Insurance companies use actuaries to price the products they sell.  They know that better pricing means more profitable business, as well as more competitive rates.

Estimating just how much the company should set aside to pay for the policyholders' losses and other liabilities, including a provision for Incurred But Not Reported (IBNR) losses and expenses, is an important job for the actuary.  If the company sets aside too much, it unnecessarily reports lower profits.  If it does not set aside enough, the company could later run into problems making the payments.  “Actuaries are known by the company they keep – solvent” is an often-heard saying.  (Okay, maybe it is a common saying only among actuaries.)

Insurers also use actuaries to forecast loss payment timing - when and how much will likely be paid out for claims.  This enables the company to manage its cash flow and maximize its investment income.  Having too much cash means a loss of investment income, having too little cash to pay claims and expenses can cause serious problems.

Self-insured companies use actuaries to determine what funds they need to set aside to pay for those events for which they self-insure.  If a company sets aside too much capital for such events, they unnecessarily lose the use of such funds.  Setting aside too little means a future accounting period will be adversely affected by events of earlier accounting periods.  The actuary can also estimate the timing of such payouts, enabling prudent cash flow management.

The actuary can also assist the company in determining when it makes sense to self-insure, what excess insurance the company should carry and how much is reasonable to pay for such coverage.  The actuary, who prices insurance, can help the company determine whether or not the price it is paying is appropriate.  Of course, insurance companies use actuaries when they buy their own insurance, called reinsurance, to make sure they are getting a good value for their money.

Because they are experts in analyzing the likelihood and the financial costs of future events, actuaries are often asked to assist companies with their risk management activities.  Risk management is the process of analyzing a firm’s exposure to risk and determining how to best handle it.

The actuary’s ability to understand what data needs to be collected and how that data should be analyzed for such undertakings make them a valued member of the risk management team.  Viewing these risks across all aspects of the organization is called Enterprise Risk Management, a task for which the actuary is well suited.