“I believe l mentioned in my previous letter that l was an actuary…”
When I was a green actuary-wannabe, at university, studying for actuarial exams, I had no clue what actuaries did. I mean nothing! I knew they dealt with math and statistics and generally are uber geeks (all of these qualities attracted me immensely), but day-to-day stuff – crickets…
I used to work in financial reporting at a life insurance company and let me tell you what I worked on so that you can either burn all your books right now and save yourselves or, I am hoping, this post will give you an idea what you will be doing if you chose this path in your actuarial labyrinth.
There were several major parts to my job:
I was the guardian of data in the company! I received, processed and massaged the data about all of our policyholders in a one large Microsoft Access database. The fact that I was using Access and not some database server can already tell you that my data was not that big – only several hundreds of thousands policies.
Every month I received this database, processed it, and extracted necessary information for various types of reports. This data also went into the creation of the model points, which we used to project the company inflows and outflows in Sungard Prophet Professional software and calculated the reserves, necessary for our company to hold.
There are several types of standards that require their separate reserve calculations. We calculated reserves based on local solvency regulations and on IFRS basis. This is typical for any cross-border international company.
These reserves had to be calculated quarterly. A more detailed calculation had to be done at year-end and typically took us from mid-December to April to do. We used a combination of Excel, Prophet Professional and external consultants to do these calculations.
What is the company worth? A measure of that is called Embedded Value and it is a projection of the company’s cashflows, discounted at a risk-neutral rate. This is possibly the biggest task I did in a year. The process started in early September and ended in late January.
Embedded Value is possibly the most comprehensive analysis of the company’s cashflows and its influencing factors.
This is a European only task, but even if you are elsewhere in the world and your company is a subsidiary of an EU company, you have to report Solvency II figures.
Solvency II is not yet finalized at the time of this writing, but it is rapidly approaching and the companies are gearing up for this new regime. This means that every quarter I had to product Solvency II figures.
Solvency II is an effort to move from the formula-based calculation of reserves to more principle-based. If you want to read more on Solvency II, here is a good primer on Solvency II.
All of the above tasks required us to use some assumptions. Some of these assumptions were economic (interest rate, inflation etc.) and others were demographic and experience based. The latter two categories required some digging around our actual past experience and then using it as a basis of future projections.
Two tasks stood out as most important. First, we needed to calculate our mortality and lapse experience. How often did our policyholders die and how often did they surrender their policies. We relied on VBA tool to perform this calculation.
The second important task was the expense investigation. We had some expenses that we used in the projections and reserve calculations. These expenses were calculated on a per-policy basis. In some years our expenses changed, while the number of policies stayed level or the other way around. We spent some time investigating the experience in Excel and setting an assumption to be used going forward.
As if all of the above is not enough, I also spent a lot of time improving processes, documenting them, answering data requests from other departments and producing a lot of ad-hoc reports.
Overall, the life of an actuary working in the financial reporting department is quite level – there is regular reporting and you can handle your tasks without difficulty if you plan them well.
The fact that you do most of these processes once a quarter, you tend to get to know the processes and figures in great detail. This is immensely useful if you are to go further into product development or consulting.
The above, of course, is not a comprehensive picture of what actuaries do, not even a comprehensive picture of what financial reporting actuaries do. However, I hope it provides a glimpse in to the world of actuarial financial reporting for those who are interested in entering this field.
Quote Source: Jack Nicholson as Warren Schmidt, “About Schmidt” (2002)
Image Source: http://www.flickr.com/photos/johnjoh/368511439/