New on FinoLib · Volume IV: Finance Careers
New on FinoLib, my finance education website: I have published an article called Chief Actuary and Head of Fund Accounting: Roles Explained, from Volume IV: Finance Careers. Here is what the article explains, written as a short expert briefing; the full piece, with every worked example, is one click away.
C.11 The Chief Actuary
The idea in plain words
The Chief Actuary owns the insurer’s reserves, its largest judgment: money set aside for claims it expects to owe. For property and casualty insurance, they project incurred claims from development triangles. For life insurance, they value decades of policy cash flows. The result is reported on statutory, US GAAP or IFRS 17 bases and backed by a signed actuarial opinion.
Key points
■Ultimate minus paid minus case reserves equals IBNR.
■A life policy reserve is the present value of benefits and expenses less premiums.
■US GAAP long-duration contracts follow LDTI; IFRS 17 applies from 2023.
A closer look
The Chief Actuary owns the single most consequential set of estimates an insurer makes — how much money the company will eventually have to pay out on policies it has already sold, sometimes decades before the claims actually materialize.
A worked example
How Reserves Are Actually Set: Property and Casualty Versus Life
Property and casualty (P&C): claims already incurred. Claims handlers set case reserves on reported claims. Reserving actuaries then arrange past claims in a development triangle (accident year against years of development) and project each year to its ultimate cost, commonly with the chain-ladder method. Ultimate minus paid minus case reserves is IBNR (incurred but not reported). Worked number: an accident year has $60.0 million paid and $9.0 million of case reserves, and the triangle gives a cumulative development factor of 1.25. Ultimate = 60.0 × 1.25 = $75.0 million; IBNR = 75.0 − 60.0 − 9.0 = $6.0 million; total unpaid = 75.0 − 60.0 = $15.0 million. Life: obligations on in-force policies.
Why It Matters
Reserve adequacy is arguably the single most judgment-heavy number in an insurer’s financial statements — a reserve set too low overstates today’s profit and stores up a future shock, while one set too high needlessly ties up capital that could otherwise be deployed, which is why the quarterly sign-off carries board-level scrutiny most other accounting estimates never receive.
Recap
Revenue Operations (C.9: The Head of Revenue Operations (SaaS)) turns deals into billed, recognized revenue and the ARR bridge, usually under the chief revenue officer while revenue accounting stays with the Controller. Stock Plan Administration (C.10: The Head of Stock Plan Administration) runs equity awards and their ASC 718 expense, and an Indian ESOP is a stock option plan, not the US retirement ESOP.
C.12 The Head of Fund Accounting
The idea in plain words
The Head of Fund Accounting makes sure each fund’s net asset value, or NAV, the price at which investors buy and sell, is right. At hedge funds and private equity, an outside administrator usually strikes the official NAV. The in-house team checks it with a shadow NAV, its own parallel calculation, and explains every break.
Key points
■Mutual funds and ETFs strike NAV daily; a hedge fund’s official NAV is typically monthly.
■The strike runs cutoff, pricing, accruals, fees, NAV per share, then capital activity.
■Breaks above tolerance are traced to a cause and escalated before release.
A closer look
Fund Accounting is the private equity or hedge fund equivalent of the Controller function — but applied separately to each individual fund the firm manages on behalf of outside investors, rather than to one company’s own set of books. Its central output is the net asset value (NAV): the fund’s assets minus its liabilities, divided by the shares or units outstanding, which is the price at which investors subscribe and redeem.
A worked example
The NAV Strike, Step by Step
An illustrative hedge fund closes September with 950,000 shares outstanding, a high-water mark (the NAV per share at which a performance fee was last paid) of $102.00, a 1.5% annual management fee and a 20% performance fee. Cutoff. Trades executed by 4:00 p.m. on the last business day are in; anything later is October’s. Subscriptions received early for October are a liability, not capital. Pricing. Each position is priced at the close from the pricing policy’s sources; the valuation team (C.13: The Head of Portfolio Valuation) supplies any hard-to-value marks. Accruals. Interest and dividends earned are added; audit, legal and administration costs incurred are deducted. Fees.
Recap
The Head of Fund Accounting makes sure each fund’s NAV is right. The strike runs cutoff, pricing, accruals, fees, NAV per share, then capital activity.
What the full article covers
In the full article I take you through these sections:
■C.11 The Chief Actuary
■C.12 The Head of Fund Accounting
It includes worked examples, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume IV: Finance Careers
Read the full article on FinoLib
The complete article, Chief Actuary and Head of Fund Accounting: Roles Explained, with every worked example, diagram, quiz and source, is free to read in Volume IV, Finance Careers on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance