…not Superman either, but those two questions are some of the reactions I’ve received when I first introduced my profession.

 ”Errr you deal with birds?”

“Oh, gotta do with airplanes, right?”

Formal introduction

Nope, my profession deals with neither aviary nor aviation. I’m in the actuarial profession. “Act-what?”, you probably ask. Now, let’s see…here’s how Society of Actuaries answer such questions:

An actuary is a business professional who analyzes the financial consequences of risk. Actuaries use mathematics, statistics and financial theory to study uncertain future events, especially those of concern to insurance and pension programs. They evaluate the likelihood of those events, design creative ways to reduce the likelihood and decrease the impact of adverse events that actually do occur.

(For more information: http://www.soa.org/about/about-what-is-an-actuary.aspx)

How many now, who initially have no clue whatsoever what an actuary is, understand what an actuary does after reading the above? Hmmm…yup, yup. As expected: none  

Practical illustrations

This is how I usually try to explain what an actuary does:

Actuary’s traditional area is in life insurance. I’m sure you know what’s a life insurance, right? Whole life, endowment, term insurance etc. The payment for a life insurance policy is called premium, and it is calculated by an actuary, in the first instance anyway. The actuary comes up with a table of premium rates that differentiates between age, sex, smoker/non-smoker etc. That table is then inserted in a software of which insurance agents use to generation premium quotations for you.

Usually this explanation works in enlightening people a little bit about the actuarial profession. I will usually go on to also say that it is also the actuary’s job to make sure the insurance company set aside sufficient provision so that it’ll be able to pay your claims if it arise in future. For example, if your premium is $1000, and let’s say expense to the company amounts to $800, the company cannot simply declare $200 as profit. It has to set up reserve to meet potential claims upon death, maturity, critical illness etc.

Another area actuary has been involved for long time is calculating reserve for pension. Like annuity, the sponsor of a pension scheme need to set up reserve so that it doesn’t suddenly need to fork out lots of money when its employees retire. Even after retirement, it still need to reserve for future pension payment as obviously it does not know how long the retirees are going to live for.

Presently, actuaries are involved in general insurance, health insurance, investment, finance and even oil & gas. Some actuaries have also volunteered for green work in analysing and quantifying the value of, say, a forest.

Quick check

Are you asleep yet? Wakey, wakey…

Demystifying

What sort of magical statistical method we use to perform our work? Actually, at the basic level, it’s rather simple (I may be shot by some actuaries after this hehe). If you have taken any finance subjects, you should be familiar with the concept of present value. The present value of a series of $1 payable at the end of each year is as follows:

1/(1+i) + 1/(1+i)^2 + 1/(1+i)^3 + …

where i = interest rate

At the basic level, actuary calculates expected present value, taking into account of decrements (death, disability, illness, etc). Let’s say that the above stream of $1 is paid only upon survival i.e. you’ll get it each time you survive to the end of the year. The expected present value is

1Px/(1+i) + 2Px/(1+i)^2 + 3Px/(1+i)^3 + …

where tPx is the probability of someone aged x surviving t years.

Once you get hold of the appropriate mortality table (i.e. death rates), it is easy to calculate tPx and thus easy to calculated expected present value.

Really that simple?

That is actually the basic formula underlying actuarial work. However, an actuary does much more than merely crunching numbers. He has to take into account of factors such as investment, regulations, tax, social behaviour, demography etc when designing products and in setting up the necessary reserve.  Of course he does not claim to be expert in everything and does rely on relevant experts but he has to at least be aware of the potential impact. All the while, he also needs to balance the interest of various stakeholders e.g. shareholders, management, government, policyholders, tax authority.

This is what makes the profession rather fascinating.

Last note 

Ok, ok. I know you want to sleep. Just one last note: a qualified actuary is one who has attained Fellowship of certain institute/society of actuaries. He’s commonly known as Actuary, with a capital A. Right below him is one who has attained Associateship but there’s no common name for him. I guess everyone else is called actuary, with a small a.

I better stop now before driving even more readers away. Goodnight!