If you’re wondering what an actuary does, you’ve come to the right place. I worked as an actuary for 4 years, and have been helping future actuaries get into the field for almost 10 years!
So, what does an actuary do?
An actuary uses large amounts of data along with their expertise in statistics and finance to determine how much money should be set aside now in order to pay for costly events that may randomly occur in the future.
But how they actually go about doing this and why they do it is the more interesting part. That’s what I’ll be talking about here.
Here’s what actuaries do, in detail.
Most actuaries do two things:
- First they predict the timing of events that may randomly occur in the future.
- Then they calculate how much money should be invested now so that there will be enough money in the future to pay for any financial losses that occur as a result of the events taking place.
How actuaries predict timing
An actuary will need to know the probability that a random event will occur each month in the future.
Let’s say it’s January 1, 2025. So an actuary would want to know the probability of an event occurring in the month of January, February, March, etc.
To do this they use past data and find trends.
For example, if the actuary is trying to predict the percentage of the population of Washington, DC will get into a car accident in January 2025, then they may look at the percentage of the population that got into a car accident in January 2024, 2023, 2022, 2021 and 2020.
This would likely indicate a trend so that the actuary could predict the percentage for January 2025.
Actuaries face challenges when the specific data that they need isn’t available or if past trends won’t necessarily be indicative of the future due to environmental, regulatory or other changes.
How Actuaries Calculate Investment Needed
The work of actuaries revolves around events that will result in a financial loss in the future.
In our accident example above, the financial loss would be the cost of repairing the vehicle after the accident, or any medical costs that were paid as a result of injuries to the people involved.
Often times, the timing of these events is random and the financial loss is random as well.
So, if the financial loss is random then, again, the actuary will use past data in order to predict how much it’ll be. They’ll be able to determine the probability of it being $0 -$1000, $1000 – $5000, $5000 – $10000, and $10000+ for example.
Then, armed with all that data of timing and financial impact they can use future interest rate predictions to calculate how much needs to be invested right now so that they’ll have enough money in the future to pay for the financial loss if and when the event occurs.
This is actuarial work at a high level.
What does an actuary do on a daily basis?
At a high level it’s difficult to imagine all the work that actually goes on behind-the-scenes in order to determine these values.
Entry-Level Actuarial Work
In entry-level positions, actuaries are often responsible for collecting, interpreting, and ensuring the accuracy of large amounts of data. Then they may have to use actuarial modelling software in order to find important trends.
After finding trends, they’ll be able to use the same modelling software in order to determine the probability of the given events occurring each month into the future. Investment actuaries will provide appropriate interest rates to assume in the future.
Then final calculations will be made to determine how much money their company needs to invest now so that they can pay for the financial loss in the future.
Reporting is also a big part of entry-level actuarial work. Most actuaries use Excel on a daily basis for reporting, or some times as less sophisticated modeling software.
Advanced Actuarial Work
Once an actuary gains more experience and passes more actuarial exams they’ll be involved in overlooking the work of the entry-level staff and making decisions based on the reports that they provide.
They’ll ensure that the methodology and assumptions used seem reasonable. They’ll look at the bigger picture of what their staff is trying to accomplish and then provide the next steps.
Advanced actuaries tend to be less involved with all the details about how processes are done but instead concentrate on reasonability of results. They use their past experience and expertise to make sense of the results that are provided.
Sometimes actuaries will be responsible for determining how they can reduce uncertainty. Inherently there are a lot of assumptions used in their work, so if there is any way for actuaries to make their predictions more accurate, they may do that.
Where do actuaries work?
Insurance policies help to protect people against large financial losses that may occur in the future due to a random event (such as an accident or death), so this is the perfect industry for actuaries to apply their skills.
So, where do actuaries work? Most actuaries work in insurance companies. They’re typically involved in calculating the premiums that policyholders should pay for their insurance or calculating the reserves.
Reserves can be thought of as the insurance company’s savings account. It’s the amount of money that actuaries have determined the company needs to invest now in order to pay for all the financial losses that their policyholders may experience in the future.
Actuaries typically are in an office setting, working about 8 hours per day each weekday. Most positions don’t require much travelling, overtime, or work on the weekends. There are some exceptions though, such as consulting actuaries.
Consulting actuaries tend to have tight deadlines since they are working for clients that want their actuarial work done as soon as possible. The clients may also require that the consulting actuaries travels to them in order to fully understand the project and what needs to be done.
What it’s Like Being an Actuary
Working as an actuary is an interesting and challenging career that involves using math on a daily basis.
There are two primary types of actuaries – pricing actuaries and valuation actuaries.
Pricing Actuaries
Pricing actuaries tend to do a lot of project type work. They’ll work for 3-4 months at a time on repricing insurance products that haven’t been looked at in a while. It’s important to keep prices up-to-date as changes in the financial environment change.
Or, they may be involved in pricing new insurance products. This usually takes longer because they’ll have to determine the feasibility of different features and appropriate assumptions for all the variables.
Valuation Actuaries
Valuation actuaries are responsible for calculating reserves, which can be thought of as the insurance company’s savings account to pay for all the future claims that policyholders make.
Valuation work tends to be more repetitive. They often complete the same tasks every month, quarter, and year.
This is different than pricing work because it’s less project based. If you like improving processes then you’d probably like this type of work better than pricing work. Pricing work often involves starting from scratch each time.
This video talks about some of what I did in my valuation position in group health insurance.
What types of math do actuaries use?
On the job, the math that actuaries use isn’t as complex as it may sound. Actuaries primarily use probability, statistics, and financial mathematics.
They’ll calculate the probability of events occuring in each month into the future, then apply statistical methods to determine the estimated financial impact. Financial mathematics allows them to apply interest concepts to arrive at the amount of money that they need to set aside in order to pay for future losses.
Actuarial exams, which are required to be passed in order to become a certified actuary, require more advanced math though. An excellent understanding of calculus, algebra and advanced statistics is required to pass them. Here’s more about how actuarial exams work.
Overall, the Law of Large Numbers (a mathematical concept) is what makes actuarial math and insurance work. With thousands of policyholders, actuaries can fairly accurately predict the amount of claims that they’ll have to pay month to month, but it would be nearly impossible to make that prediction for just one single policyholder.
How to Become an Actuary
If you’re interested in becoming an actuary, this post tells you the 8 steps that you should take.
You’ll also find tons of resources and support in the Actuary Accelerator Community, where we give you step-by-step guidance on your actuarial journey!
An actuarial career is both a challenging and rewarding one. If the concepts that I’ve talked about above are intriguing to you, then you’ll likely enjoy the work too.
