What is an Actuary ?
“The primary role of the actuary is to consider the future and make sense of it”
Institute of Actuaries of Australia
The future is full of uncertainty. Some of the events that can happen are undesirable. "Risk" is the possibility that an undesirable event will occur. Actuaries are experts in:
- evaluating the likelihood of future events,
- designing creative ways to reduce the likelihood of undesirable events,
- decreasing the impact of undesirable events that do occur.
There are many ways to manage risk. While there are some well-established techniques, more are being developed. It is an active area of research, both by faculty in universities and by practicing actuaries, who are constantly inventing new ways to maximize financial results for the participants in our economy, without exposing them to excessive risk. Some popular techniques include:
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Offsetting one risk with another. Under certain circumstances, two harmful events might possess the characteristic that when the likelihood of one goes up, the likelihood of the other goes down. Thus, if we know that when coffee prices go up, soda prices go down, we might want to invest in both coffee and soda stocks, to manage our risk.
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Risk is a matter of perspective. What might be harmful to one party, might be good for another. For example, when the value of the dollar goes down against the French Franc, that might be bad for an American business, but favorable for a French business. By trading off the consequences of an undesirable event with another party who is affected favorably, both parties are made better off.
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Focus on catastrophic risks. Mathematical theory shows that the greatest relief from risk (and consequently, the greatest increase in peace of mind) comes from eliminating the consequences of events that are very unlikely, but result in very big losses. Thus, families should think about what might happen if the breadwinner dies, their house burns down, or they lose all of their savings. They should then implement solutions that reduce the likelihood of these events, as well as manage their financial impact. This might involve purchasing a life insurance policy or investing the savings in many different stocks, to reduce the exposure to any one company’s fortunes. Generally, a few simple measures taken to address catastrophic risks have a great impact on our well-being.
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Diversify, diversify, diversify. It is better to take on many small risks than face one big risk. Many small risks generally average out, to give an outcome that is not too extreme in one direction or another. Results become more predictable. Thus, diversification is an important tool in managing risk.
At this time, the majority of actuaries work in careers that are associated with the insurance industry, though growing numbers work in other fields. They are heavily involved in insurance because that is society’s most powerful answer for managing risk. We reduce our risk of financial loss by transferring it to an insurance company that accepts the risk for a price (which is the insurance premium). Actuaries play a key role to design insurance plans, determine the premium, monitor the profitability of insurance companies and recommend corrective action when appropriate. Actuaries working in insurance companies also ensure that insurance companies have set aside enough funds to pay claims and provide advice on how to invest the insurance companies’ assets.
Actuaries work in all sectors of the economy, though they are more heavily represented in the financial services sector, including insurance companies, commercial banks, investment banks and retirement funds. They are employed by corporations as well as the state and federal government. Many work for consulting firms. Some are self-employed, enjoying financially rewarding careers that also come with the great flexibility of being one’s own boss.
And at last.
The job "actuary" has been rated the second best job in the United States by the Jobs Rated Almanac (Sixth Edition, 2002). The popular reference book lists the actuarial profession above other highly regarded careers such as accountant or attorney.
