As an actuary, I often dread the question that comes up when you meet new people, “What do you do?” The profession is not that widely known. Most people have a loose idea that it has something to do with math, statistics and insurance. Others know that it is tough to qualify due to the various entry exams. But in general, I am working with scraps.
This gives me a few options. I can take the hard route and explain the profession to them in detail and wait for their eyes to glaze over after thirty seconds. Or I can cop out and say I work in insurance. But that is also not sexy. So now I say my team built an app that helps people make better decisions surrounding their health and rewards them for it. Quite catchy hey?
Since you and I have a bit more time, let’s take the long route through the fundamentals, with a few twists and turns and a reference to Ben Stiller before ending up at the fun part.
So what do actuaries do? We calculate the cost of risk. From the price a person has to pay for health insurance to the price a farmer has to pay for flood risk. When you have a big enough portfolio of risks and a strong set of data you can calculate the price for almost any risk. You just need to predict the probability of the risky event occurring, for example the number of policyholders dying in the next 10 years using data like their age and sex. Then multiply this by the amount insured (the payout in case the event occurs), for example $1m per life. And then divide this by the number of risks insured, say 1000 lives. Plus some margins for safety and profit. Your result will be the premium each person has to pay to be covered against the risky event (death in the next 10 years in this case). It gets more complicated in the background, but this covers the basics.
There is even a movie about an actuary. Along Came Polly (2004) is a fun romcom that follows the life of Reuben Feffer (Ben Stiller), an actuary working for an insurance company in New York. At work, Reuben is given a challenging assignment. He has to determine whether his company can insure (and appropriately price) a high net worth daredevil client who loves base jumping and all things extreme. In his personal life he is facing even more challenges however. He has some romantic difficulties that underline his main weakness - he is so aware of the risks inherent in all situations that he is unable to risk anything.
While actuaries are cautious and conservative due to our training in contingencies (the “what ifs” in life), the stereotype set by Reuben is overdramatised for Hollywood. There are many analytical, number crunching pros who can call out Pi to the 100th decimal, but most actuaries (or the good ones at least) are much more rounded and can switch between the roles of mathematician and persuasive communicator effortlessly. As Frank Redington, former president of the Institute of Actuaries, once said “An actuary who is only an actuary is not an actuary.”
The profession is becoming increasingly important as actuaries are being pulled into wider fields outside of insurance. The actuarial skill set has almost limitless potential and can be applied to any field where there is uncertainty. If anything, the training does not only show which risks to avoid, but also which risks can reasonably be taken on. One of my favourite applications is a smart quoting tool that can calculate a client’s premium (to 99% certainty) by asking only six questions. There are also credit score calculators that deliver superior results by pulling in metrics that are seemingly unrelated to a client's risk of default, for example how they manage their health.
But, apart from these clever applications, there are definitely limits to actuarial science. Along Came Polly points this out in a clever way. Reuben is torn between the safe and familiar Lisa, his bride who cheated on him while on their honeymoon, and the free spirited, but risky Polly that enters his life shortly after he returns to New York. To solve this issue, he enters information about Lisa and Polly into a computer insurance program which measures risk. The program tells him that, despite his doubts, Polly is the least risky choice for Reuben. Naturally Polly is offended when she sees this risk analysis and breaks things off with him. Something Reuben’s model could not have predicted. Not all problems can be broken down into 0s and 1s. It is important to know the limitations of computer models and remember the human element in life.
At the start of my career I too was missing this component. For a long time I questioned whether my role had the impact I desired. My younger self was determined to follow in my dad’s footsteps and pursue a career in medicine. I am a big fan of my old man and his ability to help people and alleviate their pain. In my actuarial role, I felt I lost this personal touch. There was no interaction with the end users.
But despite this disconnect, over time I started seeing one big upside: I have more reach than working with one patient at a time. And, as with medicine, I can still apply my skills to help people and improve their lives. There is big potential in the insurance space to be an agent for change. My team and I are responsible for a product that rewards people for living healthier lives.
Actuaries can add a lot of value in fields with risk and uncertainty. Unfortunately, as Reuben learns the hard way, not all risks are quantifiable. It is important to understand this limitation. Also, there is value in taking risks sometimes. In order to win Polly back, Reuben eats food off the ground, something that would have mortified his former risk averse self who could not even stomach spicy food. He proves that he can take risks and make decisions without running an analysis each time. In this way, Reuben learns to live a little, ends up with the woman he loves, and, importantly, he becomes a more rounded actuary.
Thanks to Jess Schanz, Ricus Goussard, Fei-Ling Tseng, Stefan White, Kelli Jackson, Michael Sklar and Clarke Read for reading drafts of this essay.