What Is Actuarial Science?

Actuarial science is a field that is commonly used is the insurance industry in order to predict losses and maintain profitability. Insurance companies hire individuals that practice actuarial science known as actuaries. These individuals play a big role in the insurance industry and are critical in allowing an insurance company to remain profitable.

Actuarial Science

Actuarial science is a field of mathematics that actually involves many other types of disciplines. It has elements of statistics, mathematics, computer science, and probability. You will also find some aspects of finance and economics involved in this field. Individuals who wish to practice actuarial science can learn this discipline from most college programs. There are undergraduate and graduate programs that deal with learning actuarial science. 

Probabilities

Once an individual is hired by an insurance company to play the role of actuary, it is up to them to make predictions about what will happen over a given period of time. These individuals have to come up with detailed models that involve statistics and probability based on historical information. Based on this information, insurance companies will set their premium rates so that they will take in enough money to pay out all of the claims that will occur over a certain amount of time and still retain some profit. If the actuary overestimates the losses significantly, this will perhaps make the premium rates uncompetitive in the market. If they underestimate the amount of losses then the insurance company could pay out more in claims than they take in through premiums. 

Life Insurance

Actuaries are used with life insurance companies in order to predict mortality rates. While they cannot specifically predict which individuals will die over a given year, they know through historical data, that a certain amount of people out of their insurance pool will die over a given amount of time. They can create a statistical model that takes into consideration mortality rates in the age groups of their insureds. This will fairly accurately predict how many people will die so that they can charge the appropriate amount in premiums.

Health Insurance

With health insurance, the actuary is in charge of determining how many people will get sick or suffer from some type of disease. This type of actuarial science is very detailed because of the vast number of diseases and injuries that an individual could experience. It is up to the actuary to determine how many people will need medical service over the course of a given financial accounting period. 

Groups

With most insurance companies, the actuary will group insureds into different classes. This is why insurance questionnaires are generally so detailed. For example, they will group people together by age group as well as whether or not they use tobacco. They will also have different classes of health that every individual will fit into. This is why after a life insurance medical exam, you will fall into one of three or four classes when it comes to paying a premium. 

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