Actuarial Science
Actuarial science means a method of applying mathematics and statistics to predict the behavior of financial industries. The discipline contemplates carrying out an analysis and dealing with financial impacts of indescribable future events. Conservative methods of actuarial science are generally centered around mortality analysis, life table compilation, along with compound interest calculation.
Concept insights
Actuarial science deals with a risk assessment of event triggers applying scenario analysis in order to estimate its cost implications. Actuaries acting as insurance mathematicians predict the feasibility of a particular event. The target is quite simple: an insurance enterprise has to possess the means for covering claims that happen after the event takes place. For instance, examination of death rates assists in defining the due date of life insurance policy payments.
Historical note
In fact, actuarial science has been considered a formal subject since the 17th century, when the heightened demand for a perpetual insurance came into play. Several interrelated domains were incorporated, such as mathematics, theory of chances, statistics, economics and theory of information.
Over the last 30 years science has evolved by virtue of computers with greater processing speed, as well as the integration of stochastic actuarial models with a current financial theory.
Actually, lots of academic institutions introduce degrees in actuarial science. These courses presuppose a profound knowledge of mathematical and statistical methods for risk assessment in various fields.
Applying Actuarial Science
Actuarial science is widely used in all aspects of the insurance industry. It is also applicable to determine various critical factors while creating both private and public pension plans. Let’s consider the above-mentioned fields of application on the specific examples.
Insurance. Actuaries can create tables that break down rates of death, population growth, sickness levels, the likelihood of disability or permanent injury by occupation, etc. All these determinants give insurance companies an idea of how high premiums need to be allocated in order to make enough profit.
Such tables may also highlight population categories that are at high risk of injury or illness that result in insurance claims. So that the company can adjust rates or provide appropriate coverage.
In addition, actuarial science assists in elaboration of financial product policies. For instance, annuities that represent an investment outlay bringing a fixed return. Or, the term “actuarial science” is also applied in determining financial performance of investment assets owned by non-profit enterprises as endowments.
Pension plans. By understanding the death rate, the maximum number of users, and cost-of-living data, actuarial science helps to estimate who is eligible for a pension, at what age does it begin, and how the distribution process starts.
An actuarial assessment of the pension system solves a set of problems:
- the analysis of relationships between various institutions of social protection;
- the efficiency of available resources distribution;
- the prospects for changing the functioning of the economic and social spheres of society.
In other words, actuarial science identifies the expenses for alternative strategies in relation to funding, elaboration, management, accounting, along with maintenance of pension plans.
Short-term and long-term interest rates on bonds wield a major influence on these plans. A case in study can be the situation, when there are difficulties with bond revenue generation in a low-interest-rate context. So that the possibility of running out of cash increases.
Moreover, other factors influencing a pension plan’s feasibility are: allowance payments, collective negotiations, firm’s rivals, and variance of workforce demographic composition. It is also necessary to pay attention to business environment and financial market trends that can be determinants of pension plan’s funding.
