An Introduction

A false cause fallacy is a misidentification of the cause for an observed effect.



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
close to 20,000 worldwide (≈ 90% in U.S.)

Property and Casualty (or Property / Liability)
Casualty Actuarial Society : CAS
3,979 in United States / 4,317 total

Examples


Homeowners



Earthquake
Automobile
Mortgage


General Liability
Medical Malpractice
Workers’ Compensation

Products Liability

Reinsurance

- 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

2003
2004
2005
2006
2007
12 months 24 months 36 months 48 months 60 months
8,802,882 9,620,159 9,390,546 9,539,089 9,574,213
9,948,091 11,042,381 10,490,262 10,595,165
11,751,813 12,767,774 12,257,063
13,016,926 14,351,619
14,612,557
2003
2004
2005
2006
12 - 24
1.09
1.11
1.09
1.10
24 - 36
0.98
0.95
0.96
36 - 48
1.02
1.01
48 - 60
1.00
Average
12 - 24
1.10
24 - 36
0.96
36 - 48
1.01
48 - 60
1.00

Average
2003
2004
2005
2006
2007
2003
2004
2005
2006
Average
12 - 24
1.12
24 - 36
1.00
36 - 48
1.03
48 - 60
1.00
"Squaring the Triangle"
12 months
8,802,882
9,948,091
11,751,813
13,016,926
14,612,557
12 - 24
1.09
1.11
1.09
1.10
12 - 24
1.10
24 months
9,620,159
11,042,381
12,767,774
14,351,619
16,043,961
24 - 36
0.98
0.95
0.96
24 - 36
0.96
36 months
9,390,546
10,490,262
12,257,063
13,806,889
15,434,997
36 - 48
1.02
1.01
36 - 48
1.01
48 months
9,539,089
10,595,165
12,415,292
13,985,125
15,634,251
48 - 60
1.00
48 - 60
1.00
60 months
9,574,213
10,634,178
12,461,006
14,036,620
15,691,818

2003
2004
2005
2006
2007
2003
2004
2005
2006
Average
12 months 24 months 36 months 48 months 60 months
12 - 24
1.09
1.11
1.12
1.14
12 - 24
1.12
8,802,882 9,620,159 9,390,546 9,539,089 9,574,213
9,948,091 11,042,381 11,097,593 11,652,473
11,751,813 13,162,031 13,556,891
13,016,926 14,873,496
14,612,557
24 - 36
0.98
1.01
1.03
36 - 48
1.02
1.05
48 - 60
1.00
24 - 36
1.00
36 - 48
1.03
48 - 60
1.00

1800
1600
1400
1200
1000
800
600
400
200
0
25K 75K
125K 175K 225K 275K 325K 375K 425K 475K 525K 575K 625K 675K 725K 775K 825K 875K 925K 975K
10,000
375000
400000
425000
450000
475000
500000
525000
550000
575000
600000
625000
650000
675000
25000
50000
75000
100000
125000
150000
175000
200000
225000
250000
275000
300000
325000
350000

1200
1000
800
1800
1600
1400
600
400
200
0
25K 50K 75K100K125K150K175K200K225K250K275K300K325K350K375K400K425K450K475K500K525K550K575K600K625K650K675K700K725K750K775K800K825K850K875K900K925K950K975K 1M
Actual Fitted

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

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 2005
Southeastern Florida/Alabama 1926
ANDREW [SE FL / LA ]
Northern Texas: Galveston
1992
1900
Northern Texas: Galveston
Southwestern Florida
1915
1944
New England 1938
SE Florida: Lake Okeechobee 1928
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]
1965
1960
1969
1972
2004
1955
2004
1989
$18B
$17B
$15B
$15B
$15B
$14B
$14B
$13B
> $125 B
$102B
$43B
$37B
$31B
$23B
$24B
$19B

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.

View from Liberty International Underwriters
October 2001
Photograph by Ivan Rodriguez

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
.”

$1,250,000
Annual Guarantee Fund Net Assessments (000’s)
$1,000,000
$750,000
$500,000
$250,000
$0
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
Source: iii.org
A few insurers go insolvent every year for different reasons.
Catastrophes are no longer the leading cause of insolvencies.











Insurance companies
Consulting firms
Government insurance departments
Colleges and universities
Banks and investment firms
Large corporations
Public accounting firms
Failure Analysis firms
Reinsurers
Themselves









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

ranks careers according to:






Environment
Income
Outlook
Physical Demands
Security
Stress

2001










- #1 Financial Planner
- #2 Website Manager
- #3 Computer Systems Analyst
- #4
- #5 Computer Programmer
- #6 Software Engineer
- #7 Meteorologist
- #8 Biologist
- #9 Astronomer
- #10 Paralegal Assistant

2002










- #1 Biologist
- #2
- #3 Financial Planner
- #4 Computer Systems Analyst
- #5 Accountant
- #6 Software Engineer
- #7 Meteorologist
- #8 Paralegal Assistant
- #9 Statistician
- #10 Astronomer

2006
Actuary ranks in the top 25 careers
2006
Actuary ranks in the top 50 careers

based on level of formal education







High School dropout:
High School Graduate:
$19,182
$28,631
Some College (no degree): $30,173
Associate’s Degree:
Bachelor’s Degree:
Master’s Degree:
Doctoral Degree:
$36.021
$51,568
$67,073
$93,033
Source: U.S. Census Bureau, Statistical Abstract of the United States, 2007
Table 217 - Mean Earnings by Highest Degree Earned (2004)

comparison to the actuarial profession
All professions average

BA: $51,568

MA: $67,073

Ph.D: $93,033
P&C Actuaries only starting salary
1 exam: $46 - $61K
ACAS: $78,000
FCAS: $111,000
Without considering… average debt from student loans
Source: D.W. Simpson Salary Survey of September 2007 (lowest salary, least experience).


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

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
Connecticut
New York
New Jersey
California
Pennsylvania
306
258
Massachusetts 202
Ohio 166
472
469
412
349
Wisconsin
Texas
Minnesota
Florida
D.C. (MD & VA) 110
Georgia 108
Washington
Iowa
78
64
141
132
127
122

What are some other choices for
P&C Actuaries to live?
North Carolina
Michigan
Missouri
Rhode Island
New Hampshire
Kansas
Arizona
Tennessee
60 Colorado
51 Indiana
44 Nebraska
36 Oregon 13
34 South Carolina 12
21
21
14
33 Delaware
26 Nevada
25 Vermont
11
8
8

Where might a P&C actuary be
hard pressed to find a job?
Alabama
Kentucky
Louisiana
Maine
Hawaii
Mississippi
New Mexico
Utah
Alaska
3
3
4
3
6
6
6
5
2
Idaho
Montana
North Dakota
Arkansas
West Virginia
Oklahoma
South Dakota
Wyoming
0
0
1
0
2
2
2
1

Canada
Bermuda
United Kingdom
Switzerland
Hong Kong
China
Australia
340 Germany
106 Singapore
42 Taiwan
26 France
23 Korea
16 Cayman Islands
13 Ireland
5
5
6
5
4
7
7

South Korea
Israel
Brazil
Mexico
Netherlands
British West Indies
Egypt
3 India
3 Italy
2 Japan
2 Malaysia
2 South Africa
1 Spain
1 Thailand
1
1
1
1
1
1
1

Two Branches of Actuarial Science
REVISITED
CAS: Casualty Actuarial Society (Property & Casualty)
3,979 in United States / 4,317 total
SOA: Society of Actuaries (Life & Health / Pension) close to 20,000 worldwide (≈ 90% in U.S.)
How

In the CAS and SOA,
CAS Exam 1 = SOA Course P
CAS Exam 2 = SOA Course FM
CAS Exam 3F = SOA Course MFE
CAS Exam 4 = SOA Course M
Exam 3L is similar to SOA Exam MFE; both deal with life contingencies.

Exam Topic
1 Probability
2 Financial Mathematics
3 Actuarial Models
3F - Financial Economics
3L - Life Contingencies and Statistics
4 Construction and Evaluation of
Actuarial Models

Associate Level Exams (Current)
Exam Topic
5 Introduction to P&C Insurance and Ratemaking
6
7
Reserving, Insurance Accounting Principles,
Reinsurance, and Enterprise Risk Management
Law, Regulation, Government and Industry
Insurance Programs, Financial Reporting and Taxation (U.S. or Canada)

Associate Level Exams
(beginning in 2011)
Modules (Internet-Based Courses)
1
2
Introduction to P&C Insurance, Ratemaking, and Insurance Operations
Law, Regulation, Insurance Accounting
Principals, and Reinsurance
Exam Topic
•
•
Basic Ratemaking and Reserving
Law, Regulation, Government and Industry
Insurance Programs, Financial Reporting and Taxation (U.S. or Canada)

Fellowship Level Exams
(structure beginning in 2011)
Exam Topic
•
•
•
Investments and Rate of Return
Advanced Reserving, Reinsurance, and
Enterprise Risk Management
Advanced Ratemaking and
Individual Risk Rating Plans

“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

“Financial Mathematics”
A. Interest Theory
B. Finance

Validation by Educational Experience
(“VEE”)
1. Applied Statistical Methods
2. Corporate Finance
3. Economics

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

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.


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
– $175 exam fee reimbursed after passing Exam 1

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/Exams
20xx Syllabus of Basic Education
Complete Table of Contents
2. ABOUT THE PROFESSION: www.BeAnActuary.org
3. INTERNSHIPS: www.BeAnActuary.org/find/interns.cfm
4. VALIDATION BY EDUCATIONAL EXPERIENCE (VEE):
Admissions/Exams
20xx Syllabus of Basic Education
Validation by Educational Experience
5. CURRENT TOPICS:
Professional Education
Meetings and Seminar Handouts
“Click Here for the Chronological Listing”