Prof. Gorvett's Actuarial Blog

Less-Than-Fully-Accurate Predictions of Technology

2012-01-21T17:09:00.002-06:00

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?

2012-01-21T16:52:00.002-06:00

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

2012-01-19T16:45:00.001-06:00

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

- Rick

Apps for Actuaries

2012-01-17T15:25:00.002-06:00

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

2012-01-14T12:23:00.003-06:00

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

2012-01-14T12:11:00.002-06:00

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

2012-01-14T11:56:00.002-06:00

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

2012-01-09T12:40:00.002-06:00

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

2012-01-06T16:14:00.003-06:00

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

2012-01-05T22:15:00.002-06:00

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?

2012-01-05T16:55:00.001-06:00

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

- Rick

Leadership

2012-01-05T16:37:00.002-06:00

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

2012-01-04T15:41:00.003-06:00

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

2012-01-04T13:39:00.002-06:00

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

Long-Term Care Insurance - Gone!

2011-10-15T11:36:00.003-05:00

Very interesting article from The Washington Post online - interesting from an insurance perspective, and from the perspective of how Washington plays its game.

The Obama administration has eliminated the long-term care insurance program from the 2010 health care law.

"The program was to be entirely self-financed with the premiums participants paid. Obama officials said that presented them with a problem: If they designed a benefits package generous enough to meet the law’s requirements, they would have had to set premiums so high that few healthy people would enroll. And without a large share of healthy people in the pool, the CLASS plan would have become even more expensive, forcing the government to raise premiums even higher, to the point of the program’s collapse."

As the article says, this will also affect deficit-reduction plans associated with the health-care law.

- Rick

Nobel Winner - Short and Sweet

2011-10-10T21:30:00.002-05:00

Here is a graduation speech by one of today's two Nobel prize winners in economics, Thomas Sargent. Given at UC Berkeley in 2007, it is very short and a nice summary of some of what we know about economics.

- Rick

Social Security vs In-Vitro Fertilization

2011-08-30T16:36:00.002-05:00

Here is a very interesting case (from foxnews.com) regarding the rights to survivor's benefits of a child, conceived via in-vitro fertilization after the father's death.

Advances in medical and other sciences will continue to provoke the emergence of fascinating, complicated, and important issues in the risk and insurance area.

- Rick

Hurricane Irene (2)

2011-08-26T16:41:00.002-05:00

An article from yesterday's (Thursday's) Wall Street Journal, about the potential impact of Irene on east coast state-run insurance programs. The dynamic between private insurers and regulators / state-run insurers - and the potential for non-coastal policyholders to have to subsidize coastal ones - could be significantly affected, and bears watching.

- Rick

Hurricane Irene

2011-08-26T16:29:00.002-05:00

As Irene approaches the east coast of the United States, there are a number of potential risk management and insurance implications. Here's an article from the Wall Street Journal blog site about the increased trading of catastrophe bonds over the last few days.

- Rick

Medical Malpractice

2011-08-17T18:58:00.002-05:00

Here's a New York Times article summarizing a paper from the New England Journal of Medicine on medical malpractice. The focus of the paper is largely on the frequency of malpractice claims against doctors in a variety of medical specialties.

One thing that the paper does not appear to address is a big issue in medical malpractice: the costs of defending claims (the "loss adjustment expense" in insurance terminology). Thus, even though, as the paper finds, most claims do not result in indemnity payments to the claimant, there are often huge legal costs expended in defending against such claims.

- Rick

Are Birth Rates an Economic Casualty?

2011-08-11T20:07:00.002-05:00

Here's a report from the Centers for Disease Control, observing the fairly significant decline in birth rates over the last few years (since 2007). Note the short-term time series chart at the bottom of the document. Is this a result of the recent financial downturn?

Here's a long-term chart of birth rates, which also shows periods of economic recession (thanks to www.calculatedriskblog.com ).

Digging deeper into the cause / correlation would make for an interesting student project.

- Rick

The Mouse Strikes Again

2011-07-27T14:02:00.002-05:00

According to the Kaiser Health News, some hospitals have been hiring Disney as a consultant to help improve their customer/patient satisfaction. Could be some potential linkage to actuarial and risk management issues - "quality of service" is likely related, to some extent, to effectiveness of treatment.

The references toward the end of the article to some pushback against paying to send hospital staff members to Disney for training is interesting...

- Rick

Public Pensions

2011-07-11T10:50:00.002-05:00

Per an article in The Economist, it's good to see that someone (the city of Atlanta) has made progress in the public pension underfunding area...

- Rick

Health Insurance

2011-07-07T12:59:00.002-05:00

A very interesting posting by Richard Posner, who is a justice on the federal 7th Circuit Court of Appeals, and a professor at the University of Chicago. He has largely defined the field of law and economics over the last few decades.

The posting is overall very interesting, but particularly note the following quote:

Third-party payment is a pervasive feature of American medicine. Why anyone should want health insurance other than “major medical”—that is, insurance against catastrophic medical bills—is a great mystery, as is the fact that Medicare subsidizes routine health care of upper-middle-class people. Since disease and injury tend to be unpredictable, health insurance smooths costs over time, which is efficient, but a person could achieve that smoothing simply by saving the money that he now pays in health-insurance premiums and investing it to create a fund out of which to pay future health expenses as they occur.

But we are stuck with third-party payment, and it systematically favors specialists over primary-care physicians, because specialists tend to provide discrete procedures, which are easier for the insurers, whether they are private insurance companies or government, to cost. The care provided by primary-care physicians has, to an extent, an elastic and discretionary quality.

It would be interesting to see how our actuarial science and insurance
students would respond to this.

- Rick

WC in Illinois

2011-03-08T13:54:00.002-06:00

I know it's hard to believe that my home state of Illinois might be the site of possibly fraudulent activity... Here's an editorial from today's Champaign News-Gazette regarding a Workers Compensation situation that some are apparently suspecting to be questionable.

- Rick

Births, Marriages, and Divorces

2010-08-28T11:03:00.002-05:00

A NY Times report on a National Center for Health Statistics study indicates that U.S. birth, marriage, and divorce rates all fell slightly during 2009. The 100-year births-per-year graphic is nice - for example, one can see what happens to the birth rate during recessionary or expansionary periods.

- Rick

Cost of Motor Vehicle Crash Injuries

2010-08-28T10:56:00.003-05:00

A recent study by the Centers for Disease Control and Prevention, as reported in Insurance Journal, finds that the annual medical care and productivity costs associated with motor vehicle crash injuries totals over $99 billion, or nearly $500 per licensed U.S. driver.

- Rick

Life Expectancy After Retirement

2010-03-09T11:01:00.002-06:00

Here is a nice chart showing, for several countries, the increase in life expectancy after retirement over the last roughly 40 years. Important data for anyone discussing whether or not to increase retirement ages necessary for full benefits.

- Rick

Boys versus Girls

2010-02-18T10:31:00.002-06:00

Today's (February 18) Chicago Tribune (page 25, first page of the Business section) has an article titled "Teen Risk Gap Shrinks" (link here). According to the article (which references a new Allstate Foundation report), the gap between teen boys and teen girls in terms of driver risk has been diminishing. Historically, teen boys have been much riskier drivers, and more costly to insure, than teen girls -- but that gap is now characterized as narrowing.

Although... The article keeps referring to teenage girls as "admitting to" speeding, texting, etc., more often than teenage boys. It will be interesting to see whether this survey-type data, which I would think depends upon the honesty of those surveyed, is ultimately borne out by future emerging loss data...

By the way... It still shocks me that anyone would even think about texting while driving. It perhaps shocks me even more that we often have to engage in societal arguments about whether or not it should be illegal...

- Rick

Using the Terminally Ill Against Insurers

2010-02-18T10:25:00.002-06:00

In Tuesday's (February 16) Wall Street Journal, page A1, there is a very interesting article titled "Investors Recruit Terminally Ill To Outwit Insurers on Annuities." Well worth seeking out for actuaries and actuarial science students.

We certainly seem to be in an environment these days in which anything goes against the "big, bad" insurers...

- Rick

Risk Interrelationships

2010-01-18T21:25:00.002-06:00

This "Risks Interconnection Map" from the World Economic Forum 2010 is interesting. You can move your cursor around and click on the risk nodes, providing additional information regarding the frequency, severity, and interconnections associated with that risk. Fun to play with -- and a nice example of the kinds of things we are all doing in Enterprise Risk Management and related areas.

- Rick

Terrorism Risk in Context

2010-01-09T13:35:00.005-06:00

A key role played by actuaries and risk managers is the assessment of risk. An article in today's Wall Street Journal, "Undressing the Terror Threat," attempts to put the risk of terrorist attacks into perspective, and some some interesting statistics.

Also, see the accompying text, "Crunching the Risk Numbers."

- Rick

Organ Recital

2010-01-09T13:26:00.003-06:00

"The Meat Market" is an interesting article in today's (Jan. 9, 2010) Wall Street Journal, discussing the current situation with respect to organ donation, shortages of needed organs, and possible approaches to providing incentives to increase donations. Relevant to actuarial science for the topic's potential impact on health care costs, healthiness and longevity (perhaps of both recipients and donors), etc.

- Rick

Health Care Debate II

2009-08-12T14:42:00.002-05:00

Here's a quote from President Obama's health care talk in Portsmouth, NH, yesterday (per seacoastonline):

"A recent report actually shows that, in the past three years, over 12 million Americans were discriminated against by insurance companies because of a pre-existing condition. Either the insurance company refused to cover the person, or they dropped their coverage when they got sick and they needed it most, or they refused to cover a specific illness or condition, or they charged higher premiums and out-of-pocket costs. No one holds these companies accountable for these practices."

Where to start...

(1) Insurers ARE held accountable -- in several ways, but especially through the competitive marketplace.

(2) Insurers are not endowed with a bundle of money which they can to choose to either pay out or not. Pricing of an insurance policy is predicated on the frequency and severity of potential losses stemming from the risks being underwritten and insured in the policy. The policy -- which is a legal contract -- spells out the conditions, exclusions, etc., under which the indemnification relationship between the insurer and policyholder will operate. Generally, and in theory, when an insurer makes a coverage decision regarding whether a policy should respond to a particular situation, it is based upon the provisions of the policy (which, again, is a legal contract). (This is not to say that an insurer never acts "inappropriately" -- but that's a different issue that has little, if anything, to do with the broader public policy debate.)

(3) It is not "discrimination" for an insurer to enforce a pre-existing condition exclusion in an insurance contract. Such exclusions, when a part of an insurance policy, are there from the start. They are common, agreed to, and they impact the level of premium charged for the policy. Among other things, the impact of a policy exclusion is typically to make the policy affordable (or more affordable) and/or prevent moral hazard and/or... Thus, elimination of such an exclusion is certainly possible -- but the premium would need to increase in order to cover the additional risk which the insurer is taking on.

(4) When one encounters statements along the lines that an insurer "refused to cover" someone or something, remember: an insurer is a financial firm with a fiduciary obligation to ALL its policyholders (and owners and other stakeholders). When the price of its product is based upon a certain scope of coverage, the insurer potentially violates that fiduciary responsibility if it pays out more than the contract specifies.

There are very real PUBLIC POLICY issues involved in the current health care debate. It is reasonable to discuss, AS A SOCIETY, whether a certain type or level of coverage should be mandated. Most of us have mixed feelings about these things -- it's hard not to, when there are ample personal anecdotes floating about involving health and medical care. But the debate needs to start from a fair and realistic perspective regarding insurance and its role in society and the economy.

- Rick

Health Care Debate I

2009-08-12T14:19:00.002-05:00

Here is a very interesting and informative article on the current health care debate - and it's also a good and fun read. "Health Care Mythology," by Clifford Asness, managing and founding principal of AQR Capital Management. Cliff and I worked together in graduate school for a year or two, at the University of Chicago. He went off to become a big name on Wall Street; I became a little name, in academia. But I think I may have more hair...

- Rick

Data Mining

2009-08-12T13:55:00.002-05:00

"Data Mining" is one of those terms that can have either good or bad connotations. The "good" side is that lots of companies have huge databases, and data mining can be an indispensable statistical skill for culling important fcats and insights from the data -- insights that could potentially lead to a competitive advantage, or to the recognition of a critical relationship.

A recent Wall Street Journal article -- "Data Mining Isn't a Good Bet for Stock-Market Predictions" -- highlights the potential negative side of data mining. As I frequently mention in classes, "correlation" is one thing, but "causation" is something else. A relationship discovered in financial, economic, and insurance data should make sense, and should have an intuitive explanatory basis, before being used as a foundation for predictive modeling.

- Rick

"Statistics" is the Word

2009-08-06T10:01:00.001-05:00

Always nice when the mainstream media gets it right!

"For Today's Graduate, Just One Word: Statistics," The New York Times, 8/5/09.

- Rick

Actuarial Science a "Lucrative" Degree

2009-07-24T10:36:00.000-05:00

“Actuarial Science” has made the list of the “Most Lucrative College Degrees,” according to CNN and its reporting on a National Association of Colleges and Employers survey. Act sci is the only degree in the top 14 that is not an engineering/CS degree.

The ranking is based on college graduates’ starting salaries. I suspect that, if future earnings potential and the possibility of salary increases in the first 5-10 years of a career were considered, actuarial science could well be ranked even higher.

As a whole, the list certainly suggests the importance and power of mathematical skills!

- Rick

Pensions and Actuaries

2009-07-06T19:15:00.002-05:00

A commentary in today's Wall street Journal, "Public Pensions Cook the Books." It concerns how two public pension plans in Montana are handling their actuarial services. Must reading for actuaries...

- Rick

Towers Watson

2009-06-28T11:36:00.002-05:00

A big merger was just announced in the actuarial consulting world:

Towers Perrin + Watson Wyatt = Towers Watson.

This is being announced as a “merger of equals.”

- Rick

The Public Option

2009-06-27T19:51:00.002-05:00

One of the big issues in the current health care reform discussions is the "public option": introducing a public provider to compete with private health insurers. Actuaries and others familiar with the insurance industry have seen this movie before, in health care and other lines of insurance -- with respect to both proposed and implemented public insurers.

Here are a couple of nice articles discussing the public option in an economic context:

(1) "The 'Public Plan' Would be the Only Plan," by Scott Harrington (professor at the Wharton School, University of Pennsylvania), Wall Street Journal, June 15, 2009.

(2) "The Pitfalls of the Public Option," by N. Gregory Mankiw (professor at Harvard University), New York Times, June 27, 2009.

- Rick

A "Brief" Article on Economics

2009-06-10T14:57:00.003-05:00

Hmmm... Perhaps economics need not be dull after all...

From MSN Money: "How your undies track the recession," by Michael Brush.

- Rick

Hyundai: Insurance and Marketing

2009-03-14T14:35:00.002-05:00

An article about the South Korean automaker Hyundai, from The Economist. Note their use of insurance:

"...Hyundai is also benefiting from a novel scheme, launched in January, in which it offers to buy back cars from customers who lose their jobs within a year of their purchase. (The company essentially offers a smaller discount and then uses the money to buy an insurance policy.)"

Another reason for actuaries to study macroeconomics and modeling...

- Rick

Agent-Based Modeling

2009-03-14T14:20:00.002-05:00

An article on agent-based modeling from The Economist. Lots of potential for applications in insurance, actuarial science, and risk management. This is one of the research topics in our actuarial science undergraduate research program at the University of Illinois.

- Rick

The Gaussian Copula

2009-02-25T12:14:00.002-06:00

An article from Wired about the Gaussian copula. The question is how to model inter-relationships -- correlations. Students may not understand every reference in this article, but it has some good analogies and gets the point across nicely.

- Rick

State Farm Drops Out of the Florida Homeowners Market

2009-01-28T12:08:00.002-06:00

According to an artcle in today's Wall Street Journal, State Farm is leaving the Florida Homeowners Insurance Market. It will reduce its policy exposure over the next two years or so.

It's interesting that "the state-created insurer of last resort, Citizens Property Insurance Corp.," is also characterized as having "been trying to shed policies."

- Rick

Putting the "R" in InsuRance (ARRR, ARRR)

2009-01-14T09:59:00.002-06:00

Traveling the high seas? You might want to consider pirate insurance.

Per the Chicago Tribune today, Aon is promoting piracy insurance -- specifically, a policy which covers the time delay associated with a pirated shipment.

- Rick

Is Economic Uncertainty Decreasing?

2009-01-13T21:47:00.002-06:00

A posting on Vox titled "The Recession Will Be Over Sooner than You Think," by Stanford economists Bloom and Floetotto, suggests that several measures of economic uncertainty have fallen recently. In fact, they say, "economic uncertainty is now dropping so rapidly that we believe growth will resume by mid-2009."

Nice to hear an occasional optimistic voice!

Hmmm...

- Rick

Market Turmoil, Regulation, and Efficiency

2009-01-11T15:22:00.002-06:00

Two of the top financial economists in the world, Gene Fama and Ken French, recently started an online forum. They have a Q&A section in which they respond to relevant finance questions, at least a couple of which would probably be of interest to actuarial science students (as well as practitioners):

(1) "Some people have argued that the turmoil was caused by a lack of government regulation. What do you think? Do we need more regulation?"

I think the reference to the possibility of more regulation "stifling financial innovation" is very important. Also interesting is the comment that "regulators are eventually captured by the regulated. As a result, regulation often has results opposite those intended."

(2) "Is the market turmoil a sign that markets are not efficient?"

The Fama-French response identifies two market turmoil factors: expected cashflows (e.g., future dividends and growth rates), and their discount rates. Those of you who have taken my Math 210 course may recall a homework problem I always ask, which is intended to demonstrate potentially how little has to change in order to result in a significant change in the stock market. Using the dividend discount model (P = D / (i - g), where P is the price of the stock or market index, D is the next dividend, g is the growth rate of dividends, and i is the discount rate)), for example, for certain fixed values of D and i, the market consensus regarding the growth rate g need not change much in order to significantly change the price P.

- Rick

The Big Ones

2009-01-10T19:11:00.003-06:00

A summary of the most financially significant 2008 property-casualty catastrophes, from insurancenewsnet.com . For P/C insurers, catastrophes are often the risk that causes the most concern.

- Rick

Modeling Risk-Aversion

2009-01-09T19:45:00.002-06:00

From The Economist of January 8th, a short article ("The Bonds of Time") summarizing research indicating that "people born at different times make very different financial choices, even in similar economic environments."

Perhaps not surprising -- but think about the implications for the modeling of economic and financial behaviors (which in turn will potentially impact future economic and financial conditions). One more level of complexity to be considered...

- Rick

Retirement and 401(k)s

2009-01-08T19:18:00.002-06:00

An article in the Wall Street Journal today - "Big Slide in 401(k)s Spurs Calls for Change" - discusses how significantly the financial crisis has affected some people's 401(k) retirement accounts. This kind of thing is why I hesitate to conclude, as some have, that the retirement actuarial function is becoming a thing of the past. The movement from defined benefit to defined contribution / 401(k)-type plans over the recent decades might suggest a decrease in the future demand for pension actuaries -- but concerns like those expressed in this article suggest that DC/401(k) plans may not be a panacea. The entire approach to pension/retirement continues to evolve, and I think that actuaries, with their quantitative skills, have a lot to say about risk management in a context of economic and financial volatility.

A couple of comments about this article (among the many that come to mind):

(1) It's true that individuals managing their own 401(k)s have largely lost money recently - and they may need to make better decisions and be better educated regarding their financial choices. But professional money managers have also lost money.

(2) While the whole 401(k) industry and process could probably use some tweaking (and there's plenty of research going on these days regarding some possible changes, for example to the ways alternative investment choices are presented to employees), it may be a bit rash to generally indict 401(k)s based on the current financial situation.

- Rick

Stimulating the Economy

2009-01-07T19:48:00.002-06:00

A very nice and easily understood article on issues involved in stimulating the economy, from today's Wall Street Journal:

"Boost Private Investment to Boost the Economy," by Hal Varian.

Varian is a very well-known academic economist -- and happens to also be the chief economist at Google.

This article should feel very comfortable to any student who has taken even basic macroeconomics.

- Rick

Psychological Influences of the Crisis

2009-01-07T13:49:00.002-06:00

Short, nice piece (by William Watson, the Montreal Gazette) about psychological influences on the current economic crisis. I love the line "We've gone from the subprime to the ridiculous"...).

- Rick

Top Dogs

2009-01-06T10:26:00.001-06:00

Today, another ranking of jobs / careers came out (JobsRated.com), and, as usual, “actuary” has one of the top positions in the rankings. Here are the top five:

(1) Mathematician
(2) Actuary
(3) Statistician
(4) Biologist
(5) Software Engineer

The complete list and story is at

http://www.careercast.com/jobs/content/JobsRated_Top200Jobs

Across the years, and the different producers of such rankings, “actuary” is the one position that ALWAYS seems to be in the top few. Others come and go (as I recall, a few years ago, “actuary” was second to “website designer”), but “actuary” seems to have been consistently in the top several positions for over 20 years.

- Rick

Defined benefit vs defined contribution vs...

2009-01-05T14:25:00.002-06:00

"Retirement Engine Rebuilt," an article from Harvard Magazine in which Nobel prize-winning finance professor Robert Merton opines on the future evolution of retirement plans:

Definied benefit ==> defined contribution ==> SmartNest.

- Rick

Social Security Retirement Estimator

2008-07-22T15:59:00.003-05:00

A new Social Security retirement benefit estimator just went online this week at ssa.gov .

For my students, none may yet have the 40 credits (a credit is, essentially, a calendar quarter of work), or 10 years of work, necessary for retirement benefits -- so this estimator may not, for them, be personally usable.

Retirement must seem a long way away for my students... Oh, was I EVER that young???

- Rick

"Inflation" Doesn't Begin to Describe It

2008-07-20T12:52:00.002-05:00

Per this CNN article, Zimbabwe has just introduced $100 billion banknotes (each of which is worth one U.S. dollar). According to the article, the Zimbabwe inflation rate is now at 2.2 million percent.

To put $100 billion in some perspective... per the U.S. Federal Reserve, the entire U.S. M1 money supply is less than $1.4 trillion...

- Rick

Retirement Issues - Post 4

2008-07-11T14:14:00.002-05:00

Here's a paper, titled "Top Ten Myths of Social Security," by Prof. Richard Kaplan of the University of Illinois (hurrah!). The abstract quickly summarizes the ten myths - the body of the paper elaborates on each.

- Rick

Retirement Issues - Part 3

2008-07-11T13:47:00.002-05:00

Robert Myers is one of the best-known names in the history of U.S. actuarial science. He was, for 23 years, the Chief Actuary of the Social Security Administration (SSA), and spent basically his entire career in government-oriented actuarial functions.

On the SSA website, there is the transcript of an Oral History Interview with Myers. It is rather long - but also rather interesting, and worth dipping into and scanning if you have some time. There are some references to actuarial history, but, more importantly, some enlightening discussion of how some of the key Social Security issues were originally addressed and subsequently developed. Issues such as the retirement test, pay-as-you-go funding philosophy, etc. - very interesting to hear the perspective of someone who was there.

By the way, if you've never seen it, check out the SSA Actuarial Resources page. Lots of good references, including to the annual Trustees Report, actuarial projections, etc. A great resource for those interested in retirement and pension issues.

- Rick

Retirement Issues - Post 2

2008-07-11T13:38:00.002-05:00

From the Economic Policy Institute, an article entitled "How economic conditions affect retirement decisions" - specifically, the relationship between the level of unemployment and early retirement decisions. Some interesting statistical observations over the last three decades. Of course, the factors underlying movements in both these measures are critical to understand...

- Rick

Retirement Issues - Post 1

2008-07-11T13:33:00.002-05:00

Recently, in Slate, there appeared a short article by Tim Harford suggesting that, contrary to traditional wisdom, most of us seem to be doing OK with respect to personally saving enough for retirement. An interesting read. Of course, this whole important area has a vast number of interrelated factors entering into it...

- Rick

The Texas Medical Malpractice Environment

2008-05-17T19:14:00.001-05:00

From today's Wall Street Journal opinion page: an apparent medical malpractice tort reform success story.

- Rick

New Study on Life Expectancies

2008-03-23T19:49:00.002-05:00

Here's a New York Times article on a recent government study on life expectancies, which reportedly finds that the gap between the life expectancies of richer versus poorer Americans has increased over the last couple of decades. This certainly has potential implications for several areas of actuarial science: life and mortality analyses, pension valuations, etc.

As always, much of life expectancy dynamics is a function of a few key mortality issues -- e.g., note the references to differential infant mortality.

- Rick

What's It All About?

2008-03-20T20:51:00.002-05:00

An article from The New York Times explains the credit crisis in relatively simple terms. A decent place to start if you're just now trying to figure out what's goin' on.

- Rick

Is Black-Scholes a Black Hole?

2008-03-20T20:18:00.002-05:00

From Portfolio.com, an article about the potential problems with the underlying assumptions and use of the ubiquitous Black-Scholes model. Fits right in with what we discussed in the UIUC graduate minicourse in Financial Mathematics earlier this semester: real-world distributions tend to have fatter tails than normal distributions.

- Rick

Insurers uber Bankers!

2008-03-20T17:41:00.002-05:00

An Economist article suggests the possibility that insurer risk experts -- actuaries -- may have some insights into the management of modeling of risks that could be of use for banks. While that's likely true, of course the influence should optimally go in both directions.

My only problem with the article is the reference to "the green-eyeshade brigade of actuaries ." Many of our eyeshades are actually blue...

- Rick

Is the Economy "Predictable"?

2008-03-20T17:23:00.004-05:00

Although "predictable" is often the word used (or at least implied) in such queries, perhaps the question "Is the Economy 'Modelable' " would be more appropriate.

Here's a recent WSJ opinion piece by Ed Phelps, 2006 Economics Nobel prizewinner, titled "Our Uncertain Economy." Lots of comments and references here which are relevant to modeling the economy and financial markets -- and to some recent UIUC classes. Earlier this semester, in our Financial Mathematics graduate minicourse (and, more briefly, in Math 476 last semester), we talked about mean-reverting stochastic process models. Phelps's references to the "natural" levels of interest rates and unemployment, and the difficulty of identify those values, are particularly germane to the parametrization of such models.

- Rick

Technology and Risk Management

2007-08-24T21:38:00.000-05:00

The Allianz Group is using Google Earth to aid their risk management process -- a wonderful way to gain insight into their geographic risk clusters.

- Rick

Life Securitization

2007-08-24T21:21:00.000-05:00

A nice article from Business Week titled "Profiting from Mortality." Securitization is an evolving area on both the casualty and life sides of the insurance industry. There are lots of adjectives that different people might apply to this "death bond" concept: important, complex, macabre,... It's an area with which many actuaries will want to become more familiar.

- Rick

Tough Times for Quants

2007-08-24T21:13:00.000-05:00

An article from the Washington Post on Wall Street quants, and the recent market volatilty.

- Rick

Dental Insurance Isn't Painless

2007-08-24T20:49:00.000-05:00

Wow.

Several amazing aspects to this story... But make sure you fully appreciate the bottom line: the insurer not only had to cover the out-of-court settlement, but was also ordered to pay $750,000 to the dentist.

- Rick

The Road to Near-Reality

2007-08-24T20:37:00.000-05:00

Think simulation and modeling capabilities are improving every day?

Here's some persuasive evidence: a Wired article about EA Sports' "NCAA 08 Football" video game, which now has the capability of feeding and factoring into the game the real-time weather conditions of the selected stadium.

- Rick

2007 Catastrophe Potential

2007-05-21T13:09:00.000-05:00

So, you think you're paying a lot for gasoline NOW? Here's a news item on an A.M. Best Co. report.

More generally with respect to catastrophes, I think one of the most fascinating developments to watch over the next couple of years will be whether the movement toward greater acceptance of global warning (and thus, according to its adherents, greater frequency and/or severity potential of catastrophes) will lead to wide acknowledgement of the need for higher property-casualty insurance rates and changes in underwriting standards...

- Rick

Interest Rates Dressed to the Nines

2007-05-19T15:12:00.000-05:00

Here's an interesting short piece from Bloomberg. I didn't realize that in China, interest rates are always in multiples of nine.

An important point if anyone is ever trying to project future Chinese interest rates with a stochastic scenario generator or a dynamic financial analysis model!

- Rick

Speak Now, or Forever Hold Your Piece of the Pie

2007-05-18T19:33:00.000-05:00

An interesting interview with one of the authors of some research on fear in the workplace (particularly, fear of speaking up and contributing to discussions) can be found at HBS Working Knowledge, a newsletter of the Harvard Business School. Title: "Do I Dare Say Something?"

For those who are early in their careers, or even still in school, it is important to remember that the longer you wait to become "participative," the harder it is to make that move. Don't talk just for the sake of talking -- but also don't underestimate your ability to contribute.

- Rick

Actuaries of Gasoline?

2007-05-16T11:51:00.000-05:00

Here's an article from the News & Observer (Raleigh, North Carolina), about "ratemaking" for gas stations. It might be interesting to think about how the process used by these "actuaries of gasoline" differs from the traditional actuarial ratemaking process.

- Rick

When to Begin Taking Social Security

2007-05-15T10:15:00.000-05:00

Here's an interesting NYT article on the debate over when to begin taking Social Security payments. Coincidentally, this weekend's WSJ had an article discussing the uncertainty regarding retirement expenses, and how some retirees find the expenses to be greater than they had anticipated.

- Rick

Greenspan and Probabilities

2007-05-15T10:06:00.000-05:00

I often like to begin classes with a "current event" or some other item in the recent news. Often, these items deal with statistics or probabilities -- about which there are often communication or interpretation problems.

Since we're now into summer, I have no classroom forum in which to present the following -- so this blog is my outlet.

From (among other places) Bloomberg comes the following Alan Greenspan quote:

"At the moment, I still say as I said before, by algebraic implications, the odds are 2 to 1 we won't have a recession."

Yikes!

- Rick

The Ultimate Demographic Study

2007-03-04T17:57:00.000-06:00

So, just how many people HAVE walked the earth? How many humans? Ever?

At least 20 years ago, I first heard the opinion expressed that there are as many, or more, people ALIVE now than who have ever lived and died. That always sounded incomprehensible to me on its surface -- but what ARE the relevant numbers? This article reports on a demographer who has tried to quantify this.

- Rick

Risk Man

2007-03-03T15:38:00.000-06:00

Today's WSJ has an interview with Myron Scholes (available free here). Scholes is especially known for the Black-Scholes option pricing model, winning the Nobel Prize (received along with Robert Merton), and being a co-founder of Long Term Capital Management, which failed in 1998, shortly after the award of the Nobel. (In the interview, he is very honest and philosophical about the LTCM situation.)

This is a very nice piece, well worth reading. There are at least three specific comments that I found particularly interesting:

(1) The writer of the piece refers to Scholes as a "life-long student of risk." A wonderful title, and a great goal for many of us -- I like to tell my students that they should strive to become "students of the insurance industry and the actuarial profession." "Student of risk" is perhaps an even better goal and title.

(2) Scholes characterizes the financial system as moving between greater and lesser stability (or less and more risk taking). When the system becomes stable and quiet, people tend to begin taking more risks, lessening the stability. Lower stability leads to greater cautiousness and more stability, etc.

(3) When asked whether the LTCM collapse put the entire financial system in danger, Scholes admits he doesn't know. I would have thought such a view, which has occasionally been expressed, to be largely hyperbole. Interesting...

- Rick

Workers Compensation in New York

2007-03-03T15:29:00.000-06:00

The state of New York recently announced a coming overhaul of the its workers compensation system. A NYT article can be found here.

NY is an interesting WC state -- costly, but at the same time relatively low on the benefits-to-workers scale (in comparison with other states). Naturally, that's a combination that wouldn't seem, on its surface, to be amenable to easy repair. Hopefully, this new approach can succeed.

There is also a short editorial in today's WSJ, looking at this announcement as a positive.

- Rick

Life Expectancies - By Country & Relative to Income

2007-01-20T15:05:00.000-06:00

This chart is very nice. It shows, in animation, how per capita income versus life expectancy has changed for dozens of countries over the last 30 years. A number of different viewing options are available. Quite interesting for its data, as well as a nice pedagogic tool.

Related tools (as well as a link to the above-mentioned chart) can be found at www.gapminder.org .

- Rick

Risky Business

2007-01-02T13:26:00.000-06:00

I usually mention "securitization" -- whether as a reference to various types of asset-backed securities, or to the securitization of insurance risk -- at some point in most of my classes. This is becoming an area that most actuaries should understand and appreciate.

Here's an opinion piece from Saturday's (December 30, way back in 2006!) Wall Street Journal, available here via the free section of wsj.com . The piece emphasizes the good of derivatives and securitization in their potential to more effectively manage risk. The end of the piece sums up nicely: "Risk is still out there. But as we leave a successful financial year and enter a new one, take comfort in the fact that all that buying, selling, swapping, trading and securitization of risk has actually made the financial system less risky. "

- Rick

Math -- Giving It the Business

2006-12-21T16:28:00.000-06:00

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

2006-12-21T16:07:00.000-06:00

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)

2006-12-21T15:53:00.000-06:00

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

2006-09-12T15:18:00.000-05:00

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?

2006-09-03T14:37:00.000-05:00

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

2006-08-08T11:54:00.000-05:00

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!

2006-08-05T13:51:00.000-05:00

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

2006-08-05T13:13:00.000-05:00

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

2006-07-26T12:54:00.000-05:00

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

2006-07-24T20:28:00.000-05:00

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!

2006-07-24T20:15:00.000-05:00

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)

2006-07-22T15:27:00.000-05:00

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

2006-07-22T15:04:00.000-05:00

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