What is an Actuary?

by | May 3, 2017 | Discovery & Research, Pre-ASA |

When I was in high school, I had to do a career matcher test (you can do the same one here) that asked me several personal questions related to my interests, hobbies, goals, dreams, likes, dislikes, etc.  Based on the answers that I gave, it provided me a list of 20+ jobs that would be a good fit for me.

At the time, I knew that I loved math, I knew I wanted to go to university and study something that would allow me to earn a good salary and work in a high rise office (not sure why I wanted that high rise office, but that’s what I wanted!).

Well, this career matcher test was SO completely accurate because the #1 career on my list was an Actuary.

At the time, I had absolutely no idea what an actuary was so I (obviously) never considered it, but I am always so glad that I did that matcher career test because it was the reason that I decided to become an actuary.

I know most people aren’t fortunate enough to know what they want to do as a career while they’re still in high school, so even if you’re discovering the career much later it’s still a completely possible path for you.  Many people discover it much later – during college or even after being employed for many years prior.

Anyway, I thought that story was particularly relevant because when I first discovered an Actuary, I had no clue what it was and I wanted to learn as much as I could about it in order to see if it was what I really wanted to do.

Here’s what an actuary is….

An actuary typically works in an insurance company and specializes in either life and health insurance or property insurance.

The general description of an actuary would be someone that uses enormous amounts of data that an insurance company collects in order to quantify risk.  You can think of risk as the chance that the insurance company has to pay money upon a certain event (such as a death) occurring.

Once the actuary has quantified risk (ie how much do they expect the risk to cost them), the insurance company will pass that cost of that risk through to policy holders that will ultimately pay for that risk through an insurance policy. When the policy holders do pay, the insurance company needs to hold onto that money in their “bank account” so that when they have enough money saved up to pay the policy holder later when and if the risky event occurs (ie, the death).

Now, in reality the insurance company doesn’t really hold the money in a bank account, but that’s a whole other discussion. It’s actually called a “reserve”.

I know that after reading this for the first time it may not make too much sense, but let me explain with an example…

Lets say that an insurance company sells life insurance policies.  This means that it will sell a legal contract to a policy holder(an individual) that guarantees that the insurance company will pay $10,000 (for example) when the policy holder dies.

Assume we have two policy holders.  Policy holder “SM” is a smoker and policy holder “NS” is a non-smoker.  Which one do you think the insurance company should charge more to for an insurance policy? Which one has more risk of the risky event (death) occurring?

An actuary would be the one to tell you!

An actuary’s job is to determine how much the insurance company needs to charge these policy holders so that it gets paid for the amount of risk that it is accepting when it sells an insurance policy.

There is risk to the insurance company because the policy holder usually only pays a monthly fee (aka “a premium” – maybe $100 per month) but the insurance company may have to pay the $10,000 death benefit much before it has received the whole $10,000 from the policy holder.

For example, if the policy holder dies in the first month of the contract, the insurance company would still have to pay $10,000 but only enough time went by for the insurance company to receive $100 in premiums from the policy holder.  This is risky because the insurance company could lose $9,900 ($10,000-$100).  Would you agree to this deal?  Probably not, because there is too much risk of losing your money.

So why does an insurance company make this deal?

Maybe you would agree to this deal if you were 99.9% sure that the policy holder was going to live for another 10 years, so you would get $100 (premium) x 12(months in a year) x 10 (# of years policy holder will live) = $12,000 from the policy holder and only ever have to pay $10,000 whenever that policy holder dies.  You make $2000!

So you have a 0.1% chance of losing some money (the money that the policy holder hasn’t paid you yet) but you have a 99.9% chance of making $2000.

This is the deal that an insurance company makes and the actuary helps the insurance company figure out exactly what the premium should be (the $100 in the example) so that the company receives enough money from ALL it’s policy holders to pay for any of the policy holders that died too early (the 0.1%) and also make some profit (because who wants to have a business that doesn’t make profit?)

Most people know that, generally speaking, a smoker has a shorter life span than a non-smoker.  So a smoker is more RISKY to the insurance company because it is more likely that the smoker will die earlier and the insurance company will have less time to collect money from the policy holder.

So, if you were the actuary at this insurance company, you would tell the insurance company that it needs to charge smokers a higher premium than non-smokers because the insurance company is likely going to have to pay more money when the smoker dies as opposed to when the non-smoker dies.

An actuary puts a dollar amount on risk so that an insurance company knows how much it needs to charge it’s policy holders.

Now, I KNOW this subject can be confusing and if you’re still unclear about anything, let me know in the comments! I’d love to hear your questions.

If you’re interested in becoming an actuary, or just want to find out more about the career, join the Next Step Community (a place where aspiring actuaries come together to learn, study, and get the guidance and support they need on their actuarial journey!)

P.S. as an actuary, prepare yourself for a lifetime of being called an “actuarian” or an “actuarist”, and be prepared to talk about “the actuary in Along Came Polly” – because that’s the only time most people have ever heard of one! With all this knowledge, you can now consider yourself a part of the minority!

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