Banking and Insurance - Laws and Practice · Functions in Insurance and Compliance related thereto (Part I)

Actuarial Function and Valuation in Insurance for CS Professional

Updated 11 October 2026 · Fact-checked

The actuarial function measures insurance risk in money terms. Actuaries set premiums, value policy liabilities, work out bonuses and surrender values, and certify the insurer's assets and liabilities. Under the Insurance Act, 1938, an actuary approved by the Authority certifies the life insurer's statement of assets and liabilities as on 31 March each year.

Understand Actuarial Function and Valuation

Insurance is a promise to pay in the future. The insurer collects premiums today but pays claims years later. The actuarial function uses probability, mortality data, interest rates and expense data to check that today's premiums and reserves are enough to meet tomorrow's promises.

The actuary works on four things. First, premium calculation: the premium must cover expected claims, expenses, a margin for risk and a profit or surplus. Second, policy reserves: money set aside for liabilities that have not yet matured. Third, valuation: a periodic actuarial valuation of the life fund, which shows surplus and supports the bonus declared to policyholders. Fourth, solvency: checking that assets are enough to cover liabilities with a margin.

The Insurance Act, 1938 contains several rules that touch this function. Section 64V says that for checking compliance with section 64VA (solvency), assets are valued at a value not exceeding their market or realisable value. The Authority may exclude certain assets in the manner set by regulations. A proper value must be placed on every item of liability, in the manner set by regulations. Every insurer must also file, with its returns, a statement of assets and liabilities as on 31 March each year. In life insurance this statement is certified by an actuary approved by the Authority. In general insurance it is certified by an approved auditor.

Section 52 bans the dividing principle. An insurer cannot run a business where the benefit under a policy is not fixed but depends wholly or partly on how certain sums are shared among policies that become claims within time limits. Nor can premiums depend on the number of policies becoming claims within time limits. The proviso allows bonuses to life policyholders as a result of a periodic actuarial valuation, either as reversionary additions to the sum insured or as immediate cash bonuses or otherwise.

Section 113 deals with surrender value. A life policy acquires surrender value as per norms set by regulations. Every life policy must contain the formula, approved by the Authority, for the guaranteed surrender value. A non-linked policy that has acquired surrender value does not lapse for non-payment of further premiums. It stays in force to the extent of the paid-up sum insured, worked out by the approved formula in the policy, plus reversionary bonuses already attached. Linked plans are kept in force as the regulations specify.

Key rules to remember

Premium building blocks: Office premium = Net premium + Loading for expenses, commission and margins; Net premium is the actuarial cost of claims. This is a conceptual breakdown, not a statutory formula.
Net single premium for a one-year term cover (simple case): Net premium = Sum assured × Probability of death within the year; Ignores interest and expenses. Use it only when the question gives a death probability.
Valuation surplus (concept): Surplus = Value of assets − Value of liabilities (policy reserves); Bonuses to policyholders are allocated from surplus found at the periodic actuarial valuation.
Asset valuation for solvency (Section 64V(1)): Value of asset ≤ Market or realisable value; The Authority may exclude certain assets by regulations.
Statement of assets and liabilities (Section 64V(3)): As on 31 March each year, certified by an approved actuary (life) or approved auditor (general); Filed with the returns, within the time set by regulations.
Paid-up value under Section 113(3): Policy kept in force for the paid-up sum insured (by approved formula in the policy) + reversionary bonuses already attached; Applies to non-linked plans that have acquired surrender value. Exceptions are in Section 113(4).

How to solve Actuarial Function and Valuation questions

Questions on this topic are usually case-based: a fact pattern about an insurer, a policy or a valuation. Use the same structure each time.

1Identify which actuarial activity is involved: premium setting, reserving, valuation and bonus, solvency or surrender value.
2State the relevant provision in plain words, with the section number only if you are sure of it (for example 64V, 52 or 113).
3Pick out the facts that matter: type of insurer (life or general), plan type (linked or non-linked), whether the policy has acquired surrender value, and who certified the statement.
4Apply the rule to the facts. For numbers, show each step: probability, loading, reserve or paid-up amount.
5Check the exceptions, such as Section 113(4) for small paid-up amounts or a written agreement after default.
6Write a clear conclusion and add the practical compliance point, such as the 31 March statement, approved actuary certification and filing with the Authority.

Quickest way: Four-question check

When to use it: Use when time is short and the question gives a short fact pattern with a legal issue.

Who is the insurer: life or general? This decides actuary or auditor certification.
What is being valued: assets (market or realisable cap) or liabilities (proper value per regulations)?
Is a bonus or surrender value involved? Think Section 52 proviso and Section 113.
What is the compliance step: 31 March statement, approved formula in the policy, or regulations?

Common mistakes in Actuarial Function and Valuation

Saying an actuary certifies the assets and liabilities statement for every insurer.
Students remember only the actuary's role.
Fix: Remember the split: approved actuary for life business, approved auditor for general insurance business.
Treating bonus allocation as banned under the dividing principle.
Section 52 sounds like a ban on sharing surplus.
Fix: The proviso expressly permits bonuses to life policyholders from a periodic actuarial valuation, as reversionary additions or immediate cash bonuses or otherwise.
Valuing assets at cost or book value for solvency.
Accounting habits carry over.
Fix: Under Section 64V(1), assets are valued at a value not exceeding market or realisable value, and some assets may be excluded.
Saying every lapsed life policy becomes paid-up.
Students skip the conditions in Section 113.
Fix: It applies to non-linked plans that have acquired surrender value. It does not apply where the paid-up sum, with bonuses, is below the amount the Authority specifies, or where the parties agree in writing to another arrangement after default.
Quoting a fixed surrender value percentage from memory.
Students try to give a number the question did not ask for.
Fix: The Act says surrender value acquisition follows norms in the regulations, and the policy must contain the Authority-approved formula. Refer to these, not to invented figures.

Worked examples

Example 1

Suvarna Life Insurance Ltd, a life insurer, files its returns for the year. Its management proposes to attach a statement of assets and liabilities as on 31 March certified by its statutory auditor only. Advise whether this complies with the Insurance Act, 1938.

Show the solution

Provision: Section 64V(3) requires every insurer to furnish, with its returns, a statement of its assets and liabilities as on 31 March each year.
Certification: for life insurance business, the statement must be certified by an actuary approved by the Authority. An approved auditor certifies for general insurance business.
Facts: Suvarna is a life insurer, so auditor-only certification does not meet the requirement.
Assets and liabilities must be assessed as the section requires: assets at a value not exceeding market or realisable value, and liabilities at a proper value as set by regulations.

Answer: It does not comply. Suvarna must have the statement certified by an actuary approved by the Authority and file it with its returns within the time set by regulations.

Example 2

A non-linked life policy issued by Bharat Assure Ltd has acquired surrender value. The policyholder, Mr Rao, stops paying premiums. The paid-up sum insured, with bonuses, is above the amount specified by the Authority. There is no written agreement for any other arrangement. Can the insurer treat the policy as lapsed?

Show the solution

Provision: Section 113(3) says a non-linked policy that has acquired surrender value does not lapse for non-payment of further premiums, despite any contract to the contrary.
Effect: it is kept in force to the extent of the paid-up sum insured, calculated by the Authority-approved formula contained in the policy, plus reversionary bonuses already attached.
Exceptions: Section 113(4) disapplies this if the paid-up sum with bonuses is below the amount specified by the Authority, or if the parties agree in writing to another arrangement after default.
Facts: the paid-up amount is above the specified amount and there is no written agreement, so no exception applies.

Answer: No. The policy cannot lapse. It continues as a paid-up policy for the paid-up sum insured calculated by the approved formula in the policy, plus reversionary bonuses already attached.

Exam tips

Link each section to a function: 64V to valuation and certification, 52 to bonus and dividing principle, 113 to surrender and paid-up value.
Always state who certifies: approved actuary for life, approved auditor for general.
Quote the exceptions in Section 113(4) whenever a lapse question appears.
Do not invent figures for surrender value or minimum paid-up amounts. Say they are set by the Authority or regulations.
End every case answer with the compliance action, such as filing the 31 March statement.

Practice questions from Functions in Insurance and Compliance related thereto (Part I)

Actuarial Function and Valuation: frequently asked questions

What does the appointed actuary do in a life insurance company?

The actuary values the insurer's liabilities, advises on premiums and bonuses, and certifies the assets and liabilities statement for life business. The Act requires this certification by an actuary approved by the Authority.

What is actuarial valuation in life insurance?

It is a periodic assessment of the life fund's assets against policy liabilities. The surplus found supports bonuses to policyholders, which Section 52's proviso permits.

How is solvency linked to valuation under the Insurance Act, 1938?

Section 64V sets how assets and liabilities are valued to check compliance with Section 64VA. Assets are taken at no more than market or realisable value, and liabilities at a proper value as per regulations.

How do actuaries calculate premiums?

They estimate expected claims using probabilities such as mortality, allow for interest, then add loading for expenses, commission and a margin. The result is the office premium.