meep (meep) wrote,

Life in the back office

Over at this post, someone was asking about the actuarial profession. The main action is in the comment thread, and you can see that there is a huge amount of silliness going on, because I told some people at the Actuarial Outpost about it and we brought our in-jokes over. But they went away and I stayed to answer questions seriously.

One of the last questions I was asked was this:
Just one more questions actually, to what extent do you think being an actuary can help people?

So, here's the thing.

Actuaries tend to be very far removed from the beneficiaries of their work. We sit in cubicles, staring at computer screens. We wrangle with crap data. We have legacy spreadsheets we are trying to tame into something that gives us sane answers. We have proprietary database systems that create new bugs after 20 years of operation.... yay.

It can be a very isolating job. Many people find it very boring. The barrier to entry of the exams is rather high -- I've taught exam seminars and tried to help people with their frustrations of having to sit the same exams multiple times (and even tried helping people on exams I didn't teach). Then many people see that the math and concepts on the exams are way beyond what they have to implement at work, and don't see the intellectual challenge.

That's one perspective.

Here's another.

We've seen in a major way that risk exists. We're all going to die; it's just a matter of when. If you own stuff, that stuff can get destroyed or damaged and might need to be replaced. If you do stuff, something bad could happen, and you could get sued. It would be nice if there were ways that we could prepare for these risks, reduce the costs for preparing for these risks, and be able to count on that protection.

I work in the field of "Life", which means, of course, I'm concerned with death.

The types of products I look at are life insurance and annuities. Now modern versions of these products also have investment risk protections, but I'm going to focus solely on mortality/longevity risks. And I will look at these two products separately.

For life insurance, the main risk is that you'll die early, and people who depend on you will be bereft not only of your presence but also the financial support you had been giving. If things go to expectation, one could save money up while working, and then when one dies, there's a nice inheritance for these people. But what if, like my father, you die when you're 38? You didn't have enough time to save up anything.

So you need to protect against such early death. I'm not going to get into all the nasty details, but in general, the cheap life insurance coverage people get in term insurance (which is what I recommend for most people -- get term insurance, plus save up money. Past a certain age, you should have enough money saved to provide for beneficiaries and you will no longer need life insurance coverage. There are special situations, though, that may require something more complicated.)

So actuaries come in on two parts of this: setting the price (or premiums) and setting the reserves (and checking on capital).

Lots of things go into pricing, but the main thing is that the insurance company needs to be charging enough for the risk...otherwise, there's a pretty good chance the insurance company will go bust. And they did go bust pretty often early on in the history of insurance.

But then, we could just set really high prices, and that would be sufficient... but then the protection for your risk coverage wouldn't be worth it. This has also been in evolution over the ages. There are pricing swings (and again, I'm not going into the details here. But those interested in becoming actuaries, I can explain another time).

On the other side is reserving. This is setting aside money to cover the promises made. If prices are good, then adequate reserves can be set up (and adequate capital, which is the "extra" to cover adverse, say, a catastrophic earthquake/tsunami). Again, without reserves, chances can be good that the promises being made by the life insurance policy won't be fulfilled.

Obviously, insurance is a highly regulated industry. So actuaries are involved on the regulatory side. And also as auditors.

Actuaries are also involved in the design of these risk protection products.

So the whole point is that we are trying to help people reduce the financial impact of very real risks, by transferring these risks into affordable, regular premiums -- and setting it up so that you can depend on that protection being there. It took lots of disasters and failures, and a long time of developing the tools of actuarial science, for us to have a dependable insurance system. I've gone back and researched a lot of the 19th century insurance biz.... and it's ugly.

It can help to keep this big picture in your mind while you do your work. This is a very details-oriented profession (those details are very important); but this does not mean you cannot see how it contributes to helping people deal with risk better.

Yes, I've greatly simplified a lot of the issues, but that's what happens when you take the view from Mt. Everest. There is actuarial work other than life insurance, there are other risks and actuaries haven't always been that great at dealing with some of those risks in recent history (cf the failure of Equitable Life in the UK which resulted in a review of the profession there (hmm no wikipedia article on that), and their self-governance was taken away. The closest thing to that in the U.S., I think, is what's going on in public pensions.)

And someone else wrote the following:
reminds me of about schmidt where he sees all his work thrown in the garbage; yours will end up there also. 90% of actuarial work is meaningless.

I do the minimal amount of work and only extra if I find it interesting as a puzzle.

My response:
100 years from now no one will remember you either. So what?

The vast majority of people's work and lives have no lasting effect. Doesn't mean being a slackass is a great idea. If you want to be a slackass, then hey - go for it. But you're going to have a particular kind of career arc.

The stuff I talked about I found interesting. It was an intellectual challenge to me, I learned a lot, and I've gotten to reuse what I learned in a variety of places...leveraging it to all sorts of interesting things. I'm sticking my nose into other people's business all the time, which I know is annoying to these other people sometimes, but it has gotten me some of my most interesting projects and connections.

I find that opportunity rarely walks up to a person and shouts howdy... usually I have to hunt it down.
A lot of my work =has= been thrown out, in front of my face, while I was still there. I knew why it was thrown out, too. A lot of what we do is not for the ages.... but guess what? That's true of all professions. That's true of all human life. Very little lives on past us. This does not make it meaningless.

The point is to think of what is important to other people. How your small piece contributes to the wider world.

Here's an example from my working life: the last major project I worked on at TIAA-CREF was a portfolio segmentation. I'm not going to get into the details, but the point was that it was becoming difficult to "price" the retirement annuities so that annuity payments wouldn't get reduced. They hadn't reduced people's payments since the early 1990s. They knew the impact of people in retirement of lowering the amount being paid.... but you can't just increase or hold payments level if the money can't support it. TIAA has been around since 1918, and has always fulfilled its promises. They've got people who have had accounts with them for decades... people who get retirement income from them for over 40 years! We needed to figure out a way to be able to keep the payments up in a very challenging interest rate environment.

My piece of the project was but one of many. I cracked jokes that if I screwed up, no one would know for twenty years. But the way it would really work is that my part was just the starting point, and that this would be continually adjusted every year. There will be dozens of people who touch this to keep it going while this strategy is around. And who knows? Perhaps in 5-10 years, they'll do something different and what I did will no longer be pertinent. But maybe its effect will still be around 50 years from now, rolled up in the efforts of all these other people.

Finally, another way actuaries can help people is to explain these technical concepts of risk to help people make better decisions about it. To that end, I co-wrote an article with Benjamin Goodman on annuities, because not enough people are protecting themselves from outliving their savings.

So no, we're not saving lives. The people we help don't know our names (and we don't necessarily know theirs....but a big part of my job is checking over claims files. And that can get depressing.) And we won't be remembered long after we retire. But we do have some impact on people.

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