---
title: "Actuarial science"
chunk: 2/3
source: "https://en.wikipedia.org/wiki/Actuarial_science"
category: "reference"
tags: "science, encyclopedia"
date_saved: "2026-05-05T03:56:11.921022+00:00"
instance: "kb-cron"
---

=== Applications to other forms of insurance ===
Actuarial science is also applied to property, casualty, liability, and general insurance. In these forms of insurance, coverage is generally provided on a renewable period (such as a yearly). Coverage can be cancelled at the end of the period by either party.
Property and casualty insurance companies tend to specialize because of the complexity and diversity of risks. One division is to organize around personal and commercial lines of insurance. Personal lines of insurance are for individuals and include fire, auto, homeowners, theft, and umbrella coverages. Commercial lines address the insurance needs of businesses and include property, business continuation, product liability, fleet/commercial vehicle, workers compensation, fidelity and surety, and D&O insurance. The insurance industry also provides coverage for exposures such as catastrophe, weather-related risks, earthquakes, patent infringement and other forms of corporate espionage, terrorism, and "one-of-a-kind" (e.g., satellite launch). Actuarial science provides data collection, measurement, estimating, forecasting, and valuation tools to provide financial and underwriting data for management to assess marketing opportunities and the nature of the risks. Actuarial science often helps to assess the overall risk from catastrophic events in relation to its underwriting capacity or surplus.
In the reinsurance fields, actuarial science can be used to design and price reinsurance and retrocession arrangements, and to establish reserve funds for known claims and future claims and catastrophes.

=== Actuaries in criminal justice ===
There is an increasing trend to recognize that actuarial skills can be applied to a range of applications outside the traditional fields of insurance, pensions, etc. One notable example is the use in some US states of actuarial models to set criminal sentencing guidelines. These models attempt to predict the chance of re-offending according to rating factors which include the type of crime, age, educational background and ethnicity of the offender. However, these models have been open to criticism as providing justification for discrimination against specific ethnic groups by law enforcement personnel.  Whether this is statistically correct or a self-fulfilling correlation remains under debate.
Another example is the use of actuarial models to assess the risk of sex offense recidivism. Actuarial models and associated tables, such as the MnSOST-R, Static-99, and SORAG, have been used since the late 1990s to determine the likelihood that a sex offender will re-offend and thus whether he or she should be institutionalized or set free.

=== Actuarial science related to modern financial economics ===
Traditional actuarial science and modern financial economics in the US have different practices, which is caused by different ways of calculating funding and investment strategies, and by different regulations.
Regulations are from the Armstrong investigation of 1905, the Glass–Steagall Act of 1932, the adoption of the Mandatory Security Valuation Reserve by the National Association of Insurance Commissioners, which cushioned market fluctuations, and the Financial Accounting Standards Board, (FASB) in the US and Canada, which regulates pensions valuations and funding.

== History ==

Historically, much of the foundation of actuarial theory predated modern financial theory. In the early twentieth century, actuaries were developing many techniques that can be found in modern financial theory, but for various historical reasons, these developments did not achieve much recognition.
As a result, actuarial science developed along a different path, becoming more reliant on assumptions, as opposed to the arbitrage-free risk-neutral valuation concepts used in modern finance. The divergence is not related to the use of historical data and statistical projections of liability cash flows, but is instead caused by the manner in which traditional actuarial methods apply market data with those numbers. For example, one traditional actuarial method suggests that changing the mix of investments can change the value of liabilities and assets (by changing the discount rate assumption). This concept is inconsistent with financial economics.
The potential of modern financial economics theory to complement existing actuarial science was recognized by actuaries in the mid-twentieth century. In the late 1980s and early 1990s, there was a distinct effort for actuaries to combine financial theory and stochastic methods into their established models. Ideas from financial economics became increasingly influential in actuarial thinking, and actuarial science has started to embrace more sophisticated mathematical modelling of finance. Today, the profession, both in practice and in the educational syllabi of many actuarial organizations, is cognizant of the need to reflect the combined approach of tables, loss models, stochastic methods, and financial theory. However, assumption-dependent concepts are still widely used (such as the setting of the discount rate assumption as mentioned earlier), particularly in North America.
Product design adds another dimension to the debate. Financial economists argue that pension benefits are bond-like and should not be funded with equity investments without reflecting the risks of not achieving expected returns. But some pension products do reflect the risks of unexpected returns. In some cases, the pension beneficiary assumes the risk, or the employer assumes the risk. The current debate now seems to be focusing on four principles:

financial models should be free of arbitrage.
assets and liabilities with identical cash flows should have the same price. This is at odds with FASB.
the value of an asset is independent of its financing.
how pension assets should be invested
Essentially, financial economics state that pension assets should not be invested in equities for a variety of theoretical and practical reasons.