the discipline that uses math and statistics to evaluate risk in various industries, especially insurance and finance.
Actuarial Science Details
Actuarial science professionals, or actuaries, use complex mathematics to map out and assess uncertainty. They are knowledgeable, trained in the field, and must prove their competency by passing several challenging professional exams before practising or taking up employment.
Aside from math and statistics, actuarial science is also concerned with finance, economics, and computer science. While it used more general, easily outmoded models in the past, the field has undergone massive revolutionary changes over the decades thanks to high technology and the merging of traditional and modern approaches.
Real-World of Actuarial Science Example
A new insurance company is setting up its pricing system with a focus on affordability. They plan to break into a market known for skyrocketing prices by introducing themselves as the insurer that provides high-quality, comprehensive benefits at the least possible cost.
To make this possible, they need to employ an actuary to provide valuable scientific insight into their operations using math and statistics. For example, the likelihood of car accidents occurring every month, the extent of vehicle damage that such accidents will cause, and so on. After reviewing the actuary's reports and recommendations, the insurance company's top executives can calculate the best prices for their products while staying on track with their pricing plans.
However, while it is important to consider affordability when establishing pricing, it is equally imperative for the company to prevent solvency and ensure that it can continue to provide its products and services while still making a profit. Setting prices too low can be disastrous for its financial health, especially because the risk is at the core of the insurance industry itself. The balancing expertise of actuaries, therefore, proves vital.
History of Actuarial Science
The history of actuarial science served a significant role as the foundation of modern financial theory was formed, especially during the early 20th century when actuaries were actively developing different techniques that are now considered integral. Unfortunately, actuarial science did not receive the acknowledgement it deserved at that time. As an effect, it eventually went in a separate direction from modern finance, whose valuation concepts are generally low-risk because they are arbitrage-free. An arbitrage-free valuation disregards derivative or alternative market pricing. A trader buys and sells the same asset in different markets and profits from those assets' price differences.
However, actuaries began to see the chemistry between actuarial science and modern financial economics theory towards the middle of the century. From the 1980s to the 1990s, actuaries started integrating financial theory and stochastic methods, and concepts from financial economics increased in significance from the actuarial perspective. At this time, the science began adapting to complicated mathematical modelling processes commonly used by the finance industry.
Today, the actuarial profession is more conscious of reflecting the integrated approach consisting of tables, moss models, stochastic methods, and financial theory, not only in the practice itself but even in the programs of organizations that provide actuarial education.