Actuarial Science

Study of financial risks in the insurance and finance sectors using mathematical and statistical methods.

Author: Ely Karam
Ely  Karam
Ely Karam
Ely Karam, I hold a bachelor's degree in pure mathematics with a minor in business administration at AUB. Currently, I am finishing my master's degree in finance at AUB. As for my experience, I work as an investment analyst full-time and as a financial consultant part-time. I tutor mathematics, financial accounting, and corporate finance as well.
Reviewed By: Patrick Curtis
Patrick Curtis
Patrick Curtis
Private Equity | Investment Banking

Prior to becoming our CEO & Founder at Wall Street Oasis, Patrick spent three years as a Private Equity Associate for Tailwind Capital in New York and two years as an Investment Banking Analyst at Rothschild.

Patrick has an MBA in Entrepreneurial Management from The Wharton School and a BA in Economics from Williams College.

Last Updated:February 13, 2024

What Is Actuarial Science?

Actuarial science assesses financial risks in the insurance and finance sectors using mathematical and statistical methods.

The study of probability and statistics is used to analyze and resolve the financial effects of hypothetical future events. The main components of classical actuarial science are the examination of mortality, the development of life tables, and the application of compound interest.

Probability analysis is used here to determine the likelihood of an event occurring so that its financial impact may be estimated. In the insurance industry, actuaries typically use it.

For an insurance company to set aside funds to cover any claims that may result from the occurrence, actuaries study mathematical models to predict or foresee whether it is reasonable for an event to occur.

For example, by examining the mortality rates of people who are a certain age, insurance companies can learn more about the likelihood or timing of paying out a life insurance policy.

As the need for long-term insurance increased, it became legally recognized as a branch of mathematics. It connects the subjects of mathematics, probability theory, statistics, finance, economics, and computer science.

It formerly used deterministic models to generate tables and premiums. Over the last 30 years, science has seen major changes due to the widespread use of high-speed computers and the merging of stochastic actuarial models with modern finance theory.

This led to the development of an important actuarial concept, referred to as the present value of a future sum. Certain aspects of the actuarial methods for discounting pension funds have come under criticism from modern financial economics

Many institutions and universities offer actuarial science degrees, which include a strong foundational course in arithmetic, statistics, economics, and all forms of investments.

Key Takeaways

  • Actuarial science involves using mathematical and statistical methods to assess financial risks, especially in the insurance and finance sectors.
  • Actuaries use probability analysis to estimate the financial impact of hypothetical future events, aiding in decision-making in the insurance industry.
  • Actuaries analyze historical data to estimate funds needed to cover potential financial losses in the future, passing rigorous.
  • Actuarial roles include Business Analyst, Financial Planner, Risk Analyst, Underwriter, and Investment Analyst. Salaries ranging from $63,000 to $86,000.

What Does an Actuary Do?

Professionals with training in actuarial science are actuaries. Actuaries must prove their proficiency in several nations by completing a string of demanding professional tests. Actuaries examine historical data to estimate how much money should be set aside to cover potential financial losses in the future.

If you are serious about becoming an actuary, getting a degree in actuarial science will help you move the process forward faster. However, it is not essential. You may study statistics, mathematics, or finance at any level and still pass the actuarial examinations.

Actuarial studies are a terrific alternative for people who are enthusiastic about pursuing an actuarial career path and won't accept anything less. The job market is seeking folks just like you if you're up to the challenge. It's a very specialized profession that calls for substantial training and dedication.

Applications of Actuarial Science

It is mostly used in two areas: pension programs and life insurance.  

It is used for pricing financial items and calculating insurance plan premiums. However, in the age of artificial intelligence, its use has broadened to include predicting climate change.

This respected discipline requires professionals to be more than well-versed in complex mathematical and statistical concepts along with applied knowledge in finance and investment methodologies. An actuary should have hands-on knowledge and expertise in concepts related to:

  • Mathematics
  • Probability theory
  • Finance
  • Economics
  • Financial Accounting
  • Computer sciences, and more allied sciences.

The application of this knowledge is to define, analyze, understand, and make optimal decisions to address the financial implications of peculiar future events that may turn out to be favorable or unfavorable.

For example, utilizing newly developed technologies, weather-based index insurance protects subsistence farmers susceptible to the effects of shifting climatic circumstances.

To examine liabilities and enhance financial decision-making, actuarial science is also used to study financial organizations. Actuaries use this specialized science to assess how future events will affect the economy, finance, and other areas of business.

Pension Industry

When it comes to the design, funding, accounting, administration, maintenance, or modification of pension plans, the costs of different solutions are evaluated in the pension sector using actuarial methodologies.

The strategies are heavily influenced by:

  • Both short- and long-term bond rates.
  • The funded status of pension and benefit plans.
  • Collective bargaining.
  • The employer's long- and short-term financial and economic trends.
  • The employer's old and new foreign competitors.
  • The changing demographics of the workforce.
  • Changes to the Internal Revenue Code.
  • Changes to the Internal Revenue Service's perspective on the calculation of surpluses.
  • Changes to the Internal Revenue Code are all significant factors.

Several pension plans frequently need to be consolidated or, at the very least, managed fairly in mergers and acquisitions.

Old and new benefit plans must be combined to suit changing social expectations, different regulatory discrimination test computations, and offer workers and retirees clear options and transitional pathways.

Liabilities associated with benefit programs must be accurately evaluated to account for both earned benefits for previous service and rewards for future service.

Lastly, funding plans must be created that are manageable and meet the necessary standards of the board or authorities, such as the Financial Accounting Standards Board in the United States.

Life Insurance

Actuarial science is used in conventional life insurance to create life tables, analyze mortality, and apply compound interest, which combines interest from earlier periods with interest in capital investment.

It may therefore aid in creating regulations for financial products like annuities and investments that provide a guaranteed income stream. The varied financial outcomes for investable assets owned by non-profit businesses as a consequence of endowments are also determined with its help.

It also includes examining rates of utilization in health insurance, including employer-provided plans and social insurance such as:

  • The prevalence of disability or the likelihood that a certain group of people will develop a disability.
  • Morbidity, or how frequently and widely an illness affects a population.
  • Mortality or mortality rate, which counts the number of people who die in a population due to a particular illness or circumstance.
  • Fertility, often known as the fertility rate, counts the number of births.

It is also used in the fields of property, casualty, liability, and general insurance, where coverage is often offered on an annual basis (such as monthly). After the period, any party may cancel coverage.

Additionally, the insurance industry protects against risks such as disasters, weather-related hazards, earthquakes, patent infringement, and other forms of corporate espionage, terrorism, and "unique" hazards.

It includes data gathering, measuring, estimating, forecasting, and valuing techniques to help management assess marketing opportunities and the nature of the risks using financial and underwriting data.

The assessment of the overall risk from catastrophic events concerning its surplus or underwriting capacity frequently benefits from the use of actuarial science.

Social Welfare Programs

A program of actuarial estimates and studies about SSA-administered retirement, survivors, and disability insurance programs, as well as proposed modifications to those programs, is planned and directed by the Office of the Chief Actuary (OCACT), Social Security Administration.

It assesses how the Federal Disability Insurance Trust Fund and the Federal Old-Age and Survivors Insurance Trust Fund are operating, performs studies of program financing, and conducts actuarial and demographic research on social insurance and related program issues involving mortality, retirement, disability, survivorship, marriage, unemployment, poverty, etc.

It also projects future workloads.

The Office is also tasked with carrying out cost studies for the Supplemental Security Income (SSI) program, a means-tested, general-revenue-funded program for low-income elderly, blind, and handicapped persons.

The Office offers technical and advisory services to the Commissioner and the Board of Trustees of the Social Security Trust Funds. Additionally, the Office's staff provides expert testimony on the actuarial elements of Social Security matters before Congressional Committees.

Actuarial Exams, Jobs, and Estimated Salaries

You must pass the actuarial exams to become a licensed actuary. These examinations are autonomous and have no connection to academic institutions.

Actuarial exams are difficult and need much research. Most individuals take between five and ten years to finish them all as a result. Each test lasts between three and five hours and consists of multiple-choice questions and written responses.

The good news is that while you are a student, you are still permitted to work as an entry-level actuarial assistant or junior analyst. Many companies assist their workers in passing their actuarial examinations and provide them with cash incentives, so your efforts will be valued.

A useful source for further information on expenses and test difficulties is Etched Actuarial.

A person can pass the actuarial examinations more quickly and earn complete actuarial qualifications by pursuing actuarial studies degrees. However, they provide you with the fundamental knowledge in finance, accounting, statistics, and mathematics required to excel after graduation in other fields.

Following an education in actuarial science, you can pursue several occupations, along with their yearly salaries:

  • Business Analyst ~ 63,000 USD
  • Financial Planner ~ 62,000 USD
  • Risk Analyst ~ 63,000 USD
  • Underwriter ~ 60,000 USD
  • Investment Analyst ~ 63,000 USD

Jobs that require passing the actuarial exams:

  • Actuary – 86,000 USD
  • Senior Actuarial Analyst – 84,000 USD

Pros of Being An Actuary

Being an actuary entails identifying the financial risks that a firm is considering and developing strategies to mitigate such risks if they do arise. Most actuaries genuinely like their work, but you should be sure before you begin.

Some of the advantages are discussed below.

A Fantastic Approach To Combining Several Academic Specialties

A financial theorist, statistician, mathematician, and businessperson all make up an actuary. Most programs fall under more than one department (i.e., mathematics and statistics). Being an actuary can be ideal for you if you like combining multiple distinct abilities to create something.

A Professional Path Tailored To Your Preferences

A profession in actuarial science is by no means constrictive. As you gain actuarial expertise, more roles open up to you. Your initial income might almost certainly triple if you work as an actuarial expert or director, depending on your level of study.

You can start consulting or teaching in many fields if you have a degree in actuarial sciences. Actuaries have several lucrative options to choose from.

Excellent Earning Potential And Growth Pace

Actuaries often start out making roughly $60,000. The best-paid 10% of workers, as reported by the Bureau of Labor Statistics (BLS), make six figures.

Nearly all of the more specialized actuarial occupations pay considerably over $100,000 annually, and it is not uncommon for certain roles to pay close to $200,000.

The BLS reports that between 2014 and 2024, the job growth rate for actuaries will be 18 percent, which is substantially greater than the norm. In addition to decent compensation, finding available opportunities shouldn't be too difficult.

Cons of Being An Actuary

On the other hand, some of the disadvantages are discussed below.

To Become One, You Must Put Forth A Lot Of Effort. Forever

Unfortunately, this also implies that you are studying a wide range of topics and how to combine them. You could also require a Ph.D. in addition to a master's degree.

You must also pass exams for professional associations based on actuarial science disciplines to become an actuary. Being an actuary also involves continual education; throughout your career, you must complete a certain number of hours of continuing education.

Limited Latitude For Mistakes

You must be a master at what you do to succeed as an actuary. In many circumstances, you are deciding the fate of millions or even billions of dollars.

While computer systems may assist a lot of it, you ultimately need to be able to recognize when something sounds suspicious.

Actuarial science will require both excellent analytical and creative talents. Actuaries have several hats to wear, and they must excel in each one.

If Your Computer Is Your Closest Workplace Companion, Don't Be Shocked

Even though actuaries need to be at ease and capable of properly delivering accurate and significant knowledge, you won't be spending most of your workweek here.

An actuary spends much of their time alone in their office, crunching statistics and using specialist software. Therefore, it's advisable to be proficient in binary if you're considering a career in actuarial science for the enthralling discourse.

Researched and Authored by Ely Karam | LinkedIn

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