What Is Actuarial Analysis?

Actuarial analysis is a type of asset to liability analysis used by financial companies to ensure they have the funds to pay the required liabilities. Insurance and retirement investment products are two common financial products in which actuarial analysis is needed.

Key Takeaways

  • Actuarial analysis is a form of asset to liability analysis.
  • This analysis is used to ensure companies can pay their liabilities.
  • Two common products using actuarial analysis are insurance and retirement investment products.

How Actuarial Analysis Works

Actuarial analysis is used by many financial companies for managing the risks of certain products. This type of work is done by highly educated and certified professional statisticians who focus on the correlating risks of insurance products and their clients.

Actuarial analysis uses statistical models to manage financial uncertainty by making educated predictions about future events. Insurance companies, banks, government agencies, and corporations use actuarial analysis to design optimal insurance policies, retirement plans, and pension plans.

Asset to Liability Matching

The methodology for actuarial analysis and risk management is centered around the concept of asset to liability matching. This concept is used in investment management when a product has specified payout obligations.

To manage payout obligations, analytical actuarial analysis models will include several variables. In insurance products, a financial company must manage an asset portfolio that has appropriate liquidity for generating immediate payout needs and longer-term payout needs. The variables influencing product obligations will vary by the type of insurance products. Variables on an insurance product will also influence the amount of premium an insured individual must pay. Variables for car insurance may include the driver’s age, previous driving history, car type and age of the vehicle.

Another example of a financial product requiring actuarial analysis is an annuity. Financial companies offering annuities invest an investor’s scheduled payments in a portfolio of investments with varying risk levels and returns. Annuity products promise to payout scheduled payments to investors after a specified timeframe and are usually used for retirement. Annuity fund managers must ensure that their portfolio of assets is adequately available for paying out annuity payments when they become due. They invest in a variety of market investments to earn a return for their investors while also promising to make minimum payments in the product’s payout phase.

For a broader example, investors can also look to pension plans. Pension plans manage a broad portfolio of assets and invest across various risk levels to earn a return while also promising a payout in retirement. Pension plans are often an employee benefit. These plans are typically managed by an investment board conducting actuarial analysis on investments and payouts in order to ensure that plan participants are paid appropriately.