Qualified Actuary Defined
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 Actuaries
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).