If I had a loonie for every time I have been asked this question, I would be a retired actuary by now. The short answer: An actuary is a professional who is an expert in putting a value on a financial transaction that is dependent on an uncertain future event, such as insurance.
Wondering how much to save for a comfortable retirement? That's considered to be a very classical actuarial calculation. Another concrete example would be considering buying insurance, and determining if it is worth it.
In fact, an actuary is uniquely qualified, and required by Canadian federal regulation, to certify an insurer’s solvency as well as a pension plan’s funded status. Simply put: the actuary puts a value on risk.
Some questions actuaries might need to answer in their work are: What proportion of women will get breast cancer before they turn 50? Will medical advancement mean that more than half of the human population will live beyond age 100? How much more likely are smokers to die compared to non-smokers? Does a red car have more accidents than a grey car? What are the impacts to retirement income from investing in equity versus bonds? What are Heidi Klum’s legs worth? What is the value of an air mile point? Would another Icelandic volcano incident interrupt air travel in the next 50 years? Is the energy savings from green technology worth the cost?
Why we need actuaries
Let's go back to our original question on saving for a comfortable retirement: is a 10% savings rate enough? The simple answer is no. This rule of thumb first surfaced in the early 90s, but there have been two primary factors since then that have influenced the value sharply upward.
First, retirees are living longer than ever. Second, health care cost has outpaced CPI inflation.The average Canadian now lives the last 10 years of life in sickness. This means retirement planning needs to consider a longer period and more cost than ever before. Employers have also reduced pension benefits in recent years or replaced pension promises with administration services for employee savings plans.
It is noteworthy in a recent article in the Economist newspaper on the success of Nordic countries (in contrast to other Eurozone countries) which states that “in 1998, Sweden passed the most sweeping pension reform in any rich country, replacing a defined benefit system with a defined contribution one and bringing pensions more in line with lifetime incomes … in 2006, Denmark increased the state pension age from 65 to 67 …”.
This is noteworthy as defined contribution plans guarantee the upfront contributions, from which benefits are calculated based on retirement, based on current economic conditions. This is a great example of how finding better ways to manage limited financial resources is increasingly the focus of many actuaries. The world needs actuaries more than ever.
Determining your insurance needs
Let's consider our second common question: is insurance worth buying? Well, that depends on the type of insurance.
First consider Life Insurance, which pays your beneficiary an amount when you die. This type of coverage has encountered two major forces: one, the general population is living longer. Two, the historically low level of interest rates means time has less impact on future values, making short-duration Life Insurance contracts extremely cheap, while so-called whole life contracts have recently increased in value.
Even if you're young and single with no dependents, you can benefit from life insurance, which can be used to cover any of your ongoing financial commitments.
How insurance is changing
The cost of property and casualty insurance for commercial buildings, which offers protection against damage to property value and its occupants, has increased over recent years due to increased claims resulting from severe weather patterns and the threat of terrorism.
Personal liability insurance, such as home and auto, has generally been stable over many years, which has forced some of these insurers to expand into alternative arenas such as pet insurance.
Generally speaking, insurance is worth buying when the potential loss from an event would result in a bankruptcy or severe financial disruption to one’s own or dependents' lives. Most, if not all, forms of insurance are a pooling of the collective ability of the community to withstand an individual’s mishap or single event.
About actuaries
To become an actuary requires the study of financial engineering, stochastic calculus, statistics, demography, economics, decision science, risk management, finance, investment valuation, health underwriting and management science through a series of professional exams approved by the Canadian Institute of Actuaries (CIA). Yes, the CIA. U.S. Immigration conversations are a bit tricky sometimes.
