The Actuarial Profession An Introduction

What is an Actuary?

Is an Actuary a fortune teller?

Is an Actuary a professional gambler?

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.

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

P&C Lines of Business Examples  Homeowners  Earthquake  Automobile  Mortgage  General Liability  Medical Malpractice  Workers’ Compensation  Products Liability  Reinsurance

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

Pricing New Products

Body Piercing Salon Insurance How would you price that?

Loss Development

Graphing Size of Loss Distributions

Claim Counts by Size

Lognormal Fit

Modeling Catastrophes

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

1992: Hurricane Andrew 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  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

Solvency Monitoring

1906: San Francisco Earthquake Only one regional insurance company survived, offering company stock in place of cash to settle claims.

Earthquake risk is estimated with the help of seismologists. Losses are reinsured, spreading the risk globally. Today

Are all losses predictable?

View from Liberty International Underwriters October 2001 Photograph by Ivan Rodriguez

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.”

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.

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

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

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

The Jobs Rated Almanac ranks careers according to:  Environment  Income  Outlook  Physical Demands  Security  Stress

Jobs Rated Almanac Top  - #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

Jobs Rated Almanac Top  - #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

U.S. News & World Reports 2006 Actuary ranks in the top 25 careers Actuary ranks in the top 50 careers

Average Earnings based on level of formal education  High School dropout:$19,182  High School Graduate: $28,631  Some College (no degree):$30,173  Associate’s Degree:$  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 Mean Earnings by Highest Degree Earned (2004)

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).

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

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

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? Illinois472Wisconsin141 Connecticut469Texas132 New York412Minnesota127 New Jersey349Florida122 California306D.C. (MD & VA)110 Pennsylvania258Georgia108 Massachusetts202Washington78 Ohio166Iowa64

What are some other choices for P&C Actuaries to live? North Carolina60Colorado21 Michigan51Indiana21 Missouri44Nebraska14 Rhode Island36Oregon13 New Hampshire34South Carolina12 Kansas33Delaware11 Arizona26Nevada8 Tennessee25Vermont8

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

International CAS Members Canada340Germany7 Bermuda106Singapore7 United Kingdom42Taiwan6 Switzerland26France5 Hong Kong23Korea5 China16Cayman Islands5 Australia13Ireland4

International CAS Members South Korea3India1 Israel3Italy1 Brazil2Japan1 Mexico2Malaysia1 Netherlands2South Africa1 British West Indies1Spain1 Egypt1Thailand1

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?

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.

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

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)

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)

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

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

CAS and SOA Actuarial Examinations Exam 2 “Financial Mathematics” A. Interest Theory B. Finance

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

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

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).

The International Association of Black Actuaries IABA’s 2002 Annual Meeting Membership in IABA is growing.

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 Minority Programs: Scholarship applications, exam fee reimbursement forms, internships, and more.

Write this down! The CAS Website: DETAIL OF EXAMS: Admissions/Exams 20xx Syllabus of Basic Education Complete Table of Contents Complete Table of Contents 2. ABOUT THE PROFESSION: 3. INTERNSHIPS: 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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