actuarial science


  • [citation needed] • 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.

  • One could now set up an insurance scheme to provide life insurance or pensions for a group of people, and to calculate with some degree of accuracy how much each person in
    the group should contribute to a common fund assumed to earn a fixed rate of interest.

  • The strategies are greatly influenced by short-term and long-term bond rates, the funded status of the pension and benefit arrangements, 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.

  • This requires estimating future contingent events, such as the rates of mortality by age, as well as the development of mathematical techniques for discounting the value of
    funds set aside and invested.

  • [citation needed] Actuaries in criminal justice[edit] There is an increasing trend to recognize that actuarial skills can be applied to a range of applications outside the
    traditional fields of insurance, pensions, etc.

  • [3] Subfields Life insurance, pensions and healthcare[edit] 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.

  • When benefit changes occur, old and new benefit plans have to be blended, satisfying new social demands and various government discrimination test calculations, and providing
    employees and retirees with understandable choices and transition paths.

  • [13] Today, the profession, both in practice and in the educational syllabi of many actuarial organizations, is cognizant of the need to reflect the combined approach of tables,
    loss models, stochastic methods, and financial theory.

  • [9] Actuarial science related to modern financial economics[edit] Traditional actuarial science and modern financial economics in the US have different practices, which is
    caused by different ways of calculating funding and investment strategies, and by different regulations.

  • This led to the development of an important actuarial concept, referred to as the present value of a future sum.

  • [10] As a result, actuarial science developed along a different path, becoming more reliant on assumptions, as opposed to the arbitrage-free risk-neutral valuation concepts
    used in modern finance.

  • Certain aspects of the actuarial methods for discounting pension funds have come under criticism from modern financial economics.

  • [2] The study used five key criteria to rank jobs: environment, income, employment outlook, physical demands, and stress.

  • [citation needed] In the reinsurance fields, actuarial science can be used to design and price reinsurance and retrocession arrangements, and to establish reserve funds for
    known claims and future claims and catastrophes.

  • The computations of life insurance premiums and reserving requirements are rather complex, and actuaries developed techniques to make the calculations as easy as possible,
    for example “commutation functions” (essentially precalculated columns of summations over time of discounted values of survival and death probabilities).

  • [20] Early actuaries[edit] James Dodson’s pioneering work on the long term insurance contracts under which the same premium is charged each year led to the formation of the
    Society for Equitable Assurances on Lives and Survivorship (now commonly known as Equitable Life) in London in 1762.

  • [5] Actuarial science also aids in the design of benefit structures, reimbursement standards, and the effects of proposed government standards on the cost of healthcare.

  • One notable example is the use in some US states of actuarial models to set criminal sentencing guidelines.

  • At the same time there was a rapidly growing desire and need to place the valuation of personal risk on a more scientific basis.

  • The divergence is not related to the use of historical data and statistical projections of liability cash flows, but is instead caused by the manner in which traditional actuarial
    methods apply market data with those numbers.

  • [18] However, many of these earlier forms of surety and aid would often fail due to lack of understanding and knowledge.

  • The current debate now seems to be focusing on four principles: 1. financial models should be free of arbitrage 2. assets and liabilities with identical cash flows should
    have the same price.

  • A similar study by U.S. News & World Report in 2006[needs update] included actuaries among the 25 Best Professions that it expects will be in great demand in the future.

  • The science has gone through revolutionary changes since the 1980s due to the proliferation of high speed computers and the union of stochastic actuarial models with modern
    financial theory.

  • In the early twentieth century, actuaries were developing many techniques that can be found in modern financial theory, but for various historical reasons, these developments
    did not achieve much recognition.

  • These long term coverages required that money be set aside to pay future benefits, such as annuity and death benefits many years into the future.

  • Many other life insurance companies and pension funds were created over the following 200 years.

  • 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.

  • Actuarial science often helps to assess the overall risk from catastrophic events in relation to its underwriting capacity or surplus.

  • Contemporary life insurance programs have been extended to include credit and mortgage insurance, key person insurance for small businesses, long term care insurance and health
    savings accounts.

  • [citation needed] Applications to other forms of insurance[edit] Actuarial science is also applied to property, casualty, liability, and general insurance.

  • [6] • In the pension industry, actuarial methods are used to measure the costs of alternative strategies with regard to the design, funding, accounting, administration, and
    maintenance or redesign of pension plans.

  • Finally, funding schemes have to be developed that are manageable and satisfy the standards board or regulators of the appropriate country, such as the Financial Accounting
    Standards Board in the United States.

  • [14] However, assumption-dependent concepts are still widely used (such as the setting of the discount rate assumption as mentioned earlier), particularly in North America.


Works Cited

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2. ^ Needleman 2010.
3. ^ Nemko 2006.
4. ^ Hsiao 2001.
5. ^ Hsiao 2004.
6. ^ CHBRP 2004.
7. ^ Silver & Chow-Martin 2002.
8. ^ Harcourt 2003.
9. ^ Nieto & Jung 2006, pp. 28–33.
10. ^ Whelan 2002.
11. ^ Bühlmann 1997,
pp. 169–171.
12. ^ D’Arcy 1989.
13. ^ Economist 2006.
14. ^ Feldblum 2001, pp. 8–9.
15. ^ Moriarty 2006.
16. ^ Thucydides.
17. ^ Johnston 1932, §475–§476.
18. ^ Loan 1992.
19. ^ Jump up to:a b Faculty and Institute of Actuaries 2004.
20. ^
Halley 1693.
21. ^ Lewin 2007, p. 38.
22. ^ Ogborn 1956, p. 235.
23. ^ Bühlmann 1997, p. 166.
24. ^ Slud 2006.
25. ^ Hickman 2004, p. 4.
26. ^ Michelbacher 1920, pp. 224, 230.
27. ^ Bühlmann 1997, p. 168.
28. ^ MacGinnitie 1980, pp.
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Harold Whetstone (1932) [1903]. “Burial Places and Funeral Ceremonies”. The Private Life of the Romans. Revised by Mary Johnston. Chicago, Atlanta: Scott, Foresman and Company. pp. §475–§476. LCCN 32007692. Retrieved 2006-06-26. Early in the Empire,
associations were formed for the purpose of meeting the funeral expenses of their members, whether the remains were to be buried or cremated, or for the purpose of building columbāria, or for both….If the members had provided places for the disposal
of their bodies after death, they now provided for the necessary funeral expenses by paying into the common fund weekly a small fixed sum, easily within the reach of the poorest of them. When a member died, a stated sum was drawn from the treasury
for his funeral….If the purpose of the society was the building of a columbārium, the cost was first determined and the sum total divided into what we should call shares (sortēs virīlēs), each member taking as many as he could afford and paying
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& Select Mortality” (PDF). Actuarial Mathematics and Life-Table Statistics (PDF). pp. 149–150. Retrieved 2006-06-28. The Commutation Functions are a computational device to ensure that net single premiums…can all be obtained from a single table
lookup. Historically, this idea has been very important in saving calculational labor when arriving at premium quotes. Even now…company employees without quantitative training could calculate premiums in a spreadsheet format with the aid of a life
27. Thucydides (1994–2009) [c. 431 BCE]. “VI – Funeral Oration of Pericles”. History of the Peloponnesian War. Translated by Richard Crawley. Greece. Retrieved 2006-06-27. My task is now finished….those who are here interred have received
part of their honours already, and for the rest, their children will be brought up till manhood at the public expense: the state thus offers a valuable prize, as the garland of victory in this race of valour, for the reward both of those who have
fallen and their survivors.
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