IAI Actuarial Core Principles · Business Management · Decision-making process, attitude to risk and competition
An Indian general insurer's board is deciding whether to retain a large fire risk or buy reinsurance. The appointed actuary notes that the board's stated risk appetite is low. Which recommendation best reflects the role of the actuary in this decision?
The actuary should set out the expected cost and the spread of outcomes for each option and let the board choose in line with its risk appetite. Decisions need both return and risk measures; ignoring appetite or overriding the board's judgment would be inappropriate.
- AChoose the option with the highest expected profit, since risk appetite is a matter for underwriters only
- BPresent the expected cost and the variability of outcomes for each option, so the board can decide in line with its risk appetiteCorrect
- CAdvise the board to buy reinsurance regardless of cost, as low appetite means zero retention
- DAvoid giving advice, as risk appetite decisions are entirely outside actuarial work
- Recommend retaining the risk because diversification always removes the variability
Explanation
Actuaries quantify expected outcomes and risk, and communicate clearly so decision makers can match choices to appetite. Maximising expected profit alone ignores risk attitude. A blanket instruction to reinsure ignores cost and the board's own judgment.
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