Adverse Selection

Wikipedia states that "a situation where an individual's demand for insurance (either the propensity to buy insurance, or the quantity purchased, or both) is positively correlated with the individual's risk of loss (e.g. higher risks buy more insurance), and the insurer is unable to allow for this correlation in the price of insurance".

 A few examples will make things clear.

 Health Insurance :-- An individual knows best about his or her health. If he feels that there is very high probability that he will fall sick than he is tend towards taking health insurance. This is ANTI SELECTION or adverse selection if an insurer is not able to differentiate this risk from rest of the pool.

Lets see a bit more exhaustive example.

 Motor Insurance :-- Suppose we have only two cars in market ( SANTRO and INDICA ). Company A insures 50 santro cars and 50 indica cars. Company collects Rs 1000 per car. Hence total revenue for the company is Rs 100000. Company recorded a total 16 claims and average claim size being Rs 5000. Therfore total claims is of Rs 80000 and Company makes a profit of Rs 20000.

  A more detail analysis shows out of these 16 claims 11 came from Indica and 5 came from Santro. ( for simplicity lets keep avg claim cost constant ). 

  Company B when looked at the scenario priced its product in different fashion. Prices for indica was Rs 1500 and prices for Santro as Rs 750. 

  Company A sticks to their old pricing. All the Santro holders shited from company A to company B and all Indica holders taken policies from company A.

 Aftereffects :-- Company A has 150 policies ( cars ) all Indica. Collected Rs 150000 as Premium . There were 33 claims of Rs 5000 and totalling Rs 1,65,000 . Company makes a loss of Rs 15000. 

This is the effect of Adverse Selection.

Actuaries and Underwriters combine their skills together to eliminate this kind of effect to take place. Actuaries have the mathematical skills to identify the bad and good areas. Underwriters have knowledge of Market and competitors.

We ( actuaries ) have to price our product in such a manner that such effect does not take place in Market. Constant monitoring is also necessary to identify such Burning spots and to remove them with immediate effect.

 More on this later.

Moral Hazard

Definition of Moral Hazard as mentioned in Wikipedia is "Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk."This definition is self explanatory; further clarification can be added using following examples.

Burglary Insurance:-- Taken a burglary insurance , insurer keeps more costly products at home moreover he might not invest more in securing his house( use of inexpensive locks) . Or become careless ( ignore to recheck if house is lock properly in doubt).

Health Insurance:-- Just say an itch with an Insurance is a severe allergy.

Actuaries while pricing product needs to take care of Moral Hazard as an important phenomenon. While pricing the product he has to keep in mind the effects of various change in policy conditions might have on Moral Hazard. For example:-- pricing a Health insurance policy which was earlier has an deductable but was withdrawn later might have much more effect in claims because of triggering of Moral Hazard claims. Underwriters and Actuaries work together in such cases to price these effects as effectively as possible.

Jobs in Actuarial Profession

Being an actuary, you can be employed in various fields.

Life Insurance Companies

General Insurance Companies

KPO Companies (Knowledge Process Outsourcing)

Consulting companies

Investment Companies

Pension and Benefits Companies

Health Insurance Companies

Reinsurance Companies

In India, Life Insurance, KPO and Consulting companies provide large portion of the actuarial demand. Further, General Insurance sector after de-tariffing promises to provide very lucrative job profile in near future.

Pension and Benefits field is also likely to benefit given the reforms that are taking place in Pension and related areas. It is heard that Banking and Financial Companies are also now hiring actuaries for analyzing risks.

Health insurance actuaries are also in great demand, given that in India the scope of Medical Insurance is tremendous and lot of companies around the world want to enter India as soon as possible. Demand for health actuaries are bound to increase.

I don't know for sure, but talking with various industry experts, there is a feeling that work of General insurance or Health actuary involves more subjective decision. Due to this fact the responsibility of their decision is high and thus they are paid more than a life or pension actuary all around the world. Although in India General insurance or Health insurance companies are not paying as industry standard across world but it is likely to change soon.

List of Life insurers in India

1. Bajaj Allianz Life Insurance Company
   
2. Birla Sun Life Insurance Company
   
3. HDFC Standard Life Insurance Company
   
4. ICICI Prudential Life Insurance
   
5. ING Vysya Life Insurance Company
   
6. Life Insurance Corporation of India
   
7. Max New York Life Insurance Company
   
8. Met Life India Insurance Company
   
9. Kotak Mahindra Old Mutual Life Insurance
   
10. SBI Life Insurance Company
    
11. TATA AIG Life Insurance Company
    
12. Reliance Life Insurance Company
    
13. Aviva Life Insurance Company
    
14. Sahara India Life Insurance Company
    
15. Shriram Life Insurance Company
    
16. Bharti Axa Life Insurance Company
    
17. Future Generali India Life Insurance Company
    
18. IDBI Fortis Life Insurance Company
    
19. Canara HSBC Oriental Bank of Commerce Life Insurance Company
    
20. Aegon Religare Life Insurance Company
    
21. DLF Pramerica Life Insurance Company
    

List of Non-Life insurers in India

1. Bajaj Allianz General Insurance Company
   
2. ICICI Lombard General Insurance Company
   
3. IFFCO Tokio General Insurance Company
   
4. National Insurance Company
   
5. The New India Assurance Company
   
6. The Oriental Insurance Company
   
7. Reliance General Insurance Company
   
8. Royal Sundaram Alliance Insurance Company
   
9. Tata AIG General Insurance Company
   
10. United India Insurance Company
    
11. Cholamandalam MS General Insurance Company
    
12. HDFC ERGO General Insurance Company
    
13. Export Credit Guarantee Corporation of India
    
14. Agriculture Insurance Company of India
    
15. Star Health and Allied Insurance Company
    
16. Apollo DKV Insurance Company
    
17. Future Generali India Insurance Company
    
18. Universal Sompo General Insurance Company
    
19. Shriram General Insurance Company
    
20. Bharti AXA General Insurance Company
    
21. Raheja QBE General Insurance Company ( Prospective)
    

List is taken from site of IRDA.

Segmental Analysis

May be called initial step towards Portfolio Analysis, Segmental Analysis is nothing but to see the data in segments to see the trend which is not apparent when seen in totals.

In the analysis , Claim Frequency and Average claim size, burning cost as well as Loss Ratio is calculated according to different factors( rating Factors) like Location ,Age or may be different models.

In principle , following accruals principle , Earned premium should be compared to the claims that have occurred during the same period. Care should be taken , as for latest periods Claim experience seems to be better which actually is not the case as there are IBNR and IBNER cases which will increase the Claims.

Talking Actuarially , it is just the ONE WAY ANALYSIS which is a part of Premium Rating. Management sometimes like to see the data containing EILR. EILR meaning Earned incurred Loss Ratio. It is comparing Earned Premium with movement in Incurred during the time period.

Health Insurance in India and Medical Inflation

 

Health Insurance will experience tremendous growth in Indian market in coming decade. Middle class is growing thanks to growth rate of 8% to 10%. Increase in disposable income for middle class will insure that Health insurance will grow and increase its penetration in Indian market. Current penetration of Health insurance in India is very low somewhere in lower single digit. Further average age of Indian population is very low and India is a young country and going ahead average age is going to increase in India , hence increased medical cost and demand for Health Insurance. Medical Inflation plays a very important role in making Health Insurance a costly and complex affair.

Due to Medical Inflation premiums are increased every year making it hard for insurance companies to sell its products in market. Further, inflation as high as in late teens make it difficult to absorb the rise in claim cost. Brighter side is Health cost in India is among the lowest in the world and penetration level of Health Insurance is also one of the lowest in the world. On the other hand the quality of health service is also far far away from the desired levels. (May be the reason for low health cost and quality is low penetration of health insurance.)

Actuaries in Health Insurance have a major role to play in Indian scenario. To change and modify the way data is collected (both claims and policy). Data which is available right now to actuaries working in Indian health insurance companies is very less and that too of low quality. Lot of work has to be done to ensure that proper data is recorded which will enable actuaries to work on advance techniques like Portfolio Monitoring and Pricing in Health insurance.

Medical Inflation

Medical Inflation could be defined as rise in Medical Care Costs year on year. This includes Doctor Fees, Pharmacy and other Hospital services.
Medical inflation on average is around 17 % year on year much higher than general wholesale index.
Premiums of Health insurance has to increase by about same rate to tackle Medical Inflation , which has been one of the challenges for insurance companies.
Health is a long term plan with annual renewals and re-pricing. If product is getting costlier by 25 % each year ( due to Medical Inflation and Age Factor ) it is very difficult for consumer to keep renewing their policies. A stable premium like Life insurance is the need with no price increases. Designing such a policy includes accurate estimation of future Medical inflation which is not possible by any stretch of imagination.
You cannot charge high to younger generation to subsidize the higher cost for older people, this might trigger anti-selection and you will be left with portfolio containing only older people.
Health Insurance Companies have to figure out a solution that can cater to the needs of consumer and also protect their capital and interest.
In US companies do raise their premiums by large amount every year and now the fact the health premium increases every year is well understood and accepted by people. Such understanding has to be developed in Indian scenario.
The rise in Real estate prices and crunch of expert and skilled manpower has made it impossible to control Medical Inflation in coming few years also.
Insurance is also one of the factors causing Medical Inflation. When Hospitals know that there is a financer ready to pay the bills they increase the cost without much resistance and hence causes Medical Inflation. Also insured customer also wants to go into a care which is the best and costly as he is insured which causes increase in demand of high end hospitals and hence medical inflation.

General Insurance Industry In India

Name Of Company	Premium (Gross) 2007-08	Premium (Gross) 2006-07
Royal Sundaram	695.16	600.58
Tata-AIG	813.39	741.56
Reliance General	1946.42	912.31
IFFCO-TOKIO	1235.83	1150.32
ICICI Lombard	3344.69	3003.45
Bajaj Allianz	2404.34	1803.34
HDFC ERGO General	216.58	190.16
Cholamandalam	563.67	314.59
Future Generali	10.64	0
Universal Sompo	0.48	0
New India	5274.14	5017.19
National Insurance	4030.8	3814.42
United India	3738.94	3498.77
Oriental Insurance	3855.61	3928.66
ECGC	669.39	618.05
Star Health	173.03	22.51
Apollo DKV	2.98	0
AIC	828.66	564.67

You can see there are many companies which have just started operations in india. There are many more companies which will be entering the indian insurance market in coming years.
These data are taken from IRDA journal and shows the premium collected by companies over year and year on year growth.

Actuarial Knowledge Process Outsourcing

Actuaries are highly skilled professionals and are in great demand in insurance industry all over the world. Due to recently privatised industry here in India , first wave of qualified actuaries will be out within two years. By that time number of Actuarial Students will also be quite large.

KPO - Knowledge Process Outsourcing industry in india is growing rapidly. Since Actuaries all over the world are in great demand and India promises to provide skilled manpower to cater this need. KPO industry in india ( in actuarial field) promises to be a big employer and money spinner in coming 5 years.

Many IT companies have already sensed this oppurtunity and already started to stablish their KPO's. Other big multinational insurance company also have started to offshore their Actuarial Work to Indian subsidary.

Lets see how this industry fair in the future.