Qualified Actuary Definition
Actuaries are statisticians who calculate the likelihood of specified occurrences. More specifically, actuaries analyze all available information to identify the risk of a particular occurrence and the relating consequences. They primarily work in the insurance or retirement benefit industries.
A Little More on What is an Actuary
An actuary’s role begins by identifying the many factors that contribute to the probability of a given outcome. “Probability” concerns the frequency that a certain occurrence can be expected. For example, if a particular type of disease will occur in 1 out of 100 people, the probability is 1 in 100. The probability of that outcome (when the outcome is negative) is known as “risk”.
Once the risk probability is identified, the actuary will also analyze the strength or degree of the outcome and its collateral affects. For example, there is a certain probability of lightening striking. What are the potential results of the lightening strike and the potential fall-out (such as the physical repercussions) associated with event.
Categories of Actuaries
Actuaries generally work in two major areas of assessment – Life Expectancy and Non-Life Expectancy
Life expectancy actuaries generally work in insurance and retirement industries. Much of their assessments revolve around the probability associated with length of life. Some primary fields include:
- Health Insurance
- Life Insurance
- Accident and Disability Insurance
- Long-term Care Insurance
- Defined Benefit Plan (Pension) Funding
- Annuity rates.
Non-Life Expectancy actuaries focus on the probability of occurrences that do not involve an individual’s life expectancy. This may be because life expectancy is irrelevant or because factoring in these considerations in rates charged is not permitted under the law. Field for non-life actuaries include:
- Automobile Insurance
- Crop or Farm Insurance
- Commercial Property and Casualty Insurance
- Homeowner’s Insurance (theft, casualty, etc.)
- Professional Malpractice Insurance
- Worker’s Compensation
- Product Liability Insurance
A Little More on an Actuary’s Work
Depending upon the industry in which the actuary works, the actuary may be called upon to asses a unique probability of occurrence and potential results from that occurrence. For example, in the insurance industry, the actuary is charged with assisting the insurer with setting rates for customers. The premiums should be adequate to cover all expect costs from contingencies. The actuary will need to know the potential occurrences, the likelihood of occurrence, and the average cost of occurrence. All of these will be taken together to assess the likely payouts by the insurer based upon the category or characteristics of the insured. The insurer will use this to set rates for the individual insured. These calculations get far more difficult when you begin factoring in the various types of coverages and the various types of plans offered to individuals and groups.
Another common role of actuaries is to make certain that defined benefit plans are adequately funding per the Employee Retirement Income Secure Act (ERISA). The actuary must determine the estimated future obligations of the employer to retired (pensioned) employees. The factors that go into this calculation include: retiree average retirement age, retiree life expectancy, inflation rates, and expected fund earnings. Each of these must be calculated for the specific category or characteristics of the employee covered by the pension plan. It gets even more complicated when there are a certain number of employees who are vested and unvested in the plans. It requires a calculation of the likelihood of an employee vesting in the plan. All of this will allow the employer to make certain that the pension fund is adequately funded at all times — meaning the employer will have to know how much money or assets to put into the fund to cover these future obligations.
Lastly, actuaries routinely work in industries that charge a rate of return on credit or funds extended to debtors or borrowers. For example, the interest rate charged on a loan from a bank is calculated based upon the expected return of money in the market and the relevant risk rate applicable to the loan. The risk rate is generally the risk of default or reorganization pursuant to bankruptcy. The actuary would analyze all factors contributing to potential default and market variations to help the bank establish an interest rate based upon various credit qualifications (such as credit score, income-debt ratio, asset holdings, etc.).
From the above description, you can see that the the actuary’s role is highly complicated. The actuary must be highly skilled in statistical methods and have foresight of all potential outcomes and factors affecting potential outcomes. Necessarily, actuaries must be able to identify and work with large amounts of data, have exceptional problem solving ability, and be able to think strategically. Perhaps the most difficult aspect, however, is the need to communicate these complicated findings with individuals who have far less knowledge and understanding of the subject matter. Remember, the actuary will relate their findings to executives who make decisions based upon the information.
Becoming an Actuary
There is no specific education requirement to be an actuary. Though, it is difficult to acquire the skills and substantiate one’s ability in the field without completing a degree program. There are dedicated actuarial science programs in many US universities. Actuaries also frequently student research and analytics related subjects, such as mathematics, statistics, economics, or finance.
Various professional associations, including the Casualty Actuarial Association and Society of Actuaries issue credentials to actuaries. Receiving a credential requires completing a series of actuary examinations.
There are three levels of actuary credential:
- Associate of the Society of Actuaries (ASA) – This credential requires the actuary to demonstrate understanding and ability to apply the fundamental concepts and techniques for modeling and managing risk. She must also complete a professionalism course covering the Society of Actuaries code of professional conduct, which supplies the standards of actuary practice.
- Associate of Actuaries, Chartered Enterprise Risk Analyst (CERA) – This credential requires the actuary to demonstrate specialized knowledge in enterprise risk management, including identifying, measuring, and managing risk within an organization. She must also take a CERA professionalism course regarding the industry code of conduct.
- Fellow of the Society of Actuaries (FSA) – An associate can compete additional training course and take additional examinations to earn the fellow designation. This credential signifies that the actuary understand the business environment related to their specific field of expertise. There are several specialty tracks (each with their own examinations).
References for Qualified Actuaries
Academic Research on Qualified Actuary
Loss reserves and the employment status of the appointed actuary, Kelly, M., Kleffner, A., & Li, S. (2012). North American Actuarial Journal, 16(3), 285-305. This study uses various regression models with data from 1995 to 2018 to investigate the impacts of several factors on the accuracy of reserves that posted by Canadian P/C insurers. It, however, finds no evidence of systematic differences in the magnitude or direction of loss reserve errors between the insurers using company actuaries and those utilizing consultant ones.
The financial actuary and the European consumer, Levay, E. J. (1991). In Proceedings of the 2nd AFIR International Colloquium (Vol. 3, p. 51). This paper investigates the role of the Actuary in the new financial markets, and the opportunities arising from the continued integration with Europe. It also examines the available technology when it comes to assisting in marketing and administration. The paper uses the term financial actuary to describe the actuarial interests away from the predominantly insurance based disciplines.
The evolving role of the actuary in financial reporting of insurance, Gutterman, S. (2002). North American Actuarial Journal, 6(2), 47-59. This article examines the changes in the rules governing financial reporting and the values of actuaries in this reporting. It states that since the methods of assessing and managing the risk change are becoming more complex, the actuary profession, as well as individual actuaries, need to increase their efforts to enhance and expand the role of the actuary.
Management in industry as a career for the actuary: prospects and difficulties, Lever, E. H. (1949). Journal of the Institute of Actuaries, 75(2), 232-242. This paper explains that the demand for actuaries is high since they are great risk managers and problem solvers. They plan for the future through the use of mathematical skills to forecast events and also to solve problems. This paper explores the prospects and difficulties of an actuary who decides to venture in management in the industry as a career path.
The regulatory role of the actuary, Daykin, C. D. (1999). British Actuarial Journal, 5(3), 529-574. This article examines the defined benefit occupational pension schemes in the UK that are required to appoint a Scheme Actuary. It also presents Lloyd’s syndicates which are required by law to obtain an actuarial opinion at the end of year provisions while friendly societies are required to get an actuarial opinion on their technical requirements after every three years. It reviews several regulatory roles in the UK.
The Tax Treatment of Qualified Plans: A Classic Defense of the Status Quo, Zelinsky, E. A. (1987). NCL Rev., 66, 315. This paper indicates that qualified plans, as presently treated by the Internal Revenue Code, are not tax expenditures and that the relevance of the current law should not be seen as a violation of the normative income tax principles. It argues that this treatment of qualified plans fits perfectly in the conception of a normative income tax without appealing to its expenditure type considerations.
An actuary in commerce, Turner, N. C. (1951). Transactions of the Faculty of Actuaries, 20, 192-228. This article states that an actuary in commerce is used to apply mathematical and statistical methods in the assessment of the risk in insurance and financial industries. The actuary performs a wide range of tasks which include financial management, designing and pricing products and also corporate planning. Their skills especially in analyzing and modelling problems are extensively analyzed.
The Role of the Actuary in Insurance, Hafeman, M. (2009). Primer series on insurance, (4). This paper describes various roles an actuary plays in an insurance firm starting with their role with medium and large size accounts. It also investigates one of their most important roles as technical communicators and also in the solicitation of new accounts. It notes that the role of an actuary in insurance increases in significance as the market hardens.
Insurance Regulation and Supervision, Tess, D. (2014). Wiley StatsRef: Statistics Reference Online. This is a comprehensive study that reviews the major areas of concern regarding macroeconomic policies that affect the insurance sectors and insurance regulation emphasizing the issues of prudential regulation and protection of policyholders. It attempts to draw attention to the significance of adequate supervision of the insurance sector.
Loss Reserves and the Role of the Appointed Actuary♦, Kelly, M., Kleffner, A., & Li, S. University of Calgary Working Paper. This study investigates the relationship between the actuary’s position with the insurance company and the level of reserve errors. It deduces that consultant actuaries face different levels of pressure compared to actuaries employed by the insurer. The study also examines factors that can affect reserve accuracy in the US.
The appointed actuary, Johnston, E. A. (1987). Transactions of the Faculty of Actuaries, 41, 559-629. This paper focuses on an actuary appointed by a life insurance company with a primary role of performing frequent and routine valuations of the reserves held for the purpose of paying future benefits. This actuary also has a significant role in providing unbiased advice to boards and senior management on the crucial financial risks that face an insurer.
The actuary in commerce and industry, Phillips, E. W. (1927). Journal of the Institute of Actuaries, 58(2), 160-195. This article major on the extensive description of an actuary that was attempted by MR. Geoffrey Marks who was being sought by large engineering companies over a statistical problem which had occurred in connection with various repairing contracts that involved payments of more than one million pounds.