Actuaries work with insurance and financial institutions to measure, manage and mitigate risk. Actuarial risk analysis examines assumptions such as the frequency of events, the severity of losses and the correlation between events. Actuaries analyse the risk and cost of these events, often building financial models and running risk analysis in tools such as Excel.
Risk in a lifetime
A life carries many risks, and the cost of life insurance is determined by your level of risk. Age, gender, smoking, occupation, medical history and hobbies can each carry a level of risk, and life insurance actuaries calculate how these factors affect a person’s mortality.
Risk in finance
Financial institutions face credit, market, interest-rate, equity, volatility, inflation, currency, operational, liquidity and reputational risk. Risk is the cumulative effect of uncertain events that could have a negative impact on an asset. It can be qualitative or quantitative, and actuaries use financial instruments to hedge a business against it.
Enterprise risk management
Enterprise Risk Management (ERM) is a top-down strategy to identify and assess risk across an organisation and prepare for potential losses, hazards and other threats to its operations and objectives. ERM sets how much risk the organisation is willing to take and aims to minimise the harmful effects of risk on its capital and earnings.
An actuary’s main responsibilities here include setting the company’s risk appetite and limits, building company models, identifying and planning for emerging risks, valuing risk, running risk-mitigation programmes and performing stress tests.
Actuaries are always calculating risk and the cost of uncertainty using advanced mathematical and statistical tools, making them the backbone of insurers, reinsurers, multinational corporations and investment companies.