What is an Insurance Actuary?

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Greg Pease

 

An insurance actuary is a professional that analyzes financial risk using mathematics, statistics and financial theories. Most actuaries work in the insurance industry and help insurance companies determine good risks, or those the companies are less likely to have to pay out claims to as the result of a loss. Actuaries are relied on by insurance companies in determining risk for life insurance companies and for property, liability and other kinds of insurance. Insurance actuaries are important to the insurance consumer because they help insurance companies remain profitable and make sure the insurance companies are financially able to pay any claims.

History of Actuarial Science

Actuaries have been used since the late 17th century when the concept of insurance was first used. The concept of insurance is taking the risk of a group of individuals pooled together and sharing that risk among those who are “insured” against risk. All parties pay an “insurance premium” to have the insurance company protect them from losses. The first noted reference to insurance historically was when merchant ships insured their cargo. This was the first form of “marine insurance.”

Insurance companies needed a way to access risk. For instance, people who take out a life insurance policy are pooled into groups based on their lifestyle choices, personal circumstances and life expectancy. This makes it easier for insurers to quantify a risk before writing a new insurance policy. An example of the concept would be a smoker who pays more for a life insurance policy because of a risky lifestyle choice.

Training Requirements for Insurance Actuaries

Actuaries work for insurance companies, financial institutions and actuarial firms. Many insurance companies employ full-time actuaries while others are self-employed and some work for actuarial firms that offer consulting services. An actuary must understand human behavior and be able to use information systems to design and manage programs that control risk. Training for actuaries involves degrees in math, statistics, accounting, economics or finance. Some universities even offer a degree in Actuarial Science.

In addition, an actuary must pass an actuarial examination administered by professional groups such as the Casualty Actuarial Society (CAS) or the Society of Actuaries (SOA).

How Actuarial Science is Used in Insurance

Actuaries use their skills of analysis to measure probability of occurrences that cause loss such as a death, sickness, injuries, disabilities or property loss. The actuary also helps insurance companies invest wisely to maximize income and be able to pay out any potential claims. The actuary uses risk analysis to help design and price insurance policies. An insurance actuary examines statistics about claims frequency and the severity of the claim to advise insurance companies how they can best achieve a desired balance between growth and profit.

Mortality risk is one of the primary areas insurance actuaries focus on in the field of life insurance. Mortality risk determines when a person is likely to die. Lifestyle factors and past history of health conditions are also determining factors in developing insurance rates. Life insurance companies use this information to determine how much premium to charge so they will be able to pay out claims while remaining profitable. The actuary also advises an insurance company of how to best invest profits to create the best return on investment.

Property and Casualty or general insurance actuaries deal with physical and legal risks to people and their property and work on developing insurance rates for auto insurance, homeowner’s insurance, commercial property insurance, worker’s compensation insurance, product liability insurance and more. In the property and casualty insurance industry, an actuary analyzes information to minimize risk loss (loss of property, loss of funds, etc.) and help find ways to manage risk and create insurance rates based upon risk factors.

While a major function of a property and casualty insurance actuary’s job is determining insurance rates, another important aspect of an actuary’s job in property and casualty insurance is helping the insurance company set aside enough reserves to pay for any potential claims. Based on past claims, the actuary can determine how much money to set aside or “reserve” for each potential claim to make sure there is enough money to pay any future claims. It is important for an insurance company to set aside enough in reserves, so claims are paid promptly and so that the insurance company can meet its financial obligations and remain profitable.