Actuaries turn the question of when people will die into a price
Selling someone a life insurance policy or a pension means promising money decades ahead, on a date nobody knows. Actuarial science grew up in the late 1600s to make that promise affordable and safe, by estimating how many people of each age would die each year and how much set-aside money would grow meanwhile.
Two problems had to be solved together. First, mortality: tables showing the chance of death at each age, so an insurer could predict roughly how many burial, life or annuity payouts would fall due in a given year. Second, time: a sum payable in thirty years is worth less today, because money set aside now can be invested and earn interest. Combining those gave the field one of its core ideas, the present value of a future amount, and with compound interest it produced the arithmetic behind annuities and endowment policies.
The same toolkit spread widely. In health cover, actuaries study rates of illness, disability and births, and how people actually use treatments. Pension planners weigh bond rates, workforce ageing and tax rules to decide how much an employer must pay in. Property insurers price fire, theft and car policies renewed every year, and even one-off risks such as a satellite launch, while reinsurers who insure the insurers use it to cost out catastrophes. The US Social Security Administration keeps an Office of the Chief Actuary to forecast its retirement and disability funds.
For centuries the models were deterministic, fixed formulas producing tables and premiums. Since the 1980s, fast computers and randomness-based stochastic models, merged with modern financial theory, have transformed the work. That merger was overdue. Early twentieth-century actuaries had worked out techniques later found in finance but got little credit, and the profession drifted toward relying on assumptions. One traditional method, for instance, lets a change in investment mix alter the value placed on a pension's obligations, something financial economists reject.
Becoming an actuary means passing a demanding run of exams in probability and prediction. The reward seems worth it: in 2010 the job site CareerCast ranked it the best job in the United States, judging environment, income, outlook, physical demands and stress.
Source: Actuarial science
