The Self-Employed Actuary Julie Curry, FSA, MAAA Curry Actuarial Consulting LLC (770) 630-4354
Outline of Presentation • Risks and rewards of self-employment • Career path toward self-employment • Profile of a successful small business owner • Steps to starting a business • Running a small business: administrative issues • Case Studies • Question & Answer
My Background • Life Insurance Company - 8 years • Financial reporting expertise • Ernst & Young Consultant – 6 years • Consulting (M&A, financial reporting, etc) • Audit support (Statutory, GAAP) • State Ins Dept examination support • Independent Consultant – 13 years • Life insurance company financial reporting • Financial reporting systems implementation • Audit support (audit firms, dept of ins)
Types of Actuarial Jobs • Insurance/Reinsurance Co (Life, Health, PC) • Pension/Benefits Actuary • Educator • Consulting • Actuarial consulting firm • Pension/benefits consulting firm • Regulatory (Dept Ins, Fed Govt, other) • Other (banks, etc)
How to Decide Path • Interest and aptitude based on college course work • Perceived advancement opportunities • Strength in interpersonal skills • Ability of various jobs to offer actuarial students study time • Geographic limitations
First Job: My Decision Process • Summer internship at life insurance company • Interviews through college placement office were all insurance companies • Looked for company with actuarial study program and rotation program • Goal of staying close to home (Columbus OH) • Ended up at Capital Holding (Life Ins Co) in Louisville KY • Company assigned me to financial reporting • 25+ years later, I’m still in financial reporting!
Factors in Job Changes • External Factors • Position eliminated • Spouse transferred • Internal Factors • Perception of better opportunity or lower stress elsewhere • Desire to increase compensation • Interest in changing career tracks • Ins co to consulting or vice versa • Desire to move to teaching position or regulatory job
Becoming a Self-Employed Actuary • It’s not the first step in a career path! • If this is your ultimate goal, each step in career path should keep this goal in mind • Typical career path might be: • Insurance co insurance consulting firm establish own consulting firm • Pension consulting firm establish own pension consulting firm • Insurance Dept establish regulatory services consulting firm
Do you want a job with: • No paid vacation? • No pension plan? • No health insurance benefits? • No guaranteed income? • Five bosses, each of whom wants something NOW? • The potential to earn much more than you’re currently earning? • Then self-employment might be the answer!
Advantages of Self-Employment • Be your own boss • Work at home/no commute time • Casual dress • Flexible hours • Good hourly rate • Work from any location • Home is where the laptop is
Disadvantages of Self-Employment • You may not like your boss • “Work at home/no commute time” • Distractions at home • No social interaction with peers • No ability to learn from co-workers • Travel time to client location • “Flexible hours” • Often chosen by client – you’re “on call” • May be 18 hours per day during a big project (no employees!) • Good hourly rate – but no guaranteed hours
Disadvantages of Self-Employment • No employee benefits • No paid vacation • No paid sick time • No pension plan • No health insurance • Fixed expenses but variable income • No employees to help with the work load • Liability risks
Characteristics of Successful Self-Employed Actuaries • Self-Motivated • Defined Market Niche • Strong Technical Skills • Good Communication Skills • Strong Sales Skills • Broad Range of Industry Contacts • Financially Prepared for Self-Employment • Financially Disciplined
Self-Motivated • Personal Example • Atlanta Olympics in 1996 • Office closed, worked at home • My Solution: • Separate Office • Defined Office Hours • Dedicated Phone Line (Cell?)
Defined Market Niche • What “product” will you sell? • Hard to find work as a “generalist” • “Specialists” find work assisting with special products • Special projects may have funding • Underselling the competition doesn’t necessarily work
My Market Niche • “Life Insurance Financial Reporting” • That’s too general • Examples of specific “products” I sell: • Assistance with development, review, and assessment of effectiveness of controls in USGAAP financial reporting processes • Implementation of financial reporting valuation systems • Building and enhancing source of earnings analyses on universal life and annuity blocks of business • Actuarial audit support work to assist audit firms, state insurance departments, internal audit departments
Strong Technical Skills • Expertise in subject matter • Specialize • Good computer skills are a must • They don’t sell a project, but they’re necessary to complete the project • Microsoft products: Excel, Access, Powerpoint, Visual Basic, Word • Actuarial software – hands-on skills
Communication Skills • Necessary for sales presentations • Required for verbal communications during a project • Critical when writing reports to document findings • Start today to fine-tune your skills: grammar and spelling matter!
Sales Skills • The best sales skills won’t help if you don’t have a good product to sell • The best product won’t sell if you don’t have good sales skills • Step one is to get in the door (the door of the decision maker) • Many resources on effective sales techniques – read books now and develop sales skills • Even if you are never self-employed, sales skills help you sell yourself and your ideas in any job
Industry Contacts • Former Co-Workers • Actuarial Meetings • Actuarial Committees (SOA/CAS/AAA) • Former Clients • Cold Calls
Financial Preparation • Expect Low Income First Few Years • Significant Fluctuations in Cash Flow • Start-Up Costs • Computer • Software (including Actuarial software) • Office Equipment • Office Furniture • Legal Fees to Establish Business (Costs of Incorporation) • Website • Marketing Literature • Office Rental (Optional)
Financial Preparation • Fixed Costs • Insurance: • Professional Liability & Business Insurance • Medical, Disability & Life Insurance • Phone • Internet • Actuarial software • Actuarial Organization Membership Fees • Continuing Education Costs • Other costs • Travel costs for sales calls • Travel costs for on-site work • Pension funding
Business Expenses: Insurance • Professional Liability Insurance • $5,000+ per million coverage per year • Large companies often require consultants to carry coverage • Business Owners Insurance • $1,000 - $2,000 per year • Large companies often require consultants to carry coverage • Medical Insurance • Likely to be individual coverage • Requires underwriting • Rates vary with age/sex/heath/other • May be $10,000+ per year
Business Expenses: Other • Actuarial software license (optional) • ~ $20,000 per year • Society of Actuaries Dues (~$1,000) • Academy of Actuaries Dues (~$1,000) • Continuing Education • Meeting fee (~ $1,000) • Travel expenses (~ $1,000) • Pension Plan • Various options available • Simplified Employee Pension (SEP) IRA • Solo 401K • Subscriptions to literature (acctg, tax, law)
Test: Financially Prepared? • Are you a good money manager? • Do you balance your checkbook? • Are you a detailed-oriented bookkeeper? • Do you have a budget which shows in detail what you make and what you spend? • Do you have other sources of funds with which to support yourself in the early years of your new business? • Spouse’s income • Savings • Other ways to generate income (tutoring math, work for actuarial or finance temp agencies, other)
Test: Financially Disciplined? • You find that your checking account balance is up to $20,000. You are most likely to: • A. Spend it • B. Project the amount needed to cover future cash flow requirements (estimate taxes, etc.) and spend the rest. • C. Save enough to cover future cash flow requirements and save the rest to cover future periods of lower cash in-flow.
Test:Financially Disciplined • A. Likely to end up with IRS problems • B. On the right track, but need to keep in mind that there are periods of “feast” and “famine”. • C. Likely to succeed in the financial aspects of running a small business.
Recommendations • Segregate business funds from personal funds: • Separate checking account • Separate credit card • Reconcile business accounts monthly • Bill clients monthly • Never delay payment of estimate taxes • Determine how to pay yourself: • A percentage of gross receipts? • A fixed amount per week or month?
Monthly Cash Flow • Even if income is fairly regular, outflows are not. • Insert graph here showing monthly cash inflows and outflows for CAC
SBA • Small Business Association provides counseling, mentoring and training, and loans • www.sba.gov
Ten Steps to Starting a Business (per SBA.gov) • Write a business plan • Get business assistance and training • Choose a business location • Finance your business • Determine legal structure • Sole proprietorship • Partnership • Limited Liability Corporate (LLC) • Corporation • S Corp
Ten Steps to Starting a Business (per SBA.gov) • Register a business name with state government • Get a tax ID number • Register for state and local taxes • State Tax ID Number • Workers’ compensation • Unemployment and disability insurance • Obtain business licenses and permits • Federal, state and local licenses and permits • Understand employer responsibilities • Legal steps you need to take to hire employees http://www.sba.gov/sba-direct/article/2815
Other SBA Resources • Articles on self-employed and independent contractors • Articles on minority-owned businesses • Articles on woman-owned businesses • Articles on veteran-owned businesses
Women and Minorities • A number of larger companies have guidelines in place which require them to use minorities and women for 10% of their contract work • Typically accomplished by requiring vendors to subcontract at least 10% of their work to woman-owned or minority owned businesses
Minority-Owned Business • Sample contract from large bank: • A “Minority-Owned Business” is a business that is at least 51 percent owned, and whose management and daily business operations are controlled, by one or more members of a socially and economically disadvantaged minority group — namely, U.S. citizens who are Black Americans, Hispanic Americans, Native Americans, Asian-Pacific Americans, or Asian-Indian Americans.
Woman-Owned Business • Sample contract from large bank: • A “Woman-Owned Business” is a business that is at least 51 percent owned by a woman (or women) who is a U.S citizen, controls the business by exercising the power to make policy decisions, and operates the business by being actively involved in its day-to-day management.
Woman/Minority Businesses • To qualify as a Minority or Woman-Owned Business, the Business must be certified by an official certification agency acceptable to Company X. Vendor shall supply to Company X’s Vendor Diversity Group copies of official certification documentation. • Vendor’s goal is to subcontract a minimum of 10% of the total dollar amount of this Agreement to Minority and Woman-Owned Businesses annually (the “Goal”). In order to balance Company X’s overall spending, the preferred allocation of the Goal is 7% to Minority Businesses and 3% to Woman-Owned Businesses.
Preparing to be a Self-Employed Actuary • Pass actuarial exams • Develop technical expertise • Identify market niche • Make industry contacts • Develop sales and marketing skills • Work for a consulting firm • Pay off personal debts • Save money
Getting Started as a Self-Employed Actuary • Work for a consulting firm to learn the business: • Client development • Billing • Dispute resolution • Bidding projects • Develop base of contacts THEN: • Buy a business or • Start a business (self or partnership?)
Buying an Actuarial Consulting Firm • Pay based on expected future revenues from existing clients • How to finance? • Advantage is that there are existing clients • Disadvantage is that clients may choose a different firm at sale • Requires careful transition
Starting an Actuarial Consulting Business • Advantage is no cash outflow to purchase business • Disadvantage is that there are no clients initially
How to Set Billing Rate • Convert former salary into hourly rate • may be lower bound • Consider rates charged by larger consulting firms • May be upper bound • Consider risks inherent in the project • May accept lower rate on larger projects • Rate may vary seasonally (supply/demand) • Audit firm rates higher January - March
Billing Issues • Fixed fee engagements can be big risk • How to estimate hours • Double your initial estimate? • “The devil’s in the data” • How to handle billing disputes • Safer to bill periodically (monthly) rather than at project completion
Billing Files • Maintain detailed records for personal records • Time “clocked in” and “clocked out” in 15 minute intervals • Task performed in each interval • Cumulative hours per month • Summarized statement sent to client
Unbillable Time • Marketing • Sales calls • Website maintenance • Brochures • Writing articles, preparing presentations, brochures etc • Administrative • Negotiating contracts • Drafting engagement letters • Preparation of proposals in response to government “RFP” • Insurance applications and updates • Computer issues • Monthly billing and bookkeeping • Estimate tax payments
More Unbillable Time • Travel time • Continuing education meetings • Some actuaries adjust hours billed: • Factor adjustment when performing work for which the actuary is overqualified (e.g., adjust from FSA rate to ASA rate) • May not bill for “re-do” of work • May bill less after x hours per day • Very judgmental
Running a Small Business • Consider need for clerical support • May require tax or other accounting support • May require technology support • May require legal support
Technology Support • Computer issues – • You are the help desk • Need good back-up systems • Need multiple computers • Need secure systems • Phone issues – cell phone as business phone, quality issues? • Internet issues – have a backup plan • Can some of this be outsourced?
Tax/Accounting Support • Consider engaging a tax accountant to assist with tax issues • LLC or partnership => likely to file multiple state tax returns • Partnership => special partnership tax forms • Self-Employment Tax • Quarterly Tax Estimates • Consider engaging an accountant to assist with general bookkeeping (billing etc)
Legal Support • Consider engaging an attorney to assist with: • Establishment of business (incorporation etc) • Drafting of engagement letters • Review of marketing materials • Review of contracts