Actuary
From Wikipedia, the free encyclopedia
Actuary
Damage from Hurricane Katrina in 2005. Actuaries
need to estimate long-term levels of such damage in
order to accurately price property insurance, set
appropriate reserves, and design appropriate
reinsurance and capital management strategies.
Occupation
Names
Actuary
Occupation type Profession
Insurance, Reinsurance,
Activity sectors Pension plans, Social welfare
programs
Description
Mathematics, finance,
Competencies
analytical skills, business
knowledge
Education required See Credentialing and exams
Underwriter
Related jobs
An actuary is a business professional who deals with the measurement and management of risk
and uncertainty (BeAnActuary 2011a). The name of the corresponding profession is actuarial
science. These risks can affect both sides of the balance sheet, and require asset management,
liability management, and valuation skills (BeAnActuary 2011b). Actuaries provide assessments
of financial security systems, with a focus on their complexity, their mathematics, and their
mechanisms (Trowbridge 1989, p. 7).
While the concept of insurance dates to antiquity (Johnston 1903, 475476, Loan 1992, Lewin
2007, pp. 34), the mathematics and finance needed to scientifically measure and mitigate risks
have their origins in the 17th century studies of probability and annuities (Heywood 1985).
Actuaries of the 21st century require analytical skills, business knowledge, and an understanding
of human behavior and information systems to design and manage programs that control risk
(BeAnActuary 2011c). The actual steps needed to become an actuary are usually countryspecific; however, almost all processes share a rigorous schooling or examination structure and
take many years to complete (Feldblum 2001, p. 6, Institute and Faculty of Actuaries 2014).
The profession has consistently ranked as one of the most desirable (Riley 2013). In various
studies, being an actuary was ranked number one or two multiple times since 2010 (Thomas
2012, Weber 2013, CareerCast 2015).
Responsibilities
Actuaries use skills primarily in mathematics, particularly calculus-based probability and
mathematical statistics, but also economics, computer science, finance, and business. For this
reason, actuaries are essential to the insurance and reinsurance industries, either as staff
employees or as consultants; to other businesses, including sponsors of pension plans; and to
government agencies such as the Government Actuary's Department in the United Kingdom or
the Social Security Administration in the United States of America. 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 that
will help ensure that the plans are maintained on a sound financial basis (Bureau of Labor
Statistics 2015, Government Actuary's Department 2015).
Disciplines
Most traditional actuarial disciplines fall into two main categories: life and non-life.
Life actuaries, which include health and pension actuaries, primarily deal with mortality risk,
morbidity risk, and investment risk. Products prominent in their work include life insurance,
annuities, pensions, short and long term disability insurance, health insurance, health savings
accounts, and long-term care insurance (Bureau of Labor Statistics 2015). In addition to these
risks, social insurance programs are influenced by public opinion, politics, budget constraints,
changing demographics, and other factors such as medical technology, inflation, and cost of
living considerations (GAO 1980, GAO 2008).
Non-life actuaries, also known as property and casualty or general insurance actuaries, deal with
both physical and legal risks that affect people or their property. Products prominent in their
work include auto insurance, homeowners insurance, commercial property insurance, workers'
compensation, malpractice insurance, product liability insurance, marine insurance, terrorism
insurance, and other types of liability insurance (AIA 2014).
Actuaries are also called upon for their expertise in enterprise risk management (Bureau of Labor
Statistics 2015). This can involve dynamic financial analysis, stress testing, the formulation of
corporate risk policy, and the setting up and running of corporate risk departments (Institute and
Faculty of Actuaries 2011b). Actuaries are also involved in other areas of the financial services
industry, such as analysing securities offerings or market research (Bureau of Labor Statistics
2015).
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 (Institute and Faculty of Actuaries
2014). 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. The amount of
time that occurs before the loss event is 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 (Tolley, Hickman & Lew 2012).
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 code of
ethics that covers their communications and work products (ASB 2013).
Non-traditional employment
As an outgrowth of their more traditional roles, actuaries also work in the fields of risk
management and enterprise risk management for both financial and non-financial corporations
(D'Arcy 2005). Actuaries in traditional roles study and use the tools and data previously in the
domain of finance (Feldblum 2001, p. 8). The Basel II accord for financial institutions (2004),
and its analogue, the Solvency II accord for insurance companies (to come into effect in 2016),
require institutions to account for operational risk separately, and in addition to, credit, reserve,
asset, and insolvency risk. Actuarial skills are well suited to this environment because of their
training in analyzing various forms of risk, and judging the potential for upside gain, as well as
downside loss associated with these forms of risk (D'Arcy 2005).
Actuaries are also involved in investment advice and asset management, and can be general
business managers and chief financial officers (Mungan 2002, Stefan 2010). They analyze
business prospects with their financial skills in valuing or discounting risky future cash flows,
and apply their pricing expertise from insurance to other lines of business. For example,
insurance securitization requires both actuarial and finance skills (Krutov 2006). Actuaries also
act as expert witnesses by applying their analysis in court trials to estimate the economic value of
losses such as lost profits or lost wages (Wagner 2006).
History
Mathematician Nathaniel Bowditch was one of America's first insurance actuaries.
Need for insurance
The basic requirements of communal interests gave rise to risk sharing since the dawn of
civilization. For example, people who lived their entire lives in a camp had the risk of fire, which
would leave their band or family without shelter. After barter came into existence, more complex
risks emerged and 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, which exposed them to financial risk.
The primary providers in extended families or households ran the risk of premature death,
disability or infirmity, which could leave their dependents to starve. Credit procurement was
difficult if the creditor worried about repayment in the event of the borrower's death or infirmity.
Alternatively, people sometimes lived too long from a financial perspective, exhausting their
savings, if any, or becoming a burden on others in the extended family or society (Lewin 2007,
p. 3).
Early attempts
In the ancient world there was not always room for the sick, suffering, disabled, aged, or the poor
these were often not part of the cultural consciousness of societies (Perkins 1995). Early
methods of protection, aside from the normal support of the extended family, involved charity;
religious organizations or neighbors would collect for the destitute and needy. By the middle of
the 3rd century, 1,500 suffering people were being supported by charitable operations in Rome
(Perkins 1995). Charitable protection remains an active form of support in the modern era
(GivingUSA 2009), but receiving charity is uncertain and is often accompanied by social stigma.
Elementary mutual aid agreements and pensions did arise in antiquity (Thucydides). Early in the
Roman empire, associations were formed to meet the expenses of burial, cremation, and
monumentsprecursors 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 columbria,
or burial vaults, owned by the fundthe precursor to mutual insurance companies (Johnston
1903, 475476). 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 (Loan 1992).
Non-life insurance started as a hedge against loss of cargo during sea travel. Anecdotal reports of
such guarantees occur in the writings of Demosthenes, who lived in the 4th century BCE (Lewin
2007, pp. 34). The earliest records of an official non-life insurance policy come from Sicily,
where there is record of a 14th-century contract to insure a shipment of wheat (Sweeting 2011,
p. 14). In 1350, Lenardo Cattaneo assumed "all risks from act of God, or of man, and from perils
of the sea" that may occur to a shipment of wheat from Sicily to Tunis up to a maximum of 300
florins. For this he was paid a premium of 18% (Lewin 2007, p. 4).
Development of theory
2003 U.S. mortality (life) table, Table 1, Page 1
During the 17th century, a more scientific basis for risk management was being developed. In
1662, a London draper named John Graunt 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. This study became the basis for the original
life table. Combining this idea with that of compound interest and annuity valuation, it became
possible to set up an insurance scheme to provide life insurance or pensions for a group of
people, and to calculate with some degree of accuracy each member's necessary contributions to
a common fund, assuming a fixed rate of interest. The first person to correctly calculate these
values was Edmond Halley (Heywood 1985). In his work, Halley demonstrated a method of
using his life table to calculate the premium someone of a given age should pay to purchase a
life-annuity (Halley 1693).
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. This was the first life insurance company to use premium rates that were
calculated scientifically for long-term life policies, using Dodson's work. After Dodson's death in
1757, Edward Rowe Mores took over the leadership of the group that eventually became the
Society for Equitable Assurances. It was he who specified that the chief official should be called
an actuary (Ogborn 1956, p. 235). Previously, the use of the term had been restricted to an
official who recorded the decisions, or acts, of ecclesiastical courts, in ancient times originally
the secretary of the Roman senate, responsible for compiling the Acta Senatus (Ogborn 1956,
p. 233). Other companies that did not originally use such mathematical and scientific methods
most often failed or were forced to adopt the methods pioneered by Equitable (Bhlmann 1997,
p. 166).
Development of the modern profession
Main article: Actuarial science
In the 18th and 19th centuries, computational complexity was limited to manual calculations.
The actual calculations required to compute fair insurance premiums are 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 (Slud 2006). 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 (Hickman 2004, p. 4). Since calculations were cumbersome, actuarial
shortcuts were commonplace.
Non-life actuaries followed in the footsteps of their life compatriots in the early 20th century. In
the United States, the 1920 revision to workers' compensation rates took over two months of
around-the-clock work by day and night teams of actuaries (Michelbacher 1920, pp. 224, 230).
In the 1930s and 1940s, rigorous mathematical foundations for stochastic processes were
developed (Bhlmann 1997, p. 168). Actuaries began to forecast losses using models of random
events instead of deterministic methods. Computers further revolutionized the actuarial
profession. From pencil-and-paper to punchcards to microcomputers, the modeling and
forecasting ability of the actuary has grown exponentially (MacGinnitie 1980, pp. 5051).
Another modern development is the convergence of modern financial theory with actuarial
science (Bhlmann 1997, pp. 169171). In the early 20th century, actuaries were developing
techniques that can be found in modern financial theory, but for various historical reasons, these
developments did not achieve much recognition (Whelan 2002). 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 (D'Arcy 1989). In the 21st century, the profession, both in
practice and in the educational syllabi of many actuarial organizations, combines tables, loss
models, stochastic methods, and financial theory (Feldblum 2001, pp. 89), but is still not
completely aligned with modern financial economics.
Actuaries - What They Do
Through their knowledge of statistics, finance, and business, actuaries assess the risk of events
occurring and help create policies for businesses and clients that minimize the cost of that risk.
For this reason, actuaries are essential to the insurance industry.
Actuaries analyze data to estimate the probability and likely cost to the company of an event
such as death, sickness, injury, disability, or loss of property. Actuaries also address financial
matters, such as how a company should invest resources to maximize return on investments, or
how an individual should invest in order to attain a certain retirement income level. Using their
expertise in evaluating various types of risk, actuaries help design 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.
Most actuaries are employed in the insurance industry, specializing in either property and
casualty insurance or life and health insurance. They use sophisticated modeling techniques to
forecast the likelihood of certain events occurring, and the impact these events will have on
claims and potential losses for the company. For example, property and casualty actuaries
calculate the expected number of claims resulting from automobile accidents, which varies
depending on the insured person's age, sex, driving history, type of car, and other factors.
Actuaries ensure that the premium charged for such insurance will enable the company to cover
potential claims and other expenses. This premium must be profitable, yet competitive with other
insurance companies.
Within the life and health insurance fields, actuaries help companies develop health and longterm-care insurance policies by predicting the likelihood of occurrence of heart disease, diabetes,
stroke, cancer, and other chronic ailments among a particular group of people who have
something in common, such as living in a certain area or having a family history of illness. Such
work of actuaries can be beneficial to both the consumer and the company because the ability to
accurately predict the likelihood of a particular health event among a certain group ensures that
premiums are assessed fairly based on the risk to the company. Additionally, life insurance
actuaries help companies develop annuity and life insurance policies for individuals by
estimating how long someone is expected to live.
Actuaries in other financial service industries manage credit and help set a price for corporate
security offerings. They also devise new investment tools to help their firms compete with other
companies. Pension actuaries work under the provisions of the Employee Retirement Income
Security Act (ERISA) of 1974 which sets minimum standards for pension and health plans in
private industry. Actuaries working for the government help manage social programs such as
Social Security and Medicare.
Consulting actuaries provide advice to clients on a contract basis. The duties of
most consulting actuaries are similar to those of other actuaries. For example, some
may evaluate company pension plans by calculating the future value of employee
and employer contributions and determining whether the amounts are sufficient to
meet the future needs of retirees. Others help companies reduce their insurance
costs by offering them advice on how to lessen the risk of injury on the job.
Consulting actuaries sometimes testify in court regarding the value of potential
lifetime earnings of a person who is disabled or killed in an accident, the current
value of future pension benefits (in divorce cases), or other values arrived at by
complex calculations. Some actuaries work in reinsurance, a field in which one
insurance company arranges to share a large prospective liability policy with
another insurance company in exchange for a percentage of the premium.
Work Environment
Actuaries have desk jobs, and their offices usually are comfortable and pleasant.
While most actuaries work at least 40 hours a week, those in consulting type jobs
may be required to travel and thus work more than 40 hours per week.
Education & Training Required
Actuaries need a strong foundation in mathematics and general business. Usually,
actuaries earn an undergraduate degree in mathematics, statistics, or actuarial
science, or a business-related field such as finance, economics, or business. While in
college, students should complete coursework in economics, applied statistics, and
corporate finance, which is a requirement for professional certification. Furthermore,
many students obtain internships to gain experience in the profession prior to
graduation. More than 100 colleges and universities offer an actuarial science
program, and most offer a degree in mathematics, statistics, economics, or finance.
Increasingly, companies are requiring potential employees to have passed the initial
actuarial exam described in the next section, which tests an individuals proficiency
in mathematicsincluding calculus, probability, and statistics before being hired.
Beginning actuaries often rotate among different jobs in an organization, such as
marketing, underwriting, financial reporting and product development, to learn
various actuarial operations and phases of insurance work. At first, they prepare
data for actuarial projects or perform other simple tasks. As they gain experience,
actuaries may supervise clerks, prepare correspondence, draft reports, and conduct
research. They may move from one company to another early in their careers as
they advance to higher positions.
What does a Life Actuary do?
In general, the main responsibility of a life actuary is to calculate the probability that a certain
incident can happen to an individual and compute the cost it can produce. Most incidents are
accidents and diseases. In this way, actuaries come up with relatively accurate statistical rates of
fatalities, disabilities, and sicknesses.
Once the statistics are available, the life actuary then computes for the price of a certain
insurance policy for the beneficiary. These policies vary according to the clients needs, desires,
and situation. Insurance companies need actuaries to calculate probabilities in order to ensure
their insurance policies can safely cover clients. At the same time, companies want to guarantee
they still can make some profits.
Aside from accidental and natural casualties and deaths, calculating for risks in disasters and
unemployment may be included in the tasks of a life actuary. These factors are also important in
computing for insurance policy rates. Sometimes, even a client's job is included as a variable
when calculating the risk factors. Generally, when people have high-risk jobs, such as pilots and
firefighters, their insurance policies are more expensive than those with low-risk jobs, such as an
office personnel or a stay-at-home parent. A life actuary can also play a significant role in
creating investment and savings plans, which are beneficial for an individual or a family in the
future.
Being a life actuary requires some specialized skills and knowledge. Most, if not all, actuaries
are graduates with college degrees related to mathematics, statistics or business administration.
They should also pass several actuarial exams to qualify for a position. Aside from their
mathematical skills, life actuaries should also be knowledgeable about economic trends, as this
will be an important element in all statistical data. Insurance companies also deal with many
legal technicalities that actuaries should be aware of, so a background in law education may also
be an advantage.
Life insurance actuaries are very valuable because their expertise in numbers and statistics helps
provide the clients financial coverage for any unexpected events in their lives. Companies also
consider actuaries assets because not everyone possesses their very specialized skills. In fact, a
2010 research study crowned the actuary as the best job in the US. For someone who likes to
make sense of the world through numbers, being an actuary can be a fulfilling vocation. With
many economic trends requiring analysis, the demand for a life actuary may increase.
Being a life actuary requires some specialized skills and knowledge. Most, if not all, actuaries
are graduates with college degrees related to mathematics, statistics or business administration.
They should also pass several actuarial exams to qualify for a position. Aside from their
mathematical skills, life actuaries should also be knowledgeable about economic trends, as this
will be an important element in all statistical data. Insurance companies also deal with many
legal technicalities that actuaries should be aware of, so a background in law education may also
be an advantage.
Life insurance actuaries are very valuable because their expertise in numbers and statistics helps
provide the clients financial coverage for any unexpected events in their lives. Companies also
consider actuaries assets because not everyone possesses their very specialized skills. In fact, a
2010 research study crowned the actuary as the best job in the US. For someone who likes to
make sense of the world through numbers, being an actuary can be a fulfilling vocation. With
many economic trends requiring analysis, the demand for a life actuary may increase.
Definition:
Actuaries manage risk. They work for companies in a
range of fields, but especially in insurance and pensions,
analyzing the potential for undesirable events to occur
and helping to plan for (or avoid) those events.
Actuaries are key players in management teams that
help businesses plan for the future.
Actuary Salaries and Job Description
Most people may not know what an actuary does, or the reasons to become an actuary. As this
interview reveals, actuarial jobs offer great variety and growth potential. We spoke to actuary
Promod Sharma who gave us inside info on what to expect from actuarial jobs, factors that affect
actuary salaries and the outlook for actuarial jobs. Promod emphasized that actuary positions are
not necessarily boring, as many people assume. According to Promod, actuarial jobs can provide
challenging work as well as the opportunity to help consumers.
This informative interview also covers the actuary exam(s) given by the Society of Actuaries to
become an Associate of The Society Of Actuaries. If you're seeking a job in this field or want
more actuary salary info, keep reading!
Actuary Job Description:
Actuaries are trained to measure and manage risk. Actuaries are seen as technical experts who
work with mortality tables and use statistics every day - and have no personalities. The movie
"About Schmidt" with Jack Nicholson perpetuated that stereotype. Naturally, there are different
actuaries and different roles.
Most actuaries work for insurance companies or consulting firms. My career in actuary is
nontraditional. I work in the field, helping advisors who sell life insurance increase their revenue.
That involves coaching, training/education and support on actual cases.
Can you describe your steps in pursuing an actuarial career?
I wasn't sure what I wanted to become when I entered the university in 1980. Luckily, the first
year courses were general study at the University of Western Ontario. Toward the end of the first
year, I attended an open house where I first learned of Actuarial Science.
Here's what I liked: helping people (which is what insurance does), upward career mobility
(some actuaries become presidents of their companies), paid study time (none of the low-paid,
long-hour articling faced by law grads and accounting grads) and great compensation.
I registered in an actuarial program which helped prepare me for the first few of 10 standardized
actuarial examinations administered by the Society of Actuaries, based in Chicago. I had passed
three exams when I graduated and joined Metropolitan Life in Ottawa. I continued my exams
and eventually finished.
After five exams, I became an Associate of the Society of Actuaries, and later a Fellow. I've spent
over 20 years designing/pricing life and health insurance products, developing illustration
projection systems to make products tangible for consumers, creating marketing material,
writing/editing policy contracts, negotiating, managing/mentoring staff, giving presentations,
and, most recently, providing field support to advisors. As you can see, there's plenty of variety
and opportunity for upward movement.
Institute of Actuaries of India(IAI)
IAI is a statutory body established under The Actuaries Act 2006 (35 of 2006) for regulation of
profession of Actuaries in India. The provisions of the said Act have come into force from
10thday of November 2006, in terms of the notification dated 8th November 2006, issued by the
Government of India in the Ministry of Finance, Department of Economic Affairs. As a
consequence of this, the erstwhile Actuarial Society of India was dissolved and all the Assets and
Liabilities of the Actuarial Society of India were transferred to, and vested in, the Institute of
Actuaries of India constituted under Section 3 of the Actuaries Act, 2006.
The erstwhile Actuarial Society of India (ASI) was established in September 1944. Since 1979
the ASI has been a Full Member of International Actuarial Association (an umbrella
organizations to all actuarial bodies across the world) and is actively involved in its affairs. In
1982, the ASI was registered under Registration of Literary, Scientific and Charitable Societies
Act XXI of 1860 and also under Bombay Public Charitable Trust Act, 1950. In 1989, the ASI
started examinations upto Associate level, and in 1991, started conducting Fellowship level
examination leading to professional qualification of an actuary, till then the accreditation was
based on Institute of Actuaries, London examinations (now Institute and Faculty of Actuaries.).
Objects of the IAI: The main objects of the Institute are (section 5 of the Actuaries Act,
2006);
To promote, uphold and develop the standards of professional education, training, knowledge,
practice and conduct amongst Actuaries;
To promote the status of the Actuarial profession;
To regulate the practice by the Members of the profession of Actuary;
To promote, in the public interest, knowledge and research in all the matters relevant to Actuarial
Science and its application; and
To do all such things as may be incidental or conducive to the above objects or any of them.
Difference between an Actuary and an Underwriter in Insurance Industry
July 11, 2012 by levithkas 2 Comments
Actuaries
Actuaries, in an insurance company, help design and price insurance policies for their
companies, such that they remain competitive and maintain profits. They extensively use
analytics, economics and mathematics skills and tools to evaluate risks. They are the ones who
set guidelines for each risk class and category. The underwriters role comes after an actuarys
role and decision.
An actuarys role in a company is similar to that of a brain in a human body. If actuaries do
wrong pricing for the policies, then the companies cannot make profits. If the price is very low,
then the profit margin is not adequate, where as if the price is very high the customers wont buy
any policies from the company.
Roles: Determine likelihood size of the policy holders losses and put a price tag. This is called
ratemaking. Apart from this, they also perform reserving, risk management, reinsurance roles
Underwriters
Underwriters, in an insurance company, decide the category in which each customer falls,
based on the table/matrix created by the actuaries. They look at the data of the individual
customers and decide in which risk class and category the particular customer falls in.
Underwriters evaluate each clients risk and decide upon how much coverage the client can be
given, and for which how much premium he should pay. Sometimes they make decision as in
whether certain clients risk is coverable or not.
