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Diversity of actuarial Work
Actuaries and Banking
and Finance
Banking has become a more mathematical
discipline in the last 25 years. Firstly, the paradigm
has shifted from the banker using his judgement
about a deal and a company, to using historical and
market data to develop mathematical models that
allow the assessment of risk versus return.
Secondly, there has a been massive growth in the
trading of complex derivative products in recent
years. The Bank of International Settlements
recently estimated that there are 27 trillion USD
notional of interest-rate derivative contracts
outstanding. Such products can only be valued
by using complex mathematical techniques, and
for this the blend of mathematical, financial and
personal skills of an actuary is ideal.
To properly assess the risk versus return of a
deal requires not just a model of the quantities
underlying the deal and its hedging, but also of how
these quantities interact with the bank’s existing
portfolio. Thus one wishes to build a model of all
the deals currently held and measure its risk and
return profile, and compare that with the portfolio
extended by adding the new deal. To do this
requires building models not just of the distribution
of each underlying risk exposure, but also of how
they vary together. These need to be extrapolated
from historical data and here actuarial skills are
essential.
Actuaries are involved in the modelling of financial
risks typically faced by banks and in the calculation
of capital requirements for banks. This is a growing
area for actuaries.
Actuaries and
Life Insurance
Life insurance has been an important practice
area for the actuarial profession for more than
a century. In the last 20 years the life insurance
industry has seen some radical changes with the
rising importance of unit-linked contracts and the
restructure of long established mutual companies.
The role of the actuary in life insurance has evolved
and life insurance continues to be an important
employer of qualified actuaries and new graduates.
The business of life insurance revolves around longterm
financial contracts (called policies) between
life insurance companies and their customers or
policyholders.
Life insurance policies involve payments in the
event of specified circumstances involving the
death or survival of nominated lives. For example,
individuals with dependents will often take out a
temporary contract providing a lump sum payment
in the event of their death within the contract
period. Such a contract typically provides financial
security for a family in the event of
the premature death of the main bread-winner.
Life insurance companies would normally rely on
their actuaries to calculate the appropriate charge
(or premium) for contracts providing such death
benefits. In performing such calculations, actuaries
apply mathematical techniques involving probability
and compound interest. These contracts usually
involve funds being set aside and actuaries use
similar techniques to assess the amounts required
to ensure the financial integrity of life insurance
policies.
As a result of their understanding of life insurance
business actuaries are often found in senior
management roles within the industry or regulatory
bodies.
Actuaries and General Insurance
General insurance is a very broad term which
essentially covers all types of insurance which are
not classified as life insurance. Most individuals
will effect a general insurance policy during their
lifetime. Examples include motor vehicle insurance,
home contents insurance, and travel insurance.
One of the major roles an actuary plays in
general insurance is modelling risks. As a simple
example, consider motor vehicle insurance. A
typical insurance policy covers an individual for
one year, but when a policy is issued, the insurer
does not know how many motor vehicle accidents
the individual will have during the year, or how
much vehicle repairs will cost as a result of these
accidents. Based on previous years’ data for similar
insurance policies, an actuary will construct models
both for the number of accidents an individual will
experience and for the costs associated with these
accidents. A fundamental use of such models is in
the pricing of an insurance policy. The actuary must
decide on the amount (known as the premium) to
be paid by an individual for insurance cover.
Another illustration of general insurance would be
a policy covering a manufacturing company against
losses arising from an industrial accident or a fire.
Consider the situation where a large factory was
completely destroyed by fire. The losses associated
with this would run into millions of dollars, and it
would take a number of years before the insurance
claim was finally settled as the factory was rebuilt,
new machinery installed and so on. One of the
tasks for an actuary would be to set a reserve level.
This is an estimate, required for statutory purposes,
of the cost to the insurance company of eventually
settling the insurance claim. An actuary must also
be able to perform calculations to ensure that an
insurance company is solvent. Broadly speaking,
this means that the insurer has enough funds to pay
insurance claims as they arise.
A further role of actuaries in general insurance
is in determining reinsurance arrangements. An
insurance company may wish to limit the amount
it pays on an insurance claim. It can achieve this by
sharing the insurance risk with a reinsurer in return
for the payment of a reinsurance premium. A role
for the actuary is to decide on the most appropriate
type of reinsurance, and how much of the insurance
risk should be shared with the reinsurer.
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