Birth of the Actuarial Profession

 We’ve all heard how Actuarial Science is the perfect career choice for math-geeks and we’ve all spotted it on the list of high paying jobs. But, have you ever wondered what brought this profession to life? How was the probability theory developed and how it was instrumental in the creation of Actuarial Science? In this article we seek to answer these questions and learn more about the roots of this noble profession.

An actuary uses mathematical and statistical principles to estimate the financial impact of uncertainty and help clients minimize risk. Owing to this, the contribution of Actuaries to the insurance fields has been commendable, however, actuarial techniques now, are not only limited to the insurance domain but they are constantly seeking new grounds in wider fields.

Insurance dates back to Ancient times

The risk of dying too soon with meagre savings (covered by life insurers) or conversely the risk of living too long after retirement and exhausting your savings (covered by pensions today), have existed since ancient times. The traditional methods of palliating the resulting poverty was by charity. However, this wasn’t satisfactory enough and there was social stigma surrounding it. This led to the creation of an insurance of sorts where a specific amount could be provided to the members from a fund that’s been earmarked for this purpose. Apart from life insurance and pensions, the need for Marine Insurance too  prevailed, long before Actuarial Science was conceived.

The modern-day marine insurance transactions find their roots back in Ancient Greece, where a ship laden with wine from the Aegean Islands or marble from Athens was on its way to Africa. It would often return with cereals, spices and precious metals. These voyages were financed by wealthy individuals who demanded a high rate of return along with the repayment of their investment if the ship and cargo returned safely to shore, this rate of return was as high as 22.5% and had to be increased to 30% if voyage was delayed due to weather conditions. However, they agreed to let go of the repayment in case the cargo was lost. As the world trade expanded these  investors were unwilling to assume the risk. By mid-1300’s, professional risk takers, or insurers had to fill the gap, thus Marine Insurance was born. Other type of insurance including lenders insurance followed soon.

How Probability theory came into the picture?

The concepts of payment upon death and payment until death are the basis of many forms of insurance and these require the ability to predict the time of death to arrive at a cost for insurance. Needless to say, it is impossible to predict the death of an individual with utmost certainty. Nevertheless, advancements in the mathematical fields made it possible to make predictions on a group of people. Emergence of the Probability theory was significant in the creation of Actuarial Science.  Gerolamo Cardano was the first to use  the game of dice to understand Probability, but his work was published in 1663, long after death. Christian Hyugen’s noteworthy work introduced the theory of probability to the world in 1657. His proposition was mainly relevant to annuity valuations. Then, in 1693, Edmond Halley, well known as the namesake of the Halley’s comet published an article on life mortality based on age-at-death data from city of Breslau. Since, he was an expert in a different field altogether-astronomy-it is astonishing that he was able to produce such a remarkable treatise which laid the foundation of Actuarial Science. For the first time ever, it was possible to estimate the timing of death for a group of individuals.           

We have come a long way since the publication of the first life table. However, many working in the fields of Insurance, Risk and Finance have no idea how long and respectable the history of their field is, most of which can’t be encompassed in such a brief article. A limited historic perspective can hinder future progress; thus, it is vital that we all know where our roots lie. The Actuarial Science profession embraces some advance theories and techniques that have engaged the minds of some of the greatest mathematicians for the last 3 centuries. Commendably, Actuaries today are actively involved in fields outside insurance and are working alongside professionals from other disciplines. They are constantly exploring new grounds and making sure the profession is forever evolving. Therefore, as a new chapter unfolds, it only makes sense to appreciate the teaching of the history itself.

 

References:

http://subs.emis.de/journals/ZDM/zdm012i2.pdf

https://www.directknowledge.com/actuarial-science-history/