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 possibility that an undesirable event will occur. Actuaries are experts in evaluating the likelihood of future events, designing creative ways to reduce the likelihood of undesirable events, and decreasing the impact of the undesirable events that do occur. The impact of these undesirable events can be both emotional and financial. As some of these events, such as death, cannot be totally avoided, reducing their financial impact is very important. Actuaries are the leading professionals in finding ways 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 Template:Ref harvard.
Disciplines
There are four major actuarial disciplines, which are often referred to as life, health, pension, and property & casualty. Life, health, and pension actuaries deal with risks that pertain to the ongoing health and natural mortality of people. Products prominent in their work include life insurance, annuities, pensions, disability, and medical insurance. 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, medical malpractice insurance, products liability insurance, directors and officers liability insurance, environmental insurance, and other types of liability insurance.
History
Need for insurance
The need for insurance and pensions have existed for as long as risks have existed. Merchants embarking on trade journeys always bore the risk of losing anything entrusted to them, their own possessions, or even their lives. People who lived their entire lives in one hamlet still had the risk of fire, which would leave their families without a roof over their heads. The primary breadwinner of any household always ran the risk of dying too soon and leaving their family to starve. Loan procurement was difficult if the lender worried about repayment in the event of the borrowers death. Alternatively, people sometimes lived too long after retirement and exhausted their savings.
Early attempts
The original method of protection was charity; religious organizations or neighbors would collect for the destitute and needy. This form of protection is still active to this very day Template:Ref harvard. However, receiving charity is uncertain and is often accompanied by social stigma. Elementary mutual aid agreements and pensions did arise as early as ancient Greece, but these would often fail do to lack of understanding and knowledge.
Development of theory
The seventeenth century began to see personal risk placed on a more scientific basis. Independently from each other, compound interest was studied and probability theory emerged. Another important advance came in 1662 from a London draper named John Graunt, who showed that there were regularities in the patterns of life and death in a group, or cohort, of people, despite the uncertainty about the future lifetime 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 it could be worked out how much money 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. More importantly than constructing his own life table, Halley demonstrated a method of using his life table to work out how much money someone of a given age should pay to purchase a life-annuity Template:Ref harvard.
Actuaries
James Dodson’s pioneering work on the level premium system led to formation of the Society for Equitable Assurances on Lives and Survivorship in London in 1762. This was the first life insurance company to use premium rates which were calculated scientifically for long-term life policies. The company still exists, though it has run into difficulties recently. Many other life insurance companies and pension funds were created over the following 200 years. It was The Equitable 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 Template:Ref harvard.
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 Template:Ref harvard.
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 a 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.
As actuaries are considered among the preeminent experts on financial risk, there has been a recent widening of the scope of the actuarial field to include investment advice and asset management. These actuaries will work as risk managers, quantitative analysts, or investment specialists. Given their mathematical and statistical background they are well suited to the advanced modeling challenges common in these fields.
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 Template:Ref harvard. In the UK, where there are fewer than 8,000 fully qualified actuaries, typical starting salaries range between GBP24,000 and GBP30,000 (approx. US$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) Template:Ref harvard.
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 Template:Ref harvard.
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) Template:Ref harvard.
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 Template:Ref harvard. 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 Template:Ref harvard. 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 Template:Ref harvard.
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 Template:Ref harvard.
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 has spent at least three years working as an actuary, and be of 23 years of age, for him or her to qualify as a “Fellow of the (Institute/Faculty) of Actuaries” (FIA/FFA) Template:Ref harvard.
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. If 6–9 exams need to be taken to reach a desired level of credentialing, anywhere from 2,400 to 3,600 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 Template:Ref harvard.
- 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 Template:Ref harvard.
- Isaac M. Rubinow
- Founder and first president of the Casualty Actuarial Society Template:Ref harvard.
See also
References
^ "Academy Policies: Membership Requirements". American Academy of Actuaries: 2006 Yearbook (PDF). Washington, DC: American Academy of Actuaries. 2006. pp. 59–61. Retrieved 2006-06-11.
^ "What is an Actuary?". BeAnActuary Web Site. 2005. Retrieved 2006-06-11.
^ "Careers". Bimaonline.com. 2003. Retrieved 2006-06-06.
^ "Actuaries". Occupational Outlook Handbook 2006-07 Edition. U.S. Department of Labor, Bureau of Labor Statistics. December 20, 2005. Retrieved 2006-06-11.
^ "CAS Membership Requirements". Casualty Actuarial Society:2006 Syllabus of Basic Education. Casualty Actuarial Society. 2006. Retrieved 2006-06-11.
^ "Who is CAS?". Casact.org. Casualty Actuarial Society. 2006. Retrieved 2006-06-22.
^ "Membership & Education: Canadian Enrollment Information". Canadian Institute of Actuaries. 2004. Retrieved 2006-06-11. {{cite web}}: Unknown parameter |month= ignored (help)
^ Dixon, Beryl (July 14, 2004). "Occupational profile: Actuary, insurance company" (PDF). AGCAS. p. 1. Retrieved 2006-06-06.
^ "Actuary Salary Survey". D. W. Simpson & Company. 2006. Retrieved 2006-06-11.
^ Ogborn, M.E. (1973). "CATALOGUE OF AN EXHIBITION ILLUSTRATING THE HISTORY OF ACTUARIAL SCIENCE IN THE UNITED KINGDOM" (PDF). Faculty and Institute of Actuaries. pp. 7–8. Retrieved 2006-06-22. {{cite web}}: Unknown parameter |month= ignored (help)
^ "History of the actuarial profession". Faculty and Institute of Actuaries. January 13, 2004. Retrieved 2006-06-21.
^ "Becoming a student". Actuarial Profession. Faculty and Institute of Actuaries. 2006. Retrieved 2006-06-11.
^ Halley, Edmond (1693). "An Estimate of the Degrees of the Mortality of Mankind, Drawn from Curious Tables of the Births and Funerals at the City of Breslaw; With an Attempt to Ascertain the Price of Annuities upon Lives" (PDF). Philosophical Transactions of the Royal Society of London. 17: 596–610. ISSN 0260-7085. Retrieved 2006-06-21.
^ Lee, Tony (2002). "2002: Rating the Nation's Best and Worst Jobs". Retrieved 2006-04-04.
^ "Admission Requirements to the SOA". Society of Actuaries:Basic Education Catalog (PDF). Society of Actuaries. 2006. pp. 6–7. Retrieved 2006-06-11.
^ Tong, Vinnee (June 19, 2006). "Americans' donations to charity near record". Chicago Sun-Times. Digital Chicago Inc. Retrieved 2006-06-21. {{cite news}}: Check date values in: |date= (help)