What is Actuarial Science?
Actuarial Science is a science that uses mathematics and statistics in the field of finance and insurance to assess the risk involved. The uncertainty of future events and its financial implications are analyzed by the application of mathematics and statistics which is its prime focus.
What Does an Actuary Do?
- An actuary is someone who applies actuarial science by way of mathematics and statistics to analyze the current state of an organization and identify any potential risks that may impact the business.
- The potential risks identified by the actuary may or may not occur shortly since it depends on the numbers of the company. This may or may not depict the actual picture since the business can also be impacted by external events.
- An actuary is required to design, test, and manage risk aversionRisk AversionThe term "risk-averse" refers to a person's unwillingness to take risks. Investors who prefer a low-return investment with known risks to a higher-return investment with unknown risks, for example, are risk-averse. policies to reduce risk and maximize profits.
Example of Actuarial Science
The current epidemic of the Corona Virus is not only a blow to the Chinese market but also the global economy since China is the world’s largest exporter of raw materials. This is something that actuaries could not gauge, and hence, businesses across the globe have taken the hit. In such a scenario, the internal numbers of the business might not play a major role since it is the external factor that is causing the slowdown. Moreover, businesses cannot hedge for such instances where there is an epidemic outbreak, thereby stalling global progress.
Importance of Actuarial Science
- It is a proven method of understanding the current scenarios and identifying potential risks that can cause damage to the business.
- The extensive study of actuarial science and standardization of the analysis enables an actuary to adopt a problem-solving approach.
- Risk management is the most important facet of actuarial science, and business invests their time and money for the best actuarial advisors.
- The conclusion derived based on the application of actuarial science facilitates businesses to arrive at the best decisions that ensure the smooth functioning of businesses even at the time of unforeseen incidents.
- They are used for analyzing risk involved in a plan for the future; the two main applications of Actuarial science are pension plans and life insurance.
- Traditionally, actuarial science was applied to include designing and pricing insurance products, setting capital and reserves held by an insurer, and advising on superannuation funds. It had its application on compound interestCompound InterestCompound Interest is the interest earned from the initial Principal & the previously accumulated Interest amount. This is also known as “Interest on Interest” & it is always higher than the Simple Interest. as well.
- Today, actuaries are applying their skill set in non-traditional roles. These roles include assisting in solving some of the big picture problems in society like global warming. From analyzing the impact of emerging climate change on business plans to finding solutions to support the aging population.
Advantages of Being an Actuary
- Provide an in-depth analysis of the cash flowAnalysis Of The Cash FlowCash flow analysis refers to examining or analyzing the company's different cash inflows and outflows during the period under consideration from the various activities, including operating activities, investing activities, and financing activities. and arrive at a solution that best suits the business.
- Enables to perform full financial projectionsFinancial ProjectionsFinancial projection is a statistical forecast of a company's future revenue and expenditure based on historical market patterns, internal factors, data interpretation, anticipated market developments, and experiences. To meet production or sales targets, both short-term and long-term financial estimates are sometimes evaluated. of a company.
- It facilitates businesses to identify risks beforehand and devise control plans so that the impact of the risk is not greater than what was forecasted.
- Actuaries help in identifying future risks that can cause an impact on the business. If the control plane for the risk costs more than the actual loss arising out of the risk, the business can decide whether it is ready to accept the risk.
Limitations of Being an Actuary
- Decisions are made based on calculations and their outcomes. These are assumptions made based on the current situations, which can change, and the outcomes can be wrong as time progresses.
- An actuary needs to stay updated on the current market conditions and be aware of topics that are interrelated to the business so that any anomalies can be identified for arriving at the apt decision for the business.
- Mathematics and statistics are the foundation subjects of the profession of Actuarial sciences. So a person who is not good with numbers cannot thrive in the role.
Actuarial science is about applying mathematical, statistical, and business skills to measure and manage risk. The primary focus of an actuary is to analyze the business and identify any underlying risk which can be foreseen so that necessary controls can be put in place to combat the after-effects if the risk event were to happen for real. In today’s world, the need for actuaries has increased, and as a result, more and more universities have introduced courses specializing in the study and discipline of actuarial science. These courses facilitate in creating a solid foundation of mathematics, finance products, economics, and statistics. As a result, an actuary is well versed in finance, economics, and mathematics as a whole.
This has been a guide to what is Actuarial Science and its meaning. Here we discuss what an actuary does along with an example, importance, and applications. You may learn more about financing from the following articles –