‘Besides Allah/God, probably it is only an actuary who can predict the exact date and time one may die’
Unlike the physician, the role of the pharmacist is often relegated to a secondary slot when one has a chronic ailment. Suffice it to say, while the former typically engages in diagnostics and prescriptions of drugs, the latter is often involved in the preparation and dispensing of drugs to cure ailments.
The two are closely related and, therefore, not mutually exclusive. Akin to this, however, is the relationship between an actuary and an insurer. While, the actuary is involved in the design of products/policies based on such actuarial considerations as lifestyle, occupation, age, gender and health conditions, the insurer underwrites these policies in line with the actuarial parameters and with the complement of a sound marketing effort, so as to make a profit.
Who is an actuary?
An actuary is a professional who deals with the measurement and management of risks and uncertainties.
Given today’s complex financial environment, the role of actuaries cannot be overestimated, as they provide businesses with financial security systems evaluation, with a focus on their complexities and financial opportunities.
Thus, they typically apply mathematics to financial problems and evaluate their impact on businesses, both within the short and long terms.
Relevance of actuaries in insurance
Although it has a 17th century origin, the actuarial profession still remains relatively unknown, particularly in most developing economies. Indeed, many countries have fewer or no qualified actuaries.
Interestingly, there is a common joke that one can only become an actuary when s/he has five years or less to retire, but this only emphasises the difficulty in having certified actuaries.
Traditionally, the insurance and pensions industries are the main habitats of actuaries, but, lately, their services have extended into other financial services such as mortgage and banking.
Typically, actuaries engage in forecasting in order to determine the actual minimum premiums required to keep the schemes running. This not only helps to curtailing the phenomenon of ‘premium undercutting’ but also promotes competitive pricing and complex products development to meet the demands of the changing business environment.
Meanwhile, beyond the few insurers with resident actuaries, there are private consulting firms who also provide such services.
Role of the actuary in measuring insurance risk
Suffice it to say, insurance thrives on probabilities; hence most insurance policies provide protection against undesirable events such as death, fire, accidents, deepening personal financial crisis, etc.
Individuals with similar risk profiles may, therefore, be grouped and certain outcomes for them as a group may be predicted with some certainty.
This predictability, therefore, enables insurers to take on risks that are individually unpredictable, and spread the financial consequences across many policy holders with similar risk profile through the premiums charged.
Thus actuaries would measure the risks that are insured against (i.e. by individuals and groups) to determine their probabilities (or frequency) of occurrence in order to apply them (i.e. the probabilities) in varying calculations. For example, the probabilities of persons dying at particular ages can be detailed in a mortality table, which may then be used in calculating life insurance premiums and liabilities to policyholders.
Actuaries and asset and liability management
Often times, insurers place much premium on investments activities that are appropriate to the nature of their obligations; hence, they take steps to actively manage the relationship between assets and liabilities on an on-going basis.
The objective of asset and liability management (ALM) is to reduce the risk exposure that exists in the investment market to the insurer, particularly if the assets and liabilities are mismatched (e.g. where market conditions cause an increase in the value of liabilities and a decrease in the value of assets).
On a more positive note, asset and liability management can help an insurer to invest its assets more effectively and generate higher profits to ameliorate any future exposures.
Most insurers that practice ALM have established committees to oversee this activity and actuaries participate in the ALM committee together with investment managers, product line managers and financial officers.
Actuaries are often responsible for modelling the asset and liability cash flows and assessing the effects of various risk factors on the results. They develop techniques and measurement tools in order to track growth in investment.