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An Outsiders View of Actuarial Exams

An Outsiders View of Actuarial Exams

The exams: they're not just for actuaries anymore.

Every serious profession has its standardized educational requirements that prospective members must complete before they can be admitted into its practice areas. Just as the MD is a prerequisite to the practice of medicine, and the CPA is to corporate accounting, passing the actuarial exams of the Society of Actuaries (SOA) or the Casualty Actuarial Society (CAS) are necessary steps for anyone seriously considering a career as an actuary in the traditional practice areas of insurance, pensions or benefits.

I am a business analyst, not an actuary. However, I have learned through personal experience that the actuarial exams offered by the SOA provide a depth and breadth of knowledge with applications far beyond the traditional actuarial practice areas.

Background

I have spent nearly my entire career in the telecommunications industry; my background includes undergraduate and graduate coursework in engineering, physics, and mathematics. Fortunately for me, I concentrated in applied areas of study rather than some of the more specialized areas of my fellow students, so that I finished school with a somewhat more generic set of skills. Consequently, I entered the business world with a basic toolkit of mathematical modeling skills that could be applied to a broad spectrum of problems, though I lacked the formal instruction in the traditional business areas of finance, economics, and marketing. As my career progressed I picked up much of the basic knowledge I needed to be functional in business, but there remained large gaps in my knowledge. The most problematic part was that I didn't even know what I didn't know.

The telecommunications industry has passed through a series of "boom and bust" cycles in my career. Jobs were alternatively plentiful or scarce, and job security was very much in question. For these reasons I seriously contemplated entering another industry. Some years ago a colleague suggested that I study for the actuarial exams. (This was before the year 2000 conversion when the exams were more numerous but shorter in length than today.) After some initial fact-finding, I decided to go ahead and take the first few exams. Although I had to study hard, I found that they were not especially difficult, and I passed five of them. After the year 2000 conversions, the exams became fewer in number but increased in length and difficulty, requiring more intense study and a greater commitment of my time.

I decided to continue taking the exams while keeping my career options open in both the telecommunications and insurance industries. In retrospect, this was one of the best decisions I ever made. In the meantime, I held a succession of positions involving strategic pricing, marketing analysis, demand forecasting, credit and collections, and customer movement (called "churn" in my industry). They all demanded significant analytical skills; I possessed some, but certainly not all, of the required skill sets.

How the Exams Improved my Skill Set

Early in my career I discovered that I lacked specific analytical skills and that I was at or below the skill level of many of my colleagues in a number of important areas. As I took more exams, however, I found that I was quickly acquiring many of the skills I needed to be on par with my fellow analysts. As I learned more about finance, economics, probability, statistics, estimation techniques, regression, parameter estimation, confidence intervals, time-series forecasting, and so on, I was able to close most of these gaps between what I knew and what I needed to know. Eventually, as I also learned about analysis and modeling of customer loss distributions, credibility theory, frequency models, contingency models, risk analysis and other areas, I noticed that I was acquiring skills that many of my peers lacked.

As a result, I believe that I have closed most of the knowledge gaps that existed just two or three years ago, and in a number of areas I have advanced. Consequently, I have become the in-house expert in loss modeling (what we call customer churn) and in the techniques necessary to design models, estimate model parameters, analyze data from multiple perspectives, and produce good forecasts.

Even if I never work in the insurance industry, I am convinced that the skills I acquired through the SOA course of study gave me a sustainable competitive advantage. After all, virtually every business, regardless of what industry it belongs to, must analyze and understand the issues involved in forecasting total demand, customer loss rates, pricing profitably in a competitive market, and overall business risk. These are all areas in which knowledge gained from the actuarial exams can make a significant contribution to the analysis of the business issues, assessment of the risks and opportunities, and communication of the results to the business leadership team.

Examples

Specific examples of how the SOA study program improved my performance follow:

  • Marketing. A couple of key questions are: how many customers can we acquire at a given price point, and how long can we expect them to stay with us? These questions relate to demand modeling and loss modeling, respectively. The former is covered in the old exam 2, and the latter in exams 3 and 4. I found that in this area I gained a huge advantage. Whereas most people in marketing were assuming a fixed lifetime of 12 or 24 months, or a simple exponential decay model, I possessed the knowledge to analyze the data and construct much more realistic scenarios. Conclusion: here the exams gave me an edge.
  • Demand forecasting. Most of my peers in this area had degrees in economics and therefore knew how to forecast demand. This was a gap I needed to fill, since it had not been part of my curriculum. I found what I needed in SOA exam 4, and learned the standard methods for testing and estimating time-series ARIMA models. Better yet, I was able to put this knowledge to use in subsequent assignments in credit and collections and other areas. Conclusion: here the exams allowed me to close an important gap.
  • Customer movement. This relates to the marketing issue, but here the position required much more detailed analysis of customer movement, specifically the rate of loss of customers over time and the development of explanatory variables and models. The latter is critical to giving management quantitative information about the drivers of customer behavior. Here I found that the SOA exams 3 and 4 gave me a significant competitive advantage. Apart from some outside consultants, no one in the company appeared to have this skill set. I developed a proportional hazards model, tested the model against a wealth of data, and estimated the parameters. As a result I could inform management with some degree of confidence how much of the customer loss rate was attributable to the behavior of specific customer characteristics. Based entirely on my learning from those exams, I was able to design a series of cross-sectional and longitudinal studies to estimate the sensitivity parameters. Better yet, I could quantify for management which customer attributes would impact future customer losses. Conclusion: my case may or may not be typical, but exams 3 and 4 gave me a distinct advantage.
  • Risk analysis. Many managers understand and discuss risk but are unable to quantify it. Analysis and management of risk are becoming increasingly important as senior managers begin to recognize their value. However, few managers possess the necessary skills to quantify the impact of the risks on the business in a coherent way. Risk analysis includes assets, projected customer acquisitions and losses, projected customer usage (i.e., revenue per customer per month), costs, competitive behavior, and so on. The nub of the issue is about understanding the risk distributions, particularly the shapes of the tails, and the level of sensitivity of business value to these distributions. Here the material in SOA exams 3, 4, and 6 touches on many of these issues; I found the loss distributions in exams 3 and 5, and the risk management issues in exam 6, to be particularly helpful. Conclusion: much of what one needs to know can be found in these exams, especially exam 6.

Summary

Thus, even outside the traditional actuarial practice areas, I found from personal experience that taking the SOA course of study for the ASA designation gave me the skills and knowledge I needed to close some important gaps relative to my peers in some areas, and opened up a distinct competitive advantage over them in other areas. Even though I paid for all the exams and study materials out of my own pocket, the increase in my compensation and competitive position have more than made up for it.

My experience may or may not be typical. For most, it may not be necessary to complete the ASA course of study. Some may find that taking just two to four exams will give them the knowledge to be competitive in their industry, whether it is telecommunications, travel/hospitality, pharmaceutical or others. I have spoken to fellow analysts in these industries about some of these issues, and recommended the SOA exams to them. Many were completely unaware that these exams even existed and were very pleased to find out.

As always, the non-analytic skills of communications, teamwork, political awareness, and hard work will be critical to career success, but I hope that analysts outside the actuarial areas will take my experience to heart and seriously consider the SOA (or CAS) exams as a means of gaining valuable skills in today's increasingly competitive marketplace.

Andrew Salthouse, ASA, is a business analyst for Virgin Mobile, USA.