Interview with Nikita Prabhu - General Insurance Actuary

Ques 1: Why did you choose Actuarial Science as a career? Ans: I came to know about Actuarial Science when I was in high school from my father who is an insurance agent. He showed me the Ready reckoner for premium rates and told me that ‘actuaries’ were behind the mathematics of it. I researched the profession and found it quite fascinating. I could apply the knowledge gained from the study of mathematics, statistics, economics, and finance to solve a range of real-world problems. It seemed highly rewarding. Ques 2: How is it like to work in both consulting and core Insurance based company environments? Ans: I was fortunate to start my career in consulting with Ernst & Young. Early on in my career, I got exposure to the different fields that actuaries work in, such as life insurance, employee benefits and general insurance. This initial experience aroused my curiosity towards general insurance (GI) and hence I chose to become a GI actuary. In a consulting firm, you get the

Difference between Diversified and Undiversified SCR

Difference between Diversified and Undiversified SCR – Solvency II

Solvency II - Phase 1

Solvency II - Phase 2

- Solvency II SCR is a Value at Risk measure, it can be calculated via Standard formula as well as via Internal Model

- VaR is calculated for each component risk, then the diversified SCR is determined with reference to the correlation between each component. This is done by taking the sum over all risks of the square root of the product of their SCRs multiplied by the correlation coefficient

- Broadly speaking, suppose you are a group Insurer with 4 entities across the globe named A,B,C and D

- All four of them have SCR has \$100 each. Then at Group Level your SCR is definitely less than \$400 because we have to allow for diversification via correlation matrices.

- Diversification occurs wherever the risks are not perfectly correlated. (Hedging would occur where they were negatively correlated.) In EIOPA's case they have defined a correlation matrix for each risk type.

- A numerical example might help, say a company writes only term insurance business and invests only in equity (with no default risk for simplicity). Let their market risk component of SCR, SCR_m, be \$20m and their Life component of SCR, SCR_L, be \$10m (which would have been calculated by the company). The correlation between these two risks is defined by EIOPA to be 0.25.

The basic SCR before diversification is \$30m i.e. 20+10

The diversified SCR is calculated as the sum over all (both) risks as follows:

SCR = SQRT( Corr_m,m * SCR_m * SCR_m + Corr_m,L * SCR_m * SCR_L

+ Corr_L,m * SCR_L * SCR_m + Corr_L,L * SCR_L * SCR_L )

= SQRT( 1 * 20 * 20 + 0.25 * 20 * 10 + 0.25 * 10 * 20 + 1 * 10 * 10 )

= \$24.5m

- So there is a diversification benefit of \$5.5m as the diversified SCR is that much lower than the undiversified SCR.