Actuary

Actuaries are business professionals who deal with the financial impact of risk. Actuaries use skills in mathematics, economics, finance and statistics to handle uncertain future events, especially those of concern to insurance and reinsurance companies, employee benefits such as medical insurance and pension plans, and social welfare programs such as social security and Medicare.

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Disciplines

There are two major actuarial disciplines, usually referred to as Life and Casualty. Life actuaries deal with risks that pertain to the ongoing health, well-being, and natural mortality of people such as life insurance, annuities, pensions, disability and medical insurance. Casualty actuaries deal with more catastrophic, unnatural, risks that can occur to people and property. This area is known in some countries as general insurance and in the US as Property/Casualty insurance, where the terms casualty and liability may be used interchangeably. These risks include those such as auto, homeowners, commercial property insurance, workers' compensation, title insurance, medical malpractice insurance, products liability insurance, directors and officers liability insurance, environmental insurance, and other types of liability insurance.

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Traditional Responsibilities

On both the life and casualty sides, the classical functions of actuaries are to compute premiums and reserves for insurance policies covering various risks. Premiums are the amount of money the insurer needs to collect from the policyholder in order to cover the expected losses, expenses, and a provision for profit. Reserves are provisions for future liabilities, and indicate how much money should be set aside now to reasonably provide for future payouts. If you inspect the balance sheet of an insurance company, especially casualty companies, you will find that the liability side consists mainly of reserves.

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On the casualty side, often this analysis involves quantifying the probability of a loss event, called the frequency, and the size of that loss event, called the severity. Further, the amount of time that occurs before the loss event is also important, as the insurer will not have to pay anything until after the event has occurred. On the life side, often, the analysis involves quantifying how much a potential sum of money or a financial liability will be worth at different points in the future. Since neither of these kinds of analysis are purely deterministic processes, stochastic models are often used to determine a frequency and severity distributions and the parameters of these distributions. Also, forecasting interest yields and currency movements play a role, especially on the life side.

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Furthermore, actuaries do not always attempt to predict aggregate future events. Often, their work may relate to determining the cost of a financial liabilities that have already occurred, called retrospective reinsurance, or the development or re-pricing of new products.

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As actuaries have always been considered as the preeminent experts on financial risk, there has been a recent widening of the scope of the actuarial field to include investment advice and even asset management.

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Typical Employment

Actuaries are employed in insurance or reinsurance companies, consulting firms (i.e., firms that sell actuarial advice and analysis to other companies), and government departments, such as the Government Actuary's Department in the UK or the Social Security Administration in the US.

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Actuaries design and maintain products and systems. They are involved in financial reporting of companies' assets and liabilities. They must communicate complex concepts to clients who may not share their language or depth of knowledge. Actuaries work under a strict code of ethics that covers their communications and work products, but their clients may not.

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