Actuary facts for kids
An actuary is a super smart professional who uses advanced math skills. They help people and companies understand and manage risk and uncertainty. Think of them as financial detectives who predict future events.
Actuaries look at all sorts of financial situations. They figure out how much money a company might need for future payments. They also help decide how to invest money wisely. Their job is to make sure financial systems are strong and safe. The special field of study for actuaries is called actuarial science.
People have thought about insurance for a very long time. But the scientific way to measure risks started in the 1600s. Today, actuaries need to be great at solving problems and understanding how businesses work. They also need to know about human behavior and computer systems. They use this knowledge to create plans that handle risks. They make sure the cost of preventing a problem isn't more than the problem itself.
Becoming an actuary involves special education and passing tough exams. These steps can be different in various countries. But all actuaries learn the same main ideas. They learn how to assess risks, use statistics, and reduce problems. This training takes many years to finish.
Being an actuary is considered one of the best jobs! Since 2010, it has often been ranked as one of the top two jobs in the United States.
Damage from Hurricane Katrina in 2005. Actuaries need to estimate long-term levels of such damage in order to accurately price property insurance, set appropriate reserves, and design appropriate reinsurance and capital management strategies.
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Contents
What Do Actuaries Do?
Actuaries use many skills, especially in math. They are experts in probability and statistics. They also understand economics, computer science, finance, and business. This makes them very important in many areas:
- They work for insurance companies. They can be full-time employees or special advisors.
- They help other businesses, like those that offer pension plans for employees.
- They also work for government groups. Examples include the Government Actuary's Department in the UK. Another is the Social Security Administration in the US.
Actuaries collect and study lots of information. They figure out how likely an event is to happen. They also estimate how much it might cost. This could be something like an illness, an injury, or damage to property.
They also answer big financial questions. For example, how much money needs to be saved for retirement? Or how should a company invest its money to get the best results? Actuaries use their knowledge to create and price insurance plans. They also design pension plans and other financial strategies. Their goal is to make sure these plans are financially strong.
Different Types of Actuaries
Actuaries usually work in two main areas: life insurance or non-life insurance.
Life actuaries focus on risks related to people's lives and health. This includes things like how long people might live (mortality). It also covers how likely they are to get sick (morbidity). They also look at investment risks. They help create products like life insurance, retirement plans (annuities and pensions), and health insurance. They also work on plans for long-term care or if someone becomes disabled. These plans are also affected by things like new medical technology and how much things cost.
Non-life actuaries are sometimes called "property and casualty" actuaries. They deal with risks that affect people's belongings or cause legal problems. This includes things like auto insurance for cars. It also covers homeowners insurance for houses. They also work on insurance for businesses, workers' compensation, and other types of liability insurance.
Actuaries are also experts in managing all kinds of risks for big companies. This is called enterprise risk management. They help companies plan for different situations. They also help set up rules for how companies handle risks. Actuaries can also work in other finance areas. They might help analyze new investments or study what customers want.
Where Do Actuaries Work?
Actuaries have a main job: calculating how much insurance should cost. This is called the "premium." They also figure out how much money insurance companies need to keep aside. This money is called "reserves." It makes sure they can pay claims when needed.
For non-life insurance, actuaries figure out how often something bad might happen. They also estimate how big the damage will be. For life insurance, they calculate the value of money over time. This helps them plan for future payments. They use special math models to make these predictions. They also try to guess how interest rates and currency values might change. This is very important for life actuaries.
Sometimes, actuaries look at costs for events that have already happened. They also help create new insurance products. They make sure the prices are fair.
Actuaries also help design and manage the systems that insurance companies use. They help report on a company's financial health. A big part of their job is explaining complicated ideas clearly. They talk to clients who might not know as much about math and finance. Actuaries follow a strict set of rules about how they work and communicate.
Actuaries also work in newer roles. They help companies manage all their risks, not just insurance ones. This is called enterprise risk management. They use their skills to look at different types of risks. They help companies understand what they might gain or lose.
Actuaries also give advice on investments. They help manage a company's money. Some actuaries even become top leaders in companies. They might be a chief financial officer or a chief investment officer. They use their financial skills to figure out how valuable future business ideas are. They also apply their pricing knowledge for other types of businesses. For example, they might help turn insurance policies into investments. Actuaries can also be expert witnesses in court. They use their analysis to estimate financial losses, like lost earnings.
A Look Back: The History of Actuaries
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Why Did We Need Actuaries?
People have always shared risks, even in ancient times. For example, if a fire destroyed a home, the whole community would help. As trade grew, new risks appeared. Merchants could lose their goods or even their lives on journeys. Families also worried about what would happen if the main provider died or became sick. People might also live a very long time and run out of savings. These problems showed a need for ways to protect against future uncertainties.
Early Ways to Protect Against Risk
In ancient times, people often relied on family or charity for help. Religious groups or neighbors would collect money for those in need. For example, in Ancient Rome, charities helped many people by the 3rd century. While charity still exists, it's not always a sure thing.
People also created early forms of mutual aid. In the Roman Empire, groups formed to help pay for funerals. Members would pay a small amount each week into a shared fund. When a member died, the fund would cover the costs. These groups were like early versions of burial insurance. Similar ideas existed in ancient Saxon and Celtic societies.
Insurance for goods, like cargo on ships, also started long ago. The Greek speaker Demosthenes mentioned such guarantees in the 4th century BCE. The first official non-life insurance policy we know of was in Sicily in the 1300s. In 1350, a man named Lenardo Cattaneo insured a shipment of wheat. He took on "all risks" for a fee of 18% of the shipment's value.
How the Math Developed
During the 1600s, people started to develop a more scientific way to manage risks. In 1662, a London merchant named John Graunt made an important discovery. He showed that groups of people had predictable patterns of life and death. This was true even though no one could predict what would happen to one person. This study led to the first life table.
By combining this idea with how compound interest works, it became possible to create insurance plans. These plans could offer life insurance or pensions for groups of people. It also allowed for calculating how much each person needed to pay into a shared fund. This was based on a fixed interest rate. Edmond Halley was the first person to correctly calculate these values. He showed how to use a life table to figure out the cost of a life-annuity.
The First Actuaries
James Dodson did important work on a system for calculating insurance payments. This led to the creation of the Society for Equitable Assurances in London in 1762. This was the first life insurance company to use scientific methods to set prices. They used Dodson's work for long-term life policies.
After Dodson passed away in 1757, Edward Rowe Mores led the group. He decided that the main official should be called an actuary. Before this, the word "actuary" was used for officials who recorded decisions in courts. Other companies that did not use these scientific methods often failed. They eventually had to adopt the methods pioneered by Equitable.
Becoming a Modern Profession
In the 1700s and 1800s, calculations were done by hand. Figuring out fair insurance prices was a lot of work. Actuaries at that time created special shortcuts to make these calculations faster and more accurate.
In the mid-1800s, professional groups were formed. These groups supported actuaries and their science. They also protected the public by making sure actuaries were skilled and ethical.
Non-life actuaries followed in the early 1900s. For example, in 1920, updating workers' compensation rates took over two months. Teams of actuaries worked day and night. In the 1930s and 1940s, new math ideas helped actuaries predict losses. They started using models of random events instead of fixed methods.
Computers completely changed the actuarial profession. From paper and pencils to powerful computers, actuaries' ability to model and predict has grown a lot.
Another modern change is how finance theory and actuarial science have come together. In the late 1980s and early 1990s, actuaries started combining financial theory with their models. Today, the profession uses life tables, loss models, and financial theory.
Why Being an Actuary is a Great Job
There are not many actuaries in the world compared to other jobs. This means actuaries are in high demand. They are also paid very well for their important work.
The actuarial profession has been consistently ranked as one of the most desirable jobs for decades. Actuaries usually work reasonable hours in comfortable offices. They don't need to do physical work that could cause injury. They are well paid, and there are always good job opportunities. It's also considered one of the best jobs for women. It's even seen as a job that holds up well during tough economic times.
How to Become an Actuary
Becoming a fully qualified actuary means passing a tough series of professional exams. This usually takes several years. In some countries, like Denmark, most of the study happens at a university. In others, like the US, most study happens while working. In the UK, and countries that follow its system, there's a mix of university study and exams.
Getting Ready for Exams
These qualifying exams are very difficult. So, people studying for them usually get a lot of support. Often, employers give paid time off work to study. They also pay for actuaries to attend special seminars for the exams. Many companies also give automatic pay raises or promotions when an exam is passed. This gives students a strong reason to study hard during their free time. A common rule is that for each four-hour exam, about 400 hours of study are needed. This means thousands of hours of study over several years, assuming no failed attempts.
How Exams Are Graded
Historically, the actuarial profession didn't always share the exact passing scores for exams. To address concerns about quotas, a former head of examiners for the Institute and Faculty of Actuaries explained. He said there are no quotas for how many people fail. Pass rates change based on how well prepared the candidates are. The goal is to pass those who show they are ready, not to limit the number of passes. In 2000, the Casualty Actuarial Society (CAS) started releasing pass marks. The CAS also stated that they do not use specific pass ratios. They affirmed in 2001 that if 70% of candidates show they understand the material, then 70% should pass. If only 30% show understanding, then only 30% should pass.
Famous Actuaries
- Nathaniel Bowditch (1773–1838)
- An early American mathematician known for his work on ocean navigation. In 1804, Bowditch became one of America's first insurance actuaries. He was president of the Essex Fire and Marine Insurance Company.
- Harald Cramér (1893–1985)
- A Swedish actuary and expert in probability. He made important contributions to mathematical statistics. Cramér was an Honorary President of the Swedish Actuarial Society.
- Bruno de Finetti (1906–1985)
- An Italian statistician and actuary famous for his work on subjective probability theory. He helped create the Italian Central Institute of Statistics in 1926. He also set up the first statistics faculty in Rome in 1936.
- James Dodson (c. 1705 – 1757)
- Head of the Royal Mathematical School. Dodson built on the mortality tables created by Edmund Halley in 1693.
- Edmond Halley (1656–1742)
- While Halley lived before the modern actuarial profession, he was the first to scientifically calculate insurance premiums.
- James C. Hickman (1927–2006)
- An American actuarial teacher, researcher, and writer.
- Oswald Jacoby (1902–1984)
- An American actuary best known as a contract bridge player. He was the youngest person ever to pass four exams of the Society of Actuaries.
- David X. Li
- A Canadian actuary who, in the early 2000s, pioneered new models for pricing complex financial products.
- Filip Lundberg (1876–1965)
- A Swedish actuary and mathematician. Lundberg is considered one of the founders of mathematical risk theory.
- Edward Rowe Mores (1731–1778)
- The first person to use the title 'actuary' for a business role.
- William Morgan (1750–1833)
- Morgan became the Actuary of the Society for Equitable Assurances in 1775. He expanded on earlier work and is often called the father of the actuarial profession.
- Robert J. Myers (1912–2010)
- An American actuary who played a key role in creating the U.S. Social Security program.
- Frank Redington (1906–1984)
- A British actuary who developed the Redington Immunization Theory.
- Isaac M. Rubinow (1875–1936)
- The founder and first president of the Casualty Actuarial Society.
- Elizur Wright (1804–1885)
- An American actuary and abolitionist. He was a math professor who fought for laws requiring insurance companies to hold enough money to pay policies.
See also
In Spanish: Actuaría para niños
