Actuarial Science – Definition and Applications

What Is Actuarial Science?

Actuarial science is an umbrella term for the entire area of risk assessment and management, including portfolio management and risk analytics/optimization. It applies mathematical modeling and statistical analysis to predict economic events such as insurance premiums, gross domestic product, interest rates, and credit scores.

These studies provide forecasts that can design a financially sound plan and interpret variations in the financial markets. The oldest kind of actuarial science involves looking at mortality rates and life insurance.

Understanding Actuarial Science

Actuarial science is a set of methods that attempt to quantify how likely it is that a particular event will occur in order so that the financial consequences of the event can be determined. Actuarial science is used in the insurance industry by actuaries.

Actuarial science helps predict the cost of insurance for individuals, companies, and households by using statistical methods to estimate the probability that an event will occur and then using mathematical techniques to project the impact of that event on a future event.

Actuarial science is a broad field with a long history, consisting of complex mathematics and rigorous statistics. It began in the late 17th century to provide financial security for businesses and individuals. Actuarial science is an applied discipline where mathematics, statistics, and economics organize and manage financial risk in the insurance and finance industries.

The field of actuarial science has evolved to incorporate new mathematics and models, making it a key tool in developing insurance products. Although predictive actuarial calculations are used to a much greater extent today, deterministic models are still used to construct actuarial tables and insurance premiums.

Applications of Actuarial Science

As of 2009, the two main applications of actuarial science are life insurance and pension plans. Moreover, actuarial science can be applied to financial organizations to analyze the potential risks coming from their various liabilities and make effective financial decisions.

Life Insurance

Actuarial science is a phrase used in the insurance industry to describe the science of risk assessment. It can be defined as using mathematics to analyze and estimate the probability of unexpected and adverse events, such as death or illness, occurring in a given population. It is used to ensure that financial products, such as annuities, remain attractive to the insured. It involves special skills used to develop policies for financial products such as annuities, which are investments that pay a fixed income stream. The money in these can also grow over time, which increases the risk of an investment turning bad.

In terms of its application to life insurance, actuarial science is based on a branch of mathematics known as optimization.

Actuarial science provides the data, theoretical methods, and statistical techniques used to develop actuarial tables, which enable insurance companies to perform their industry-specific valuations. This technique is also applied to property, casualty, liability, and general insurance.

In addition, actuarial science helps the health insurance industry

  • To estimate rates of disability in the population or the risk of certain people becoming disabled.
  • Forecast the frequency and extent to which events occur, such as disease or casualty claims that affect businesses, governments, or individuals.
  • Mortality, a statistic that measures the number of mortalities in a population or from a specific disease or event
  • The fertility rate, which refers to the number of children born per woman.

Pension Plans

Actuarial science applies statistical analysis to the design, funding, accounting, administration, and maintenance of pensions and other public benefits. It involves estimating future payments that require actuarial knowledge to estimate probabilities of payments made by a specified party to another party if events relevant to the calculation of such payments occur and plot the resulting distribution of these probabilities. Actuarial science is used to calculate benefits payable under existing systems either as estimates or facts due to actuarial methods and assumptions changes. It is also used for any system that uses actuarial methods to determine pension payments, such as social security, sickness insurance, and unemployment insurance.

 Actuarial science is an integral part of all pension planning processes. In actuarial terms, a pension plan comprises two parts: an investment side and a retirement side. About the investment side, each participant typically invests a portion of their paychecks into the plan and receives annual tax deductions for contributing to it.

What does an actuary do?

An actuary is a specialist who looks at the chances of different scenarios happening in an organization. They look at the cash flows which an organization has been experiencing, their financial responsibility, and how much staff and resources are used to meet those objectives. They set up risk strategies, which are plans designed to deal with those eventualities if they occur.

They use mathematical models and data to help individuals and organizations plan and manage their finances. Industries such as insurance, public utilities, industrial enterprises, real estate, and education are some of the biggest users of actuaries today. Actuaries are used by major firms such as Lloyds of London, Standard Chartered Bank, Bank of Baroda, and many more.

Key Takeaways

  • Actuarial science is a set of methods that attempt to quantify how likely it is that a particular event will occur in order so that the financial consequences of the event can be determined.
  • Actuarial science is a phrase used in the insurance industry to describe the science of risk assessment.
  • Actuarial science can be applied to financial organizations to analyze the potential risks coming from their various liabilities and make effective financial decisions.
  • Actuarial science is an integral part of all pension planning processes. In actuarial terms, a pension plan comprises two parts: an investment side and a retirement side.