Actuary

Actuaries are business professionals who deal with the financial impact of risk and uncertainty.

The future is full of uncertain events, some of which are undesirable. Risk is the probability that an undesirable event will occur. Actuaries are highly trained experts with a deep understanding of financial security systems, their reasons for being, their complexity, their mathematics, and the way they work . They evaluate the likelihood of future events, design creative ways to quantify the contingent outcomes in order minimize losses associated with uncertain undesirable events. The impact of these undesirable events can be both emotional and financial. As some of these events, such as death, cannot be totally avoided, minimizing their financial impact is very important. These risks can impact both sides of the balance sheet and require asset management, liability management, and valuation skills. Actuaries are skilled professionals in finding ways to quantify and to manage risk. It takes a combination of strong analytical skills, business knowledge and understanding of human behavior to design and manage programs that control risk .

Actuaries work in a number of insurance disciplines, which may be classified as life, health, pensions, annuities, and asset management, social welfare programs, property and casualty, and reinsurance.

Life, health, and pension actuaries deal with mortality risk, morbidity and the ongoing utilization of drugs and medical services risk, and investment risk. Products prominent in their work include life insurance, annuities, pensions, mortgage and credit insurance, short and long term disability, and medical, dental and long term care insurance. In addition to these risks, social insurance programs are greatly influenced by public opinion, politics, budget constraints, changing demographics and other factors such as medical technology, inflation and cost of living considerations .

Casualty actuaries, also known as non-life or general insurance actuaries, deal with more catastrophic, unnatural risks that can occur to people or property. Products prominent in their work include auto insurance, homeowners insurance, commercial property insurance, workers’ compensation, title insurance, malpractice insurance, products liability insurance, directors and officers liability insurance, environmental and marine insurance, terrorism insurance and other types of liability insurance. Reinsurance products have to accommodate all of the previously mentioned products, and in addition have to properly reflect the increasing long term risks assocated with cultural litigiousness, acts of war, terrorism and politics .

In 2002, a Wall Street Journal survey on the best jobs in the United States listed “actuary” as the second best job, while in previous editions of the list, actuaries had been the top rated job .

History

Need for insurance

The basic requirements of communal interests gave rise to risk sharing since the dawn of civilization. People who lived their entire lives in a camp had the risk of fire, which would leave their band or family without shelter. As more complex forms of exchange developed beyond barter, new forms of risk manifested. Merchants embarking on trade journeys bore the risk of losing goods entrusted to them, their own possessions, or even their lives. Intermediaries developed to warehouse and trade goods, and they often suffered from financial risk. The primary providers in any extended families or household always ran the risk of premature death, disability or infirmity leaving their dependents to starve. Credit procurement was difficult if the lender worried about repayment in the event of the borrowers death or infirmity. Alternatively, people sometimes lived too long, exhausting their savings, if any, or becoming a burden on others in the extended family or society.

Early attempts

In the ancient world there was no room for the sick, suffering, disabled, aged, or the poor—it was not part of the cultural consciousness of societies . Early methods of protection involved charity; religious organizations or neighbors would collect for the destitute and needy. By the middle of the third century, 1,500 suffering people were being supported by charitable operations in Rome . Charitable protection is still an active form of support to this very day . However, receiving charity is uncertain and is often accompanied by social stigma. Elementary mutual aid agreements and pensions did arise in antiquity . Early in the Roman empire, associations were formed to meet the expenses of burial, cremation, and monuments—precusors to burial insurance and friendly societies. A small sum was paid into a communal fund on a weekly basis, and upon the death of a member, the fund would cover the expenses of rites and burial. These societies sometimes sold shares in the building of columbāria, or burial vaults, owned by the fund—the precursor to mutual insurance companies . Other early examples of mutual surety and assurance pacts can be traced back to various forms of fellowship within the Saxon clans of England and their Germanic forbears, and to Celtic society . However, many of these earlier forms of surety and aid would often fail due to lack of understanding and knowledge .

Development of theory

The seventeenth century was a period of extraordinary advances in mathematics in Germany, France and England. At the same time there was a rapidly growing desire and need to place the valuation of personal risk on a more scientific basis. Independently from each other, compound interest was studied and probability theory emerged as a well understood mathematical discipline. Another important advance came in 1662 from a London draper named John Graunt, who showed that there were predictable patterns of longevity and death in a defined group, or cohort, of people, despite the uncertainty about the future longevity or mortality of any one individual person. This study became the basis for the original life table. It was now possible set up an insurance scheme to provide life insurance or pensions for a group of people, and to calculate with some degree of accuracy, how much each person in the group should contribute to a common fund assumed to earn a fixed rate of interest. The first person to demonstrate publicly how this could be done was Edmond Halley. In addition to constructing his own life table, Halley demonstrated a method of using his life table to calculate the premium or amount of money someone of a given age should pay to purchase a life-annuity .

Early actuaries

James Dodson’s pioneering work on the level premium system led to the formation of the Society for Equitable Assurances on Lives and Survivorship (now commonly known as Equitable Life) in London in 1762. The company still exists, though it has run into difficulties recently. This was the first life insurance company to use premium rates which were calculated scientifically for long-term life policies. Many other life insurance companies and pension funds were created over the following 200 years. It was the Society for Equitable Assurances which first used the term ‘actuary’ for its chief executive officer in 1762. Previously, the use of the term had been restricted to an official who recorded the decisions, or ‘acts’, of ecclesiastical courts . Other companies which did not originally use such mathematical and scientific methods, most often failed, or were forced to adopt the methods pioneered by Equitable .

Development of the modern profession

In the eighteenth and nineteenth centuries, computational complexity was limited to manual calculations. The actual calculations required to compute fair insurance premiums are rather complex. The actuaries of that time developed methods to construct easily-used tables, using sophisticated approximations called commutation functions, to facilitate timely, accurate, manual calculations of premiums . Over time, actuarial organizations were founded to support and further both actuaries and actuarial science, and to protect the public interest by ensuring competency and ethical standards . However, calculations remained cumbersome, and actuarial shortcuts were commonplace. Non-life actuaries followed in the footsteps of their life compatriots in the early twentieth century. The 1920 revision to workers compensation rates took over two months of around-the-clock work by day and night teams of actuaries . In the 1930s and 1940s, however, the rigorous mathematical foundations for stochastic processes were developed . Actuaries could now begin to forecast losses using models of random events, instead of the deterministic methods they had been constrained to in the past. The introduction and development of the computer industry further revolutionized the actuarial profession. From pencil-and-paper to punchcards to current high-speed devices, the modeling and forecasting ability of the actuary has grown exponentially, and actuaries needed to adjust to this new world .

Another modern development is the convergence of modern financial theory with actuarial science . In the early twentieth century, actuaries were developing many techniques that can be found in modern financial theory, but for various historical reasons, these developments did not achieve much recognition . However, in the late 1980s and early 1990s, there was a distinct effort for actuaries to combine financial theory and stochastic methods into their established models . Today, the profession, both in practice and in the educational syllabi of many actuarial organizations, is cognizant of the need to reflect the combined approach of tables, loss models, stochastic methods, and financial theory .

Responsibilities

Actuaries use skills in mathematics, economics, finance, probability and statistics, and business to help businesses assess the risk of certain events occurring, and to formulate policies that minimize the cost of that risk. For this reason, actuaries are essential to the insurance and reinsurance industry, either as staff employees or as consultants, as well as to government agencies such as the Government Actuary’s Department in the UK or the Social Security Administration in the US. Actuaries assemble and analyze data to estimate the probability and likely cost of the occurrence of an event such as death, sickness, injury, disability, or loss of property. Actuaries also address financial questions, including those involving the level of pension contributions required to produce a certain retirement income and the way in which a company should invest resources to maximize its return on investments in light of potential risk. Using their broad knowledge, actuaries help design and price insurance policies, pension plans, and other financial strategies in a manner which will help ensure that the plans are maintained on a sound financial basis .

Traditional employment

On both the life and casualty sides, the classical function of actuaries is to calculate premiums and reserves for insurance policies covering various risks. Premiums are the amount of money the insurer needs to collect from the policyholder in order to cover the expected losses, expenses, and a provision for profit. Reserves are provisions for future liabilities and indicate how much money should be set aside now to reasonably provide for future payouts. If you inspect the balance sheet of an insurance company, you will find that the liability side consists mainly of reserves.

On the casualty side, this analysis often involves quantifying the probability of a loss event, called the frequency, and the size of that loss event, called the severity. Further, the amount of time that occurs before the loss event is also important, as the insurer will not have to pay anything until after the event has occurred. On the life side, the analysis often involves quantifying how much a potential sum of money or a financial liability will be worth at different points in the future. Since neither of these kinds of analysis are purely deterministic processes, stochastic models are often used to determine frequency and severity distributions and the parameters of these distributions. Forecasting interest yields and currency movements also plays a role in determining future costs, especially on the life side.

Actuaries do not always attempt to predict aggregate future events. Often, their work may relate to determining the cost of financial liabilities that have already occurred, called retrospective reinsurance, or the development or re-pricing of new products.

Actuaries also design and maintain products and systems. They are involved in financial reporting of companies’ assets and liabilities. They must communicate complex concepts to clients who may not share their language or depth of knowledge. Actuaries work under a strict code of ethics that covers their communications and work products, but their clients may not adhere to those same standards when interpreting the data or using it within different kinds of businesses.

Non-traditional employment

Many actuaries are general business managers or financial officers. They analyze prospective business prospects with their financial skills in valuing or discounting risky future cash flows, and many apply their pricing expertise from insurance to other lines business. Some actuaries act as expert witnesses by applying their analysis in court trials to estimate the economic value of losses such lost profits or lost wages.

There has been a recent widening of the scope of the actuarial field to include investment advice and asset management. Further, there has been a convergence from the financial fields of risk management and quantitative analysis with actuarial science. Now, actuaries also work as risk managers, quantitative analysts, or investment specialists. Even actuaries in traditional roles are now studying and using the tools and data previously the domain of finance .

Remuneration

The credentialing and examination procedure for becoming a fully qualified actuary can be discouraging, and thus the profession remains very small throughout the world. As a result, actuaries are in high demand, and they are highly paid for the services they render . In the UK, where there are fewer than 8,000 fully qualified actuaries, typical starting salaries range between GBP24,000 and GBP30,000 (approx. States dollar|US$" target="_blank" >^*44,000–US$55,000 c.June 2006) and newly qualified actuaries in insurance companies earn somewhere between GBP44,000 and GBP64,000 (approx. US$81,000–US$118,000 c.June 2006) per year. Many successful actuaries earn over GBP100,000 a year (approx. US$185,000 c.June 2006) .

In developing markets such as India, annual compensation for newly qualified actuaries starts at around 8 lakh (800,000 Indian rupees or approximately US$17,500 c.June 2006) and can go as high as 20 lakh (approx. US$43,600 c.June 2006) .

Credentialing and exams

Becoming a fully credentialed actuary requires passing a rigorous series of exams, usually taking several years. In some countries, such as France, most study takes place in a university setting. In others, such as the U.S. and the U.K., most study takes place during employment.

United States

In the U.S., for life and health actuaries, exams are given by the Society of Actuaries, while for property and casualty actuaries the exams are administered by the Casualty Actuarial Society. The Society of Actuaries’ membership requirements include passing six examinations for Associateship, and an additional two exams, together with the completion of a professional paper, for Fellowship . The Casualty Actuary Society requires the successful completion of seven examinations for Associateship and two additional exams for Fellowship. In addition to these requirements, casualty actuarial candidates must also complete professionalism education and be recommended for membership by existing members . Continuing education is required after certification for all actuaries.

In order to sign statements of actuarial opinion, however, American actuaries must be members of the American Academy of Actuaries. Academy membership requirements include membership in one of the recognized actuarial societies, at least three years of full-time equivalent experience in responsible actuarial work, and either residency in the United States for at least three years or a non-resident or new resident who meets certain requirements .

Canada

The Canadian Institute of Actuaries, or the CIA, recognizes fellows of both the Society of Actuaries and the Casualty Actuary Society, provided that they have specialized study in Canadian actuarial practice. For fellows of the SOA, this is fulfilled by taking the CIA’s Practice Education Course (PEC). For fellows of the Casualty Actuarial Society, this is fulfilled by taking exam 7C (Canada) instead of exam 7US. Unlike their American counterparts, the CIA only has one class of actuary—Fellow. Further, the CIA requires three years of actuarial practice within the previous decade, and 18 months of Canadian actuarial practice within the last three years, to become a fellow .

UK and Republic of Ireland

Qualification in the United Kingdom and the Republic of Ireland consists of a combination of exams and courses provided by the professional bodies, the Institute of Actuaries based in London, England, and the Faculty of Actuaries based in Edinburgh, Scotland—separate but coinciding bodies. No geographic limitations exist for these bodies. Students and actuaries in any part of the UK or the Republic of Ireland may be a member of either or both bodies. The exams may only be taken upon having officially joined the body, unlike many other countries where exams may be taken earlier. However, a candidate may offer proof of having previously covered topics, usually while at university, in order to be exempt from taking certain subjects. The exams themselves are split into four sections: Core Technical (CT), Core Applications (CA), Specialist Technical (ST), and Specialist Applications (SA). In addition to exams and courses, it is required that the candidate have at least three years' experience of actuarial work under supervision of a recognized actuary for him or her to qualify as a “Fellow of the (Institute/Faculty) of Actuaries” (FIA/FFA) .

Other countries

Many other countries pattern their requirements after the larger societies of the US or UK. In general, the website of these organizations is often the easiest source for finding out about membership requirements.

Exam support

As these qualifying exams are rigorous, support is usually available to people progressing through the exams. Often, employers provide paid on-the-job study time and paid attendance at seminars designed for the exams. Also, many companies which employ actuaries have automatic pay raises or promotions when exams are passed. As a result, actuarial students have strong incentives for putting in adequate study time during off-work hours. A common rule of thumb for exam students is to put in roughly 400 hours of study time per full exam taken . Thus, several thousands of hours of study time should be anticipated over several years, assuming no failures . In practice, as the historical passing percentages remain below 50% for these exams, the “travel time” to credentialing is extended and more study time is needed. This process resembles formal schooling, so that actuaries who are sitting for exams are still called “students” or “candidates” despite holding important positions with substantial responsibilities.

Notable actuaries

Edmond Halley :While Halley actually predated much of what is now considered the start of the actuarial profession, he was the first to mathematically and statistically rigorously calculate premiums for a life insurance policy .

William Morgan :Morgan was the appointed Actuary of the Society for Equitable Assurances in 1775. He laid the foundations of the actuarial profession, and may be rightly considered the father of the actuarial profession .

Isaac M. Rubinow :Founder and first president of the Casualty Actuarial Society .

Fictional actuaries

Due to the low public-profile of the job, two of the most recognisable actuaries to the general public happen to be characters in movies. However, many actuaries were unhappy with the stereotypical portrayals of these actuaries as unhappy, math-obsessed and socially inept people while others have claimed that the portrayals are close to home, if a bit exaggerated. .

Reuben Feffer: Reuben is portrayed by Ben Stiller and is from the movie Along Came Polly. Reuben is portrayed as nervous and extremely risk-averse; he even uses actuarial models to calculate the probabilty of relationships with women going well.

Warren Schmidt: Warren is protrayed by Jack Nicholson and is from the movie About Schmidt. The movie mostly covers Shmidt's retirement from an insurance company. Schmidt is portrayed as antisocial and unfriendly. He does not want to retire and spends his free time still working on actuarial calculations.

References

External links

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