What Science Says About Insurance in Canada
In the world, there is a relationship between science and insurance. This is a science field called actuarial science. Science is the systematic study of the structure and behavior of the physical and natural world through observation, experimentation, and the testing of theories against the evidence obtained while insurance is concerned with ensuring people, property, and businesses from risk. It is a fact that unforeseen circumstances and events beyond our control could happen. Then the role of insurance is paramount in cushioning the hard hit such an occurrence would have on a person. So, the purpose of insurance is absorbing of the responsibility of risk from a person called the insured by another called the insurer upon the payment of a consolidation called the premium.
What Is Actuarial Science?
Actuarial science is a discipline that assesses financial risks in the insurance and finance fields, using mathematical and statistical methods. Actuarial science applies the mathematics of probability and statistics to define, analyze, and solve the financial implications of uncertain future events. Traditional actuarial science largely revolves around the analysis of mortality and the production of life tables, and the application of compound interest.
Understanding Actuarial Science
Actuarial science attempts to quantify the risk of an event occurring using probability analysis so that its financial impact can be determined. Actuarial science is typically used in the insurance industry by actuaries. Actuaries analyze mathematical models to predict or forecast the reasonableness of an event occurring so that an insurance company can allocate funds to pay out any claims that might result from the event. For example, studying the mortality rates of individuals of a certain age would help insurance companies understand the likelihood or timeframe of paying out a life insurance policy.
Actuarial science became a formal mathematical discipline in the late 17th century with the increased demand for long-term insurance coverage. Actuarial science spans several interrelated subjects, including mathematics, probability theory, statistics, finance, economics, and computer science. Historically, actuarial science used deterministic models in the construction of tables and premiums. In the last 30 years, science has undergone revolutionary changes due to the proliferation of high-speed computers and the union of stochastic actuarial models with modern financial theory.
Applications of Actuarial Science
Life insurance and pension plans are the two main applications of actuarial science. However, actuarial science is also applied in the study of financial organizations to analyze their liabilities and improve financial decision-making. Actuaries employ this specialty science to evaluate the financial, economic, and other business applications of future events.
Insurance
In traditional life insurance, actuarial science focuses on the analysis of mortality, the production of life tables, and the application of compound interest, which is the accumulated interest from previous periods plus the interest on the principal investment. As a result, actuarial science can help develop policies for financial products such as annuities, which are investments that pay a fixed income stream. Actuarial science is also used to determine the various financial outcomes for investable assets held by non-profit corporations as a result of endowments.
In health insurance, including employer-provided plans and social insurance, actuarial science includes analyzing rates of
- Disability in the population or the risk of a certain group of people becoming disabled
- Morbidity or the frequency and the extent to which a disease occurs in a population
- Mortality or mortality rate, which measures the number of deaths in a population that result from a specific disease or event
- Fertility or fertility rate, which measures the number of children born
For example, disability rates are determined for veterans that may have been wounded in the line of duty. Certain percentages are assigned to the extent of the disability to determine the payout from disability insurance.
Actuarial science is also applied to property, casualty, liability, and general insurance–instances in which coverage is generally provided on a renewable period, (such as yearly). Coverage can be canceled at the end of the period by either party.
Pensions
In the pension industry, actuarial science compares the costs of alternative strategies for the design, funding, accounting, administration, and maintenance or redesign of pension plans. A pension plan is a defined-benefit plan, which is a type of retirement plan involving contributions from the employer to be set aside and paid out to the employees upon retirement.
Short-term and long-term bond rates greatly influence pension plans and their investment strategies. Bonds are debt instruments issued by governments and corporations that typically pay a periodic interest rate. For example, in a low-interest-rate environment, a pension plan might have difficulty earning income from the bonds that it has invested in, which increases the probability that the pension plan could run out of money.
Other factors impacting a pension plan’s viability include benefit arrangements, collective bargaining, the employer’s competitors, and changing demographics of the workforce. Tax laws and the policies of the Internal Revenue Service (IRS) regarding the calculation of pension surpluses also impact the finances of a pension plan. Additionally, economic conditions and trends in the financial markets can impact the probability of a pension plan’s remaining funds.
Universities and Professional Certifications
According to the Bureau of Labor Statistics, the number of actuaries employed is expected to grow by 21% from 2021 to 2031. For this reason, many universities offer educational degrees and courses in actuarial science. In addition, there are professional designations for those interested in pursuing the field.
Universities
The Society of Actuaries identifies and reports colleges that meet one of three levels of recognition:
- UCAP-Introduction Curriculum: Universities that maintain course requirements for two professional actuarial exams in addition to having met other approved course requirements.
- UCAP-Advanced Curriculum: Universities that maintain course requirements for four professional exams in addition to having met other approved course requirements.
- Center of Actuarial Excellence: Universities that maintain eight specific requirements in connection with a variety of matters. This is the highest tier of competency identified by the SOA for a university.
As of December 2022, there are roughly 25 Center of Actuarial Excellence schools across the United States, Canada, Australia, Singapore, the United Kingdom, and China. Within the U.S., these schools include but are not limited to Brigham Young, Georgia State, Purdue, Connecticut, and Michigan
Professional Designations and Credentials
There are several different professional designations an actuary can pursue to further gain credibility and proficiency in their field. The Casualty Actuarial Society offers the Associate (ACAS) and Fellow (FCAS) membership levels, each of the two with escalating requirements. For example, the ACAS credential can be achieved after passing six exams, while the FCAS is earned after nine exams. Areas of focus for the FCAS exam include:
- Probability
- Financial Mathematics
- Financial Economics
- Modern Actuarial Statistics
- Basic Techniques for Ratemaking and Estimating Claim Liabilities
- Regulation & Financial Reporting
- Policy Liabilities, Insurance Company Valuation, and Enterprise Risk Management
- Advanced Ratemaking
The Society of Actuaries promotes several different actuarial exams to demonstrate competency in the field.
- An Associate of the Society of Actuaries (ASA) demonstrates knowledge of fundamental concepts of modeling and managing risk. The examination requirements are changing as of Spring 2023, and the list of required examinations includes topics on predictive analysis, economics, probabilities, and financial markets.
- A Chartered Enterprise Risk Analyst (CERA) specializes in knowing identifying, measuring, and managing risk in risk-bearing enterprises. Similar to the ASA requirements, the CERA requirements include a professional course covering the code of conduct.
- A Fellow of the Society of Actuaries (FSA) demonstrates knowledge of financial decisions involving pensions, life insurance, health insurance, and investments. FSAs also must demonstrate in-depth knowledge and the application of appropriate techniques to these various areas.4
Is Actuarial Science Difficult?
Actuarial science is a difficult profession. Actuarial exams usually last between 3 and 5 hours, and each requires rigorous preparation. Candidates must often have a bachelor’s degree, and it makes take up to a decade for a candidate to complete all training and exams.
What Type of Math Do Actuaries Use?
Actuaries often have a background in probability, statistics, and financial mathematics. Most often, an actuary will assess the probability of an event happening, then apply statistical methods to determine what the financial impact of that outcome will be. Actuaries usually do not use calculus at work, though calculus may be a prerequisite to meeting other course requirements.
How Long Does It Take To Become an Actuary?
For most, it may take up to a decade or longer to become an actuary. A bachelor’s degree in actuarial science may take between 3 to 5 years, and it may take at least another several years to pass rigorous professional actuarial exams.
The Bottom Line
Actuarial science is the study of mathematically predicting the probability of something happening in the future and assigning that outcome a financial value. Companies, pension funds, and insurance agencies rely on actuaries to develop models to assess areas of risk and devise policies to mitigate potential future challenges.