Actuary: definition of the profession
An actuary is a specialist in the quantitative assessment of risk. Actuaries apply mathematics, probability theory, statistics, economics and financial modelling to estimate future payments and the resources they will require.
In insurance, it is impossible to know in advance which client will suffer an event, or when. However, on a large body of data it is possible to estimate the probability and the average size of a loss. This is the basis on which rates, reserves and programme limits are set.
Main tasks of an actuary
- calculating insurance rates and adjusting models;
- estimating insurance reserves;
- analysing claim frequency and severity;
- forecasting cash flows;
- testing the financial stability of a product;
- assessing reinsurance protection;
- stress-testing adverse scenarios;
- preparing actuarial opinions and reports.
How an actuary influences an insurance policy
An insurance rate must be sufficient to cover future claims and expenses while remaining competitive. The actuary analyses the characteristics of the risk: age, term, sum insured, object, region, incident statistics and other factors permitted for the chosen class of insurance.
In long-term products, including life insurance and annuities, the calculations take into account the duration of the obligations, investment income, inflation, mortality, early termination and the company's expenses. A small change in assumptions can have a significant effect on the result.
Actuarial reserves
An insurance reserve is the calculated amount of the insurer's liabilities. It is not created as a free pool of money but to secure future payments under policies in force. Actuarial methods help to account for reported and not yet reported losses, the timing of payments and data uncertainty.
What knowledge an actuary needs
- Mathematics and statistics: distributions, regression, time series.
- Finance: discounting, investment and asset management.
- Insurance: products, reserves, reinsurance and claims settlement.
- Programming: data processing and automation of calculations.
- Communication: explaining complex models to management and the regulator.
- Professional ethics: independence of assessment and transparency of assumptions.
Where actuaries work
Actuaries are in demand at general and life insurance companies, pension and investment organisations, consulting firms, audit firms, banks, government bodies and risk management departments.
Frequently asked questions
Are an actuary and an underwriter the same thing?
No. An actuary develops models and the rating basis, while an underwriter assesses a specific risk and decides on the terms on which it is insured.
Why are the calculations reviewed regularly?
Loss statistics, the cost of repairs and medical treatment, customer behaviour, the economy and legal requirements all change. Models must take new data into account.
This material is for educational purposes.
Actuaries and regulation of the insurance market
Actuarial calculations are used in forming insurance reserves, analysing solvency and justifying rates. To perform regulated functions, a specialist must meet the requirements of the legislation and, where provided for, hold a licence for actuarial activity. The current status is checked in the official register of the Agency for Regulation and Development of the Financial Market.
Services in compulsory classes of insurance are provided only by insurance companies holding the relevant licence. An actuary calculates probabilities, rates and reserves, but does not sell a policy in their own name and does not decide on an individual insurance claim in place of the insurer.
How actuarial calculations affect the client
An actuary's work is invisible when a policy is arranged in the ordinary way, but it affects the stability of the product. A rate that is too low may fail to cover future claims, while one that is excessively high will make insurance unaffordable. The specialist's task is to find a justified balance, taking into account statistics, expenses, reinsurance and the required return on capital.
A good model must be regularly tested against actual data. If the frequency or size of losses changes, the assumptions are revised. At the same time, the algorithm must not conceal data errors or unjustified discrimination against clients.
Actuaries and new technologies
Machine learning and automation speed up the processing of large volumes of data but do not replace professional judgement. The actuary assesses the quality of the sample, the robustness of the model, the explainability of the result and the consequences of an error. Personal data protection and control of algorithmic bias are of particular importance.
Summary
The actuary in insurance links mathematics, finance and risk management. Their calculations help to set justified rates, build reserves and verify the company's ability to meet its obligations. The profession requires strong quantitative training, an understanding of the business, ethics and the ability to explain complex models in plain language.