An insurance actuary is responsible for compiling and analyzing statistical data that describes risk. They collect data from a variety of sources and then use that data to determine the probability of a given negative event taking place over various spans of time. Actuaries then provide their employers with tables that include both risk and the potential costs associated with that risk, which are used to issue insurance policies.
Insurance companies make money by charging a fee for managing pools of risk. When issuing a policy, an insurance company must determine the probability that the event insured against by that policy will come to pass and the average cost of a claim if one is filed. This information is then used to set rates within a specific pool, allowing an insurance company to make a predictable profit and allowing policyholders to share risk among themselves. The shared risk ensures that a rare but serious event cannot wipe out an individual policy holder’s assets.
Such risk pooling and premium assessment only work properly if insurance companies have access to very accurate data on the sorts of risks and costs that their policyholders might encounter. Tables of risk and cost are compiled by an insurance actuary. This process involves extensive research, as accurate risk tables must be built on a large sample of raw data if they are to be effective. An insurance actuary will not normally collect this raw data, but will, instead, organize and process it, looking for useful trends and markets that can improve their company’s ability to model risk.
The structure of the risk models created by an insurance actuary will look very different in different fields of insurance. Some types of insurance, such as homeowner’s insurance, generate claims infrequently but may produce fairly large claims and, in some cases, such as in the aftermath of a major storm or other disaster, may generate many claims at the same time, a risk that insurance companies typically hedge against by securing a second layer of insurance to protect themselves.
Compiling risk tables for health insurance is a particularly complicated task for an insurance actuary. Health insurance policies come in many different varieties and are far more complicated to underwrite than are simple life insurance policies. Many different risk factors, each of which contributes a different amount of potential cost, must be considered at the same time. An insurance actuary will attempt to balance all of these factors when analyzing the risk profile of an individual or group seeking insurance. In this instance, analyzing a group is a simpler task, as the law of averages can be more easily applied.