What role does math play in the insurance industry?

a. Insurance companies use statistics to find how likely a client will need to

use the insurance so they can set premiums in order to have the highest

chance of making a profit.

Insurance companies use algebra and geometry to calculate the distance

from clients' major emergencies to nearest hospitals.

Insurance companies use statistics to hypothesize how likely clients are

to switch over to competitive companies.

d. Insurance companies use calculus to find out how likely a client will need

to use the insurance so they can set premiums in order to have the

highest chance of making a profit.

The correct answer based on the options given is A)

Explanation:

Actuarial Science is a branch of mathematics predominantly used by the Insurance Industry to create a formula or mathematical model that enables them to charge a profit-oriented rate for a particular risk.

If insurance companies charge arbitrarily, they may overcharge thus leading to a collapse of the system. If they undercharge, the system of pooling risks becomes unsustainable as claim paying capabilities are reduced.

Hence the need to use a mathematical model to ensure that rates give room for the ability of the system to meets it's obligations when they arise and for the companies to make a profit.

The use of models is the reason why sometimes there are hard markets in insurance and at other times there are soft markets.

Cheers!

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