Many companies are awash in various finance types who summarize and present all sorts of financial information. Large corporations and companies in certain industries (insurance, financial sector, accounting firms) commonly have another role in finance for actuarial analysis. So what do actuarial analysts do?
The actuarial analyst is a role typically used in a company to perform different types of analysis and commonly work in areas related to assessing risk probabilities around financial gains and losses. Pension contributions, risk assessments, and insurance premiums are all areas where actuarial analysts commonly contribute to organizations. The complex nature of the transactions and estimates related to these issues are the reason why specialists are commonly used. Average accountants and financial analysts don’t really have the skill set to work in these specialist areas.
The duties can vary from industry to industry depending on what the specific focus is for that industry. In the insurance sector actuarial analysts will typically work on analyzing insurance rates and probability factors to determine the appropriate costs for different types of policies. In the finance sector they will typically work in analyzing the different strategies needed to adapt do different risk scenarios that will be faced.
With large corporations the actuarial analyst will commonly assist leadership with decision making in certain scenarios where the risks are relatively complex to estimate. Additionally, financial forecasting is another area where actuarial analysts contribute as there can be many different factors to consider (especially in longer term scenarios).
The last common are for employment for actuarial analysis is in the government sector. Government budgets and projects are often have many long term considerations and factoring them into a financial projection can be very difficult. Doing so without a specialist would be extremely difficult. Additionally, governments in many countries have some of the largest financial obligations in terms of retirement funds and health care obligations. Accounting for these can be incredible complex and is somewhere actuarial analysts fit in. Unfortunately in this role political considerations can make it difficult for actuaries to do their job effectively, as some of the risk parameters will be given to them as opposed to simply allowing them to do their jobs.
Actuarial Analysts in Investing
Actuarial analysts in financial institutions can have a major impact on investment decision making, where the outputs of their work can have a significant impact on senior management.
So what do actuarial analysts do in an investing context? The concept of risk is central to investment decision making, incurring higher risk comes with the chance of higher returns, and vice versa. While that’s good to know in a general sense, how do you quantify that and use it to make the best decisions? Ideally from an investment perspective you want to find investments you can make where the risk is relatively low in terms of the potential gains, and avoid situations where the quantifiable risk far outweighs any potential gains.
This is where actuarial analysis come in. They work on creating complex financial models to provide actual quantifiable estimates related to the risks of different investment opportunities. By comparing those risks to the possible returns (also derived from complex financial models) the analysts can provide rankings or ratings of different investment opportunities. This allows management to make somewhat more informed decisions and also better understand the risks related to the different decisions they make.
The only caveat is that there is no single “winning” model here. No one has learned to be the market as at the end of the day all of these complex financial models are based on estimates and projections that may or may not reflect what actually happens. This doesn’t mean the efforts are wasted, however, as making a somewhat informed decision is still far better than simply throwing darts at a stack of company profiles.