Can actuaries predict the future and pandemics like coronavirus?

What is an actuary?

An actuary is essentially an expert in risk management. Actuaries use mathematics, statistics, and financial theory to measure the probability and risk of future events.

Actuaries have highly valued mathematical skills and expertise and are an essential component to theinsurance and reinsurance industry.  Most traditional actuarial disciplines fall into two main categories. Life actuaries focus on the risks associated with health and pensions such as mortality and morbidity risk.

They use their expertise to determine the launch of important products such as life insurance, annuities, pensions, short and long term disability insurance, health insurance, health savings accounts and long-term care insurance.

In contrast, non-life actuaries tend to specialise in property and casualty or general insurance and deal with both the physical and legal risks that affect people or their property. They use their expertise to determine the type of insurance products that should be taken to market, including auto, homeowners, commercial, property workers’ compensation, malpractice, product liability, marine, terrorism and general liability insurance.

Although the majority of actuaries tend to work for insurance companies, there is also a growing demand for them in consulting firms, government organisations, large corporations, hospitals, banks and investment firms, as well as businesses that need to manage financial risk.

What skills do you need to become an actuary?

To be a successful actuary, you need excel in mathematics, particularly calculus-based probability, and mathematical statistics, but also enjoy economics, computer science, finance and business.

However, this is a very varied profession, with the majority of actuary’s having diverse academic backgrounds. Some will have studied mathematics to avery high level, while others may not even have a mathematical degree.

Nonetheless they all have a passion and dedication for complex mathematical problemsolving, using advanced analytics and big data.

Becoming a qualified actuary varies from country to country but all require passing a rigorous series of professional examinations, usually taking several years.

In Denmark, most study takes place in a university and is followed by a set of examinations, while in the United States, actuary students are placed in insurance companies to learn on the job experience followed by a series of examinations. In the UK, and countries based on its process, there is a hybrid structure that involves a mixture of university, exam and job-based learning.

Today’s complex and rapidly changing world has resulted in the profession being

consistently ranked as one of the most desirable for young graduates. In the UK, the Institute and Faculty of Actuaries (IFoA) currently has 30,000 members, of which over 40% are under the age of 30 and more than 80% are male.

Despite this, the number of actuaries in the world is relatively low in comparison to other professions making them high in demand and also highly paid.

How did the profession start?

Although the concept of insurance can be traced back hundreds, if not thousands of years, the use of real-time data and science to determine premium rates only started in London in 1762 by the then Equitable Assurances on Lives and Survivorship Society (now commonly known as Equitable Life).

Under the stewardship of pioneer James Dodson, they were the first life insurance company to use premium rates that were calculated scientifically for long-term life policies. Other insurance companies who did not use mathematical and scientific methods soon failed and the majority were forced to adopt these new methods in order to survive and compete with Equitable Life.

When Dodson died, Edward Rowe Mores took over the leadership of the group and specified that the chief official who helped to determine these rates should be called an actuary.

During the 18thand 19thcenturies, actuaries had little resources available to them other than manually working out complex mathematical calculations. Many of the actuaries developed tables, using sophisticated approximations and financial theory to help them make timely, accurate, manual calculations of premiums.

One of the most important tables was the one created by Edmund Halley, an English astronomer, geophysicist, mathematician, meteorologist and physicist. Halley invented the first mortality table in 1693 as well as a formula to calculate the probability of life expectancy. This table allowed the British government to sell life annuities at an appropriate price based on the age of the purchaser.

How has technology revolutionised the profession?

Computers have dramatically transformed the actuarial profession. Today’s actuaries no longer have to follow the traditional pencil-and-paper table format. Instead, they are able to utilise more sophisticated programmes, that are quicker and more reliable.  Robust software and constantly evolving technology such as data visualisation, graphical representation methods, predictive models, cloud storage and collaborative tools, have unlocked new methods and models, including analysing individual claims and policy data in real-time.

Some of the examples include the use of artificial intelligence (AI) and big data produced by telematics devices in vehicles or contributing to the claims process by doing a claim-by-claim analysis to identify which claims have risks of exceeding the expected payment.  Using the Robotic Process Automation (RPA) has also helped automate routine tasks such as moving and reconciling data, freeing up actuaries’ time and energy.

Along with new and effective processing methods, the question of how to assess and mitigate newer risks become increasingly complex too. Actuaries are shaping insurers with innovative products that cater for pioneering technologies such as renting cars through a phone app, using rideshare, or taking a trip in an autonomous vehicle.

How are good are actuaries in predicting catastrophic events?

Actuaries use a host of data to predict the effects of major disastrous events such as earthquakes, tsunamis and other natural but untimely disasters. The result has increased accuracy, improved mapping of how specific stocks will fluctuate and – most importantly – safeguarded insurers and reinsurers in better preparing them for all types of risk associated with these events.

However, there will be times when there are unpredictable events that go beyond what is normally expected of a situation and that have potentially severe consequences. In the past events such as the sinking of the Titanic, the Fukushima accident and the attack on the World Trade Centres in New York were all unexpected events that had catastrophic results.

These types of events are known as Black Swan events and a good example today is the current Covid-19 pandemic. There are major challenges when attempting to anticipate the impact of Corvid-19, especially as the global situation is shifting rapidly.

COVID-19 is impacting the insurance industry on multiple fronts – from business continuity, which in some cases is grinding to a complete halt, to employee safety, a higher than average claims processing and client service considerations.

Actuaries may not have been able to predict the start date, or the aftereffects of the Covid-19 crisis, but they are certainly able to monitor, assess, and provide expert predictions as the situation unfolds.

A Covid-19 Actuaries Response Group has already been set up with actuaries, epidemiologists, and longevity specialists from 11 member countries. Their aim is to disseminate materials that will be of benefit to actuaries around the world, many of who are now working remotely, as well as their employers and clients.

This might include a discussion on the virus itself, how it can be modelled, a forecast impact on mortality and health services, and various strategies that different countries are employing to combat it. How the world responds to and gets out of the Covid-19 pandemic will be analysed by actuaries for years to come, in order to be better prepare the world for a pandemic of this scale in the future.

Image by moritz320 from Pixabay 

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