Numbers That Protect
Those who take out income protection insurance rarely ask how the premium is calculated. Why do occupation or age play a role? Why is a distinction made between serious illness and temporary incapacity for work?
And those who book travel cancellation insurance hardly consider how the provider factors in the possibility that a volcanic eruption in the Canary Islands could cancel all flights simultaneously.
Behind these questions lies a field that is as precise as it is multifaceted: actuarial science, and the people who master it are called actuaries.
What is an actuary?
An actuary is an expert with a deep understanding of statistics, probability theory, financial theory, and legal frameworks. In Germany, the professional title is recognized by the German Actuarial Association (DAV); the training includes a degree in (business) mathematics or statistics and a multi-stage examination program.
Actuarial Science: The Foundation
Actuarial science deals with the assessment and pricing of risks. Its basic premise sounds simple: Insurance works because many policyholders collectively bear a small number of losses. But how many losses occur, and how high are they?
In travel cancellation insurance, for example, actuaries ask: How frequently do policyholders cancel their trips, for what reasons, during which travel periods—and how do events like severe weather or war, which can trigger numerous cancellations, develop?
To answer these questions, actuaries use statistics, claims databases, or survival models—depending on the product. The goal: A tariff that can remain valid in the long term—neither too expensive for the customer nor unprofitable for the insurer.
Developing, Adjusting, and Monitoring Tariffs
The core of actuarial work is the calculation of new products and the review of existing ones. In addition to the expected claims volume, actuaries also consider costs, safety margins, and regulatory requirements.
Because a tariff, once calculated, is not a permanent fixture. Actuaries continuously monitor whether actual performance meets expectations. For example, if diagnosis rates for certain serious illnesses increase, or if a business partner suddenly has three times as many policyholders due to a merger, the premium must be reviewed and adjusted if necessary.
Looking to the Future
Insurance companies must set aside reserves for claims that have already occurred but are not yet settled. When calculating an income protection insurance policy, such as one taken out after financing, this means: How long is the obligation to pay benefits expected to last in the event of the insured's illness, and what loan amount will still be outstanding during this period? Actuaries use disease progression models and statistical recovery rates to determine the necessary level of these reserves.
When a new product idea is developed, such as a modular travel insurance policy that can be individually configured online, actuaries are involved from the outset. They assess feasibility, define insurable risks, and develop the mathematical framework on which the product is built.
Legal Framework
Actuaries prepare key regulatory reports, assess risks and solvency, even under stress scenarios, and participate in product testing. They bear responsibility both internally and to regulators and have a legally enshrined key role.
What distinguishes actuaries from pure mathematicians is their influence on strategic decisions. Their calculations determine whether a product is profitable, whether a company will enter a new segment, or whether an existing portfolio needs to be streamlined. They work closely with risk management, sales, finance, and IT—translating complex models into understandable recommendations for action.
The tasks of an actuary extend far beyond calculations. Actuaries combine mathematical precision with economic thinking, regulatory knowledge, and strategic judgment. Or, put another way:
Actuaries translate uncertainty into numbers—and numbers into prices.