Actuaries in Insurance

Whenever we hear the term Actuarial Science, our first thought is insurance. This is because actuaries have been employed in the insurance domain since the 1700s and majority of them still work at insurance companies. While most traditional actuarial practices revolve around mortality analysis of life insurance, these processes can also be applied to property, motor, liability and other forms of non-life insurance. However, the main question still remains, what exactly it is that they do in the insurance sector?

Let’s find out.

Risk accompanies every human activity. An expert in risk estimation is an actuary. Actuaries evaluate financial risks in the insurance and finance fields, using mathematical and statistical methods. They apply the mathematics of probability and statistics to define, analyze, and solve the financial implications of uncertain future events.

In order to stay in business, insurance companies need a way to access risk and quantify it before writing a new insurance policy. To do this, insurance companies rely on actuaries to provide a variety of statistical and financial services. Actuaries analyze these risks in order to design insurance policies and price them for different insuring groups such that it is affordable for the customer while making sure that the company stays profitable. Moreover, actuarial analysis also takes past losses and projects them into the future to determine the reserves an insurer needs to keep in order to stay solvent.

Traditionally, actuaries were employed in life insurance companies where they focused on analysis of mortality in order to develop policies for financial products like annuities, term policies, etc. Here they help companies assess risk, then use that analysis  to (help) design and price these 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, those groups must pay higher life insurance rates. This concept, however, is not limited to life insurance companies. Actuaries have been involved in risk assessment for other kinds of insurance too.

But what does risk assessment for different kinds of insurance entail?

Assessing risk involves gauging the probability of occurrences that will result in loss for the company, such as:

1.       Death: Mortality risk, one of the primary focus areas in the life insurance field, determines when a person is likely to die. Actuaries determine the mortality risk for various insuring groups and arrive at an appropriate premium that they must pay to compensate the company for taking on the risk.

2.       Property or other loss: General insurance actuaries manage physical and legal risk associated with property. They compute insurance rates for motor insurance, homeowner’s insurance, product liability insurance, and much more

3.       Sickness: Actuaries employed in health insurance study the lifestyle factors and history of health problems in order to determine the risk they would be taking on. Based on this they calculate appropriate premium rates such that the company is in a position to pay out claims while still remaining profitable.

4.        Disability: Worker’s compensation insurance is based on the likelihood of injury, temporary or permanent disability.  Actuaries analyze how likely workers are to get injured based on the work they do and charge premiums accordingly.

5.       Pensions: Pension actuaries design, test, and evaluate company pension plans to determine if the expected funds available in the future will be enough to ensure payment of future benefits.

Apart from pricing based on various risk factors, actuaries are also responsible for managing financial reserves. They determine the amount the company must set aside as reserves in order to pay for potential claims. They look at historical data of claims and decide how much money needs to be reserved for each potential claim to make sure there is enough to pay for future claims that might arise. It is extremely important for an insurance company to set aside enough in the form of reserves, so that claims are paid swiftly and the company is able to meet any other financial obligations. Insurance actuaries also help insurance companies invest wisely to maximize returns and enable payment of potential claims.

The operation of insurance companies is largely based on the degree of risk they undertake and the returns that they generate from it. Which is why, they require advanced analytical and statistical skills that an actuary possess in order to gauge risks and returns associated with each proposal they receive. The contribution of actuaries in the insurance sector is commendable and even though actuaries are majorly employed in the insurance sector, their skill set can be applied to various unconventional fields. The role of actuaries in such domains is in its development phase however there is a lot of potential there.

References:  

https://www.investopedia.com/terms/a/actuarial-science.asp

https://www.thebalance.com/what-is-an-insurance-actuary-4171820-https://www.godigit.com/guides/insurance-actuary

https://www.acko.com/articles/general-info/the-role-of-an-actuary-in-insurance/

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