Actuarial Science

Updated on March 18, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Actuarial Science Meaning

Actuarial science assesses financial risk based on statistical and mathematical concepts. Actuaries are professionals who study past trends to determine the future possibility of loss. They also allocate a reserve amount to cope with anticipated risks.

An actuary designs, tests, and manages risk aversion policies to reduce risk and maximize profits. But the potential risks identified by an actuary may or may not occur since businesses are impacted by external events also. Actuarial science is applied in insurance, pension planning, investment, finance, banking, health, climate change, and technology.

Key Takeaways

  • Actuarial science implements statistics and mathematical principles to ascertain the level of financial risk. It is used to assess the risks involved in investments, insurance, pension schemes, and finance.
  • An actuary formulates, reviews, and manages risk aversion policies to ensure maximum profit. They are employed by insurance firms, investment banks, and pension fund organizations.
  • To become a full-fledged certified actuary under the Institute and Faculty of Actuaries (IFoA), UK, a candidate has to clear thirteen exams.

Actuarial Science

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What do Actuaries do?

Actuaries or actuarial scientists quantify the amount of financial risk. They commonly work in insurance, pension, investment, and finance sectors. These experts foresee financial uncertainties and measure their impact. Actuaries are also required to design, test, and manage risk aversion policies. They are like lifesavers in deep waters and therefore get compensated with a substantial remuneration.

For example, Ryan takes up health insurance plans for himself and his elderly mother. Ryan is 25 years old, while his mother is 52. Yet, insurance companies charge twice as much for his mother. Why do premiums vary? This is because actuaries calculate insurance premiums specifically for each individual. This way, insurance companies mitigate risks.  
Since Ryan’s mother is older, she is more likely to develop specific health issues or may have some disease at the time of insurance. Therefore, multiple variables need to be considered. This is what actuaries do. They formulate financial models. They design financial products, assessments, and services.

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Applications of Acturial Science

Traditionally, actuarial science was employed to price financial products and determine the premium for insurance plans. But in the era of artificial intelligence, its application has expanded to climate change predictions as well.

Following are the common fields that employ actuaries:

#1 – Insurance Companies

Insurance providers are at high risk of hefty claims. Actuaries analyze past data and recent facts to calculate appropriate premiums. Then, they chart out premiums specifically for each plan depending on the financial risk. For example, life insurance actuaries consider factors like age, genetics, mortality rate, and diseases.  

#2 – Pension Funds

Actuaries formulate pension fund schemes to benefit the employees of different occupations. They conduct in-depth valuation and analysis to figure out the best possible returns.  

#3 – Investment Consultancies

The investment firms offering products like mutual funds also employ actuaries. Actuaries assist in designing financial products. They assess the risk involved in each investment product and alter policies accordingly.

#4 – Stock Exchange

Stock markets are unpredictable. To ascertain risk, actuaries consider stock valuation, credit history, earnings, cash flow, revenue, profits, and debt. Actuaries advise equity investments by disclosing the level of risk involved.

#5 – Banking

Actuaries also undertake credit risk modeling, investment banking, treasury, corporate finance, market risk analysis, financial product design, and retail banking.

#6 – Financial Services

Actuaries plan the fund-raising and budgeting strategies of an organization. For this purpose, they consider capital structure, regulatory compliance, and cost of capital.  

Importance of Actuarial Science

Employing actuaries has the following advantages:

  1. Risk Assessment: It is a proven method of understanding the current scenarios and identifying potential risks that can damage a business.
  2. Problem-Solving Attitude: Actuaries have standardized analysis enabling them to identify and solve problems.
  3. Risk Management: This is the primary purpose behind actuarial science. Businesses invest considerable time and money to land the best actuarial advisors.
  4. Facilitates Decision-making: Based on the application of actuarial science, businesses are decisive and conclusive. This ensures smooth functioning even during unforeseen circumstances.
  5. Futuristic Approach:  Actuaries analyze the past and current trends to develop a picture of future risk possibilities.  

Examples

The Corona Virus epidemic was a blow to the Chinese market and the global economy. China was the world’s largest exporter of raw materials. Unfortunately, actuaries could not foresee such an impact; businesses took a hit. 

In such a scenario, the internal numbers of the business might not play a significant role since it is the external factor that is causing the slowdown. Moreover, companies cannot hedge for such instances of an epidemic outbreak, thereby stalling global progress.

Guardian is a famous mutual life insurer. Post-covid, the Guardian, restructured their technology, data, and processes by enhancing actuaries’ skills and data science learning. Guardian intends to protect themselves from similar future situations.

A Career in Actuarial Science

When it comes to making a career in actuarial science, only a handful attempt; the primary reason behind it is the level of difficulty, of course.

A career in Actuarial science is lucrative. An actuary in the US makes around $114,628. Actuaries with 1 to 2 years of experience earn about $86686, while those with 6 to 9 years of experience earn as much as $196469. The top destinations for actuaries in the US include The Accolade, State Compensation Insurance Fund, Equitable, and Lincoln Financial Group.

Actuaries require in-depth knowledge of mathematics and statistical techniques. Then, they apply this knowledge to solve problems and mitigate risks. Altogether, it is one of the best-paying career options.

Who Should become an Actuary and How?

A candidate can secure a bachelor’s or master’s degree in actuarial science.  Following are the basic steps involved in becoming an actuarial scientist:

  • A candidate with a good score in high school (generally 85% and above) or a graduation degree in any stream with at least 55% can get enrolled into actuarial science under the Institute and Faculty of Actuaries (IFoA).
  • The next step is to decide the actuarial stream. Candidates have to choose either insurance, pension funds, health, banking, finance, or investment as a niche. They can also join as an intern (it isn’t compulsory but helps gain exposure).
  • Now, the most crucial step is to clear the exam series. Under the IFoA curriculum, there is a series of thirteen actuarial exams. However, qualifying for at least one or two of the exams is required for securing a job. Then again, passing more exams makes the candidate eligible for better positions. Also, the final exam varies depending on the particular actuarial stream.

Frequently Asked Questions (FAQs)

What does actuarial science deal with?

Actuarial science refers to a core discipline that identifies and quantifies financial risks involved in investment, insurance, finance, banking, and the health sector. Actuaries employ statistical and mathematical principles to arrive at conclusions.

Is actuarial science a good career?

Actuarial science is a flourishing career, and an actuary is seen as a high-paying career opportunity compared to other options. It is suitable for those interested in mathematics and statistics. Actuaries apply these theories to solve real-world problems and help companies recognize uncertainties. In the US, actuaries can earn around $114628 a year.

How do you become an actuary?

Anyone who is a high school graduate with 85% in mathematics and secured 55% in graduation can enroll under the Institute and Faculty of Actuaries (IFoA). To become a qualified actuary, an aspirant has to pass thirteen exams. However, the aspirant can clear the exams gradually. They can start as interns, gain knowledge and keep attempting further exams.

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