Insurance Explained – Actuaries

August 25, 2021

Ever wonder how insurance companies work? As a consumer, the insurance company only appears when a claim needs to be filed, or a reimbursement is due. In an effort to become more educated consumers, here’s a look at what goes on behind the scenes in an insurance company, starting with actuaries.

Actuaries are the backbone of risk management. An actuary uses statistical and mathematical models as well as finance principles to understand risk. If there’s anything to understand about insurance companies, it’s that their products are made to cover the unplanned risk of life, which is exactly what actuaries are calculating. When insurance companies ask all those prerequisite questions like age, personal information, and the amount of coverage you need, it’s to give actuaries data to work with in calculating premiums. That is also why some benefits are “guarantee issue”. This means insurance companies are going to insure you no matter the likelihood of something happening.

An important and high-level aspect of actuarial work is ensuring the data is also reasonable. Regulations can change or changes beyond human control can affect the data and influence whether past data will still be an accurate picture of what is to come. In an average workday an actuary will find the timing of when a random event will occur and how much money should be invested now to cover that random event in the future. This requires a lot of past data to see where trends happen. This is why self-funded plans are revolutionary because it means a business owner has access to past data trends. And as we see with actuaries, the power of past information can help predict future trends. A business owner can be more informed about where funds are being spent, then make efforts to either curb the spending or better prepare for those expenses. Premiums can be tailored more specifically to the employees in a company.

Next time Open Enrollment rolls around and you see those premium rates, you’ll have a better idea of where those numbers are coming from and how they are calculated.