What Is an Insurance Actuary?

Insurance Actuary Explained

Definition

An insurance actuary looks at risk for a living. This is done using mathematics, statistics, and financial theories.

Couple signing paperwork with an insurance agent
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Definition and Example of an Insurance Actuary

An insurance actuary analyzes financial risk. They use mathematical, statistical, and financial modeling to determine the chances that something will happen. Their analysis helps insurance companies design insurance policies.

When creating policies, actuaries analyze the risk of insuring different groups of people based on their lifestyle, their health, where they live, and several other factors. Their work allows a company to offer plans that are priced in a way that still makes a profit.

Insurance companies rely on actuaries to determine risk for life, property, liability, auto, home, and other insurance plans.

Note

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.

How Insurance Actuaries Work

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 the risk of making a payout before writing a new insurance plan. These companies rely on actuaries to assess the risk involved.

Risk Assessment

Insurance actuaries help companies assess risk by analyzing data about groups of people. Then, they use that analysis to help design and price insurance policies. The higher the risk for a specific group, the more likely it is that the company will have to pay out a claim if it insures someone from that group. As a result, people who fall into those groups must pay higher rates.

Mortality risk is one of the main areas insurance actuaries focus on. Mortality risk is the risk of death. 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 might have lower premiums on life insurance policies.

Note

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

Investments

Actuaries often analyze stocks, bonds, funds, or other investments used by insurance companies to maximize their reserves and income while maintaining the ability to pay out any potential claims.

Financial Reserves

Insurance companies also need to set aside enough money in reserve to pay for customer claims that come up. Actuaries assist with this process by determining how much money to set aside based on past claims. This ensures that there is enough money available to pay any future claims.

Having enough money on hand means that claims can be paid quickly. It also means that the company can stay in business after making payouts.

Types of Insurance Actuaries

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 can pay out claims while still making a profit.

Disability and worker’s compensation insurance are based on how likely people are to be injured or temporarily or permanently disabled on the job. This risk is based on the type of work they do and 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, and product liability insurance, and more.

Key Takeaways

  • An insurance actuary analyzes risk using mathematical, statistical, and financial modeling and 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 ensure that insurance companies have enough money on hand to pay out claims.
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