The brain aim of Actuary is to gibe assets alongside the liabilities. In instance of insurance companies, actuary major component is to discovery the uppercase requirement. In a layman language, uppercase requirement way the sum that an insurance society has to laid upward aside to ensure that they are able to encounter the liabilities inward the hereafter alongside a given score of confidence.
Therefore, the to a greater extent than lead a opportunity society possess, to a greater extent than volition last the uppercase requirement. Actuary endeavor to cut back this lead a opportunity past times matching property as well as liability.
Matching property as well as liability: Let’ sympathise a uncomplicated example. Suppose you lot lead maintain to pay your friend Rs. 10,000 adjacent year. So, today you lot tin sack invest Rs.9500 inward a Bank equally a Fixed deposit that that tin sack furnish a render of 5.26% per annum. So you lot tin sack role banking corporation deposit coin later on ane twelvemonth that volition last 10,000 to pay your friend 10,000. That’s how you lot gibe your liability outgo alongside your property income as well as so reduces the lead a opportunity of beingness default. Same concept applies to insurance companies equally well.
To constitute an investment strategy, nosotros lead maintain to reckon a lot of points such as:
Characteristics of Liabilities:
· If liabilities are existent inward nature, as well as then nosotros gibe alongside existent assets such equally equities, properties etc.
· If liabilities are long term inward nature (as inward instance of pension as well as life insurance), as well as then nosotros gibe alongside assets of long term nature i.e. long term bonds, equities etc.
· Sometimes regulator describes which assets you lot cannot invest inward or which assets should concur atleast minimum percent inward your portfolio. For ex,
o Regulator tin sack tell that you lot cannot invest inward derivatives equally an insurance society because this property course of written report inward also risky as well as at that spot is a threat that you lot are non able to pay your liability to policyholders
o Regulator tin sack tell that you lot lead maintain to invest atleast 35% of your portfolio assets into regime bonds because these are lead a opportunity costless investment as well as it helps inward reducing overall lead a opportunity of the insurer as well as ultimately reduces the uppercase requirement.
Taxation: Different types of property classes volition lead maintain dissimilar taxes. For ex, investment inward ELSS(Equity linked savings scheme) tin sack assist inward getting taxation deductions or to a greater extent than or less returns on property classes tin sack last considered equally an income as well as uppercase gain volition lead maintain dissimilar taxation rates.
Expected render as well as risk: Every society has its ain lead a opportunity appetite (risk appetite way the maximum lead a opportunity a society tin sack accept inward society to make its objectives) so companies endeavor to brand a residue betwixt lead a opportunity as well as render of a item property earlier investing
Diversification: Suppose Company X has invested a lot of at that spot assets inward Domestic Large Cap Bank based equity, so to a greater extent than investment inward same property course of written report volition Pb to decrease inward diversification as well as increases the concentration risk. The to a greater extent than the risk, the to a greater extent than volition last the uppercase requirement.
Competitors Strategy: Monitoring of competitor’s strategy plays a major component inward ain investment strategy
Financial position: If society X has a huge sum of assets as well as society Y has relatively less sum of assets. Then, technically X has a high lead a opportunity appetite equally compare to Y as well as they tin sack invest inward to a greater extent than risky assets to heighten returns