Actuary vs. Underwriter: Using Math to Manage Risk

Insurance is a necessary part of life. With car, health, vacation, home, and life insurance all available, it’s hard to avoid purchasing it in some form. Most of us can’t afford major unexpected costs, such as emergency surgery, so insurance companies exist to pool money and payout to those who need it. Yet, insurance companies are for-profit businesses that must ensure the money they bring in will cover any payouts they make.

Two types of professionals who help insurance companies determine whom to cover and for how much are actuaries and insurance underwriters. They figure out what a policy is likely to pay out and what an insurance company should charge a customer for coverage. Continue reading to find out more about actuaries and underwriters, their similarities, what sets them apart, and how to land a job in either profession.

Actuaries are specially trained professionals who analyze potential risk and probability. They use mathematics and statistics to come up with risk probability tables based on the industry. For example, an actuary who works in car insurance could determine how likely it is that a person would get into a major accident. That probability would be influenced by factors such as the driver’s age, car type, living situation, and work travel. The actuary would then create risk categories into which insurance companies can sort their customers, outlining each one’s potential to get in an accident and thus require an insurance payout. As a result, insurance companies have different rates and categories depending on these calculations. Becoming an actuary requires at least a bachelor’s degree, followed by a series of exams. Aspiring actuaries can work in the industry as they progress through their training and study to pass their exams.

The U.S. Bureau of Labor Statistics (BLS) reports there were 25,000 actuaries working domestically as of May 2018. Those actuaries made a median annual salary of $102,880, with the lowest 10% earning approximately $61,140, and the top 10% earning as much as $186,110 per year. The highest-paying field by median annual salary was professional, scientific, and technical services ($108,920), followed by finance and insurance ($103,010) and government ($102,240).

Of the 25,000 current actuaries, 71% of them (17,750) worked in finance and insurance; 15% in professional, scientific, and technical services; and 4% in government. The BLS projects the job market for actuaries to grow 20% between 2018 and 2028, which equates to 5,000 new domestic jobs. This growth rate is four times the projected national job average during that span. Of the new actuary jobs, the BLS projects 3,000 will be in finance and insurance and 1,400 will be in professional, scientific, and technical services.

Insurance underwriters connect actuaries and customers. They apply the tables developed by actuaries to the real world. They input a customer’s specific information into their programs and spreadsheets to figure out where they fall on actuarial tables, accounting for the individual’s specific life factors. For example, a car insurance underwriter might analyze a person who lives in a high-crime area (which increases the likelihood of theft) but who has a locked garage and telecommutes to work. That underwriter might recommend a lower price than the actuarial tables suggest, in the hopes that this person will outperform his or her probable payout.

The BLS reports there were 110,400 insurance underwriters working in the United States as of May 2018, making a median annual salary of $69,380 each year. According to the BLS, there is little difference in the median annual salary for insurance underwriters across industries. Aside from credit intermediation and related activities ($75,700), most insurance underwriters work in an industry that pays a median annual salary between $67,310 and $69,470.

The largest group of insurance underwriters (42%) worked for direct insurance carriers, excluding life, health, and medical insurance. Another 22% worked for insurance agencies and brokerages, 7% worked in “other insurance-related activities,” and the remainder worked for niche insurance providers. The BLS expects the overall job market for insurance underwriters to shrink by 5% between 2018 and 2028, losing 5,400 jobs during that span. However, some areas will gain employment, including insurance agencies and brokerages, direct health and medical insurance carriers, and nondepository credit intermediation.

Actuaries and underwriters work in similar environments, typically in an office setting, most often for an insurance company. Both jobs require a background in mathematics, statistics, and probability, with an understanding of how to perform risk analysis calculations for potential insurance payouts. In addition, actuaries and underwriters work with computer programs, spreadsheets, charts, and other specialized software that helps them sort through different risk categories to approximate the probability of an accident.

While actuaries and underwriters work in the same environments and industries, there are several key factors that set them apart. Their use of insurance categories and their approaches to risk are different and occur at separate stages of the insurance process.

It’s the actuary’s job to create the categories that insurance companies use to determine their policy prices, based on different probability factors and inputs. Actuaries estimate the likelihood of many events, such as disasters and common accidents. They also account for demographic and economic factors, depending on the type of insurance company for which they work.

Underwriters figure out in which of those categories a potential customer falls. They can then adjust prices for that customer based on specific factors in an attempt to attract the customer at a lower price. Alternatively, they may determine the customer is uninsurable.

Actuarial categories are about risk management for the insurance company. Actuaries try to ensure insurance companies do not go bankrupt, so they create tables of approximate risk that maintain revenue over payouts.

Underwriters, however, try to bring in new customers, so they might lower prices and increase the risk for the insurance company in the hope of not having to pay out claims. They will look for factors that encourage lower prices to acquire customers and increase profits.

For people with a background in mathematics and probability, actuary and underwriter are two popular career choices that can lead to stable, high-paying jobs in office settings. Math whizzes interested in independent work designing the risk categories for insurance companies might find that a job as an actuary is compelling. For those who are interested in mathematics and statistics but would also like to work directly with customers, work as an underwriter may prove to be a better fit. Explore how Maryville University’s online Bachelor of Science in Mathematics can put you on track to enter either one of these professions.

Recommended Readings
A Student’s Guide to Probability and Statistics

What Is a Degree in Math and Why Is It Important?

Sources
The Actuary, “Careers: Underwriter: Look Before You Leap”

Alot Careers, “Actuary vs. Underwriter”

Investopedia, “A Day in the Life of an Actuary”

The Street, “What Is an Underwriter and What Do They Do?”

U.S. Bureau of Labor Statistics, Actuaries

U.S. Bureau of Labor Statistics, Insurance Underwriters