4001 Lecture 1

7/23/2019 4001 Lecture 1

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Business School

Actuarial Theory & Practice A - Week 1

Introduction and review

Anthony Asher 2015

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Agenda

Introducing myself

The actuarial control cycleWhat the course is about

Your role in developing judgement

The financial services industry

Activity Details Hours

Preparation: Read course outline & skimlecture, movie reviews

1

Attendance: 2

Reading: UAM1 and readings 1½

UAM19 and readings 1½

IAAust Syllabus ½

Background – Bellis (2000) When you have time

Exercise Map syllabus to ACC ½

On line quiz ½Prepare

presentation/portfolio2

TOTAL 10

Next week

readingsUAM 3 and 5 2

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Introducing myself

• 17 years lecturing

• Chief actuary of life insurer in South Africa,

& worked for APRA and Deloitte in Australia (and Singapore remotely)

• Served on a number of Audit and Investment committees• Many professional actuarial committees, currently:

• Convenor of Retirement Incomes Working Group

• Editorial Board of Australian Journal of Actuarial Practice

• Research interests in retirement income products, financial advice, ethics and

governance,

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The actuarial control cycle

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So what questions do you need to address?

The Australian Capabilities Framework

1. Contribution to Business Strategy

2. Leadership

3. Actuarial Approach to Problem Solving

4. Valuing Uncertain Future Cash Flows

5. Risk Management6. Professional Governance

7. Product Development Management and Pricing

8. Investment Advice and Governance

http://www.actuaries.asn.au/Library/Education/Other%20Education/2012/Actu

arialCapabilitiesForTheFuture.pdf

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The Control Cycle: what is the problem?

Analyse

Experience

Insurance CT4

Lapses CT4

Expenses CT2

Investments CT7,8

6

Value liabilities

Profit test, model office

Analysis of surplus

(CT1,3,5,6)

Recommendations Insurance Super Mortgages

Risk management

- Capital

- Reinsurance

- Underwriting

- Claims- Policy conditions

- Investments All issues

apply for

life, general

and health

insurance

Trivial for

Australian

DC funds,

but

investmentrelevant to

members

All relevant

Marketing

- Product design

- Pricing

- Promotion/place

Growing

importance All apply as

for insuranceExpenses All apply as

for

insurance

Data

Investment Not relevantBusiness operations

- management

The purpose is tomanage future cashflows. Problems may

arise at any point

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The control cycle: what management does

Analyse Experience

Insurance CT4

Lapses CT4

Expenses CT2

Investments CT7,8

Value liabilities (CT1,5,6)

Analysis of surplus

Model office

Recommendations Insurance Super Mortgages

Risk management

- Capital

- Reinsurance

- Underwriting

- Claims

- Policy conditions

- Investments All issues

apply for

life, generaland health

insurance

Trivial for

Australian

DC funds,

but

investment

relevant to

members

All relevant

Marketing

- Product design- Pricing

- Promotion/place

Growingimportance All apply as

for

insuranceExpenses

All apply as

for

insurance

Data

Investment Not

applicable

Organizing

Marketing

Finance

Administration

Investment

Context

Part III

Strategic

planning

LeadingThe managerial functions can be divided intoplanning, leading, organising and controlling.

In their formal role, actuaries assist management

in the control process.

In their wider roles, the actuaries’ understanding of

the control cycle gives them a unique perspective

on general management issues.

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Actuarial Control Cycle

A framework for thinking about and dealing with dynamic financial problems

About identifying variables

Modelling interactions

Monitoring results

Making recommendations

Modifying models

Considers all elements of the problem

• Sub group analysis

• Whole system analysis

• Experience & external factor changes

• Modification of modelling for sub group and whole system

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Discussion topic

What makes the actuarial control cycle particularly actuarial?

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The course – developing actuarial judgement

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The aim of the course

“During Part II students are expected to develop a holistic approach to practical problem solving, anddevelop a level of judgement and professional skills required to successfully apply actuarialprinciples.” ( Actuaries Institute Syllabus)

But “holistic”, “judgement” and “professional” are not easy to define. Using tightdefinitions may be counter-productive, as our definitions may exclude elements or instances thatwe want to retain.

What are your definitions? …

There may be many right and wrong answers ... Your objective is to learn to recognise the wronganswers, and construct better right answers.

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What the Course is About

Bringing together the techniques you studied in ACTL courses

How actuaries relate and manage diverse functions in financial institutions

• Acting as a professional

• The operating environment

• The financial services industry

− Its structure

− Product development and pricing

− Risk management

• Inter relationship of financial product pricing, capital, reinsurance, underwriting and

profits

To do well in this course, you need to be able to marshal the relevant facts and then

apply appropriate general principles to develop a prudent and professional answer.

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Your 10 hours a week course

Reading

You are required to read the material before class and answer the multiple choice questions. This will

help you to get the full benefit from the discussion

You need to summarise the readings and link to course outcomes

Tutorials require your participation:

The formal presentations and responses

Questions and comments in class

Lectures will cover Issues from previous week

Highlight main issues to be covered and learning outcome expected (guest lecturers from industry will

provide background information)

Important announcements

Small group discussions

Exercises and assignmentThe UAM exercises, multiple choice questions and work on your portfolio and the assignment

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Presentations

You are not being evaluated on the completeness of your answer, but on whether you have somethingworthwhile to say and say it convincingly. Do not try to say too much.

Most important is to know what you want to say. Once you have prepared the content for the first time,

write down what you want to say in one sentence. Then check that is what you are saying. Then

rewrite your content, and do it all again.

You are being evaluated by the extent to which you engage with the audience.

• Look at them. Do not spend too much time looking at the screen or your notes. Look into their eyes

• Connect with them by telling them something you think is worthwhile and interesting. If you do not

find it interesting, you can be sure that they do not either. Think whether they will understand all the

terms you use

• Communicate your feelings by using your voice and body language. A little bit of exaggeration may

be fine – look at yourself speaking in the mirror to get an idea of how you are coming across.

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Collaboration

Working together with someone is normally more productive and more fun.

In actuarial work, as in many other types of work, it is imperative that at least one other

person checks your work for mistakes and to add a second opinion.

Studying together is no different. You encourage each other to do more work and learn

particularly when you are trying to answer someone else question or explaining things to

each other. Have the first draft of your presentation, your summary notes and your

answers to the text book questions checked by a buddy.

In classes, you will be asked to contribute to large group and small group discussions.

The more you put into them the more you will learn.

In the assignment, you are being asked to work formally together, which means that you

will each need to be given a role in the group and also to keep records of what happens

in the group.

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Your role in developing actuarial judgement

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Thinking logically

Need valid assumptions and argument Assumptions

– Need evidence if possible

– Noise to signal ratios

Argument

– Correlation and causation

– Induction and projecting into the futureConclusion

– Fallacy of composition

Actuaries have to be able to identify and communicate risks and uncertainty

Analyse the arguments that might have been made for the following conclusions:

“Consumers are becoming increasingly aware of inflation”

“50% of Australians are underinsured for death of the breadwinner”

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Thinking virtuously

Virtues are not primarily altruistic, but are the elements of building a good character which leads to agood life

Holistic, professional judgements require some of the main virtues that are primarily self centred:

Integrity

Self-control, to make sure you have all the necessary skills and informatio

Wisdom, which is the ability to make good judgements under conditions of uncertainty and conflict

Courage, to stand up when other people are putting pressure on you

But it also has an element that must consider others:

Justice, to ensure that you give your clients and colleagues their due – their fair share

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Positive psychology

The 120 question VIA Inventory of Strengths (VIA-IS) survey has been completed by over a million respondents

from 75 countries and finds significant convergence of responses: “Even the smallest correlation with the US

profile of ranked strengths that emerged in this study meets the common standard for a large effect” (Mcgrath,

2015, p51)

He finds 23 virtues or strengths that are “clustered” into five “factors”:

• Interpersonal: Fairness, Forgiveness, Kindness, Receptivity, Teamwork, Modesty, Love

• Emotional: Humour, Social IQ, Creativity, Bravery

• Intellectual: Prudence, Intellectual Pursuits, Love of Learning, Beauty, Curiosity

• Restraint: Judgment, Perseverance, Perspective, Honesty

• Future Orientation: Positivity, Future-Mindedness, Self-Regulation, Spirituality

McGrath, R. E. (2015). Character strengths in 75 nations: An update. The Journal of Positive Psychology 10:1, 41-52.

These fit well with the traditional virtues …

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The technical virtues

• Virtues are largely aspirations not rules• We acquire them by reflective practice• Communities can encourage them and shame their absence• They bring a sense of identity and self-efficacy

• And we have to learn to deal with human error …

Social knowledgeand skills

Relating to others

Communicating, leadingand following

Technical knowledgeand skills

Judgement

Applying what we knowlogically and productively

Objective is

human

flourishing:Meeting social

needs …

What

we do

Who

weare

Professionalism holds identity & vocation together – rewards are primarily intrinsic

P

e r s o n a l … … … … … . .

S o c i a l r e l a t i o n s h i p

s

Being ………………………..………………………………….Doing

Why we

do it

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The cardinal virtues

• Virtues are aspirations not rules• We acquire them by reflective practice• Communities can encourage them and shame their absence• They bring a sense of identity and self-efficacy

• But we have to learn to forgive ourselves and others …

To these, we need to add

love, which transforms who

we are, what we do, and why

we do it.

Courage

confronts social pressures

Justice

governs the social impactsof our actions

Self-control

governs our personalappetites and inclinations

Prudence

ensures the personalconsequences of our

actions are productive

Objective ishuman

flourishing:

friendship,peace,

prosperity,beauty …

Whatwe doWhowe

are

Integrity holds character & vocation together – rewards are primarily intrinsic

P

e r s o n a l … … … … … . .

S o c i a l r e l a t i o n s h i p

s

Being ………………………..………………………………….Doing

Why we

do it

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Thinking holistically

Mental models• Assumptions

• Internal relationships

Context

• In your organization

• Management

• Systems

• Culture

• In the wider world

• Physical Environment• Economy

• Society

• Politics

As part of the process of

integrating your thinking, the

portfolio exercise will be a

systematic way of thinking of

what you have learnt in the part

I and how it applies to part II

and the real world!

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The context – the financial services industry

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Need to

allocate

capital for

business &

housing

FamiliesFamilies

Government:

- Social security

Government:

- tax

- infrastructure

- direct

Banks

Banks

Insurance

companies &

mutual funds

Capital and stock

markets

Retirement

funds

Peoples’need for

financial

security

Personal initiatives:

- Entrepreneurial

- Ethical- Everyday maintenance

Economic & Social history governs:

- Law, regulation, institutional forms, conflict resolution (formalization)

- Market size and shape: products, prices, promotion and place

- Physical, technological & social capital (eg accountants & actuaries)

- Narratives of value and power

Standards:

- Just: freedom & equality

- Effective & efficient

- Robust

Systematic risks:

- Economic (Oil, China …)

- Societal (Families, war …)

- Physical (Global warming …)

Real

economySocial life

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Wall street movies

I do not recommend you watch either – and would actually suggest you give Wolf a miss, but thereviews can do no harm.

Margin Cal l http://www.newyorker.com/arts/critics/cinema/2011/10/31/111031crci_cinema_denby?currentPage=all

Do you think it is exaggerated?

What were the key moments?

What are the institutional structures that create and allow such things?

Does John Tuld have any redeeming features?

Would you work for him?

Wolf of wal l streethttp://www.smh.com.au/entertainment/movies/the-wolf-of-wall-street-review-lies-and-avarice-20140123-319ov.html

Do you think it is exaggerated?

What were the key moments?

What are the institutional structures that create and allow such things?

Does Jordan have any redeeming features?

Would you work for him?

http://www.newyorker.com/arts/critics/cinema/2011/10/31/111031crci_cinema_denby?currentPage=all

http://www.smh.com.au/entertainment/movies/the-wolf-of-wall-street-review-lies-and-avarice-20140123-319ov.html

http://www.smh.com.au/entertainment/movies/the-wolf-of-wall-street-review-lies-and-avarice-20140123-319ov.html

http://www.newyorker.com/arts/critics/cinema/2011/10/31/111031crci_cinema_denby?currentPage=all

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Working in Finance

• Hugely powerful: 35% of the Australian stockmarket• Reputation for bright people, highly paid

• Interesting work & important for financial security and productive investment

• Reputation for greed and deception

• ANZ and other Australian banks required to

repay hundreds of millions that they illegallycharged credit card customers in “penalty

fees”

• Large wealth managers have reportedly been

making a secret profit by putting

superannuation money on deposit with banks

in their group at lower interest rates

• In the UK, insurers have been forced to pay

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Finally, a word of encouragement

Being an actuarial student should be very challenging. Thechallenges can range from those which arise from School

requirements - academic issues, getting things in on time,

understanding the material and so on – and those which come

from life in general – how are you feeling today? Have things

happened which are interfering with your ability to study or feel

OK, do you know what you are doing or where you are going?

Do you feel in control of things or not and so on. All these things

are important and attention needs to be paid to both aspects of

life as a student.When one is able to rise to a challenge it can be exhilarating and

exciting. We hope that that is your major response to your time

as a student. However, if the challenge feels overwhelming, take

comfort that all your colleagues will have felt this at some point

or other …

Adapted from: http://www.law.unsw.edu.au/current-

students/surviving-thriving/when-things-go-wrong

The site has some helpful tips if you are feeling totally over-

whelmed, but remember the Actuarial learning cycle on the right!

1. This is easyand boring;

just a repeat of…

2. Oops, Imissed the

point last timeand I do notthink I am

clever enoughto catch up

3. Eureka!Now I see

what it is allabout

4. Thissubject hasgot somebeautiful

elements and Ireally love it

http://www.law.unsw.edu.au/current-students/surviving-thriving/when-things-go-wrong





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4001 Lecture 1