What is an Actuary?
IN GENERAL TERMS:
- When asked to explain what
an actuary is, I usually say something like "An actuary is a kind
of mathematician who specializes in the quantification of contingent
events." Sounds impressive, doesn't it? What does it mean?
WHAT IS A CONTINGENT EVENT?
- A contingent event is something that
might or might not happen. As actuaries use the term, we refer to two kinds of events.
- One kind of contingent event is catastrophes, such as
floods, hurricanes, auto accidents, illnesses. These will certainly
happen to SOMEBODY, but we don't know to whom.
- The second kind of contingent event is
the sort, such as death, which will eventually happen to everybody, but for a particular person, we don't know
MONETARY VALUES ONLY:
- Actuaries study contingent events which have a monetary value associated with
them. They collect statistics on all kinds of happenings, and determine which ones
can appropriately be insured against. Insuring against some event does not mean that
the event will not happen, but that if it does happen the insured person or his beneficiaries
will receive compensation. One of the jobs of an actuary is to calculate the premium
which must be charged in order to pay policyholders who are injured by an insured event.
- People buy insurance to protect themselves from suffering large
monetary losses when an improbable but disastrous event occurs. There is
insurance against floods, which doesn't prevent floods but which pays
persons injured by floods to help repair their homes and businesses.
- There is insurance against car accidents which can pay for the repair of
the cars and the medical bills of injured drivers and passengers.
- There is life insurance, which pays the policy amount to the
beneficiaries in case of the death of the policyholder.
- There is health insurance which helps people meet their medical costs
when they get sick, and may pay for checkups and vaccinations to help them stay well.
PRINCIPLES OF INSURANCE:
- This is how
insurance works. A very large number of people called
"policyholders" purchase a certain kind of insurance. A very small (we
hope) number of people suffer a loss from the insured
event. The premiums of all the policyholders together are combined and used to pay
the claims of the few who have losses.
Nothing Frequent, Trivial:
- Not all contingencies can be
insured against. There is no way you can buy an
insurance policy against a common cold. The premium each year would have to equal
the benefit each year because EVERYONE has at least one cold per year, (especially if
they can get paid for it).
Rare Catatrophic Events Only:
- Insurance is generally available
only for events that are
very infrequent, are mostly beyond the control of the policyholder (fire insurance companies don't
pay for an arson by the policyholder, for instance), and that are catastrophic.
What About Abnormally Bad Years?
- There is a lot more to calculating a premium that looking at one year's claims,
of course. For instance, in addition to the ordinary premium for an average year's
catastrophes, the actuary needs to set aside enough over a period of years to meet the greater than normal
claims which will occur in a few really bad years. Such events may be called something
like "100 Year Floods" or "pandemics".
It is the actuary's job to know the approximately correct frequency of
"100 year floods", and it often isn't 100 years!
ROLE OF THE ACTUARY:
- An actuary is trained to collect and evaluate the
history of insured losses. He will study how many people purchase
the insurance of a particular kind, he will look at historical records to determine the probability of insurable
catastrophic events, and he will estimate the size of the claims which will be received
from the people who have been injured. From that data and more, he can calculate a premium.
- I hope this explanation helps you to understand what
an actuary is and does. If you think you would like to be an actuary, and you are
VERY good at math, I hope you will contact some of the actuarial organizations pointed to
from my home page and have them send you information on how you too can become an
actuary. It's a great career!
By the way, throughout this page I refer to an actuary as "he", but some of the best actuaries are women, and it is a great career for us, too.