Australian School of Business

Actuarial Theory & Practice A - Week 2

The professional in the

commercial environment
Anthony Asher 2015

Agenda
Tests of professionalism
Technical standards
The general environment
The facts have changed ...
Managing the changes

Activity
Preparation:
Attendance:
Reading:

Details

Hours

Read lecture and consider

discussion topics

UAM 3 and 5
Institutes code of conduct
Three readings from
references in Chapter 5

Exercises

3
1

From UAM
Prepare presentation

1
1
10

TOTAL

TESTS OF PROFESSIONALISM
Apply the tests of professionalism
a)

Identify the principles of professionalism and relate them to the actuarial profession

b)

Outline the main features and functions of the professional association, its code of conduct,
professional standards and major guidance notes

c)

Discuss the responsibilities of actuaries individually and in statutory roles

d)

Demonstrate an understanding of the need for, and application of, materiality and peer review

e)

Identify situations where actuarial expertise may be insufficient, and analyse what consequent
actions might then be appropriate

Part II syllabus

OVERALL APPROACH
Discuss and Apply an Actuarial Control Cycle in a Variety of Practical Commercial Situations
a) Identify the elements of the Control Cycle and how the elements interrelate in an actuarial context
b) Recognise the various stakeholders involved in a variety of situations involving medium and longterm commercial decisions and demonstrate how the use of the Control Cycle can add value in
resolving issues between the stakeholders
c) Demonstrate how the Control Cycle can be applied in a variety of practical commercial situations

Part II syllabus

Errors
Thinking is Bad: Implications of Human
Error Research for Spreadsheet Research
and Practice Raymond R. Panko
http://arxiv.org/ftp/arxiv/papers/0801/0801.3114.pdf

Suggestions:
Need to spend over 30% of the
time testing best to be
continuous
Reduce the memory load by
using short formula and
modular structure.

Do not rush!
+ Take time to consider and
document model assumptions,
testing if necessary with others

TECHNICAL STANDARDS
The UK actuarial profession has issued generic technical standards for reporting, modelling and data.
http://www.actuaries.org.uk/regulation/pages/technical-actuarial-standards-tass-online-learning-materials

They can be summarised:

An actuarial report shall include sufficient information to enable its users to judge its relevance to them.
It should explain the nature of the underlying calculations, the source of data, as well as the nature
and significance of material risks and uncertainties. The material underlying assumptions and any risks
margins should be adequately discussed. If one of a series of regular reports, it should indicate
projected results in the future.
Internal documentation shall contain enough detail for a technically competent person, with no
previous knowledge of the particular model, to assess the judgements made. This documentation
should include justification:

of the actuarial models used, the material underlying assumptions, with an account of their
calibration and any risks margins incorporated

for the selection and grouping of the data used, with an account of the checks made
Read Technical Actuarial Standard D: DATA
http://www.frc.org.uk/getattachment/1d08e3b5-00bc-4793-b457-284162f002af/TAS-D-Data-version-1-Nov-09.aspx

Discussion topic 2
Are the UK technical standards important?
Are they well written and helpful?

GENERAL ENVIRONMENT
Relate the main features within the general environment to medium and long term commercial
decisions

a)

Interpret how the present economic conditions and the social, demographic, and economic trends
within a community can affect medium and long-term commercial decisions

b)

Discuss the impact of technological changes on the economic environment

c)

Demonstrate an understanding of the different types of investment and investment theories

Part II syllabus

OECD economic and demographic trends

Longer and healthier? lives

Higher incomes
Generous pensions &
tax concessions

Technical change

Less poverty amongst aged

Age
discrimination
Earlier retirement

Less work by men

Less manual work

Fewer births

Mothers in workplace

Higher house prices

Increased crime
Family
breakdown

World economic and demographic trends

Longer and healthier? lives
Higher incomes
Generous pensions &
tax concessions
Age
discrimination
Technical change

Less poverty amongst aged

Earlier retirement
Less work by men

Less manual? work

Population growth

Mothers in workplace?

Higher house prices

Environmental
degradation

Fewer births

Increased crime
Family
breakdown
Failed states

THE FACTS HAVE CHANGED.

Technology
Manufacturing capacity greatly increased by automation
Electronic distribution costs effectively zero software, music and news distribution costs
Artificial intelligence will put some knowledge workers out of work
Big data

11

Technical
and social
changes

http://www.hamiltonproject.org/multimedia/charts/cost_of_computin
g_power_equal_to_an_ipad2/

http://www.people-press.org/2009/12/21/current-decade-rates-as-worstin-50-years/

12

The facts have changed: Democracy

http://democracyranking.org/wordpress/?page_id=738#

13

The facts have changed: Democracy

http://democracyranking.org/wordpress/?page_id=831#prettyPhoto

14

http://democracyranking.org/wordpress/?page_id=738#

15

The facts have changed interest rates

Government interest rates
are the lowest ever
recorded.
The Dutch series shown
here is the longest recorded.
Some interest rates are now
negative!

http://www.fandc.com/FundNets_FileLibrary/f
ile/uk_it_quarterly_EAT.pdf (no longer
available) &

16

The facts have changed? National debt is rising

Debt levels have risen significantly, but not to historic highs.
even if there are more off balance sheet liabilities in the form of
unfunded pension fund liabilities for the public service and
national pay-as-you-go retirement and old age care schemes

http://www.econbrowser.com/archives/2012/08/
how_long_can_ja.html

17

The facts have changed? House prices

Steve Keen blog

http://www.debtdeflation.com/blogs/2008/03/0
3/steve-keens-debtwatch-no-20-march-2008double-or-nothing/

18

The facts have changed - Population growth

19
19

The facts have changed? Population aging

The facts have changed - Water conflicts

Source: UN. World Water Development Report 4. World Water Assessment Programme (WWAP), March 2012.

21
21

The facts have changed oil prices last year

Jeremy Grantham (2011) Time to wake up: Days of abundant resources and falling prices are over forever
http://www.theoildrum.com/node/7853

22

The facts have changed? All commodity prices

Jeremy Grantham (2011) Time to wake up: Days of abundant resources and falling prices are over forever
http://www.theoildrum.com/node/7853

23

http://www.bp.com/content/dam/bp/pdf/Energy-economics/statistical-review2014/BP-statistical-review-of-world-energy-2014-full-report.pdf

24

Discussion Topic 2
What are likely to be the most important changes to the context for:

Life insurance companies operating in Asia

General insurance companies operating in Australia

Banks operating in Australia and Asia

Superannuation funds investing in international markets?

25

The context
Government policy

Valuation and accounting standards

Legal decisions may change contracts (superimposed inflation) retrospectively
Competition policy affects mergers and acquisitions
Policy may limit business methods (bans on commission, discrimination)

Social attitudes

May lead government policy changes

May lead to reputation losses (sexual harassment)

Technological changes

Internet and automation may reduce costs and offer new means of marketing or new products
(ATM)
Medical advances and longevity
New sources of energy, climate control

Natural events

Worse because of global warming or population growth

Economic cycles and structural changes

Unemployment and different life choices

Increases to house and other prices means less for other purchases

Competition

New competitors enter market for a variety of reasons

Existing competitors may change their strategies
26

Management of these Factors

These factors can change the companys ability to mobilise resources (people and finance) the cost of
claims and administration, investment returns, ability to attract new business and retention of in force
business, ability to optimise pricing.

Companys
core
capabilities

Provides products
and services

Market
needs
Pays for product

Response includes:

Robust design of capabilities and market strategy

Use ACC to avoid or transfer the risks or increase capital to absorb them

Maintain integrity and good relationships with government and the community

27

Discussion Topic 3
TYPES OF
KNOWLEDGE

Known

Unknown

Aware

Explicit knowledge

Uncertainty

Unaware

Tacit knowledge

Ignorance

There are three types of risks:

Known (you have a good idea of the frequency & severity)
Unknown (you know the risk exists but are uncertain about
frequency or severity)
Unknowable (you cant predict)
How do these fit in the table above?
How would you manage each of these in a general insurance
company?

28