a professional who measures financial risk and offers advice on how a business entity may minimize it.
Actuaries don’t simply measure risk by following their guts, and they certainly don’t measure it using educated guesses. Actuaries use financial theory, statistics, and other mathematical methods to figure out how to best create financial security safeguards. These safeguards protect against or reduce the likelihood of unfavorable financial events.
Those who become actuaries must study Actuarial Science and become an Associate with nationally recognized professional groups. These professional groups are broken down into different specialties. For example, the Society of Actuaries (SOA) works in life and health insurance, pensions, and other employee benefit plans. The Causality Actuary Society (CAS) deals with workers’ compensation, auto, and fire insurance. Both the SOA and CAS administer the actuarial exams a hopeful actuary must take to become certified.
Though most actuaries, about 60%, work in insurance (AllBusinessSchools.com), they also occupy other fields. These fields include:
- Accounting Firms
- Financial Institutions, e.g., banks
- Consultants (contract work)
- Government insurance programs
Within these fields, you may see an actuary called a chief financial officer, data analyst, risk manager, or insurance product manager.
Example of an Actuary
A contracted actuary is working with an auto insurance firm to help the company figure how much they should charge as their premium. A premium is how much you pay an insurance company each month to cover your risk. To determine the company’s premium, the actuary needs to determine the time value of money and the likelihood of an event using a large set of numbers. Actuaries cannot predict individual events but can statistically measure out trends into the future to see where you fall. Because of this, they’ll use a large sample size of historical data from the company.
Let’s say this insurance company will cover $2,000 total should you get into an accident. The first thing an actuary will do is calculate the time value of money. This concept considers the amount of interest a loan will accrue over a certain amount of years. If you need the full payout after three years, an actuary may suggest a premium (paid over a year) of $1,550 for interest to hit $2,000. If you need it later, say ten years, that initial number will be lower since there’s more time for interest to build up.
Our actuary will then calculate the likelihood of an event happening within different time frames. For instance, there’s a 20% chance that you’ll get into a car accident after the first year, a 30% chance that you’ll get into an accident after five years, etc. The actuary combines each premium and then determines the final premium according to the likelihood of an accident. This premium is fair as it covers the risk the insurance company takes covering you as a risk on the road (with some profit), without overcharging you.
Significance of an Actuary
An actuary is like an insurance plan for an insurance company. Without people who specialize in risk management, an insurance company may offer too much or too little in premiums. Actuaries also consider an individual’s risk factors (health, sex, age, driving history, etc.) to help determine premiums for things like life insurance. Though it may seem discriminatory at first, an actuary’s work is all based on trends and numbers, not bias. Besides keeping premiums fair, an actuary can also assess a workplace’s risk of injury and suggest ways to reduce that risk. All in all, actuaries keep business practices fair and safe for everyone involved.