Actuarial science is ever-evolving, as is the role of the actuary in modern business. Actuaries are constantly being called upon to apply their skills to a wide variety of tasks, both within their core fields of insurance and pension management, and in other areas of business. Here's a look at the recent trends for actuaries in different businesses:
Insurance
The insurance industry is undergoing an incredible sea change, as companies find themselves part of larger financial conglomerates. Insurers have been put in the uncomfortable positions of having to answer to noninsurance professionals. Top-level executive posts, once the domain of actuaries responsible for maintaining solid coverage plans, are now going to "professional" executives focused on solidifying shareholder value, cost-containment and bottom-line results. Some actuaries report dictums from "on high" that pressure them into altering their models for better results. A few fear that it's only a matter of time before insurers find themselves in a financial jam from an unforeseen occurrence that was not properly modeled.
Yet the technology and actuarial science behind it continues to improve. Better computing power lets actuaries model more variables in any give risk profile, allowing for more accurate projections. Actuarial science is still based on assumptions, but now those assumptions can be thoroughly vetted and explored to a point unheard of just a few years ago. For now, the improvements in thinking and technology have allowed actuaries to meet the demands of their corporate leaders without sacrificing fiduciary values. Again, however, the pressure on insurance companies to perform for shareholders remains a top concern.
That pressure may lead insurers to be taken private in the coming years. Private equity emerged as a major acquisition force in the markets in 2006, and the lure of going private is enticing for many public companies tired of quarter-to-quarter performance measures without being able to take a chance on growth. GEICO and General Re, for example, benefit from being part of Berkshire Hathaway Inc. -- while publicly traded, Warren Buffett's investment vehicle insulates these major insurers from the demands of shareholders. That's primarily due to Buffett, but privately held companies often experience the same kind of autonomy.
Insurers may also continue to explore merging with other major financial companies, though Citigroup's failed experiment with the Travelers' Group may prove a deterrent. Citicorp and Travelers' merged in 1998, but it became apparent within a few years that the insurance exposure meant a risk to the overall company's profits. Investors in insurance companies, after all, know that a disaster like Hurricane Katrina could severely harm profits. Citigroup decided to divest its insurance underwriting businesses. It first sold Travelers Property and Casualty to the St. Paul Group in 2004, which formed the St. Paul Travelers Companies. The following year, Citigroup sold its life insurance underwriting arm to MetLife. Citigroup still sells insurance under the Travelers' "umbrella," but no longer underwrites the policies. Indeed, most major financial corporations will sell insurance -- as long as someone else is underwriting it.
"Insurance wasn't something we were prepared to do," one Citigroup executive said after the divestitures. "A money center bank like us, we're a profit machine. Good times and bad, we can make money on it. Insurance isn't like that. There's only so much risk you can mitigate, and a major disaster isn't something that you can easily deal with."
The insurance sector remains the top employer of actuaries, and we will discuss insurance in more detail later on in this book.
Pension Funds
More and more, pensions are seen as a burden on corporations and their shareholders, and more companies are struggling under the weight of generous plans from a generation ago. The airline industry, in particular, shows how a pension plan can weigh heavily on companies already struggling in other areas. The Pension Benefit Guaranty Corporation, a federally created agency that takes over struggling plans, helps protect pensions from corporate cutbacks and bankruptcies that threaten the benefits of more than 44 million people. Sadly, some pensioners never receive the full benefits promised them, but the PBGC does salvage many plans that Americans rely on for their retirement.
Most plans, however, are ended by employers without having to resort to PBGC protections, though the PBGC does have oversight when a company ends a pension plan. Corporations simply say that employees hired after a certain date will no longer enjoy pension benefits. In the vast majority of cases, the money instead goes into a 401(k) account. That frees the company from the cost of not only maintaining a pension plan, but also any risks associated with higher-than-expected payouts for employees. Once a company decides to end a plan, it is required, in most cases, to provide benefits to workers who have already paid into the plan. Sometimes, pensioners will receive full benefits, and actuaries will be involved in making sure the plan is well invested to provide those benefits for a generation to come. Other times, the plan ends, no new money is received and pension benefits are frozen at a given amount for each worker, based on seniority and payments into the plan. Again, those plans will continue to exist, under the oversight of actuaries, until all benefits are paid.
Wrapping up a pension plan is a massive challenge for actuaries. Many have been put into the position of defining what their fellow employees will receive, or even if the plan must be handed over to the PBGC under duress due to the burden of payment on the company. Private pension plans are on their way out, and actuaries must shepherd them out of existence over the next 50 years while protecting as much of the benefits as possible.
Government pension plans, on the other hand, remain a key attraction for employees, and few of these have been phased out. Some feel it's only a matter of time before local, state and even the federal governments move to replace defined-benefit plans with defined-contribution plans like 401(k)s. However, until that time, government pension plans remain the biggest employer of actuaries in this field.
Currently, government pension plans are becoming far more active as shareholders in corporations, and their operations are becoming far more complex. CalPERS, the California Employees' Retirement System, provides retirement and health benefits to 1.5 million families, and generated an estimated $30 billion in revenue in 2004 and 2005. It has used its financial muscle to stand up for workers' rights in a number of corporate shareholder battles, and is also invested in a wider variety of vehicles beyond stocks and bonds. CalPERS and other pension plans have increasingly looked to hedge funds for returns, and recently CalPERS announced it was looking to invest in China. This can provide an immense challenge for actuaries seeking to define the risks associated with these investments -- all while ensuring benefits for an aging population.
Financial services
At first glance, Wall Street appears to be far less risk-adverse than it was just a few years ago. The rise of hedge funds can be accountable to some extent. They were initially designed as hedges against drops in the market -- hence the name. The funds were there to provide total positive returns in all kinds of market environments, from raging bull markets to outright depression. Yet in recent years, hedge funds have taken the promise of absolute returns to a new level. They now invest in nearly anything -- commodities, currency, credit instruments, real estate, distressed companies and, of course, stocks and bonds -- in order to generate monster returns for their clients.
Those same clients are also shareholders in many financial services companies, and have pressured Wall Street firms to come up with equally impressive returns. As a result, the proprietary trading desks of many Wall Street companies have, in effect, become hedge funds. In 2006, investment banks large and small derived the majority of their profit growth from highly aggressive "prop" trading. More companies are putting more assets at risk every day in the marketplace.
Smart hedge funds and investment banks use actuaries to help determine the risk involved in a given investment and to create hedges that can minimize losses. These risk models are incredibly complex, with thousands of moving parts and assumptions that can be invalidated in seconds. This is the cutting edge of actuarial science, flying by at blinding speeds. It's a heady challenge for actuaries used to conservative estimates and careful risk assessments that, heretofore, would take weeks to accomplish. Yet it seems to be working, thus far.
Of course, these institutional traders have exit strategies built into their risk models. But some question whether the cascading effect of multiple exit strategies, executed at nearly the same time, could make the market environment far worse than projected. Most markets, whether they be stocks, bonds, currencies, credit or commodities, have yet to really see the impact of a major disruption since the advent of these aggressive trading strategies. That makes modeling the risk involved a tremendous task. It also raises the question of the implied risk to those remaining in the market -- something that some actuaries are already trying to figure out.
Needless to say, there are huge challenges for actuaries in the financial services industry, and that will mean continued growth and opportunity for actuaries there.
Government
Increasingly, there's been a call by politicians and others to start running the government as a business. While one could argue that fiscal conservatism has fallen by the wayside, there's still a movement within government, at every level, to contain costs, analyze risk and find ways to mitigate potential risks. As we've discussed, entitlement plans are the immediate beneficiaries of the application of actuarial science. But other areas of government are increasingly using actuaries as well.
Hurricane Katrina, in 2005, was a wake-up call to many in government, illustrating the need for better risk management. The Federal Emergency Management Agency (FEMA) was largely ineffective in deploying its resources in the wake of the storm, hamstrung in part by politics, but also due to the failure of contingency plans. Actuaries model all kinds of risk, and find themselves now working hard to ensure better returns on the deployment of resources in emergencies such as these.
And just as the effects of the Gulf Coast hurricanes of 2005 rippled throughout the country, so too did they ripple throughout government. Actuaries involved in Medicare and Medicaid found themselves struggling to cope with increased demands on resources. The military, already stretched thin, had to readjust its risk profile to provide National Guard troops to the area while fighting continued in Afghanistan and Iraq. Even the Postal Service had to find ways to recover, continue to deliver the mail and, most importantly, prepare for future catastrophies. And certainly, the local and state governments involved are now busy working to mitigate the risk of future hurricanes in the area.
The deployment of government resources, whether in a crisis situation or in everyday life, is a constant challenge that actuaries are helping to meet.
Corporate America
Actuarial consulting firms receive increasing calls for their expertise in a wide range of areas. We've already discussed a few business planning examples, but risk mitigation for existing businesses is becoming increasingly important throughout the corporate world.
Corporations are sitting on the largest cash reserves in history, while their appetite for risk remains at its lowest levels in history. Thus, they aren't necessarily investing heavily in new businesses. Instead, they are offering cash dividends to shareholders and repurchasing their own shares in order to increase share prices.
Yet actuaries are already working with some companies to better invest that free cash to maximize value and minimize the tax risks associated with keeping so much cash on hand. In many ways, these cash reserves are becoming mini-hedge funds. Microsoft even has an investment team, including an actuary, to manage the cash it has accumulated through the years.
Companies also hire independent or consulting actuaries to help manage a variety of activities. Certainly, consulting actuaries can help a company manage its insurance policies. They can identify risk areas and develop mitigation plans in current activities. They can even help in product launches by identifying potential markets, looking at the risk new production would have on current product lines, and even in pricing new products to best take advantage of current consumer trends.
Career trends
As you may have surmised by now, actuarial work is a growing, evolving and exciting field. It's a core part of the insurance and pension industries, and is becoming indispensable in government and throughout corporate America. And as befits an increasingly critical skill set & the pay is quite good.
Actuaries are constantly rated as having some of the best jobs in America with regard to not only salary, but also the hours, the lifestyle and relevance to the world at large. Starting actuaries can expect salaries up to $60,000 per year right out of college, while established actuaries can pull in up to $250,000 per year -- and that's not including the possibility of advancement beyond actuarial posts and into the upper echelons of the business world. It's not unheard of for actuaries to become chief executives at top insurers and HMOs. Increasingly, they're also being called upon to serve as chief risk officers in a variety of companies, assessing not only financial risk, but also regulatory compliance as well.
Demand for actuaries remains high, not only for their increased visibility in the business world, but also because of their high level of education and training. Becoming an actuary requires a very good knowledge of advanced mathematics, as well as the creativity to apply mathematics in unique ways depending on the situation. That combination makes good actuaries hard to find -- which only bodes well for the job seeker with the appropriate skills, creativity and certifications.
The one drawback in this career is that, for highly motivated people, actuaries tend to level off at a certain point. Most actuaries live very comfortable lives, but even at insurance companies and the like, there are only so many top spots. The expansion of actuarial work into highly lucrative industries, such as hedge funds and investment banks, has alleviated this situation somewhat. And consulting actuaries can do quite well working for themselves, charging a premium for their services -- though the hours are certainly longer.
Still, there are few complaints from actuaries. There aren't many 9-to-5 desk jobs that pay as well as actuarial work, and the intellectual challenge is immense. And there are few areas in advanced mathematics where you can make an immediate difference in people's lives -- this is one of them.
Rising up the ladder [SIDEBAR]
Certainly, many actuaries have become top insurance executives, with several serving in C-level positions in a variety of publicly traded companies. Despite the recent trend of having career executives take over these top jobs, actuaries with a strong business background can find themselves secure in the corner office of an insurance company someday.
Yet there are other avenues for advancement. Watson Wyatt Worldwide, the British consulting firm, has John J. Haley, a Fellow of the Society of Actuaries, as president and chief executive officer. And Greg Cooper, a Fellow of the Institute of Actuaries of Australia, was recently named chief executive of Schroders Investment Management Australia.
Actuaries are also at the forefront of change in their traditional industry -- insurance. Arthur Carlos, FSA, was recently named as president and CEO of Destiny Health, a unique health insurance provider that rewards participants for healthy lifestyle choices.
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