Have you ever wondered about the actuarial role in life insurance? The actuary's job is somewhat morbid yet also quite fascinating. To really understand how the actuary works, you first need to understand some life insurance basics.
Life Insurance Basics
Do you know when you will die? It's a thought that most of don't like to think about, but it's at the core of the life insurance industry.
The idea of insurance is to transfer risk away from yourself. Risk is normally represented in financial terms. Examples include the risk of having a large hospital bill if you get sick, or the risk of paying for the damages to someone's car if you are involved in an accident. To transfer these risks, people buy health and auto insurance.
What about the risk of dying? When you die, you are free of any debts you may owe, but someone in your family may become responsible for your debts. The debt may be your mortgage, credit card bills, or car payment.
Even if your house and car are paid off, there is still the matter of securing the financial future of your family. With your wages now gone, how will your family live? There are also costs associated with your death, such as funeral expenses.
Dying is a scary thought, but it doesn't have to be something you worry about needlessly if you have life insurance.
How Life Insurance Works
In order for a life insurance company to be able to pay for your funeral expenses, cover your debts and provide lost wages to your family, they need to have some idea long you might live. They also need this knowledge to be able to charge you a fair premium for the life insurance coverage.
A company also needs to spread out the risk involved with offering insurance. If a life insurance company were to only have customers with terminal cancer, they'd be out of business very quickly because of all the life insurance settlements. It's not that a company doesn't want to pay, it's that they risk going bankrupt if the risk is not managed well. A bankrupt life insurance company means none of the customers receive benefits.
To manage the risk most effectively, people are grouped into similar categories of risk. It is the actuary who determines how to group people.
Actuarial Role in Life Insurance
Life insurance is a numbers game, and the actuarial role in life insurance is to crunch the numbers. There are many variables that factor into your life expectancy. So, the first job of the life insurance company is to collect information such as:
- Habits (smoking, drinking, etc.)
- Current health status
- Ethnic group
- Parental information
With all of this information, the actuary can then begin the process of grouping people by life expectancy. This is done by feeding all the data into statistical models that help the actuary determine who to offer life insurance policies to and what life insurance rates to charge.
How to Become an Actuary
If math and applied statistics interest you, a career as an actuary is worth considering. To become an actuary, you need a minimum of bachelor's degree. Some universities offer a degree in actuarial science, but other good majors include:
Regardless of your major, you should study math through the calculus level and take both probability and statistics. You will also need to be comfortable using computers, especially math and spreadsheet programs.
For additional information about becoming an actuary, visit Be An Actuary.org.