- With regularly predictable patterns in diseases and life expectancy, it is possible to balance the random events of life and determine a person's risk to the insurance company. If someone is too risky, then the insurance company can't insure him because they would lose money on that particular person.
Categories of Risk
- Every person has some basic risks factors. Using these factors, the actuary calculates the total risk to the insurance company. The major categories are age, disease, likelihood of casualty (risky jobs) and "other." The "other" category covers the incidentals of risk that may come person to person.
Life, Death and Casualties
- During life you have to determine how much a person has to pay to add up to more than the policy amount. Deaths and casualties are times when a company has to pay out for a policy. A death is a natural occurrence due to old age or disease. A casualty is when an individual dies unexpectedly, e.g., a car wreck would be a casualty. Paying out a policy means that the pay is the amount of the life insurance. A $5,000 policy would pay a family $5,000 upon the death of the holder. The job of the actuary is to figure out how much the family has to pay monthly to receive these benefits.
- One of duties of an actuary is the creation and design of pension plans. The actuary can design fair plans that benefit all without leaving the company destitute. Pensions are often based on how many years employees have been with the company. But actuaries can estimate how long that person is likely to live and design pensions around those numbers. It's very similar to life insurance, but in reverse. In this case the company is paying out monthly or weekly amounts, and there is no payout upon death of the individual.
- With life insurance, actuaries calculate the health risks over a lifetime, but in some cases they need to address the short-term risks as well. The most prevalent example of this is homeowner policies that are reissued every year. Actuaries need to be able to factor how changing factors will affect a policy over the course of a year. For example, if a crime rate rises significantly, then the insurance company will most likely charge more due to increased risk for someone living in that particular area.