The Importance of Insurance and Actuarial Science Education

in Our Current State of Economy

Prepared for

Prof. Shibli Rubayat-Ul-IslamChairman, Department of Banking & InsuranceDean, Faculty of Business StudiesUniversity of Dhaka

Prepared by

Firoz AlamStudent ID: 516 013 018Master of Actuarial ScienceYear # 1, Semester # 1

MASTER OF ACTUARIAL SCIENCE PROGRAMDEPARTMENT OF BANKING & INSURANCE

FACULTY OF BUSINESS STUDIESUNIVERSITY OF DHAKA

WHAT IS INSURANCE:

Insurance is a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium.

An entity which provides insurance is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance is known as an insured or policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate the insured in the event of a covered loss. The loss must involve something in which the insured has an insurable interest established by ownership, possession, or preexisting relationship. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The amount of money charged by the insurer to the insured for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster.

Insurance allows individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship at a reasonably affordable rate.

The insurance business are primarily of two types, namely, life insurance and property-casualty (general) insurance. Life insurance provides protection against the possibility of untimely death, illness, and retirement. Property insurance protects against personal injury, and liability such as accidents, theft, and fire.

WHAT IS ACTUARIAL SCIENCE:

Actuarial Science is the discipline that applies mathematical and statistical methods to assess risks in Insurance, Finance, and other industries and professions. Actuaries are professionals who are qualified in this field through intense education and experience. In many countries, Actuaries must demonstrate their competence by passing a series of thorough professional examinations.

Actuarial science includes a number of interrelated subjects, including probability, mathematics, statistics, finance, economics, financial economics, and computer programming. Historically, actuarial science used deterministic models in the construction of Tables and premiums. The science has gone through revolutionary changes during the last 30 years due to proliferation of high speed computers and the union of stochastic actuarial models with modern financial theory.

APPLICATION OF ACTUARIAL SCIENCE:

Actuarial science became a formal mathematical discipline in the late 17th century with the increased demand for long-term insurance coverage such as Burial, Life insurance, and Annuities. These long term coverage required that money be set aside to pay future benefits, such as annuity and death benefits many years into the future. This requires estimating future contingent events, such as the rates of mortality by age, as well as the development of mathematical techniques for discounting the value of funds set aside and invested. This led to the development of an important actuarial concept, referred to as the Present value of a future sum. Certain aspects of the actuarial methods for discounting pension funds have come under criticism from modern financial economics.

In traditional life insurance, actuarial science focuses on the analysis of mortality, the production of life tables, and the application of compound interest to produce life insurance, annuities and endowment policies. Contemporary life insurance programs have been extended to include credit and mortgage insurance, key man insurance for small businesses, long term care insurance and health savings accounts (Hsiao 2001).

In health insurance, including insurance provided directly by employers, and social insurance, actuarial science focuses on the analysis of rates of disability, morbidity, mortality, fertility and other contingencies. The effects of consumer choice and the geographical distribution of the utilization of medical services and procedures, and the utilization of drugs and therapies, is also of great importance. These factors underlay the development of the Resource-Base Relative Value Scale (RBRVS) at Harvard in a multi-disciplined study (Hsiao 2004). Actuarial science also aids in the design of benefit structures, reimbursement standards, and the effects of proposed government standards on the cost of healthcare (CHBRP 2004).

In the pension industry, actuarial methods are used to measure the costs of alternative strategies with regard to the design, funding, accounting, administration, and maintenance or redesign of pension plans. The strategies are greatly influenced by short-term and long-term bond rates, the funded status of the pension and benefit arrangements, collective bargaining; the employer's old, new and foreign competitors; the changing demographics of the workforce; changes in the internal revenue code; changes in the attitude of the internal revenue service regarding the calculation of surpluses; and equally importantly, both the short and long term financial and economic trends. It is common with mergers and acquisitions that several pension plans have to be combined or at least administered on an equitable basis. When benefit changes occur, old and new benefit plans have to be blended, satisfying new social demands and various government discrimination test calculations, and providing employees and retirees with understandable choices and transition paths. Benefit plans liabilities have to be properly valued, reflecting both earned benefits for past service, and the benefits for future service. Finally, funding schemes have to be developed that are manageable and satisfy the standards board or regulators of the appropriate country, such as the Financial Accounting Standards Board in the United States.

Actuarial science is also applied to Property, Casualty, Liability, and General insurance. In these forms of insurance, coverage is generally provided on a renewable period, (such as a yearly). Coverage can be cancelled at the end of the period by either party.

Property and casualty insurance companies tend to specialize because of the complexity and diversity of risks. One division is to organize around personal and commercial lines of insurance. Personal lines of insurance are for individuals and include fire, auto, homeowners, theft and umbrella coverages. Commercial lines address the insurance needs of businesses and include property, business continuation, product liability, fleet/commercial vehicle, workers compensation, fidelity & surety, and D&O insurance. The insurance industry also provides coverage for exposures such as catastrophe, weather-related risks, earthquakes, patent infringement and other forms of corporate espionage, terrorism, and "one-of-a-kind" (e.g., satellite launch). Actuarial science provides data collection, measurement, estimating, forecasting, and valuation tools to provide financial and underwriting data for management to assess marketing opportunities and the nature of the risks. Actuarial science often helps to assess the overall risk from catastrophic events in relation to its underwriting capacity or surplus.

In the reinsurance fields, actuarial science can be used to design and price reinsurance and retrocession arrangements, and to establish reserve funds for known claims and future claims and catastrophes.

INSURANCE INDUSTRY IN BANGLADESH:

A well-planned, well-organized, efficient and viable insurance industry is a necessary condition for the economic and financial infrastructural development in a country. Insurance is one of the most important financial institutions in the sense that besides covering losses of individual policy holders for death and accidents or damages of properties, it serves as an important national purpose of channeling the savings of the general mass or special group of people to investment. Bangladesh economy is beset with pressure of over population, frequency of natural calamities, low per capita income and lack of technical know-how. Insurance has the potential to make a significant overall impact on the economy of Bangladesh where capital is relatively in short supply, the rate of savings is very low, investment opportunities are few and far between, inflation is the norm, and provisions of social security for the people are almost non-existent.

This (insurance) action would be conducive to raise per capita income and play a positive role in the economy. Consequently, the per capita insurance premium is also found very low and the market did not grow much, compared to the other Asian countries. For this reason the industry is under-capitalized; hence most insurance companies found it extremely difficult to retain a reasonable percentage of large risk undertaken by them. It is true that people must live with hazards and to some extent insurance can free people from those hazards. But the people of Bangladesh still do not prefer to insure themselves as their low purchasing power does not

permit them to avail insurance policy. The main constraint in the development of insurance industry in Bangladesh is the lack of risk awareness, financial inability etc. In Bangladesh, there is a greater degree of risk but the insurance market is not so large as compared to the degree of risk. The insurance products are not bought spontaneously but bought just for meeting legal obligations.

At present there are 77 insurance companies / operators working in Bangladesh, including:Govt. owned Life Corporation : 1Govt. owned Non-Life Corporation : 1Privately owned Life Company : 29Privately owned Non-Life Company : 45Foreign Life Company : 1

Last year, some 4 multinational insurance companies have been given permission to start their business operation in Bangladesh, including Life Insurance Corporation of India, Prudential Insurance of United Kingdom, and other 2 from Japan.

Bangladesh insurance market is still small with a combined life and non-life insurance market premium of about US $2 billion in 2014. The industry ranked 68th in the world with a paltry 0.02% share in the global insurance industry. Per capita insurance spending is only US$ 5.2. Insurance penetration (premium as a % of GDP) remains low at 0.12% (0.09% for life insurance and 0.03% for non-life). The growth of non-life insurance companies in 2013 was about 7%, and life sector grew at a rate of more than 10%.

However, though the global insurance market declined but Bangladesh has seen a significant growth over last year. Growth in the industrialized countries was -- 2.8% for life and -- 0.6% for non life insurance, however, emerging markets grew at a rate of 4.2% for life and 2.9% for non-life insurance. Bangladesh is the second most supportive country to free market economy.

Total premium income of private sector life insurance companies in Bangladesh in year 2014 was Tk. 66.88 billion, which represented a growth of 7.13% over that of 2013 (Tk. 62.43 billion). Rise in premium income of private sector life insurance business both in the 1st year and the renewals was due to expansion of life business in the country through introduction of micro insurance like Sujhan Bima, Greeho Sanchaya Bima, Gana Grameen Bima, Loko Bima, Jana Bima, Palli Bima, Islami Khudra Bima, Group Bima, and Wage Earners' Group Insurance scheme etc.

The total assets of the private sector life insurance companies stood at Tk. 297.62 billion as at 31st December 2014, registering an increase of 14.55%.

The gross premium income of non-life private sector insurance companies increased from Tk. 21.04 billion in 2013 to Tk. 22.67 billion in 2014, a growth of 7.76%. The total investment made by the private sector general insurance companies in year 2014 was Tk. 29.82 billion. The total assets of non-life insurance companies stood at Tk. 59.11 on 31 December 2014.

Considering what is happening in outside world, especially in other similar or neighbouring countries, our insurance industry still need to go a long way. Governance model is weak, product base is shallow, risk taking ability is low due to low capital base and premium income is low with low market penetration. There are instances of major corruption with regard to premium collection, reinsurance, claim settlement and etc. There are also instances of insider trading, director's manipulation and lack of control. The quality of manpower is quite poor and no major investment or focus was put in for their development. The preliminary review by the regulatory agency revealed horrendous pictures. Few company bosses even tried to harass the regulators under the coverage of few political masters since they were not dancing according to their tunes. The intelligence agency reports also found massive irregularities in the major life and non-life insurance companies. A large section of population, non-resident workers/remittance earners, agriculture are still outside the insurance coverage. Their asset-liability management is quite poor and there is rampant interference by the board in day to day affairs of the companies.

Good part is, the present IDRA seniors do have respectable understanding about what is going around. They did put up a laundry list too. We all should hope and pray, they are being allowed to work properly and provided with adequate support from all stakeholders. They should also bring in more competition into this opportunity space, allow more internationally recognized operators to join the journey towards excellence and thereby build up a respectable insurance sector in Bangladesh.

IMPORTANCE OF INSURANCE AND ACTUARIAL SCIENCE EDUCATION IN BANGLADESH:

Higher education institutions in Bangladesh include 34 public universities, 56 private universities, 2 international universities, 31 specialized colleges, and 2 special universities. Unfortunately, no university in Bangladesh conducted an actuarial education program until recently. Considering the importance and demand of time, the premier educational institute in the country, the University of Dhaka, offered Professional Master Degree in Actuarial Science last year. Besides, Insurance Development and Regulatory Authority (IDRA) had a meeting with the representatives of all universities in the country, where they requested the universities to offer courses on Actuarial Science, as we need abundant supply of Actuaries in our country to take care of our frail Insurance Sector and take the industry to a new height with their education and qualities.

In spite of the growth of the insurance industry and other financial institutions in Bangladesh, there is an acute shortage of qualified actuaries in the country. As a result, most of the organizations outsource actuarial services. At present, there are only one fellow and two associate actuaries in Bangladesh. However, a good number of candidates are pursuing the professional examinations offered by the Institute and Faculty of Actuaries in the United Kingdom. Some other candidates are pursuing professional examinations from the Institute of Actuaries of India organized by the Bangladesh Insurance Academy.

Very recently, the Insurance Development Regulatory Authority (IDRA) of Bangladesh introduced actuarial departments in life insurance companies. Most of the partly qualified students joined these companies to work while taking professional examinations. Pursuing actuarial examinations from Bangladesh is a great challenge due to the high cost of examinations, as well as the high cost (and lack) of study materials and tutorials. Given the circumstances, it is a great pleasure that the Actuaries Without Borders (AWB) Section of the International Actuarial Association has come forward to provide volunteers to prepare the students for examinations which has given a high degree of momentum to a country like ours.

The actuarial profession in Bangladesh has huge potential, as at present 30 life and 45 non-life insurance companies are operating with more life insurance companies soon to be approved for business. Financial markets are also expanding, which will create more avenues for actuarial services. With the right support—such as mentorship, professional and skills development, and motivation—the sky is the limit for the actuarial profession in Bangladesh.

Bibliography:

1. http://www.investopedia.com/ 2. https://en.wikipedia.org/ 3. http://the-insured.com/insurance-sector-of-bangladesh-the-ultimate-guide/ 4. “Actuarial Study in Bangladesh” by A K M Elias Hossain, President, Actuarial Society of

Bangladesh5. Society of Actuaries, International News, September 2014 – Issue 63; Article titled “The

Actuarial Profession in Bangladesh” by A K M Elias Hossain, President, Actuarial Society of Bangladesh

6. Dr. Mohammed Shamim Uddin Khan and Md. Nazim UddinInsurance Industry in Bangladesh: Opportunities & ChallengesThoughts on Economics; Vol. 23, No. 04

7. “The Insurance Industry in Bangladesh, Key Trends and Opportunities to 2018” by ‘Research and Markets’