Anyone who takes out income protection insurance probably rarely wonders how the premium is calculated. Why do profession or age matter? Why is there a distinction between a serious illness and temporary incapacity for work?
And anyone who books travel cancellation insurance hardly thinks about how the provider factors in that a volcanic eruption in the Canary Islands could cancel all flights at once.
Behind these questions lies a field that is as precise as it is complex: 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, financial theory, and legal frameworks. In Germany, the professional title is recognized by the German Actuarial Society (DAV); training includes a degree in (business) mathematics or statistics and a multi-stage examination program.
Insurance Mathematics: the Foundation
Insurance mathematics deals with the assessment and pricing of risks. It sounds simple at its core: insurance works because many policyholders together cover a few claims. But how many claims occur and at what amounts? For example, in trip cancellation insurance, the actuarial team asks: How often do people cancel their trips, for what reasons, during which travel periods - and how do events like extreme weather or wars, which cause a large number of cancellations?
Actuaries use statistics, claims databases, or survival models for this – depending on the product. The goal: a rate that can be valid in the long term – not too expensive for the customer, and not running at a loss for the insurer.
Developing, adjusting, and monitoring rates
The core of actuarial work is calculating new products and reviewing existing ones. Besides the expected claim volume, the actuary also considers costs, safety margins, and regulatory requirements. After all, a rate that has been calculated once isn’t set in stone. Actuaries continuously monitor whether the actual results match expectations. For example, if diagnosis rates for certain serious illnesses rise, or if a business partner suddenly has three times as many insured people due to a merger, the rate needs to be reviewed and possibly adjusted.
A Look into the Future
For claims that have already occurred but are not yet settled, insurance companies need to set aside reserves. When calculating an income insurance, for example, one that is taken out after a loan, this means: How long is there likely to be a payment obligation in the event of the insured person getting sick, and what loan amount is still outstanding during this period? Actuaries use illness progression models and statistical recovery rates to determine how high these reserves need to be.
When a new product idea comes up, like a modular travel insurance that can be customized online, actuaries are involved from the very beginning. They check feasibility, define insurable risks, and develop the mathematical framework that the product is built on.
Legal Framework
Actuaries create key regulatory reports, assess risks and solvency even under stress scenarios, and are involved in product reviews. They carry responsibility both internally and towards regulators and have a legally established key role. What sets actuaries apart 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 - and translate complex models into actionable insights. The tasks of an actuary go far beyond just doing calculations. Actuaries combine mathematical precision with economic thinking, regulatory knowledge, and strategic judgment.
Or in other words: actuaries turn uncertainty into numbers - and numbers into prices.