Force of Nature

VOLUME 16 ISSUE 3

JUN 19 JUL

FORCE OF NATURE

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THE VOLUME 16 ISSUE 3

JUN 19 JUL

26 CONTENTS FEATURES 12 42 UNDENIABLE SYNERGY SHARPEN YOUR SKILLS A case for the chief modeling officer Actuaries have the opportunity to extend their technical By Van Beach skills to all aspects of health care By Kurt J. Wrobel 20 RISK AROUND THE INDUSTRY 46 An introduction to some lesser-known emerging risks BUILDING ERM BUY-IN within the actuarial realm Switching to a value-based approach can result in better decision-making for organizations 26 Interview by Martin Snow HUNGRY FOR RISK? Practical applications of a risk appetite framework 52 By Rebecca B. Scotchie and Christopher H. Murphy TAKE THE LEAP Q&A with Bill Rearden, ASA, MSc, MA, co-founder and 34 CEO of Ironbound Consulting Group FORCE OF NATURE Why and how to include climate change in the risk management framework By Fei Xie ONLINE EXCLUSIVE! Read this issue's online exclusive, “Risk is Opportunity,” at TheActuaryMagazine.org/ Risk-Opportunity.

POSTMASTER: Send address changes to the SOA, c/o Communications Department, 475 N. Martingale Rd., Schaumburg, IL 60173-2226.

The Actuary welcomes both solicited and unsolicited submissions. The editors reserve the right to accept, reject or request changes to solicited and unsolicited submissions, as well as edit articles for length, basic syntax, grammar, spelling and punctuation. The Actuary is copyedited according to Associated Press (AP) style. For more information about submitting an article, please contact Jacque Kirkwood, magazine staff editor, at 847.706.3572, [email protected] or Society of Actuaries, 475 N. Martingale Rd., Suite 600, Schaumburg, IL 60173-2226. Copyright © 2019 Society of Actuaries. All rights reserved. No part of this publication may be reproduced in any form without the express written permission of the Society of Actuaries. 56

SOA PRESIDENT The Actuary is published bimonthly James M. Glickman (February/March, April/May, June/July, FSA, MAAA, CLU August/September, October/November, [email protected] December/January) by the Society of Actuaries, 475 N. Martingale Rd., Suite SOA STAFF CONTACTS 600, Schaumburg, IL 60173-2226. Patrick Gould Periodicals postage paid at Schaumburg, Managing Director of IL, and additional mailing offices. 58 Marketing & Communications USPS #022-627. [email protected] This publication is provided for infor- Cheré LaRose mational and educational purposes only. Director of Member & Neither the Society of Actuaries nor the Candidate Communications respective authors’ employers make any [email protected] endorsement, representation or guar- antee with regard to any content, and Julia Anderson Bauer disclaim any liability in connection with Publications Manager the use or misuse of any information [email protected] provided herein. This publication should not be construed as professional or Jacque Kirkwood financial advice. Statements of fact and Magazine Staff Editor opinions expressed herein are those of [email protected] the individual authors and are not necessarily those of the Society of Actuaries Erin Pierce or the respective authors’ employers. Magazine Staff Designer CONTENTS [email protected] The Actuary is free to members of the Society of Actuaries. Nonmember sub- DEPARTMENTS scriptions: students $22; North American $43; Int’l $64.50. Please send subscription requests to: Society of Actuaries, 6 FROM THE PRESIDENT P.O. Box 95600, Chicago, IL 60694-5600. Volunteering to Advance the Profession

8 EDITORIAL CREATIVE SERVICES A Step Ahead of Crisis Kathleen Hagan Associate Director of Content

10 NEW + NOTEWORTHY Enrique Rick Cruz Your Source for International Happenings, Senior Art Director Industry Briefings and SOA News CONTRIBUTING EDITORS 54 INCLUSIVE IDEAS Dorothy Andrews, ASA, MAAA, CSPA Dave Snell, ASA, MAAA Challenge: Accepted [email protected] [email protected] Abigail Caldwell, FSA, MAAA Martin Snow, FSA, MAAA 56 EDUCATION [email protected] [email protected] Different Perspectives on Volunteering Kelly Hennigan, FSA, CFA Qi Sun, FSA [email protected] [email protected] 58 RESEARCH Jason Hiquet, FSA, CERA Ricardo Trachtman, FSA, MAAA Expanding Research Projects in New Ways: [email protected] [email protected] Q&A with R. Dale Hall Olga Jacobs, FSA, MAAA Nimmie Veerappen, FSA, FCIA 60 DISCOVER [email protected] [email protected] On Trend Tim Koenig, ASA, MAAA [email protected] 62 TIMELESS The Past, Present and Future of the SOA EDUCATION CONSULTANT Kory Olsen, FSA, CERA, MAAA [email protected]

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The Actuary FROM THE PRESIDENT Volunteering to Advance the Profession

JAMES M. GLICKMAN, FSA, MAAA, CLU, is president of the Society of Actuaries. He can be reached at [email protected]. PHOTO: HYON SMITH HYON PHOTO:

6 JUN/JUL 19 | theactuarymagazine.org The Actuary

Whether you have volunteered in my professional career. I’m especially proud of the work creating and watching the SOA the past or have been meaning to Long Term Care Insurance Section grow. For volunteer, I encourage you to consider those of you who don’t know, I have worked closely within the long-term care insurance participating in one of the many industry for the last 30 of my 47 years in the opportunities to help make your actuarial profession. I encourage you to take profession even better. the time to engage with one or more of the sections that fit your particular areas of interest. A little bit of your time and effort will go a long way toward enhancing your area hen I took office as Society of Actuaries of practice, and I am sure you will find it (SOA) president, I announced one of my personally rewarding. biggest priorities for the year ahead would The SOA seeks to get all members involved, be to enhance each member’s experiences especially those members who now make up Wwith the SOA and, to the extent possible, get more actu- nearly half of all our FSAs—the millennial aries actively involved in volunteer activities. There are so generation. The SOA Board has identified as many volunteer opportunities to consider, from education one of our most important strategic projects and research, to professional development and section- the development of new ways to engage with focused efforts. members and encourage all to participate. Let’s look at why volunteering is so valuable, both for Two recent examples include a digital initia- you and the actuarial profession. We are a volunteer-driven tive now underway to better engage with our organization: from exam grading, to the development and youngest members and a Member Recognition implementation of our Strategic Plan, to speaking opportu- Program, which provides annual thank-you nities at professional development events and participation gifts to our members who earn the most par- in actuarial research—all of these activities move the ticipation points. Please review the program at profession forward thanks to the efforts of members like recognition.SOA.org to see how you can qualify. you. Without volunteers serving on professional interest Whether you have volunteered in the past section councils, we wouldn’t have the expert-driven news- or have been meaning to volunteer, I encour- letters, podcasts, research nor professional development age you to consider participating in one of events. Meetings such as the Life & Annuity Symposium, the many opportunities to help make your the Enterprise Risk Management Symposium, the Health profession even better. Meeting, the Valuation Actuary Symposium and the SOA Annual Meeting & Exhibit could not exist without the volunteer efforts of our sections and their members. RELATED LINKS For example, you don’t have to be an educator to participate as an exam grader or help to create new exam 2017–2021 Strategic Plan questions. Likewise, you don’t have to be a researcher SOA.org/programs/strategic-planning to join a research project oversight group (POG) and guide the accuracy and objectivity of a research project Volunteer Program or experience study. These groups are vital to the actuar- bit.ly/SOA-Volunteer ial profession, regardless of topic. By serving on POGs, you’re helping to complete research that will benefit Volunteer Recognition the profession. recognition.SOA.org I’ve been an FSA for 35 years and have served as a volunteer for nearly 40 years. I’ve found my volunteer Volunteer Database experiences to be among the most rewarding activities of bit.ly/SOA-Volunteer-Opps

7 theactuarymagazine.org | JUN/JUL 19 The Actuary EDITORIAL

A Step Ahead of Crisis BY KELLY HENNIGAN AND MARTIN SNOW

WHILE MORE THAN 10 those that are unseen—to these concerns, Van Beach, Risk manage- YEARS HAVE PASSED prepare for the future. FSA, MAAA, proposes ment is most SINCE THE SEPT. 15, A fundamental question the establishment of the important prior 2008, COLLAPSE OF around enterprise risk chief modeling officer (see LEHMAN BROTHERS AND management (ERM) is article on page 12). to a crisis. Once THE LAST FULL-BLOWN how to achieve senior Looking toward the the crisis starts, INTERNATIONAL BANKING leadership support for a future, several articles in CRISIS, the qualitative risk management program. this issue contemplate there are few and quantitative risks In an article based on their impending risks and how levers we have affecting our industry and Outstanding Session to prepare for them. Kurt to manage the the way we work have Award from the 2018 ERM Wrobel, FSA, MAAA, never been greater. The Symposium, Sim Segal, focuses on the health balance sheet pace of regulatory, tech- FSA, CERA, and Philip insurance market (page until markets nological, operational and Sherrill, CPA, CIA, CHIE, 42). Fei Xie, FSA, FCIA, stabilize. environmental change is walk us through how to presents what happens quicker than ever before. identify an ERM program when a new risk such as —Doug Caldwell, Innovation is moving that lacks this buy-in, climate change emerges FSA, CERA, MAAA, forward and affecting us what the typical causes are (page 34). She reflects on executive vice in ways we would not have and what to do about it the devastation caused president, Investment imagined a few years ago. (see page 46). Other chal- by the recent wildfires Risk, Model Risk, In this issue of The Actuary, lenges faced in the risk in California and how to Governance & the collection of feature field include the consid- manage climate risk. To Reporting, and U.S. articles explores how erations on how actuarial round out our features chief risk officer, to identify and manage results are achieved, what in this issue, Rebecca B. MetLife emerging risks—both they represent and how to Scotchie, FSA, MAAA, and those that are evident and utilize them. To address Christopher H. Murphy,

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ASA, articulate how to set up an actuarial risk appetite (see page 26). ONLINE EXCLUSIVE! While we recognize To take us to the next level, that this issue cannot we asked chief risk officers capture every risk facing to share insights with us. In our industry, we wanted to the online only article, “Risk include as many topics as is Opportunity,” Suzette L. possible for our readers. A Huovinen, FSA, CERA, CFA, few mini-articles outlining ABOUT THE WRITER ABOUT THE WRITER MAAA, chief actuary and key emerging risks are also KELLY HENNIGAN, FSA, CFA, MARTIN SNOW, FSA, MAAA, chief risk officer at Securian, included (starting on page is vice president, head of is vice president and chief states: “Risk management 20), covering the emer- Investment Operations, at delivery officer at Atidot, is a great way to get a broad perspective on an gence and adoption (or Venerable. She is currently a provider of predictive organization. You have to nonadoption) of FinTech a contributing editor for analytics solutions to the The Actuary magazine life insurance industry. He understand all aspects of and InsurTech, the inter- the business to truly identify dependence of risk and and was the 2015–2016 is currently a contributing chairperson of the SOA editor for The Actuary and manage the risks.” strategic risk management. Leadership & Development magazine. Snow can be We hope you find Section. Hennigan can be reached at martin@atidot. Visit TheActuaryMagazine. this issue informative in reached at kelly.hennigan@ com. org/Risk-Opportunity sharing key topics from venerableannuity.com. to read more important which we can learn and do insights from chief risk what is needed to stay one officers. step ahead of emerging changes and risks.

Underwriting Issues and Innovation Seminar July 28–30, 2019 Chicago, IL

Join industry professionals to learn about the latest topics and issues in life insurance underwriting, including:

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Learn at SOA.org/Underwriting2019 Register by July 7 and Save The Actuary NEW + NOTEWORTHY

The SOA in India Investment Section Update The Society of Actuaries (SOA) sent a delegation to India In addition to keeping up with the developments in March to explore and learn more about the Indian in the capital markets, we’ve been busy at the actuarial community. The SOA delegation included Dave Investment Section Council. The goal of the Sandberg, FSA, CERA, FCA, MAAA, SOA Board and Investment Section is always to provide our members International Committee member; Andy Peterson, FSA, with accessible and relevant investment content. EA, FCA, MAAA, SOA senior director, International; and Our flagship publication,Risks and Rewards, was Ann Henstrand, SOA senior global strategy advisor. published in February and will be published again in August. The newsletter is available in both print and an easy-to-use electronic format that can be accessed on computers and mobile devices. Our 2019 asset allocation contest is underway, with prizes awarded to portfolios with the best performance between April 1 and Sept. 30. The winners will be recognized at the Investment Section breakfast at the 2019 Society of Actuaries (SOA) Annual Meeting & Exhibit. Also underway is our 2019 Redington Prize contest, where we recognize the best investment paper written by an actuary. Entries were due June 2, and the winner of this contest will be announced in September. We have a number of webcasts planned in 2019, including an Investment Boot Camp, a series on economic scenario generators and an overview of pension cash balance plans. We also produced a series of “How I Became an Investment Actuary” podcasts. Planning for the 2019 Investment Seminar is also in progress. This seminar will take place in Toronto on the Sunday preceding the 2019 SOA Annual Meeting & Exhibit. This year’s seminar is being coordinated with the CFA Institute and will have sessions to interest both chartered financial analysts (CFAs) and investment actuaries. For details on all of our activities, please check out our section webpage at bit.ly/SOA-Investment. As always, if there are any suggestions to improve our content, please let me or any of our council members know.

ABOUT THE WRITER BRYAN E. BOUDREAU, FSA, FCA, MAAA, is senior vice PETERSON OF ANDY COURTESY PHOTOS president at MetLife and chairperson of the SOA’s Dave Sandberg, FSA, CERA, FCA, MAAA; Ann Henstrand; and Andy Investment Section Council. He can be reached at Peterson, FSA, EA, FCA, MAAA; visited the palace at Agra Fort (top) bboudreau@metlife.com. and the Taj Mahal (above) during their time in India.

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During the first part of their trip, the SOA delegation India, Birla Institute of Management Technology and attended the Institute of Actuaries of India’s (IAI’s) 20th AON Services India Private Ltd. Global Conference of Actuaries (GCA) in Mumbai, Throughout the meetings, the SOA delegation found where both Sandberg and Peterson served as session there was significant interest in the Indian market to leaders. More than 700 attendees gathered for the GCA, learn about the SOA’s educational and research offerings. which was preceded by an IAI gala ceremony to recog- The delegation learned that actuarial teams at global nize volunteers, award recipients and the new class of employers, global consultancies and domestic outsourcers IAI qualifiers. The gala ceremony included a number of are interested in providing their staff with additional Bollywood-style dance acts put together by GCA attend- training in global and U.S./Canadian skill sets, including ees and was truly a cultural event. While at the GCA, the valuation, product design, accounting, financial reporting delegation had positive meetings with representatives frameworks, solvency oversight systems and reserving. of the IAI and other individuals working in the actuarial The SOA delegation also discovered there may be profession in India. interest in collaborative research projects with the The SOA delegation then visited Delhi, where they SOA in topics such as micro-insurance, private pension held additional meetings and briefings with associations, markets, mortality, catastrophe modeling and sustainability, educational institutions, and employers and individuals enterprise risk management (ERM), climate index model- familiar with the market in India. The SOA delegation ing, and general insurance and health topics. met representatives from Amity University, MetLife Looking forward, the SOA will evaluate possible options Global Services Center, PwC, the Risk Management for future engagement. The International Committee will Association of India, Mercer Consulting (India), Deloitte discuss these possibilities and bring them to the SOA Board.

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BY VAN BEACH SYNERGY

12 JUN/JUL 19 | theactuarymagazine.org The Actuary le A case for the chief modeling officer b ctuarial practice and technology have undeniable synergy. a With the introduction of mainframe computers, actuaries i gained a tool to improve the speed and accuracy of their work along with greater access to data. Personal computers n A unshackled actuaries, enabling them to build models that provide greater insights into actuarial risks and the e financial operations of insurance companies around the globe. As computing capabilities continue to become less expensive and more powerful, the applications and anal- d ysis of actuarial models continue to expand. Regulation and financial reporting, once founded on factor-based or formulaic approaches, migrated to principle-based (read, “model-supported”) regimes—Solvency II, International n Financial Reporting Standards (IFRS) 17, principle-based reserves (PBR), Actuarial Guideline 43, and Financial Accounting Standards Board (FASB) Targeted Improve- U ments for Long Duration Contracts (LDTI) are all examples. Economic capital, asset liability management (ALM), cash-flow testing and a wide array of other actuarial analyses all have models at their foundation. In fact, we should take the opening sentence of this SYNERGY article one step further: Actuarial practice and modeling, enabled through technology, have undeniable synergy. Modeling has become the foundation of actuarial practice, but something else also happened. Modeling has changed the actuarial organization. Modeling has introduced an array of activities necessary to produce model results, many of which are not truly actuarial. Modeling has created significant dependencies outside of the actuarial department, including broadening the range of technical skills necessary to build, maintain and evolve models to provide the requisite information for today’s reporting requirements. And now, as the technology that brings together massive data, computational power and algorithms moves forward, actuarial practice will also advance, with even more processes, technologies and skills being introduced.

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While the pace of technology innovation necessitated a rigor in deployment and use is driving change and disruption, it is not of models to recognize and enforce distinct the only source of pressure for actuarial development and production stages within organizations and their reliance upon the modeling life cycle. Maybe most critical, models. Regulatory requirements continue actuarial organizations also are becoming to expand and evolve with increased cognizant of the difference between the expectations for accuracy, disclosure, business aspects of the modeling process transparency and speed. Shareholders and the operational aspects of modeling. demand greater returns and reduced The operational side of modeling— expense, even while the economic and selecting, building, maintaining and competitive environment becomes more executing the end-to-end modeling complex. Within an insurance company, process—needs to be explicitly recognized executives rely on actuaries and models as a critical partner to the business side of to provide timely insights regarding modeling, which defines the assumptions, acquisitions, capital and reinsurance requests the projections, and then con- strategies, investment approaches, risk sumes, synthesizes and acts on the model management and other key decisions. results. This partnership can enable the Actuarial organizations are being asked actuarial organization to become more to be both more strategic and more strategic through better use of models operationally efficient during a period and the insights they provide. It also can of rapid change. This is a real challenge. increase operational efficiency and the And yet as rapidly as modeling has effectiveness of an organization through reshaped actuarial practice, the actuarial optimized development and execution of organization has lagged in its evolution. the end-to-end modeling process. The Modeling has introduced A wide range of nonactuarial tasks—data organization will be better positioned an array of activities preparation and management; model setup, to take advantage of rapidly emerging necessary to produce execution and monitoring; maintenance of technologies such as cognitive models and model results, many the computational grid; assembly of results; analytics. In short, insurers need to create of which are not and so on—are often being done manually a role that can be a partner to the chief truly actuarial. by actuaries. Core modeling activities actuary to take responsibility for modeling around model development, input data operations; develop relationships with IT design, validation—activities critical to and other areas outside of the actuarial having high-quality, reliable, maintainable function; put a focus on the end-to-end models—are often delegated to entry-level modeling process across the breadth of actuarial students. Resources with model- the company; and signal to talented ing talent are not retained because there modelers, engineers, data scientists and is no career path for a technical modeling other technicians both inside and outside actuary. In short, even though models of the organization that their skills are are the foundation for actuarial practice, recognized and valued. The time has come modeling roles are not well-understood for the chief modeling officer to enter and are too often undervalued. the stage. The evolution of modeling is demanding an evolution of the actuarial operating The Sum is Greater Than the Parts model.1 The interplay of data, technology Understanding the business versus the and methodology has expanded the end- operational skills and activities related to-end modeling process and requisite to modeling holds the key to the new activities, and thus has diversified the skills actuarial operating model. When these required to complete actuarial analyses. differences are recognized and each The use of models for financial reporting function is empowered to focus on what and other mission-critical applications has it does best, the resulting sum of the two

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The skills and expertise required to be an exceptional “business” modeler are not the same skills and expertise necessary to be an exceptional “operational” modeler.

parallel functions is greater than the To be clear, this is not to say an oper- original comingled model. ational modeler does not need business What is different between the business expertise or the business modeler does and operational modelers? Business model- not need technical skills—clearly they do. ers are responsible for the “what” questions: The point is the depth of expertise differs between the two, so that the roles are ➊| What products are most capital complementary. The skills and expertise intensive? required to be an exceptional “business” ➋| What is the impact to generally modeler are not the same skills and accepted accounting principles expertise necessary to be an exceptional (GAAP) earnings if we consistently “operational” modeler. realize better-than-expected mortality The operational modeling organization improvements? will look very different from the business ➌| What is the financial impact of organization. The operational modeling choosing a given historical transition organization will have a broad range of date for LDTI? actuarial and nonactuarial resources. The operational modeling team will have a Even though models The operational modelers solve the heavy focus on technology and tools to are the foundation “how” questions: streamline and enhance processes. The for actuarial practice, actuaries on the team will be more techni- modeling roles are not ➊| How do we make the model run cal with deeper skills in modeling, analytics well-understood and are optimally to reduce cost? and other areas. Data scientists and other too often undervalued. ➋| How are the assumptions structured advanced technical resources will work so they are easy to maintain and use alongside actuaries, and their roles and for attribution analysis? responsibilities likely will blur. Both devel- ➌| How do we implement changes for opment and production roles will exist, LDTI to be consistent across all with development roles focused on build- business units while still recognizing ing new capabilities and production roles the unique requirements of each focused on execution—both periodic (e.g., product line? quarterly) and ad hoc. The operational ➍| How will we implement machine modeling organization will be a service learning to improve anomaly detection? organization to the business users with a

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A CHIEF ACTUARY’S PERSPECTIVE

Andy Rallis, FSA, MAAA, EVP and global chief actuary at MetLife, acknowledges: “In other situations where a company wants to has experienced firsthand the increased focus on modeling as benefit from standard approaches and leverage a specialized skill part of actuarial practice, and he has taken bold steps to cen- set like predictive modeling, putting those roles inside the modeling tralize the modeling function. “The modeling organization was organization absolutely makes sense.” created to address Solvency II,” says Rallis. “With 46 countries, we Talent is a critical aspect of the evolution of the modeling orga- had to have standard approaches—if everyone was left on their nization. Rallis notes the benefits of separating the operational own, it would have been really messy.” modeling skills from the business skills when creating the modeling But Rallis did not stop there. Recognizing the strength of the organization. Predictive analytics and data science are areas that diverse group that had been assembled—with teams focused on will pose a challenge for companies to address organizationally. development, production, execution and quality assurance—he In fact, Rallis sees that “actuaries are being provided with oppor- expanded beyond financial reporting. “Once we had the organiza- tunities to learn a wide range of skills, and many of these are highly tion in place, we moved many of our other actuarial applications technical and very specialized.” Companies will need a strategy to this group—embedded value, cash-flow testing, asset liability for acquiring, developing and retaining these skills. MetLife “has management (ALM)— anything that resembled a production benefitted tremendously from having a dedicated modeling process” and immediately benefitted from “greater efficiency organization,” says Rallis, who recognizes the positive impact of and quality.” creating a technical career path that leads to very senior levels Rallis continues: “It’s made the actuarial team stronger. The within an organization. modeling organization serves the business users and provides the Just how high? A diverse team with critical responsibilities, like technical skills to support the modeling needs of MetLife.” that which exists with the modeling organization, requires lead- When asked about the impact outside of the actuarial team, ership. At MetLife, the modeling team is led by the global head of Rallis says: “The relationship with IT has greatly improved. The Actuarial Modeling, and that role is a peer to the four regional chief modeling organization is an advocate for the business users when actuaries at MetLife. While the role is not a “chief” in title, they are making IT requests. They also help communicate the IT challenges seated at the table with chiefs. So, will MetLife ever have a chief and constraints in a way the business users understand. The modeling officer? Rallis chuckles and says, “We already do—I just modeling organization also has improved the relationship with chose a different title.” risk management and audit.” Some modeling applications continue to exist outside of the ABOUT THE INTERVIEWEE modeling organization. Rallis says MetLife chose to “draw the ANDY RALLIS, FSA, MAAA, is EVP and global chief actuary at line with production modeling applications” and leave “creative MetLife. He is also president-elect of the Society of Actuaries. modeling functions with the business users.” Rallis readily He can be reached at [email protected].

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focus on high-quality, timely, cost-efficient on the business applications will be production of analytical information broader, allowing for more strategic that meets all applicable compliance and conversations within the organization. audit requirements. The stature of the modeling operations The business organization is the driver team is also elevated. With the team now of the modeling analysis, so business actu- centralized and owning key modeling aries are focused on insights—enabled by responsibilities, the productivity of the the efficient modeling chassis provided by modeling operations team becomes their operational modeling counterparts. very visible. Modeling roles are better During development cycles, the business understood, and the impact of the team actuaries define the requirements for the responsible for the development and deliv- changes and are responsible for validating ery of modeling results becomes readily the results. During the production process, apparent. With a visible, defined organi- the business actuaries define the analyses zation focused on modeling operations, a required, set the assumptions and focus career path is established for actuaries with on analyzing the results. Enhancement modeling talent and interest. Like-minded requests are noted for the next develop- individuals can be paired with peers who ment and model release cycle. become mentors and internal resources to further develop modeling skills. Modeling Elevating the Actuarial Function no longer is a job that entry-level actuarial There have been many articles written on students are asked to perform until they the desire for actuaries to become more can be promoted to a “real” actuarial role— strategic, typically also referencing the modeling is a critical actuarial function. “mundane” tasks that consume dispropor- tionate amounts of time and need to be Why a Chief? With a visible, defined automated or eliminated. More recently, Driven by changes in regulation, risk man- organization focused on cognitive technologies and robotics have agement and the competitive landscape, modeling operations, a been raised as tools that actuaries can modeling has had an increasing role and career path is established leverage in order to again become more impact within the actuarial organization. for actuaries with strategic.2 The unstated issue is how to The reliance on models for quantification modeling talent actually implement and achieve these of insurance risks and opportunities has and interest. advantages. It often seems implied that all expanded the breadth of internal stake- actuaries should be educated and trained holders beyond the chief actuary to include to use emerging technologies and tools. other C-suite executives including the While actuaries should have the opportu- chief risk officer, the chief financial officer nity to pursue continuing education and and the chief executive officer. training, it makes sense to separate the Modeling is critical to the insurance technical skills from the business expertise organization, serves many stakeholders, is and perspectives within an actuarial orga- unique in its role in the organization and nization to make the insights actionable. is driven by highly skilled talent. It drives Enabling actuaries who are focused on competitive advantage, is necessary business applications to have technical for compliance and is an area where partners rather than firsthand technical cost-containment and efficiency are expertise is a powerful source of leverage. at a premium. Especially as the modeling tools and meth- Becoming efficient and effective at odologies applicable to actuarial practice modeling requires a broad array of talents become more diverse, it will equally take and specialized skills and expertise. Mod- a diversity of resources to harness these eling roles have operational components approaches. When done effectively, the that require a continual focus on process insights available to the actuaries focused and optimization. As technology changes,

17 theactuarymagazine.org | JUN/JUL 19 FEATURE UNDENIABLE SYNERGY best practices will need to be continually reevaluated. The associated with modeling operations more effectively, modeling process is at the intersection of data, technol- with the chief modeling officer having final authority. ogy, risk, compliance, finance and actuarial. It is a distinct Capitalize on change. Technology is changing rapidly, function that originated as part of the actuarial function, and the impact to financial modeling will continue to but it has evolved to have unique characteristics. In many evolve. A chief modeling officer will provide the leader- respects, it most closely aligns with the information tech- ship and focus to navigate the changing landscape. nology (IT) organization in terms of the role it plays in Identify opportunity. With a seat at the table during the organization, the processes it must follow and the skill executive discussions, the chief modeling officer, armed sets on the team. However, it is distinctly different given with a deep understanding of modeling capabilities, can the analytical tools and methodologies it utilizes. Further, spur ideas and offer solutions to drive new products, the talent in this analytical component is what drives the new markets and new opportunities through modeling- value—it is more than simply procedural. “Operations” enabled insights. encompasses highly technical business analytics in addition Competitive advantage. Finally, with an internal to all supporting processes around the analytics. champion for modeling, the organization is positioned The trend of appointing a modeling leader has begun to move beyond cost reduction and compliance to and is picking up steam. Modeling resources are being achieving competitive advantage. consolidated into centers of excellence, shared service centers and corporate modeling teams. Titles such as director Conclusion of modeling and controls, vice president of corporate While the use of models has become more strategic, the actuarial model services, and modeling transformation operational environment required to support the models has and modernization lead are becoming more common. become more diverse and complex. New responsibilities and Companies recognize that consolidating all modeling activities are required for actuarial analyses, many of which responsibilities facilitates consistency in approaches, are not purely actuarial. It is now increasingly recognized rationalization of technologies, wider use of tools, that the complexity and breadth of models require a unique elimination of redundancies and a wide array of other operational modeling skill set to effectively develop, main- operational efficiencies. tain and execute these models. Technology, the fundamental Establishing a chief modeling officer role with the enabler of modeling capabilities, is advancing at an exponen- responsibility for modeling operations is a natural evolu- tial pace that will put even greater emphasis and pressure tion and has several tangible benefits. on modeling operations. How should an insurer respond given the potential implications on costs, compliance and Attract and retain talent. The role recognizes the competitive advantage? Understanding the business versus strategic importance of the modeling function, signaling the operational skills and activities related to modeling this importance both internally and externally. Recogniz- holds the key to the new actuarial operating model. Given ing the function in this way is critical for attracting and today’s environment, the trajectory of modeling technol- retaining modeling talent, providing a career path and ogies and applications, and the mission-critical nature of internal parity with their business-focused counterparts. modeling within insurance organizations, the time has Clout to deliver. Seating a chief at the executive table come for the chief modeling officer. alongside the chief actuary, chief financial officer, chief information officer, chief technology officer and chief risk officer provides the internal clout to both partner References 1 Wagner, Darryl, Tony Johnson, Nate Pohle, and James Dunseth. More Than with and serve internal clients. Machines. The Actuary, October/November 2018, https://theactuarymagazine. Focus. Providing the modeling organization with senior org/more-than-machines/ (accessed March 5, 2019). 2 Hughes, Mike, Ian Sterling, and Raju Saxena. Robots Join the Team— leadership not only puts focus on the modeling process, Automation, Transformation, and the Future of Actuarial Work. Contingencies, it also enables the chief actuary to focus on truly actu- Actuarial Software Now Special Section, Winter 2018, http://contingencies.org/ robots-join-team/ arial issues and allows the IT organization to relinquish (accessed February 28, 2019). some of the actuarial modeling support burden. Invest for return. With the operational aspects of modeling isolated, the company can make more explicit ABOUT THE WRITER decisions on investment in modeling capabilities and VAN BEACH, FSA, MAAA, is principal, Life Technology Solutions, evaluate return. The company also can manage costs at Milliman. He can be reached at [email protected].

18 JUN/JUL 19 | theactuarymagazine.org Reimagine pricing, underwriting and claims

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20 JUN/JUL 19 | theactuarymagazine.org The Actuary

An introduction to some lesser-known emerging risks RISK within the actuarial realm around the industry

hief risk officer of Venerable Holdings Inc., Charles Schwartz, says: “The insurance risk profession is adept at capturing and assessing the risk of ‘known unknowns,’ C less so the ‘unknown unknowns.’” To help us think about risks that may be perceived as less common or less likely—but may very well be the next major risk—here are four pieces on key emerging topics across InsurTech, FinTech, risk interdependence and strategic risk management. Let’s start with InsurTech. As recently as three years ago, few had heard of it. Yet by the end of 2016, it was top-of-mind for many, and ITA PRO magazine named it “word of the year.” Martin Snow, FSA, MAAA, and Theresa Rollin, PMP, describe artificial intelligence (AI) and the risks the InsurTech industry faces. The broader category of FinTech, which applies to all financial services and is more developed than InsurTech, has its own unique risks. Michael Leibrock discusses the balancing of FinTech opportunities with the risks. The interdependence of risk surrounds us and is easily forgettable when things are going well. April Shen, FSA, CFA, CERA, MAAA, encourages us to consider these risks even when all seems to be in order, as

21 theactuarymagazine.org | JUN/JUL 19 FEATURE RISK AROUND THE INDUSTRY

that is precisely the time to prepare. The final piece As Clayton Christensen and Scott Anthony point out by Tricia Matson, FSA, MAAA, focuses on employing in their book, Seeing What’s Next: Using the Theories of strategic risk management—how can risk management Innovation to Predict Industry Change, established firms be done consistently and in advance to improve corporate successfully tackle opportunities based on the sources of decision-making? today’s revenue, where they have resources to succeed, We hope this content inspires you to think about other what their existing processes facilitate, and how their risks around the industry that may not always be top of values suggest prioritization in the context of all other mind—the “unknown unknowns.” resource demands. Although predictive analytics can help a company’s most valued customers today, it requires new resources, processes and values. Current processes are not enabling companies to consider what tomorrow’s values will be, from where revenue will be derived in the future The Predictive Analytics and how new entrants enter the market. Revolution: What You Need to Do Innovators succeed by finding niche areas to enter the market and continue to improve their processes while BY MARTIN SNOW AND THERESA ROLLIN established players continue to prioritize investments in their existing processes that generate more revenue in the One of the biggest risks facing the insurance industry near term. By the time the established players realize a new today is that companies do not fully embrace how data technology is a threat, the innovators are well ahead of the and the tools to analyze it will completely change the previously established players. Consider what Amazon and insurance paradigm. Data enabled Netflix to make its partners are doing with Haven. Companies risk a new Blockbuster obsolete, and the mobile phone is starting to entrant such as Amazon or Google building products and make bank tellers obsolete with the mobile depositing of processes designed around the new technology, as well checks via the phone’s camera and internet connection. as others embracing these technologies to better manage Likewise, we believe predictive analytics, artificial intel- balance sheet risk and variability. ligence (AI) and machine learning will create a massive We recommend that insurers consider if they are revolution in the insurance industry—equal in scale and prepared to allow this to happen while they continue to scope to digital cameras overtaking film and mobile consider the best approach. Insurers will want to look phones making all of your data portable. The determi- closely at what predictive analytics can offer and update nant of future success for established insurers will be how their resources, processes and values (culture)—including well they embrace new technologies. decision-making, organization and strategic planning—to We see some insurers making investments in predictive get ahead of the emerging predictive analytics revolution. analytics, such as automated underwriting and data science These are not easy changes to make, and they may require teams. But this is taking place on a smaller scale than is augmenting, training or adding personnel; leveraging third necessary to reap the full rewards of the technology. parties; and extensive cultural change management. For example, most companies are not using existing Core changes are required for insurers to succeed and capabilities to: reap the major strategic benefits that will accrue for early adopters. How are you going to change the thinking at ➊| Identify and reach out to the your company? Will you continue to invest in products millions of people who do not like Kodak film and Blockbuster videos that will soon have sufficient insurance. become obsolete? Or will you move to the future?

➋| Proactively manage health insurance claims to benefit ABOUT THE WRITERS both the customer and MARTIN SNOW, FSA, MAAA, is vice president and chief delivery the insurer. officer at Atidot. He is also a contributing editor for The Actuary. Snow can be reached at [email protected]. ➌| Assess and manage significant risks with more precision and THERESA ROLLIN, PMP, is head of U.S. Sales at Atidot. She can reduced variability. be reached at [email protected].

22 JUN/JUL 19 | theactuarymagazine.org The Actuary

assessment framework now, before potential risks emerge and create real financial losses or operational incidents. The Future of FinTech

BY MICHAEL LEIBROCK Reference 1 Gray, Andrew, and Michael Leibrock. FinTech and Financial Stability: Exploring How Technological Innovations Could Impact the Safety & Security of Global The rapid emergence of new FinTech applications is one of Markets. Depository Trust & Clearing Corporation, October 2017, http://www.dtcc. com/~/media/Files/PDFs/Fintech%20and%20Financial%20Stability.pdf (accessed the most promising developments affecting the financial ser- April 5, 2019). vices industry today, yet it has the potential to drive increased risk as adoption increases. As a result, it is critical for firms ABOUT THE WRITER to ensure implementation decisions balance business value MICHAEL LEIBROCK is managing director of Credit and Systemic with the potential risk of adopting emerging FinTech. Risk at DTCC. He can be reached at [email protected]. Some key factors firms should evaluate when considering FinTech adoption are:1

➊| The provision of core banking functions by Bread and Butter: FinTech firms. FinTech companies that provide core The Interdependence of Risks banking functions could enhance financial stability through diversification of credit and liquidity risk. BY APRIL SHEN However, given the short track record of these com- “ panies, this could also create systemic vulnerabilities. The chance of the bread falling with ➋| The level of FinTech-related fragmentation. The unbundling of financial services associated with the the buttered side down is directly rise of FinTech has the potential to fragment the proportional to the cost of the carpet. creation and delivery of financial services across additional providers and platforms. —Murphy’s Law ➌| The impact of FinTech on concentration risk. Actuaries are experts in quantifying and managing risks, The rise of FinTech could reduce concentration risk including analyzing risks on a stand-alone basis as well as by allowing nontraditional service providers to compete integrating and stressing risks simultaneously. The inter- with incumbent firms. Conversely, it also could create dependence of different types of risks is relevant to an new pockets of risk should a small cluster of FinTech actuary’s risk management strategy. companies become dominant in any given area. The interdependence of risks could be triggered by the ➍| The degree of reliance on automated decision- causality between risk A and risk B, which is relatively more making processes. Overreliance on purely data-driven predominant. However, there’s more subtle interdependence algorithms could lead to errors that might not have when risk A and risk B are merely associated or caused by occurred in an environment that requires additional a mutual risk C, which may not be analyzed directly. For human judgment. In addition, due to the inherent example, the International Swaps and Derivatives Associ- complexity of decision-making algorithms, their ation (ISDA) defines “wrong-way risk” as the risk that occurs opaque nature also could hide biases that may be when “exposure to a counterparty is adversely correlated with hard to identify. the credit quality of that counterparty.” Essentially, this risk ➎| The sustained growth and adoption of FinTech emerges when default risk and credit exposure increase simul- services. The impact of FinTech depends on the taneously, which may be caused by macroeconomic factors. extent to which it becomes a mainstream component Wrong-way risk exemplifies interdependence of risks of the financial ecosystem and how it will ultimately that actuaries can incorporate in their models by making be used for delivering critical financial services. mitigating assumptions. It might lead to changes in the overall risk management strategy or risk budget in stress By gaining a better understanding of systemic risks, scenarios when the credit risk is high—for example, the firms can ensure the continued safety of the industry. incentive to purchase a credit default swap (CDS) instru- Given the rapid pace of FinTech adoption, it is imperative ment from an independent counterparty to break the that firms begin to establish an appropriate internal dependence. Another example of interdependence is the

23 theactuarymagazine.org | JUN/JUL 19 FEATURE RISK AROUND THE INDUSTRY interaction of modeling risk and market risk. While compa- across the enterprise. Historically, many insurers have nies use complicated simulations to model market risks, the made decisions with a focus on accounting metrics and complexity of the models poses additional risk, such as the within individual business lines or functional areas. For boundaries and limitations associated with the model itself. example, new product pricing is often focused on internal When “Murphy’s Law” is invoked, it means everything rates of return. Enterprise hedging or reinsurance deci- that can go wrong will go wrong. This is symbolic of sions may be focused on reducing U.S. generally accepted the correlation and interdependencies of risks. Looking accounting principles (GAAP) earnings volatility or back at the economic crisis and the mortgage market in statutory capital management. While some have looked at 2007–2008, Murphy’s Law rang true. One of the reasons so this through more of an economic lens (for example, for few people predicted anything like the financial crisis was purposes of asset liability management), it has not typically the common knowledge that housing markets in different been on an enterprisewide basis. Diversification across parts of the United States moved independently of one risks may have been considered in a qualitative way, but another, and there was very little interdependence between historically it has not been part of what drives the metrics the change of housing prices in one region with that in considered in strategic decision-making. other regions.1 However, as Andy Laperriere of ISI Group This is changing for a variety of reasons, including: said in November 2007, “As an old pro in the mortgage business told us yesterday, the developments in the housing ➊| Better and faster enterprisewide risk and return and mortgage finance market have been consistent with the metrics, often developed by the ERM function most pessimistic scenario one could have imagined.”2 ➋| Continued focus on strategic risk management by There are many ways to model interdependent risks, rating agencies, most notably S&P such as simulation, copula, integrated testing and stress ➌| Increased competition and reduced margins in testing. Actuaries should contemplate the impacts of inter- insurance products dependence in their risk management decision-making process and overall organizational strategy. The bread can Strategic risk management involves evaluating decisions fall with the buttered side down when it matters most. through a consistent and robust risk-and-reward lens before they are undertaken. Exactly how a company defines risk and reward will and should depend on its individual facts and References circumstances. For example, a company may be very focused 1 Underwood, Alice. Guide to ERM: Interdependence of Risks. Willis Towers Watson Wire, March 3, 2014, https://blog.willis.com/2014/03/guide-to-erm-interdependence- on GAAP earnings and therefore uses that as the reward of-risks (accessed April 5, 2019). metric. Critical to the process, however, is the inclusion of a 2 The Wall Street Journal. Murphy’s Law of Mortgage Meltdowns. The Wall Street Journal, November 21, 2007, https://blogs.wsj.com/economics/2007/11/21/ risk metric that consistently captures all material risks across murphys-law-of-mortgage-meltdowns (accessed April 5, 2019). the enterprise, including diversification benefits. Since many organizations haven’t historically had such a metric, strategic ABOUT THE WRITER risk management in its complete sense has been very chal- APRIL SHEN, FSA, CFA, CERA, MAAA, is an actuary with lenging. But now many organizations have an internal risk PricewaterhouseCoopers. She can be reached at rijing.shen@ capital metric (such as economic capital) that can be used. gmail.com. Companies that have a robust and consistent way to evaluate risk and reward—and use that information regularly as part of the strategic decision process—will, over time, outperform their peers that do not use strategic Improving Performance Through risk management (assuming all else is equal). While many Strategic Risk Management organizations may focus on strategic risk management due to a push from external stakeholders (such as rating agen- BY TRICIA MATSON cies), its use is potentially the best way to unlock the value of a mature ERM function. As the U.S. insurance industry continues to develop more mature enterprise risk management (ERM) programs, ABOUT THE WRITER there is increased focus on strategic risk management. In TRICIA MATSON, FSA, MAAA, is a partner at Risk & Regulatory other words, the industry is using these ERM processes Consulting in Farmington, Connecticut. She can be reached at and supporting analyses to make better strategic decisions [email protected].

24 JUN/JUL 19 | theactuarymagazine.org Aug. 26–27 Hyatt Regency Denver Denver, CO

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Practical applications of a risk appetite framework

BY REBECCA B. SCOTCHIE AND CHRISTOPHER H. MURPHY

26 JUN/JUL 19 | theactuarymagazine.org The Actuary

isk appetite, risk exposure, risk tolerance, risk limit dashboard—these are all buzzwords used by your organization’s enterprise risk management (ERM) program, right? While they may seem like high-level academic concepts that do not apply to your actuarial existence, the reality is many R of your daily activities support key initiatives of your organization that help it operate within its risk appetite. So, what are these concepts all about, and how do they apply to you? Assumption of risk is essential for insurers. Whether risk is knocking at or proactively welcomed through the door, it underpins your organiza- I tion’s objectives, strategy and value proposition. As actuaries, we manage risk daily. The actions we take often feel intuitive, merely what is expected to properly manage the business. What is sometimes lost is a realization that we are—or should be—actively considering our organization’s appetite for certain risks. Risk appetite is not only focused on the risks themselves, but also on achievement of organizational objectives. A well-run company summarizes how its stomach feels about risk via a risk appetite statement, and founda- tional to an insurer’s ERM program is its risk appetite framework. Think of risk appetite akin to the North Star or a point on a compass, and a risk appetite statement like a country’s constitution. Figure 1 illustrates sample excerpts of what a risk appetite statement might articulate.

Figure 1 Risk Appetite Statement

RISKS OBJECTIVES

Attitude and capacity for Willingness to put achievement assuming risk of objectives at risk

“We seek and will accept a high level “We are willing to put some earnings of mortality risk.” at risk if the expected return is above a certain threshold.” “The only way to avoid reputational risk is to close our doors; as such, we accept it and expend great effort to minimize it.” RISK APPETITE Approach to managing risks Attitude regarding uncertainty in achieving “We have enough capital to objectives manage through risk events with a 0.5% probability.” “We must be able to pay all claimants, vendors and employees.” “We spend significant time and resources to minimize events that could damage the company’s reputation.”

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This article expands on the components of a risk and manage risk exposures to remain within risk toler- appetite framework and suggests an approach for devel- ances. An organization’s risk appetite framework aids oping and implementing it within your organization. The decision-making, holds staff accountable and supports the sometimes-intangible concepts of ERM are connected organization’s culture. Representative principles1 upon to how we as actuaries apply and adhere to our organi- which it is developed are shown in Figure 2. zations’ risk appetites daily. As you read, you will gain A best practice framework is not only defensive, but understanding regarding how your organization also opportunistic. The board of directors, C-suite and empowers you to act in its best interest. senior management share responsibility for the development and governance of the risk appetite framework. Risk Appetite Framework The framework is reinforced by strategic and operational A risk appetite framework comprises all activities utilized policies, guidelines, statements, processes and governance. to determine risk appetite, monitor actual risk taking Monitoring adherence to the organization’s risk appetite is a responsibility shared by all staff.

Principles of a Risk Appetite Framework Figure 2 Refining an Organization’s Risk Appetite Once guiding principles have been determined, one effective approach to further refine risk appetite is to leverage 1 | Establishing a questionnaire,2 using variations of these questions:

Align with the company’s vision and business strategy. ➊| What are our objectives? Identify risk preferences for all material risks. Objectives likely will be aligned with protecting and Consider diverse interests and objectives of key stakeholders. growing franchise value, maintaining adequate and Use both quantitative and qualitative boundaries, as appropriate. efficient levels of capital, maintaining liquidity to satisfy obligations and achieving target performance. ➋| What are our risk categories, and what is the tolerance for each? 2 | Embedding Common risk categories are strategic, credit, market, insurance, operational and reputational. Tolerance will be high for some, such that they Embed ownership in culture and expectations. are sought out and appropriately managed, while Cascade through the company to achieve understanding low for others, such that exposures are kept to and support. a minimum. Build supporting activities on operating policies and procedures. ➌| What is our attitude regarding uncertainty in Place responsibility for embedding on risk and other management achieving our objectives? committees. ➍| When faced with decision-making, how willing are Provide evidence of strategy and risk appetite alignment. we to put achievement of each objective at risk? Relate risk limits to objectives and stakeholder priorities. Manage risk exposures via practical and actionable methods. The process, demonstrated in Figure 3, will drive focused discussions, ultimately resulting in content for a risk appetite statement. 3 | Governance

Figure 3 Development Process Establish involvement, responsibility and ownership by the board of directors and senior management. Establish roles and responsibilities for monitoring adherence to Establish risk appetite. Create Administer guiding Reassess risk appetite after significant events and review at questionnaire questionnaire principles least annually.

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As Figure 4 illustrates, a rating scale can be used for levels by confirming existing policies, procedures, monitor- certain questions whereby, for example, “1—Averse” ing and metrics, and by expanding linkages to risk appetite. would indicate zero or near-zero tolerance and avoidance of the risk at all costs, and “5—Tolerant” would indicate a Rooting Risk Appetite in Culture high level of tolerance and acceptance of the risk in order The organization’s risk and other management committees to exploit associated gains.3 have oversight responsibility for assuring risk appetite is The questionnaire should be sent to senior leadership cascaded to all areas and levels of the organization and for completion. Answers should then be aggregated, that appropriate monitoring occurs. These committees summarized and shared for reactions. They can be shared also are responsible for making sure business lines have and discussed both one-on-one and in small groups, which action plans if risk exposures breach certain tolerances lend themselves to robust discussion. or limits, and for assuring decisions are consistent with Information gathered through the questionnaire risk appetite. Business units, in turn, are responsible for process and subsequent discussions provides content for determining risk limits, and utilizing and refining existing an initial draft of the risk appetite statement, which can policies, procedures, monitoring and metrics. be iterated to completion with senior leadership. The Risk limits4 are operational controls established at the final risk appetite statement contains the overarching level of the organization that manages risk on a day-to-day sentiment of senior leadership for risk preferences and basis and should be relatively easy to measure and monitor. tolerances, and it serves as a guide for the rest of the They serve a dual purpose: to ensure enough risk is being organization. As denoted by Figure 5 on page 30, risk assumed while also limiting excessive risk taking. Some appetite is cascaded to different organizational areas and risk limits are “hard limits” for which action must be

Figure 4 Risk Appetite Questionnaire

Question 1 Question 2

Many employees have laptop computers, allowing them great What is your appetite for access to customer information or flexibility in how and where they work. What is your appetite for confidential data by the individual who stole the laptop? a stolen laptop (the physical asset)? X 1—Averse 1—Averse 2—Cautious 2—Cautious 3—Moderate 3—Moderate 4—Flexible X 4—Flexible 5—Tolerant 5—Tolerant We have no tolerance for theft of confidential information on the If we had zero tolerance for stolen laptops, we would lock all laptops in laptop; as such, we invest a significant amount of money in a room as employees exited the building. Instead, given the significant industry-leading security software. impact on productivity, we have a high level of tolerance for stolen laptops and issue them to most employees.

Create risk We, the people, Compile Discuss appetite of ABC Insurance Company … responses results statement

29 theactuarymagazine.org | JUN/JUL 19 FEATURE HUNGRY FOR RISK? taken immediately to remediate a breach. Other risk limits are “soft limits” for which monitoring is intended to drive discussion, heighten awareness and influence decision- making—immediate remedial action is not necessary. Making the link between existing practices and risk appetite encourages a culture that operates with a risk management mindset and empowers staff. Employees are accountable for identifying and enhancing programs to keep risk exposures within the organization’s risk appetite, leveraging risk limits and action triggers as needed. With support from oversight committees, frontline staff are responsible for developing and assuring an escalation process exists to ensure appropriate actions are taken commensurate with each breach. In a mature state, staff proactively anticipate potential risk limit breaches rather than react to them.

Practical Applications: Bringing It All Together So, how do actuaries consider risk appetite each day? Per- haps not always explicitly, but they inherently understand uncertainty in achieving objectives and naturally consider For certain organizations, these examples may represent alternatives. The following examples summarize ways in current activities to actively manage risks and monitor which actuaries consider risk appetite, risk tolerances and risk profiles, while for others they may represent oppor- necessary trade-offs in their day-to-day work. tunities to impact the organization’s financial positioning

Figure 5 Risk Appetite Framework

Risk Appetite Policy and Statement A risk appetite policy and statement expand on the company’s principles for embedding and establishing its appetite for risk as well as expectations for 1 governance and management.

Policies and Procedures Business and operational policies and procedures naturally exist 2 to establish risk appetite and guide adherence to it.

Monitoring and Metrics Monitoring and operational metrics employed by each 3 business unit can be continually refined to ensure adherence to risk appetite.

30 JUN/JUL 19 | theactuarymagazine.org The Actuary

quantitative or qualitative, and it may be performed at various levels of granularity. A simple example of a quantitative risk profile assessment is the National Association of Insurance Commissioners (NAIC) risk-based capital (RBC) ratio. This ratio can provide a sense of overall risk exposure, with implications if the ratio is too high or too low. Capital usually is managed to be within a certain range. The range is reflective of risk appetite, and the bookends constitute the risk limits. Monitoring against risk appetite leads to decision-making and actions such as increasing diversification (to improve the capital ratio) or investing in a new product line (putting excess capital at risk to ful- fill the fundamental purpose of an insurance organization). A more detailed quantitative assessment might take the form of a risk limit dashboard. Risk limits should be developed for each major driver of risk, such as mortality, persistency or business mix (see Figure 6 for a basic representation). Color and arrow indicators measure against each stated risk limit (within, watching, outside) against its risk appetite. Regardless, all examples serve as and express trend (improving, unchanged, deteriorating) useful tools to drive discussion, strategy considerations based on the recent past and expectations regarding the and decision-making. future. The dashboard should also drive discussion and action taking—each hard or soft risk limit should have an Example 1: New Business Pricing associated set of actions should a breach occur. Many actuaries focus on new product development and Management may request a more qualitative risk profile pricing, with the goal of achieving an expected financial assessment for a specific business line. It would ideally return. In doing so, assumptions are made, such as consider risk exposures, concern level (high, medium, low) expected business mix (gender, age, etc.). In reality, actual and recent movement (improved, minimal change, wors- business mix always varies from expectations. What are the ened). Management actions (actual or expected) could be reactions to an unanticipated mix of business? What if the summarized, along with their expected impact. Such an greatest proportion of business sold is in the most unprof- assessment empowers ownership and accountability. itable sectors? As new business is obtained, actual characteristics are compared to pricing assumptions to determine the impact on expected future returns. Variances are assessed, and adjustments are made. Voilà! Monitoring and managing Figure 6 Risk Limit Dashboard against risk appetite is achieved. To address new business variances, consider potential actions for altering new business sales and profitability. Risk Limit Assessment Outlook Can underwriting guidelines or premium rates be adjusted? Can commission scales be altered? Does the Mortality company need to stop selling the product? Potential No greater than 110% 99% (within) ▶ Unchanged A/E actions fall along a broad spectrum from less severe to more severe. Persistency 91% No less than 90% ▲ Improving A/E (watching) Example 2: Risk Profile Assessment/Dashboard A risk profile assessment is a point-in-time review of Business mix the organization’s risk exposures measured against its No greater than 60% 65% (outside) ▼ Deteriorating (% male) risk tolerances and limits. The assessment can be either

31 theactuarymagazine.org | JUN/JUL 19 FEATURE HUNGRY FOR RISK?

Figure 7 Sensitivity Testing

Mortality Claims Incidence Persistency

$11 Million $15 Million $3 Million Watching Outside risk appetite Within risk appetite

The dials represent the impact of sensitivity tests for mortality, claims incidence and persistency on expected results. Sensitivity tests have been calibrated to one-in-20 year events. The relationship of the impact to risk appetite is represented with colors—green (within), yellow (watching) and red (outside).

Example 3: Sensitivity Testing Establishing a clear link between what actuaries do and Sensitivity testing is used to understand potential volatility the importance of helping our organizations operate of future results and to inform and monitor risk appetite within their risk appetite increases the likelihood of and risk limits. Individual sensitivity tests can be created fulfilling organizational objectives, strategy, vision and for key risk exposures calibrated to a similar likelihood. values. The value to our profession and our industry lies For example, a sensitivity test on mortality reflecting a in shifting from a reactive approach to a proactive one one-in-20 year occurrence (i.e., 5% likelihood in a given with respect to risk appetite and potential breaches. year), could be applied to understand impact on expected results, reserves and/or capital. After applying similarly calibrated sensitivity tests for all key risk exposures, management can use this information to define risk appetite. After References 1 CRO Council and CRO Forum. Establishing and Embedding Risk Appetite: Practi- risk appetite has been identified, sensitivity testing can tioners’ View. CRO Council and CRO Forum, December 2013, http://crocouncil.org/ then be used to determine if expected volatility falls within images/CRO_Forum-Council_ Risk_Appetite_FINAL.pdf (accessed March 21, 2019). 2 Acknowledgment to the Gartner Risk Management Council for guidance. risk appetite. Figure 7 illustrates the impact of sensitivity 3 Ibid. results and their relationship to risk appetite. 4 Supra note 1.

Example 4: Economic Capital ABOUT THE WRITERS A frequently used metric for risk appetite is economic capi- REBECCA B. SCOTCHIE, FSA, MAAA, is a principal at Oliver tal. Determining economic capital requires considering the Wyman in Atlanta, Georgia. She can be reached at entire organization’s balance sheet and indicates the total [email protected]. level of assets needed to assure solvency through extreme yet plausible events. The calculation builds on sensitivity CHRISTOPHER H. MURPHY, ASA, is a consultant at testing for individual risks and aggregates results with Oliver Wyman in Atlanta, Georgia. He can be reached consideration for diversification. Measuring and managing at [email protected]. economic capital within a certain range is how many organizations understand and manage their risk appetite.

Conclusion The views or opinions expressed in this article are those of The concept of risk appetite may not be in all actuaries’ the authors and do not necessarily reflect the official policy or position of Oliver Wyman. vocabulary; however, it is inherent in their practice.

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FORCE OF NATURE BY FEI XIE Why and how to include climate change in the risk management framework

34 JUN/JUL 19 | theactuarymagazine.org The Actuary

he boards of directors for many corpora- activities. These activities span across tions received an alarming and surprising many sectors of the economy, including note in their quarterly management those that are carbon intensive, making update reports: California’s largest utility these investment assets susceptible to T and one of the United States’ largest climate-related risks. The physical impacts investor-owned electric utilities, Pacific of climate change pose a direct risk to the Gas and Electric (PG&E), was filing insurance company or pension fund’s own for bankruptcy. Many companies have operations. Climate change also poses financial exposures to PG&E through indirect risk to the insurance company or investments, accounts receivable or pension fund’s assets as we transition to secondary exposure, and the risk analysis a low-carbon economy, which can lead to would include credit analysis and scenario a combination of higher credit risk from testing to measure potential exposures. potential asset impairment/write down For such a large and stable organization (e.g., reduced repayment capacity or credit to declare bankruptcy would shock many. downgrade) and higher market risk (e.g., However, a January 2019 headline in The depreciation of company or security valua- Washington Post summarized the story tions or reduced value of collateral). Assets well: “Pacific Gas and Electric is a com- in real estate, infrastructure, agricultural pany that was just bankrupted by climate and brown energy businesses are partic- change. It won’t be the last.” ularly at risk. Potential financial impacts Risk management related to climate could also stem from reputational risk as change can broadly be broken down into a result of negative publicity as well as two categories: regulatory fines. To maintain financial health and pro- ➊| Disclosure tect the interests of policyholders and ➋| Managing financial impacts from shareholders, companies must assess their climate change exposure and maintain a high degree of resilience to climate-related risks. Disclosure is a powerful tool to eval- This article focuses on insurance com- uate how a corporation assesses, prices panies and pension funds, although many and manages climate-related risks. Most of the concepts also apply to financial companies are focusing on disclosure institutions in general. It does not intend now, as it is the key to address investor to address specific insurance risks as a result and customer awareness, and demand for of climate-related events stemming from more information related to the impacts P&C insurance coverage or pandemic of climate change. risks. The discussion focuses on the gen- While the full financial risks from cli- eral concepts of how climate change can mate change may crystallize over longer impact insurance companies and pension time horizons, they are becoming ever funds, in particular on the asset side. more apparent. Global insured losses from natural disaster events in 2017 were Climate Change Background the highest ever recorded.1 The financial Climate change refers to changes in impact from climate change is not unique weather severity, weather patterns, heat- to the property and casualty (P&C) insur- ing/cooling of the planet, migration of ance industry—it potentially can affect all species and vector-borne illnesses. Sustain- financial institutions on the asset side. ability risk is another term generally used Insurance companies, pension funds, in a broader sense that can also include banks, asset management and other societal aspects such as reducing poverty, financial institutions are all involved with increasing diversity and equality, and so on. a wide range of financing and investment See Figure 1 on page 36 for more details.

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Financial risks from climate change Climate-related developments in policy Figure 1 Climate Change Versus Sustainability arise through two primary channels or and regulation Risk and Everything “risk factors”: physical and transition The emergence of disruptive technology in Between (see Figure 2).These factors manifest, or business models for example, as increasing underwriting, Shifting sentiment and societal preferences reserving, credit or market risk for firms. Evolving evidence, frameworks and Sustainability risk refers to Physical risks from climate change legal interpretations the uncertainty in being able can be related to specific weather events to maintain business (such as heat waves, floods, wildfires and This could prompt a reassessment of operations and sustain the storms) and longer-term shifts in climate the value of a large range of assets and growth of the corporation (such as changes in precipitation and create credit exposures for banks and due to negative externalities extreme weather variability, rising sea other lenders as costs and opportunities such as environmental levels and rising mean temperatures). become apparent. degradation, social risk Physical risk is generally better Climate change also has a third risk issues and climate change. understood compared to transition risk. that is not a focus of this article: liability. Transition risks can arise from the process Liability risk2 is related to the important Environmental and social of adjustment toward a low-carbon econ- question: “If future generations suffer risk is the risk of loss from omy. This adjustment is influenced by a from severe climate change, who will they an environmental or social range of factors, including: hold responsible?” issue. Environmental and social risk issues include site contamination, waste management, land and Figure 2 Details on Climate Change Risk Types resource use, biodiversity, water quality and availability, Risk Type Potential Impacts climate change, environmental regulation, human rights, indigenous peoples’ Impact on insurance liabilities rights and consultation, and Damage to physical assets Physical community engagement. Disruption to business operations, transportation and supply chains Increase in health-related costs Environmental risk is the Depreciation of company or security valuations risk of loss from direct or Viability of business models indirect negative impacts Markets Credit rating implications of environmental events, Asset depreciation including those related to physical impacts of climate change and the shift toward Write-offs for investments in disrupted technologies a lower-carbon economy. Technology Increasing need to invest in new, cleaner technologies These events may include Transition Business process change costs to accommodate new technologies increased frequency and Compliance costs severity of natural or human- Policy Obligation due to cap-and-trade/carbon tax programs made environmental disasters, and legal and emerging regulatory and Restrictions and limitations on carbon intensive assets public policy developments. Damage to brand value or reputation resulting in lost revenue Reputation Additional expenditure (e.g., corporate affairs, litigation, etc.) is Climate change risk Positioning with investor coalitions demanding greater disclosure the risk of loss resulting from adverse impacts of Impacts that could arise in the future as parties who have suffered a loss from the Liability climate change. effects of climate change seek compensation from those they hold responsible

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Climate-related Disclosure Figure 3 Stakeholder Expectations and Requirements for Climate Investor, regulatory and stakeholder and Sustainability Reporting and Disclosure expectations continue to evolve around climate change risk management. For climate change risk, disclosure is the key. Although carbon emission and climate- related disclosures began in early 2000 among some corporations, they were initially considered a “nice-to-have.” The focus when the disclosure of these risks started was to mitigate potential climate-related reputational risk. Industry Voluntary One of the major milestones for climate United Nations Ratings Agencies change disclosure occurred in December Associations Reporting

2015, when the Financial Stability Board Carbon Disclosure Canadian Life and United Nations Sustainalytics (FSB) established the Task Force on Health Insurance Environment Project Climate-related Financial Disclosures Association Programme Financial Initiative (TCFD) to develop voluntary, consistent International CSRHub Integrated Reporting climate-related financial risk disclosures Chartered Adaptation Private Framework for companies to use when providing Professional Accountants Canada Sector Initiative information to investors, lenders, Bloomberg Sustainability insurers and other stakeholders. The Sustainable Accounting TCFD recommendations released in Development Goals Standards Board Institutional June 2017 focused on enhancing market Shareholder Services Inc. transparency and enabling the efficient Principles for Greenhouse Gas Responsible Protocol allocation of capital in the transition to a Investment low-carbon economy as envisioned by the MSCI Inc. GRESB Paris Climate Agreement. More than 580 The Global organizations are supporting the TCFD Company as of February 2019, with new supporters Global Reporting being added on a continuous basis. Initiative Mandatory greenhouse gas (GHG) reporting, also known as mandatory Task Force on carbon reporting, is the law in 40 coun- Climate-related Financial tries across the world, including the Disclosures United Kingdom, many EU member states, Canada, the United States, Mexico, Australia, Japan and South Africa (as of 2018). In the United Kingdom, publicly listed companies are required to account for their GHG emissions as part of their annual financial reporting, while EU GHG reporting is included within nonfinancial reporting. However, the GHG reporting qualification varies across jurisdictions. Examples of the global landscape of climate and sustainability reporting and disclosure are shown in Figure 3, and the list is expanding fast.

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Regulatory (the Academy)—is Requirements to an indicator of the Manage Financial frequency of extreme Impacts From weather and the Climate Change extent of sea level The requirements change in the United of managing States and Canada. It climate-related risks The Actuaries Climate Index is an indicator of the shows the five-year are evolving rap- frequency of extreme weather and the extent of sea moving average of idly, with increasing level change in the United States and Canada. climate extremes expectations from and sea level across regulators that the United States insurance companies and Canada reached have a strategy for the management of the financial risks a new high with data released for winter 2017–2018. associated with climate change. Increasing values in the index point to increased occur- In the United States, the California insurance commis- rences of extreme climate events. sioner released the results of a new analysis of the climate Climate change risk is no longer something on the hori- risk exposure faced by investments held by the insurance zon—it is arriving. Failure to properly plan for and react industry. The California Department of Insurance is the to climate change could lead to more incidents similar to first financial regulator to undertake an analysis of both the PG&E event. There is a real urgency to address climate-related physical risks and transition risks faced climate-related risk within a company’s risk framework. by insurers’ assets. To effectively manage climate change risk, a company In the United Kingdom, the Prudential Regulatory needs to establish a holistic view of how climate-related Authority recently released a consultation paper on events may have impacts across the enterprise (e.g., by climate change risk on four main areas: governance, business segment, product line, investment portfolio, risk management, scenario analysis and disclosure. geography, local regulatory requirements, risk type, In Canada, the Canadian Securities Administrators etc.) and identify plausible mitigation actions. This also (CSA) is developing guidance and considering new dis- facilitates the development of appropriate climate change closure requirements relating to climate-related risks, and stress scenarios for scenario analysis that can be used to the Office of the Superintendent of Financial Institutions assess a company’s resilience and vulnerabilities to poten- (OSFI) expects insurers to develop a strategy for manag- tial climate change events. ing climate change risk. Effective management of climate change risks requires In summary, with increasing focus from stakeholders integration across all elements in the risk management and regulators on formalizing requirements for dis- framework, tailored to an individual company’s system closures and the measurement of climate change, the of risk management (see Figure 4). insurance industry and pension funds should review their current practices and consider adopting a more holistic Integrating Climate Change Into a Risk approach, incorporating climate-related risk into their Management Framework risk management frameworks. Climate change can be integrated into a risk management framework in three ways. These potential routes mainly Determining Level of Exposure focus on climate change, but they could be extended for The velocity of change and potential exposure magnitude the broader sustainability risk: should be considered in addition to each company’s specific system of risk management in addressing climate- Option 1. Recognize climate change risk is a key risk related risk. The scientific community continues to point similar to insurance, market and credit risks. to growing evidence of the likelihood and severity of sig- Option 2. Recognize climate change affects financial nificant warming of the planet. The Actuaries Climate risks as well as nonfinancial risks such as operational risk. Index—sponsored by the Society of Actuaries (SOA), Option 3. Recognize climate change could fit into a Canadian Institute of Actuaries (CIA), Casualty Actuarial company’s risk management framework as a new sub- Society (CAS) and the American Academy of Actuaries risk category under an existing key risk category.

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See Figure 5 on page 40 for a visual representation of Option 1: Climate Change Risk as a Stand-alone these three options. and Separate Key Risk For companies with a relatively mature risk manage- Figure 4 Example of a Risk Management Framework ment framework, this is a fairly straightforward approach to leverage the existing infrastructure already in place for financial and other key risks. It involves establishing Governance appropriate policies and standards, as well as risk appetite and limits associated with climate change risk. One of the Board and risk committees biggest benefits of this approach is that there will be clear Management risk committees governance as well as roles and responsibilities associated Mandates/risk policies/procedures with the management of climate change risk. On the other hand, climate change itself is less likely to Risk Strategy and Appetite cause direct financial losses for insurance companies or pension funds. Rather, it is more likely to be experienced Risk strategy: Risk philosophy of the corporation that links through interactions with other key risks. This could to the business strategy create challenges in establishing and implementing a Risk appetite: The level of risk and types of risk the corporation specific risk identification related to climate change and an is willing to accept in order to achieve its business objective identification, measurement, management, monitoring and reporting (IMMMR) process. It also may not be the best approach for identifying potential impacts to the other risk Risk Process types within the existing risk processes.

Identification → Measurement → Management → Monitoring → Reporting Option 2: Climate Change Risk Embedded Within Existing Risks System and Data This option addresses and embeds climate change risk within the existing risk processes, reflecting the close interaction among climate risk and existing key risk Risk Culture and People types (e.g., credit, market, insurance, operational and reputational risk). Under this option, a company can establish credit limits associated with any carbon- Risk Taxonomy intensive industries or minimize investing assets in real estate located in areas exposed to rising sea levels for a Market Credit Insurance Operational given asset portfolio. The monitoring and reporting of

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Figure 5 Three Options to Integrate Climate Change Into a Company’s Risk Universe

Climate Change Credit Market Insurance Operational Other Key Risks (Option 1)

Fixed income Climate change risk Interest rate risk Mortality risk Fraud risk investments risk (Option 3)

Reinsurance and derivative Equity risk Lapse risk Process risk counterparty risk

Other subcategories Other subcategories Other subcategories Other subcategories as applicable as applicable as applicable as applicable

Climate Change (Option 2) such limits also can become part of the existing use of emerging technology, agile business practices risk processes. and increasing reliance on suppliers are also growing. However, this approach could potentially mean a very The overall universe of emerging risks is expanding large number of existing processes or procedures will (e.g., cyber, technology, supplier, fraud), and regulatory need to be updated or enhanced to reflect the inclusion requirements continue to grow around conduct risk, pri- of climate-related risk. The governance and monitoring vacy legislation, customer-focused outcomes and so on. of the climate-related risks also could become frag- These risks have similar characteristics to climate mented, and it could become challenging to maintain change risk and bring similar challenges to a corporation. consistency between the risk limits and the overall risk In developing its risk management framework for climate- appetite and strategy around climate change risk. related risk, each corporation also should consider how it can effectively incorporate new risks, evolving risks Option 3: Climate Change Risk Embedded Within and new regulatory requirements in a broader sense. The an Existing Risk Type adopted approach should be a balance of offering offen- For companies with a relatively lower material or a sive capability while ensuring increased alignment with narrower potential exposure to climate-related risks, it the business’ strategy to aid in better decision-making might be sufficient and more efficient to address the risk and create more value. by creating a new subcategory under existing key risks. Strategic risks, insurance risks and operational risks could be some of the potential options. This is probably the References 1 Bevere, Lucia, Marla Schwartz Pourrabbani, and Rajeev Sharan. Sigma 1/2018: least “onerous” option compared to the other two options. Natural Catastrophes and Man-made Disasters in 2017: A Year of Record-breaking However, there could be the potential limitation of the Losses. Swiss Re Institute, April 11, 2018, https://www.swissre.com/institute/ research/sigma-research/sigma-2018-01.html (accessed April 5, 2019). comprehensiveness and lack of clarity on the definition of 2 An example of liability risk is when investors back a business that goes on to suffer the risk itself, as well as the effectiveness of the underlying a loss due to climate-related events. There may then be a question as to whether the business had provided enough information about its exposure to these risk processes. climate-related financial risks. If investors feel this information had not been provided, they might make a claim against the business. Liability cases could also include people who have suffered from physical events, such as flooding, making Final Considerations—Efficiency and Optimization claims against companies they argue are, at least in part, responsible. Financial institutions are undergoing major disruption. Insurance business models have been relatively insulated, but the pace of change is accelerating and not expected to slow down. Advanced technology, data and digital capa- ABOUT THE WRITER bilities are growing exponentially, driving lower costs and FEI XIE, FSA, FCIA, is director, Risk Reporting and Analytics, at enhancing customer experiences. But at the same time, Great-West Life in Toronto, Ontario, Canada. She can be reached nonfinancial risks stemming from the pace of change, at [email protected].

40 JUN/JUL 19 | theactuarymagazine.org September 19–20 Philadelphia, PA

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20190418_PA_Ad_final.indd 1 4/18/19 12:48 PM FEATURE Sharpen Your Skills Actuaries have the opportunity to extend their technical skills to all aspects of health care

BY KURT J. WROBEL

Skate to where the puck is going, not to where it has been. —Wayne Gretzky, former National Hockey League player, Hall of Fame member

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imilar to hockey players who need to understand where the puck is going in order to be successful, actuaries need to understand where the health care industry is headed in order to develop skills that will be needed in the future. While hard work and exam success are prerequisites, the S extent of your success is connected to where you place your effort and how those skills will be valued in the market. A focused effort on the most highly sought-after skills of the future is much more likely to produce success than a blind focus on skills that may have been I more highly valued in the past. This article will focus on several broad themes that affect the health insurance market and how these changes will impact the needed skills and career prospects for those in the actuarial profession.

The Health Insurance Market: Where the Puck Has Been Historically, most health insurers were stand-alone companies where provider discounts, administrative costs and customer service primarily drove an insurer’s success. With these capabilities, health insurers provided services similar to insurers in other lines of business—they offered financial protection for people and organizations against higher-than- expected medical claims. In most environments, a competitive market drove down rates and helped ensure relatively modest operating margins for most insurers. In addition, regulators focused on the application of rating rules to help assure the financial solvency of the organization offering insurance products—all in keeping with their mandate to protect consumers and ensure sufficient financial protection in case of insurer failure. In this environment, actuaries distinguished themselves as the lead risk managers in health insurance. We help our organizations achieve their expected margins through accurate premium rate and trend development, ensure an accurate accounting of our organizations’ financial performance through reserve estimates, and protect the long-term financial sustainability of the insurer. This has been and will be a major part of our mission as actuaries. We need to be effective risk managers; we need to use our analytic skills to develop accurate premium rates; and we need to base our actuarial opinions on actuarial standards of practice. This professional approach to important financial decisions has helped health insurers, for the most part, remain stable, and provide financial protection for people during the most vulnerable times of their lives.

The Health Insurance Market: Where the Puck is Going Things are changing, however. Instead of being a stand-alone insurance company, many insurers are becoming increasingly connected to organizations that provide care through all aspects of the delivery system, including hospitals, physicians and pharmacies. Even if there isn’t a direct connection, many insurers are developing risk-based arrangements with provider organizations that are blurring the distinction between insurance companies and providers.

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Through these combinations and arrangements, orga- health insurance more affordable is a critical aspect of nizations are attempting to address the United States’ the changes occurring in the market. With these changes, affordability challenge by creating integrated organiza- actuaries have a unique opportunity to help drive change tions focused on reducing medical costs while providing by using analytic skills to find savings opportunities. In high-quality care. Unlike the existing fee-for-service order to lead, we will need to develop our knowledge in system, these organizations have a financial incentive all aspects of the health care delivery system—including to reduce medical costs because of the risk arrangement an in-depth knowledge of the how care is delivered, the inherent in an insurance product. contracting process with providers, and techniques that This change should be exciting for actuaries. We can can better manage utilization. participate in helping to solve one of the most prevalent An ability to drive operational change with problems in our country, while also continuing to analytic findings will become a more important maintain our primary role as the lead managers of risk skill. In many of our historical roles, we focused on risk in health insurance. management, premium rate development and reserve In addition to the combining of insurance payers estimates. While these are important activities, in many and providers, we are seeing more regulatory complex- cases this work focused on estimates where operational ity across all lines of business—including Medicare, change was not required. A premium rate, for example, Medicaid and the Affordable Care Act (ACA) market- could be developed and then filed with an insurance place—with the very real possibility of more change with department without requiring significant operational the further expansion of Medicare to a broader popula- changes within an organization. With the increasing tion. The rules are complex and can have wide-ranging focus on health care affordability and improved per- impacts on the financial and operational success of formance from the health care delivery system, we will an organization. need to develop analytic insights—but we also will need Over the last several years, we also have seen a sig- to ensure we can drive management change internally nificant increase in computing power and the volume by connecting observations with tangible actions that of data available to analyze. More and more people are improve performance. attempting to analyze this data through a variety of Effective communication regarding all aspects methods ranging from sophisticated modeling tech- of health care, including the health care delivery niques employed by data scientists to less sophisticated system and insurance concepts, will be critical for approaches employed by people attempting to justify a our profession. With insurance organizations becoming decision. This shift has been accelerated by books and more connected with providers, actuaries will need to articles that highlight the “big data” success stories from improve how they communicate technical topics to these big-name companies like Amazon and Google. audiences. While this need has long been understood, it will become increasingly important as new people and How to Skate to Where the Puck Will Be organizations are introduced to our complex industry. With the inevitable change to a stronger connection Beyond clear communication of complex topics, we between insurers and provider organizations, we also also need to tell stories that connect the elements of the need to think about how our profession can be more delivery system with insurance and the final product sold effective in driving results in these new organizations, to consumers. Considering the complexity across this where regulation has become more complex and the data entire continuum from the delivery system to insurance, more accessible. this skill to develop overarching stories that address While the following bullet points offer some thoughts complex topics (while avoiding needless details) will be on how to think about this environment, it is by no means important when communicating to a broader audience. an exhaustive list. Regardless, as one thinks about career Risk management will be different as providers prospects, it is important to have a viewpoint on where and larger organizations take on insurance risk. As the industry is going to help guide career experiences and providers accept more risk through a variety of arrange- skill development. ments, it will be important for them to fully understand the financial implications of the risk deal and then have A broad knowledge of the health care delivery the ability and willingness to make operational changes system will become increasingly important. The based on the results of the risk taking. The ability to continued focus on reducing medical costs and making draw this connection between understanding the initial

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It is important to have a viewpoint on where the industry is going to help guide career experiences and skill development.

risk arrangement to making operational change will be This knowledge of the regulatory environment will particularly important for the actuarial profession. also position actuaries to provide key insights into Risk management will also change for larger proposed policy changes. As we have seen with the ACA, organizations that have a delivery system division our observations can be critical in improving policy. combined with an insurance company. In many cases, the financial results of the insurance company could serve as The future is bright for our profession. We stand at a hedge against adverse results in the delivery system. For important crossroads for one of the most pressing prob- example, a particularly light flu season could benefit the lems in the United States—high medical costs. While insurance company (and members), but adversely impact our historic position as risk managers will continue to the financial results of the delivery system assets. As we be important, we also have the opportunity to extend consider the risk implications across the entire enterprise, our technical skills to other aspects of heath care. This this natural hedging mechanism must be considered. challenge to develop approaches to reduce medical costs A detailed knowledge of complex regulatory rules will most likely will be met by people with a broad knowledge differentiate actuaries relative to other professions of the regulatory environment, strong analytic skills, (data scientists and economists) where analytic skills an intuitive knowledge of risk, and the ability to execute are primarily emphasized. The trajectory in health and drive operational change. While many in our pro- insurance is toward more complex regulations, particularly fession will find success in purely technical fields, the in the lines of business with the greatest growth (Medicare, changes in the health care industry will allow others in Medicaid and the ACA marketplace). With this continued the actuarial profession to succeed as generalists who complexity, actuaries will be able to differentiate them- can apply analytic skills across a broad cross section selves by combining analytic skills with detailed regulatory of challenges. knowledge critical to addressing important financial decisions. In many cases in health insurance, the ability to use ABOUT THE WRITER large data sets and complex modeling to answer a financial KURT J. WROBEL, FSA, MAAA, is the chief financial officer and question is simply inadequate without also having a strong chief actuary at the Geisinger Health Plan. He can be reached at understanding of the regulatory environment. [email protected].

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INTERVIEW BY MARTIN SNOW

Building ERM Buy-in Switching to a value-based approach can result in better decision-making for organizations

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Philip Sherrill, CPA, CIA, CHIE, and Sim Segal, FSA, CERA, recipients of Best Session Award for their 2018 ERM hief risk officers often describe their main Symposium presentation “Building Buy-In: Overcoming the #1 Obstacle to Effective ERM,” share selected insights challenge as a lack of buy-in. Without from their session in this interview. buy-in—from heads of business seg- C ments, executive leadership, the board and external stakeholders—the impact of the enterprise risk management (ERM) Sherrill: When the buy-in isn’t there, you program cannot achieve its full promise probably won’t see management and the of supporting better risk-reward decision- board having meaningful discussions making at the highest levels, starting about ERM, at least not consistently. It’s with strategic planning. Without proper not in their line of sight. The perfor- buy-in, ERM remains useful but limited, mance analytics they monitor may also often supporting only risk mitigation exclude ERM metrics in favor of tactical and capital management decisions. This results. We typically prefer to focus on lack of buy-in is often not the fault of the things we think we can get our arms chief risk officer (CRO), but rather due to around. That’s where the value-based inherent flaws in the most popular ERM approach comes in. approach, which is capital-based. In this interview, Philip Sherrill, CPA, Snow: What are some of the causes of CIA, CHIE, and Sim Segal, FSA, CERA, this lack of buy-in? recipients of Best Session Award for their 2018 ERM Symposium presenta- Segal: One of the main causes is a tion “Building Buy-In: Overcoming the capital-based ERM framework—one #1 Obstacle to Effective ERM,” share that defines risk as an event that results selected insights from their session. They in a decrease in a capital ratio such as explain how switching to a value-based risk-based capital (RBC). A capital-based ERM approach overcomes the limitations framework results in a disconnect of a capital-based approach, achieves between the ERM program and the stra- buy-in, paves the way for the ERM tegic plan, incentive compensation and program to expand its reach and engages decision-making. To gain buy-in, orga- the CRO in the organization’s most nizations must adopt a value-based ERM important decisions. framework, which defines risk as an event causing a deviation from achieving the Snow: What are some of the symptoms results expected in the strategic plan. of an ERM program that may be lacking buy-in? Snow: How is value-based ERM better at achieving buy-in? Segal: One sign of a lack of buy-in is when ERM has limited purview, such Segal: A value-based ERM program as not being adopted across all business begins with a focus on achieving the segments or not being applied across all strategic plan goals, which is something sources of risk. An example of the latter is everyone in the organization cares about. that many ERM programs are not really So, right off the bat, you have buy-in, ERM, but rather financial risk management because your entire focus is helping (FRM) because their scope is limited to others increase the likelihood of achieving financial risks. Another indication is when their goals. Another aspect of value-based ERM information is not used to inform ERM that helps with decision-maker routine business decisions. buy-in is that it measures both downside

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and upside volatility. This allows value- and members of the board. We’re in our based ERM to support routine business third year, and I see more enthusiasm and decision-making, because it provides engagement today because we’ve stayed information on both the risk and reward the course and kept them involved. We sides of decision-making. brought a broad range of disciplines into the process from the start, and we Sherrill: For our organization [Arkansas got everyone on the same page in terms Blue Cross and Blue Shield], ERM is of understanding how to think and talk becoming the “golden thread.” It pro- about risk in a consistent way. vides the needed discipline to tie together objectives, risks, strategies and tactics. Snow: It’s clear that engaging the right All roads lead to and from the strategy. people is critical. What insights would It forced us to explicitly examine the you like to share about the QRA assumptions in our strategic plan. We methodology? had to reach a consensus on what they were and what they meant. That benefit Segal: The most common methods for alone strengthened our commitment to the QRA are: the strategy, and it continues to help us mature our ERM culture. Open small-group facilitated discussions Individual surveys sent to participants Snow: If an organization were to to complete employ a value-based ERM framework, how would its approach to risk Unfortunately, both methods have identification differ, and how would inherent problems. The open small- There is no replacement it generate more buy-in? group interviews are often skewed by a for face-to-face single leader in the group. Also, partici- interaction. Segal: The central activity of risk identi- pants often feel uncomfortable revealing fication is the qualitative risk assessment certain key risks in a nonconfidential (QRA), which typically involves surveys to environment. Individual surveys sent to identify key risks. Often, the QRA survey participants can damage relationships, participants are limited to a small group, because this method is impersonal. This sometimes even restricted to just the can be the first interaction with ERM corporate area. This limits the oppor- and what do they see? An email in their tunity to advance the organization’s risk inbox assigning them a task to complete culture and gain buy-in, because only a on their own. Also, the level of effort is handful of individuals are learning how inconsistent—some participants give it to think about risk in an advanced way. serious attention while others just rush Instead, QRA interviews should be con- to get it done—so the results are incon- ducted with a group of two to three dozen sistent. Finally, the quality is typically low, participants who have broader inclusion because there are several tricky aspects to horizontally—corporate, the business ERM, and written instructions are often segments and key functional areas—and misunderstood or not even read. vertically—the C-suite, business segment To address these issues, leading ERM leaders and their lieutenants, and some programs use individual, confidential mid-level leaders. face-to-face interviews for their QRA. There is no one else present to influence Sherrill: This was important for our opinions. There is also confidentiality to ERM program. We achieved a high level create a safe space to share all key risks. of engagement because we included This method can enhance relationships executive staff, subject-matter experts because it is personal—you are participating

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along with them. There is a consistent way from the start. Both leadership and the level of effort, because all participants are board valued the guidance and direction. spending an equal amount of time in the interview with you. Finally, there is a high Snow: You mentioned there are some level of quality, because you are present tricky aspects to defining risk in a to guide them interactively—in a Socratic value-based ERM context. Can you way—through the challenging aspects. share an example?

Sherrill: There is no replacement for Segal: Unfortunately, in most ERM face-to-face interaction. I can’t stress that programs, risks are not always defined enough. You enhance clarity. You build by their originating source. This causes relationships. You build trust. We created confusion in the QRA scoring of like- a safe environment for people to offer lihood, because there is no consistent When you implement a value-based ERM guesses and opinions, to disagree, to offer context. For example, “reputation risk” is approach, you become alternatives. I really like this about the often labeled as a risk and scored in QRA involved in the most value-based ERM approach: It’s not just surveys. The problem is that there are important conversations about the numbers and how you score the many different sources of risk—for exam- and decisions in risks and model the dollars. It recognizes ple, poor product quality, poor customer the enterprise. the importance of the people participat- service, internal fraud and so on—that ing, building relationships and enhancing can rise to the level where they trigger the risk culture—which includes creating negative media coverage and then repu- a consistent risk vocabulary and how we tational damage, subsequently decreasing socialize it. We needed a jump-start for revenues and/or increasing expenses our program, which is why it was critical and/or cost of capital. Without specifying for us to engage the right external ERM a single specific risk source, each QRA partner—seeking out and engaging deep participant may be imagining a different ERM expertise helped us set the right source and context, and the likelihood foundation and implement it the right scores are then aggregating results that

49 theactuarymagazine.org | JUN/JUL 19 FEATURE BUILDING ERM BUY-IN

are not scoring the same risk event. In contrast, in a value- based ERM approach, risks are consistently defined by their originating source, allowing all QRA participants Getting the source right from the to score the likelihood for the same risk event.

start is integral to clarifying what Sherrill: I agree. Getting the source right from the start is a “risk” and what is not. is integral to clarifying what is a “risk” and what is not. It’s central to how we think and speak about risk. At one point, we were focused mainly on the outcomes of risk modeling and lost sight of what was driving the scenarios, the sources of risk. It has continued to advance our risk culture and the kinds of risk conversations we have with leadership.

Segal: Failure to consistently define risks by source also can cause problems in the QRA scoring of severity, because it can omit another set of impacts downstream from the originating source. The missing set of impacts could be exacerbating or offsetting, but either way, this results in misestimation and suboptimal results. See Figure 1 for an illustration of this concept.

Sherrill: This is another aspect of the value-based ERM approach I like. We’re talking about plausible events, real-world possibilities. We focus on creating a complete and holistic real-world scenario of how a risk event might happen and all of its downstream consequences. It’s more realistic and more useful than mere stress tests, which are often hypothetical and rarely happen exactly as predicted in real life. We need to deal with the consequences of the real world, so I need risk scenarios that simulate that. This builds buy-in, because the scenarios are credible. It describes the way things could really happen, and it reso- nates with decision-makers.

Figure 1 Identifying Risk Source to Capture All Downstream Impacts ➊ Risk Source ➋ ➌ ➍ ➎

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Snow: How is buy-in enhanced with How can we make the business case value-based risk quantification and for doing the things we know need risk decision-making? to be done?

Segal: One of the themes I return to Sherrill: These were definitely questions repeatedly is the importance of practicality our leaders were asking, among others. It in ERM modeling. Many ERM models are allowed us to gain a deeper understanding overly complex, resulting in an unaccept- of our strategic plan and its likelihood of able level of model risk. Value-based ERM success. It helped us identify and more models are robust enough to rely on when rigorously evaluate alternate strategic making decisions, but they are designed decisions. It adds CROs to the equation. with a clean and nimble structure to When you implement a value-based minimize model risk. Finally, ERM models ERM approach, you become involved in often have esoteric constructs that cannot the most important conversations and be explained simply and clearly to man- decisions in the enterprise. Being able to agement. As a result, management is not bring ERM information to the table that comfortable enough with the model to use truly informs routine business decision- it in major business decisions. Value-based making, from strategic planning on ERM models involve straightforward con- down—that’s exciting. cepts that are transparent to management, generating trust, buy-in and reliance on Conclusion Value-based ERM the models to support key decisions. The lack of buy-in that relegates capital- models involve based ERM programs to supporting straightforward concepts Sherrill: For our organization, that trans- only mitigation and capital management that are transparent to lated into a model tailored to our business decisions can be overcome by switching management, generating that aggregated results in a way that was to a value-based ERM approach. With trust, buy-in and reliance meaningful to our leaders when making the right ERM methodology, tactics and on the models to support decisions. What helped build that level of implementation, CROs can gain buy-in, key decisions. connection was an ability to socialize the broaden their impact and be dealt into results and to explain the basic workings the conversations that inform the most of the model in a way everyone could powerful risk-reward decisions in the orga- understand. The value-based ERM model nization, starting with strategic planning. also demonstrates the power of real-time “what-if” modeling, which is nimble, relevant and responsive to leadership’s ABOUT THE INTERVIEWER needs. This was critical to embedding the MARTIN SNOW, FSA, MAAA, is vice president methodology into the fabric of the and chief delivery officer at Atidot, a provider decision-making process. of predictive analytics solutions to the life insurance industry. He can be reached at Segal: Another key to gaining buy-in is [email protected]. that the value-based approach goes far beyond just measuring the threats to the ABOUT THE INTERVIEWEES capital ratio. It allows us to answer more PHILIP SHERRILL, CPA, CIA, CHIE, is vice president and chief audit executive at Arkansas interesting questions, such as: Blue Cross and Blue Shield in Little Rock, Arkansas. He can be reached at pesherrill@ What obstacles are in the way of arkbluecross.com. achieving the strategic plan? What is the likelihood of achieving our SIM SEGAL, FSA, CERA, is president of SimErgy strategic plan goals, and how can we Consulting in Manhattan. He can be reached at improve our chances? [email protected].

51 theactuarymagazine.org | JUN/JUL 19 EXPERT ADVICE Take the Leap Q&A with Bill Rearden, ASA, MSc, MA, I also gained proficiency in Mandarin Chinese during my co-founder and CEO of Ironbound time there. Consulting Group As a CEO, what is your definition of leadership? What is the most interesting and My driving philosophy in life is: We rise by lifting others. rewarding aspect of your job? I approach every aspect of leadership with how I can As co-founder and CEO of Ironbound Consulting help lift others to achieve the success they desire. For me, Group, a boutique strategy consulting firm on leadership is about leveraging access to remove barriers Wall Street, we created dream jobs for ourselves and expedite forward progress. Successful leadership and our team. Our company’s core mission is to must inspire people to pursue their passions and be the help build a better world, so everything we do best version of themselves. generates positive outcomes. The most rewarding aspects of my job are the How do you help decision-makers and life experiences that come with being an entre- entrepreneurs take calculated risks? preneur. It is beyond my wildest dreams. In just Many executives make crucial strategic business decisions a few years, our organization’s brand awareness based on gut feelings. Much of the information they has grown tremendously. As a result, our network receive is around expected results enveloped between effect has enabled us to work with celebrities, best and worst case scenarios. When founding Ironbound fortune 100 CEOs, and their board members. Consulting Group, we wanted to expand this simple My advice to actuaries who are curious about static framework into something more dynamic. entrepreneurship is to take the leap; you won’t We are innovators, scaling quantitative back-office analysis regret it. to a wider spectrum of front-office applications. In the coming decade, artificial intelligence (AI) will play a bigger role How have your international travels helped in corporate strategy. We are on the forefront of that change, you to grow as an actuary, leader and enabling our executive clients to make superior decisions. person in general? Traveling has helped me grow as a person by What or who inspires you, and why? connecting with people from different cultures. Walt Disney is my favorite inspirational entrepreneur. He Early in my childhood, I traveled extensively said, “If you can dream it, you can do it.” That is my guiding internationally. During my formal schooling wisdom. I am a big dreamer, and I am not alone. Successful years, I lived in major cities across North America people agree their success boiled down to following their including Toronto, Washington, D.C., and San passion and pursuing their dreams. The most important Francisco. After graduate school, I spent a year takeaway from this article is: If you believe in something in Taiwan as a research fellow working on wholeheartedly, have the passion to fuel the needed ambi- solvency validation related to market risk models. tion, then dream big and go for it. You will succeed!

52 JUN/JUL 19 | theactuarymagazine.org My advice to actuaries READ MORE ONLINE! who are curious about Read the full Q&A at entrepreneurship is to The ActuaryMagazine.org/ Take-The-Leap. take the leap; you won’t regret it.

Bill Rearden can be reached at [email protected]. PHOTO: ROB TANNENBAUM PHOTO: The Actuary INCLUSIVE IDEAS

Passionate about data? Hone your predictive analytics skills in the SOA’s 2019 Kaggle Involvement Program, open now. Individuals and groups are encouraged to participate. The program closes Dec. 31, 2019. Visit kaggle.SOA.org to learn more. Challenge: Accepted

ou don’t often equate home loans with actuarial real prize comes from the learning experience and [being science. However, using advanced statistical and able to] contribute my code to the community.” machine learning methods, Society of Actuaries The SOA’s Kaggle Involvement Program recognizes (SOA) member Carlos Brioso, FSA, CERA, actuaries for participating in these Kaggle competitions, craftedY a data solution that would help low-income con- and it is an opportunity for actuaries to develop and sumers secure home loans. That innovative and inclusive showcase their data modeling skills. Brioso is among the solution earned him the coveted distinction of Kaggle 15 individuals who earned prizes and bragging rights Competitions Master. through the SOA’s 2018 Kaggle Involvement Program. Through Kaggle competitions, participants compete Individuals or teams are recognized if they place in the to produce the best models for predicting and describing top 10% of their competition or achieve Kaggle Compe- data provided by third-party competition hosts. Brioso, titions Master status. who is the director of the Center for Data Science and “It’s important for actuaries to get more involved in Artificial Intelligence at New York Life, now ranks in the data science,” says Brioso. “Actuaries have business acu- top 1% of more than 100,000 data scientists and machine men, but we have to combine it with the ability to handle learning engineers worldwide in Google’s Kaggle com- data. Kaggle is a time commitment, but the skills you gain munity. Reflecting on his participation, Brioso says, “The are worth it.”

54 JUN/JUL 19 | theactuarymagazine.org The Actuary

2018 KAGGLE INVOLVEMENT PROGRAM WINNERS SOA members participated in data science competitions that challenged them to use cutting-edge technology to build models and find solutions with important societal implications, from preventing environmental accidents at sea to ensuring underserved populations have access to fair lending practices. Kaggle is a time commitment, but Congratulations to these members who placed in the top 10% the skills you gain are worth it. of competitors worldwide in these Kaggle challenges. —Carlos Brioso, FSA, CERA, director, Center for Data Science and Artificial Intelligence, Airbus Ship Detection Challenge New York Life Airbus Group Inc. challenged Kagglers to aid in building a model that detects ships in satellite images as quickly as possible to aid in preventing infractions at sea such as environmentally devastating ship accidents, piracy, illegal fishing, drug trafficking and prohibited cargo movement. Santander Value Prediction Challenge In this competition, Santander Group asked participants Final Placement Member Percentile Rank (843 competitors) to identify the value of transactions in order to anticipate customer needs and provide personalized customer service solutions. Maria Wellen, ASA 61 7.236% Final Placement Percentile Members (4,484 Rank competitors) Home Credit Default Risk Home Credit Group’s challenge asked competitors to help Michael Francis, ASA 215 4.795% unlock the full potential of their data to ensure that clients capable of repayment are not rejected and that loans are given Kailan Shang, FSA, ACIA 309 6.869% with a principal, maturity and repayment calendar that will empower their clients to be successful. Joseph Cook-Shugart, FSA 389 8.675% Final Placement Members/Teams (7,198 Percentile Rank competitors) TGS Salt Identification Challenge Several areas of Earth with large accumulations of oil and Carlos Brioso, FSA, CERA 15 0.208% gas also have huge deposits of salt below the surface. To assist in avoiding potentially dangerous situations for oil and Nicholas Garcia, ASA 70 0.972% gas company drillers, TGS asked Kaggle’s machine learning community to build an algorithm that automatically and Joseph Cook-Shugart, FSA 112 1.556% accurately identifies if a subsurface target on a seismic image also contains salt. Matthew Emery, FSA, CERA, MAAA Final Placement 385 5.349% Percentile Allen Gonczol, FSA, MAAA Member (3,234 Rank Corey Lutz, ASA, MAAA competitors)

Yu Lin, FSA, ACIA 390 5.418% Kailan Shang, FSA, ACIA Kailan Shang, FSA, ACIA 304 9.400%

55 theactuarymagazine.org | JUN/JUL 19 The Actuary EDUCATION Different Perspectives on Volunteering

BY DANIEL S. PRIBE

hortly after I The SOA volunteers I knew were yours to create breakthrough ideas. Let’s received my friends and people I greatly respected. explore these ideas a little further. FSA, a friend I was curious about the inner workings approached me of the examination system and wanted Get Out of Your Own Head Sabout volunteering to to be a part of it rather than sit around Most of my SOA volunteer experiences work on the Society of and complain about it. have been as a member of a committee Actuaries (SOA) exams. such as an exam or research POG. Mem- The memories of the It has been roughly two decades since bers of these committees came from grueling exam experience I made the decision to volunteer with the different backgrounds, so there was a were too fresh in my mind, SOA, and I have been fortunate to work healthy diversity of thought. This diver- so I declined for several in a variety of roles. I have written a few sity was sometimes a source of friction months. I was also admit- articles, given a couple of presentations and forced the group members to defend tedly a little peeved with and worked on a couple of project over- their individual opinions and try and the SOA, as I was on the sight groups (POGs). However, the bulk understand the positions of others—to wrong end of one of the of my volunteer work has been with the “get out of our heads,” so to speak. In the redesigns in the exam- exams and education. case of developing exams, these positions ination system. But after I started my volunteer journey writing sometimes took the point of view of the thinking about it more, I exam questions. It was exciting when candidate or the grader, for example. reconsidered and decided I saw one of my questions on an exam. Heated discussions took place as we to join one of the exam I eventually became chair of an exam, determined what was fair yet discrimi- committees. There were Examination General Officer of the nating enough to demonstrate who had two primary reasons for Group and Health track, and ultimately sufficient knowledge and who did not. my change in heart: general chairperson of the Education Similarly, in the case of a research project, Executive Group. I benefitted from all of discussions were had regarding why the the important advantages of volunteering, researcher went down one path and not such as earning continuing education another. While these discussions were credits, developing existing skills and sometimes uncomfortable, they were knowledge, and staying active and up-to- rewarding because we all came away with date on important topics in my area of a broader understanding. Ultimately, the practice. However, the most rewarding groups came up with a more robust and part of my volunteer experience has been complete solution than any of the posi- the people. tions each of us held individually. Working with groups of people who In short, volunteering for the SOA have different experiences and points of helps grow our knowledge. The British view helps us get out of our own heads, so politician Benjamin Disraeli once said, to speak. Additionally, others may have “The greatest good you can do for another different ideas that can be combined with is not just share your riches, but reveal

56 JUN/JUL 19 | theactuarymagazine.org The Actuary

The greatest good you can do for another is not just share your riches, but reveal to them their own. —Benjamin Disraeli

to them their own.” In an odd way, this gets at what I am band U2 on the rock song “Sarajevo Girl” in 1995. These trying to convey here. seemingly disparate forms of music combined to create something quite beautiful. Unusual Combinations Lead to Breakthrough Ideas The volunteer committees I’ve been on have not come An example of the power of combining ideas is one of the up with anything quite like the printing press or a hit contenders for the greatest invention of all time: the print- song, but my collaborations with people with disparate ing press. Before the printing press, writing and drawing backgrounds to produce either an exam or research were completed by hand, usually in a scriptorium. Scribes paper have been some of the most gratifying parts of my would measure the page layout and then copy the texts volunteer career. from another book. An illuminator would follow by adding designs. As a result, books were expensive and usually Volunteer in the Future owned by the wealthy, universities or monasteries. Soon I will be rolling off the Education Executive Group. In the 1300s and 1400s, people had developed the As I look back on my experiences, the most rewarding basics of printing by cutting letters and designs into have been working with some really great people. Each blocks of wood that would then be dipped in ink and of them, in their own way, has had a positive impact on pressed on paper. In the mid-1400s, along came Johann the training of future actuaries and in making the SOA Gutenberg. He had experience at a mint and recognized a strong and robust organization. that printing could become more efficient by combining This, however, is not the end of my volunteering with the blocks within a machine. He then built the press the SOA. I will continue to write questions for the exams, that would come to bear his name. This “movable type help with research projects and work with other groups machine” had metal block letters that could be moved in my practice area. The value of volunteering and serving around to create new words and sentences. The invention others cannot be understated. As Albert Einstein once created relatively unrestricted circulation of information said, “Only a life lived for others is a life worthwhile.” and ideas, resulted in a sharp increase in literacy, threat- ened the power of political and religious authorities, and ushered in the Renaissance, Reformation and the Age of Enlightenment. ABOUT THE WRITER Another example of a powerful combination is when the DANIEL S. PRIBE, FSA, MAAA, is VP and chief actuary at Lumeris. opera singer Pavarotti collaborated with the Irish rock He can be reached at [email protected].

57 theactuarymagazine.org | JUN/JUL 19 The Actuary RESEARCH

Expanding Research Projects in New Ways Q&A with R. Dale Hall

anaging director of Research at the Society security and the impact of longevity, and the biology of of Actuaries (SOA), R. Dale Hall, discusses a aging. As a follow-up to this triennial event, we’ll develop variety of projects that stretch beyond tradi- a monograph highlighting the key discussions, helping tional research papers and experience studies to add to the continuing body of research on longevity Mto advance the profession and serve the public. and aging. What is the Living to 100 Symposium? Can you tell us about the contest involving Hall: We have hosted the SOA Living to 100 Symposium innovations for living longer? every three years since 2002. It is a unique event that Hall: Last year, the SOA’s Mortality and Longevity emphasizes research, and it brings together academics, Research Program Steering Committee created researchers, actuaries and many others to discuss aging, the Workable Innovations for Living Longer (WILL) living longer, mortality improvement and related studies. Contest. It highlights new ideas to help people extend There’s a wealth of papers from our past events, and I their healthy life expectancy, such as through physical encourage you to check out these collections. activity, social interactions or other means. For instance, We’re gearing up for the 2020 SOA Living to 100 Nate Worrell, FSA, MAAA, received first place in 2018 Symposium, which will take place January 13–15 in Lake for his idea to create a longevity assistant—a potential Buena Vista, Florida. At this event, we will have keynote tool to help people track their physical activity and take presentations on the modeling of aging, retirement positive steps toward healthier decisions.

58 JUN/JUL 19 | theactuarymagazine.org The Actuary

Now in its second year, the WILL contest empha- What other projects and tools have been developed sizes new ways to help society in terms of living longer through SOA research? and how actuaries can be a part of this innovation and Hall: In addition to our research papers, experience thought leadership. Individuals can submit their ideas studies, essays and presentations, the SOA works on a either by video or written submission, and then the top variety of calculators, including the Actuaries Longevity five entries will pitch their ideas to a panel of actuaries Illustrator, which is a tool developed with the American during the 2019 SOA Annual Meeting & Exhibit. Stay Academy of Actuaries. This tool helps provide individ- tuned for updates on the ideas generated from this contest. uals and personal finance experts with a better sense of survival distributions and longevity as they plan for How are you working with students on retirement expenses and risks. research projects? Hall: We created the SOA Student Research Case Study ABOUT THE WRITER Challenge as a way for actuarial students from colleges R. DALE HALL, FSA, CERA, MAAA, CFA, is managing director and universities around the world to develop their of Research at the Society of Actuaries. He can be reached at research skills. We ask them to work together in teams to [email protected]. harness data, use models and create a solution to a hypothetical situation. For this year’s challenge, there were 63 teams, and each team designed an autonomous vehicle insurance policy and performed actuarial projections Visit SOA.org/research/research-topic-list for the latest of future loss costs. I found it very encouraging to see updates on new research opportunities, data requests, all of these future actuaries sharing their ideas and, in experience studies and completed research projects. turn, meeting with SOA members to get a better sense of the actuarial community. Students from Drake University in Des Moines, Iowa, received first place (and a $5,000 grant) for their entry idea. Their project focused on a variety of new policyholder behaviors, cybersecurity risks and changes in vehicle-miles exposures that would emerge with the RESEARCH READS implementation of autonomous vehicles. Innovation and Technology This spring, the SOA launched its Actuarial Innovation & Technology Strategic Research Program, which focuses on research involving the use of new technology and the actuarial profession. One of the new reports highlights RELATED LINKS technologies whose usage is anticipated to grow the fast- est among actuaries in 2019. Data visualization, predictive SOA Living to 100 Symposium modeling, cloud computing and storage, and collaborative Livingto100.SOA.org tools are expected to be used more in the coming year. SOA.org/programs/act-innov-tech Video on Living to 100 bit.ly/Top-Tech-2019 bit.ly/Living-100-Video Survey of Emerging Risks Research Competitions and Awards The Joint Risk Management Section of the Canadian Insti- bit.ly/Comp-Awards tute of Actuaries (CIA), Casualty Actuarial Society (CAS) and the SOA released the 12th Annual Survey of Emerging Student Research Case Study Challenge Risks. Major findings include growing climate concerns bit.ly/SOA-2019-Student-Research and cybersecurity. bit.ly/12th-SOA-Risk-Survey Actuaries Longevity Illustrator LongevityIllustrator.org

59 theactuarymagazine.org | JUN/JUL 19 The Actuary DISCOVERInnovative resources and professional development opportunities to help you become a better actuary and leader ON TREND

Online Exclusive Risk is Opportunity: Perspectives From Chief Risk Officers The Actuary asked several chief risk officers to provide perspectives on emerging changes in the risk landscape and the current risk environment, and to reflect on the pursuit of career trajectories in risk. Suzette L. Huovinen, FSA, CERA, CFA, MAAA, chief actuary and chief risk officer at Securian, expressed one thought-provoking idea: “Risk management is a great way to get a broad perspective on an organization. You must understand all aspects of the business to truly identify and manage the risks. It’s critical to be good at asking ques- Meetings tions—don’t be afraid, there are no stupid questions!” Visit TheActuaryMagazine. 2019 Actuarial Research Conference org/Risk-Opportunity to read Aug. 14–17 the online-only article and Indianapolis get more important insights Designed for both academics and practicing actuaries, the 54th from chief risk officers. Actuarial Research Conference is hosted by five universities in Indiana, including Indiana University—Purdue University Indianapolis (IUPUI), the University of Notre Dame, Ball State University, Butler University and Purdue University. This event also provides researchers the opportunity to present their work through contributed talks and a poster session. bit.ly/ARC-2019

2019 Predictive Analytics Symposium Sept. 19–20 Philadelphia It’s never too soon to arm yourself with critical predictive analytics Report knowledge or to enhance your expertise in this field. Whether Shaping the Future of Health Care you’re interested in predictive models as a manager, implementer The SOA surveyed more than 200 health care executives, and or practicing expert, this conference provides information to help 60% said their organizations use predictive analytics—a 13-point you jump to the next level. Anyone interested in the field of increase from last year. Read our 2019 predictive analytics trend predictive analytics and/or how it relates to the actuarial forecast to see how this will shape the future of health care. profession should attend. bit.ly/2019-PA-Trends bit.ly/SOA-PA-2019

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Tools and Resources The Actuarial Toolkit The Actuarial Toolkit provides a variety of online resources for actuarial candidates, actuaries and actuarial analysts. The toolkit includes a glossary and R Console in addition to various applications and online tools. bit.ly/SOA-Toolkit

Actuaries Climate Index This tool was designed to help inform actuaries, public policymakers and the public about climate trends and some of the potential Video impacts of a changing climate on the United States and Canada. Learning Through Innovation The index is an objective measure of observed changes in extreme Carol McCall, FSA, MAAA, began her actuarial journey at age 9 weather and sea levels. when she did her first pension valuation. McCall’s career path ActuariesClimateIndex.org brought her to lead research and development in Humana’s Innovation Center. Learn how her actuarial background enabled her to leverage analytics and data to help innovate in the health services space. bit.ly/C-McCall

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CAA Global is a joint venture of the Institute and Faculty of Actuaries (IFoA) and the Society of Actuaries (SOA). 61 theactuarymagazine.org | JUN/JUL 19 Timeless THE PAST, PRESENT AND FUTURE OF THE SOA

1982 was a pivotal year for the While serving as president of the SOA 1982 Society of Actuaries (SOA) and and after finishing her term, Lautzenhe- for Barbara J. Lautzenheiser, FSA, MAAA. iser was a member of the Living to 100 She was named the first woman president Research Symposia, Long-term Care of the SOA and carved the pathway for Insurance Actuarial Track, Life Practice other women to carry that title forward. Advancement Committee, Actuary of “Being a speaker and being a leader the Future Section Council, The Actuary may sound impossible now, but you do editorial board, Education Task Force, it the way you do almost anything else,” Strategic Planning Committee, Elections said Lautzenheiser in a 1983 presidential Committee, Board of Directors and address. “You do it one step at a time, the North American Actuarial Council. incrementally. Success by the inch is a This is just a glimpse into her volunteer cinch. Success by the yard is hard. You activities. She donated her time, talent can do anything if you do it slowly and in and expertise when and wherever it was small steps.” needed for the SOA. Colleagues describe her as intelligent, How did Lautzenheiser become SOA successful and willing to take risks. president? She so aptly responded in “Barbara was a leader in the SOA and Barbara J. Lautzenheiser, FSA, MAAA her 1983 presidential address: “About 12 in getting the world to understand risk years ago, the chief underwriter of the classification,” said Anna Rappaport, FSA, MAAA. “She served as a company I was with at the time walked into my office and said, role model for many young women who needed encouragement to ‘I had a very interesting luncheon today.’ And I [asked], ‘Why?’ He seek leadership roles.” said, ‘The woman who is head of the Epileptic Foundation … tried Lautzenheiser demonstrated that success when she became to convince me it wasn’t fair that she had to pay more for her life the first woman to head a major insurance company in the United insurance, because it wasn’t her fault she had epilepsy.’ Lightbulbs States (Montgomery Ward Life Insurance Company, in 1986). went off. I realized that was exactly what was happening with wom- After years with Montgomery Ward, she returned to Hartford, en’s issues [that were] just beginning to percolate at that time.” Connecticut, where she had been a vice president of Phoenix She continued: “So, I began to speak out on the issue. I began Mutual. She also was the principal of Lautzenheiser and Associates, to stand up for what I believed. That visibility led to The Academy a consulting firm located in Hartford. Board. That led to the Society of Actuaries Board. That led to vice Lautzenheiser’s formula for success was “be visible.” “I was president, and that led to being able to be here and share this present at every meeting, on every panel, behind every micro- with you this morning. Power comes in having the fortitude to do phone with a question,” she said in an interview. “Whatever what one believes in rather than what is expected.” committees were relevant, I got on them.” Lautzenheiser resides in South Glastonbury, Connecticut.

Send us information about SOA history that will enlighten everyone about our organization’s past, and serve as a springboard for future growth, as the actuarial profession continues to inspire and evolve. Write to theactuary@ soa.org and share. PHOTO COURTESY OF THE SOCIETY OF ACTUARIES OF THE SOCIETY COURTESY PHOTO

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