   #copyright

Actuary

2007 Schools Wikipedia Selection. Related subjects: Economics

   Damage from Hurricane Katrina. Actuaries need to estimate long-term
   averages of such damage to accurately price property insurance.
   Enlarge
   Damage from Hurricane Katrina. Actuaries need to estimate long-term
   averages of such damage to accurately price property insurance.

   An actuary is a business professional who deals with the financial
   impact of risk and uncertainty.

   Actuaries are those with a deep understanding of financial security
   systems, their reasons for being, their complexity, their mathematics,
   and the way they work.. They evaluate the likelihood of events and
   quantify the contingent outcomes in order to minimize losses, both
   emotional and financial, associated with uncertain undesirable events.
   Since many events, such as death, cannot be totally avoided, it is
   helpful to take measures to minimize their financial impact when they
   occur. These risks can impact both sides of the balance sheet, and
   require asset management, liability management, and valuation skills.
   Analytical skills, business knowledge and understanding of human
   behaviour and the vagaries of information systems are required to
   design and manage programs that control risk .

   Actuaries' insurance disciplines may be classified as life, health,
   pensions, annuities, and asset management, social welfare programs,
   property, casualty, liability, general insurance and reinsurance. Life,
   health, and pension actuaries deal with mortality risk, morbidity, and
   consumer choice regarding the ongoing utilization of drugs and medical
   services risk, and investment risk. Products prominent in their work
   include life insurance, annuities, pensions, mortgage and credit
   insurance, short and long term disability, and medical, dental, health
   savings accounts and long term care insurance. In addition to these
   risks, social insurance programs are greatly influenced by public
   opinion, politics, budget constraints, changing demographics and other
   factors such as medical technology, inflation and cost of living
   considerations .

   Casualty actuaries, also known as non-life or general insurance
   actuaries, deal with catastrophic, unnatural risks that can occur to
   people or property. Products prominent in their work include auto
   insurance, homeowners insurance, commercial property insurance,
   workers’ compensation, title insurance, malpractice insurance, products
   liability insurance, directors and officers liability insurance,
   environmental and marine insurance, terrorism insurance and other types
   of liability insurance. Reinsurance products have to accommodate all of
   the previously mentioned products, and in addition have to properly
   reflect the increasing long term risks associated with climate change,
   cultural litigiousness, acts of war, terrorism and politics .

   In 2002, a Wall Street Journal survey on the best jobs in the United
   States listed actuary as the second best job, while in previous
   editions of the list, actuaries had been the top rated job . The survey
   used six key criteria to rank jobs: environment, income, employment
   outlook, physical demands, security and stress. The survey goes on to
   state that paralegals have better jobs than attorneys, biologists have
   better jobs than doctors, and accountants have better jobs than CEOs.

History

Need for insurance

   The basic requirements of communal interests gave rise to risk sharing
   since the dawn of civilization. For example, people who lived their
   entire lives in a camp had the risk of fire, which would leave their
   band or family without shelter. As more complex forms of exchange
   developed beyond barter, new forms of risk manifested. Merchants
   embarking on trade journeys bore the risk of losing goods entrusted to
   them, their own possessions, or even their lives. Intermediaries
   developed to warehouse and trade goods, and they often suffered from
   financial risk. The primary providers in any extended families or
   household always ran the risk of premature death, disability or
   infirmity, leaving their dependents to starve. Credit procurement was
   difficult if the lender worried about repayment in the event of the
   borrower's death or infirmity. Alternatively, people sometimes lived
   too long, exhausting their savings, if any, or becoming a burden on
   others in the extended family or society .

Early attempts

   In the ancient world there was no room for the sick, suffering,
   disabled, aged, or the poor—these were largely not part of the cultural
   consciousness of societies . Early methods of protection involved
   charity; religious organizations or neighbors would collect for the
   destitute and needy. By the middle of the third century, 1,500
   suffering people were being supported by charitable operations in Rome
   . Charitable protection is still an active form of support to this very
   day . However, receiving charity is uncertain and is often accompanied
   by social stigma. Elementary mutual aid agreements and pensions did
   arise in antiquity . Early in the Roman empire, associations were
   formed to meet the expenses of burial, cremation, and
   monuments—precursors to burial insurance and friendly societies. A
   small sum was paid into a communal fund on a weekly basis, and upon the
   death of a member, the fund would cover the expenses of rites and
   burial. These societies sometimes sold shares in the building of
   columbāria, or burial vaults, owned by the fund—the precursor to mutual
   insurance companies . Other early examples of mutual surety and
   assurance pacts can be traced back to various forms of fellowship
   within the Saxon clans of England and their Germanic forbears, and to
   Celtic society . However, many of these earlier forms of surety and aid
   would fail due to lack of understanding and knowledge .

Development of theory

   2003 US mortality (life) table, Table 1, Page 1
   Enlarge
   2003 US mortality ( life) table, Table 1, Page 1

   The 17th century was a period of extraordinary advances in mathematics
   in Germany, France, and England. At the same time there was a rapidly
   growing desire and need to place the valuation of personal risk on a
   more scientific basis. Independently from each other, compound interest
   was studied and probability theory emerged as a well understood
   mathematical discipline. Another important advance came in 1662 from a
   London draper named John Graunt, who showed that there were predictable
   patterns of longevity and death in a defined group, or cohort, of
   people, despite the uncertainty about the future longevity or mortality
   of any one individual person. This study became the basis for the
   original life table. It was now possible to set up an insurance scheme
   to provide life insurance or pensions for a group of people, and to
   calculate with some degree of accuracy how much each person in the
   group should contribute to a common fund assumed to earn a fixed rate
   of interest. The first person to demonstrate publicly how this could be
   done was Edmond Halley. In addition to constructing his own life table,
   Halley demonstrated a method of using his life table to calculate the
   premium someone of a given age should pay to purchase a life-annuity .

Early actuaries

   James Dodson’s pioneering work on the level premium system led to the
   formation of the Society for Equitable Assurances on Lives and
   Survivorship (now commonly known as Equitable Life) in London in 1762.
   This was the first life insurance company to use premium rates which
   were calculated scientifically for long-term life policies, using
   Dodson’s work. The company still exists, though it has run into
   difficulties recently. After Dodson’s death in 1757, Edward Rowe Mores
   took over the leadership of the group that eventually became the
   Society for Equitable Assurances in 1762. It was he who specified that
   the chief official should be called an ‘actuary’ . Previously, the use
   of the term had been restricted to an official who recorded the
   decisions, or ‘acts’, of ecclesiastical courts, in ancient times
   originally the secretary of the Roman senate, responsible for compiling
   the Acta Senatus . Other companies which did not originally use such
   mathematical and scientific methods most often failed or were forced to
   adopt the methods pioneered by Equitable .

Development of the modern profession

   In the eighteenth and nineteenth centuries, computational complexity
   was limited to manual calculations. The actual calculations required to
   compute fair insurance premiums are rather complex. The actuaries of
   that time developed methods to construct easily-used tables, using
   sophisticated approximations called commutation functions, to
   facilitate timely, accurate, manual calculations of premiums . Over
   time, actuarial organizations were founded to support and further both
   actuaries and actuarial science, and to protect the public interest by
   ensuring competency and ethical standards . However, calculations
   remained cumbersome, and actuarial shortcuts were commonplace. Non-life
   actuaries followed in the footsteps of their life compatriots in the
   early twentieth century. The 1920 revision to workers compensation
   rates took over two months of around-the-clock work by day and night
   teams of actuaries . In the 1930s and 1940s, however, rigorous
   mathematical foundations for stochastic processes were developed .
   Actuaries could now begin to forecast losses using models of random
   events instead of deterministic methods. Computers further
   revolutionized the actuarial profession. From pencil-and-paper to
   punchcards to microcomputers, the modeling and forecasting ability of
   the actuary has grown exponentially .

   Another modern development is the convergence of modern financial
   theory with actuarial science . In the early twentieth century,
   actuaries were developing many techniques that can be found in modern
   financial theory, but for various historical reasons, these
   developments did not achieve much recognition . However, in the late
   1980s and early 1990s, there was a distinct effort for actuaries to
   combine financial theory and stochastic methods into their established
   models . Today, the profession, both in practice and in the educational
   syllabi of many actuarial organizations, combines tables, loss models,
   stochastic methods, and financial theory , but is still not completely
   aligned with modern financial economics.

Responsibilities

   Actuaries use skills in mathematics, economics, finance, probability
   and statistics, and business to help businesses assess the risk of
   certain events occurring, and to formulate policies that minimize the
   cost of that risk. For this reason, actuaries are essential to the
   insurance and reinsurance industry, either as staff employees or as
   consultants, as well as to government agencies such as the Government
   Actuary’s Department in the UK or the Social Security Administration in
   the US. Actuaries assemble and analyze data to estimate the probability
   and likely cost of the occurrence of an event such as death, sickness,
   injury, disability, or loss of property. Actuaries also address
   financial questions, including those involving the level of pension
   contributions required to produce a certain retirement income and the
   way in which a company should invest resources to maximize its return
   on investments in light of potential risk. Using their broad knowledge,
   actuaries help design and price insurance policies, pension plans, and
   other financial strategies in a manner which will help ensure that the
   plans are maintained on a sound financial basis .

Traditional employment

   On both the life and casualty sides, the classical function of
   actuaries is to calculate premiums and reserves for insurance policies
   covering various risks. Premiums are the amount of money the insurer
   needs to collect from the policyholder in order to cover the expected
   losses, expenses, and a provision for profit. Reserves are provisions
   for future liabilities and indicate how much money should be set aside
   now to reasonably provide for future payouts. If you inspect the
   balance sheet of an insurance company, you will find that the liability
   side consists mainly of reserves.

   On the casualty side, this analysis often involves quantifying the
   probability of a loss event, called the frequency, and the size of that
   loss event, called the severity. Further, the amount of time that
   occurs before the loss event is also important, as the insurer will not
   have to pay anything until after the event has occurred. On the life
   side, the analysis often involves quantifying how much a potential sum
   of money or a financial liability will be worth at different points in
   the future. Since neither of these kinds of analysis are purely
   deterministic processes, stochastic models are often used to determine
   frequency and severity distributions and the parameters of these
   distributions. Forecasting interest yields and currency movements also
   plays a role in determining future costs, especially on the life side.

   Actuaries do not always attempt to predict aggregate future events.
   Often, their work may relate to determining the cost of financial
   liabilities that have already occurred, called retrospective
   reinsurance, or the development or re-pricing of new products.

   Actuaries also design and maintain products and systems. They are
   involved in financial reporting of companies’ assets and liabilities.
   They must communicate complex concepts to clients who may not share
   their language or depth of knowledge. Actuaries work under a strict
   code of ethics that covers their communications and work products, but
   their clients may not adhere to those same standards when interpreting
   the data or using it within different kinds of businesses.

Non-traditional employment

   Many actuaries are general business managers or financial officers.
   They analyze prospective business prospects with their financial skills
   in valuing or discounting risky future cash flows, and many apply their
   pricing expertise from insurance to other lines of business. Some
   actuaries act as expert witnesses by applying their analysis in court
   trials to estimate the economic value of losses such as lost profits or
   lost wages.

   There has been a recent widening of the scope of the actuarial field to
   include investment advice and asset management. Further, there has been
   a convergence from the financial fields of risk management and
   quantitative analysis with actuarial science. Now, actuaries also work
   as risk managers, quantitative analysts, or investment specialists.
   Even actuaries in traditional roles are now studying and using the
   tools and data previously in the domain of finance . One of the latest
   developments in the industry, insurance securitization, requires both
   the actuarial and finance skills . .

Remuneration

   The credentialing and examination procedure for becoming a fully
   qualified actuary can be discouraging. Consequently, the profession
   remains very small throughout the world. As a result, actuaries are in
   high demand, and they are highly paid for the services they render . In
   the UK, where there are approximately 8,000 fully qualified actuaries,
   typical starting salaries range between GBP £24,000 and £30,000
   (approx. US$44,000–US$55,000 c. June 2006) and newly qualified
   actuaries in insurance companies earn somewhere between £44,000 and
   £64,000 (approx. US$81,000–US$118,000 c. June 2006) per year. Many
   successful actuaries earn over £100,000 a year (approx. US$185,000 c.
   June 2006) .

   In developing markets such as India, annual compensation for newly
   qualified actuaries starts at around 8 lakh (800,000 Indian rupees or
   approximately US$17,500 c. June 2006) and can go as high as 20 lakh
   (approx. US$43,600 c. June 2006) .

Credentialing and exams

   Becoming a fully credentialed actuary requires passing a rigorous
   series of exams, usually taking several years. In some countries, such
   as France, most study takes place in a university setting. In others,
   such as the U.S. and the UK, most study takes place during employment.

UK and Republic of Ireland

   Qualification in the United Kingdom and the Republic of Ireland
   consists of a combination of exams and courses provided by the
   professional bodies, the Institute of Actuaries based in London,
   England, and the Faculty of Actuaries based in Edinburgh,
   Scotland—separate but coinciding bodies. No geographic limitations
   exist for these bodies. Students and actuaries in any part of the UK or
   the Republic of Ireland may be a member of either or both bodies. The
   exams may only be taken upon having officially joined the body, unlike
   many other countries where exams may be taken earlier. However, a
   candidate may offer proof of having previously covered topics, usually
   while at university, in order to be exempt from taking certain
   subjects. The exams themselves are now split into four sections: Core
   Technical (CT), Core Applications (CA), Specialist Technical (ST), and
   Specialist Applications (SA). For students that joined the Profession
   after June 2004, a further requirement that the student carry out a
   "Work-based skills" exercise has been brought into effect. This
   involves the student submitting a series of essays to the Profession
   detailing the work that he or she has been involved in. In addition to
   exams, essays and courses, it is required that the candidate have at
   least three years' experience of actuarial work under supervision of a
   recognized actuary for him or her to qualify as a “Fellow of the
   (Institute/Faculty) of Actuaries” (FIA/FFA) .

United States

   In the U.S., for life and health actuaries, exams are given by the
   Society of Actuaries, while for property and casualty actuaries the
   exams are administered by the Casualty Actuarial Society. The Society
   of Actuaries’ membership requirements include passing six examinations
   for Associateship, and an additional two exams, together with the
   completion of a professional paper, for Fellowship . The Casualty
   Actuary Society requires the successful completion of seven
   examinations for Associateship and two additional exams for Fellowship.
   In addition to these requirements, casualty actuarial candidates must
   also complete professionalism education and be recommended for
   membership by existing members . Continuing education is required after
   certification for all actuaries.

   In order to sign statements of actuarial opinion, however, American
   actuaries must be members of the American Academy of Actuaries. Academy
   membership requirements include membership in one of the recognized
   actuarial societies, at least three years of full-time equivalent
   experience in responsible actuarial work, and either residency in the
   United States for at least three years or a non-resident or new
   resident who meets certain requirements .

Canada

   The Canadian Institute of Actuaries (the CIA) recognizes fellows of
   both the Society of Actuaries and the Casualty Actuary Society,
   provided that they have specialized study in Canadian actuarial
   practice. For fellows of the SOA, this is fulfilled by taking the CIA’s
   Practice Education Course (PEC). For fellows of the Casualty Actuarial
   Society, this is fulfilled by taking exam 7C (Canada) instead of exam
   7US. Unlike their American counterparts, the CIA only has one class of
   actuary—Fellow. Further, the CIA requires three years of actuarial
   practice within the previous decade, and 18 months of Canadian
   actuarial practice within the last three years, to become a fellow .

Sweden

   Actuarial training Sweden takes place at Stockholm University. The four
   year master's program covers the subjects mathematics, mathematical
   statistics, insurance mathematics, financial mathematics, insurance law
   and insurance economics. The program operates under the Division of
   Mathematical Statistics .

Other countries

   Many other countries pattern their requirements after the larger
   societies of the US or UK. In general, the websites of these
   organizations are often the easiest source for finding out about
   membership requirements.

Exam support

   As these qualifying exams are rigorous, support is usually available to
   people progressing through the exams. Often, employers provide paid
   on-the-job study time and paid attendance at seminars designed for the
   exams . Also, many companies which employ actuaries have automatic pay
   raises or promotions when exams are passed. As a result, actuarial
   students have strong incentives for devoting adequate study time during
   off-work hours. A common rule of thumb for exam students is to put in
   roughly 400 hours of study time per full exam taken . Thus, several
   thousands of hours of study time should be anticipated over several
   years, assuming no failures . In practice, as the historical passing
   percentages remain below 50% for these exams, the “travel time” to
   credentialing is extended and more study time is needed. This process
   resembles formal schooling, so that actuaries who are sitting for exams
   are still called “students” or “candidates” despite holding important
   positions with substantial responsibilities.

Notable actuaries

   Edmond Halley
          While Halley actually predated much of what is now considered
          the start of the actuarial profession, he was the first to
          mathematically and statistically rigorously calculate premiums
          for a life insurance policy .

   Edward Rowe Mores
          First person to use the title ‘actuary’ with respect to a
          business position .

   William Morgan
          Morgan was the appointed Actuary of the Society for Equitable
          Assurances in 1775. He expanded on Mores's and Dodson's work,
          and may be rightly considered the father of the actuarial
          profession in that his title became applied to the field as a
          whole..

   Isaac M. Rubinow
          Founder and first president of the Casualty Actuarial Society .

Fictional actuaries

   Due to the low public-profile of the job, two of the most recognisable
   actuaries to the general public happen to be characters in movies. Many
   actuaries were unhappy with the stereotypical portrayals of these
   actuaries as unhappy, math-obsessed and socially inept people; others
   have claimed that the portrayals are close to home, if a bit
   exaggerated. .

   Warren Schmidt
          Warren is portrayed by Jack Nicholson and is from the movie
          About Schmidt. The movie mostly covers Schmidt's retirement from
          an insurance company. Schmidt is portrayed as antisocial and
          unfriendly. He does not want to retire and spends his free time
          still working on actuarial calculations.

   Retrieved from " http://en.wikipedia.org/wiki/Actuary"
   This reference article is mainly selected from the English Wikipedia
   with only minor checks and changes (see www.wikipedia.org for details
   of authors and sources) and is available under the GNU Free
   Documentation License. See also our Disclaimer.
