The Actuarial
Profession
An Introduction
What is an Actuary?
Is an Actuary a fortune teller?
Is an Actuary
a professional gambler?
Doctrine of False Cause
A false cause fallacy is a misidentification of
the cause for an observed effect.
“Why do…”



People who have root canals get cancer more often.
People who attend the symphony live longer.
People who floss their teeth live longer.
Two Branches of Actuarial Science

Life & Health / Pension
- Society of Actuaries : SOA
- around 17,000 in United States

Property and Casualty (or Property / Liability)
- Casualty Actuarial Society : CAS
- 3,425 in United States / 3,857 total
P&C Lines of Business
Examples
Homeowners
 Earthquake
 Automobile
 Mortgage
 General Liability
 Medical Malpractice
 Workers’ Compensation
 Products Liability
 Reinsurance

Example Actuarial Problems
- Pricing New Products
- Price Classification
- Modeling Catastrophes
- Strategic Planning
- Graphing Size of Loss Distributions
- Establishing Loss Reserves
- Solvency Monitoring
- Rate Adequacy Studies
- Trending and Development of Losses
- Current Leveling of Premiums
- Credibility Measures
Pricing New Products
Body Piercing Salon Insurance
How
would
you
price
that?
Loss Development
Loss Development
12 months
24 months
36 months
48 months
60 months
1999
8,802,882
9,620,159
9,390,546
9,539,089
9,574,213
2000
9,948,091
11,042,381
10,490,262
10,595,165
2001
11,751,813
12,767,774
12,257,063
2002
13,046,926
14,351,619
2003
14,612,557
12 - 24
24-36
36-48
48-60
1999
1.09
0.98
1.02
1.00
2000
1.11
0.95
1.01
2001
1.09
0.96
2002
1.10
Average
12 - 24
24-36
36-48
48-60
1.10
0.96
1.01
1.00
Loss Development
Average
12 - 24
24-36
36-48
48-60
1.10
0.96
1.01
1.00
"Squaring the Triangle"
12 months
24 months
36 months
48 months
60 months
1999
8,802,882
9,620,159
9,390,546
9,539,089
9,574,213
2000
9,948,091 11,042,381 10,490,262 10,595,165 10,634,177
2001
11,751,813 12,767,774 12,257,063 12,415,292 12,461,006
2002
13,046,926 14,351,619 13,806,889 13,985,125 14,036,619
2003
14,612,557 16,034,700 15,426,088 15,625,226 15,682,760
Loss Development
12 months
24 months
36 months
48 months
60 months
1999
8,802,882
9,620,159
9,390,546
9,539,089
9,574,213
2000
9,948,091
11,042,381
11,097,593
11,652,473
2001
11,751,813
13,162,031
13,556,891
2002
13,046,926
14,873,496
2003
14,612,557
12 - 24
24-36
36-48
48-60
1999
1.09
0.98
1.02
1.00
2000
1.11
1.01
1.05
2001
1.12
1.03
2002
1.14
Average
12 - 24
24-36
36-48
48-60
1.12
1.00
1.03
1.00
Graphing
Size of Loss
Distributions
97
5K
92
5K
87
5K
82
5K
77
5K
72
5K
67
5K
62
5K
57
5K
52
5K
47
5K
42
5K
37
5K
32
5K
27
5K
22
5K
17
5K
12
5K
75
K
25
K
Claim Counts by Size
1800
1600
1400
1200
1000
800
600
400
200
0
25
K
50
K
75
10 K
0
12 K
5
15 K
0
17 K
5
20 K
0
22 K
5
25 K
0
27 K
5
30 K
0
32 K
5
35 K
0
37 K
5
40 K
0
42 K
5
45 K
0
47 K
5
50 K
0K
52
5
55 K
0
57 K
5
60 K
0
62 K
5
65 K
0
67 K
5
70 K
0
72 K
5
75 K
0
77 K
5
80 K
0
82 K
5
85 K
0
87 K
5
90 K
0
92 K
5
95 K
0
97 K
5K
1M
Lognormal Fit
1800
1600
1400
1200
1000
800
600
400
200
0
Actual
Fitted
Modeling Catastrophes
1992 Hurricane Load - Florida

1992 Florida Homeowners Premium
= $1,000,000,000 ($1 billion)

1992 Florida Homeowners Expected Loss Ratio = 65%
=> Expected Loss Costs
= 65% x $1,000,000,000
= $650,000,000 ($650 million)

Excess Wind Factor = 1.14

Expected Loss Costs = Normal Losses x Excess Wind Factor
=> Normal Losses = $650,000,000/1.14
= $570,000,000

Catastrophe Losses = Total Losses – Normal Losses
= $650,000,000 - $570,000,000
= $80,000,000
1992: Hurricane Andrew
Photograph © Allan Tannenbaum
Today
Simulation models are used to estimate hurricane risk,
using meteorological data.
The Costliest Hurricanes
Adjusted to 2004 Cost, Population, and Wealth Levels
















KATRINA
Southeastern Florida/Alabama
ANDREW [SE FL / LA ]
Northern Texas: Galveston
Northern Texas: Galveston
Southwestern Florida
New England
SE Florida: Lake Okeechobee
BETSY [SE FL / LA]
DONNA [FL / Eastern U.S.]
CAMILLE [MS / LA / VA ]
AGNES [NW FL / NE U.S.]
CHARLEY [SW FL]
DIANE [NE U.S.]
IVAN [NW FL / AL]
HUGO [SC]
2005
1926
1992
1900
1915
1944
1938
1928
1965
1960
1969
1972
2004
1955
2004
1989
> $125 B
$102B
$43B
$37B
$31B
$23B
$24B
$19B
$18B
$17B
$15B
$15B
$15B
$14B
$14B
$13B
Solvency Monitoring
1906: San Francisco Earthquake
Only one regional insurance company survived,
offering company stock in place of cash to settle claims.
Today
Earthquake risk is estimated with the help of seismologists.
Losses are reinsured, spreading the risk globally.
Are all losses
predictable?
View from Liberty International Underwriters
October 2001
Photograph by Ivan Rodriguez
2004 Prediction
National Oceanic and Atmospheric Administration
“In virtually every coastal city from Texas
to Maine, the present Tropical Prediction Center Director
(Max Mayfield) former National Hurricane Center Directors
have stated that the United States is building
towards its next hurricane disaster.
…
The areas along the United States Gulf and Atlantic coasts
where most of this country’s hurricane related fatalities
have occurred are also now experiencing the country’s most
significant growth in population. This situation, in
combination with continued building along the coast,
will lead to serious problems for
many areas in hurricanes.”
Insurer
Insolvencies
Number of Insurer Insolvencies
60
50
40
30
20
Year
A few insurers go insolvent every year for different reasons.
Catastrophes are no longer the leading cause of insolvencies.
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
0
1973
10
1972
Number of Insolvencies
70
Who do actuaries work for?










Insurance companies
Consulting firms
Government insurance departments
Colleges and universities
Banks and investment firms
Large corporations
Public accounting firms
Failure Analysis firms
Reinsurers
Themselves
Who do actuaries work with?
Other Actuaries (e.g. mentors, peers, students)
 Underwriting (e.g. pricing large accounts)
 Sales (e.g. developing pricing strategies)
 Marketing (e.g. retention analyses)
 Claims (e.g. loss reserving studies)
 Risk Management (e.g. response to loss trends)
 Clients / Large Insureds
 Reinsurers

Advantages
to the
Actuarial Profession












High earnings potential
No cost of graduate school – no loans to repay
Option to begin retirement savings early to compound it
Advance by examinations – no “glass ceiling”
Advancement opportunities expand throughout career
Professional Interactions – “Front Office” role
Variety of avenues to choose
Newsworthy projects
High demand – less sensitive to economic cycles
Job security
Financial Savvy – gain personal investing skills
Overall, a highly ranked profession
The Jobs Rated Almanac
ranks careers according to:
Environment
 Income
 Outlook
 Physical Demands
 Security
 Stress

Jobs Rated Almanac Top 10
2001
- #1 Financial Planner
 - #2 Website Manager
 - #3 Computer Systems Analyst


#4 ACTUARY
#5 Computer Programmer
#6 Software Engineer
#7 Meteorologist
#8 Biologist
#9 Astronomer
#10 Paralegal Assistant
Jobs Rated Almanac Top 10
2002

- #1 Biologist

#2 ACTUARY
#3 Financial Planner
#4 Computer Systems Analyst
#5 Accountant
#6 Software Engineer
#7 Meteorologist
#8 Paralegal Assistant
#9 Statistician
#10 Astronomer
Average Earnings
based on level of formal education
 High
School:
 Bachelor’s:
 Master’s:
 Ph.D:
$12,900
$49,700
$61,000
$80,000
Average Earnings
comparison to the actuarial profession
All professions
P&C Actuaries only
starting salary
BA:
$49,700
 MA:
$61,000
 Ph.D: $80,000

1 exam:
ACAS:
FCAS:
$41 - $53K
$77,000
$145,000
Without considering…
average debt from student loans
The Cost of Graduate School
MBA:
$20,000 / year (tuition only)
M.A.:
$35,000 / year (all costs)
[ Example: Syracuse Architectural program ]
Ph.D.:
Graduate students may receive
a stipend for research or teaching
Without considering
… delayed saving for retirement
Retirement Planning
from age 22

Every $100/month saved for seven years
(length of Ph.D. program) at 10% interest,
by age 65 will amount to $370,714.

Saving 4% of income (increasing from
$38,000/year to $77,000/year), with 2%
employer matching for 7 years at 10%
by age 65 will total over $1 million.
(Caveat: in today’s dollars, $1,000,000 = $325,775*)
*Assuming a 3% annual rate of inflation
Disadvantages
to the
Actuarial Profession







Difficulty of the examination process
Frustrating data problems
Narrow field with high degree of specialization
Confinement to an office (non-consultant)
Required travel and long hours (consultant)
Relocation may be necessary for ACAS or FCAS
May not provide good topics of conversation
Where do Most P&C Actuaries Live?
Illinois
414
Wisconsin
112
Connecticut
397
Minnesota
109
New York
366
D.C. (MD & VA)
107
New Jersey
317
Texas
102
California
266
Florida
97
Pennsylvania
233
Georgia
94
Massachusetts
166
Washington
64
Ohio
130
North Carolina
46
What are some other choices for
P&C Actuaries to live?
Michigan
44
Arizona
21
Iowa
42
Indiana
19
Missouri
41
Colorado
18
Kansas
40
Oregon
12
Rhode Island
35
Delaware
10
New Hampshire
31
South Carolina
9
Tennessee
22
Nebraska
8
Where might a P&C actuary be
hard pressed to find a job?
Alabama
7
Idaho
2
Louisiana
6
Montana
2
Maine
6
Oklahoma
2
Nevada
6
West Virginia
2
Kentucky
4
Arkansas
1
Vermont
4
Hawaii
1
Mississippi
3
North Dakota
1
New Mexico
3
Utah
1
Alaska
2
Wyoming
0
International CAS Members
Canada
246
China
3
Bermuda
73
Mexico
3
United Kingdom
31
South Korea
3
Switzerland
22
Brazil
2
Singapore
7
Israel
2
Taiwan
7
Barbados (W.I.)
1
Australia
6
Cayman Islands
1
France
6
Italy
1
Germany
6
Japan
1
Hong Kong
6
South Africa
1
Ireland
4
Two Branches of Actuarial Science
REVISITED
CAS: Casualty Actuarial Society (Property & Casualty)
3,425 in United States / 3,857 total
SOA: Society of Actuaries (Life & Health / Pension)
around 17,000 in United States
How do I choose
a path?
In the CAS and SOA,
Exam Parts
1, 2, & 4
are the same.
CAS Exam 1 = SOA Exam P
CAS Exam 2 = SOA Exam FM
CAS Exam 4 = SOA Exam C
CAS Actuarial Examinations
Associate Level Exams
Exam
1
2
3
4
5
6
7
Topic
Probability
Financial Mathematics
Statistics and Actuarial Models
Construction and Evaluation of Actuarial Models
Introduction to P&C Insurance and Ratemaking
Reserving, Insurance Accounting Principles,
and Reinsurance
Annual Statement, Taxation, Regulation
(U.S. or Canada)
CAS Actuarial Examinations
Fellowship Level Exams
Exam
Topic
8
9
Investments and Financial Analysis
Advanced Ratemaking, Rate of Return, and
Individual Risk Rating Plans
CAS and SOA
Actuarial Examinations
Exam 1
“Probability”
A. General Probability
B. Univariate Probability Distributions:
binomial, negative binomial, geometric, uniform,
hypergeometric, Poisson, exponential, Pareto, normal,
chi-square, beta, lognormal, gamma, and Weibull
C. Multivariate Probability Distributions
CAS and SOA
Actuarial Examinations
Exam 2
“Financial Mathematics”
A. Interest Theory
B. Finance
Validation by Educational Experience
(“VEE”)
1. Applied Statistical Methods
2. Corporate Finance
3. Economics
Skills and Personality Traits
to succeed as an Actuary
•
•
•
•
•
•
•
•
•
•
•
Analytic thinking
Problem solving
Good common sense / “business” sense
Facility with Mathematics
Ability to explain complex ideas
Organized, concise writer
Determination
Independence
Disciplined study habits
Tendency to start projects early
Comfortable using computer programs
like Excel, Access, Word, SAS
The Changing Face of Actuaries
In 2003, women held the presidency in three of the five professional
organizations governing the field of actuarial science. Pictured are:
- Barbara Lautzenheiser, president of the American Academy of Actuaries (FSA 1969);
- Mary Frances Miller, president of the Casualty Actuarial Society (FCAS 1988); and
- Margaret Tiller Sherwood, president of the Conference of Consulting Actuaries
(FCAS 1982, ASA 1984).
The International Association
of Black Actuaries
IABA’s 2002 Annual Meeting
Membership in IABA is growing.
Advancing Diversity

Minority Students:
– African American, Latino, or Native American

Scholarships for Minority Students
– Individual awards of $500 - $3,000, annually
– Demonstrated performance and commitment

Exam Fee Reimbursement for Minority Students
– Reimbursed for successfully passing Exam 1
– $175 exam fee reimbursed, up to two times ($350)

Visit the website www.BeAnActuary.org
Minority Programs: Scholarship applications, exam
fee reimbursement forms, internships, and more.
Write this down!
The CAS Website: www.casact.org
1. DETAIL OF EXAMS:
Admissions
2006 Syllabus of Basic Education
CAS Basic Education Summary
2. ABOUT THE PROFESSION:
www.BeAnActuary.org
3. INTERNSHIPS:
www.BeAnActuary.org/find/atp.cfm
4. VALIDATION BY EDUCATIONAL EXPERIENCE (VEE):
Admissions
2006 Syllabus of Basic Education
Validation by Educational Experience
5. CURRENT TOPICS:
Continuing Education
Meeting and Seminar Handouts
View the Chronological List
The End