Business Reference Guide: The Intricacies of Actuarial Science (PDF)

Seth M. Azria opens the collection with an essay on the theory of life insurance and the major types of insurance policies.
As he explains, “No [insured] member will know in advance whether they will receive more compensation than
the premiums paid or whether they will merely be paying for the losses of others in the group…Sharing economic
risk in this fashion is called the principle of risk distribution.” Carolyn Sprague moves on to describe the challenges
insurance companies face in maintaining sufficient capital and their resulting endeavors to increase equity capital and
disperse risk across an array of financial markets. Sprague also illuminates the issues surrounding the insurance of
pure risks such as terrorist attacks, catastrophic events, and pandemics, all of which provide limited historical data
with which to model an informed risk assessment. Heather Newton provides an overview of the financial strategies
of insurance companies, and she details the components of insurance company income, investment strategies, and
risk management techniques. In her essay on risk theory and credibility, Sprague bridges the overarching managerial
concerns of the insurance industry with the specific duties and responsibilities that actuaries have. While risk theory
examines the risks incurred to the insurer and to the overall insurance portfolios, credibility theory deals with calculated
risk and the maintenance of competitive premium rates.