Reviewed by Stefan Tirschler
Updated August 31, 2022
ac·tu·ar·y | ˈak(t)SHəˌwerē
Definition: A person in the financial industry who compiles and analyzes data to manage risk and maximize returns on investment.
She is very excited to begin her new career as an actuary for a prominent insurance company.
An actuary is a person who collects and analyzes data to help financial companies manage risk. Their field is known as actuarial science. Actuaries most commonly work for insurance companies.
Insurance actuaries use their analytical skills to help insurers decide what types of policies to offer, where to offer them, and how much they should cost, among other things. Insurers can’t blindly insure everyone who comes knocking—that would be irresponsible.
So how do insurance companies decide who gets a policy and how much it costs?
They rely on actuaries to figure out how they can offer insurance to as many people as possible, while calculating premiums that will provide enough money to cover claims and to stay profitable.
Charlene is an actuary working for a home insurance provider. She collects and analyzes data in order to predict future losses for which the company will have to pay out claims. Her research also helps the company decide how to adjust their premiums to cover those predicted expenses.
Charlene has a bachelor’s degree of science in mathematics, and is a very skilled programmer. She’s also a great communicator, since a large part of her job is reporting her findings to different decision-makers throughout the company.
Like any company, insurers need to be profitable, otherwise they would eventually cease to exist. This is why they can’t offer cheap policies to every single person who asks, just to collect more premiums.
Agreeing to insure something is a risk. While the insurer is more than happy to collect premiums, the other side of the deal is that they’ve agreed to cover the cost of insured losses. If an insured’s home is destroyed in a fire, the insurer will pay out a greater sum of money than they ever collected in premiums from the homeowner.
That’s why premiums have to be carefully determined: so that the sum of everyone’s little annual premium will be enough to pay for the few big losses that occur every year.
Of course, there are different levels of risk. For example, a building located in Vancouver is much more likely to be destroyed by an earthquake than one located in Winnipeg. When insuring homes across Canada, insurers need to understand these different risk factors to help them decide what premiums to charge (or if they even want to offer insurance in certain areas). Insurance actuaries work to answer these kinds of questions.
The home insurance company that Charlene works for is considering expanding its coverage area to a new city. They ask Charlene and her fellow actuaries to analyze the potential risks and help design the new policies. Among her other findings, Charlene discovers that homeowners in this city have made a very high number of insurance claims due to damage from sewer backups.
She learns that the city has an older sewer system that often backs up during heavy rain. She advises that her company should charge higher premiums to customers in this city who don’t have backwater valves installed in their homes.
The higher premiums help ensure that there will be enough money in the bank to cover the higher cost of more frequent sewer backup claims.
The amount of information an actuary has to process is massive. In order to make smart predictions, they need to incorporate all kinds of data. An insurance actuary might use claims history, weather patterns, crime rates, or any number of other sources to do their job.
Actuaries have exceptional analytical skills, with keen attention to detail and critical thinking. These skills are added to just about every job description ever, but actuaries actually rely on them to be successful.
Actuaries also help insurers determine how much money they need to set aside – called “reserves” – to pay claims that statistically the insurer knows already happened, but that their customers haven’t reported to them yet.
Customers expect their insurers to settle claims quickly, so it’s important that insurance companies know how much cash they need to have on hand. Actuaries use their skills to make predictions about the cost of future claims.
Insurance companies have a fine line to walk when it comes to balancing the cost of their policies. Offer them too cheaply, and the insurer will not have enough money to cover the cost of claims for which they are responsible. Too expensive, and no one will want to buy them.
Insurers employ actuaries to help them analyze data and make smart decisions when it comes to taking risks.
Actuaries are very much in demand in Canada and across the world. Actuarial science is often rated as a top profession, thanks to high salaries and generally great work-life balance. It’s a solid career choice for someone that likes analytical problem-solving.
Looking for another insurance definition? Look it up in The Insurance Glossary, home to dozens of easy-to-follow definitions for the most common insurance terms. Or, get an online quote in under 5 minutes and find out how affordable personalized home insurance can be.
About the expert: Stefan Tirschler
Stefan is responsible for underwriting leadership, market expansion, and product research and development for Square One's operations. Stefan has earned his Fellow Chartered Insurance Professional designation, and maintains a level 2 general insurance license in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. Stefan is also an Education Committee member and CIP/GIE instructor for the Insurance Institute of Canada.
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