Life Insurance
SA4 Life Insurance tests pricing, valuation and risk management for Indian life products - protection, savings, annuities and ULIPs - under IRDAI regulations and the Appointed Actuary regime. Expect a pricing or reserve calculation plus questions on assumptions and policyholder treatment.
Core rules and concepts
- Gross premiums = expected present value (EPV) of benefits + EPV of expenses + profit margin, using pricing assumptions with margins; reserves use best-estimate assumptions plus prescribed margins.
- Net premium reserve = EPV(benefits) − EPV(future net premiums); Zillmerisation spreads acquisition costs.
- IAM 2012-14 is the customary mortality starting point; annuitants need lighter mortality and longevity improvement.
- Participating business: asset share drives bonus, and at least 90% of surplus must go to policyholders.
- ULIPs are governed by the IRDAI (Unit Linked Insurance Products) Regulations, with caps on charges and minimum death/maturity benefits.
Worked example
A two-year single-premium endowment pays sum assured ₹100,000 on death or survival. Interest is 6%, q1 = 0.005, q2 = 0.006, expenses ignored. EPV death year 1 = 100,000 × 0.005/1.06 = ₹471.70. Death year 2 = 100,000 × 0.995 × 0.006/1.06² = ₹531.30. Maturity = 100,000 × 0.995 × 0.994/1.06² = ₹88,037. Total single premium = ₹89,040. The reasoning: each cash flow is probability-weighted and discounted; survival is required to reach year 2.
Traps that cost marks
- Valuing reserves on pricing assumptions, which hides margins.
- Ignoring lapse, surrender and paid-up behaviour when projecting cash flows.
- Double counting bonus or ignoring the cost of guarantees and options.
- Mismatching asset and liability durations, especially for annuity books.