Risk and How Actuaries Manage It

There is no description of actuaries and what actuaries do that would be thorough without an explanation of risk.

Risk is something that will come in many different forms. There’s not one company or one person that doesn’t face risks. The actuary is someone that fulfills an important and substantial necessity in a society through measurements and management of risk.

The contributions actuaries make to the economic, physical and psychological makeup of society and the wellbeing of society is colossal. This may seem like a major overstatement, simply put, it’s not. If programs for risk management that actuaries develop didn’t exist, economic growth wouldn’t be capable of happening.

There are so many different ways for risk to be managed. Although there are certain techniques that are extremely well established, both the practicing actuaries and academics are continuously working on and inventing more methods to capitalize on monetary outcomes for those participants in the economy, without baring those participants to unnecessary peril. Various examples of the most popular techniques are listed out and explained below.

The Many Types of Risk Management

Diversification

Something so important we’ll say it three times:

  1. Diversification
  2. Diversification
  3. Diversification

To put this simply, it’s much better to talk on many smaller risks than to face just one big risk. When you take many smaller risks you’ll find that they will generally average themselves out. This is something that’s going to give an outcome that will never be too extreme to one direction or another. Through diversification the results are going to become more predictable, thus being one of the most important tools in the management of risk.

Catastrophic Risk Focus

Mathematical theory shows that the highest respite form risk will come from the elimination of event consequences that are unlikely, however, still result in losses that are big. Consequently, the highest respites from risk will also lead to the greatest composure levels. However, even though there are things that are more unlikely, they’ll still need to be thought about. For instance, things like if the main breadwinner of the family passes away, or all of ones savings are lost.

So with these types of instances people and families need to implement solutions which will lessen the probability of these events, along with the management of financial impacts. Such as, with the possibility of the main breadwinner dying, the purchasing of a life insurance policy, or the diversification of assets into different stocks and bonds, will reduce exposure to anyone’s or any company’s financial fortune.

Most often, just taking some simple measures to address the potential, if unlikely, catastrophic risks, will have an amazing impact for any person or any company.

Risk Is All About Perception

What may be damaging to one group might be something that’s good for another group. For instance, when the dollar’s value goes down against the francs, it’s something that could be harmful to an American company, however, be favorable to a French company. Through the trading off of consequences of undesirable events of a part that’s affected in a favorable manner, both of the parties will be at an advantage.

There are many more ways to manage risk; however, these are some of the main ones that are utilized by companies, groups, individuals and actuaries.

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