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 about the 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 of confidence.
The purpose of MAD is to build a buffer for misestimations of the best estimate or adverse fluctuations. But it does not cover 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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