|Q1: What is the difference between actuarial and actuary?|
|Q2: What is an actuary?|
|Q3: What is a contingent event?|
|Q4: What is insurance?|
|Q5: How does insurance work (why can an insurance company afford to take these risks)?|
|Q6: What is risk classification and why should I care about it?|
|Q7: What is life insurance?|
|Q8: What is an annuity?|
|Q9: How can an insurance company tell how long I will live?|
|Q10: What is expected lifespan? I've heard that I can take IRA distributions based on my expected lifespan, is that a good way of avoiding paying an insurance company for an annuity?|
|Q11: What kind of risks are there for insurance companies and why should I care?|
|Q12: What do you mean by statistical credibility?|
|Q13: You mentioned Social Security, is it insurance?|
|Q14: What types of work might actuaries do?|
|Q15: Who hires actuaries?|
|Q16: What are the educational requirements for actuaries?|
Q17: What are the credentials of actuaries?
Q18: What does APL mean?
Q19: What does MBS mean?
|A1: The difference is grammatical. Actuary is a noun, referring to a person's occupation, and actuarial is the adjective that describes the type of work or the type of consultant.|
|A2: An actuary is a risk management professional, par excellence, who specializes in applying mathematics and statistics to financial risk, especially the financial risk of contingent events.|
|A3: A contingent event is an event that happens only if another event takes place. For example, you collect on your automobile insurance, if you have had an accident and the claim exceeds the deductible amount. Other contingent events may be collecting insurance benefits over a period of time as a result of becoming disabled, or needing long-term care.|
|A4: Insurance is an agreement between you and an insurance company that they will pay you an amount if the contingent event occurs. Insurance is a risk transfer method, you transfer financial risk where you could not afford the consequences to the insurer in exchange for one or more premium payments. This is why it is critical for you to evaluate the ethical standing and the financial quality of the company that you will buy from. Major rating agencies such as Best's, Fitch, Moody's, S&P, and Weiss rate insurance companies.|
|A5: Insurance works because of the law of large numbers. Insurance companies insure a large number of people (or cars, houses etc.) with similar characteristics. The actuaries know statistically how many of the insureds will experience a contingent event (and the variability of the results) in a given year. No one knows who will experience the event, just that the benefits will cost the company a certain amount of money in the next year. Also if you have a level premium policy then you are paying more in the early years so that you don't have exorbitant costs in the later years. The excess that you pay is invested in investment quality assets (usually bonds). The interest earned on the investment also helps to keep your premiums down to a reasonable level.|
|A6: Risk classification is the process of grouping people with similar risk classifications together. It is important because if it is not done properly the premiums will be too high (and people will drop their insurance coverage or change insurers) or they will be too low. If they are too low, then the people whose risk is higher than they are being charged for will keep the coverage (and buy more if possible), and the company will lose money. This will lead to an increase in premiums, which will cause the "overcharged people" to change companies and the expenses to continue to mount leading to what is called an anti-selective spiral, where slowly more and more people leave the company while the sickest or most accident prone are forced to stay and pay higher and higher premiums. In the worst case, the company goes bankrupt and then every one has their original risk back, plus they have paid all of these premiums!|
|A7: Life insurance is protection against the contingent event of dying too soon. Life insurance has many uses, but protection of assets and providing for one's final expenses and dependents are the critical ones. Sometimes life insurance is used to provide liquidity to pay estate taxes, when the heirs inherit assets such as a business that can not readily be converted to cash to pay taxes or provide for those heirs that are not involved in the business.|
|A8: An annuity is a series of payments. Insurance companies offer both immediate and deferred annuities. An immediate annuity pays you on a regular basis, either for a fixed period of time or for life. Life annuities are protection against the financial risk of outliving one's assets or living too long. A deferred fixed annuity is an investment similar to a CD but without the government guarantee. A deferred variable annuity is similar to a portfolio of mutual funds, but often with a minimum guarantee.|
|A9: In short no insurance company can say how long you will live. However insurance companies have mortality tables that show on the average what percentage of people that are your age and sex will die. There are mortality tables based on the US population, insured population, annuitant populations and each large company has their own experience table. These tables reflect the data by the common characteristics. Since the percentage that dies is not forced to be constant, it will vary and the tables may reflect either just the average or perhaps a point on the distribution so that the insurance company is comfortable that they will be able to handle all of the claims that they get.|
|A10: Expected life is the average number of years of life left for someone with your age and sex. It depends on the mortality table being used for the calculation. Since it is an average approximately 50 % of the people will live longer than the expected life. Therefore if you are taking distributions from your IRA based on expected life, about half of the people will run out of assets in the IRA before they die! That is not a good result, if the IRA is the only source of funds other than social security, in which case an immediate life annuity is a better choice, because it will guarantee that you can not outlive your income. Immediate annuities can be structured with level payments or increasing payments (at a fixed rate of increase). The presence of other income sources in addition to funds from the IRA and social security, could lead to different conclusions.|
A11: You should care because it is important that the company not go bankrupt or you could lose your coverage or have your policy sold to a company that you don't like. Actuaries classify risks into four groups.
|A12: Statistical credibility means having enough data that one is confident that the results are due to the risk being measured and not due to "chance". Otherwise the premiums are just an educated guess, combined with the desire to recoup old losses. The losses from September 11th threaten not only the original writers of the insurance on the World Trade Center, but also all of their reinsurers (when insurance companies have too much risk they buy insurance from reinsurers). This is a place like flood insurance where the government should help out.|
|A13: Social security is a social insurance. It is a compromise between insurance and social policy or welfare benefits. When your benefits reflect your cost, that is actuarial equity and it is a characteristic of private insurance. When you get benefits, because you are poor and you need them that is social policy. Social security has some characteristics of both systems. There is no stigma to collecting social security unlike welfare, but the relationship between your costs and benefits is not as clean as with private insurance. By the way, it is important to remember that Social Security is far more than just money for seniors! There are benefits for the disabled and for survivors. Almost a quarter of the benefits paid today go to families for disability and survivorship, In the reform social security camp these benefits have been ignored and they are critically important, and should not be ignored.|
Actuaries have traditionally set the premiums(pricing) for insurance policies based upon the relevant assumptions such as the cost of benefits, the number of people who will pay premiums, the cost of the marketers, and the overhead of the company.
Actuaries set the reserves (the amount of assets that a company has to have to meet its obligations). They investigate the financial health of Social Security and Medicare, or serve as expert witnesses to evaluate the value of pension plans. Actuaries work on valuing blocks of business for mergers and acquisitions. Actuaries may also be government regulators who work to protect the consumer.
|A15: Actuaries work for insurance companies, consulting firms, the government agencies, investment firms and individuals.|
|A16: Almost all actuaries have at least a bachelor's degree in actuarial science, mathematics or statistics, which is followed by a course of study that varies by the type of actuary (in the US), which consists of a series of examinations. The educational requirements typically include some accounting, economics, finance and marketing in addition to mathematics and statistics. Since the educational program in the US and Canada was based on the examination system of the Institute of Actuaries (England) there are a few individuals who became actuaries in the US through a self study program. Most employers generally require at least a bachelors degree today, as do the actuarial organizations of most countries around the world. The international actuarial association strongly supports requiring a minimum of a bachelor's degree, a position that SMC strongly endorses.|
This depends upon the country. Below is a list of the most common terms in the US and Canada. There are other acronyms, which are not listed.
ACAS means an Associate of the Casualty Actuarial Society (CAS). This person has passed the first seven examinations of the CAS and generally works with personal lines (homeowner's, auto), or commercial line insurance.
ASA means an Associate of the Society of Actuaries (SoA). This person has passed the first major segment of the SoA syllabus (at a minimum all of the mathematics and statistics exams) and works in life, health, pension, finance or investment.
EA means an Enrolled Actuary. This individual has passed two examinations covering pension valuation and US laws, has had at least three years of experience, is up-to-date on continuing education, and is entitled to practice before the IRS.
FCAS is a Fellow of the Casualty Actuarial Society. This person has passed all ten of the CAS exams.
FCIA is a Fellow of the Canadian Institute of Actuaries (CIA). This individual is either an FCAS or an FSA but with some experience in both areas. Canada does not differentiate between property/casualty insurance, and life and health insurance.
FSA is a Fellow of the Society of Actuaries and has completed the entire course of study, both the mathematics and business exams.
MAAA means a Member of the American Academy of Actuaries, which is the US counterpart to the CIA. The MAAA also has continuing education requirements.
|A18: APL is a (specific) programming language, which is a very powerful high level language, which uses some unique symbols to represent mathematical processes. APL can handle vectors and matrices as easily as other languages handle scalars (constants) and it can do operations in one line of code that other languages require loops to process. APL is flexible with respect to dimensions of vectors and matricies. This makes APL code shorter and more concise than that of other languages. The two most well-known of the early high level languages are FORTRAN, which stands for FORmula TRANslation and COBOL, which came from COmmon Business Oriented Language. APL literally means A Programming Language. A good discussion of the merits of APL may be found at Why APL?|
MBS stands for Mortgage Backed Security. The simplest MBS's are pools of residential mortgages, which are aggregated by one of the three US quasi-government agencies: