Not sure what an actuary does? Well, you’re in the right place!
An actuary is a career professional that specializes in risk quantification. This means that they’re able to foresee the timing and financial impact of random events that may occur in the future, like a car accident or the onset of a life-threatening illness.
There are two primary types of actuaries. One is a pricing actuary and the other is a valuation (or reserving) actuary. Both these types of actuaries work in an insurance company, but it is possible for an actuary to work in other types of companies too.
Before we dive into what an actuary does, first you’ll need to understand how insurance involves risk.
How Insurance Involves Risk
There are many different events that may occur in a person’s lifetime that would cause them to need to pay thousands of dollars unexpectedly.
This could be a car accident, an unexpected vet bill, or for treatment of a life-threatening illness for example.
So, without insurance, these people are taking a risk that if one of these unexpected events occur, they’ll have to pay the cost of it out of their own pocket (sometimes they may not even have enough money to cover the cost of it).
Purchasing insurance is a way to pass this risk to an insurance company rather than taking on the risk themselves. It means that instead of the individual having to pay for the cost of the unexpected event, the insurance company will pay instead if and when the event occurs.
But, of course, the insurance company isn’t going to do that for free. They’ll require that the person pays a premium (a fee for insurance). The premium is typically much less than the cost of the event.
So, now that you understand how insurance involves risk, let’s look into what a pricing actuary does.
What does a pricing actuary do?
A pricing actuary is responsible for determining the appropriate premium (price) that should be charged to someone looking to purchase insurance (aka policyholder).
To do this, they use large amounts of data that has been recorded and tracked over a period of many years (sometimes over 100+ years). They’re able to find trends in the data and use that to predict when events (insurable events) will occur in the future.
There are many different kinds of insurance, such as life insurance, vehicle insurance, pet insurance, and travel insurance. So, examples of insurable events may be a car accident, a death, or an unexpected vet bill.
Once they’re able to predict when these insurable events will occur in the future and how much the event would cost, they can calculate an appropriate premium to charge.
What does a reserving actuary do?
Before we talk about what a reserving actuary does, it’s important to understand what a “claim” is.
A claim is made whenever an insured event occurs to someone that has insurance. I talked about insured events above, but as a recap, examples of insured events may be a car accident, a death, or an unexpected vet bill. Basically, it is the specific event that the insurance policy covers.
In insurance, a reserve is similar to a savings account: It is the amount of money that the insurance company needs to have available in order to pay for all the claims that may be made in the future.
It is a reserving actuary’s job to determine how much money the insurance company needs to have available so that it can pay all the claims that are made in the future. Sometimes claims may be made 10, 20, or even 30 years or more into the future!
So, this requires an actuary to predict the timing and cost of these events so that when the time comes in the future to pay the claim, the insurance company will have enough money available.
This video below explains what I did as a reserving actuary (aka valuation actuary) day-to-day.
How to Become an Actuary
Insurance companies and it’s policyholders rely extensively on the knowledge and expertise of actuaries.
Because of this, they need a lot of specialized training. In order to become fully qualified, they need to have a bachelor’s degree, pass a series of 10 actuarial exams, and complete several other requirements.
If you’re considering becoming an actuary in Canada or the U.S., then you should read this post. It goes into detail about the 8 steps that you’ll need to take. Fortunately, even though it’s a long process, you can start working in entry-level actuarial positions before you’ve completed all the requirements.
What does an actuary do for an insurance company? There are two primary things that actuaries do for an insurance company. Pricing actuaries calculate premiums and valuation actuaries calculate reserves.
What does an actuary do on a daily basis? The tasks that an actuary will do on a daily basis depends on the type of actuary they are. Generally actuaries are using data to make predictions for the future and quantify risk.