In Case You're Dying for Cash

Here's a long, but good, article from the August 10 New York Times, titled "Are You Worth More Dead Than Alive?"  Some might indeed think it's a bit of an uncomfortable topic -- basically, people and companies betting on when someone will die.  But the world of viatical or life settlements is a growing reality, and of course it's related to actuarial science in both its reliance on life expectancy calculations, and its financial implications.

Essentially, someone in need of cash (perhaps for medical bills because of a terminal illness, or perhaps even for a healthy person's desire to, say, travel in her/his retirement years) sells their life insurance policy to the highest bidder.  The purchaser takes over the premium payments and becomes the beneficiary upon the death of the original insured.

Interesting subject from a number of perspectives:  cultural, financial, moral, regulatory,...

- Rick

Are Companies "Risk-Neutral"?

I've always wondered why it's so readily common in finance to assume that a company is "risk-neutral."  The common idea is that people are risk-averse, but organizations are risk-neutral.

And yet, that's always bothered me, because a company doesn't make decisions - rather, the people that comprise the company and the corporate culture make operational and strategic corporate decisions.  And if people tend to be risk-averse -- doesn't that attitude toward risk carryover into their working lives and activities?

Here's a paper posted on the Social Science Research Network (SSRN, at www.ssrn.com) titled "Behavioral Consistency in Corporate Finance: CEO Personal and Corporate Leverage," which seems to point in the direction of my concern.  Here's the abstract:

"We find that firms behave consistently with how their CEOs behave personally in the context of leverage choices. Analyzing data on CEOs' leverage in their most recent primary home purchases, we find a positive, economically relevant, robust relation between corporate and personal leverage in the cross-section and when examining CEO turnovers. The results are consistent with an endogenous matching of CEOs to firms based on preferences, as well as with CEOs imprinting their personal preferences on the firms they manage, particularly when governance is weaker. Besides enhancing our understanding of the determinants of corporate capital structures, the broader contribution of the paper is to show that CEOs' personal behavior can, in part, explain corporate financial behavior of the firms they manage."

- Rick

Recent increases in Fertility Rates

An abstract from an article in the April 2012 issue of the Journal of Population Economics finds

"... fertility increases among college graduate women, especially at older ages since the mid- to late 1990s. There are also increases in fertility among less-educated women, but these are concentrated at younger ages."

- Rick

Intergenerational Debt

A nice piece from Niall Ferguson in The Telegraph, "We're Mortgaging the Future of the Younger Generation."  Some quotes:

"Often these debts get discussed as if they themselves were the problem, and the result is a rather sterile argument between proponents of “austerity” and “stimulus”. I want to suggest that they are a consequence of a more profound malaise." 

"The heart of the matter is the way public debt allows the current generation of voters to live at the expense of those as yet too young to vote or as yet unborn. In this regard, the statistics commonly cited as government debt are themselves deeply misleading, for they encompass only the sums owed by governments in the form of bonds." 

"... the official debts in the form of bonds do not include the often far larger unfunded liabilities of welfare schemes like – to give the biggest American programmes – Medicare, Medicaid and Social Security."

- Rick

Modeling Culture

Anyone interested in modeling European business climate and prodictivity might take note of this article from yesterday's New York Times website:

" For most Europeans, almost nothing is more prized than their four to six weeks of guaranteed annual vacation leave. But it was not clear just how sacrosanct that time off was until Thursday, when Europe’s highest court ruled that workers who happened to get sick on vacation were legally entitled to take another vacation. "

- Rick

Microinsurance

A couple of short news reports on "microinsurance," courtesy of World Risk and Insurance News:

Report 1

Report 2

- Rick

Now I've Seen Everything - Public Pension Edition

Borrowing from the very same pension fund to which you owe money in order to make your required contributions...

If you don't believe it, check out the New York Times article, "To Pay New York Pension Fund, Cities Borrow From It First."

- Rick

Climate Change and Insurance

Here's a case worth watching - one of many possible future climate change-related insurance and risk management issues.

In this case, the issue is how "climate change" relates to the definition of a loss or occurrence in an insurance policy. Ultimately, of course, another issue will be whether a company can be held liable for causing or contributing to climate change - and whether "damage" from climate change can be identified reasonably and measurably.

Down the road, consistency in these and other decisions will be critical. For example, if climate change is accepted as leading to more frequent and harsher hurricanes, then logically insurers should be allowed rate increases to reflect that greater exposure.

The next decade or so should be interesting...

- Rick

American Airlines and Pensions

We're watching a case study unfold before our eyes: American Airlines, in bankruptcy reorganization, considering what to do about its massively underfunded pension plan.

From BusinessInsurance.com:

AA wants to terminate its pension plans

Pension Benefit Guaranty Corporation (PBGC) takes action

A lawmaker chimes in

- Rick

Less-Than-Fully-Accurate Predictions of Technology

From the Scientific American website: "Use It Better: The Worst Tech Predictions of All Time." Whenever I see a list like this, I always wonder what predictions or assumptions which we all embrace today, will turn out (perhaps even in the relatively short-term) to be utterly wrong.

- Rick

The Mathematics of Serial Killing?

When I first saw this article, "Math formula may explain why serial killers kill," on foxnews.com earlier today, I was more than skeptical. The article describes research on the spacing between murders of a 1980s serial killer. "The researchers found that the seemingly random spacing of his murders followed a mathematical distribution known as a power law." The article also says that "The finding suggests an explanation for why serial killers kill."

Now, lots of natural and human-oriented things and processes have been empirically linked to a power law: wealth, city population, the occurrence of earthquakes, etc. In a power law, the frequency of something varies according to some characteristic of that thing.

The power law is so prevalent, in fact, that one wonders whether there might be some yet-unknown law or factor that causes its emergence naturally and frequently.

What concerned me in the first two paragraphs of the above article was the reference that the power law finding might represent an "explanation" for serial killing. An empirical finding that data follows a power law can be interesting - but how could it be explanatory without understanding the natural forces, if any, that might lead to frequent emergence of the power law?

Nevertheless, I admit - I found the rest of the article highly interesting and compelling...

- Rick

A List to Avoid

Here's a list you don't want to be on: Business Insurance's 2011 Insurance Fraud Hall of Shame.

- Rick

Apps for Actuaries

The Society of Actuaries now has a website devoted to mobile resources, called "Apps for Actuaries." Inevitable, I suppose - but still interesting!

- Rick

Human Probability Assessments II

Another quote from the 2011 Annual Question of Edge.org. This time, it's from Antony Garrett Lisi's contribution, "Uncalculated Risk":

“We humans are terrible at dealing with probability. We are not merely bad at it, but seem hardwired to be incompetent, in spite of the fact that we encounter innumerable circumstances every day which depend on accurate probabilistic calculations for our well-being… This blind spot in our collective consciousness – the inability to deal with probability – may seem insignificant, but it has dire practical consequences. We are afraid of the wrong things, and we are making bad decisions… We are especially ill-equipped to manage risk when dealing with small likelihoods of major events.”

- Rick

Human Probability Assessments I

Here's a quote that I just cited in a paper I submitted a couple of days ago:

“People are bad at assessing probabilities. They are bad at it not just because they are bad at addition and multiplication. Rather, people are bad at probability in a deep, intuitive level: they overestimate the probability of rare but shocking events… Conversely, they underestimate the probability of common, but quiet and insidious events… When it comes to understanding probability, people basically suck.”

The quote is from Seth Lloyd's "Living is Fatal" contribution to Edge.org's 2011 Annual Question: What Scientific Concept Would Improve Everybody’s Cognitive Toolkit?

Edge.org asks such a question each year, and collects responses from over 100 selected contributors. Very interesting browsing, and very thought-provoking.

- Rick

More Media Attention on Actuaries

The Society of Actuaries' webpage has a link to an article on an Alabama TV station site regarding "2012 Top Paying Jobs." Here's the "money" quote (pun intended):

"And the top job in 2012, are the people like Lee Bowron, an Actuary. As a consultant, he crunches the numbers on financial risk for insurance companies...
Fact - actuaries have the potential to make 137-thousand a year."

Of course, this is really a meaningless statement. Saying "potential" is like saying that one could earn "up to" 137 thousand a year - virtually any number fits the statement. Also, there are lots and lots of actuaries who make well over 137K - in fact, I wonder where they even got that number, and what kind of statistic it represents.

Also, the starting salary mentioned in the article for actuaries seems low.

- Rick

Data Mining in Insurance

On page C5 of today's WSJ is a short item regarding the hiring of a Chief Science Officer by Chartis, the largest insurance firm in the AIG group. The goal of this new position and unit is to perform "technical pricing" on the voluminous risk management data that AIG has collected globally over the years. This data mining effort will include investigations into possible better loss forecasts and pricing of commercial property-casualty insurance lines of business.

Data mining is something that quite a few current actuarial science students will end up being involved in at some level.

- Rick

Corporate Pension Funding

A new report from actuarial firm Milliman Inc. says that the funding status of large corporate defined benefit pension plans deteriorated during last year. As of December 31, 2011, the Milliman 100 Pension Funding Index, which reflects the funding status of the 100 largest U.S. corporate pension plans, indicated a funding ratio of 72.4%, for a total funding deficit of $464 billion.

The funding ratio and the deficit numbers are highly sensitive to economic conditions, including interest rates and invested asset performance.

- Rick

Twins are More Likely Than They Used to Be

A new report from the National Center for Health Statistics (part of the Centers for Disease Control and Prevention) finds that "In 2009, 1 in every 30 babies born in the United States was a twin, compared with 1 in every 53 babies in 1980." The twin birth rates rose by particularly large amounts amongst women over 35 and, especially, women over 40. I would certainly presume that much of that increase is due to the development, and greater availability and effectiveness, of infertility treatments over the last three decades.

As the data brief concludes, "The study of multiple births is important because of their elevated health risks and accompanying greater health care costs. The rise in twinning has influenced the upward trend in key infant health indicators such as preterm and low birthweight rates during the 1980s and 1990s."

- Rick

Can You Increase Your Intelligence?

This posting on the Scientific American Blogs suggests yes...

- Rick

Leadership

From Forbes.com, one person's take on how to be persuasive in business. Some nice insights and anecdotes.

- Rick

2011: A Record Year for Insured Catastrophe Losses

A posting today from Business Insurance notes that, according to Munich Reinsurance Co. research, "2011 was the costliest year on record for insured natural catastrophe losses... Insured losses from natural catastrophes totaled about $105 billion..." The article says that about two-thirds of the losses were from the Japan and New Zealand earthquakes (although the posting then says that the two earthquakes caused $53 billion in damages, which is more like one-half, but perhaps I'm missing something).

Here's a link to a press release from Munich Re regarding their research.

- Rick

Our Data Runneth Over

An article, "So, What's Your Algorithm," from today's Wall Street Journal discusses the opportunities associated with enormous databases, and the need for people with analytical skills who can develop appropriate algorithms. "... analytics harvested from massive databases will begin to inform our day-to-day business decisions. Call it big data, analytics, or decision science." The amount of data out there is truly staggering.

A great opporunity for actuarial science majors, math and statistics majors, and others with quantitative and analytical skills to have an important impact on the future.

- Rick