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 is a professional that analyzes financial risk using mathematics, statistics, and financial theories. Most actuaries work in the insurance industry and help insurance companies create and price insurance policies based on the likelihood that they will have to pay out claims.

Learn more about what insurance actuaries do and how that impacts insurance prices that consumers pay.

What Is an Insurance Actuary?

An insurance actuary is a professional that analyzes financial risk using mathematical and statistical models, as well as financial theories. They use this risk analysis to help insurance companies design insurance policies and price them for profitability, based on the risk of insuring different groups of customers.

Actuaries are relied on by insurance companies in determining risk for life insurance policies, as well as property, liability, and other kinds of insurance.

Insurance is based on bringing a group of individuals together to share risk. Higher-risk customers are more expensive for the insurance company. Lower-risk customers may never require insurance payouts.

Actuaries may work for insurance companies, financial institutions, and actuarial firms. Many insurance companies employ full-time actuaries. Other actuaries may be self-employed or work for firms that offer consulting services.

How Insurance Actuaries Work

In order to stay in business, insurance companies need 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.

To do this, insurance companies rely on actuaries to provide a variety of statistical and financial services.

Risk Assessment

Insurance actuaries help companies assess risk, then 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 insurance company will have to pay out a claim. As a result, those groups must pay higher insurance rates.

Assessing risk involves measuring the probability of occurrences that cause loss, such as:

  • Death: 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. If an actuary determines that risk of death is lower for a group based on certain factors (age, health, lifestyle), that group is offered a lower price on life insurance.
  • Sickness: Actuaries who work in health insurance often look at lifestyle factors and past history of health conditions when 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.
  • Injury/disability: Disability and worker’s compensation insurance are based on the likelihood of injury, temporary disability, or permanent disability. Actuaries analyze how likely workers are to become injured or disabled based on the type of work they do, then companies set insurance premiums accordingly.
  • Property loss: Property or general insurance actuaries deal with physical and legal risks to people and their property. They help develop insurance rates for auto insurance, homeowner’s insurance, commercial property insurance, product liability insurance, and more.

Investments

An insurance actuary may help insurance companies invest wisely to maximize income and be able to pay out any potential claims.

Managing financial reserves

While a major function of an insurance actuary’s job is determining insurance rates, another important aspect of an actuary’s job 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.

Requirements for an Insurance Actuary

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 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).

Key Takeaways

  • 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 create and price insurance policies based on the likelihood that they will have to pay out claims.
  • Insurance actuaries may also help with investments and managing financial reserves. This ensures that insurance companies have enough money available to pay out any potential claims.