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Actuarial Science – What is it – Is it Difficult – Does it Pay Well?

What Is Actuarial Science?

Actuarial ScienceActuarial science is a discipline that uses mathematics, statistics, and economics to assesses financial risks in the insurance and finance fields. Actuarial science majors use this training in mathematics and economics to solve business problems that identify and manage financial risk.

Actuaries apply the mathematics of probability and statistics to define, analyze, and solve the financial implications of uncertain future events. Traditional actuarial science largely revolves around the analysis of mortality and the production of life tables.  In banking, it manages the application of compound interest.

Simply put, actuarial science is the systematic study of data.  For example, data that relate to mortality or financial loss due to an adverse event.  Actuaries analyze trends to make reasonable assumptions when there are no reliable data.  The goal is to develop reliable models of what the future may look like. This is then used in the design and pricing of insurance products to provide financial stability and protection against losses.

Actuarial Science – A Closer Look

Actuarial science attempts to quantify the risk of an event using probability analysis.  The goal is to understand and predict any financial impact that can be determined. Actuarial science is typically used in the insurance and banking industry. Actuaries analyze mathematical models to predict or forecast reasonable events that will likely occur.  As a result, insurance companies can allocate funds to pay out any claims that might result from the event. For example, studying the mortality rates of individuals helps insurance companies understand the likelihood or timeframe of paying out life insurance policies.

Many colleges and universities offer degrees in actuarial science.  The curriculum provides a solid foundation in mathematics, statistics, economics, and all types of investments.

What Does an Actuary Do?

In the insurance industry, actuaries analyze past data.  Then, they use that information to determine how much money should be set aside.  It allows them to predict and manage financial losses which could occur in the future. The job involves consistently and accurately predicting the likelihood of misfortune in the midst of uncertainty and its potential financial cost. For example, consider car accidents. If an actuary wants to predict how many people in New York will get in an accident in August, they will look at the percentage of people involved in accidents in the previous years.

Based on that data, the actuary will identify a trend and use it to predict the percentage for the current year.  Then, they help establish how much each person should pay for their insurance.  This is to ensure there are enough funds to cover the damages of the expected car accidents. One of the main challenges for an actuary is when there isn’t any past data.  Another challenge is when the data isn’t relevant due to policy, environmental, or other types of changes.

Actuaries are hired by insurance companies, banks, consulting firms, healthcare organizations, the government, and more. They enjoy high pay, high job security, and a great work-life balance.

Actuarial Science in the Insurance Industry

The insurance industry employs the majority of actuaries.  In other words, this is the sector where new graduates have the highest likelihood of ending up. Needless to say, you’ll find a large number of actuaries working in insurance.  Actuarial science became a formal mathematical discipline in the late 17th century.  This was due to the increasing demand for long-term insurance coverage for burial, life insurance, and annuities.  As a result, actuarial science is all about identifying and managing risks.

Health and Care

The responsibilities will typically be inclined towards morbidity rates.  This means the likelihood that an individual will get sick or disabled.  Or, the possibility that an individual will have to seek medical attention, and whether or not they’ll recover.

  • Disability insurance – covers the loss of income in the event an employee is unable to work due to a disability.  For example, disability rates are determined for veterans that may have been wounded in the line of duty.  Percentages are modeled to the type and extent of the disability.  In turn, this helps to determine the payout from disability insurance. Statistical analysis is also applied to property, casualty, liability, and general insurance.  These are areas where coverage is generally provided on a renewable period. Coverage can be canceled at the end of the period by either party.
  • Critical illness insurance – aims to offset the costs that come with life-altering diseases such as cancer and stroke.
  • Medical insurance – covers the costs of getting medical attention in case of illness. The plans are diverse covering medicine, consultation, and lab work bills.
  • Income protection insurance – not as widespread as the above three, it provides cover against the inability to work due to either accident or illness.

Life insurance

As an actuary, you’ll take part in almost everything that goes on with insurance policies. This includes the development of individual products, pricing, marketing, assessing, and managing the associated risk.  Additionally, there is the need to manage customers’ funds. Actuaries are charged with formulating strategies geared towards turning a profit for the policyholders.

General insurance

Under general insurance, there are policies for commercial risk, property, homeowners, motor insurance, terrorism, and natural disaster. The responsibility involves looking at vast amounts of data and assessing the risk in each of the mentioned areas. This analysis is at the core of insurance.  It is the basis for determining the right amount of reserves to compensate policyholders at any given time.

Pensions

Usually, you’ll be working with employer-based pension funds.  This can mean as little as a single person’s benefits to the benefits of millions of people. You may have to design a scheme from scratch.  Most likely, however, you will work with the one already in place. The actuary’s role is to provide professional insight and to ensure these pension plans are adequately funded. That is, the pension assets must match liabilities, expenses, and expected future claims. This is what is referred to as actuarial valuation.

Actuarial Science in Finance and Investment

The finance and investment areas are quite diverse. This presents a number of alternatives for potential actuaries who do not want to enter the insurance industry. In finance, there are positions available in any of the following segments:

Risk Management

This can be virtually in any industry. It is the underlying role of the actuarial profession. Risk is a component of everything in life. As a result, there are numerous positions that require actuaries to analyze the possible risks that the business faces. More to the point, you will be expected to develop models to minimize these risks. On a consultancy basis, you’ll need precise layouts of these models so that the company can use them even in your absence.

Investment Management

Analytical skill and knowledge are required in every little detail of investing:

  • Maintaining portfolios at profitable ranges
  • Trading assets – buying and selling financial assets and securities
  • Analyzing opportunities – reviewing available investment opportunities to determine the ones with a higher degree of profit potential.

As an actuary, you’re in a better position to offer valuable insight. This is because you’ll be well trained in the disciplines necessary to make accurate determinations.

Banking

Some insurance companies have their own banking divisions.  The traditional route to a bank was to learn the ropes in insurance and move laterally into the banking division.  Actuaries were valued to identify matters of risk and finances in general. Now, however, banks are increasingly hiring actuaries directly.  This was initially due to the long-term forecasting ability and skill-set actuaries possess.  Clearly, that is the focus of the whole discipline. Demand for those skills is only projected to increase better as time goes by.

More banks are joining the rush for actuarial manpower as the banking and insurance sectors intersect.  This demand is fueled through increased hedging by the insurance carriers. Usually, they use banks for this.  And, the banks that provide this service are now willing to directly enlist the services of an actuary.

Corporate Finance

Actuarial skills for predicting future risk and risk assessment are essential at the international corporate level. Principally, the responsibilities involve capital management and advising on financially viable projects to undertake. This skill set is in demand for both government and privately owned corporations. Additional exposure usually comes in the form of mergers and acquisitions experience. (Source: analystprep.com)

Is Actuarial Science Difficult?

Admission requirements for Actuarial Studies

These are the general requirements you can expect during the application process. Some universities may ask you for more documents, while others also accept students with a Bachelor’s degree that’s not related to Actuarial Studies.

Bachelor’s in Actuarial Science

  • Minimum English language test scores: IELTS – 6 or TOEFL – 80
  • High-school transcript of records
  • Letter of recommendation
  • Financial certification

Master’s in Actuarial Science

  • Minimum English language test scores: IELTS – 6.5 or TOEFL – 85
  • Bachelor’s degree in Mathematics, Statistics, or a related field
  • Minimum GPA: 3.0
  • GRE test scores

Actuarial Exams

You need to pass the actuarial exams to become a qualified actuary. These are independent exams and aren’t related to academic institutions.  Actuarial exams are difficult and require intense preparation. This is why most people need between 7-10 years to pass all of them. Each exam can take between 3-5 hours and involves both multiple-choice questions as well as written answers. (Source: mastersportal.com)

Is an Actuarial Science Degree Worth it?

If you’re determined to become an actuary, an Actuary Science degree will help you achieve that. However, the degree is not a requirement. You can earn a Finance, Mathematics, or Statistics degree and still pass the actuarial exams. Actuarial Studies are a great choice for people who are determined to follow an actuary career path and won’t settle for anything else. It is a very specialized discipline requiring focus, training, and devotion.  But if you’re up for the challenge, the job market eagerly snaps up qualified graduates.

Do actuaries make good money?

Fully qualified actuaries can make $150,000+ annually, so most people would say actuaries make good money. But it really depends on your definition of good money. (Source: etchedactuarial.com)

Up Next: What Is the Sortino Ratio?

Sortino RatioThe Sortino ratio evaluates risk vs return on an investment or portfolio. It is a variation of the Sharpe ratio but it only factors in downside deviation.

For an investor, the ratio helps determine an investment’s return relative to risk. Investors can also use it to differentiate between investments with differing returns and risk profiles.

The Sortino Ratio subtracts a portfolio’s risk-free rate from its return. It then divides that number by the investment or asset’s downside deviation. Downside deviation is a measure of downside risk that considers whether an asset or investment falls below a certain threshold.  As a tool, it essentially helps level the playing field when it comes to assessing risk. Consequently, the Sortino Ratio can help investors determine if an investment’s returns are high enough to consider moving forward.

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