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Difference between an Actuary and an Underwriter in Insurance Industry

Actuaries

– Actuaries, in an insurance company, help design and price insurance policies for their companies, such that they remain competitive and maintain profits. They extensively use analytics, economics and mathematics skills and tools to evaluate risks. They are the ones who set guidelines for each risk class and category. The underwriter’s role comes after an actuary’s role and decision.

– An actuary’s role in a company is similar to that of a brain in a human body. If actuaries do wrong pricing for the policies, then the companies cannot make profits. If the price is very low, then the profit margin is not adequate, where as if the price is very high the customers won’t buy any policies from the company.

– Roles: Determine likelihood size of the policy holder’s losses and put a price tag. This is called ratemaking. Apart from this, they also perform reserving, risk management, reinsurance roles

Underwriters

– Underwriters, in an insurance company, decide the category in which each customer falls, based on the table/matrix created by the actuaries. They look at the data of the individual customers and decide in which risk class and category the particular customer falls in.

– Underwriters evaluate each client’s risk and decide upon how much coverage the client can be given, and for which how much premium he should pay. Sometimes they make decision as in whether certain client’s risk is coverable or not.

A perfect Analogy explanation

I remember reading a perfect analogy explaining the role of an actuary and an underwriter.
“An actuary, an underwriter, and an insurance salesperson are riding in a car. The salesperson has his foot on the gas, the underwriter has his foot on the brake, and the actuary is looking out the back window telling them where to go.”

Organizational chart for Actuaries and Underwriters

Organizational chart for actuaries and underwriters

Ontario in trouble, Hoping for Solvency!

Ontario province faces huge outstanding debt securities. What is Don Drummond and Moody’s saying?
Brief 

Ontario Province face huge debt (has huge outstanding debt securities)

Don Drummond’s report/recommendations for Ontario released on Wednesday

Ontario’s rating outlook was cut to negative from stable by Moody’s Investors Service

Who is who?

Dalton McGuinty

The Premier of Ontario (Premier ministre de l’Ontario in French) is the first Minister of the Crown for the Canadian province of Ontario.

Mr. Don Drummond

Mr. Drummond is the recently retired Senior Vice President and Chief Economist with the TD Bank. Prior to joining TD in 2000, the native of Vancouver had a long and distinguished career in the federal public service.

Moody’s Investors Service, often referred to as Moody’s, is the bond credit rating business of Moody’s Corporation, representing the company’s traditional line of business and its historical name. Moody’s Investors Service provides international financial research on bonds issued by commercial and government entities and, with Standard & Poor’s and Fitch Group, is considered one of the Big Three credit rating agencies.

Ontario province

Ontario has about $190 B in outstanding debt securities.

Ontario’s struggles are crucial for the country because its economy is larger than that of many countries, including Sweden, Poland and Belgium, and accounts for about 40 per cent of the national economy, with a gross domestic product of $612-billion last year.

However, the province has a $16-billion deficit and a rate of growth that is slower than that of some other provinces, which makes it difficult to find ways to balance the books.

A credit rating downgrade would not only make Ontario’s government bonds – which accounted for just over half of all trading in Canadian provincial bonds in the first nine months of 2011 – less attractive to investors, it could also make it more expensive to borrow money at the very time when the debt is mounting.

Drummond’s recommendation released

It has been about a year since Premier Dalton McGuinty asked him to dive into Ontario’s public services and find ways for the minority Liberal government to wipe out a $16-billion deficit by 2017. Mr. Drummond and his three co-authors on Wednesday served up 362 recommendations spanning more than 540 pages – the biggest print job in Queen’s Park history. He is proud of this. The executive summary is 62 pages.

 “We call it the ‘summary for the not-very-busy executive.’ ” Drummond says

Drummond’s Proposals

His proposals range from overhauling health care by moving more services away from hospitals, to scrapping electricity subsidies, to making tax breaks for businesses conditional on whether they help boost productivity, not just whether they create and maintain jobs. The general thrust through the entire document is making the success of all programs measurable, so they are run more efficiently, or junked. So far, the McGuinty Liberals have outright rejected only one recommendation – to kill all-day kindergarten.

“I hope they’ll implement them, but if they don’t, I don’t think it’s because they weren’t good ideas,” he says. “I would probably do 350 of them even if I had a huge fiscal surplus. I mean, why would you want to run a program inefficiently?” –Don Drummond says

His recommendations – hard to implement

It’s certainly nothing compared to the massive “radicalization” he is about to call for in how Canada’s most populous province operates. Mr. Drummond sounds supremely confident that his sweeping and sometimes draconian proposals offer the best hope for Ontario to get its house in order. But he is realistic about how hard it will be to implement them.

“No government in the world has ever done this before,” he says. “I’m calling for a revolutionizing, a radicalization, of virtually everything a government does, to make it focus on efficiency, not just in one area at a time, but simultaneously in virtually everything they do. It’ll take unbelievable courage and unbelievable intelligence, and it’ll take an unbelievable capacity at both the political level, and the bureaucratic level.”

Moody’s

Moody’s Investors Service warned on Thursday that it might lower the rating if the province doesn’t take serious steps in the next budget to deal with its multibillion-dollar deficit.

If we don’t do what he recommends, then Moody’s (Investors’ Service, the debt-rating agency) might downgrade us, increasing the cost of borrowing.” Moody’s cites Ontario’s slowing growth and growing debt for revision.

What is term insurance? How is it advantageous? Why is it not accepted widely?

Term insurance is the basic and original form of Insurance. But the popularity for the term insurance among consumers is less popular, especially in countries like India.

Can you define Insurance?  Insurance is something that takes back to the financial position you were in, before experiencing an unexpected loss.

Typically, a Term insurance is pure form of insurance, where the policy holder pays premium for the risk, which in this case is mostly loss of life, and covers his risk using the premium paid. If the policy holder has not faced any risk in the agreed term, no insurance premium is accumulated and paid back. Which essentially means that the term insurance is not an investment, rather a pure risk covering Insurance agreement.

So, is a Term Insurance advantageous?

It depends, but on a general note, any middle aged family member having dependents like wife,sons & daughters should have a term insurance included in his portfolio.  The advantage is simple. Term insurance is cheap. Its much cheaper than a conventional life insurance designed to give a guaranteed return, based on the principal and interest accumulation. It is cheap but with no definite returns. But is essential.

A perfect analogy for a term insurance ,would be a Vehicle insurance. Does any body question, why we are not getting any definite returns from a Car insurance? then why do you question a term insurance? A lot of us are safe drivers ,and never actually face an accident, but still we are paying premiums annualy, just to keep ourselves in a bailable space in case of an unfortunate event. The same is the case with term insurance, it helps your family in distress.

There is also this psychological factor affiliated to it. Why would some one think about his/her death when he/she is actually alive and healthy? But ,things are changing, people are changing, in a slower yet consistent pace. Soon, each one of us will realize the need for a Term insurance in our portfolio.

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