Actuarial science is a study of risks and the likelihood of their occurrence and the financial consequences that will arise when these future events occur. Actuarial science is based on mathematics, probability, statistics, finance, business, computer programming and economics to assess and calculate these risks. Before an insurance company can underwrite risk coverage it is important to analyze that risk and calculate the probability of it arising and how much the loss will be if it occurs. Actuarial science is important because it provides the underwriter with data to assess the risks and the market opportunities available. Actuaries collect the data and use it to formulate and value risks and insurance covers.
Actuaries are professionals who study mathematical, financial, statistical, analytical and computing skills to apply to actuarial science models to both insurance and financial products. They use these loss models to calculate risk by using probability mathematics and statistics and understanding the business environment. They study actuarial science at the university and also sit for a series of actuarial science professional examinations. Today they use advanced technology in computer programming to calculate premiums and how much coverage should cost. This involves analysis and pricing of the insurance products. When they calculate the probability of the loss they advise insurance companies on the amount to charge for risk coverage and pricing of premiums.
An underwriter considers the risk of loss and its likelihood of occurring. If the likelihood is high then the premium charged will be high. An area with a high likelihood of a flood will be charged higher than an area with less likelihood of a flood because of the high risk of loss. An elderly person will be charged higher life insurance premiums than young people because they are likely to die soon and the risk is high.
Actuarial science uses discounting of future sums to the present value when actuaries are calculating life insurance, annuities, pension plans, long-term health care and mortgage insurance. They use compound interest to forecast how much a future event will cost. They use life tables and mortality rates when calculating life insurance. In annuities they discount the future sums and compare different strategies to decide on retirement and pension plans.
Actuaries calculate health care and Social Security by taking into consideration workforce factors which include mortality, unemployment, poverty, disability, families with children, marriage and low-income families among other factors. Insurance sets money aside to pay for losses and damages. In health care, life insurance and annuities actuarial science uses actuarial models, mortality rate and compound interest rates to discount money invested to the present value. Actuaries forecast using high speed programs and computer programming.
Since insurance premiums are pooled and paid to a fund of a particular risk the likelihood of all the policyholders suffering one loss all at a time is least likely. Only part of those insured will suffer the loss and therefore the pooled funds will cover those losses and leave a profit for the insurer.