In life insurance, premium is calculated by taking account likely future experiences which might occur in respect of interest, mortality and expenditure. These are assumptions or expectations. It is not necessary that the future experience may or may not conform to these expectations. However, if they conform to it than the premium charged by the insurer could be considered adequate and then the business can be said to be properly funded. However, if the experience is worse than the expectations, then the premium found would not be sufficient and the business could face difficulties. The practice which is adopted by all prudent insurance companies is that periodically they will check validity of these assumptions in order to ensure that the business is running on sound lines. It is a process which is known as actuarial valuation. According to the Insurance Act in India, it is necessary to do actuarial valuation every year. Some years back, it was necessary to do the actuarial valuation once in three years. At that time also, varied companies were doing actuarial valuation every year. Prudence demands that the checking should be done as frequently as possible. While in its valuation, the actuary would estimate the liability of the insurance company in respect of the business in its books. Then he will make an estimation of the amount which would be due to be received in future, as these will help in adding to funds to meet liability. Then it will be compared with the actual current life fund. In case the actual life fund is more than the insurer is solvent or vice versa.
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