5 Ways That Actuaries Impact Your Insurance Coverage And Premiums

5 Ways That Actuaries Impact Your Insurance Coverage And Premiums

There is a quote attributed to Benjamin Franklyn that states, “The only certainties in life are death and taxes”, but many would argue that, given its influence in all areas of our lives, insurance should be added too, and if so, then it brings into the limelight the role of actuarial services within the insurance industry.

If you are wondering what actuarial services are, they are rendered by professionals known as actuaries, and the role of an actuary is to use statistical and mathematical models to establish what the likelihood is of particular future events such as accidents, natural disasters, specific crimes like burglary, and deaths from specific illnesses, to name but a few.

What an actuary does within the insurance industry covers many tasks, but in the main, they help insurance companies to determine what the risks are relating to the coverage they provide versus the premiums they charge their customers and clients. Read on, and you will learn more about how an actuary influences many aspects of the insurance policies which you hold.

#1 – Actuaries Assist Insurance Companies In Managing Their Risk

Simple logic will tell you that if an insurance company underestimates the risks it is liable for and thus pays out more in claims than it collects in premiums, it will quickly go out of business. This is addressed through the work of actuaries in predicting the likelihood of potential claims. Via this risk management, an insurance company can better remain profitable by reducing claims volumes and amounts based on the calculated risks.

#2 – Actuaries Advise Insurance Companies On Setting Their Premiums

Insurance premiums vary greatly based on who is being insured and the coverage provided. However, another crucial factor in an insurance company specifying its premiums is the work done by an actuary. For example, they will use complex statistical models to determine which groups of drivers are more likely to make claims than others, and thus the premiums charged to that driver group will be higher.

Other examples include greater risks within a particular location that is prone to hurricanes, and therefore, the household insurance premiums for those living there being higher, and activities deemed as having a greater risk of injury, such as skiing, with higher premiums for accidental insurance for those participating.

#3 – Actuaries Help Insurance Companies Set Their Coverage Limits

A coverage limit is a maximum that an insurance company will pay out for any specific circumstance within a policy, and given that some of these can be extremely high values, it is essential they set them according to what an actuary advises relating to risk. For example, if the actuary’s risk models calculate that the maximum loss from a burglary is $100,000, then the insurance company will set its coverage limit at or just below that amount.

#4 – Actuaries Play A Role In Claims Management

Actuaries will identify trends or patterns, predict what claims will cost long term, help claims adjusters calculate payouts, and also advise insurance companies on what changes they should make to their policies to lower the likelihood and value of future claims. Actuarial services also highlight potential fraudulent and suspicious activities so that future fraudulent claims can be both identified and avoided.

#5 – Actuaries Aid Insurance Companies In Developing New Insurance Products And Policies

Insurance companies are always seeking ways to introduce new policies and products, and again, they will turn to actuaries to help them with those aims. Given that risk is a huge component within insurance policies, actuarial services will help insurance companies develop products that have low risk and are thus likely to be more profitable and, conversely avoid creating policies with high financial risks.