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.
BREAKING DOWN Actuarial Science
Actuarial science became a formal mathematical discipline in the late 17th century with the increased demand for long-term insurance coverage such as burial, life insurance, and annuities. 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, the science has undergone revolutionary changes due to the proliferation of high speed computers and the union of stochastic actuarial models with modern financial theory.
Many colleges and universities offer degrees in actuarial science, which consists of a solid foundation course in mathematics, statistics and economics and on all types of investments.
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.
In traditional life insurance, actuarial science focuses on the analysis of mortality, the production of life tables, and the application of compound interest to produce life insurance, annuities and endowment policies. In health insurance, including employer-provided plans and social insurance, actuarial science focuses on analyzing rates of disability, morbidity, mortality, fertility and other contingencies.
In the pension industry, actuarial science compares the costs of alternative strategies with regard to the design, funding, accounting, administration, and maintenance or redesign of pension plans. Short-term and long-term bond rates greatly influence these strategies – as do the funded status of the pension and benefit arrangements, collective bargaining, the employer's competitors, changing demographics of the workforce, changes in the internal revenue code, changes in the attitude of the internal revenue service regarding the calculation of surpluses and both short and long term financial and economic trends.
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 a yearly). Coverage can be canceled at the end of the period by either party.