As an Actuarial Science and Risk Management student at Queen’s University Belfast, I spend nearly as much time trying to explain what an Actuary is, as I do actually studying for my degree.
Whenever I tell people I am studying to become an Actuary, the common questions I get asked are;
The short and sweet answer to these questions is “no”. An Actuary is not the same as an accountant, is not the next A-lister nor are they going to be wielding a bow and arrow (well not during the working week anyway!).
So, what do actuaries do... In short, an Actuary is someone who attempts to quantify risk by attempting to predict the future based on what has happened in the past, through doing a lot of hard sums.
A full definition of what an actuary does can be found on the Institute and Faculty of Actuaries (IFoA) Website which states:
Actuaries are problem solvers and strategic thinkers, who use their mathematical skills to help measure the probability and risk of future events. They use these skills to predict the financial impact of these events on a business and their clients.”
Becoming an Actuary
In order to gain the expertise and skills to do these calculations, the pathway to becoming an actuary is anything but easy. In order to become a fully qualified Fellow of the IFoA, the UK’s chartered professional body for actuaries, you must pass 13 professional exams.
There are different types of membership to the Institute and Faculty of Actuaries - Student, Associate and then Fellow. When you first join the IFoA, you will have a Student membership. Once you have passed seven Actuarial and Business exams as well as three core practice exams, you can call yourself an Associate of the IFoA.
It is possible to receive exemptions from some of these exams based on your degree path. For example, as an Actuarial Science and Risk Management student at Queen’s University Belfast, I have the chance to obtain exemptions from up to 6 of these exams. So, if Actuarial Science is the path you see yourself taking, a smart degree choice could give you a great head start!
The next stage is to then choose your specialty. To do this, you will need to complete two specialist principal exams and one specialist advanced exam. Once you have passed these three exams, you are now a Fellow of the Institute and Faculty of Actuaries and are fully qualified. Not only are actuaries technically skilled, they also must be self-motivated and determined in order to push themselves to become fully qualified in their specialist field.
What is the Role of an Actuary?
So, what do actuaries do....
The basis of all actuarial work is calculating how much money a company needs to set aside to cover any future claims or pay-outs, by using large amounts of data along with their specialist knowledge. There are many different areas in which you can work as an actuary, all of which provide a different set of challenges and require different specialist knowledge.
In order to calculate how much money a company will need to reserve; an actuary is required to make predictions about when the claims are expected to be made and how much each claim will be for.
In order to calculate the first part of this – when the claim or “event” will occur – an actuary must calculate some probabilities. To do this, the actuary will use data, either provided by the client or from their own companies database. Although this data is necessary for making predictions, checks must be done on it before it can be used, to ensure it is “reasonable”.
This is where the expertise of an actuary is extremely useful. The actuary must ensure the data they have collected follows trends they would expect to see in their specialist field. They need to differentiate between errors in the data and extreme cases. Assessments are then made on the age, sex and any other variable that could affect the likelihood of a claim being made, as well as when the claim is likely to be made. The timing of pay-outs is extremely important in order to allow for the time value of money and thus make the correct allowances and investments.
Calculating the average amount of the expected claims is the next step for an actuary. Once again this requires another set of data representing historical claims, cost of repair to vehicles or property etc. Again, this data will need to be checked for anomalies, which requires actuarial expertise.
By combining the estimates of the probable number of claims, when the claims are going to occur and what value the claims are likely to take, the amount of money that needs to be invested to cover all the claims can be calculated.
While this is the basis of what actuaries do, because of their vast statistical and financial knowledge, as well as their excellent abilities with calculus and algebra, there are many other tasks in which actuaries can participate, such as reporting and consulting with clients.
What do Actuaries do in the Pensions & Benefits Industry?
One sector in which actuaries can work is the pensions sector. Recently this sector has become more and more complex due to changes in the types of pension schemes offered by employers, from defined benefit to defined contribution, and thus is demanding more actuarial attention.
The role of a pensions actuary involves collaborating with pension lawyers and administrators to ensure pension schemes are appropriate for the wants and needs of the trustees of the pension scheme. Due to calculations of expected pay-outs of pensions needing to be carried out as previously stated, a pensions actuary is required. The actuary will also ensure the scheme adheres to the changing legislation and regulation of pensions. Changes within the investment market will also contribute to the quantity of money a corporation must invest to be able to meet the pension payments.
Due to their expertise, a pensions actuary can advise a company on the following:
As a whole, pension actuaries are invaluable to the development and monitoring of pension schemes for companies.
What do Actuaries do in the Insurance Industry?
What do Actuaries do in Life Insurance?
Unsurprisingly, an actuary working in the life insurance industry is involved in developing life insurance policies for individuals and groups. This area is one of the most common, largest and traditional sectors for an actuary to work in.
A life insurance actuary will use the process outlined previously in the “What is the Role of an Actuary” section. They will use data for the main risk factors for life insurance such as age, sex, occupation, postal code and smoking status in order to determine how long a person is expected to live.
The life insurance actuary will then use these calculations to design and price products and the equivalent contracts. Once the products and contracts are designed and approved, the actuary may also be involved in marketing the new products to highlight their benefits to the public. They will also be required to monitor the level of available funds held to pay the benefits. This is done to ensure there is sufficient money to pay claims as soon as they occur. They also provide expertise on investing assets in order to ensure the available funds remain at the required level.
Once products are released, it is the job of the life actuary to monitor products to ensure they remain profitable, and check all assumptions used in producing the product remain accurate. If a certain product is extremely profitable, it is possible for the life actuary to suggest additional benefits that could be added, ensuring it is good value-for-money for the customers.
What do Actuaries do in General Insurance?
The job of a general insurance actuary is not dissimilar to that of a life insurance actuary. The main difference being the type of products they develop. Life actuaries produce life insurance products whereas general insurance actuaries will be involved in developing, home insurance, pet insurance and any other forms of insurance they believe the public would purchase. Both life insurance actuaries and general insurance actuaries use the same analysis techniques to develop products.
A general insurance actuary will provide advice and expertise in the following areas;
General insurance can be seen as two broad areas:
What do Actuaries do in Finance and Investment?
Actuaries who work in the Finance and Investment industry work within investment management, investment banking, investment consulting and retail finance advise. Due to actuaries having an extensive technical skills base as well as having a vast understanding of assets and liabilities, they are able to have senior management and advisory roles as well as being able to work on financial reporting corporate finance and mergers and acquisitions.
Within these roles in this industry, actuaries will once again be assessing historical data and using statistical methods to make predictions and estimates of expected returns in investments. Not unlike insurance and pensions actuaries.
So, What Do Actuaries Do...
Through the roles of actuaries outlined in this paper, you would not be blamed for concluding that actuaries are closer to fortune tellers than accountants, actors or archers.
The truth is that actuaries do attempt to predict the future through analysing historical data, doing some statistical assessments and adding some prudency to allow for any unforeseen situations, such as that which we have experienced with the Covid-19 Pandemic. The role of an actuary is to put a monetary value on risk and be able to communicate the implications of their calculations.