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What is an actuary? Details for anyone considering the career.

by | Jul 4, 2018 | Getting Started |

 

“Actuary” isn’t a term many people have heard of.  If you’ve just recently discovered this mathematical career, you’re probably wondering what exactly it is.

What is an actuary? An actuary is a professional that uses statistics to predict the likelihood of certain events occurring in the future.  

Actuaries typically work in insurance companies.  They may be responsible for calculating insurance premiums, for calculating how much the company needs to save in order to pay for future claims, or for evaluating other risks within the company.

For example, an actuary may determine the insurance premium that a driver should be charged for vehicle insurance that pays $5,000 if the driver gets into a car accident.  First, the actuary will have to determine (using statistics) how likely it is for the driver to get into an accident.  With that info, the premium to charge can be calculated.

But before I get into too many details, I’ll expand a bit on what an actuary really is.

What is an actuary?

An actuary is professional that specializes in evaluating risk.  They’re able to use math and statistics on large amounts of data in order to predict the timing and financial impact of uncertain future events.

When you’re just learning about the field, this can seem a bit complex, so let’s break it down a bit.

First off, what are uncertain future events?  Well, these are events that could randomly occur at some point in the future (they may never occur).

For example, a car accident is an uncertain future event.  We all hope that we won’t get into one, but it sometimes happens.  And it’s random.  We never know when one may occur and they occur in no particular pattern.

But not only can an actuary predict these, but they can also predict the financial impact of the events.  A small accident may only cost $2000 – $3000 in damage, whereas a bigger accident may completely demolish a brand new $50,000 car.

But how can an actuary predict these things?  An actuary uses statistics and a concept called the law of large numbers in order to be able to make these predictions.

Statistics, such as the expected cost and timing of future events, can be obtained by studying and analyzing large amounts of data on car accidents (for example).  Insurance companies collect tons of data which actuaries can use to find trends that allow them to fairly accurately predict what will happen in the future.

But, the law of large numbers comes into play because an actuary cannot make accurate predictions for any one individual person or event.  They can only make accurate predictions if they have thousands of individuals or events.

They’ll be able to predict that, for example, 200 out of 5000 people will get in accident this month.  But they’ll have no idea about specifically which of those 500 people will be the ones to get in the accidents.

So why does an insurance company need actuaries?

Let’s go back to the example in the introduction where the driver gets $5000 if they get into a car accident.

You probably wouldn’t buy that insurance coverage, right now, for $5,000. That’s because you don’t even know if you’ll get into an accident.

It doesn’t make sense to pay $5,000 right now just to get $5,000 back only IF you get in a car accident. That doesn’t seem fair.

But, what is the fair amount for you to pay?  Maybe it’s $300.  Maybe it’s $1,000.  Maybe it’s $3,472. Who knows.

You may not know what’s fair, but an actuary would know.  An actuary would use hundreds of pieces of data, collected over many many years, to determine how likely it is that the $5,000 will need to be paid, and how far into the future that will be.

Does it sound interesting yet? If not, then maybe the actuarial career isn’t for you. But, if it sounds like something you can’t wait to learn more about, then you’re in the right place! I had that exact feeling when I learned about the career too.

How does an actuary determine premium?

There are two primary considerations that an actuary has to think about when calculating premium. First is the time value of money and second is the likelihood of the event (ie. an accident) occurring.

Actuaries spend many years in school and hundreds of hours studying for actuarial exams in order to learn exactly how these two concepts work. But, I’ll explain them briefly here.

Starting with Data

Essentially, an actuary will use thousands of pieces of data, analyse it for trends, and then skillfully project those trends 10, 20, 30 or more years into the future so that they can make predictions about what is going to happen in the future. For example, an actuary would predict how likely a driver is to get in the accident each month into the future.

An actuary needs to be able to predict the future so that they have an idea of when a given event will occur, if it even occurs at all. The further into the future an event is expected to occur, the lower the premium would be.

In our example, this means that the actuary would charge you less for your insurance the further into the future that he anticipated (due to the data) that your accident would be. For example, a man with an expected ‘accident date’ that is 3 years away would be charged less for insurance than a man with an expected ‘accident date’ that is 7 years away.

Why? Well, it’s a concept called the time value of money.

Time Value of Money

Time value of money (aka interest) is a very important concept that you’d cover in depth if you decided to become an actuary.

Let’s suppose the bank lent you $1,000. If you keep it for 10 years, the bank is going to want you to give them back more than $1000.  The money they want back, in addition to the $1000, is interest.  It’s like a fee for borrowing someone else’s money.

The concept of interest means that $1000 will grow into more money over time.  It’ll earn interest if it is lent out.

This is something that actuaries have to take into consideration.  Insurance companies earn a lot of interest by lending their money out to other companies.

So, if an actuary determines that the insurance company will have to pay $5,000 in 3 years, then the insurance company needs to lend out, say $4,500 now, so that $5000 will be available in 3 years.

However, if the actuary determines that the insurance company will have to pay $5,000 in 7 years, then the insurance company will need to lend out less, say $4,000, because more interest will be earned in the extra 4 years.

Likelihood of occurrence

Not only does the actuary have to consider how far into the future the event is expected to occur, but he also has to consider the likelihood of the event occurring.

Up until now, I’ve made it sound like the actuary is able to determine an exact point in time in the future when the driver will get into an accident.

In fact, this isn’t true. Instead, the actuary has a wide range of possible time frames in which he believes (due to data) that the accident could occur. For example, he may believe that there is a 10% chance that it happens within the next year, a 20% chance that it happens following year, and a 70% chance that it never happens at all.

You may be seeing now that this opens up tons of possibilities. Because, due to time value of money, the price to charge the driver will be different depending on whether the accident happens in the first year, the second year, or not at all.

To deal with this, the actuary determines the final premium by calculating a premium to charge for each time frame (first year, second year, etc), and then combining them mathematically depending on how likely it is for the accident to occur within that time frame.

It’s complex stuff that you, as an actuary, will deal with every day!

How to become an actuary

The actuarial career is very interesting and requires a lot of math, statistics, and probability. Actuaries also have to make many decisions based on judgment. There’s not always a right and wrong answer in the actuarial world.

Because of this, actuaries require a lot of very complex mathematical knowledge.

Most aspiring actuaries choose to get a college or university degree in either statistics or actuarial science. Actuarial science deals specifically with the mathematics and statistics applicable to the work that most actuaries do on a daily basis. It’s much more specialized than statistics in general.

In addition to a degree, there are also approximately 10 actuarial exams (here’s all about how actuarial exams work) that you have to pass in order to become fully qualified. These are exams written outside of school, and they require hundreds of hours studying on your own time.

However, you don’t have to become fully qualified in order to start working. Many students pass 2-3 actuarial exams while they’re still in school, and then the rest while they’re working.

On-the-job training and learning has a huge impact on your understanding of how everything you’ve studied all fits together and actually gets used in real life.

Overall, the process of becoming an actuary takes many people 7-10 years. Some people that start never become fully qualified. They decide not to continue writing exams due to the huge time commitment or the difficulty of them.

The video below details the 8 main steps to becoming an actuary. (Sorry for the poor quality!). If you’d prefer to read the steps instead, you can go here.

 

Actuarial job outlook

The skills of an actuary are becoming more and more in demand. However, there are also more and more students learning about the career and studying to become an actuary.

This means that the actuarial job market becoming fairly competitive, especially in Canada.

Many graduates have difficulty finding jobs, but there are also many that are able to easily find a job. My belief is that this is an issue in many different industries, not just the actuarial field.

Your ability to get a job depends very much on the technical skills that you develop throughout your school years, as well as your ability to communicate and pass exams. If you’re able to get an actuarial internship while you’re in school, your chances of getting a job after increase drastically.

That being said, actuaries have a very special skill set that can be applied in hundreds of different jobs. We’re very well trained in data analytics and statistics, and typically have excellent technical skills. These are all very highly prized skills.

So, if it ends up being too difficult to get an actuarial job after school you shouldn’t be concerned that you won’t find any job. There will likely be many employers that would absolutely love the skill set that you have to offer.

You may just need to take a detour from your original path, gain some work experience and pass more exams, and then continue looking for an actuarial job.

Because of this, I recommend not majoring in actuarial science even if you want to become an actuary. That path is very specialized and it’s not something that most people outside of the actuarial field are familiar with. They may not recognize the value in it.

If you want to become an actuary, instead major in something like statistics, economics or something similar. Then you won’t be specializing so much that it’s difficult to get a job in another field if necessary. This post goes into much more detail about the best majors for aspiring actuaries.

Actually, to be an actuary your degree doesn’t matter much. What employers value most is your ability to pass exams, your ability to communicate well, and your technical skills.

How much does an actuary make?

One of the reasons so many people decide to become actuaries is become of the low stress work and the high salary.

How much an actuary makes depends on several different factors, including your geographical area, your past experience, the industry, and the number of exams you’ve passed.

In the United States, it’s fairly common for someone just starting out to earn about $50K per year. That’s with 1-2 exams passed and no experience.

Passing exams and gaining experience can quickly increase your salary. After 5 years with 5-7 actuarial exams passed, you could very easily be earning about $100K annually. That’s doubling your salary in just 5 years!

As you gain even more and more experience, and once you’ve passed all the actuarial exams, the income ranges really start to widen. You can see this for yourself by referring to this website to see summarized results of recent actuarial salary surveys.

Is it hard to become an actuary?

Becoming a fully qualified actuary takes a lot of dedication and commitment. You’ll spend hundreds of hours studying. And, like I said above, it typically takes 7-10 years to meet all the requirements.

It’s very common for aspiring actuaries to fail exams along the way, which means you have to be very perseverant too.

The exams require tons of math, so if math isn’t your strong suit or if you just don’t like it all that much, then you’ll definitely want to stay away from the actuarial career path. You have to LOVE math.

So, because of all these aspects, it is very difficult for most people to become an actuary. It’s a big challenge. But, in the end most people will say it was worth it!

Where do actuaries work?

Actuaries can work in a variety of different settings. Most notoriously though, they’re working in insurance companies.

Insurance is a risky business, so having the analytical skills of actuaries is incredibly important.

Actuaries use data to ensure that the insurance company is charging it’s policyholders properly for the amount of risk and uncertainty that they’re accepting. It’s crucial in preventing huge amounts of lost money, while still making the insurance affordable and fair for its policyholders.

Since actuaries are experts in evaluating risk and uncertainty, there are many other places that actuaries can work.

For example, actuaries are often involved in corporate pension plan set-ups. Being able to determine exactly how much money employees and companies need to contribute to pension plans is a huge undertaking.

It involves determining expected years of employment, salary projections, and interest rates.

There are often actuarial jobs in the government too. The government is responsible for handling health plans (Obama Care, OHIP, etc.) which require the unique, analytical and forward thinking minds of actuaries.

Truly, the list of places where actuaries could work is endless. Marketing, investments, banking, employee benefits are all possibilities. Where there’s risk and money, an actuary is the person to hire!

What’s it like to work as an actuary?

Actuaries typically work in an office on a computer. The type of work that you’d do as an actuary gradually changes from the time you start your career to the time you’re 10-15 years into the career.

When you just get started, you’re often doing a lot of technical computer work. You use programs such as Excel and other statistical modelling software on a regular basis. You write codes and set up computer models that are used to do all the complex projections that actuaries need in order to do their job.

This video below, called A Day in the Life, talks a lot about what I did day-to-day in the beginning of my actuarial career. I get into some technical details, but even if you don’t understand those you’ll still get value and additional insight into the career.  You can read the post here instead if you’d like.

 

 

Gradually as you gain experience, pass more exams, and move up in the company ranks you’ll be less and less responsible for the technical work. Instead, you’ll be more and more involved in critical business decisions, and strategically deciding how to achieve the company’s goals.

Then, you’ll have a team of less experienced actuaries reporting to you, and they’ll be able to implement the technical requirements that are necessary in order to fulfill your strategic ideas.

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Get FREE study tips and advice for Exam P & FM!

You can get my best studying tips and advice sent right to your inbox. Just add your email below. Learn things like:

• How to get 80%+ questions right.

• Why you shouldn't memorize.

• The quickest way to pass your exam.


Bobby passed his first actuarial exam! Watch the video below to learn how.


Want to learn more about the Study Strategy Program? Go here for all the details!

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