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What is Actuarial Analysis?

By D. Poupon
Updated May 16, 2024
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Actuarial analysis is the process used by an actuary to evaluate the likelihood of risk to an investment and ways to lessen the financial impact of that risk. Actuaries have interdisciplinary training in mathematics, finance and economics and have completed a rigorous exam process. They analyze historical data, searching for trends used to project future losses caused by the risk. The analysis typically is used to price insurance premiums and to determine the amount of reserves necessary to cover losses. Actuaries mainly work for life insurance companies, property and causality insurance companies and private companies developing pension plans.

In many countries such as the United States, United Kingdom and Canada, actuaries have at least a bachelor’s degree in mathematics, statistics, finance or economics. They enter the workforce as actuarial assistants and gain experience while passing a rigorous set of about 10 exams in as many years, qualifying first as associates and last as fellows. In other countries, actuarial science is taught in a master's program, and upon completion, future actuaries join powerful institutes. A large emphasis is put on continuing professional development to stay informed of new developments in actuarial methods as well as finance.

Similar to technical analysis that looks for trends in financial markets, actuarial analysis looks for trends in markets pertaining to risk. A trend could be the effect on car accident claims of a new texting-while-driving law or the increase in the price of health care with the development of a highly effective but extremely expensive cancer medicine. Actuaries analyze these trends in conjunction with recorded losses in order to model future losses.

Using either traditional deterministic or other methods, an actuary’s model is used to find the actuarial rate, or the expected future loss resulting from a particular risk. This rate is used to determine a company’s reserves that cover future claims as well as claims that have been incurred but not reported. This information also is used as a guideline for underwriters when pricing policies, especially for new or highly competitive markets. Actuarial adjustments to reserves and premiums ensure that an insurance company has enough capital to remain solvent.

Insurance companies are the main stage for actuarial analysis, typically used to study mortality, morbidity, car accidents and fires. Their role in financial institutions has developed as markets have become more volatile and exposed to more risk. Likewise, government policymakers and large corporations are interested in actuarial analysis to devise pension plans and to reduce healthcare costs. As the cost and frequency of natural disasters increase, the expertise of reinsurance actuaries is required to better understand catastrophic risk.

Actuarial analysis is not a perfect science, because it depends on the skill and experience of an actuary. In fact, incorrect assumptions called actuarial risk, particularly underestimating the frequency or severity of a loss, can be devastating to a company’s earning. In spite of these faults, the information provided by actuarial analysis is invaluable to an insurance management team.

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