The Actuary, February/March 2015, Volume 12, Issue 1

60 Pages·2015·8.57 MB·English

FEBRUARY/MARCH 2015 VOLUME 12 ISSUE 1
THE INDIVIDUAL ACA
MARKET—WHAT’S NEXT?
Determining next steps in the ACA
transition phase, p. 14
QUANTIFYING
CONTROLLING OUR
BEHAVIOR
PANDEMIC RISK
Insights from behavioral finance can
provide a helpful perspective on
processes, p. 20
What the Ebola outbreak
SUSTAINABLE ERM has taught us, p. 28
Sustainable ERM influences underwriting,
product development, claim management,
and more, p. 36

‘
COVER STORY
28 QUANTIFYING PANDEMIC
RISK
Building stochastic mortality and
morbidity modeling for pandemic
events is now possible.
By Doug Fullam and Nita Madhav
FEATURES
14 THE INDIVIDUAL ACA
MARKET—WHAT’S NEXT?
In the ACA transition phase, risk
protections and profit constraints
limit the variation in financial
results for an insurer.
By Kurt Wrobel
20 CONTROLLING OUR
BEHAVIOR
Insights from behavioral finance
can provide a helpful perspective
on processes and analytics such as
a nervous system.
By Mark Griffin
36 SUSTAINABLE ERM
Sustainable ERM influences
everything from underwriting,
product development, claim
management, marketing and
investment.
By Fan Yang
SOA PRESIDENT CONTRIBUTING EDITORS DEPARTMENTS
Errol Cramer Rod Bubke
FSA, MAAA FSA, MAAA
[email protected] [email protected] 6 EDITORIAL
ACTUARIAL RELEVANCE THROUGH
SOA STAFF CONTACTS Alan Cooke
Patrick Gould FSA, FCIA, MAAA INNOVATION
Managing Director of Marketing [email protected]
& Communications
[email protected] Carl Hansen 10 LETTER FROM THE PRESIDENT
FSA, EA, FCA, MAAA
Cheré LaRose [email protected] A DIALOGUE WITH OUR FUTURE
Director of Member & Candidate
MEMBERS
Communications Christine Hofbeck
[email protected] FSA, MAAA
[email protected]
44 SECTION HIGHLIGHTS
Karen Perry
Publications Manager Wilbur Lo HEALTH SECTION
[email protected] FSA
[email protected]
Jacque Kirkwood
46 EDUCATION
Magazine Staff Editor Albert Moore
[email protected] ASA, MAAA CANDIDATE ENGAGEMENT
[email protected]
Erin Pierce INITIATIVE
Graphic Designer
Jeffrey Schuman
[email protected]
FSA, MAAA
51 SOA AT WORK
[email protected]
The Actuary is published bi-monthly (February,
April, June, August, October, December) by the 52 LOOKING AT THE ACTUARIAL
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This publication is provided for informational Karin Swenson-Moore DEVELOPMENT
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tion or guarantee with regard to any content,
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Editorial
ACTUARIAL RELEVANCE
THROUGH INNOVATION
BY ALBERT MOORE
I OFTEN USE A PARTICULAR • Which additional skills and Disruptive innovation is a phrase coined
UNNAMED COMPANY as an object knowledge must we develop within by Clayton Christensen, the Kim B. Clark
lesson for the need to accurately assess our members? professor of business administration at
opportunities and threats. A leader in • What are the emerging challenges the Harvard Business School. He defines
its industry, in 1988, it employed more or problems for which we can disruptive innovation as a process or
than 145,000. In 2012, less than 14,000 apply our technical, analytical and innovation that fosters new products
were employed. That company failed to management understanding? or markets that disrupt or overturn the
take seriously an emerging technology: • Are there new approaches that traditional business practices, methods or
cell phones. I do not think that company actuaries can employ to solve current models and that “takes root initially in simple
anticipated how cell phones could impact and future challenges? applications at the bottom of a market and
their “unrelated” business. Actuaries must • Which products, processes and then relentlessly moves up market, eventually
not fall into the same trap. services are needed to meet current displacing established competitors.”1
and emerging market needs?
There are opportunities and threats facing • Are there additional applications of Christensen takes great pains to narrow
our profession, and the opportunities actuarial risk classification? disruptive innovation to include ideas or
far exceed the threats. Every year, an concepts that are not breakthrough or
actuarial career is ranked as one of the We must expand our understanding sustaining innovations (improvements to
top professions. Actuaries must embrace and application of innovative thought already functioning processes). Disruptive
and foster innovation to meet the growing processes to answer these questions and ideas are often not refined, may have
need for professionals with our unique take advantage of the opportunities for limited applicability, have no apparent
skills and expertise. increased relevance. market and may take many years before
growth in market share threatens the status
Innovation is needed to answer the There are many schools of thought quo. For these reasons, the disruptive
following questions facing the actuarial surrounding the topic of innovation. innovators require discipline, patience and
profession: “Disruptive innovation” is one school great (albeit relentless) vision.
of thought that can assist us to embrace
• What additional disciplines, industries our role as innovators and aid in Christensen gives several examples that
and markets can benefit from identifying emerging opportunities for will aid in our understanding of disruptive
actuarial skills and expertise? our profession. innovation.
6 | THE ACTUARY | FEBRUARY/MARCH 2015
• Cell phones did not make an involved foresaw that the CERA In 1962, George R.
initial splash but today there are designation could extend actuarial risk Dinney, FCIA, and an
a growing number of households expertise to banking and the broader actuary at the Great-
that no longer have land lines. financial industry. West Life Assurance
“The number of households with Co., defined his
cell phones increased from 36 The second example of a disruptive universal life plan. Albert Moore
percent to 71 percent between 1998 innovation is the application of predictive The concept was far ahead of the thinking
and 2005, according to new data analytics to actuarial and industry of his day. In 1971, Dinney addressed the
released by the U.S. Census Bureau. problems. Slowly, actuaries are using Canadian Institute of Actuaries and once
This corresponded with a decrease predictive techniques in creative ways. At again made the case for his universal life
in households with telephone the 2014 Life & Annuity Symposium, there plan and outlined the growing challenges
landlines, particularly households were sessions highlighting several uses of facing the insurance industry. By the 1980s,
headed by young adults.”2 predictive models: universal life products began to gain traction.
• Personal computers slowly became a • Creation of a mortality score based In 1982, Dinney demonstrated his innovation
fixture on every desk. upon the credit database further by appealing to actuaries to adopt
• Discount retailers threatened the
stand-alone department stores, and This helps me to rationalize why the universal
both are being threatened by online
life plan, invented in 1962, took so long to be
shopping.
adopted.
I can think of several examples of
disruptive innovation that have impacted
actuaries. • Generation of client profiles to create the underlying concepts rather than just
quality sales leads and matching to the mechanism of the universal plan. By
The first example that comes to mind advisers 1985, universal life sales had threatened
is the introduction of the Chartered • Application of models for the viability of traditional products.
Enterprise Risk Analyst (CERA) designation underwriting decisions and savings
to meet the growing need for enterprise • Utilization of models in the Disruptive ideas require vision but also
risk management (ERM). The CERA assumption review process time:
designation did not have an immediate • Refinement of experience studies
demand. However, after the fall of Enron, • Detection of fraud and suspicious This helps me to rationalize why
the introduction of Sarbanes-Oxley Act transactions. the universal life plan, invented
of 2002 and other regulatory measures, in 1962, took so long to be
various professions sought to claim the The final example that I will provide of the adopted. Adoption had to await
expertise in ERM. innovative process is a historical object a new generation of flat-earth
lesson in the concepts and promise of people, within the life insurance
In November 2005, the Society of disruptive innovation. The introduction business, who perceived the
Actuaries board took measures to of universal life insurance provides a technology to be an answer to a
position members to explore ERM hindsight view of the innovative process at difficult environmental condition,
opportunities and differentiate the work—the collaborative nature of ultimate specifically inflation.3
CERA designation from “traditional” adoption, the resistance from the status
designations. The CERA name was quo and the ultimate vindication of the Christensen advances one school of
formally approved in 2007. Those visionary. thought of how to promote innovation that
FEBRUARY/MARCH 2015 | THE ACTUARY | 7
resonates with me. He and his co-authors should accelerate innovation within our Actuarial Research Clearing House (ARCH), vol. 1982.1
hypothesize there are techniques that industry. (1982): 215–80.
advance innovative thinking.4 They present 4 J eff Dyer, Hal Gregersen and Clayton M. Christensen,
The Innovator’s DNA: Mastering the Five Skills of
five essential methods: Finally, actuaries need to understand the
Disruptive Innovators (Boston: Harvard Business Press,
• Associating concept of experimentation. I get the sense
2011).
• Questioning that most actuaries undervalue the lessons
• Observing learned by exploration.
Albert J. Moore, ASA, MAAA, is second vice
• Networking
president, Actuarial Systems at Ohio National Financial
• Experimenting. Experimentation can be a challenge
Services in Cincinnati, Ohio. He can be reached at albert_
for very smart people. Experimentation [email protected].
Associative thinking would require requires the willingness to make mistakes,
actuaries to think deeply as to how our to look and sound foolish, and to invest
skills can be applied to nontraditional time in endeavors that may pay zero
disciplines. We should consider how other tangible return. Experimentation requires
industries are solving or approaching someone who understands the value
problems that could have applicability to of gaining insight. Another impediment
our work. to actuarial experimentation is, in most
situations, our mistakes have tangible
As an example, much of the ground in monetary implications!
predictive analytics has been broken in
the property casualty world. By associating In summary, I encourage actuaries to
how other industries employ predictive begin to think innovatively in all that
techniques to various problems, similar we do. Recognize that some of the best
approaches can be adapted in life and ideas and successes require a relentless
health insurance. vision of the possibilities of a proposed
solution. Developing simple concepts,
The technique of questioning should be slowly introduced, often leads to
natural for actuaries. Ask a question in a room innovations that have the potential to
of actuaries and you are almost guaranteed disrupt the conventional wisdom. Our
that even after all have gone separate ways, profession can continue to expand and
many will be pondering the query. meet the public needs by fostering an
environment where the techniques of
Some questions are solved by pure innovation are developed throughout our
superior brain power and genius. But I profession. A
would surmise that many challenges are
solved by observation, testing and putting END NOTES
pieces together. I do not understand why 1 “ Disruptive Innovation,” Clayton Christensen’s website,
the insurance industry underutilizes focus accessed Dec. 12, 2014, www.claytonchristensen.com/
key-concepts/#sthash.nYS1qJye.dpuf.
groups and surveying of clients.
2 U .S. Census Bureau, “Homes with Cell Phones Nearly
Double in First Half of Decade,” news release, Nov. 19,
With the technology of the day,
2009, www.census.gov/newsroom/releases/archives/
collaboration and networking to share
income_wealth/cb09-174.html.
ideas, and posing and answering questions 3 G eorge R. Dinney, “Life Insurance as a Game,”
8 | THE ACTUARY | FEBRUARY/MARCH 2015
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Letter From The President
A DIALOGUE WITH OUR
FUTURE MEMBERS
BY ERROL CRAMER
THE CONTINUED VIBRANCY AND who were very knowledgeable, focused and engaged in the profession and industry
VITALITY of our organization depends eager to engage in conversation. (e.g., read the business news), are eager to
on our success in recruiting and training learn, and ask insightful questions. Some
the best minds as our future generations of From my various meetings with U.S. and learning may occur based on any business
members. In fact, we exist as an organization Canadian students, three themes typically courses taken at school—and the SOA
solely as a collection of professionals highly arise. First, they want to know what syllabus includes some communication
skilled in our respective areas of practice. employers value most in a job candidate. and professionalism opportunities—but
We need then to be attuned to the college A key concern is getting that entry level adequately acquiring these skills is a career
kids of today—the millennials—to hear their position. My answer is communication skills long process. I tell my history of getting
voices and let them know the story of our and business acumen. What distinguishes involved early on in volunteering for
profession and the opportunities waiting. a professional from a technician is the professional and industry organizations, and
These will be our support staff in the near ability to use judgment in making critical the subsequent leadership positions I have
future and our successors in retirement. assessments of complex situations. held on many boards and committees.
And, to be effective, one needs strong
The traditional route for prospective new communication skills. At ASNA, the SOA Third, they want to know what choices
members currently is through actuarial sponsored a case study where teams to make for their career tracks. Students
science programs and these are often, but were presented complex, real-life issues a often express a lot of angst over having
not exclusively, through schools that have chief actuary may face, e.g., grow sales of to commit to a track (the SOA has six
earned the Society of Actuaries’ (SOA’s) Product X profitability while maintaining specialty tracks on the way to becoming
Center of Actuarial Excellence (CAE) risks within established margins, and an FSA), and fear of locking themselves
certification. One of my most enjoyable prepare and make a presentation to the into a particular area of practice early in
duties as SOA president is to meet and board. Observing the process, I saw team their career. I let them know of life’s twists
dialogue with members and potential future members fully engaged and competing with and turns that will lead them into many
members, and this includes visits to schools fierce determination. different work opportunities, and that’s
and other college events. One such recent OK. Also, I let them know that exams are
event was a weekend seminar and job fair of Second, they want to know how best to only an initial selection process for entry
the Actuarial Students National Association acquire the critical business skills. My into membership, and career-long work
(ASNA) in Montreal which drew 600 college answer is that as entry level hires they experience and professional development
students from across Canada. The theme will be evaluated typically on leadership will equip them for moving onto other
was aptly named “Insuring the Future.” I was potential. The lesson I give them for tracks as needed. I note that tracks are just
heartened by the high quality of attendees interviews is to demonstrate they are one distinguisher, that deeper specialization
10 | THE ACTUARY | FEBRUARY/MARCH 2015