Actuarial

[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.

As seen on the wires:

North American insurers increasingly are seeking the services of external or unaffiliated actuarial firms to provide actuarial opinions for annual statutory filings.[...]

At work here, according to the report, appears to be some spirit of the Sarbanes-Oxley Act of 2002, with not only companies moving away from the use of internal or affiliated actuarial opinions to the use of independent actuarial firms, but also the survey results show some insurers moving away from using the same firm in both auditing and actuarial functions.

I suppose this means that my actuarial brethren should be expecting more calls from recruiters about consulting gigs.

As seen at the Columbian in Clark County, Washington:

While it is Sohn’s job to determine how much money we have, it is the actuary’s job to determine how much money is needed. The actuary helps keep the state’s public pension system fully funded and actuarially sound.

To that end, the actuary recently found that the mortality assumptions used to determine contribution rates failed to take into consideration the fact that people are living longer. He immediately recommended another $64 million in state money for the 2007-09 biennium to cover future costs.

While the $64 million is not an enormous amount when you’re talking about a $30 billion state budget, the compounding effects over a 25-year period to state and local governments are worth noting: $4.2 billion. Like the man says, “Can you hear me now?”

This is the whole reason for having a state actuary in the first place: to reveal problems while they are small and can be handled. Public and private pension systems across the nation are making headlines every day for being underfunded or failing altogether. It’s in our state’s and our state workers’ best interests to have a firm grasp on our state’s future legal and financial obligations.

But, for political reasons, the actuary’s recommendations are being ignored. And this is not the first time.

While this editorial by Senator Joe Zarelli pertains only to one pension program in the State of Washington, it’s a discussion that could well be applied in dozens of other situations around the country, all the way up to the looming deficits in the federal Social Security and Medicare programs.

It does no good to have someone work to provide advance warnings of big problems that could be easy to fix if caught early, if you’re going to ignore those warnings.

I’ve been poking around online, looking for poll results on Oregon Measure 42, the anti-insurance scoring initiative on the ballot in Oregon this November.

I still haven’t found any publicly released polls online, annoyingly.

While I was searching for polling data, I did, however, find a ton of bad or incomplete information. This annoys me, as I believe, perhaps naively, that voters should be provided with factual information upon which to base their vote upon.

A prior job of mine was working closely with credit scoring for insurance — all the way from building the model, to incorporating it into our rating, to talking about it with agents, regulators, and consumers. In other words, I know a little something about the subject.

In my current job, I don’t work with personal lines, and I work at a company where PL is relatively minor and where we don’t do much business in Oregon. So, I don’t really have an immediate interest (other than professional curiosity) as to how the Measure 42 vote goes.

With that said, below the fold, I’ll offer my thoughts on some of the points being raised on Measure 42.

Read the rest of this page →

I’m going to apologize in advance to non-actuarial/non-insurance readers of this blog. This is most likely my only post today, and it’s going to be long and probably pretty boring to non-actuaries.

I wrote almost two weeks ago about a draft of the CRUSAP report on the American actuarial profession having been released (available for download at crusap.net).

I’ve had a chance to read through it and think about it. My (admittedly somewhat irreverent) summary is as follows:

• The public isn’t all that aware of the profession, which is a shame since actuaries are in a perfect position to opine about major matters of public interest (e.g. pension underfunding, Social Security, medicare);
   
• The profession’s continuing education guidelines are wimpy in the face of change in the insurance and financial services fields;
   
• The profession’s self-regulation is weak, particularly given a lack of whistle-blower protections and limitations on sharing confidential information that may be used as evidence of an actuary’s relative competence; and
   
• The profession is over-organized for its size…but the CRUSAP folks recognize that resolving the turf battles to bring the level of professional bureaucracy down to more efficient levels will be incredibly bloodily political and therefore perhaps unresolvable.

It’s that last part that has me thinking. CRUSAP is probably correct that the idea of shedding some of our alphabet soup of professional organizations is so touchy that it’s unrealistic to expect that there will be any improvement, or even much constructive dialogue.

However, as someone who dislikes bureaucracy and inefficiency, the idea of consolidating/distilling our professional organizations does have some appeal to me. And, from my admittedly property-and-casualty centric view, I can’t help but notice that such a reorganization could offer a nice resolution to some of the more heated issues debated in the CAS’s hallowed halls.

If I were king, perhaps this is how I’d restructure the American actuarial landscape:

• Merge the major American actuarial bodies, rolling them up into the American Academy of Actuaries.
   
• Credentials awarded prior to the great merging would continue to exist, although the granting organizations would cease to exist as independent entities. In other words, FCAS’s would become “FCAS,MAAA”. ACAS’s would become “ACAS,MAAA”. FSA’s would be “FSA,MAAA”, and ASA’s would be “ASA,MAAA”. Fellowship and Associateship would both continue to be sufficient for practice rights domestically. (In other words, probably not much would change for most current actuaries, especially since so many are already both members of the Academy and either the SOA/CAS.)
   
• After the great merging, two new classes of membership would be created. Students attaining some middle-landmark would be eligible for MAAA. Someone completing exams roughly equivalent to the current 8 exam level in the CAS (or whatever the equivalent is these days over in SOA land) would be eligible to become “Fellow of the American Academy of Actuaries” (FAAA).
   
  (Note that this would have the handy benefit of not inherently devaluing the FSA/FCAS credentials. The new credential provides a way to distinguish within our little guild between the 9+ exam FCAS/FSA fellows and the 8-ish exam FAAA’s, while still retaining the Fellow label to avoid confusing folks out in the real world.)
   
• At the time of the great merging, I would envision the former-SOA and former-CAS exam systems continuing to exist as discrete entities for a while, although I would hope that eventually some additional areas of overlap on syllabus material could be found. (However, becoming a casualty-focused FAAA should still require something a bit more refined than ‘everything a life actuary has to take except substituting a casualty exam in at the very end’.) It’d be even better if there could be some coordination on exam material with the British Institute/Fellowship of Actuaries.
   
  (I’d also still like to see a transition from self-study exams to internet-based classes, but I appear to be virtually alone in the CAS in thinking that way, and so I won’t beat that dead horse any more.)
   
• FAAA-ship should convey full membership and practice rights domestically and eligibility for mutual recognition abroad. MAAA-ness plus some term of practical experience (e.g., 5 years) would be sufficient to deserve limited voting rights within the expanded Academy (e.g. suffrage wouldn’t extend to matters concerning eligibility for Fellowship). However, MAAA-ness wouldn’t be sufficient for domestic practice rights.
   
• I’d beef up the continuing ed requirements, up to the point of perhaps requiring some formal classwork/examwork (but probably not as grueling as the actuarial exams) once every three years, to ensure that credentialed actuaries are staying up on developments in the profession. Given distance-learning technology and the size of the expanded Academy, this should be doable.
   

There are some issues that I’m aware of with this scheme for which I don’t currently have good answers. For example:

• What about the Canadians? The CAS and SOA are international educational bodies, while today’s AAA is U.S.-focused. Perhaps the Canadian Institute would loosely affiliate with the expanded Academy in a rough approximation to the relationship between the Institute and Faculty in England and Scotland?
   
• There has been some talk about the possible value of an “actuarial technician” designation, possibly with different training. I think it’s an interesting idea, but it’s not something I’m addressing with my reorganization scheme.
   
• Today’s CAS is extremely territorial when it comes to its organization and exam system. I think CRUSAP was probably very wise in essentially saying “we need to point this out as a weakness in the profession, but we don’t think a practical resolution is realistically achievable.”

That’s enough rambling for one day. What do you think?

If you’re interested in such things, you’re probably already aware of this. However, the draft of the “Critical Review of the United States Actuarial Profession” report by the American Academy of Actuaries has been released. Comments are due by 31 October.

CRUSAP, a presidential initiative of the American Academy of Actuaries, was launched in May 2005 with the establishment of the CRUSAP Task Force. The task force is conducting a critical analysis of the American actuarial profession, using enterprise risk management and management consulting techniques.

Focusing on such challenges as globalization, the decline of pension plans, and a changing financial-services marketplace for actuarial skills, CRUSAP’s mission is to identify risks and opportunities facing the U.S. profession, and to make recommendations for managing them.

Presumably an unofficial discussion will take place at the Actuarial Outpost forum.

I’d offer a quick summary, but with the executive summary running 13 pages long, it’s going to take time to slog through this. Perhaps I’ve found my “airplane reading” for my trip next week.

I was surprised to see in one of my regular searches this article from the Honolulu Star-Bulletin:

Mary Kate Smith loves mathematics, and while going to graduate school figured out a way to turn it into a rewarding career: She became an actuary for an insurance company. The job lets her revel in regression analysis, forecasting, model building, probability distribution and similar such things that most people barely understand. Her employer is First Insurance Company of Hawaii Ltd. in Honolulu, which she joined last year after working for an insurance brokerage in Chicago.

….and from there it goes into a routine interview with Ms. Smith about her life as a Workers Comp actuary in Honolulu. The information in the article is not news to folks already familiar with the profession, but for folks wondering what the heck is it that an actuary does…it’s a pretty good read.

One of the more energetic debates within the Casualty Actuarial Society this year has been on the subject of whether to grant career Associates the right to vote in CAS elections, and the ability to be elected to certain positions on the board of directors.

According to an announcement on the CAS website, the measures failed by roughly a 6:4 margin.

A bit of background: In the US, the two larger actuarial educational bodies, the SOA and the CAS, have historically had two classes of membership. Once you pass enough exams to be considered to be qualified to do general actuarial work, you’re an Associate. Pass a few more exams to determine that you’re an expert, and you become a Fellow.

Both Associates and Fellows are considered actuaries, members of their societies, and eligible for practice rights in the U.S. Both classes of members pay the same dues. However, Associates are barred from voting in society elections and from serving in high office. This, makes sense if Associateship is viewed as a stepping stone to Fellowship, since you wouldn’t want an Associate having authority over whether he/she should be deemed a Fellow.

For various reasons, many actuaries choose to stop at Associateship, and are considered “Career Associates”. The reasons for this vary, but can include too much demand on their time at home or at work to permit studying, or just generally becoming sick of the exams.

The subject of Associate suffrage has come up within the CAS due to a few changes in the environment. For example, the “exam gap” between ACAS and FCAS has narrowed from a historical ratio of (5 for ACAS vs. 10 for FCAS) to (7 for ACAS vs. 9 for FCAS). Also, international cross-recognition of Fellows has created a situation where it’s now potentially easier to become a Fellow through international channels than it is to become an ACAS through the traditional method.

This has lead to both a question of whether it’s fair that folks who could arguably be viewed as “less qualified” than a home-grown ACAS have suffrage while ACAS’s do not. And, this has lead to a debate as to whether the ACAS designation should be retired.

Much of the criticism about the suffrage proposal seemed to revolve around concerns of Associates potentially gaining right to vote on the “what should we do about the ACAS designation” question (i.e., it wouldn’t be fair to grant Associates the ability to pass an amendment to the bylaws elevating themselves to FCAS). That, in my opinion, is a very valid concern, and the proposed amendments could have been better written to address that issue, for example by granting Associates the right to vote on all subjects except those regarding eligibility for Fellowship or on matters concerning the differences in classes of membership.

There were also mutterings from Fellows that perceived the proposals as a dilution of their designation, and that suffrage would prove to be a disincentive to advance from Associateship to Fellowship. That seems silly and petty in my mind; I have yet to talk with one career Associate or Fellow who has said that the right to vote affected their decisions on whether to pursue the upper exams.

Well, at least the matter is resolved for now. What remains to be seen is whether the question resurfaces in a couple of years, perhaps after the subject of whether to continue awarding ACAS designations is finally hashed out…if it is ever resolved.

Of course, my opinions don’t really matter here. After all, I’m just a lowly career Associate, paying full dues, without a vote. Wasn’t there a phrase popular 200-ish years ago, “no taxation without representation?”

From an Indian government press release issued today:

The Actuaries Bill, 2006 has been enacted. After the President signed the legislation as passed by Parliament and its gazette notification, the Act has come into force.

Under the Act, the Institute of Actuaries of India will be set up to conduct examinations for the profession of actuaries to regulate the profession. The Institute would look into professional misconduct and create necessary facilities for the growth and training of the members of the profession. As a result, the Actuarial Society of India would be dissolved and its assets and liabilities transferred to the proposed Institute of Actuaries of India.

The guild gets nationalized, it seems…..