Industry Overview
Modern Actuaries
Outside finance, however, there's a variety of risks and rewards that can be measured by actuaries. These can be as simple as running numbers on vendor bids and their potential services, or as complex as determining whether a product line will be profitable.
Here's a look at the most popular career choices for actuaries today:
The insurance industry
The insurance industry wouldn't be a reality without actuarial science and its practitioners. The calculation of risk versus benefit is core to ensuring a profitable insurance business. The near-constant change in regulations and requirements for the industry means there's plenty of work for actuaries. In addition, many insurers are entering other financial fields to boost profits, so actuaries are often deployed to ensure these annuities, savings programs and other instruments fulfill the company's fiduciary duties to the customer and still turn a profit -- all while adhering to insurance company regulations and the actuarial code of professional conduct.
The challenges for actuaries in insurance continue to evolve. The introduction of a new automobile model can result in many weeks of actuarial work as the safety and performance features of the cars are studied -- even the automakers' targeted sales demographics make a difference. In health and life insurance, medical breakthroughs alter not only the equation of life expectancies, but also the companies' cost structures. The reason health insurers sometimes cannot pay for experimental treatments is because the insurers' actuaries feel it wouldn't be able to cover the costs of everyone wanting the treatment.
Actuaries working in insurance tend to specialize quickly, and often know as much about what they're insuring as they do about actuarial science itself. An actuary working for a health insurer develops a good working knowledge of medicine and pharmaceuticals, while an actuary working on policies for cargo ships develops a keen awareness of how the shipping industry works. The more the actuary learns, the better he or she is at the job. However, that also makes transitioning to different actuarial fields more difficult as the actuary becomes known for his or her insights. "It's a good thing I like health insurance," one actuary quipped. "Otherwise, if I tried to find another job, I'd have a hard time branching out."
MetLife remains one of the largest and best-known life insurers in the world, while St. Paul's Travelers Group, a stitched-together conglomerate of various insurers, remains a force in casualty insurance, like Allstate Corp. and State Farm. HMOs such as HealthSouth and UnitedHealth Group are some of the largest employers of actuaries in the health insurance industry.
Pension funds
With the rise of 401(k) plans over the past 25 years, America's pension plans are quickly going the way of the dinosaurs. Employers favor 401(k) plans because, in essence, it's up to the individual employee to maintain the plan and build toward his or her retirement, and the employer does not have to guarantee a set payment once the employee retires. In essence, 401(k) plans take the money that would have gone into a pension and gives it to the employee to invest and manage.
For actuaries specialized in pension plans, that can sound like a death knell for their careers. However, there is still plenty of opportunity for pension plan actuaries. For one, most government workers still receive pensions, and that likely will remain the case for at least another generation. Federal, state and local workers all have pensions that need to be managed by actuaries so that the funds' performance can ensure regular payments through the employees' retirement years. And even as corporations wind down their pension plans, actuaries are needed to ensure that the fund can still pay its retirees the promised benefits before the fund is closed.
A pension fund, of course, needs to ensure that it will have enough money on hand to pay all of the benefits it owes. Thus, pension funds measure the risk-reward of every investment they make. No fund would pile into a single up-and-coming stock, no matter how good it looked -- there's always a chance the fund could lose everything. Thus, a fund will be more conservative, investing in bonds and other fixed-income instruments with less risk and stable returns. The actuary weighs that risk and return every day.
The federal government and most state governments offer pensions for their workers. The California and New York public sector pension funds are two of the biggest and most active in the country. As major shareholders in a variety of public companies, they often use their stake as a bully pulpit to push for better corporate governance -- and ideally, boost share prices.
Working for a pension fund doesn't have the specialization "trap" that working for an insurer can bring. Indeed, many pension actuaries make successful transitions into the broader financial services industry.
Broader financial services
Any given day, a hedge fund manager might ask, "How much money can I put into the currency markets, with a 400-to-1 leverage account, to maximize returns while reducing risk?" Let's translate that into English. A hedge fund wants to play the foreign exchange market. It has the opportunity to receive $400 in credit for every $1 it puts in, but a wrong move means that the fund could lose its entire stake in just one trade. Enter an actuary, who can help assess the current state of the foreign exchange markets, the hedge fund's finances, how much the fund could afford to lose if the bet turns bad and how much it could stand to gain while still paying back the 400-to-1 credit terms. The actuary can also devise a hedging strategy -- another investment that, while costing less, would help offset losses should the first investment go south.
As you can see, actuaries have critical skills that major institutional investors can use to maximize their returns. From the proprietary trading desks at the major Wall Street firms to mutual funds, hedge funds and a staggering variety of investment vehicles, actuaries are there to give investors as much of an advantage as possible by assessing and mitigating risk.
Finance can be a somewhat rough-and-tumble world, especially for actuaries used to the more staid insurance or pension industries. It's fast-paced and stressful at times, but the monetary rewards for actuaries able to handle the pace are much larger than in other areas of actuarial work.
Elsewhere in corporate America
Increasingly, corporations are using actuaries to mitigate a variety of risks -- and squeeze out every last cent of profit or cost savings that could help increase shareholder value. Take, for example, a restaurant chain choosing between three different sites for its newest eatery in a given city. An actuary would certainly be consulted to discuss the various insurance costs associated with each site. Additionally, the actuary can assess broader population trends and which potential customers are nearest to a given site. They can run probability statistics on how well other restaurants have done in similar sites around the country -- does a restaurant placed near a rival actually perform better? The actuary can answer that.
Expansion always brings financial risks, and actuaries can help any kind of company mitigate those. Whether it's a new branch outlet, a new product line or even simply increased or decreased production, actuarial projections can give a company critical insights into its potential moves.
Few companies outside the financial sectors employ full-time actuaries not connected with their human resources or benefits departments. In these cases, consulting actuaries are called in to render advice. At smaller companies, the HR actuary might even do double duty, assessing the risk of a potential move while administering insurance policies, for example.
Governments and nonprofits
Government entitlement plans are a lot like pension plans in the way actuaries manage risk, though working for the government certainly poses a unique challenge. For example, actuaries have been at the forefront of warning calls regarding the solvency of Social Security. The math here, of course, is depressingly simple: baby boomers are getting older and are living longer. Baby boomers also outnumber the next generation -- the ones paying into the Social Security program. More benefits plus fewer incoming dollars equals & a serious problem. The actuaries managing Social Security have their jobs cut out for them.
Actuaries are also used throughout government programs. Medicare and Medicaid have similar structures, as do a variety of housing and grant programs. Actuaries are even used by the Department of Defense to help project risks in deployment and the costs associated with those risks. And the Treasury Department has a staff of actuaries to project tax income for the budgeting offices of the various federal agencies. Local and state governments use actuaries in a similar manner.
Outside of government, actuaries have had successful careers in a variety of nonprofit environments. College endowments, for example, are run by money managers, but it's the actuaries who tell the money managers how much they need to make and how much risk they can take on in order to do so. And nonprofits have insurance programs and activity risks much like any corporation would. Consulting actuaries can find work here as well.
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