Demystifying Actuarial Science

Talk by Daniel Mutuku to First Year Students Held on 29th March 2012 at the New Science Complex, Lecture Theatre 1, JKUAT Main Campus

The Co-ordinator, Actuarial Science, The Chair and Committee of the Jomo Kenyatta University Actuarial Students Association (JKUASA), University Students, all protocols observed, ladies and gentlemen.

Good afternoon all.

Let me begin by thanking you Mr Andika and the Department of Statistics and Actuarial Sciences for supporting this initiative by JKUASA. And thank you JKUASA Committee and members for organising this meeting. Thank you first years and the rest of the students or turning up today, it is an honour for you to come listen to what we have to say.

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I am very thankful and humbled for having been asked to come and speak on this subject Actuarial Science. I actually think this is a lecture before the main lectures for the unit Introduction to Actuarial Science that is provided in the first year of study here at JKUAT. I will therefore not intend to go through that whole unit with you; I will do my best to present an initial introduction to the field and opportunities therein.

I want to believe that all of us doing actuarial science must have come across the term before applying for the course. Therefore we have some idea of what the profession is. I came across an interesting finding today: that the word actuarial comes from the Latin word actuarius, meaning secretary of accounts. This is when the life tables were beginning to be prepared.

I therefore want to go through some definitions of the profession that have been come up with:

Wikipedia: Actuarial science is the discipline that applies mathematical and statistical methods to assess risk in the insurance and finance industries.

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Society of Actuaries: An actuary is a business professional who analyzes the financial consequences of risk.

The Institute and Faculty of Actuaries: ... a lot of the work an actuary does might be thought of as risk management.

Beanactuary.com: Actuaries are experts in:

Evaluating the likelihood of future eventsusing numbers, not crystal balls.

Designing creative ways to reduce the likelihood of undesirable events.

Decreasing the impact of undesirable events that do occur.

The Actuarial Society of Kenya: Actuaries are experts in assessing the financial impact of tomorrow's uncertain events.

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JKUAT: Actuarial Science is a branch of science that uses Mathematics, Statistics, Economics and Financial knowledge to model and manage future uncertainty in the financial and insurance industries.

We therefore see a running theme here: risk and its management. Risk means probable events. Uncertainty. Then impact of the uncertain probable events. Then the financial impact of these uncertain probable events.

Uncertain meaning we are not sure whether it will happen or not. To what extent will it happen? A good example is fire. Fire can raze down the contents of a whole building. It can also clear off what is on the first floor. And leave out the rest of the floors intact. So we can have total loss or partial loss. And this is an uncertain event.

Because of probable events, a discipline is needed to understand these, Probability and Statistics. I am happy to note that this course is fully covered by the department here. Having passed through these corridors, I can say that you can take my word for it. Get ready to calculate probability ratios. Another parameter that arises from this is mortality tables. You will see these in the course of your first year going forward. Mortality rate is simply a probability of dying (or the probability of not surviving). This is the
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improbability of surviving. Or the improbability of not dying. Dont let this confuse you. Go through the notes and attend all lectures so that this becomes a walk in the park for you.

I will also talk about probability distributions. Some events take a certain form of occurrence. Take for example the performance of students in a class. I use this example because it is the first example I was given by my first lecturer of probability and statistics. The high scoring students are usually few. The average scoring students tend to be many and the low scoring students are also, more often than not, few. I was taught that if you plot a graph of the marks attained against the number of students who attained those marks, a bell shape graph would emerge. It was interesting to find this to be the case. I was then told that this is called the normal distribution. I believe the name has not changed since then.

Calculus is also a core unit you will come across. Elementary calculus was what we did in high school. We differentiated and integrated elementary functions. Now here we will continue, but with less elementary functions.

I am basically saying this: the coursework here is very important for actuarial science. What you will be taught here will be the backbone of
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what you will be doing in the actuarial profession going forward. I want to tell you have an inquisitive mind. A research-ful attitude if you may. Be willing to go the extra mile to understand how these disciplines work. Without this actuarial science might become a hard nut to crack. Befriend your lecturers. Ask them where you do not understand. Be attentive in class. Complete your assignments early enough so that you do not lag behind. Work in groups where challenging problems appear. Discuss amongst yourselves but not during an examination.

There is a course called Financial Mathematics. It might have acquired the name Actuarial Mathematics by now. Or could have been split into the two here in JKUAT. This you will need to understand so that the financial aspect of the risk is appreciated. Here you will see interest rates, financial instruments, accumulations and discounts, and a lot more. And many financial models. Take note of this. You will need the theory of how insurance, pensions and investments work. This will also be enveloped with some economic theory and a bit of management skill. Read through the notes, and try to think how all these tie together. The visualisation enables you to start to appreciate why this is so and how this is so coming to see the big picture. This is because the profession is really about complementing other professions in the bigger financial sector and the economy as a whole.
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It is very important that we are very much conversant with information technology and communication skills. Programming, database management, data handling, drafting of reports, data analysis with IT tools including macros, internet and its uses, name it.... There is a whole world out there for actuarial science when the IT aspect comes along. This means that now the theory becomes practical. The mathematical functions on paper now become excel functions that churn out figures.

A lot of skills need to be developed. Analytical skills. Are we able to notice trends and make judgements? Numerical skills. Are we good with figures? Are we able to manipulate them with ease? I mean the right kind of manipulation. IT skills. How good are we with the relevant IT tools? How well are we able to communicate our thoughts? Communication is very essential because it is about breaking up the jargon into words that we can all understand and use freely. Get set to develop this while you are in campus.

The next question is about actuarial professional papers. There are 15 of these from the Institute of Actuaries in the UK. Fewer I believe from the Society of Actuaries in the UK. They cover basically what you will cover
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here in campus. I believe the actuarial science syllabus covers all this. Its only that accreditation by the Institute has not been completed to confirm that this is the case. My suggestion to each of you is to begin as soon as you can. I personally did not begin them while in Campus and hence have to study for them while working. I am aware that a number of students in their third and fourth years are making good progress in this. I would suggest that you liaise with them and form study groups to start studying for these papers, not neglecting your current studies here at JKUAT. I know you can do far with the core technical papers by year four if you start early. And I know that you are all very bright.

Concerning job opportunities, there are a lot of areas where actuaries come into play. Insurance (both life and general). Pensions. Investment. Healthcare. ERAs. These are the traditional ones. In Kenya there are many areas I believe you can venture into. I believe with the development agenda that the country now has, risk management in the upcoming and ongoing projects is essential. Hence actuarial skills. The fact that government is devolving will mean that more insurance, pensions, investment services will be needed by the devolved governments. Foreign investment is coming in what better way of analysing the potent ability of the new ventures without actuarial skills? Its a whole world (within Kenya) out there. Its us all to come up with ideas. Tell me yours.
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With this short introduction to the course, let me rest my case for now. I have touched on many diverse things to look at when talking about actuarial science. This means that a lot is possible with this profession. With our skills. This is because good judgement comes from all this actuarial work. Good financial decisions are arrived at because of our input. This is surely the right profession for you to be in only have the right viewpoint.

Thank you all for listening to me. I trust that you will all go far in this profession.

I thank God most importantly for enabling me to be here. Thank you all and God bless you.

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