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#### A Concrete Example Of What An Actuary Does

##### July 9, 2014

When I was in high school, I knew I wanted to pursue a career involving math. I did an internship working for some mechanical engineers at an oil platform consultant company, but I never witnessed my mentors do more than basic geometry or algebra. That’s when I started looking into actuarial science. It sounded like a more challenging and stimulating career for me. Problem was, I was having a hard time understanding exactly what an actuary does. Try googling what an actuary does and you’ll get nothing more than variations of the definition – an actuary is someone who deals with risk.

Fast forward a few years. I’m now the senior data specialist for a national workers compensation provider and I work with actuaries all the time. It’s awesome. Even thought I’m not technically an actuary, I do most of my company’s actuarial work (and then some). I’m writing this article to provide a concrete example of what an actuary does for people like my high school self. Keep in mind that “actuary” is a pretty general term and this is one example of many actuarial problems.

# Estimating Unpaid Claims

Suppose you work in a grocery store named Super Mart. One day at work, you slip in a puddle of juice and injure your back. You’re too hurt to continue working, but luckily for you Super Mart is required to carry a workers compensation policy that will pay for your lost wages and any medical bills you incur related to your injury.

This is where it gets interesting. The insurance company will assign an adjuster to handle your claim. The adjuster will (among other things) try to estimate how much money your claim is going to cost. Based on her analysis, she might estimate that you’ll be back to work in a month and won’t need more than a couple of doctor visits and some pain medication for a grand total of $10,000… A month goes by and your back hasn’t gotten any better. You’re still popping pain pills and your doctor is starting to discuss surgery. The insurance company has already paid$8,000 toward your claim and the adjuster raises her estimate of future payments from $2,000 to$92,000. As time goes on the adjuster will continue to monitor your progress and “adjust” her estimate of the value of your claim.

This is known as loss development. It happens all the time and it’s a big problem for insurance companies. Consider the set of all claims that occurred in 2010 for a single insurance company. At the end of the year, the insurance company might estimate the total value of those claims to be $50 Million. BUT, as new information comes in and some claims take a turn for the worst, that estimate might change to$60 Million… and then $65 Million. In 40 or 50 years when all the claims are closed and have been paid for, the ultimate value of the claims may be$71 Million. Ideally for the insurance company, they would have predicted $71 Million at the end of 2010 so they would’ve known whether they could afford to pay for the claims and whether to raise or lower their prices in 2011. It’s the actuary’s job to try to predict that magic number – to estimate the ultimate value of unpaid claims. It’s a complex problem with no perfect solution, but most methods of doing it involve using historical patterns of loss development to predict future loss development. Some actuaries spend their entire careers working on this problem. Since I work for a company that writes exclusively workers comp policies with large aggregate deductibles this problem is 10 times more interesting and 100 times more challenging. (We only pay for the portion of claims on a policy which exceed$500,000, for example.)

And there you have it – a basic explanation of a challenging problem that you could be solving if you decide to become an actuary. Please remember that this is just one example in a broad range of problems that actuaries face. If you’re interested in a more in-depth discussion of estimating unpaid claims (since I swept a lot under the rug), please let me know in the comments!