Actuarial Analyst Interview Questions and Answers - 2

5. What do you mean by Technical Provisions?

Insurance business collects the premium earlier and is required to pay the claims and benefits at a later date. This makes the liabilities for future a big item in the balance sheet of an insurer. These liabilities are called as Technical provisions.

Now, some technical provisions can be related to:

i) Outstanding liabilities for events that have already occurred.

ii) Liabilities for which the triggering event has not yet occurred.

iii) It can also be long term, level premium life insurance policies. Here is premium is higher than the cost of claims in the initial years of policy while is lower than the cost of claims in the later years

Technical provisions adequately recognize the level of obligation insurer has towards the policy holders or their clients.

In absence of these provisions, the insurer might find itself with insufficient funds to meet the obligations, which may lead to insolvency.

Technical provisions allow a realistic evaluation of the insurer’s balance sheet and it’s profitability

6. What role do Actuaries play in determining the technical provisions?

One of the primary responsibilities of Actuaries is to determine the Technical provisions. For this they,

i. Need to select the right methods to value different kinds of obligations.

ii. Establish the assumptions for the parameters that’ll have an impact on obligation’s value

iii. Ensure that policy and claims data used is complete and accurate.

iv. Prepare models that use the selected methods and assumptions & apply them to the data to calculate technical provisions.

v. They also check the sensitivity of these technical provisions to the changes in assumptions. They have to do this to ensure the adequacy of these provisions even in the future, just in case the assumptions change a bit with time. The results might indicate a need to modify the methods or assumptions.

7. What is the difference between Deterministic and Stochastic models? What according to you are the advantages of Stochastic models?

Deterministic models are the mathematical models in which the outcomes are determined by the relationship between states and events. There’s no room for random variation in a Deterministic model.  The deterministic model helps you make a point estimate of the payments that’ll need to be made out in future but it doesn’t take into consideration any variances that may show up in due course of time.

While a Stochastic model allows for a room for random variation in one or more inputs overtime and produces a different output every time. The random variation finds it base in the historical data. So, the modeler can say with some level of confidence that the payouts in future will fall in this range. But on the down side, the Stochastic models may be computationally very complex to perform.