5 Main Types of Actuaries (Plus Entry-Level Salary)
If you’re thinking about becoming an actuary, or looking for your first job as an actuary, you probably want to know your options! Well, in this post I’ve provided tons of details on the 5 primary types of actuaries and their entry-level salary range assuming 2 exams passed.
Life Insurance Actuary
Entry-level salary with 2 exams passed: $51K – $64K (more info here)
A life insurance actuary is one of the most common types of actuaries. Anyone in the U.S. or Canada that is pursuing a career as a life insurance actuary will write exams administered by the Society of Actuaries.
What is life insurance?
These types of actuaries work for insurance companies that offer products like whole life insurance and term life insurance. These types of insurance pay a lump sum of money when someone dies.
This type of insurance is used for many different reasons. One of the most common is to provide the family of the policy holder (the owner of the insurance contract) with money to use since the income of that family member is now gone. It can be used to help cover bills, children’s expenses, funeral expenses and more.
Life insurance is very long term contract so actuaries in this field are pricing insurance contracts that will last 10, 20 or sometimes even more than 30 years.
Predictions life insurance actuaries make
Life insurance actuaries use their skills to predict when a person will die. They can’t do this for any one person, but since insurance companies sell policies to thousands of people the actuary can fairly accurately predict how many of those people will die each year.
They use these predictions in order to properly price life insurance. The price that someone will pay for insurance (known as the insurance premium) depends on how soon the actuary expects that person to pass away as well as the face amount of their policy..
Someone that is expected to live for 30+ more years will pay a much lower premium than someone that is expected to live less than 10 years, all else being equal. This is because the insurance company has less time to recoup the cost of providing this insurance.
Likewise, someone with an insurance policy that has a face amount of $10,000 will pay a much lower premium than someone with an insurance policy with a face amount of $70,000. However, the actuary doesn’t have to predict this amount because it is set at the beginning of the contract.
Data life insurance actuaries use
This type of actuary will be very interested in mortality rates. Mortality rates are the percentage of people that will die in any given year.
The mortality rate for any person depends on a variety of different factors, such as age, gender and smoking status. You can see an example of a mortality rate table here. That one is for female smokers in the United States.
The data in that table was collected in 1980 but actuaries can still use it by applying “mortality improvement” factors in order to better reflect mortality rates in today’s world. Due to improvements in health care, mortality rates have been decreasing since the 1980s.
Eventually this may change and we may start to see mortality rates increasing as obesity is becoming a problem that is causing many illnesses, and death at an earlier age.
Another big factor in life insurance is lapse rates. Lapse rates are the rate at which people cancel their policy. A high frequency of early cancellations can be a big problem for insurance companies because a very large portion of the expenses are incurred at the beginning of the policy (ie. underwriting and administration).
So, if policyholders lapse early after only paying a few premium payments the insurance company may not have had enough time to fully recoup the cost of getting that policyholder set up.
Is it for you?
With all this talk of death, it may seem like this is a fairly gloomy area of actuarial work. But of all the different insurance products available, life insurance is probably one of the most fulfilling.
Think about it. You’re working to provide people with the funds they need in order to continue on comfortably (hopefully) after the loss of someone important in their life. Those people are typically going through a very hard time, and having the extra money available to pay any bills can relieve them of a lot of stress.
Health Insurance Actuary
Entry-level salary with 2 exams passed: $54K – $66K (more info here)
A health insurance actuary often works with employer disability, health, medication and dental plans. This is called “group insurance” because everyone that works for the company is included under the same insurance plan and there aren’t usually any other requirements.
If your place of work offers benefits like these, you can be sure that an actuary was involved!
Health insurance actuaries may also work to provide individual disability, health, medication or dental insurance policies to people that are self-employed or don’t get benefits through their employer.
The Society of Actuaries administers the exams for anyone looking to become a health actuary in the U.S. or Canada.
What is health insurance?
I explained above that this includes several different areas.
Disability insurance is designed to replace someone’s income in the event that they become ill or injured and are unable to perform their job duties. This means that the ill or injured person would start receiving a bi-weekly or monthly payment from the insurance company until they are able to go back to work.
Usually the insurance company would not pay 100% of the income that the person would be getting at their job. By doing that it not only lowers the cost of the insurance but it also encourages the person to go back to work as soon as they can so that they aren’t relying on the insurance company’s payment longer than truly necessary.
This is another common type of insurance that you’d get through your employer. It covers the cost (or a portion of it) for health-related sessions. This could be for appointments with a chiropractor, a massage therapist or a physiotherapist for example.
Similar to how disability insurance doesn’t usually cover 100% of your income, usually a health insurance plan won’t cover 100% of the cost of the session either. Not only does this lower the cost of the insurance but it also encourages people to only get the services that they really need.
Medication (Prescription Drug) Coverage
This is a very common type of insurance to be included in employer benefit plans too. Prescription drugs can often be very expensive and sometimes are required for years (or for life).
This type of insurance will cover the cost of medication prescribed by a doctor. Depending on the plan, all types of medication and all brands are covered or there are some exceptions that will not be covered by the insurance plan.
Some medication insurance plans will pay 100% of the cost, but insurance is cheaper if only a portion of the cost is covered. Like the other types of insurance that I’ve talked about, the insurance company can encourage people to only use medication they really need by requiring them to pay a portion of the cost.
Dental insurance is fairly straightforward and works very much like the other types of insurance that I’ve talked about above. Basically, an insurance company will pay for the cost of dental work, including check-ups, cavities, braces, and any other dental work.
Again, by only covering a portion of the cost, the premiums for dental insurance will be lower and policy holders will be encouraged to only get procedures that they actually need.
Predictions health insurance actuaries make
Actuaries that work in disability insurance try to predict how many of the insurance company’s policyholders will become unable to work each year. They’ll also try to determine how much money they’ll need to pay to policyholders in place of their lost income.
These types of actuaries will also have to try to estimate how long policyholders will be out of work for, as the longer a policyholder is out of work, the longer the insurance company has to pay them for.
Health insurance actuaries will use past data in order to predict how much money they’ll be spending on prescription drugs, health-related sessions, and dental benefits. These are “low cost/high frequency” claims so they’re fairly easy to predict accurately.
(Side note: Life insurance claims are “high cost/low frequency” claims, so there tends to be more variability in the amount that an insurance company has to pay each year. That makes it harder to predict accurately.)
With health, dental, and medication insurance, many claims are submitted to the insurance company within 1-2 months of receiving the service of prescription. But there are always policyholders that wait months and months before submitting the claim.
Because of this, health actuaries need to estimate how many claims have already been incurred but just have not been submitted to the insurance company yet. This calculation is called the “incurred but not reported” (IBNR) calculation.
Using what actuaries call a “claim triangle”, they’re able to predict how much money the insurance company will need to set aside for these claims even though they haven’t been submitted yet.
Data health insurance actuaries use
These types of actuaries use tons of data and much of it is data that is collected by the insurance company itself. This is because the demographics of the company’s policyholders has a big impact on the cost of this insurance and because the high frequency of claims give the insurance enough data to use.
These actuaries will be constantly looking at the monthly claims amounts for claims that have been reported, and determining how that relates to the claim amounts that they can expect in the future.
They’ll need to take into consideration increasing medication costs, claim frequency and current demographics of their policyholders. Lapse rates (ie policy cancellation) also have to be considered when pricing
Savings and Retirement Actuary
Entry-level salary with 2 exams passed: $46K – $62K (more info here)
This type of actuary actually doesn’t deal with insurance products at all! Instead, these actuaries create and price investment and annuity products that allow individuals to be financially prepared for retirement.
S&R actuaries may work with individual annuities or they may work with employers to help them figure out the logistics of a retirement pension plan for their employees.
To become an S&R actuary, one would write exams administered by the Society of Actuaries in order to work in Canada or the U.S.
What is an annuity?
An annuity is a stream of regular payments that the issuing company (often an insurance company) pays to the annuitant (usually the purchaser of the annuity). This stream of payments is perfect for someone that has retired because they are able to continue getting regular payments even though they’re no longer working.
During an employee’s working years, he or she will likely be saving money for retirement through various sources. Firstly, they’ll have money that’s being contributed to their retirement fund by their employers. Hopefully, the individual will also be saving money from each paycheck and putting it aside into a savings account.
This money will be invested in various different financial instruments, such as bonds, stocks and real estate so that it grows. Upon retirement, the employee will have a large amount of savings that they can use to purchase an annuity that will start paying them immediately.
Predictions S&R actuaries make
Similar to life insurance, S&R actuaries try to estimate how long people will live. But S&R actuaries think about life and death a bit differently than a life actuary would.
For life insurance, an insurance company is usually better off when a policyholder lives longer because they are able to delay the insurance payment further into the future. S&R actuaries, on the other hand, create products that pay the annuitant until death so from that standpoint it’s actually financially better for a policyholder to die sooner.
Data S&R actuaries use
For S&R actuaries, current interest rates are very important because they will be used in the pricing of annuities. The price of annuities changes very frequently (daily or weekly) to reflect these rates.
If interest rates increase, then the cost of the annuity would decrease because the insurance company is able to earn more money from interest. Likewise, a decrease in interest rates would result in an increased cost of the annuity. (These are concepts you would learn about on Exam FM).
Mortality rates are also very useful for S&R actuaries because they need to be able to predict how long people will be receiving payments for. Since mortality rates are higher for older people an actuary would expect to make fewer annuity payments to an older person, hence reducing the price of the annuity.
Property and Casualty Actuary
Entry-level salary with 2 exams passed: $50K – $71K (more info here)
Technically, a P&C actuary fits under a larger umbrella, called a “general actuary” but P&C is the most common of all the actuaries under that umbrella. These actuaries will write exams administered by the Casualty Actuarial Society if they plan to work in Canada or the U.S.
General actuaries create and price insurance products for anything that is unrelated to human health and death. For instance, they get involved in automobile insurance, property insurance, commercial (business) insurance and professional liability insurance.
What is property and casualty insurance?
P&C insurance specifically relates to vehicle insurance and property insurance.
When a vehicle or some other personal (expensive) belongings are damaged or stolen, an insurance company will cover the cost of replacing or fixing those belongings (assuming that the owner has an insurance policy of course). Damage could be due to an automobile accident, fire damage or severe weather damage.
Often times, the insurance company doesn’t pay the entire amount of the damage. The policyholder has to pay a portion of it, called the “deductible” (more about that here on YouTube for Exam P where this concept is learned).
Predictions P&C actuaries make
These types of claims are usually high frequency/low severity, especially for auto insurance. Think of how many accidents you’ve seen in your life! It happens all the time. But that means that these types of claims are easier to predict.
Vehicle insurance actuaries predict the likelihood of the policyholder getting into an accident and also the cost of the accident. Costs can be far higher than just the damage done to the vehicle.
If the policyholder was at-fault for the accident and caused injury to the other driver then the insurance company may have to pay thousands of dollars in medical and hospitalization expenses.
Property insurance actuaries predict the likelihood of damage to property from fire, extreme weather, broken pipes causing flooding, mold growth and anything else that could cause damage to a house or other property.
They also have to consider the likelihood of the property getting stolen. Obviously, that’s not a concern for the house itself, but these types of policies typically cover for loss due to theft of items within the house.
Data P&C actuaries use
Very similar to health insurance actuaries, these types of actuaries collect much of their data from on their own policyholders. They do this because the demographics of their policyholders play a large part in how much money they’re going to need to payout in claims, and because there is tons of data due to the high claim frequency.
A company that tends to attract much safer drivers is going to determine the assumptions to use in pricing from their own data because that will reflect the fact that they attract safer drivers. For example, they will have lower accident rates.
On the other hand, a company that tends to insure vehicles and other property in high crime cities would discover that their assumptions for pricing are much different than a company that mostly insures people in lower crime cities. The expected rate of theft would be much higher, results in higher insurance costs.
Enterprise Risk Management Actuary
Entry-level salary with 2 exams passed: $??K – $??K
This type of actuary is fairly new to the actuarial world. Basically, these actuaries try to consolidate all the risks that a company is exposed to and summarize that risk into a financial dollar amount.
These types of actuaries don’t necessarily work in an insurance company, but they certainly can. There are many types of risk that an insurance company is exposed to in exactly the same way as any other business is exposed to.
One aspect that an ERM actuary would be responsible for is determining the potential impacts and cost that a negative impact on reputation could have.
If, for example, the public found out that a certain company had been dumping huge amounts of waste into the ocean, this would negatively impact their reputation which would lead to lower sales and lost revenue, as well as legal charges and court costs.
Depending on the severity, this could amount to huge costs which may have the potential to force the company out of business. The ERM actuary would recognize this, ahead of time, and encourage the company to hold enough capital as backup in order to get them out of this position if needed.
This is particularly important for insurance companies because there is a lot of regulation built around ERM. Since thousands of people are relying on insurance companies to pay their claims when the time comes, it is taken very seriously.
An insurance company can’t just go out of business like most companies can, if they had to. Insurance companies have made contracts with their policyholders that last years and years into the future so regulations around ERM for insurance companies have been put in place in order to protect policyholders.
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