The Non-Traditional Actuary: What Roles Can Actuaries Work In?
Step into the innovative world of non-traditional actuaries, where skills in risk assessment and data analytics open doors to diverse industries, from blockchain technology to climate risk management, reshaping traditional actuarial roles and expanding career horizons.
Whilst many people may not know what the life of an actuary looks like, the skill set they develop lends itself well in many career pathways. Some people may know that actuaries are experts in risk management, and with the ever-evolving world bringing new risks comes, fresh new challenges and opportunities for individuals in the actuarial field to expand their horizons. An actuary’s analytic, problem solving, and management skills put them in high demand for the changing world of work.
Where Have Non-traditional Actuary Roles Come From?
When the insurance industry was conceived, policy holder forms were recorded with pen and paper. In many cases, there wasn’t an appropriate amount of data in order to carry out accurate statistical calculations. In fact, life tables and mortality rates only began being formally used in 1762 by the Society for Equitable Assurances. However, mortality data was shaky, with less formal ways of recording deaths, meaning mortality rates were difficult to calculate accurately. There were also more diseases and early deaths prevalent, thus mortality shocks more common, making it challenging for insurers to do profitable business.
Since the internet boom in the 90s, this has all changed. Written forms are now recorded electronically, with most forms now being completed online. Usually, with automation techniques, the policyholder data in these forms makes its way to a database, in which data can be used by actuaries to conduct the appropriate calculations. With the growth of cloud computing, insurance companies have been able to collect increasing amounts of data to make more granular and accurate predictions about the future claims that will be made. The CEO of Insurtech start-up Flock has claimed “90% of the worlds’ recorded data was produced in the last two years.”
This ‘Big Data’ era has led to the creation of new data science careers. These roles involve diving into huge data sets collected by nearly every company, with the goal of finding trends, relationships, and sensitivities, and relaying them in a way that the businesses will understand. This is very similar to what actuaries have been doing for years, through interpreting results in a way that trustees will understand.
The next step in the internet evolution will be Web 3.0, led by the distributed ledger technology, more commonly known as blockchain. Without getting into too much technical detail, blockchain involves several computers storing, sharing, and verifying data, whether that be Bitcoin transactions, sharing data usually stored in a central database, or verifying general insurance claims made by policyholders. Once this technology takes hold, actuaries will have to take account for nuances in distributed ledgers.
A growing problem with blockchain technology is the rising cost in terms of energy consumption, with individuals setting up huge “Bitcoin Mines” in order to verify transactions to make some fractional amount of bitcoin. The costs of these are extreme in terms of the carbon footprint and the silicon extraction needed for semiconductors for the computer microchips. Climate Regulations against this will eventually crack down on Bitcoin mines. With actuary’s expertise in risk management, it is likely many will see opportunities in climate risk in the future.
The Non-traditional Actuary: Data Science
The term ‘data science’ has no formal definition. It is a broad and ever-expanding field involving the use of analytical methods to extract insights, usually from large sets of data. It usually shares sentences with other technical terms like ‘Big Data’, ‘Deep Leaning’, and ‘Artificial Intelligence’. The similarities in skillsets between actuaries and data scientists has led to a re-evaluation of the future of the actuarial profession. The IFOA have already acknowledged this and have since created a data science certificate.
The growth of data science and predictive analytics techniques is becoming increasingly apparent in the insurance world. A survey from Milliman showed 83% of non-life insurance firms are considering incorporating data science into their business within the next 3 years, with 50% already doing so.
Data science methods will be applicable to a wide range of actuarial related tasks, such as underwriting, lapse prediction, renewal premium prediction and claims prediction. The Milliman survey showed the most common areas of usage were pricing, by actuaries, followed by sales and marketing areas.
The practical applications of data science techniques are endless in the actuarial field. With increasing amounts of data being collected about customers, high level data analytics will be essential in terms of management. New visualisation tools, such as PowerBi by Microsoft, will be crucial in summarising the large data sets. With Excel struggling to deal with larger data sets, there will be increasing usage of data frames within Python and R systems in order to validate and analyse the data.
Insurance companies will also have to adapt to data science in order to stay competitive. Many methods currently being implemented are focussed around improving the customer experience. Customer behaviour can now be analysed using generalised linear models, which will encourage competitive underwriting with lower premiums. These models can also be used to predict lapse behaviour.
With digital marketing, insurance products can become targeted toward particular customers. Predictive analytics also impacts claims pay-outs. For example, Allstate’s car insurance products can result in automatic pay-outs provided valid images of the damaged car are provided. Data science has provided new ways of dealing with policyholder information, which actuaries will have to account for in their risk calculations.
If for no other benefit, developing these key predictive modelling skills will allow actuaries to become more well-rounded professionals, providing opportunities to get involved in company projects they were previously unable to, and could open up exciting and lucrative job prospects in the future.
The Non-traditional Actuary: Blockchain
Currently, if two parties wish to send money to each other, they have to go through a centralized service, such as PayPal or banks. If an individual wants to access certain historic data online, they’ll have do so through a centralised database. Similarly, if someone wishes to get an insurance policy, they have to go through a centralised cedant, and also have to use them to verify the claim. Distributed ledger technology, more commonly known as Blockchain aims to make these processes more efficient through decentralisation and Web 3.0.
Blockchain is essentially a database shared and stored by multiple participants, whom are essentially computers on a peer-to-peer network, working to solve difficult mathematical problems to verify and encrypt the data joining the blockchain. This may sound complex (and it is), but it works and makes interacting with the internet much more efficient.
In the case of insurance, individuals would pool resources together in the peer-to-peer business model with the mutual agreement of insuring against an event. This is essentially how insurance companies function currently, the difference being that no central authority is required. This would result in a variety of insurance products that would be more transparent, affordable, and accessible, with faster claim pay-outs as data can be verified automatically.
This would impact actuarial work in numerous ways. Firstly, all eligible claims will now be paid out automatically in a decentralised system, meaning adjustments will need to be made in the probability calculation of making a claim given the insured event occurred. Secondly, new ways of measuring risks will have to be considered, as the blockchain will be working to verify that an insurable event occurred, which could simplify calculations. Model risk may also have to be considered as blockchain systems are still incredibly young and may be quite unpredictable.
This may sound like a fever dream but blockchain already becoming a reality. Several companies including EY, Willis Tower Watson, AXA XL and Insurtech start-up Lemonade have already implemented blockchain solutions. EY built a marine insurance product which shared the data points between cedants, brokers and reinsurers on a blockchain network. This reduced the need for database reconciliation and increased efficiency. AXA built a blockchain solution for flight delay insurance which gave policy holders automatic pay-outs if their flight was delayed by more than 2 hours.
The Swiss blockchain web 3.0 start-up B3i are designing several insurance solutions, and have already launched their reinsurance solution, B3i Re. The scheme has proved successful, with established market players Allianz and SwissRe taking out legally binding reinsurance contracts on the distributed ledger they provided.
So, whilst blockchain may still be in its developmental stages, more applications are coming through and it has proved the technology is here to stay, and such is a space actuaries should be watching.
The Non-traditional Actuary: Climate Change
For many individuals, including actuaries, climate risk may seem like a distant nightmare, which they will not have to consider by their early retirement. But the impacts of climate risk are here and are only accelerating. Furthermore, The Chatham House Report stated that no region will be spared from the devastating effects of climate change including flooding, drought, water security, food security, and decreasing productivity and health quality. All of these are risk factors that should be considered in actuarial calculations.
A common general insurance product seen by actuaries is home insurance. With 2.4 billion people living within 100 kilometres of the coast, the risk to personal property is increasing as the effects of climate change worsen. The impact has already been realised with five of the Solomon Islands already becoming submerged. With no countries expected to escape the risk of climate change, all coastal properties will be at risk of more severe flood damage or wind damage in the case of more extreme hurricane events.
The impact on insurance pricing will be two-fold. Houses in more coastal areas will have higher premiums on their policy due to the higher risk of damage. In addition, people will be more likely to relocate as a result of climate risk, inflating the price of land locked properties, which will increase the premiums charged to other homeowners as a result. Other rating factors may have to be considered when pricing home insurance such as flood safety measures that are in place in the area or on the property itself.
As these risks become more apparent, we could see more regulations come into insurance around C02 emissions, particularly with motor insurance. The UK government has already announced the ban of sales on new petrol and diesel cars by 2030. This will leave an old fleet of legacy vehicles which could be hit with higher insurance premiums due to the climate risk they are posing, and to encourage drivers to switch to either hybrid or electric options.
Other risks mentioned in the Chatham House Report were related to food and water security. With increased drought in certain areas, we could see food shortages worldwide. This could severely impact crop insurers directly, but indirectly it could impact life insurers due to increased mortality. This, along with the health impacts associated with rising temperatures, could cause further mortality shocks which will impact the claims life insurers will pay out so they will have to raise premiums in the future. If actuaries can account for this beforehand, they can minimise the difference between expected and actual claim amounts.
In Conclusion…
I’ve only just scratched the surface of the non-traditional actuary positions that actuaries can fill. Other roles could include wealth management, data mining, software development, environmental finance or digital sales and marketing just to name a few.
But I believe the above roles are the broadest and will be applicable to most actuary’s careers in the near future, with data science techniques and blockchain moving into the mainstream, and how all actuaries will have to consider traditional alongside climate risks going forward.
