It is not easy to become an actuary, but if you do become one, you are on your way to a very rewarding career that uses math all the time. An actuary is someone who is employed in the insurance industry. Others work in actuarial consulting firms.A very low number of actuaries work for government agencies, and computer software developers. People in this profession manage risk. Every person and organization faces risk. As experts in measuring and managing risk, actuaries fill and play a significant need in our society.
This is the beginning lesson of teaching basic thing of actuarial science. Here, we talk about actuarial science related to the insurance industry.This lesson provides a brief definition of terms that are fundamental to understanding insurance rate-making and Basic Insurance Terms.
An exposure is the basic unit of risk that underlies the insurance premium. The exposure measure used for rate-making purposes varies considerably by line of business. For example, one house insured for one year represents one exposure for homeowners insurance. Annual payroll in thousands of Rupees represents the typical exposure unit for Sri Lankan workers compensation insurance. There are four different ways that insurers measure exposures: written, earned, unearned, and in-force exposures.
- Written exposures are the total exposures arising from policies issued (i.e., underwritten or written) during a specified period of time, such as a calendar year or quarter.
- Earned exposures represent the portion of the written exposures for which coverage has already been provided as of a certain point in time.
- Unearned exposures represent the portion of the written exposures for which coverage has not yet been provided as of that point in time.
- In-force exposures are the number of insured units that are exposed to loss at a given point in time.
Premium is the amount the insured pays for insurance coverage. The term can also be used to describe the aggregate amount a group of insured pays over a period of time. Like exposures, there are written, earned, unearned, and in-force premium definitions.
- Written premium is the total premium associated with policies that were issued during a specified period.
- Earned premium represents the portion of the written premium for which coverage has already been provided as of a certain point in time.
- Unearned premium is the portion of the written premium for which coverage has yet to be provided as of a certain point in time.
- In-force premium is the full-term premium for policies that are in effect at a given point in time.
An insurance policy involves the insured paying money (i.e., premium) to an insurer in exchange for a promise to indemnify the insured for the financial consequences of an event covered by the policy. If the event is covered by the policy, the insured (or other individual as provided in the insurance policy) makes a demand to the insurer for indemnification under the policy. The demand is called a claim and the individual making the demand is called a claimant. The claimant can be an insured or a third party alleging injuries or damages that are covered by the policy.
The date of the event that caused the loss is called the date of loss or accident date (also sometimes called occurrence date). For most lines of business and perils, the accident is a sudden event. For some lines and perils, the loss may be the result of continuous or repeated exposure to substantially the same general hazard conditions; in such cases, the accident date is often the date when the damage, or loss, is apparent. Until the claimant reports the claim to the insurer (i.e., the report date) the insurer is unaware of the claim. Claims not currently known by the insurer are referred to as unreported claims of incurred but not reported (IBNR) claims. After the report date, the claim is known to the company and is classified as a reported claim. Until the claim is settled, the reported claim is considered an open claim. Once the claim is settled, it is categorized as a closed claim. In some instances, further activity may occur after the claim is closed, and the claim may be re-opened.
Loss is the amount of compensation paid or payable to the claimant under the terms of the insurance policy. The actuarial community occasionally uses the terms losses and claims interchangeably. Here, we always use the term claim to refer to the demand for compensation, and loss to refer to the amount of compensation.
The terms associated with losses are paid loss, case reserve, reported or case incurred loss, IBNR/IBNER reserve, and ultimate loss. Paid losses, as the name suggests, are those amounts that have been paid to claimants. When a claim is reported and payment is expected to be made in the future, the insurer establishes a case reserve, which is an estimate of the amount of money required to ultimately settle that claim. The case reserve excludes any payments already made. The amount of the case reserve is monitored and adjusted as payments are made and additional information is obtained about the damages.Reported loss or case incurred loss is the sum of the paid losses and the current case reserve for that claim:
Reported Losses = Paid Losses + Case Reserve
This is not the end of actuarial lesson. you can see more of Basic Insurance Terms in next post.