in the life
that is insured. That is, you will suffer financially if the insured dies. You
cannot buy a life insurance policy for a person on whom you have no
insurable interest.
3. PRINCIPLE OF PROXIMATE CAUSE
• While calculating the claim for a loss, the proximate cause, i.e., the cause
which is the closest and the main reason for a loss should be considered.
• Though it is a vital factor in all types of insurance, this principle is not used
in Life insurance.
4. PRINCIPLE OF SUBROGATION
• This principle comes into play when a loss has occurred due to some other
person/party and not the insured. In such a case, the insurance company has a
legal right to reach that party for recovery.
5. PRINCIPLE OF INDEMNITY
• The principle of indemnity states that the insurance will only cover you for
the loss that has happened. The insurer will thoroughly inspect and calculate
the losses. The main motive of this principle is to put you in the same
position financially as you were before the loss. This principle, however,
does not apply to life insurance and critical health policies
6. PRINCIPLE OF CONTRIBUTION
• According to the principle of contribution, if you have taken insurance from

more than one insurer, both insurers will share the loss in the proportion of
their respective coverage.
• If one insurance company has paid in full, it has the right to approach other
insurance companies to receive a proportionate amount.
7. PRINCIPLE OF LOSS MINIMIZATION
• You must take all the necessary steps to limit the loss when it happens. You
must take all the necessary precautions to prevent the loss even after
purchasing the insurance. This is the principle of loss minimization.
RELEVANCE OF ACTUARIAL PRINCIPLES
• Risk Assessment: Actuaries use statistical models and historical data to

assess the likelihood and potential cost of various risks, such as accidents,
illnesses, or natural disasters. This helps insurance companies determine
appropriate premiums to cover these risks.
• Premium Setting: Actuaries calculate premiums based on the expected cost
of claims, administrative expenses, and a margin for profit. They consider
factors such as age, gender, health status, and occupation to determine
individual risk levels and set premiums accordingly.
• Reserving: Actuaries estimate the amount of money insurance companies

need to set aside to cover future claims and expenses. This ensures that the
company has enough funds to pay claims as they arise.
• Reinsurance: Actuaries help insurance companies manage their risk by
purchasing reinsurance, which is insurance for insurers. Reinsurance helps
spread risk across multiple companies and can protect against large losses.
• Regulatory Compliance: Actuaries ensure that insurance companies comply

with regulatory requirements, such as solvency and capital adequacy
standards. They also provide expertise in financial reporting and risk
management.
• Product Development: Actuaries play a key role in developing new
insurance products by assessing the risks involved and determining
appropriate pricing and coverage levels.
• Data Analysis: Actuaries analyze large amounts of data to identify trends

and patterns that can help improve risk assessment and pricing models.
• Customer Service: Actuaries help insurance companies provide better

customer service by developing tools and processes to streamline claims
processing and improve the overall customer experience.
PREMIUM SETTING
• Premium setting in insurance is a complex process that involves various

factors and considerations. The premium is the amount of money an
insurance company charges for coverage, and it is typically paid on a regular
basis (e.g., monthly, quarterly, or annually) by the policyholder. The premium
is based on the risk profile of the insured, the type and amount of coverage
provided, and other factors that influence the likelihood and cost of claims.
KEY FACTORS THAT INSURERS CONSIDER
WHEN SETTING PREMIUMS
• Risk Assessment: Insurers assess the risk profile of the insured, including
factors such as age, gender, health status, occupation, lifestyle, and location.
The higher the risk of a claim, the higher the premium is likely to be.
• Underwriting: Underwriters evaluate the information provided by the

insured and determine the terms and conditions of the policy, including the
coverage limits, deductibles, and other policy features. These factors can
affect the premium amount.
• Claims History: Insurers consider the insured's claims history, including the
frequency and severity of past claims. A history of frequent or costly claims
may result in a higher premium.
• Type and Amount of Coverage: The type and amount of coverage provided
by the policy also influence the premium. Policies with broader coverage or
higher limits typically have higher premiums.
• Insurance Company's Expenses: Insurers factor in their own expenses,
including administrative costs, sales and marketing expenses, and profit
margins, when setting premiums.
• Market Conditions: Insurers consider market conditions, including

competition, regulatory requirements, and economic factors, when setting
premiums. They also consider the risk of catastrophic events that could affect
their overall claims experience.
• Reinsurance: Insurers may purchase reinsurance to transfer a portion of their
risk to other insurers or reinsurers. The cost of reinsurance can affect the
premium amount.
• Regulatory Requirements: Insurers must comply with regulatory

requirements, which may include minimum capital and reserve requirements,
as well as restrictions on premium rates.
Overall, premium setting is a dynamic process that requires insurers
to balance the need to cover their costs and make a profit with the
need to provide affordable coverage to policyholders. Insurers use
actuarial principles, statistical models, and other tools to analyze
risk and set premiums that are appropriate for the level of coverage
provided.
THANK YOU

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ACTUARIAL PRINCIPLES &

• Actuarial principles define how earnings-related pension providers calculate

• In insurance, there are 7 basic principles that should be upheld, i.e.

• This is a primary principle of insurance. According to this principle, you

• According to the principle of contribution, if you have taken insurance from

• Risk Assessment: Actuaries use statistical models and historical data to

• Reserving: Actuaries estimate the amount of money insurance companies

• Regulatory Compliance: Actuaries ensure that insurance companies comply

• Data Analysis: Actuaries analyze large amounts of data to identify trends

• Customer Service: Actuaries help insurance companies provide better

• Premium setting in insurance is a complex process that involves various

• Underwriting: Underwriters evaluate the information provided by the

• Market Conditions: Insurers consider market conditions, including

• Regulatory Requirements: Insurers must comply with regulatory

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