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What is an Actuary?
In a nutshell, the actuary is the person or group of persons who works with complicated formulas to determine what premium your life or health insurance company needs to charge.
Actuarial science is a complex mathematical science that dates back to 17th century when mathematicians and scientists in several European countries became fascinated by the scientific aspects of probability. Prior to this time, some groups existed that attempted to provide some form of life insurance, burial expense provision, or life annuities—an early attempt to create a retirement plan. Deciding what premium a person needed to pay was extremely difficult; most groups failed and fell into obscurity in just a few years.
Prior to the development of computers, actuaries had to use long formulas and pages of tables to calculate the likelihood of any single event happening to a specific group of people. While it was not possible to pinpoint a particular person for an event—such as death or catastrophic illness, the 20th century brought the study of probability, statistics, economics, and financial theory together to form a precise and accurate actuarial science.
The calculations of the actuaries thus allow an insurance company to predict, with surprising accuracy, the likelihood of the occurrence heart disease, diabetes, stroke, cancer, Alzheimer's Disease, and many other chronic ailments among a particular group of people who have something in common—such as living in a certain area, or having a family history of illness.
Today's actuaries have an even more challenging job than those of the 19th and 20th centuries due to cultural changes, a global interaction among people who at one time would have had no chance of contact, and the extreme variation in life styles. Fortunately for them, calculations that once would have taken months to work out can now be accomplished in seconds with the aid of computers and calculators.
The work of an actuary is beneficial to both the consumer and the company, although it may seem to be more for the protection of a company. The ability to accurately predict the likelihood of a particular health event occurring within a certain group (called cohort) of people is supposed to ensure that premiums will be assessed fairly based on the risk to the company. Companies do, however, have the ability to select their own target groups and establish premiums based on the actuarial tables specific to that group. Thus, a group of seniors in a particular geographic area will be more likely to have heart disease than a similar age group in a different geographic area. These differences lead to widely differing premiums in different parts of the country. If they chose a different grouping method—such as economic status or education without regard to age, for example—the necessary premiums would be radically different.
Modern companies use the finely tuned actuarial calculations to both avoid undesirable risk, determine the amount of money they must keep available for paying claims, and to estimate the profits that will be available to share holders. Consequently, fewer health insurance companies go bankrupt today, and few actuaries have to worry about being out of work.