Think like an insurance company, says Chris Groendyke, director of RMU’s top-ranked actuarial science program.
Risk is something we all must take into account and plan our strategies around. Actuaries are trained experts in risk who use statistics, data analysis, and the rules of finance to help insurers turn unpredictable events into a profitable business model. The next time you’re dealing with a risk, try thinking like an insurance company.
Have enough in the bank. Before you take a risk, make sure you can survive the worst-case scenario. Insurance companies are required to have reserve funds in case they have to pay out a spate of claims. Your household should have an emergency fund to cover three or more months of expenses.
Hedge your bets. When mortality rates are high — that is, when high rates of life insurance policyholders die — insurance companies take a hit not only in benefits paid out but by no longer receiving premiums or the interest they generate. To balance those out, insurers can sell annuities that pay holders as long as they are alive and stop paying when they die.
Get different baskets for your eggs. Flood insurers don’t limit their policies to just one city; if they’re only insuring New Orleans homeowners, the next hurricane could wipe them out. Even if they aren’t perfectly equal, keep risks spread out and independent of each other to avoid them all happening at once.
Let someone else do it. Just as people pay an insurance company to assume the financial risk in case of their house burning down, insurers pay other companies to insure their risk. It’s called reinsurance.
Know when to fold ‘em. Some risks are not worth taking. If you have half a dozen crashes on your record and a glovebox full of speeding tickets, some insurance companies will refuse to write you an auto policy, not even with a sky-high premium.
Chris Groendyke is the director of the actuarial science program at RMU, which is one of only 17 U.S. universities to be rated a Center of Actuarial Excellence by the Society of Actuaries. He was a life insurance actuary for seven years before getting his Ph.D., and has been at RMU since 2012.