Risk Management in Life Insurance

Life insurance is the most common insurance policy in our society. But there is some risk factor in life insurance which is covered by the insurance provider. So, let’s find out the risk management in life insurance

Solvency Margin

The insurer makes assumptions into future for parameters such as mortality, morbidity, expenses, interest etc. Sub-regulation (b) of Regulation 5 of IRDA Regulations (Assets, Liabilities and Solvency Margin of Insurers) 2000; specifies that the best estimate assumption shall be adjusted by an appropriate Margin for Adverse Deviation (MAD) which is dependent upon the degree confidence.

The purpose of MAD is to build a buffer for misestimations of the best estimate or adverse fluctuations. But it does not cover for volatility and catastrophe risks for which separate excess assets known as solvency Margin should be provided by the insurer.

Risk-Based Capital

Risks based capital includes asset default risk, mortality morbidity risk, volatility risk, catastrophe risk, margin risk and fund risk. Each company needs to develop implement and maintain appropriate and effective procedures to manage its capital position, i.e., ongoing minimum capital requirements, and future capital requirements.

The capital  management planning identifies  the quantity, quality and  sources of additional capital required, availability of any external sources, estimating  the financial  impact of raising additional  capital, taking into account the plans and requirements of various business  units of the  company.

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