Rethinking Actuarial Principles 2019

Facet Actuaries ---- Presentation Jos Berkemeijer AAG --- Rethinking Actuarial Principles 126 November 2019
Facet Actuaries
Jos Berkemeijer AAG,
November 26, 2019
RETHINKING
ACTUARIAL
PRINCIPLES
Or…. How to Stay a Qualified Actuary?

Agenda
1. Scope of the actuary
2. What is risk?
3. Zero risk
4. Innovation
• What is innovation?
• The innovation force field
• Dutch innovation struggle
• Discussion

Scope of the actuary | Actuarial Work Field and Development
Big Data
Systemic risk
Regulatory Risk
Model Risk
Parameter risk
Economic Risk Models
Behavior Risk Models
Robo Advice
New Solidarity
Crowd/Community
- Funding
- Longevity Solidarity
- Disease Solidarity
- InvestingMedical Care
- Efficiency
- Waiting list
reduction
- Disease
Management
Communication
comprehensibility
tests
Bitcoin
Blockchain
Gamification
Cooperation Risk

Scope of the actuary | CHANGE: From Actuary to Client Perspective
Expert viewClient view
Globalization, Expectations, Social dynamics, Learning, Apps, Games, Speed of change, etc.

Scope of the actuary | Communication | Customer empathy…
Adding Rabbits
Math teacher asks six year old Johnny:
"If you have 200 rabbits and you add another 100 rabbits, how many rabbits would you have?"
Johnny…: "I think the answer is 337 Sir".
Math teacher: "No, Johnny. That's the wrong answer. Try again.
Johnny takes another five seconds: "Still probably 337 Sir" "
"No Johnny, wrong again. You know nothing about mathematics!".
Immediately Johnny answers:
"And you know nothing about rabbits Sir"

Scope of the actuary | Professional-Social Perspective | Networking
Company
 Colleagues
 CEO/CFO
 Receptionist
YOU
Politics
 Government departments
 Project groups
 Face to face
 Cup of coffee
Actuarial Space
 Actuarial Association
 Permanent Education
 Research, Publications
Regulators
 Studies, Projects
 Research
 Cup of tea
Science Space
 Partnerships
 IT, Communication
 Accountants, econometrists
 Informal invitations
Social
 Sports or Chess team
 Volunteer work, Friends
 Have a drink
How much time do you spend on networking?

Scope of the actuary | Old School learning
Source: locke

Scope of the actuary | Applied Model
Source: locke

Scope of the actuary | From (Big) Data to Understanding | Simplification
https://www.lifecoachcode.com/2016/09/14/better-really-understand-things-partially-know-lot/
The harder to decideThe less understandingThe More Info

Scope of the actuary | Communication and ‘being understood’

Scope of the actuary | Lessons in management or decision making?
And Now For Something Completely Different
Actuary
From Backroom to Boardroom
How decisions are taken on our advice?
Decision making should part of our actuarial skill set

Scope of the actuary | Creativity versus Knowledge | lifelong learning
Source: BI
98%
30%
12%
2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
5 10 15 20 25 30 35 40 45 50 55 60
Creativity Knowledge
The ages your brain peaks at everything98% of children aged 3-5 years passed NASA creativity test at GENIUS LEVEL
Source: ITV
Divergent thinking
Convergent thinking

Scope of the actuary | Stuck in our actuarial viewpoint | Professional bias.
Turn it 180 degrees and what was ‘up’ becomes ‘down’

Scope of the actuary | Flip thinking for actuaries
Any intelligent fool can make things bigger, more complex, and more violent.
It takes a touch of genius and a lot of courage to move in the opposite direction.
Albert Einstein
Job Skills (Jack Freund)
The winning general is the one who can best act on
imperfect information and half-formed theories.
Napoleon Bonaparte
The winning actuary is the one who
can best support the general…..
Jos Berkemeijer
Every actuary has a touch of genius…
Jos Berkemeijer

Scope of the actuary |Actuarial priorities…
Anybody
that can
help with
systemic
risk?
CEO CFO
Strategy Mountain
Meanwhile… in the actuarial rabbit hole
One second…, and I’ll be able
to estimate the mortality rate
150 year ahead and in 15
decimal places!
Sea of Risk

Scope of the actuary | Actuary Definition
IAA
What does an actuary do?
Actuaries evaluate risk and opportunity
– applying mathematical, statistical,
economic and financial analyses to a
wide range of business problems.
What is an actuarial professional?
Actuarial professionals (actuaries and actuarial
analysts) are professionally involved in the
identification and quantification of risks and
determine the financial consequences that
these risks entail.
Dutch Actuarial Association
https://www.ag-ai.nl/view.php?action=view&Pagina_Id=439https://www.actuaries.asn.au/becoming-an-actuary/what-does-an-actuary-do
If you're not part of the solution, you're part of the problem

Scope of the actuary | Revised definition I | Statements
Discussion: How does the revised definition of an actuary looks like?
1. What is an actuary? (‘Smart’ version)
Actuaries create, advice and communicate solutions to achieve
or control financial, operational or communicational consumer,
business or society goals on basis of ‘stakeholder’s risk attitudes’
and a value added sound ‘scientific approach’
2. What is an actuary? (‘Simple’ version)
An actuary helps you with solutions to solve risky financial,
operational or communicational problems

Scope of the actuary | Revised definition II |Statement
• How does an actuary work?
Interactively with their environment, actuaries use and
continuously develop and maintain a broad and deep set of
skills varying from mathematics, statistics, risk, finance,
investment, administration, marketing, legal, IT, compliance,
(big) data, decision making and management to communication,
to add value and learn in delivering solutions for clients.

What is risk? | Risk perception fallacy
Risk = σ Harry Markowitz

What is risk? | Standard deviation as a measure for risk?

What is risk? |Bonds & Equities…
What is more risky Bonds or S&P-500 ?
Meanwhile…
• Actuaries are practicing
a popular song
of Simon & Garfunkel
• Or perhaps the song
of the regulator?
S&P-500 US Bonds 10Y S&P-500 US Bonds 10Y
1928-2015 11.4% 5.2% 19.8% 7.8%
2013-2015 15.7% 1.0% 15.5% 9.9%
Yearly Return Yearly Risk (SD)
Period

What is risk? |Randomness… (and fat tails)

What is risk? | Taleb’s view | What is more risky?
0
1
2
3
4
5
6
1 2 3 4 5 6 7 8 9 10
Stocks A Stocks B Stocks C
Nassim Nicholas Taleb
Black Swans
Antifragile

What is risk? | Taleb’s View | The Turkey

What is risk? |Spread = Risk?

What is risk? |Systemic Risk Versus Systematic Risk
R Systemic
R Systematic
=
1
?
Systemic Risk in actuarial models?

What is risk? |Estimating risk | Risk Impact Models

What is risk? | Linear thinking
Signs of (dangerous) linear thinking
• Mean Reversion
• Risk = Volatility = σ =Standard Deviation;
• Volatility (σ) is more or less constant in time…
• If a distribution is complex, a normal distribution nevertheless will do fine
• Results of the past are an adequate estimator for the future
• Mean reversion: Returns continue to go back to an average value over time
• Increasing volatility is a good predictor of an upcoming financial crisis
• Tail risks are not really interesting or can't be modeled anyway
Linear mechanisms in life
• On a short time scale things don't change much
• The best estimate for ‘tomorrow’ is ‘today’
• Results are a (linear) combination of events in the past
• Every event now, must have a cause

What is risk? | Linear thinking | Hard to unlearn….

What is risk? |Forwards…. Hope? | ‘Believes’ are ‘priced’….
ECB interest rates (20190915) & 1mth forward path

What is risk? | Long term | Life expectancy underestimation

What is risk? | Discussion statement 1: Estimates
Jane,
Born in 2019
Pension year: 2091
ONLY IF … P(X | X1,X2,X3,..)
1. I think it’s ethically and professionally responsible,
to estimate Jane’s average investment return and mortality rate
with a 95% confidence level for the next 70 years or more

What is risk? | Discussion statement 2: Uncertainty life expectancy
2. Within the next 30 years new anti aging medicines
will improve life expectancy with more than 10 years
© DW2
• (2016) The Food and Drug Administration has approved human
testing for what could be the world’s first anti-aging drug: metformin
• (2019) We will soon learn if a much-hyped, rapamycin-like drug can
boost the immune response by targeting how the body ages.

What is risk? | Discussion statement 3: Manage your own life ending?
3. By 2050 most elderly will be able to manage their own
life’s exit strategy (pro)actively
To provide a decent
pension for my children,
I’ve asked my hospice to
keep me alive forever, as
my pension is $ 300 per
day and my nursing
costs are only $ 150

What is risk? | Long Term Investment Communication Dilemma
Confident,
but not Informative
Informative,
but not confident
Inv X 10
Inv X 41
Inv X 2.5
Inv X 14
Inv X 0.7
Inv X 10
Confidence
Level
99,5%
Confidence
Level
50,0%

What is risk? |Pension communication…
- Pension estimates: expected, optimistic, pessimistic….@#%#@?
- Is 75% of pension members able to tell how high his/her pension is?
Nobody Knows

What is risk? | Long Term Investment Communication Dilemma
Informative,
No risk framing
Inv X 11
Inv X 4
Inv X 7
Alternatives?
Skip estimates. Only communicate a range of constant fixed return outcomes
Any other alternatives?

What is risk? |Mean reversion
De ‘Haalbaarheidstoets’: 60 jaar vooruit plannen…..

What is risk? | Model risk, Parameter Risk, Uncertainty
Source:ActuariesOrg
Data Risk
Model Risk
Parameter Risk
Uncertainty
Process Risk
=
?

What is risk? | Global debt included in models?

What is risk? | Religion & Science (Actuarial Models), all based on ‘Believes’
Model
Market
(Value)
Behavior
Believes
Assumptions
Discussion Statement
We should include behavior in our models
(e.g. Behavior ALM, Behavior Recovery Plans, etc.)

Zero Risk |Customer Risk Information Regulation
A fund's past performance
does not necessarily predict
future results
US SEC
Past performance
is not a guide to
future performance
Dutch Authority for the Financial Markets (AFM)
2002 Past performance is not a guarantee of future results
2006
2019
Risk Meter
Key investor information provides insight into the nature and risks
of the mutual fund offered
Introduction Navigation metaphor for Pensions

What is risk? | Discussion Statements
1. All long-term forecasts or economic dependent predictions or outcomes, even on
basis of confidence intervals, are based on assumptions that on the long term will
turn out to be different
2. It is inherent impossible and therefore irresponsible to predict long term economic
dependent variables and outcomes with confidence intervals of 50% or more
3. 99.X% confidence levels are a realistic goal
4. Risk free rates are ‘risk free’ but volatile; Volatility should be taken into account
5. Pension Discount Rate:
Interest rate curve & Risk premium & Customer Utility Function?

Zero risk| Changing risk attitude | Apollo example
Apollo ‘One mission’ probability of survival
90%
Estimated one mission ‘Shuttle’ probability of survival
99.999%
Apollo ‘Six missions’ probability of survival?
53%
Facts
Challenger disaster (1986)
Columbia disaster (2003)
What’s the future of a ‘zero risk’ earning model?
Heading for Mars or the Moon again?

Zero risk| Regulatory Framework | 100% confidence level?

Zero risk| Long term default probabilities
Long term ‘zero risk’ objective is an illusion
‘Doubt is the beginning of wisdom,
100% confidence the end’
Jos Berkemeijer

Zero Risk | Pension fund discount rate discussion
Nobody likes uncertainty, so don't use a higher discount rate
Ronald Doornbos FD | November 24, 2019
Everybody knows pensions are uncertain, so use a higher discount rate
Mr. Anonymus | November 26, 2019

Zero risk| Relationship Trust and ‘Confidence level’
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0% 20% 40% 60% 80% 100%
Trust
Confidence level

Zero risk| Pensions | Breaking up Benefit Defined Pension Plans?
Age 20 Pension date
DC Pension payment
Buy your pension annuity
- Interest rate / return ? Risk?
- Artificial transition solutions (messing around)
Decreasing investment risk | Less return !
Innovation
• Maintain intergenerational
solidarity on investments
and longevity
• Introduce individual saving
accounts.

Zero risk| Pensions | Prescript Pension Lifecycle Investing
What about the risk attitude of pension plan members?
Age
BONDSSTOCKS

Zero risk | Holistic view | Discounted space of probable outcomes

Zero risk | Holistic view | Focus
Keynes: ‘It is better to be roughly right than precisely wrong.’
Where to focus?
1. Near future (t < 5, 10 years)
2. Conditions (Bayesian), assumptions, scenarios (e)
3. Strategy: = ’Recipes’ optimization strategy

Zero risk | Holistic view | Recipes instead of estimates.
Recipes approach examples
• Flexible strategies that manage risk
• Early warning indicators instead of
trigger points
• Self adapting profit sharing contracts
• Solidarity algorithms based on
groups, communities and big data,
instead of guarantees
• Etc., Etc.

What is innovation? | Definition
The process of translating an idea or invention into a good or
service that creates value or for which customers will pay.
Confines
• satisfy specific customers needs or expectations
• replicable at an economical cost
Involves
• Ideas, information, imagination, initiatives
• Processes, goods, products, services..
Innovation categories
• Evolutionary, continuous
• Revolutionary, disruptive

Conclusion

Rethinking Actuarial Principles 2019

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