Insurance Actuary. What is it? Is it a good career?
If you’re interested in a career in math, no doubt you’ve come across something telling you that being an insurance actuary is one of the best jobs you can get.
What is an insurance actuary? An insurance actuary is a professional that specializes one of the following:
- Calculating insurance premiums.
- Calculating how much money to save for future claims.
- Evaluating other types of risk in insurance companies.
First, let’s explore each of these jobs a bit further.
Roles of an Insurance Actuary
So, like I said above there are three primary types of jobs that insurance actuaries do.
First is that they calculate the appropriate premium to charge for insurance products. A premium is the price that someone will have to pay to the insurance company in order to obtain an insurance policy. These are called pricing actuaries.
Another possible role is to calculate how much money an insurance company needs to save so that they can afford to pay a policyholder if they make a claim in the future. These are called valuation actuaries.
The last type of insurance actuary is an ERM (Enterprise Risk Management) actuary. These types of actuaries are responsible for recognizing, evaluating and mitigating other types of risk not specifically related to insurance.
A pricing actuarie uses math and statistical concepts in order to determine the likelihood that a policyholder will make a claim in the future and the expected amount of that claim. They have to take into consideration personal characteristics about the person, such as gender, age, and smoking status because those all impact the likelihoods.
Then, using that information, they determine the appropriate amount to charge. This is called the premium and it’s the amount that someone would have to pay the insurance company to obtain an insurance policy.
An actuary can’t determine these likelihoods for any one individual though. They can only determine them accurately for large groups of people. So that’s why insurance companies need to have thousands of policy holders.
Actuaries use the law of large numbers. So, with thousands and thousands of policyholders, it is possible to predict (fairly accurately) how much an insurance company will need to pay in claims each month. Once they know the amount that will need to be paid in claims for the group, they can divide up the cost evenly amongst all the policy holders.
But, that cost isn’t all that the actuary considers when calculating a premium. They’ll have to also considering operating expenses that the insurance company has (such as building maintenance, staff, etc) and profit.
Whenever a new insurance policy is sold, an insurance company needs to put some money aside in order to pay for any future claims that the policyholder may make in the future.
A policyholder pays a lot of money at the beginning of their policy (in the form of a premium). But an insurance company can’t spend all that money right when they receive it, because the new insurance contract puts them on the hook to pay for any claims that are made by the policyholder in the future.
Insurance claims could be, for example, payment for prescription medications (health insurance) or for the cost of fixing a policyholder’s car once they’ve been in an accident (car insurance).
So, in order to ensure that insurance company has enough money to pay for these claims when they arise, it sets aside some money. You can think of it like a savings account, but an actuary would call it a reserve.
Valuation actuaries calculate the reserve using tons of data from various sources.
I go into much more depth about what valuation actuaries do here.
An ERM actuary is typically responsible for identifying, evaluating and mitigating risk in an insurance company. Most actuaries deal strictly with risk related to insurance, but an ERM actuary deals with other risks too.
For example, an ERM actuary might look at reputation risk. Reputation risk is the risk of different-than-expected income due to negative publicity. Sometimes negative publicity can significantly reduce sales or cause policy holders to cancel their insurance contracts.
If sales are much lower than expected, or more policy holders cancel their policies than expected, the insurance company could run into problems.
Is an actuarial career right for you?
It takes a very unique type of person to pursue a career as an actuary.
First off, you’ve got to love numbers! Actuaries use lots of math and statistical concepts on a daily basis. Without having an in depth understanding and some mathematical intuition, being a good actuary would be difficult.
Secondly, you have to consider if you’ll enjoy the work environment. Actuaries work in an office setting and are on a computer most of the day. Most positions don’t require much travel.
There tends to be quite a bit of collaboration (idea generation) with team members, but much of the work is done individually. This can vary from one position to the next though.
Third, is that you have to find insurance interesting. Becoming an actuary is a long process (which I’ll talk about below) so if the type of work and the concepts behind insurance don’t interest you then it’ll be hard to stay motivated.
That being said, there are some things you may not like as much. The actuarial exams that you’d need to pass in order to become fully qualified can take anywhere from 6 to 10 years.
Fortunately you can work as an actuary before you’re fully qualified, but you still need to be willing to commit tons of your own personal time to the exams.
Insurance Actuary Career Insight
So now let’s get to the real question here. Is an actuary a good career?
You’ll hear people talk about the high salary, low stress, good work-life balance, etc. Is it true?
Actuaries get paid good money. Your family would probably be quite comfortable living off of an actuary’s salary alone.
It will, however, take several years to reach that stage though because you’ll have to gain some experience first and pass several exams.
I’ve talked much more about salary here.
There are lots of other jobs nowadays that also pay a really good salary but may not require as much of a time commitment (the actuarial exams take thousands of hours to study for).
But, don’t let this stop you from becoming one! If the career sounds like one that’s extremely interesting to you, it’s a great choice. Just don’t go into it just for the money because there are other options.
In general, actuarial work is fairly low stress.
Consulting actuaries in particular tend to work long hours due to the tight deadlines that are often put on them. Although I’ve never worked as a consultant actuary, I imagine this would be quite stressful.
Even in non-consulting jobs, tight deadlines can be an issue at times. But this is probably something that occurs in most workplaces.
Once you’re a fully qualified actuary, the balance between work and life is (or can be) quite good. You’d work your regular 8 hour days (maybe some overtime here and there) and be done.
As someone that is still writing exams (not yet fully qualified), the balance isn’t as good. Tons of your own personal time after work has to go towards studying for exams.
This gets especially bad in the last 1-2 months before the exam.
What is an insurance actuary salary?
An entry-level insurance actuary with 2 exams passed will likely make somewhere between $46,000 and $71,000. Once fully-qualified with 6-7 years of experience, $125,000 to $190,000 would be reasonable. With 20+ years of experience, a salary of $500,000 or more is possible.
What does an insurance actuary do?
An insurance actuary is usually involved in either the calculation of insurance premium or the calculation of reserves. Both require the use of tons of historical data and statistical concepts in order to predict the timing and cost of future events.
What degree do you need to become an insurance actuary?
An insurance actuary needs a bachelor’s degree but the subject doesn’t matter. What’s more important is that they’ve passed some actuarial exams and they have excellent technical skills, like Excel and programming knowledge.
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