Math -- Giving It the Business

The December 18 issue of Business Week has a long section on the "Best of 2006" -- best with respect to leaders, products and ideas. One of the Best Ideas of 2006 is... MATH! Here's a link to the list of BW's best ideas (go to slide 12, or click on the little yellow "smiley-face" with the math symbols at the bottom).

- Rick

2006 Insured Catastrophe Losses

Swiss Re has posted their preliminary evaluation of worldwide catastrophe losses (go to their website, and click on the December 20 news release link). Based on their calculations, 2006 insured worldwide catastrophe losses are around $15 billion -- as opposed to 2005's $100+ billion figure. The 2006 figure, assuming it holds for the next ten days of the year, is the third lowest in the last 20 years.

Looking forward, we have already begun to see and hear some predictions that 2007's hurricane season will be worse. There's a very interesting dynamic in the catastrophe insurance / reinsurance market going on right now!

- Rick

Catastrophe Bond Sales are Anything But (a catastrophe)

Today's Wall Street Journal (page C1) has an article describing the active 2006 market in catastrophe bonds. According to data compiled by Goldman Sachs, investments in cat bonds and similar instruments have totalled over $9.2 billion this year (well more than twice 2005's total).

In addition to this recent activity, I think there may be some "unexplored" types of securitized insurance instruments whose markets will develop in the future -- e.g., contingent equity puts based upon the occurrence or non-occurrence of a specified catastrophe.

- Rick

Football and Actuarial Science

It has become popular to offer prizes or monetary awards in the event of something occurring. Examples are numerous:

• Prizes for holes-in-one at golf tournaments.
• Awards for successfully making a basket from half-court at half-time of an NBA game.
• Taco Bell's offer, a few years ago, of a free taco to everyone in the U.S. if the space station Mir hit a target off the coast of Australia when it fell back to earth (it missed....).
• The capture of the Loch Ness monster (I think it was Seagrams that offered an award for this a few decades ago -- they insured this contingency with Lloyd's of London) (no one cashed in....).

Here is a link to an article describing a recent example -- free furniture because the Bears shut out the Packers! (Woof woof!!!)

As an actuary, how would YOU have priced this?

- Rick

Where Do Pensions Come From?

Here's an interesting and thought-provoking article on some of the socioeconomic and political dynamics underlying the early days of pensions, and how changes in those dynamics are helping to cause the concerns and problems associated with current pension systems.

- Rick

Even Actuaries Aren't Clairvoyant

This is an interesting press release, from the UK actuarial profession, regarding new mortality tables. A couple of key sentences:

Previous sets of tables have incorporated projections of future mortality, but this has not been done with the latest tables because of the uncertainty surrounding future improvements.... Instead the profession is saying that actuaries – and other professionals using mortality projections – should consider a range of scenarios.

Apparently, the UK organization feels that medical and other developments are occurring with too much rapidity and uncertainty to allow traditional actuarial point estimate projections.

- Rick

Self-Control: The Key to Success!

Here is an article from an Australian publication. I've often told my students that, when it comes to actuarial and general business success, intelligence is no more than 1/3 of the equation (and perhaps less) -- that other factors (discipline, communication skills, etc.) are worth at least twice as much. Here's more ammunition.

By the way, this article also explains why I never try to resist a chocolate-chip cookie (or "biscuit," as they call them in the UK and Australia): I'm saving my willpower reserves for much more important matters! (-:

- Rick

Dynamic (Financial) Analysis

One of my research interests involves a process referred to in the actuarial profession and insurance industry as "dynamic financial analysis" (DFA). DFA emerged a decade or so ago as an approach to integrate the analysis of both the underwriting and financial (or liability and asset) sides of an insurer, and to recognize their interrelationships. It has now largely evolved into an analytical tool within another research interest, enterprise risk management (ERM) -- DFA can help to understand and quantify the impact on a company of risks viewed in an enterprise-wide or holistic framework.

In general, DFA treats the emergence of economic and financial variables as stochastic (and usually projects future values of those variables via Monte Carlo or other simulation techniques). Another approach is the testing of specific, hypothesized future scenarios. But internal consistency is important. For example, while it's possible to change just one variable at a time, and leave the others static or unchanged (ceteris paribus, in latin), such a scenario may not be reasonable -- a change in one variable may generally be associated with a change in another variable (through causation or just simple correlation).

The U.S. Department of the Treasury has recently issued a report titled "A Dynamic Analysis of Permanent Extension of the President's Tax Relief." This represents a new type of analysis -- dynamic as opposed to the historical static -- of tax policy. A quote from the Executive Summary:

Dynamic analysis goes beyond traditional analysis of tax policy by focusing on the broad economic effects in both the short and long term. Simply, dynamic analysis provides a more comprehensive and complete approach to analyzing tax policy by including its effects on the overall size of the economy and other major macroeconomic variables. The President’s FY 2007 Budget proposes to create a division of dynamic analysis within the Department of Treasury’s Office of Tax Analysis.

A nice start down the D(F)A road.

- Rick

Finance and Physics

I just finished reading a book titled "My Life as a Quant: Reflections on Physics and Finance," by Emanuel Derman (co-creater of the eponymous Black-Derman-Toy interest rate model). A nice book, recommended to anyone interested in quantitative finance.

Derman got a Ph.D. in theoretical physics, and worked in several university physics positions, before becoming a Wall Street "quant." His last chapter has a nice line, where he discusses how physics is in many ways more amenable to modeling than are economics and finance. He writes, "Trained economists have never seen a really first-class model. It's not that physics is 'better,' but rather that finance is harder."

As some of us say, because people's behaviors and preferences change, unlike physical laws, "Finance and actuarial science aren't rocket science -- they're HARDER."

- Rick

Gas Prices and Demand Curves

In the current issue of Business Week, there is an article ("Can't Stop Guzzling," pp. 26-29) that discusses how little our demand for gas appears to have been affected by the recent high prices. It's an interesting article, and an interesting issue: determining a demand curve for a product. Apparently this one is pretty inelastic -- but for prices up to how much per gallon?

Relevance to actuarial science: underlying auto insurance exposure should be some function of, among other things, amount driven, and how we drive. Are these being affected by changing gas prices?

- Rick

Math Geeks Rule!

In case you missed it a number of moths ago, here's a link to a Business Week cover story from January 23, 2006: "Math Will Rock Your World." It describes the impact and influence that math and mathematicians are having throughout business and industry.

- Rick

One Impressive Economist (Actually, Two)

In today's Wall Street Journal (Sat/Sun, July 22-23), on page A10, there is an interview with Milton Friedman (and his wife, Rose). It's a nice piece that gives a flavor of his mind and their relationship -- Rose is also an economist, and they collaborated frequently.

Most of you (referring to my students) are far too young to have had any real exposure to Friedman the Economist (actually, for the most part, *I'm* too young, too, but I was conscious of the tail end of his career, and of his incredible legacy). As no doubt with certain other figures, it is probably hard for younger people to fully appreciate the stature and influence of Milton Friedman. He won the Nobel Prize in economics in 1976 -- my impression is that most economists at the time felt the award had been delayed, relative to deservedness -- and was always somewhat controversial. His two most famous books -- both eminently readable -- are probably "Capitalism and Freedon" and "Free to Choose."

Milton Friedman is now 94 years old, and he and his wife are in their 68th year of marriage (oh my GOODNESS!).

And why even mention this WSJ interview in an actuarial science forum? In part, of course, because economics is foundational to what we do, and the context in which we do it. But also because of a wonderful anecdote, mentioned in the Friedmans' memoir, "Two Lucky People." There was one profession that Milton Friedman, that great intellect, considered entering but decided against after taking an exam. You've got it: actuarial science!

- Rick

Hurricane Season

One of the most significant -- and certainly one of the more visible -- risks faced by a property-casualty insurance company is catastrophe risk. As we are heading into the core of hurricane season, it's not surprising that meteorological prognostications and estimations of hurricane preparedness are on everyone's radar screens.

A press release regarding a New Hurricane Readiness Index can be found on the Insurance Information Institute website, at

http://www.iii.org/media/updates/press.757472/

This survey and evaluation, sponsored by a number of major P/C insurers, concludes that homeowners still have a ways to go with respect to preparedness for future hurricanes.

Other noteworthy insurance-related hurricane-season writings in the last couple of weeks include a page 1 Wall Street Journal article about the current demand-supply crunch for catastrophe insurance ("As Hurricane Season Begins, Disaster Insurance Runs Short," Monday, July 10), and an article in Barron's about the possible favorable results for some insurers if the hurricane season turns out to be not-so-bad ("Fair Weather's Friends," also July 10).

- Rick