An
actuary is a business professional who deals with the financial impact of
risk
and uncertainty. Actuaries provide assessments of financial security
systems, with a focus on their complexity, their mathematics, and their
mechanisms (
Trowbridge 1989, p. 7).
Actuaries mathematically evaluate the probability of events and
quantify the contingent outcomes in order to minimize the impacts of
financial losses associated with uncertain undesirable events. Since
many events, such as death, cannot be avoided, it is helpful to take
measures to minimize their financial impact when they occur. These risks
can affect both sides of the
balance sheet, and require
asset management,
liability
management, and valuation skills. Analytical skills, business knowledge
and understanding of human behavior and the vagaries of information
systems are required to design and manage programs that control risk (
BeAnActuary 2005a).
The profession has consistently ranked as one of the most desirable in various studies over the years. In 2006, a study by
U.S. News & World Report included actuaries among the 25 Best Professions that it expects will be in great demand in the future (
Nemko 2006).
A study published by job search website CareerCast ranked actuary
relative to other jobs in the United States as number 1 in 2010 (
Needleman 2010), number 2 in 2012 (
Thomas 2012) and number 1 in 2013 (
Weber 2013). The study used five key criteria to rank jobs: environment, income, employment outlook, physical demands and stress.
Disciplines
Actuaries'
insurance disciplines include
life;
health;
pensions, annuities, and asset management;
social welfare programs;
property;
casualty;
general insurance; and
reinsurance. Life, health, and pension actuaries deal with
mortality risk,
morbidity,
and consumer choice regarding 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,
health savings accounts 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 (
Bureau of Labor Statistics 2009).
Casualty actuaries, also known as non-life or
general insurance
actuaries, deal with risks that can occur to people or property other
than risks related to the life or health of a person. 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 reflect properly the increasing long term risks
associated with
climate change, cultural litigiousness,
acts of war,
terrorism and politics (
Bureau of Labor Statistics 2009).
Both major classes of actuaries are also called upon for their expertise in
enterprise risk management (
Bureau of Labor Statistics 2009). 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, and can be involved in managing corporate credit, company evaluations, and tool development (
Bureau of Labor Statistics 2009).
History
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
basic
exchange came into existence, more complex forms developed beyond a basic
barter economy, 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, 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
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 is still an active form of support to this very day (
GivingUSA 2009). However, 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 monuments—precursors 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 (
Johnston 1903, §475–§476). 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. 3–4). The earliest records of an official non-life insurance policy come from
Sicily, where there is record of a fourteenth-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 eighteen per cent (
Lewin 2007, p. 4). In current terminology, this would be an ocean marine contract for a rate-on-line of 18%.
Development of theory
2003 US mortality (
life) table, Table 1, Page 1
The 17th 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 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 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 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 which were calculated scientifically for long-term life
policies, using Dodson's work. The company still exists, though it has
run into difficulties recently. After Dodson's death in 1757,
Edward Rowe Mores
took over the leadership of the group that eventually became the
Society for Equitable Assurances in 1762. 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 which did not originally use such mathematical
and scientific methods most often failed or were forced to adopt the
methods pioneered by Equitable (
Bühlmann 1997, p. 166).
Development of the modern profession
In the 18th and 19th 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 (
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). However, calculations remained cumbersome, and 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, however, rigorous mathematical foundations for
stochastic processes were developed (
Bühlmann 1997, p. 168). Actuaries could now begin 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. 50–51).
Another modern development is the convergence of modern
financial theory with actuarial science (
Bühlmann 1997,
pp. 169–171). In the early 20th 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 (
Whelan 2002).
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 (
D'arcy 1989).
Today, 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. 8–9), but is still not completely aligned with modern
financial economics (
Bader & Gold 2003).
Responsibilities
Actuaries use skills primarily in
mathematics, particularly
calculus-based
probability and
mathematical statistics, but also
economics,
computer science,
finance,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; to other businesses, including sponsors of pension plans; and 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 (
Bureau of Labor Statistics 2009).
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 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 of business. Some actuaries 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.
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 in the domain of
finance (
Feldblum 2001,
p. 8). One of the latest developments in the industry, insurance
securitization, requires both the actuarial and finance skills (
Krutov 2006).
Another field in which actuaries are becoming more prominent is that of
Enterprise Risk Management, for both financial and non-financial corporations (
D'arcy 2005). For example, the
Basel II accord for financial institutions, and its analogue, the
Solvency II accord for insurance companies, requires such 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).
Remuneration
The credentialing and examination procedure for becoming a fully
qualified actuary can be intensely demanding. Consequently, 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 USA, newly qualified actuaries typically earn at
least $100,000, while more experienced actuaries more likely earn over
$150,000 per year.(
Ezra 2011)
In the UK, where there are approximately 9,000 fully qualified
actuaries, typical post-university starting salaries range between
GBP
£25,300 and £35,000 ($40,500 and $56,000) and successful, more
experienced actuaries can earn well in excess of £100,000 ($160,000) a
year (
Lomas 2009).
Credentialing and exams
Becoming a fully credentialed actuary requires passing a rigorous
series of professional examinations, usually taking several years in
total. In some countries, such as Denmark, most study takes place in a
university setting (
Norberg 1990, p. 407). In others, such as the U.S., most study takes place during employment through a series of examinations (
SOA 2012,
CAS 2011). In the UK, and countries based on its process, there is a hybrid university-exam structure (
Institute and Faculty of Actuaries 2011a).
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 (
BeAnActuary 2005b).
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 devoting adequate study time during off-work
hours. A common rule of thumb for exam students is that, for the Society
of Actuaries examinations, roughly 400 hours of study time are
necessary for each four-hour exam (
Sieger 1998). Thus, thousands of hours of study time should be anticipated over several years, assuming no failures (
Feldblum 2001,
p. 6). 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.
Pass marks and pass rates
Unlike some other professions, the actuarial profession is generally
reluctant to specify the pass marks for its examinations. This has led
to speculation over the years that the profession runs a quota system,
perhaps (a) to limit the supply of those who pass the exams and qualify
in the profession or (b) because a high fail rate might give the
impression of difficulty and high value to a qualification that is not
easy to obtain. This concern is confirmed by a former Chairman of the
Board of Examiners of the Institute and Faculty of Actuaries who made
the following denial (
Muckart):
Although students find it hard to believe, the Board of Examiners
does not have fail quotas to achieve. Accordingly pass rates are free to
vary (and do). They are determined by the quality of the candidates
sitting the examination and in particular how well prepared they are.
Fitness to pass is the criterion, not whether you can achieve a mark in
the top 40% of candidates sitting.
Regarding this concern, the CAS has stated (
CAS 2001):
The Board further affirms that the CAS shall use no predetermined
pass ratio as a guideline for setting the pass mark for any examination.
If the CAS determines that 70% of all candidates have demonstrated
sufficient grasp of the syllabus material, then those 70% should pass.
Similarly, if the CAS determines that only 30% of all candidates have
demonstrated sufficient grasp of the syllabus material, then only those
30% should pass.
Notable actuaries
- Nathaniel Bowditch
- Early American mathematician remembered for his work on ocean
navigation. In 1804, Bowditch became America's first insurance actuary
as president of the Essex Fire and Marine Insurance Company in Salem, Massachusetts. Under his direction, the Company prospered despite difficult political conditions and the War of 1812.
- Harald Cramér
- Swedish actuary and probabilist notable for his contributions in the area mathematical statistics, such as the Cramér–Rao inequality (Cramér 1946). Professor Cramér was an Honorary President of the Swedish Actuarial Society (Kendall 1983).
- James Dodson
- Head of the Royal Mathematical School, and Stone's School, Dodson
built on the statistical mortality tables developed by Edmund Halley in
1693 (Lewin 2007, p. 38).
- 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 (Halley 1693).
- James C. Hickman
- Notable actuarial educator, researcher, and author (Chaptman 2006).
- David X. Li
- Canadian qualified actuary who in the first decade of the 21st century pioneered the use of Gaussian copula models for the pricing of collateralized debt obligations
(CDOs). The Financial Times called him "the world's most influential
actuary," while in the aftermath of the Global financial crisis of
2008–2009, to which Li's model has been credited partly to blame, his
model has been called a "recipe for disaster".
- Edward Rowe Mores
- First person to use the title 'actuary' with respect to a business position (Ogborn 1956).
- William Morgan
- Morgan was the appointed Actuary of the Society for Equitable
Assurances in 1775. He expanded on Mores's and Dodson's work, and may be
rightly considered the father of the actuarial profession in that his
title became applied to the field as a whole.(Ogborn 1973).
- Anette Norberg
- Skip for the Swedish Women's Curling Team at the 2010 Winter Olympics. Norberg has won gold medals at the 2010 Winter Olympics, the 2006 Winter Olympics, seven European Curling Championships, and two World Curling Championships.
- Maurice Princet
- French actuary and close associate of artist Pablo Picasso.
Princet is considered "Le Mathématicien du Cubisme" ("The Mathematician
of Cubism") for his "critical influence on Picasso's development as an
artist at the birth of cubism" (Boyle 2002).
- Frank Redington
- Developed the Redington Immunization Theory
- Isaac M. Rubinow
- Founder and first president of the Casualty Actuarial Society (CASF 2008).
- Elizur Wright
- American actuary and abolitionist, professor of mathematics at
Western Reserve College (Ohio). He campaigned for laws that required
life insurance companies to hold sufficient reserves to guarantee that
policies would be paid (Stearns 1905).
Fictional actuaries
Due to the low public-profile of the job, some of the most
recognizable actuaries to the general public happen to be characters in
movies. Many actuaries were unhappy with the stereotypical portrayals of
these actuaries as unhappy, math-obsessed and socially inept people;
others have claimed that the portrayals are close to home, if a bit
exaggerated (
Coleman 2003).
References
- Bader, Lawrence N.; Gold, Jeremy (2003). "Reinventing Pension Actuarial Science" (PDF). Pension Forum 14 (2). pp. 1–39. Retrieved 2008-09-14.
- "What is an Actuary?". BeAnActuary. 2005a. Retrieved 2006-06-11.
- "About Actuarial Examinations". BeAnActuary. 2005b. Retrieved 2006-08-21.
- Boyle, Phelim (September 2002). "The actuary and the artist" (PDF). The Actuary: 32. Retrieved 2007-03-15.
- Bühlmann, Hans (November 1997). "The actuary: The role and limitations of the profession since the mid-19th century" (PDF). ASTIN Bulletin 27 (2): 165–171. Retrieved 2006-06-28.
- "Actuaries". Occupational Outlook Handbook, 2010–11 Edition. Bureau of Labor Statistics, U.S. Department of Labor. December 17, 2009. Retrieved February 27, 2012.
- "2011 CAS Basic Education Summary" (PDF). Syllabus of Basic Education. Casualty Actuarial Society. 2011. Retrieved 2011-01-19.
- "History". CAS Overview. Casualty Actuarial Society. 2008. Retrieved August 14, 2011.
- "Policy For Setting Pass Marks". Exams & Admissions. Casualty Actuarial Society. March 2, 2001. Retrieved June 12, 2013.
- Chaptman, Dennis (September 13, 2006). "James C. Hickman, former business school dean, dies". News. University of Wisconsin–Madison. Retrieved 2008-01-11.
- Coleman, Lynn G. (Spring 2003). "Was "About Schmidt" about actuaries?". The Future Actuary 12 (1). Retrieved 2006-08-29.
- Cramér, Harald (1946). Mathematical Methods of Statistics. Princeton, NJ: Princeton Univ. Press. ISBN 0-691-08004-6. OCLC 185436716.
- D'arcy, Stephen P. (May 1989). "On Becoming An Actuary of the Third Kind" (PDF). Proceedings of the Casualty Actuarial Society. LXXVI (145): 45–76. Retrieved 2006-06-28.
- D'arcy, Stephen P. (November 2005). "On Becoming An Actuary of the Fourth Kind" (PDF). Proceedings of the Casualty Actuarial Society XCII (177): 745–754. Retrieved 2007-07-05.
- "Actuarial Salaries". Ezra Penland. 2011. Retrieved July 27, 2011.
