Actuarial practice and core technical application (IAI CP1)
CP1 (Actuarial Practice) tests whether you can turn the core technical toolkit into defensible practical work. Questions give a business situation - a product launch, a valuation, a scheme funding problem - and ask you to design an approach, choose assumptions, quantify the outcome and recommend a course of action. Marks sit in structure, reasoning and professionalism as much as arithmetic.
The control cycle
Follow it visibly in every answer: define the problem and the stakeholder; collect and check data; build a model proportionate to the purpose; set assumptions; derive results; communicate; monitor and feed back. State the purpose first - pricing, reserving, capital and funding each need a different basis.
Pricing versus reserving
Pricing is prospective: best-estimate assumptions plus explicit margins for risk and profit, tested against a risk discount rate. Reserving and statutory valuation are retrospective: a prudent, prescribed basis for business already written, which must not be flattered by future new business. Confusing the two bases is the commonest conceptual error.
Professional obligations
The Actuaries Act 2006 established the Institute of Actuaries of India, and members are bound by the IAI Code of Conduct: integrity, competence, confidentiality, clear communication and no misleading reporting. An Appointed Actuary certifies insurance valuations and must report to the board - and, if solvency is threatened, to the regulator. Commercial pressure never overrides these duties.
Worked example
A one-year term assurance pays INR 1,000,000 on death. Expected mortality is q = 0.002, so expected claim cost = 0.002 × 1,000,000 = INR 2,000. Expenses are INR 500 per policy plus 20% of premium; target profit is 10% of premium; ignore discounting. Then P = 2,000 + 500 + 0.2P + 0.1P, so 0.7P = 2,500 and P = INR 3,571. If mortality is actually 0.003, claim cost is 3,000 and the policy loses about INR 1,000: quantify such sensitivities rather than merely naming them.
Traps that cost marks
- Wrong direction of prudence: higher mortality raises a death-cover reserve but lowers an annuity reserve.
- Ignoring expense inflation on long-tailed business.
- Discounting at a risk discount rate where a prescribed valuation rate applies.
- Giving numbers without stating purpose, basis and recommendation.