Careers in Finance: Actuary
You’ve probably seen the commercials from insurance companies featuring happy ‘customers’ like ‘Tom, 44, a non-smoker who just received a half a million dollar life insurance policy for just $19 per month’.
If you’ve ever wondered how insurers come up with those numbers, they came from a finance professional known as an actuary.
Part analyst, part mathematician, part business professional, actuaries are the brains behind the scenes that affect the finances of millions of people and can even shape public policy. If you are assessing financial career options, consider becoming an actuary.
What is an actuary?
An actuary is a business professional who uses quantitative methods to assess risk for an organization or company. They mine huge quantities of data using statistical modeling to quantify the risk.
Combining variables including a client’s age, gender and health, actuaries take the understanding of numbers and probabilities to a whole new level.
For life insurers, actuaries will try and predict when someone is likely to die. Then, they help determine an appropriate premium to charge to compensate for the risk.
Still, they are business professionals first and mathematics practitioners second. Their expertise wields them considerable power and their calculations affect millions of people from insurance policyholders to retirees depending on their pensions. They can be valuable risk managers, assessing the probabilities of outlier (black swan) events occurring.
Financial Career Options for Actuaries
Actuaries can work in a wide range of fields but often enter the insurance or pension industries. Insurance companies are in the business of managing risk (their own). Consequently, insurers employ actuaries who utilize predictive math to ensure an insurance company won’t run out of money to pay off customer claims.1
On the casualty side, actuaries determine the probability of a loss and its size. They determine when insurance companies are taking on greater risks and, when they do, adjust premiums accordingly.
Their work also determines the amount of reserves required by insurance companies. This point is particularly interesting as some insurance companies are being named as ‘significantly important financial institutions, SIFIs, which would require them to maintain higher capital ratios.
It should be noted that since private life insurance companies are major employers of actuaries, there may be perceived conflicts of interest.
Some critics feel that actuaries are influenced by their employers and might be more inclined to perceive higher risks to insurers to justify premium increases to the public. Senator Al Franken testified to this before Congress.
Insurance is largely regulated at the state level. Health Care plans file with the state’s insurance boards and the states try to determine if the plan’s pricing are fair to consumers. But they sometimes lack the valuation expertise to make this judgement as they don’t keep actuaries on staff.2 This is not unlike the conflicts of interest a sell-side financial analyst experiences between research objectivity and the interests of their employer. In reality, there are conflicts of interest found throughout the financial industry.
In the pension industry, actuaries are tasked with overseeing that pension plans are funded properly. This is a huge responsibility that affects the retirements of millions of Americans in both the public and private sector. Their calculations can alter budgeting by municipalities and can even affect tax policy.
In 2015, a lawsuit was filed on behalf of beneficiaries in Rhode Island claiming that the City of Cranston was at fault in its handling of the city’s Police and Fire pension funds.3 The suit stated that the fund became severely underfunded after the city suspended additional cost of living adjustment, or COLA, contributions. Actuaries took the stand for both sides in the case and the judge ultimately determined the city was not at fault with the suspension which was intended to get the fund out of “critical status”.4
Actuaries are also in demand from any financial institution and may be called upon to set up and run corporate risk departments and for their expertise in enterprise risk management.5 Given this skill, you can expect actuaries to be a high-demand position for some time to come.
Actuary vs Analyst
If you are interested in an analytical position, you might also consider a career as a financial analyst. Both analyst and actuary are very quantitative by nature with plenty of number crunching. While similar, there are a few differences.
Actuaries operate more in the background with less client-facing roles so that may be a better fit for certain personalities.
While financial analyst isn’t exactly considered an extravert position, there are plenty of opportunities for interaction. Analysts must call upon corporate management and conduct interviews to ascertain whether they are meeting performance targets or to clarify reported earnings. They must also make recommendations to investment committees and portfolio managers, often in the form of presentations.
Writing skills are more important for analysts since they must disperse their market calls through a written research report which needs to convey a clear and understandable message. While both positions are well-compensated, financial analysts on Wall Street (especially sell-side analysts) can earn substantially more than actuaries. That being said, there is likely job security as an actuary. And as shown earlier, actuaries are sometimes called on as expert witnesses, often testifying on topics relating to pensions and city finances. This makes actuaries a rather powerful position.
Compensation for Actuaries
The compensation for actuaries is quite lucrative, especially if employed by the private sector. The median pay for actuaries is $81,482 according to Payscale.6 Working in the insurance industry, the best employer in terms of compensation, is Prudential who pay actuaries a median salary for actuaries of $139,000.7
The highest actuarial designation is ‘Fellow of the Society of Actuaries (FSA)’ and if the actuary can become a fellow, the compensation can reach $150,000 to $250,000.8
How do I Become an Actuary?
To become an actuary, it is obviously important that you be skilled in mathematics and statistics as you’ll be working with numbers on a daily basis (candidates with these backgrounds sometimes to choose the actuarial sciences if they decide not to go the teaching route-the money is much better).
A Masters in Finance degree might be required if the candidate’s undergraduate studies were not in mathematics, statistics or finance.
There are some cut and dry qualification requirements to become an actuary and render an ‘actuarial opinion’. To be ‘credentialed’ by the American Academy of Actuaries, you must have three years of working actuarial experience.9
Similar to the CFA program, there are also Professional Conduct standards that need to be met and periodically. To keep up to date on various industry changes, actuaries also are required undergo 30 hours of continuing education (CE) training, something that is just optional for CFA charter holders.