What Is an Insurance Actuary?

Definition & Examples of an Insurance Actuary

Couple signing paperwork with an insurance agent
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An insurance actuary looks at risk for a living. This is done using mathematics, statistics, and financial theories.

Most actuaries work in the insurance industry. Insurance companies need to know the risks that will come from insuring a person or group. Actuaries help insurance companies create and price insurance plans based on how likely it is that they will have to pay out claims.

Learn more about what insurance actuaries do and how their work impacts the prices that you have to pay.

What Is an Insurance Actuary?

An insurance actuary analyzes financial risk. They use mathematical and statistical models, as well as financial theories, to find out the chance that something will happen.

This analysis helps insurance companies design insurance policies. Actuaries can analyze the risk of insuring different groups of people based on their lifestyle, health, where they live, and other factors.

Knowing the risks of insuring someone lets plans be priced in a way that still makes a profit. Insurance companies rely on actuaries to determine risk for many types of insurance. This can include life, property, liability, auto, home, and other plans.

Insurance is based on bringing a group of individuals together to share risk. High-risk people are more likely to file claims and often cost more for the insurance company. Low-risk people may never need payouts at all.

Actuaries may work for insurance companies. They may also work for financial institutions or actuarial firms.

Many insurance companies employ full-time actuaries. Other actuaries may work for themselves or for a firm that provides consultants to other businesses.

How Insurance Actuaries Work

In order to make money and stay in business, insurance companies need a way to assess risk. For instance, people who take out a life insurance policy are pooled into groups based on their lifestyle choices, health, age, and other factors.

This makes it easier for insurers to know what the risk of making a payout is before writing a new insurance plan. These companies rely on actuaries to assess the risk involved using math and statistics.

Risk Assessment

Insurance actuaries help companies assess risk. Then, they use that analysis to help design and price insurance policies.

The higher the risk for a certain group, the more likely it is that the company will have to pay out a claim. As a result, people who fall into those groups must pay higher rates.

Assessing risk involves measuring the probability that something will happen to cause a loss. There are many risks that actuaries look at.

Mortality risk is one of the main areas insurance actuaries focus on. Mortality risk relates to when a person is likely to die. If an actuary can show that the risk of death is lower for a group based on certain factors (such as age or health), that group can get a lower price on life insurance.

Actuaries who work in health insurance often look at lifestyle factors and past health problems. Companies use this information to decide how much to charge for a plan. They want to price their plans so they will be able to pay out claims while still making a profit.

Disability and worker’s compensation insurance are based on how likely people are to be injured on the job, as well as temporarily or permanently disabled. This risk is based on the type of work they do, as well as how many past claims a business has filed.

Property or general insurance actuaries deal with physical and legal risks to people and their property. They help set rates for auto, homeowner’s, commercial property, product liability insurance, and more.

Investments

Insurance companies need to make smart investment choices to maximize income and be able to pay out any potential claims. Actuaries often help with these choices.

Financial Reserves

Insurance companies also need to set aside enough money in reserve to pay for any claims that come up. Actuaries assist with this process too.

Based on past claims, the actuary can find out how much money to set aside. This ensures that there is enough money to pay any future claims.

Having enough money on hand means that claims can be paid quickly. It also means that the company can keep making a profit, even once those payouts are made.

Requirements for an Insurance Actuary

An actuary must understand how people behave. They also need to 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 schools offer a degree in Actuarial Science. An actuary also must pass an actuarial exam. These are given by professional groups such as the Casualty Actuarial Society (CAS) or the Society of Actuaries (SOA).

Key Takeaways

  • An insurance actuary analyzes risk using mathematics, statistics, and financial theories.
  • Most actuaries work in the insurance industry to help create and price insurance policies based on how likely it is that people will make claims.
  • Insurance actuaries may also help with investments and managing financial reserves to make sure that insurance companies have enough money on hand to pay out claims.