I work in IT (databasers and visualisation), but recently started a new job at a company that deals with actuaries, underwriting etc. Can someone explain what actuaries do in a way i can understand? Their are so many acronyms that get thrown about that when i ask about they literally just say what the letters mean and nothing further. Colleagues have tried, but tend to be quite short with their explanations and i don’t want to annoy them by asking more and more questions.
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Actuaries attempt to determine risk exposure to individuals in order to price insurance.
Using life insurance as an example, things like family history of cancer or other diseases, as well as things like “do you enjoy skydiving or other dangerous activities” in order to (as accurately as possible) try to estimate how old you will be when you die (more specifically, how many years from now, based on age and risk factors).
Then depending on the payout of the life insurance, determine what an appropriate monthly/annual premium should cost in order to fund the payout. The longer the time horizon, and/or the lower the payout, the smaller the premium amount would be.
Since insurance companies are collecting premiums from millions of individuals, being wrong on any given policy is “covered” by premiums paid in the aggregate, so long as on average they’re correct. Some people will will live far longer than expected, and pay more than the amount needed by the insurance company to pay out the policy upon their death, and others may die after 2 premiums have been paid.
This applies to all types of insurance, and actuarial “science” is why car insurance is on average, most expensive for teenage boys and “repeat offenders” (riskiest demographics). Then the cost scales with the type of coverage, and how expensive the car is.
Actuaries, at a very basic level, try to estimate risk.
They use statistical methods to estimate certain numbers that can then be used in making pricing or investment decisions. The most familiar one is life expectancy: an actuary looks at your statistics and basically estimates when you will die; this estimate is then used to set a price for your life insurance policy (higher if you’re more likely to die, lower if not).
Actuaries run different models with different assumptions to arrive at some prediction of what the future state of the world will be, and their companies use those estimates to buy insurance, sell insurance, hedge their positions, etc.
Insurance is a business where the goal is to take a big group of people and collect a small amount of money from each of them to cover some very large expenses that happen to a small number of them. To do this they need to collect small amounts that in total exceed the total amount of the large expenses. So, they need very good estimates of just how often those large expenses will occur. Actuaries are the people who are very good at estimating the actual number of people the large expenses will happen in the group.
Actuaries are experts in finance and mathematics, and can apply this to quantify risk.
The main area of work is in insurance – where they can be involved in pricing (working out how much to charge to cover claims and profit for future policies), and reserving (how much money to set aside for future payments related to existing policies)
Have you gambled? Every bet in a casino or at a bookie has odds of paying out. Actuarials deal with calculating odds only instead of a casino it’s an insurance company.
What are the odds that a 55 year old heavy smoker will die in the next 12 months? What would our pay out then be? Using that information what should we charge them for an insurance premium?
What are the odds that a 19 year old male with a brand new Ford Mustang spins out and drives it through a crowd of people at Cars and Coffee? If he does that, what’s our expected liability? What should we charge that 19 year old in insurance premiums?
It’s all about risk, calculating the likelihood of a risk, the magnitude of a payout and then using that information to determine what they should charge for coverage.
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