What is an Actuary?

When I meet someone for the first time, they often ask what I do for a living. When they find out I am an actuary, they often ask, “What is that?” I used to say, “We are mathematicians who work for insurance companies” or something like that, which usually prompts the person to either change the subject or look for someone else to talk with.

More recently I would say, “We convert data into information that is pertinent to an insurance company’s operations, usually for pricing their products or for financial purposes.” That got a similar result.

My new answer is, “Actuaries save lives and prevent injuries.”

Really. We do.

If I said I saved lives as an emergency medical technician or firefighter, others would immediately understand. But how does a person in an office using a computer to crunch data prevent accidents, let alone save lives?

How actuaries save lives and prevent accidents requires some explanation. We do it by providing incentives for safer behaviors and actions. People and companies who perform riskier actions pay more for insurance than people and companies who perform safer actions. Perhaps some personal examples would help.

I drive on a lot of long trips. I am tempted to go 80 miles an hour, but I don’t. We all know the math on how much time an additional 10 miles an hour can save on a 500-mile road trip. I can afford the cost of a speeding ticket, but I don’t want to pay the extra cost of my insurance going up due to a few speeding tickets, so I slow down.

My insurance rates and its perceived increase modify my actions: I drive slower than I would otherwise like. In doing so, it also decreases the probability of my having an accident.

Money is a powerful motivator. Reflecting the riskiness of actions through the price of insurance is a big, albeit somewhat hidden, motivator for people to change behaviors. If people know that smoking will shorten their lives, they might or might not quit. But if you charge them $120 more a month for health care because they smoke, they might reconsider quitting.

Some of you may recall the discounts insurers offered in the past to non-smoking drivers and homeowners. I wasn’t sure the discounts were warranted until a friend of mine and I were headed to lunch one day. While he was driving, he dropped his lit cigarette into his lap. I thought that he was about to lose control of the car! Fortunately, he recovered, but only after a harrowing few seconds of erratic driving.

I wonder how many accidents have happened because someone dropped their cell phone and were looking for it. It’s a similar situation — distracted driving — but I would much rather have a cell phone in my lap than a lit cigarette.

In two ways, actuaries have already saved lives. First, we started estimating “safe driver” credits. This drove home the idea that, if you are a bad driver, you will pay more for insurance. Second, actuaries were some of the first to champion smoke detectors, lowering the insurance costs for those buildings where they were installed. We offered this discount long before building codes required smoke detectors. This gave homeowners and building owners powerful incentives to purchase and install smoke detectors, saving countless lives.

Actuaries continue to save lives because we:

  • Justify lowering insurance rates for businesses who protect their workers (workers’ comp premiums), which ensures that the companies’ goods and services are more cost effective than those who do not protect their workers.
  • Recognize that drivers of high performance cars should pay more than the same drivers using more sedate vehicles.
  • Determine the costs of various types of insurance, including fire, based on how well the community protects its citizens and properties through law enforcement and fire department response times and expertise.

No doubt, you can add one or two examples of your own where your daily work activities shape people’s behaviors, and therefore save lives and prevent accidents.

Governments can pass laws and ordinances in attempts to protect its citizens and their property, but the violators are only punished (fined) when caught. Insurance applies cost differentials to all who purchase it and almost immediately punishes the insureds who exhibit unsafe practices.

Actuaries predict the final cost of insurance claims that might otherwise take years to know, thus decreasing the time needed to recognize the monetary cost of unsafe behaviors.

Catastrophe modelers encourage people to either not live in catastrophe-prone areas or pay the price. In some instances, buildings designed and built to withstand hurricanes in those zones save the lives of their occupants.

Self-insurance pricing and reserving provide much the same incentives as primary insurers, perhaps with even greater leverage.

Reinsurers also have a role to play. They hold primary companies to expected loss levels, so those companies can’t escape the consequences of their actions, be it underwriting, pricing or demographics.

So, the next time someone asks, “What is an actuary?” I still plan to respond, “Actuaries save lives and prevent injuries.” So far, it has been a rewarding discussion.

Congratulations and thanks to all of you who join me in the noble profession of saving lives and preventing accidents.

An aside: The next time you speak to a group of students, start off with that line and see if you get their attention better than, “We are mathematicians for insurance companies.” I’d like to hear how it goes.