In the insurance industry, we sell promises. If our customers pay the premium we request, we promise to pay them some amount of money in the future when (or if) something happens. They give us cash today, and we promise to pay them cash in the future under certain conditions. The more attractive promises we make, the more cash we can collect today. However, if we can’t keep the promises we make then very bad things happen. That’s why actuaries are involved. We make sure insurance companies can keep their promises.
That’s a big job! If the promises aren’t good enough then no business is sold and no premium is collected. The insurance company goes out of business. If the promises are too good then they can’t be kept and the insurance company goes out of business. The promises need to be just right.
How can actuaries handle this responsibility? We must make assumptions about the future and project the impact of those assumptions on the promises made by the insurance company. However, we know that our assumptions could turn out to be wrong. That is why we must test a range of assumptions to evaluate the risks inherent in the promises we make.
Computing facilities available today give us the ability to test lots of assumptions. That’s why some now say that the “super stars” of our profession are the Modeling Actuaries. The models we use are increasingly complex, and the results they produce are increasingly difficult to explain. However, we have no choice. There is only one practice worse than managing an insurance company with models and projections. That would be NOT managing an insurance company with models and projections.
The models and projections required of actuaries by regulators, rating agencies, investors, and managers are certain to continue to increase. As we do this work we must always remember – it’s all about the promises.