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Actuary of the Future

As we try to navigate our way through the exciting and exacting digital revolution that our kind is experiencing, it is a worthwhile exercise to reflect and consider how actuarial science has evolved and grown exponentially since its conception.

Nowadays, the techniques used by actuaries are a far cry from the first mortality tables created by Halley in the late 17th century. However, if our profession is to progress at the rate which we have seen in the past, we need to ensure that we are making use of the technological advancements that are born from these changing times.

I imagine that if actuaries of the past had been asked what they picture the actuary of the future would be working on in decades to come, their estimations would have been uncharacteristically incorrect. In the same vein, as an aspiring actuary I too ask myself what the future holds and how we can be prepared as an actuary of the future.

Data – The World’s Most Valuable Commodity

actuary of the future data

By 2020, Statista projected that humans will have produced, replicated, and gathered approximately 64.2 zettabytes of data. To put that into more tangible terms, if a terabyte was 1 kilometre, then 64.2 zettabytes would be equivalent to 1,300 round trips to the moon and back. This unprecedented access to data has positive implications for essentially all facets of human existence, yet it begs the question, what will the actuary of the future be able do with it?

For decades, actuaries have been sitting on a treasure trove of data that they could do very little with as they didn’t possess the technology to analyse data on such a large scale.

However, thanks to developments in Machine Learning, AI, and Data Science, actuaries in this day and age can apply a combination of pattern-recognition software, data visualisation techniques and predictive analytics to utilise this gold mine of historical data for business applications that were merely a dream less than two decades ago. Nevertheless, the actuary of the future cannot become stagnant and must evolve with the world around us.

Blockchain and The Internet of Things

actuary of the future using iot technology

In order for us to understand how actuaries are going to change how the world of insurance works, we first need to understand where this change is going to stem from. Two of the most exciting concepts that the insurance industry has fixed its gaze on are the Internet of things and Blockchain.

From an actuary’s perspective, the Internet of Things has provided a lot of excitement with regards to data collection and analysis for years to come. Put simply, the Internet of Things is the concept of connecting any device to the Internet and to other devices. All these devices would then collect and share data.

The idea of a network of interconnected devices such as sensors to measure rising water levels around your home, self-driving vehicles and even smart refrigerators that can detect what foods you place in them would give actuaries the ability to measure individual risk with levels of accuracy that we have never seen before.

As sensors become more accurate and efficient, data recorded by the sensors will be able to be sent to a secure database in real time and machine learning algorithms will be able to update customers’ premiums, mortality expectations and pay out on policies almost instantaneously. By 2025, Mckinsey & Co. project that there will be over 43 billion IoT connected devices worldwide, which will inevitably open doors for actuaries to ply their trade in areas which have yet to be explored from an insurance standpoint.

Blockchain technology is defined by IBM as “a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk, and cutting costs for all involved.”

The important result from this innovation is that insurance companies will be able to create digital contracts, known as smart contracts, that will pay out whenever a pre-determined set of conditions are met. Data pertaining to the contract will be uploaded to the blockchain and once the agreed conditions have been satisfied the contract will pay out. No longer will customers need to go through a middleman to make an insurance claim and insurers will have a clear accurate log of claims.

Additionally, machine learning algorithms which analyse the data being uploaded will be able to detect whenever a fraudulent claim is being made. The result will be the dissolution of the smart contract and restitution paid to the party which was harmed. Smart contracts will keep both parties honest and will streamline insurance.

Actuarial Applications 

The implications of this technological metamorphosis for the actuary of the future working in the insurance industry are endless.

In the future, we could see car ownership being an expense only for people who have an interest in collecting vehicles or for those who indulge in the past time of driving a manual car. Auto giants such as Tesla, who are leading the charge when it comes to mass adoption of the autonomous vehicle, could see their business model change from selling directly to the consumer to a service where consumers pay solely for their journeys.

Long gone will be the days of haggling with an insurance broker down the phone and instead actuaries will work with autonomous vehicle data to provide insurance to the manufacturers against the risk of malfunction, breakdown, and damage to the vehicle by passengers. Moreover, as the ability of sensors to detect deterioration and breakdown improves, AI will be able to detect when cars will need to be repaired in real time, allowing insurance companies to adjust their reserves almost instantaneously to account for the impending claims.

self driving car on a road

Similarly, life insurance firms will be able to account for their members who make use of the practicality and safety of autonomous vehicles and pass this cost saving down to the consumer as a reflection of the reduced risk they face every time they travel.

They will also avail of the data provided by wearable, ingestible and smart technology that humans will incorporate into their everyday lives. A combination of a wearable fitness tracker, medicine embedded with Radio Frequency Identifiers (RFIDs) and a smart kitchen is an example of an interconnected network of data sources that life insurers and health insurers alike, could use to estimate each customer’s life expectancy more quickly, accurately and in a more user-friendly way.

This access to real time data would give insurance firms the ability to nudge their consumers in the right direction whenever they begin to pick up habits that negatively affect their health and reward their customers who are behaving healthily through an in-house smartphone app for example.

Smart contracts will give insurance firms the ability to increase premiums as certain health metrics reach undesirable levels, and in extreme cases, contracts will be cancelled entirely when the condition of their customer’s health deteriorates beneath an agreed benchmark. Some health and life insurance firms such as Vitality, AXA Equitable Life Insurance Co. and MONY Life Insurance Co. of America are already making use of wearable technology to incentivise their customers to exercise regularly in return for a reduced premium.

Personally, I have already experienced the benefits of wearable technology as my Whoop Band was able to detect that my respiratory rate was out of its normal range before I started to feel the effects of Covid-19 earlier this year. In the future, if this was the case, it is easy to see how my health insurance company could have notified me of how my premium would be affected by my state of health and even could have notified me in advance that I might need medical attention.

With regards to the actuary of the future working in the pensions industry, it is likely that pensioners will purchase their own annuities from insurance firms in the future rather than receiving the old-fashioned Defined Benefit style pension. The role of actuaries will be to help develop the machine learning algorithms which the remaining Defined Benefit pension schemes will use to model their projected probability of success regarding meeting their liabilities.

Similarly, the actuary of the future working in pensions will deploy their expertise when helping to develop machine learning algorithms which analyse health and financial metrics which will be used to determine whether individuals are on track to reach their desired pension by an age they have determined previously. Once again, apps will be deployed to help keep users updated whenever their current behaviours impact their future financial position and will give them advice regarding what they need to do to keep them on track.

However, businesses becoming more data driven goes hand in hand with an increase in their exposure to cybercrime. The actuary of the future will need to become more skilled at identifying where firms leave themselves open to cyber-attacks.

By analysing both the datasets that were targeted during previous cyber-attacks, and the current data that is being collected, actuaries will be able to calculate the risk firms face in the event of a breach at different levels of severity. Additionally, as more data is collected on cyber-attacks, we will be able to develop frameworks and recommend best practices that will help them to mitigate and react to breaches in the future. Actuaries will be able to monitor the level of threat each firm faces and accordingly update their reserves and premiums in the event of an attack.

However, as time progresses more data will likely be stored on a system that is built using blockchain technology. Hackers will not be able to breach databases with as much ease as they currently can. These breaches will be detectable by the algorithms built into the blockchain itself and the need to for actuaries to calculate the risk of these breaches will be minimised.

Instead, the role of the actuary of the future will evolve into understanding and overseeing the operation of the blockchain technology and ensuring that it is fit for purpose and that the data it is storing is being collected in effective and responsible ways.

Does This Innovation Spell the End for Actuaries?

actuary looking at the future

After reading my thoughts on where the actuary of the future might find themselves in years to come, you might be thinking to yourself that the deployment of blockchain and the Internet of Things along with new and improved Artificial Intelligence and Machine Learning technology might put actuaries out of the job. However, I believe that this is far from the truth.

Yes, the actuary of the future will have to adapt to change, but this in my opinion is one of the key traits of a good actuary and a fundamental attribute required for survival.

Down the road, actuaries will find themselves at the forefront of digital change and consigned to oblivion will be the old fashioned excel models that we greatly cherish.

As hard to envision as this may be, change is coming, and I have confidence that the actuary of the future has a large role to play in it.

“This is a guest article written by Jude Campbell. Jude can be found on LinkedIn here.”

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