Actuarial

One of my favorite aspects of my job is getting to build snazzy models to…well, predict things. So, it was with some interest that I encountered a reference to predictive modeling in Friday’s Wall Street Journal (subscriber link). The article discusses one auto dealership’s efforts to get Detroit to actually equip vehicles the way consumers want to actually buy them:

At one AutoNation Inc. location in Delray Beach, Fla., scores of “orphan” vehicles have been sitting on the lot for months. One hulking silver Dodge Ram pickup has languished unsold for 237 days, an eternity by automotive standards. The problem? Chrysler equipped the truck with a V6 engine instead of the V8 requested by most buyers of big trucks.

Parked nearby is a red Jeep Grand Cherokee with four-wheel drive, a feature popular in snowy climes but not sunny Florida. One Chrysler Sebring convertible is so loaded with options that its sticker price is $32,000 — nearly as much as a BMW 3 Series.[...]

Frustrated the Big Three aren’t moving fast enough, Mr. Jackson is taking matters into his own hands. About a year ago, AutoNation hired McKinsey & Co. and two other consulting groups with retail expertise to mine consumer data. The goal is to identify the few versions of every vehicle that are big sellers among the thousands of possible variations. GM’s Mr. LaNeve says his company is seriously considering joining with Mr. Jackson to create a “predictive modeling” system.

What’s surprising is not that this is happening…it is that it’s taken this long for Detroit to have started moving towards this sort of analysis.

Seen at Chicago Business:

An actuary who has spent his career in sports statistics has developed a program to determine who will win the Super Bowl.

John Dewan, who also happens to be a Chicago Bears fan, says he was thrilled to find that his prediction system showed his home team would win the big game. [...]

In the same way corporate actuaries evaluate the likelihood of future events, he has designed a method to determine victory by looking at the Bears’ and Colts’ rushing yards, passing yards, points scored, turnovers, regular-season records, total yards and points allowed to come up with his prediction.

Interestingly, though, when you look at passing yardage statistics, the results go against common sense.[...]

“That’s because the team that relies less on the passing game and more on the running game tends to win the Super Bowl. It’s opposite of what people might expect,” he says, unless you’re a Bears fan.

Personally, I find the idea of a football championship in which Manchester United isn’t playing rather odd…but that’s just me, I guess.

I wonder if the American Academy will make the guy an honorary MAAA. From a Palm Beach Post blog:

In a sad state of affairs, no one at the state Office of Insurance Regulation could do an updated analysis for legislators meeting in special session. They could have been helpful in helping to determine how much cost savings could be achieved under the two homeowner insurance premium reduction plans in progress.

Dave Foy, chief of staff for OIR, says the problem is the office has no actuaries who could do the work.

One of the three property insurance actuaries who review property insurance rates filings had quit, another was in the hospital and a third was being deposed in a court hearing over regulators denial of a large rate increase for a small Florida insurer.[...]

Actuaries can make hundreds of thousands of dollars working for private insurance companies, but only a fraction of that working for state insurance departments. So it is no wonder that state insurance departments across the United States have always had a problem in hiring and retaining qualified actuaries.

Press release is here, and the monograph itself is here.

Th monograph contains one of the more balanced explanations for the OASDI trust fund’s existence:

Social Security trust fund assets are invested almost entirely in non-marketable special-issue U.S. government securities that represent loans to the U.S. Treasury’s general fund. Thus, one result of the trust fund build-up has been that Social Security is financing a portion of the deficit spending from the general fund. When the trust funds are drawn down, the Treasury will need to find an alternate source for this financing. For this reason, some individuals are troubled by the large trust fund accumulations and are resistant to program changes that may increase Social Security financing of the rest of the government.

I still say that functionally, the trust fund is a piece of “accounting magic”. Even though there are accounting entries that say that Social Security has a positive trust fund, the reality is that the money has been spent to shore up other branches of the government that would otherwise contribute to the deficit.

The trust fund is available to Social Security….but funding will have to be diverted from other purposes or deficits increased to access it.

The punchline of the monograph can be found in its conclusion:

the American Academy of Actuaries’ Social Insurance Committee believes that preventive maintenance of the program by changing it now is preferable to waiting until changes are forced by circumstances. For example, consider a worker who is age 45 when the program is changed. When this worker reaches the Social Security retirement age of 67, he or she will have been paying increased taxes, or saving more to compensate for lower expected benefits, for 22 years. Each year reform is delayed means this worker will have fewer years to be part of the solution, and fewer years to prepare for the changes that reform will inevitably bring.

There are numerous potential reforms that could address Social Security’s financial problems. Options within the current defined benefit structure include increasing the tax rate, reducing benefits by changing the benefit formula, reducing benefits by changing the way they are automatically adjusted for inflation, reducing benefits to dependents, changing the way trust fund assets are invested, and raising the age at which unreduced benefits are paid. Alternatively, the system could be fundamentally changed so that all or some of the benefits are paid from individual accounts. This report presents the committee’s analysis of these and other options, without the endorsement of any particular change.

A couple of weeks ago, I was up on my soapbox discussing the merits of actuarial activism. The monograph is an example of what I think some actuaries should feel free to engage in — saying “here’s a problem; here are several ways you could address it; and here are those methods’ pros and cons”.

I wouldn’t mind hearing about a few actuaries publicly expressing preference for particular solutions of their choice… debate can distill ideas into a better solution, after all… but that would detract from this excellent committee-written document.

To any P&C actuaries reading this blog — you may be interested to know, if you didn’t already, that the CAS has released a white paper on the CAS’s education strategy and is soliciting feedback.

Interestingly the online survey seems to broach the subject of possibly replacing at least one of the existing self-study exams with an online class, a concept I used to be extremely vocal in calling for…until it seemed that I was alone in that thought.

Perhaps times are changing.

InsureBlog has an excellent article up disagreeing with the concept of community rating (that is, charging the same rate in a community, regardless of some characteristics of the individual community member acquiring insurance). The punchline:

Community rated insurance premiums makes as much sense as community rated loans. That is, in a world of community rated lenders, everyone would pay the same rate when borrowing money. Those who are most credit worthy are lumped in with deadbeats who never pay their bills, and everyone is charged the same interest rate for the same kind of loan. One can easily imagine what those interest rates would be. Why anyone would envision this as fair is beyond our ken, but for some odd reason some believe charging everyone the same rate for health insurance, regardless of health or age, is a more equitable system than the one used in the other 46 states.

If you’re feeling masochistic and want to dive into the theory of the value of risk classification plans, you may wish to find a copy of Risk Classification in Life Insurance by Cummins, Smith, Vance and VanDerhei. One chapter of the book is on the CAS advanced ratemaking exam. Annoyingly, the relevant section isn’t available online, but a copy can be obtained by ordering a Part 9 study kit from the CAS Store, or from your favorite online bookseller.

Well, it seems that a post I made over the weekend, on a letter to the editor published in the Wall Street Journal may have been open to misinterpretation.

The author of the letter, in the comments to my post and later in an email, expressed some concern about the possible implications of one point of disagreement I had. Quoting my earlier post:

I’m not sure that I entirely agree with the closing paragraph. While actuaries do have an obligation to provide objective analysis when performing their duties, and there is admittedly an “interesting” bit of convolution required when politics and legislated responsibilities/obligations become involved (c.f. some of the debate in the Medicare Part D fiasco), I think actuaries have a bit more responsibility than simply laying down the facts.

One of the precepts of actuarial professionalism urges the actuary to consider the audience of his/her work product, and requires the actuary to exercise care so that the work product is not misused or abused. Professionalism standards also oblige actuaries to act first and foremost in the public interest.

My invoking professionalism standards in the post might give a reader the wrong impression of my meaning. So, I’ll recast my concern in a hopefully clearer manner:

I am concerned that, at least within the American insurance community…at least on the P&C side of the house, which is where my familiarity lies… that actuaries are at risk of being marginalized by virtue of being seen as either back-room, moldy number-cruncher and/or as a guild of individuals who hand down pronouncements from their throne, somewhat removed from the front lines of the game.

Now, there is not anything wrong with a designated expert providing a purely objective, unbiased opinion for decision-makers to act upon. Such is a valuable role, and within insurance and risk-oriented fields, an actuary is a natural person to fill that position. An actuary fulfilling that role is presumably providing a valuable service, and barring evidence to the contrary probably shouldn’t be construed to acting “unprofessional”, at least not by the likes of me.

Where I do become somewhat uncomfortable is with the notion that that is the only suitable environment for an actuary to act upon. I think it is appropriate for an actuary, when appropriately qualified and under appropriate circumstances, to go beyond simply saying “this is the answer” to kibitzing with “…and this is what will happen if no further action is taken….and here are some possible areas to be explored if a different outcome is desired…”

In other words, I’m uncomfortable with seeing the profession portrayed strictly as a group of unbiased, somewhat disinterested, oracles pronouncing fact from a sea of data. While we need some such individuals in the profession, I’d also like to see the public looking to the profession when advocacy is called for.

That is the point I was trying to make with my earlier post. I apologize if anyone construed my earlier comments as an attack on the professionalism of any non-advocates in the audience.

And, please, don’t let one of my buttons having been pushed detract from the kudos that Mr. Filliger deserves for calling the Journal on the gratuitous swipe at the actuarial profession.

It sounds like the employment picture in South Africa for actuaries is somewhat complicated according to this Moneyweb article:

As to be expected, non-white actuaries are still in short supply in South Africa. They are in high demand in technical as well as managerial and other positions. Unlike many of their white peers, they can virtually name their price. If you are actuarially qualified and not white, you can expect to earn more than R1m before bonuses in senior financial services’ positions.

One London agent at a large organisation that specialises in placing actuaries internationally said there is huge interest from partly qualified and qualified actuaries in South Africa in taking up positions elsewhere in the world.

Many actuaries are finding it tougher in recent times to secure the better-paid jobs because of employment equity targets, he said. The country’s high crime rate has also been cited as a reason for seeking actuarial work elsewhere, he said.

Currently there are dozens of actuaries considering moving to the United Kingdom, Australia and - for those fluent in Afrikaans - Holland, said the recruitment agent, who asked not to be identified.

One subtle, refreshing point I take away from the article — apparently actuaries are well-enough known in the business world in South Africa that there’s no need for an article such as this to explain what we are.

[Update -- It seems that my comments below may be open to misinterpretation. Please see this later post for a clarification.]

Earlier this week I pointed to an OpEd in the WSJ entitled “Economics is not For Actuaries”. (subscriber link)

It seems taht column caught the attention of another actuary as well. Here’s a letter to the editor in today’s Journal:

As a life-long actuary, I take great exception to George Gilder’s Jan. 2 editorial-page commentary “Economics Is Not For Actuaries.” First, the headline is a swipe at our profession, and a gratuitous one at that. Again, further down in the article, he refers to “actuarial trumpery” without giving any examples of what he is talking about.

I’d like to remind him that the last time an actuary made the front-page headlines was when one of our own stood up to his boss and refused to release numbers that in the actuary’s opinion understated the potential costs of the Medicare Part D program. Egregious example of “trumpery” there.

I’d also like to remind Mr. Gilder that actuaries have been doing responsible actuarial valuations of the Social Security system for decades and the projections have been pretty good ones at that. It’s not our fault if Congress doesn’t act on our recommendations. You can lead a horse to water . . .

Finally, in the last paragraph, Mr. Gilder concludes, “Let the Democratic accountant-economists grouse about. . . .” Who even knows what this means? Does he equate accountant-economists with actuaries by locating this sentence in his closing statement, by implication tying back into the title of his article in reference to actuaries? Does he perhaps not know the difference between accountants and actuaries? Is he accustomed to people even thinking about his statements? If so, you’d think he would choose his words so as to have some actual meaning.

The thing that’s most galling about this piece is that the actuaries are the only ones without an ax to grind in this whole debate — we report the numbers, according to our training (I studied for more than 12 years to receive my professional credentials), our skills and our integrity. Whether the numbers paint a picture of systemic collapse, of fully funded benefits, or of points in between, is left for the politicians and whatever Mr. Gilder calls himself to decide.

Lou Filliger, FSA

I’m not sure that I entirely agree with the closing paragraph. While actuaries do have an obligation to provide objective analysis when performing their duties, and there is admittedly an “interesting” bit of convolution required when politics and legislated responsibilities/obligations become involved (c.f. some of the debate in the Medicare Part D fiasco), I think actuaries have a bit more responsibility than simply laying down the facts.

One of the precepts of actuarial professionalism urges the actuary to consider the audience of his/her work product, and requires the actuary to exercise care so that the work product is not misused or abused. Professionalism standards also oblige actuaries to act first and foremost in the public interest.

Shouldn’t that imply an obligation to ring the bell when there’s a potential problem, to describe the results if the problem are left unchecked, and to offer potential solutions.

True, choosing among and acting upon those ideas…or choosing not to act… is within the pervue of the politician and the bureaucrat. However, I think actuaries could be a little less cold and ivory-tower like than the letter-writer would suggest.

The final version of the Critical Review of the United States Actuarial Profession has been released. It’s available for download from the CRUSAP website.

It’s longer than the draft circulated for comments, and it’ll take a bit of time to digest the new version. My thoughts on the prior version were posted in this blog last October.

One thing that did jump out in my initial scan of the final report — there seems to have been a shift from thinking that consolidation of the profession would be beneficial-but-politically unrealistic to an outright call for consolidation.

I don’t dislike that shift. However, I think it will be interesting to witness the reaction of the CAS’s membership to that outright recommendation.

I do, however, stand by my earlier position of thinking that consolidation which preserves the uniqueness of the CAS’s focus in the exam system, is probably a good idea, and potentially offers a neat way to handle a few of the other questions the society has been wrestling with (specifically: classes of membership, reformation the exam system, and voting rights).

However, I do also empathize with my fellow CAS members about the fear of being lost in a sea of life actuaries if some sort of merger/consolidation were ever to occur.

There should be on the horizon a debate that will be most interesting to witness.