Understand > What is Actuary
Actuary is a profession that deals with future financial uncertainty and prices future financial risk. Also known as: Financial Architect and Social Mathematician
Daily Work include
- Calculates insurance policy premium
- Calculates assets and capital that insurance company needs to hold
- Calculates how much a company needs to set aside to fund the pension fund
- Determine what type of asset and how much of the asset to buy to hedge liability
- Determine how the asset investment strategy will be based on the liability
- Estimate future possible event and proposed cause of action
- Audit insurance company on their financial reporting
- Develop insurance product: what is the face amount? What is the term? What interest rate to credit? What medical fee is covered and what is not?
- Develop pension product: what is the vesting period? What is the formula of pension benefit?
- Build stochastic model
- Risk management
Daily Tools
- Historical data experience
- What is the current and future financial market performance; how much will the bond market earn in the next 5 years, how much will the stock market earn in the next 5 years
- Mathematical and statistical Model
- Knowledge on socio-economy, population, marketing, etc.
- Business law, regulation from government agency, Actuarial association practice guideline.
- Actuarial experience and judgement
Examples of business decision made by Actuary
Every day, actuary makes business decisions based on mathematical and statistical models. Here are some examples:
Capital and asset holding – Insurance companies need to hold enough asset and capital to make sure they stay healthy now and into the future. But how much should they hold? Holding too little asset will be financially dangerous and the public will lose confidence on them, but holding too much asset will be inefficient due to waste in money that could be better invested elsewhere. What is enough requires professional judgement of the actuary.
Price an insurance product – all insurance products on the market need to be priced by Actuary. But how to price? Price lower attracts more market share but face the risk of losing money. Price higher increases profit margin but risk losing market share? So what price is “right”?
Invest in what kind of asset – everyone knows that invest in cash earns no interest; invest in short-term assets earn less interest than invest in long-term assets. So how much should be invested in cash? How much in short-term assets? And how much in long-term assets? Short-term assets provide liquidity so it can be easily liquidated when cash is needed but it earns less return. Holding long-term assets earns a higher interest but increase the risk of insolvency when the company needs liquidity.
How to design an insurance product – Every insurer wants to differentiate itself by introducing different product that will attract customer and make money. However, adding more features in the product makes it more complicated and expensive, creating a simple product cannot differentiate at all.
How to build a mathematical and statistical model – Actuary use models everyday to do the job. A more complicated model reflects the real situation better. A simpler model tends to lose accuracy. But a more complicated model takes longer time to run and analyze compared to a simple model. So there is a trade-off between time efficient and result accuracy that Actuary has to face.