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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10. ^ Whelan 2002.
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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
table.
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Photo credit: https://www.flickr.com/photos/traveloriented/13976191172/’]