Actuarial science

Actuarial science applies mathematical and statistical methods to finance and insurance, particularly to the assessment of risk. Actuaries are professionals who are qualified in this field through highly competitive examinations and experience.

Actuarial science includes a number of interrelating disciplines, including probability and statistics, finance, and economics. Historically, actuarial science used deterministic models in the construction of tables and premiums. The science has gone through revolutionary changes during the last 30 years due to the proliferation of high speed computers and the synergy of stochastic actuarial models with modern financial theory (Frees 1990).

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. Contempory life insurance programs have been extended to include credit and morgage insurance, key man insurance for small businesses, long term care insurance and medical savings accounts (Hsiao 2001).

In health insurance and corporate benefit programs in the USA, and social insurance, actuarial science focuses on the analyses of rates of disability, morbidity, mortality, fertility and other contingencies. The effects of the geographical distribution of the utilization of medical services and procedures, and the utilization of drugs and therapies, is also of great importance. These factors underly the development of the Resource-Base Relative Value Scale (RBRVS) at Harvard in a multi-disciplined study. (Hsiao 1988) Actuarial science also aids in the design of benefit structures, reimbursement standards, and the effects of proposed governemnt standards on the cost of healthcare (cf. CHBRP 2004).

In the pension industry, actuarial methods are used to measure the costs of alternative strategies with regard to the design, maintenance or redesign of pension plans. The strategies are greatly influenced by collective bargaining; the employer's old, new and foreign competitors; the 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 equally importantly, both the short and long term financial and economic trends. It is common with mergers and acquisitions that several pension plans have to be combined or at least administered on an equitable basis. When benefit changes occur, old and new benefit plans have to be blended, satisfying the demands of political correctness and various government discrimination test calculations, and providing employees and retirees with understandle choices and transition paths. Benefit plans liabilities have to be properly valued, reflecting both earned benefits for past service, and the benefits for future service. Finally, funding schemes have to be developed that are manageable and satify the Financial Accounting Standards Board (FASB).

In social welfare programs, the Office of the Chief Actuary (OCACT), Social Security Administration plans and directs a program of actuarial estimates and analyses relating to SSA-administered retirement, survivors and disability insurance programs and to proposed changes in those programs. It evaluates operations of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund, conducts studies of program financing, performs actuarial and demographic research on social insurance and related program issues involving mortality, morbidity, utilization, retirement, disability, survivorship, marriage, unemployment, poverty, old age, families with children, etc., and projects future workloads. In addition, the Office is charged with conducting cost analyses relating to the Supplemental Security Income (SSI) program, a general-revenue financed, means-tested program for low-income aged, blind and disabled people. The Office provides technical and consultative services to the Commissioner, to the Board of Trustees of the Social Security Trust Funds, and its staff appears before Congressional Committees to provide expert testimony on the actuarial aspects of Social Security issues.

In the property and casulaty insurance fields, which protect against losses like those caused by hurricanes as well as automobile accidents, actuarial science tries to forecast aggregate losses to persons and property.

In reinsurance, actuarial science attempts to predict the behavior of large blocks of policies affecting a particular cedant company. This can be very different from cedant to cedant, as it depends strongly on the insureds claims handling and underwriting abilities.

Many universities have undergraduate and graduate degree programs in actuarial science.

Bibliography

• Charles L. Trowbridge (1989). "Fundamental Concepts of Actuarial Science" (PDF). Revised Edition. Actuarial Education and Research Fund. Retrieved on 2006-06-28.

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