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The Actuarial Profession An Introduction
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What is an Actuary?
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Is an Actuary a fortune teller?
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Is an Actuary a professional gambler?
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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.
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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
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P&C Lines of Business Examples Homeowners Earthquake Automobile Mortgage General Liability Medical Malpractice Workers’ Compensation Products Liability Reinsurance
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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
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Pricing New Products
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Body Piercing Salon Insurance How would you price that?
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Loss Development
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Graphing Size of Loss Distributions
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Claim Counts by Size
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Lognormal Fit
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Modeling Catastrophes
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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
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1992: Hurricane Andrew Photograph © Allan Tannenbaum
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Today Simulation models are used to estimate hurricane risk, using meteorological data.
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The Costliest Hurricanes Adjusted to 2004 Cost, Population, and Wealth Levels KATRINA2005 > $125 B Southeastern Florida/Alabama 1926 $102B ANDREW [SE FL / LA ] 1992$43B Northern Texas: Galveston 1900$37B Northern Texas: Galveston1915$31B Southwestern Florida 1944$23B New England 1938$24B SE Florida: Lake Okeechobee 1928$19B BETSY [SE FL / LA] 1965$18B DONNA [FL / Eastern U.S.]1960$17B CAMILLE [MS / LA / VA ]1969$15B AGNES [NW FL / NE U.S.]1972$15B CHARLEY [SW FL]2004$15B DIANE [NE U.S.]1955$14B IVAN [NW FL / AL]2004$14B HUGO [SC]1989$13B
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Solvency Monitoring
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1906: San Francisco Earthquake Only one regional insurance company survived, offering company stock in place of cash to settle claims.
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Earthquake risk is estimated with the help of seismologists. Losses are reinsured, spreading the risk globally. Today
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Are all losses predictable?
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View from Liberty International Underwriters October 2001 Photograph by Ivan Rodriguez
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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.”
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Insurer Insolvencies Annual Guarantee Fund Net Assessments (000’s) A few insurers go insolvent every year for different reasons. Catastrophes are no longer the leading cause of insolvencies.
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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
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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
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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
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The Jobs Rated Almanac ranks careers according to: Environment Income Outlook Physical Demands Security Stress
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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
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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
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U.S. News & World Reports 2006 Actuary ranks in the top 25 careers www.CNNMoney.com www.CNNMoney.com 2006 Actuary ranks in the top 50 careers www.CNNMoney.com
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Average Earnings based on level of formal education High School dropout:$19,182 High School Graduate: $28,631 Some College (no degree):$30,173 Associate’s Degree:$36.021 Bachelor’s Degree: $51,568 Master’s Degree: $67,073 Doctoral Degree: $93,033 Source: U.S. Census Bureau, Statistical Abstract of the United States, 2007 Table 217 - Mean Earnings by Highest Degree Earned (2004)
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Average Earnings comparison to the actuarial profession All professionsP&C Actuaries only average starting salary BA: $51,5681 exam: $46 - $61K MA: $67,073ACAS: $78,000 Ph.D: $93,033FCAS:$111,000 Without considering… average debt from student loans Source: D.W. Simpson Salary Survey of September 2007 (lowest salary, least experience).
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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 … delayed saving for retirement
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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
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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
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Where do Most P&C Actuaries Live? Illinois472Wisconsin141 Connecticut469Texas132 New York412Minnesota127 New Jersey349Florida122 California306D.C. (MD & VA)110 Pennsylvania258Georgia108 Massachusetts202Washington78 Ohio166Iowa64
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What are some other choices for P&C Actuaries to live? North Carolina60Colorado21 Michigan51Indiana21 Missouri44Nebraska14 Rhode Island36Oregon13 New Hampshire34South Carolina12 Kansas33Delaware11 Arizona26Nevada8 Tennessee25Vermont8
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Where might a P&C actuary be hard pressed to find a job ? Alabama6Idaho2 Kentucky6Montana2 Louisiana6North Dakota2 Maine5Arkansas1 Hawaii4West Virginia1 Mississippi3Oklahoma0 New Mexico3South Dakota0 Utah3Wyoming0 Alaska2
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International CAS Members Canada340Germany7 Bermuda106Singapore7 United Kingdom42Taiwan6 Switzerland26France5 Hong Kong23Korea5 China16Cayman Islands5 Australia13Ireland4
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International CAS Members South Korea3India1 Israel3Italy1 Brazil2Japan1 Mexico2Malaysia1 Netherlands2South Africa1 British West Indies1Spain1 Egypt1Thailand1
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Two Branches of Actuarial Science REVISITED CAS : Casualty Actuarial Society (Property & Casualty) 3,979 in United States / 4,317 total 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 do I choose a path?
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In the CAS and SOA, Exam Parts 1, 2, 3F & 4 are the same. 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.
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CAS Actuarial Examinations Basic Education Exams ExamTopic 1 Probability 1 Probability 2 Financial Mathematics 2 Financial Mathematics 3 Actuarial Models 3 Actuarial Models 3F - Financial Economics 3F - Financial Economics 3L - Life Contingencies and Statistics 3L - Life Contingencies and Statistics 4 Construction and Evaluation of 4 Construction and Evaluation of Actuarial Models Actuarial Models
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CAS Actuarial Examinations Associate Level Exams (Current) ExamTopic 5Introduction to P&C Insurance and Ratemaking 5Introduction to P&C Insurance and Ratemaking 6Reserving, Insurance Accounting Principles, 6Reserving, Insurance Accounting Principles, Reinsurance, and Enterprise Risk Management 7Law, Regulation, Government and Industry 7Law, Regulation, Government and Industry Insurance Programs, Financial Reporting and Taxation (U.S. or Canada)
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CAS Actuarial Examinations Associate Level Exams (beginning in 2011) Modules (Internet-Based Courses) 1Introduction to P&C Insurance, Ratemaking, and Insurance Operations 2Law, Regulation, Insurance Accounting Principals, and Reinsurance ExamTopic Basic Ratemaking and Reserving Basic Ratemaking and Reserving Law, Regulation, Government and Industry Law, Regulation, Government and Industry Insurance Programs, Financial Reporting and Taxation (U.S. or Canada)
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CAS Actuarial Examinations Fellowship Level Exams (structure beginning in 2011) ExamTopic Investments and Rate of Return Investments and Rate of Return Advanced Reserving, Reinsurance, and Advanced Reserving, Reinsurance, and Enterprise Risk Management Advanced Ratemaking and Advanced Ratemaking and Individual Risk Rating Plans
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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
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CAS and SOA Actuarial Examinations Exam 2 “Financial Mathematics” A. Interest Theory B. Finance
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Validation by Educational Experience (“VEE”) 1.Applied Statistical Methods 2. Corporate Finance 3. Economics
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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
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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).
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The International Association of Black Actuaries IABA’s 2002 Annual Meeting Membership in IABA is growing.
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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 –$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. www.BeAnActuary.org
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Write this down! The CAS Website: www.casact.org www.casact.org 1. DETAIL OF EXAMS: Admissions/Exams 20xx Syllabus of Basic Education Complete Table of Contents 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 Professional Education Meetings and Seminar Handouts Meetings and Seminar Handouts “Click Here for the Chronological Listing” “Click Here for the Chronological Listing”
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The End
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