23 May 2022
3 Min Read

What Do Insurance Actuaries Actually Do? Why Should it Matter to Insurance Buyers?

The role of insurance actuaries isn’t very well understood outside of the industry, but actuaries play a crucial part in several areas relevant to consumers. The functions of underwriters and actuaries are related, but not identical, and often confused.

Actuarial duties broadly fall into three primary areas: reserving, pricing, and capital modelling. This article will look at those areas in-depth and further explain why it’s important for insurance buyers to know about actuarial duties, and even better, find a good actuary to be “on their side” for insurance premium negotiations.

The Job of an Actuary

Insurance, as a concept, relies on careful mathematical modelling and analysis to function. Insurance companies need to charge a premium proportional to the risk of an insured asset to generate returns. If the risks aren’t assessed properly, an insurer may over- or under-charge for a premium. It can also lead to over- or under-insured assets for the consumer.

Reserving and Pricing

An actuary’s job involves using advanced mathematical techniques to correctly assess the outcome of insurance liabilities and thereby the provisions necessary for reporting purposes. In turn, actuaries use that information to calculate premiums by estimating claim frequency and claim severity of an average claim (or average claim cost) similar to the one that is being underwritten. This provides an approximation of expected maximum losses and generates a risk profile of that insurance buyer, i.e. what claims might be expected, what costs and expenses is the insurer likely to incur and how much risk is being taken by the shareholders, so that a premium commensurate with the risk can be charged.

Capital Modelling

Furthermore, actuaries have an important internal function for insurance companies: capital modelling. Essentially, insurance companies are in the business of forecasting that an insured asset will remain unchanged and safe. However, they need to be prepared for that forecast to be wrong (and hence get more claims than expected). Thus they need sufficient capital (solvency) in all but the most extreme scenarios.

Actuaries also analyse the liability of both assets and insurers to produce expected capital and solvency needs. One of the most important aspects is having the capital to cover claims as they arise. Inadequate actuarial analysis can lead to disastrous consequences for insurers, including the intervention of insurance regulators.

Why Actuaries Matter to Insurance Buyers

By now, the duties of actuaries should be relatively clear, but how do they affect insurance buyers? In short, actuaries are the primary force driving premium pricing, so any premium negotiation will hinge on actuarial reviews. Once a premium receives internal actuarial sign-off within the insurer, it’s difficult to negotiate different terms without appealing to the actuary’s decision.

Corporate insurance renewals can often get pretty complicated, and the size of an organisation affects how long and involved the renewal process will be. Actuaries assess the renewal profile for an organisation based on everything that happened in the previous insurance period, but more importantly, what could happen in the next insured period.. Therefore, understanding what actuaries will look for plays a key part in avoiding/minimising IPT (insurance premium tax) – legally!

Changes Under Solvency II

The Solvency II Directive changes a variety of guidelines to be used in the valuation of technical provisions for insurance and reinsurance undertakings. The guidelines are broadly categorised into data quality requirements, segmentation and unbundling requirements, and methodological requirements.

The Solvency II Directive is a way to unify the EU insurance market and provide extended consumer protections, but it has drawn criticism regarding the demanding nature of the legislation. Premium setting practices change in many areas and the consequences of the Directive are yet to fully materialise.

Looking Ahead

It’s difficult to predict how Brexit will affect the application of Solvency II to UK insurers. The actuarial framework has changed substantially in the last few years – Insurance Buyers would be well advised to understand “exactly where their premiums come from” by having a good insurance actuary “on their side”.