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How to Leverage Actuarial Analysis for Risk-Related Decision-Making

Actuarial Profession
by Jan DeClue
Analysts reviewing data at a desk.
Analysts reviewing data at a desk.

Businesses of all types deal with financial risk and uncertainty that can lead to short- and long-term implications. To mitigate the impact of disruption and other events on a firm's finances, organizations need to develop a financial plan and policies for minimizing the cost of those risks.

Actuarial analysts specialize in helping professional services firms improve their risk-related decision-making capabilities through the discipline of actuarial science.

This is everything you should know about actuarial analysis including what it is, what analysts do and how organizations can leverage these professionals to better plan for long-term financial success.

What Does an Actuarial Analyst Do?

Actuarial analysts use mathematics, statistics and financial theory to help professional services firms analyze data, calculate probability and make predictions. All in all, an actuary enables an organization to make more informed decisions about risk management, financial planning and other strategic scenarios.

Most commonly, actuaries work within insurance companies and other finance-forward organizations. Within those industries, they assist with reviewing premiums, analyzing losses, assessing rates and more. However, actuarial analysis is a major key in many professional services away from insurance and finance. Examples of other industries where actuaries work are:

  • Healthcare: In this industry, actuaries analyze medical data, utilization patterns and costs to assist in pricing health insurance policies, estimating medical claim reserves and predicting healthcare trends.
  • Consulting: In consulting firms, actuaries provide expertise to clients across different industries, as it relates to risk management, financial planning, regulatory compliance and strategic decision-making.
  • Government: Actuaries commonly design and assess government insurance programs, like Social Security and Medicare. Beyond helping manage these programs, actuaries also ensure their compliance with regulatory laws.
  • Higher education: Within colleges and universities, actuaries can provide expertise for tuition pricing. They can help an institution balance its financial needs and affordability for students.

What Is Actuarial Science?

Actuarial science is the name given to the discipline and field of study of actuarial analysis. It encompasses all of the financial theories, mathematics and techniques used by actuaries to do their job effectively.

Key aspects of actuarial science include:

  • Risk assessment.
  • Probability and statistics.
  • Financial theory.
  • Business strategy.
  • Asset management.
  • And more.

The Value Of Actuarial Analysis

Qualified actuaries are invaluable to professional service firms. They provide organizations with data-driven insights into their risk exposure that help them make more informed decisions across their business, and assist with long-term financial planning.

This is mainly accomplished through reviewing and developing policies that help organizations minimize the cost of risk across the board. However, there are many more advantages that professional service firms gain through working with qualified actuaries that go beyond just enhanced decision-making and better risk management:

  • Better adaptability: Regularly monitoring and analyzing risk factors allows firms to quickly adapt to changing market conditions and emerging risks. Such agility also creates some headway to prepare for potential challenges or to take advantage of new opportunities.
  • Financial stability: Helping firms assess their exposure to various risks, such as market fluctuations, regulatory changes and unexpected events, allows them to plan for contingencies and maintain a resilient financial position.
  • Clearer long-term planning: With the knowledge at hand that actuaries provide, firms are better equipped to make decisions that align with their business goals.
  • Optimized investments: Assessing the risk and return potential of different asset classes is a large part of what actuaries do. Armed with these assessments, firms can adjust their investment portfolios to suit their risk tolerance.
  • Competitive edge: Effectively managing risks and demonstrating a strong understanding of financial exposure makes it easier for clients, partners and investors to trust and engage with a firm.

These benefits, and more, are the results of robust, data-driven and scientific actuarial processes that have a history of effectiveness and success for professional services firms in a variety of industries. But, how exactly do actuaries produce these benefits?

How Do Actuarial Analysts Help Professional Services Firms Make Risk-Related Decisions?

Actuarial analysts use a variety of tactics, formulas and models within the discipline of actuarial science to help organizations quantify risk, prepare for the future and increase their risk tolerance and resilience.

The list of expertise that qualified actuaries possess is serviceable, however, there are a handful of key responsibilities that most actuaries carry out in their day-to-day work lives within a professional services firm.

Quantifying Risk

Actuarial analysts use mathematical and statistical techniques to measure the potential impact of various risks on a firm's financial position. Examples include operational risk, liability risk, insurance risk and even environmental risk, such as the impact of climate change on business.

To do this, actuaries use specific risk assessment techniques, such as:

  • Applying optimism bias.
  • Conducting single-point probability analysis.
  • Quantitative risk analysis (QRA).

Data Analysis

This method involves analyzing large volumes of data to identify patterns, trends and potential risks. By examining historical data and understanding how different variables are correlated, actuaries can provide insights into the likelihood of certain events occurring while estimating their total potential financial consequences.

Regulatory Compliance

Many industries are subject to regulations that require organizations to maintain certain levels of financial stability and risk management. Actuaries help professional services firms ensure compliance with these regulations by assessing their current financial position and providing expert recommendations to help them meet any regulatory requirements that they are upheld to.

Life Insurance Planning

Insurance plays a critical role in managing risks associated with liability, property damage, employee benefits and more. Actuaries assist in determining appropriate insurance coverage levels for employees and negotiating premium amounts to balance business needs and affordability for insureds.

Pension and Retirement Planning

Actuaries have a large hand in designing and administering pension plans and retirement benefits for organizations. They ensure that pension funds are adequately financed to meet future pension obligations. Actuaries may also provide expert guidance on pension contribution levels and benefit structures. Similar to life insurance planning, one of the main goals is to balance business and legal requirements with affordability.

Predictive Modeling

Predictive models help organizations anticipate future outcomes based on historical data and any relevant variables. Qualified actuaries use this strategy to make informed predictions about different scenarios, such as sales forecasting, customer behavior, financial market trends and more.

Professional services firms can use these models to be proactive and prepare for different situations so that they can plan accordingly.

Other Ways Actuaries Provide Support

Equipped with financial knowledge of their organization, actuaries often also provide more direct support to team members, stakeholders and more. It's not uncommon to see an actuary:

  • Providing testimony: Particularly relating to insurance companies, when testimony is needed in a lawsuit, an actuary can provide it. They have deep knowledge and inferences about an organization's finances, which often proves beneficial in a court of law.
  • Managing a team: A qualified actuary is often at a senior level within their organization's finance department. As such, they may be responsible for providing guidance, training and mentorship to other staff members.

Expert Actuarial Analysis with Lewis & Ellis

At Lewis & Ellis, our qualified and experienced actuaries provide outstanding support across many industries, including:

  • Regulatory compliance.
  • Life insurance and annuities.
  • Health care and health insurance.
  • Property and casualty insurance.
  • Regulatory agencies.
  • Life settlements.
  • Employee benefits.

Expert actuarial analysis is just an email or a phone call away. To better manage your risk and gain a comprehensive understanding of your business from an actuarial perspective, contact Lewis & Ellis today to get in touch with a qualified actuary.



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