Insurance course offered at business school. Full of knowledge on actuarial science. Worth a read if you want to have a career in insurance.

1. FINN 372
Actuarial Sciences &
Insurance
Spring Semester, 2023

2.  Age 64
 FSA (1982), FPSA & FASI
 7 years Canada
 Proprietor of Nauman Associates since 1985
 Ambassador to Pakistan for SOA for 5 years
 PSOA Council approx. 20 years
 PSOA President – 5 years
 Taught 6 semesters at LUMS in Spring 2020, all
3 in 2021, Spring and Fall in 2022

3.  Disconnect of Insurance Industry and
Universities
 Offer course initially as test
 Reasonably well received
 Balance between business exposure and
technicality

4.  Insurance 35% (basics, Life Insurance products,
Takaful & financial statements)
 Actuarial 45% (basics catch up, evaluation of
Science assurance & annuities,
premium calculation & reserves
 Actuarial 10% (Practical premium calculation)
Model
 Code of 10% (Codes & Case Study)
Conduct
 Emphasis on life insurance

5.  Emphasis on concepts
 Lesser emphasis on theory
 No proofs
 No complex extensions
 Mathematical none the same (will take mathematical
turn after a few lectures)
 Stress on learning

6.  CP – All lectures from
lecture 3 onwards - 5%
 *Attendance (lecture 3
onwards) - 5%
 Project (tentatively - 15%
between lectures 10 & 18)
 Quizzes (5 out of 6) - 40%
 Midterm - 15%
 Final - 20%
Total = 100%

7.  Attendance will be marked from Lecture 3 and
onwards
 There will be no penalty for first 3 absences
 Penalty of 2.5% will be levied in case of 4
absences and 5.0% in case of 5 absences
 6 or more absences will result in course failure

8.  Quizzes every alternate week
 1st Quiz in lecture 5
 Mid in lecture 16
 Cheat sheets allowed (after first quiz)
 Combination of MCQ’s, True/False &
Subjective
 Increasing weightage of subjective portion with
time.

9.  Punctuality
 No cell phones
 Name tags
 Questions any time
 Presentations upload (in combination with
coursepack)

10.  3 TA’s (Eman, Hassan & Mishal – all part time)
 Instructor generally available
 Prior appointment/contact

11.  Learning (particularly from each other)
 Enhance critical thinking
 Relate theoretical knowledge (particularly
Maths) to everyday life
 Keep things simple

12.  Chapters 1 & 2 of Coursepack
 Pages 12-36

13.  Chance of an adverse event/outcome having
negative financial impact (is that necessary)
 Uncertainty/unpredictability/random/chance based
 Extent of Risk is variation in possible outcomes of an
event based on chance
 Greater the variation around average (or expected
loss), greater the risk
 We generally know the possible outcomes but not
which one will take place
 Risk is unknown financial loss as a result of
random event

14. Natural : flood, drought
Health : illness, epidemic, pandemic
Life-cycle : old age, death
Social : crime, war
Economic : unemployment, financial
crisis
Political : riot, coup
Environment : pollution, nuclear disaster

15.  Risks have various consequences which could
affect the person and an entity members
 Thus, risk management is important
 E.g. possible consequences of accidents include
financial losses, temporary or permanent
disability, death
 Loss from insurance perspective is chance
based (random) reduction in economic value of
an asset (person or object)
 Different from depreciation

16. 1. Avoidance or reduction : Choosing not to (or
carefully) participate in an activity because of the
risk involved, e.g. not getting a driver’s license,
driving carefully;
2. Retention : Saving money in case of future losses,
e.g. putting money regularly in a savings account in
case of a car accident;
3. Transfer : Passing the risk on to an insurance
company, e.g. paying a monthly fee for an
insurance policy and expecting the insurance
company to protect your assets.
 Can be a combination of 1-3
 Can vary significantly between individual
depending upon perceptions and attitudes.

17. Chance of Loss
Amount of Loss
Low High
Low Retain & meet when
happens
Retain and set money
aside
High Insure Avoid / Reduce
Note : Risk Management strategy will vary greatly
from person to person depending on his risk
attitude and appetite.

18. Insurance is a legal contract that transfers adverse
financial consequences risk from a policyholder to
an insurance provider, in exchange for a
consideration (premium)
OR
Insurance is financial arrangement which
redistributes cost of unexpected losses

19. Premiums
Insurance Company
Claims
Insurance works through “pooling“
Relatively small individual outgo against
significant loss

20.  Difficult to forecast loss and its amount for 1
individual or asset
 Confidence in forecast increases as similar risks
are combined (pooled)
Example :
 Difficult to predict loss in 1 year for 1 car; but
prediction becomes better as number increases
e.g. 10, 100, 1,000, 10,000 etc.
 Law of large numbers
 Insurance Companies pool similar risks are
reasonably confident about loss for pool

21.  Charge average loss premium to each
individual and pay claims where loss actually
incurs
 Insurance Companies redistribute losses over
greater pool

22.  Pure risk only results in loss
 Speculative risk has up and down side
(investments)
 Extreme of speculative risk is gambling
 Traditionally only “pure risk insurable”

23.  Loss should be
 Definite
 Measurable (amount & timing)
 Relatively low chance of happening
 Sufficient severity to cause financial hardship to insured
 Outside the control of insured
 Part of large group of similar risks
 Does not give significant rise to irresponsible or
indifferent behavior
 Preferably not catastrophic in nature (war) for the
insurance industry.

24.  Peril is defined as cause of loss (death, sickness, fire,
earthquake, accident etc.)
 Hazard is a condition or situation which increases chance OR
severity of peril
 Hazards can be divided between physical and moral/morale
hazards
 Physical hazard is a physical phenomenon that increases
chance or severity of loss (poorly maintained road, traffic
lights malfunction etc.)
 Moral/Morale hazard result from dishonesty or
inappropriate behaviour of the insured
 Moral hazard is conscious effort to increase chance of
severity of peril (fraudulent claim, lying, dishonesty)
 Morale hazard is unconscious effort for the same (state
of mind, indifference etc. – improving with time due to
technology)

25.  Physical Hazard – generally beyond control of insured
and not as a result of insurance
 Morale Hazard – non-deliberate attitude as a result of
insurance
 Moral Hazard – deliberate or conscious act as a result of
insurance
 Boundaries can get blurred between morale and moral
hazard

26.  A person (say A) has insurable interest in a person or
object (say B) when damage / loss to B results in
financial loss to A
 Dependents of a breadwinner
 Owner of assets (etc.)
 Indemnification principle
 Put back in same financial position
 No profit from damage/loss
 Insurance system operates to at most indemnify losses
(no profit results from insurance)
 Essential requirement

27.  If insurable interest does not exist, indemnification
principle will not apply
 Absence gives rise to moral/morale hazard
 Some pure risks are considered non-insurable or non-
desirable

28. 1. Damage to car in an accident (relatively large)
2. Major routine repair of car
3. Business loss generally
4. Loss of Profit due to fire
5. Major event cancellation loss
– under what conditions
6. Life insurance with payment of proceeds
- Dependent
- Non-dependent
7. Loss from investment in stock market investment

29. 8. Loss from investment if broker defaults
9. Ransom Insurance
10. Claims from pandemic (Covid 19)

30.  Premiums should be fair for insurance system to be
sustainable
 If insured is paying more than mathematical fair price,
insured is subsidizing
 If insured is paying less than mathematical fair share,
insured is being subsidized
* Overall, lot of subjectivity in subsidization due to varying
perceptions and cultural values (subsidy to a certain extent is
inherent in insurance)

31.  In case of heavy subsidies, individuals subsidizing will
have tendency to leave
 Increases overall premium
 Gets into price spiral
 Important to come up with a proper, fair and socially
acceptable risk classification system
 Separate pools of broadly similar risks

32.  Material difference in risk from next class
 Relatively same expected value of loss
 Preferably large number in each risk bracket
 Reliability
 Incentive Value
 Practical and legal considerations (Gender, race,
ability to pay etc.)
 Market Impact
 Fairness has relative meaning (what about
being penalized for factors insured’s outside
control).

33.  Form of moral hazard
 The insured person conceals information that places
him in a high risk bracket
 Expectation of more or higher losses than average
 Stems for the fact that those with higher probability
of risk are more likely to buy
 Can be viewed as incorrect risk classification
 Thus, average risk of the insured group increases and
premium rises
 Ultimately, low-risk people quit and high-risk people
are left in the group
 Makes insurance unfeasible (Cost spiral)

34. Ways to minimize adverse selection and moral (and
morale) hazard
 Have rigorous underwriting (upfront checking of
risks) procedures
 Implement co-payments and deductibles (morale
hazard also)
 Exclude predictable events (such as planned
surgeries) from the benefit package
 Scrutiny at claims stage (moral hazard only)
 Establish mandatory insurance, so that high risk
and low risk people are members of the risk pool to
reduce financial impact (generally not practical)

35.  Age
 Gender
 Medical history (including family history)
 Smoking
 Occupation

36.  Change to risk “makers” rather than risk “markers”
 Lifestyle (diet, exercise, smoking)
 Body mass index (BMI)
 Use of technology
 Dynamic underwriting (wearables)
 Regular premium discounts or hikes
 Use of cell phones (smoking status, anxiety)

37.  Life
 Health
 Motor
 Marine
 Fire

38. A. Benefits
 Stability in family (protects income & assets)
 Stability for businesses (protects income & assets)
 Encourages positive risk taking in economy
 Enhances risk management culture
 More efficient resource allocation
 Lower firm’s cost of capital (reduces uncertainty)
 Anti-monopoly
 Supports credit in economy
 Contribution to society's welfare and social security
system
 Long-term savings and investments (infrastructure etc.)

39. B. Costs (Incremental outgoes due to Insurance)
 Increase in cost due to moral hazard
 Increase cost due to morale hazard
 Frivolous litigation due to claims
 Intermediation cost (generally quite high particularly
in developing countries)