158 • APRIL 2011
The Brisbane Flood
Nature’s Risk Framework
A General Insurance Approach to Credit Rating Transitions
Risk Appetite and Reinsurance Efficiency
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What’s New on the Web – April
Economic Valuations 5 Nature’s Risk Framework
A new Practice Guideline 199.03 (Economic Valuations) has been CommENT – Brent Walker
released. This Practice Guideline replaces Guidance Note 552 (Economic
Valuations) which was issued in July 2004. In order to provide time for 8 President’s Column
Members to familiarise themselves with its content, the new Practice Barry Rafe
Guideline 199.03 commences on 1 October 2011. At the same time,
Council approved the withdrawal of Guidance Note 252 (Economic
Valuations of Life Insurance Business) last issued in July 2004. The
9 Actuary Unearthed
Exposé – Chris Seddon
reasons for the withdrawal of Guidance Note 252 are set out in the
Explanatory Memorandum available at www.actuaries.asn.au.
10 The Actuarial Pulse
sURvEY– Kitty Ho
Prudential Reporting under the SIS Act
A new Practice Guideline 499.03 (Prudential Reporting under the SIS 13 The Brisbane Flood
Act) has been released. This Practice Guideline replaces Guidance Lessons for the Future – the thoughts of
Note 460 (Prudential Reporting to Trustees and the Regulator) which
was issued in December 1994. The new Practice Guideline 499.03 one actuary
commences on 1 April 2011. REpoRT – Peter Vinson
Professional Standard 402
17 A General Insurance Approach to Credit
Exposure Draft of revised Professional Standard 402 REvIEW – Daniel Mussett
(Determination of Accrued Benefits for Defined Benefit
Superannuation Funds) 20 Finding and Working with Mentors
An Exposure Draft of proposed revisions to Professional Standard 402 REpoRT – Institute Leadership Committee
(Determination of Accrued Benefits for Defined Benefit Superannuation
Funds) has been released for comment. The closing date for comments
is 2 May 2011. Exposure Draft available at www.actuaries.asn.au
22 In the Margin
pUzzlEs – Genevieve Hayes
23 More than Maths
CommUNICATIoNs – Martin Mulcare
24 Risk Appetite and Reinsurance Efficiency
CommENT – Daniel Maneval
26 Our Volunteers
REpoRT – Rebecca Moore
28 Beach Day – Going Against the Odds
sTUDENT ColUmN – Jenny Trinh
29 CEO’s Column
Diary Dates 2011 Melinda Howes
Wed 4 May Sydney, Insights: An Overview 30 Flood Resilience – Risks, Mitigation and
Institute of Consumer Credit Funding Solutions
Insurance NoTICE – one-Day seminar
Kevin Gomes / Marcus Arena
Wed 4 May Melbourne Insights Networking
– Basel III – How
Significant? Ian Paterson
Mon 16 May Sydney, Flood Resilience:
Westin Hotel Risks, Mitigation and
Thurs 2 June Sydney, APRA – Insurance Capital
Four Seasons Review Seminar
A C T U A RY A U S T R A L I A ■ April 2011
here have been some challenges laid down to some What is our role as actuaries in these debates and decisions?
of our ‘standard’ insurance practices in the last few Do we as actuaries want to stand up for these rating factors?
weeks. The first relates to flood insurance definitions But then isn’t gender equality at the heart of what our
and is the subject of an article by Peter Vinson (p13) profession stands for? Do we need to be creative in our pricing
and the Pulse Survey (p10) this month. and find other factors to price on?
The second relates to the ruling on 1 March by the European This all made me wonder though, where will it stop? What other
Court of Justice that from 21 December 2012 gender could “discrimination” might be outlawed? What if age is outlawed
not be used as a rating factor for insurance. The differential as a rating factor (this is already the case in health)? What
pricing was considered discrimination on the basis of gender. other rating factors could be considered discrimination? What
My understanding is that all members of the European Union about occupation in group insurance? Or is postcode reflecting
will need to comply. socio-economic status and therefore I am being discriminated
against in car or house insurance? If I can’t afford an alarm, am
Could that happen here? But of course it already has in heath I being discriminated against? Where will it stop? ▲
insurance. It has also been the case in the US for a number of
years for pension purposes. Who would drive it in Australia? James Collier
It will lead to higher premiums for women for a number of email@example.com
products – personally I am happy with my lower life and car
insurance premiums (but give me equality on everything else Catherine Robertson-Hodder
of course)! firstname.lastname@example.org
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Next Edition Published by The Institute of Actuaries of Australia
AA159 May 2011 © The Institute of Actuaries of Australia ISSN 1035-6673
AA160 June 2011 Deadline for contributions: 1 May 2011
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AC TUARY A U S T R A L I A ■ April 2011
Earthquake, Christchurch New Zealand 2001 Source: © Kay Linton-Mann - reproduced with permission
he paper by JB Dow FFA on ‘Early Actuarial Work of the ionosphere caused by “the extreme solar minimum”. He went
in Eighteenth Century Scotland’ (Faculty of Actuaries on to say “Sensors onboard the US Air Force C/NOFS satellites
16 October 1972) reminded actuaries then how little have recorded a record collapse of the ionosphere. The night-
mankind knew about mortality and populations back in time ionosphere is only 260 miles above Earth’s surface, a sharp
the 18th century. The paper discussed the contributions to what decrease from the usual value of around 400 miles. The ionosphere
would become actuarial thought processes by Robert Wallace is also 100 degrees cooler than expected.” The consequences
(1697-1771), Alexander Webster (1707-1784) and Colin MacLaurin of this are significant for the US Space program. This NASA
(1698-1746) in the development of a widows’ fund for the Church scientist also indicated how this current “extreme solar minimum”
of Scotland. Colin was regarded as a mathematician second only to is characterized by the “sun’s magnetic field being in a weird
Sir Isaac Newton, whom he knew. It was Sir Isaac who inspired “The state”, the Earth being greatly more “exposed to cosmic rays”, “the
Falling Apple” article in the March 2011 edition of Actuary Australia. radiation belts being charged with killer electrons”, all “contributing
to a reduction in temperatures on Earth”. But he also said that in the
New space-age tools to analyse nature’s risks have become long term “this extreme solar minimum is not a permanent solution
available in the late 20th and early 21st Century. Without these tools to global warming”. His frame of reference for these statements was
actuaries could be analysing nature’s risks with about as much “since the dawn of the space age”.
relative sophistication as Wallace, Webster and MacLaurin analysed
mortality risks in the 18th Century. But to use these space-age tools The framework that should be used for analysing nature’s risk is
actuaries also have to work within nature’s framework. This article is not earth years but the sunspot activity within solar cycles. Solar
about the use of that framework and what it reveals. The tools and
their uses should be the subjects of many future actuarial papers by
actuaries who use and develop them, hopefully for purposes well
beyond the measurement of risk of major volcanic, earthquake and
extreme weather events that are included in this article.
‘The Falling Apple’ article indicated that the sun had entered a
state known as a solar grand minimum. There is skepticism about
this and what it means, particularly among some climate scientists
and presumably actuaries working on aspects of carbon dioxide
abatement schemes. In Vienna on February 10, 2011, there was a
United Nations committee meeting on the “peaceful uses of outer
space”. The Lead Program Scientist of the Heliophysics Division
of NASA gave a presentation about the risks to business of space
weather super storms. In this presentation he stated: “Space has Aerial view of Minato, Japan, a week after tsunami devastation Source:
never been closer to Earth”! He was referring to the current collapse Wikimedia Commons, (U.S. Marine Corps/Released photo by Lance Cpl. Ethan Johnson)
A C T U A RY A U S T R A L I A ■ April 2011
6 comment Tsunami damage inOfunato, Japan Source: Wikimedia Commons, U.S. Navy photo by
Mass Communication Specialist 1st Class Matthew M. Bradley
cycles change approximately with each elliptical orbit of Jupiter
around the sun – every 11.86 earth years of its orbit. The sunspot
activity within each of these cycles can vary significantly between
cycles. Why solar cycle variations occur is not fully understood
by scientists. During solar grand minimums the sunspot activity is
severely restricted for several solar cycles and some of that activity
could be uni-polar or negative sunspots. So, for example, data
available from NASA on extreme ultra-violet emissions, the solar
wind speed, the sun’s magnetosphere and F10.7 radio flux, which
reflect the changing sunspot activity and account for the effect of
negative sunspots will, in the future, provide the tools to develop
even better frameworks for the measurement of nature’s risks.
These and many other useful datasets are readily available on the
NASA website and can be downloaded by anyone. Sunspot data a solar minimum.1 Their paper explores how muon (sub-atomic
going back to 1749 can be downloaded from the Solar Influence particle) bombardment of the caldera of active volcanoes with silica
Data Analysis Centre (SIDC) (http://sidc.oma.be/), which is the rich magma causes explosive eruptions and shows how the number
solar physics research department of the Royal Observatory of of muons reaching earth during solar minimums is significantly
Belgium. The SIDC includes the World Data Center for the sunspot increased. Their paper explains the science behind the relatively high
index and the ISES Regional Warning Center Brussels for space incidence of volcanic activity during solar minima.
weather forecasting. This data appears to indicate much higher
sunspot activity in recent times but this is mainly due to more A similar correlation appears for major earthquakes (defined as eight
sophisticated telescopes and the use of satellites to observe the or more on the Richter scale) and sunspot activity. Increased major
activity on the surface of the sun. earthquake activity does occur during strong solar minimums and
grand minimums. A scientific explanation to the increased major
The solar cycle framework enables a better understanding of the earthquake activity during solar minimums has been provided by
risk of major earthquake and volcanic activity. This is because there some Russian scientists2. Basically their theory is that the reduced
is a strong correlation between major volcanic activity (according magnetic pressure on Earth during solar minima enables tectonic
to cubic kilometers of ejected matter), major earthquake activity plates to move a little more freely thus more easily allowing for the
(8.0 or more on the Richter scale) and strong solar minimums or releases of built up frictional forces between them.
grand minimums. In the last 250 years the following major volcanic
eruptions occurred during strong solar minima or grand minima: Since sunspot activity started lessening significantly in 2004 there
Grimvotn (Iceland) 1783/84 (14 Km3), Tambora (Indonesia) 1815 have been 11 major earthquakes (over size 8.0): Solomon Islands –
(160 Km3), Krakatoa 1883 (5.0 Km3), Santa Maria (Guatemala) 8.1 (April 2004), Sumatra-Andaman & Indian Ocean tsunami – 9.2
1902 (4.8 Km3), Novarupta (Alaska) 1912 (3.4 Km3). The only (December 2004), Nias (Indonesia) – 8.6 (March 2005), Tonga – 8.0
major eruption to occur during a solar maximum was Pinatabo (May 2006), Kiril Islands (Russia) twice – 8.1 (November 2006 &
(Philippines) 1991 (between 6 and 16 Km3) – see graph below. January 2007), Peru – 8.0 (August 2007), Sumatra – 8.5 (September
2007), Samoa – 8.1 (September 2009), Maule (Chile) – 8.8 (February
Pinatabo’s eruption occurred immediately after Typhoon Yunya 2010), Sendai (Japan) and Pacific Ocean tsunami – 9.0 (March
passed directly over the top of the volcano. Japanese scientists 2011). The previous 11 major earthquakes occurred over 38 years
suggest this typhoon provided the same trigger as is provided by or more than five times as many years.
AC TUARY A U S T R A L I A ■ April 2011
Earthquake Incidence Rate Multiple for Reduced Sunspot Activity so after, a solar cycle with strong sunspot activity. Strong La Nina and
weaker El Nino events tended to occur with, or during the decade or
1750-1949 1950 -2010 so after, a solar cycle with weak sunspot activity. Presumably the lag
affect of ENSO activity after indicative solar cycle sunspot activity is
Number of earthquakes > 8.0 34 31 due to oceans very slowly absorbing or releasing the marginal heat
increases and decreases caused by the changing sunspot activity.
Mean sunspots for month 46.93 68.22 As the sun is now in a solar grand minimum it is seems likely that
there will be a prolonged period of strong La Nina and weak El Nino
Incidence multiple under mean 1.55 3.37 events as the oceans gradually release the marginal heat gained
during the previous long period of much stronger sunspot activity.
Incidence multiple under 0.75 x mean 1.85 4.83 But if there is a large explosive volcanic event during this solar grand
minimum then it is also possible that the additional airborne aerosols
Incidence multiple under 0.5 x mean 1.90 4.39 could trigger an extended El Nino event.
Earthquake recording equipment has been more prevalent and Actuaries should now be aware that there is substantially increased
more sophisticated since 1950 than it was for the previous 200 risk of calamitous events of nature during a solar grand minimum.
years. Modern telescopes observing the sun can see many more They should also be aware that there are alternate methods of
sunspots than could be seen in earlier times. For example a sunspot predicting the risk of nature’s calamities. But to understand these
the size of Earth would not have been detected prior to about 1950. changing risks actuaries must also use nature’s risk framework.
So data for earthquakes over size eight on the Richter scale has I am not aware of any actuaries using this risk framework, nor am
been divided into those occurring prior to 1950 and those occurring I aware of any using the techniques that I have suggested. I would
from 1950. The incidence rate per month has been calculated be delighted to hear otherwise. I am sure that many actuaries will
according to whether the earthquake occurred in a month with use nature’s risk framework, the techniques and space-age data
above or below the mean sunspot activity with similar calculations sources in the future. I look forward to reading many actuarial
for months with above or below 0.75 times the mean and 0.5 times papers on this in the future. ▲
the mean. The multiples of the incidence rates for the lower sunspot
activity were then determined. The results are shown in the table. Brent Walker
It seems that very large earthquakes occur between four and five firstname.lastname@example.org
times more frequently in periods of low sunspot activity. That means
large earthquakes are four to five times more prevalent during solar
minimums and grand minimums.
There is also a significant link between the El-Nino and La-Nina
weather patterns and sunspot activity. Data of the El Nino Southern
Oscillation (ENSO) Index, obtained from the National Oceanic and 1 ‘Explosive volcanic eruptions triggered by cosmic rays: Volcano as a bubble
Atmospheric Administration (NOAA) website, was mapped against chamber’; Toshikazu Ebisuzaki, Hiroko Miyahara Ryuho Kataoka, Tatsuhiko
sunspot activity (see graph, top of page). The ENSO data is only Sato Yasuhiro Ishimine. November 2010.
available since 1950 but a pattern appeared. Strong El Nino and 2 ‘About possible influence of solar activity on seismic and volcanic activities:
weak La Nina events tended to occur with, or during the decade or Long term forecast’; Khain V. E. Khalilov E. N. Moscow State University. 2008.
A C T U A RY A U S T R A L I A ■ April 2011
8 president’s column
employers have been keen to protect their employees. The
issue however is that we have now seen governments and large
employers collapse under the weight of DB schemes.
So, if not employers and the government, who should be carrying
the financial risk of longevity? I remember Darren Wickham’s
paper from a few years ago where he suggested that we abolish
retirement. I supported Darren’s successful nomination for Actuary
of the Year off the back of that paper but it is not until now that
I appreciate the message. In effect it is that individuals need to
take more responsibility for managing the financial implications of
their own longevity. I believe therefore that the role of the actuarial
profession is to develop policies that promote the removal of
barriers to working later. We should also continue to educate the
Have actuaries been complicit in some of government and the community generally that there are significant
the Global Financial Crisis pain?
costs in supporting older people who are still capable and willing
now have the humble privilege of contributing to Actuary to work.
Australia (AA) as President. I used to be the Editor of AA and one
of the advantages was that I could say what I thought without Now, I may sound like the Christmas Grinch promoting the idea
worrying that anybody would take it too seriously. I think that I that people should ‘work till they drop’ but the reality is that, if we
will need to be more careful now because by definition I am also want a better world for our great-grandchildren, then we need to
obliged to speak on behalf of the Institute. But don’t fear I won’t face the fact that we are the profession that is best placed to blow
be neutered! the whistle on increasing costs.
I will depart from past practice in this column by focusing on As we have seen in Europe and the US, neither governments nor
public policy issues for actuaries. Traditionally this column has large companies can hold back the tide of increasing retirement
served as a part travel log of presidential visits. Not that there is and health costs. We have seen government pensions being
anything wrong with these, on the contrary we need to recognise reduced out of austerity measures and large corporations that
the importance of the global profession, rather it is because my cannot afford to meet pension payments and hence collapse or
personal focus this year will be on public policy issues. In an renege on ‘guarantees’ that were never going to be met.
effort to redefine the role of the President, to reduce workloads
and encourage more interest from young, busy and successful Are actuaries complicit? As it turned out, the supposed guarantee
actuaries to become President, Council has agreed that the was never real, even from government funded arrangements.
President needs to allocate only up to 30% of their time on Companies that were supposed to build cars were laden down
presidential duties. with liabilities linked to life expectancies, share markets, investment
strategies and expectations from their beneficiaries that they were
This means that there needs to be an allocation of leadership never going to meet over the longer term. I know it’s easy to look
responsibilities amongst the presidential trio and others. Our back and proclaim on these matters but now we know what
international relationships will be managed by our Senior Vice should we do about it and given what we now know should we
President David Goodsall. David is not only very good at it but he accept some responsibility? We probably shouldn’t beat ourselves
has committed up to three years to ensure that we get the most up too much but I think it is a debate worth having. ▲
out of our investments in this area. My focus will be in meeting
membership, public policy and education policy issues. Barry Rafe
Anyway, to the issue at hand, I presented a paper to the Financial
Services Forum last year arguing against government support of
a lifetime annuity market in Australia. My motivation was the issue
of longevity and who it is in our community that needs to foot the
bill. There was interesting debate over this paper and I did back
off a bit on the issue of protection against longevity risk of some
of the less wealthy in our community, who have managed to
save for retirement, but not sufficient to carry their own risks. The
bigger issue however that has emerged from the Global Financial
Crisis (GFC) and the ever increasing projections on increasing life
expectancy is the question of whether actuaries were ever right in
promoting defined benefits (DB) plans to employers.
Yes I know this is heretical because DB plans were the mainstay
for the actuarial profession almost from our inception, and altruistic
AC TUARY A U S T R A L I A ■ April 2011
actuary unearthed 9
Where I studied to become an actuary... I’d like to be brave enough to…
Macquarie University Cope with heights (take a look at http://
BA, FIA, FIAA In my life I’m planning to change…
My listening skills, which have room
My work history... to improve!
I’ve never changed jobs – I started on a
cadetship with Legal & General while at At least once in their life, every actuary
uni and stayed with them after uni in 1975 should…
until they were taken over by Colonial in Work closely with others in areas
1998 and then Colonial was taken over by considered ‘not traditionally actuarial’
CBA in 2000 (someone has to keep the so they appreciate others’ perspectives
Title… corporate history!)
If I won the lottery, I would…
Portfolio Actuary What’s most interesting about my role... Use it wisely to benefit others e.g. through
Organisation... Helping people in the business to SIM
CommInsure, CBA understand the business they are in
People say I look like…
My favourite energetic pursuit… My role’s greatest challenges... My father (and some random person years
Being a father! Working with people with whom I don’t ago) said Malcolm Fraser – work that out!
have a natural affinity; to understand them,
The sport I most like to watch... I should publish a video of myself on
show patience and still deliver
Rugby Union – Wallabies, Waratahs, YouTube doing …
Gosford and other teams My brain can’t even start to imagine
Who has been the biggest influence on my how I could embarrass myself so much to
The last book I read (and when)... career (and why)... do this
Simple Church, in February this year All the various actuaries who have
My most embarrassing moment…
enabled me to enjoy such a broad career
My favourite artist/album... If I told you, that really would be
in life insurance e.g. Trevor Matthews,
I enjoy specific songs more than a single embarrassing
artist e.g. He ain’t heavy, he’s my brother
by the Hollies If I could travel back in time I would…
My proudest career achievement to date is…
Talk with significant people e.g. Jesus,
Being part of a team that developed a
My favourite film... Moses, then come back to share their
product and wrote the administration
I don’t have one but these are among my insights with others now, then go back
system for it at the same time, under tight
favourites – Star Wars, Star Trek, Crocodile and forth
Dundee and Miss Congeniality
My best advice for my children…
The most valuable skill an actuary can
My interesting / quirky hobbies... Follow Jesus, show concern for others
I don’t think I have quirky hobbies – I just
and do something they enjoy
Understanding the power and dynamics
love my hobby of holidays!
of compound interest and being able to Four words that sum me up…
The person I’d most like to meet... communicate effectively Integrity, reliability, serious, fun ▲
Captain Picard (trekkies will know!)
If I were President of the Institute, I would… Chris Seddon
What gets my goat... Wonder how I’d fit that into my life and email@example.com
Unfairness, arrogance, unsafe drivers then try to encourage actuaries to be
good communicators of solutions to
What I wanted to be when I grew up... complex problems
I only knew I loved maths, until year 12
(next question) My most important decision…
To follow Jesus
Why I decided to become an actuary...
Year 12 when David Knox and I discovered I’m most passionate about…
there was this profession called actuaries; My family, enjoying time with close friends,
it seemed to combine maths and business my church, being involved in a cross-
which appealed to me since I could see a cultural Christian mission organisation
purpose in doing further maths called SIM
A C T U A RY A U S T R A L I A ■ April 2011
Next Survey New questions will be available in May 2011.
The Actuarial Pulse is an anonymous, web-based survey of Institute
members, run on a monthly basis, giving members an opportunity to
express their opinions on a mixture of serious and not-so-serious issues.
As expected, price is the main driver when it comes to purchasing
home and contents insurance, although many respondents added
What would you like to know? If you have a question you would they would compare the price with the coverage they expect to
like to put to the membership, email it to firstname.lastname@example.org get. Some of the respondents in ‘Other’ referred to considerations
such as multi-policy discounts, staff discounts and ensuring specific
Results Report generated on 14 March 2011, 318 responses to items can be covered. Some commented that they are too lazy to
the survey. switch and tend to renew with the same insurer without doing any
his month’s Pulse survey consisted of questions on
Insurance (including flood insurance) and Mentoring, Q2: Do you read the terms and conditions of your home and
the results of the Mentoring questions are discussed in contents insurance policy?
another article published in this issue – Finding and Working With
a Mentor (p20). No. %
Thoroughly 94 30%
Whenever there is an insurance matter in the media, the opinion of Just a skim through 189 60%
one or two actuaries is often asked for and published. This survey No 34 11%
aims to gain a more general view of the opinions of the actuarial
community, when it comes to purchasing insurance and as to what
you think of the issues surrounding flood insurance. It is comforting to know that close to 90% of respondents read
their insurance policy’s terms and conditions. Many commented
Q1: What is the main consideration when you purchase they read the policy thoroughly at the initial purchase and will just
home and contents insurance? skim through upon renewals. For three of the respondents who
answered ‘no’ to the question, their comments were:” ● I specify
No. % the conditions required and rely on the broker to inform me of
Price 152 48% any differences. ● It would take hours! ● When I claim, I’m very
Policy terms and conditions 65 21% stubborn.
Brand name 41 13%
Customer service (e.g.own past experiences with insurer) 35 11% For those who read their terms and conditions, did you check
Other 22 7% whether flood was covered? The next few questions relate to flood
Broker recommendation 2 1% insurance and how actuaries view this type of cover.
Home and Contents Insurance
Policy terms and conditions
AC TUARY A U S T R A L I A ■ April 2011
Q3: Do you think home and contents insurance policies As well as some ideas for implementation: ● Market disclosure on
should include flood cover at all? purchase – “this is on a flood plain” in the marketing/contract. What
about premium discounts for those who take measures to improve
No. % flood worthiness. ● Maybe it could be incorporated into their council
Yes 252 79% rates, the councils could arrange ‘group policies’ for the whole area.
No 57 18%
And from the other half who think it should not be made
82% of respondents say that flood cover should be included, but compulsory: ● It is an economic decision as long as they can
many of the comments put in conditions such as: ● Only as an make it with knowledge. ● If you don’t want to buy home and
optional extra; ● Only if properly priced / fully funded premium; or ● contents insurance, it’s your problem. CTP is different as you may
If not in a flood prone area. accidentally injure someone else. ● Flood insurance should only
be made compulsory if the government is prepared to release all
For the ‘no’ respondents, here are some of their comments: information about flood prone areas to insurers. ● Flood cover will
● As long as the government will help out in the event of a flood. be unaffordable for many in flood-prone areas. Who is going to be
● Not as standard because those houses built on known flood able to pay $25,000 p.a.?
plains will not be able to afford it. Governments should face up to
the reality that they will have to either divert the water or move the Q5: Should each insurer wishing to be in the market have
houses. Re-building in the same swamp is ridiculous. ● I would vote to provide cover only for all types of flood combined (not
“yes” if I could be confident that policies covered all floods, the bulk various types separately)?
of home owners insured their houses for a realistic amount and
premiums for “riskier” areas had an appropriate loading for floods No. %
and other risks e.g. earthquake. ● If I lie down on train tracks, I Yes 141 44%
expect to get run over by a train. Same with buying a house in flood No 167 53%
Actuaries seem to be quite divided on the flood definition question
With that last comment, perhaps those who are aware of living in as well. Here are the ‘yes’ respondents’ comments: ● Too confusing
flood-prone zones should definitely take out insurance. Our next to have multiple types of floods and allows insurers to try to wriggle
question asks whether this should be made compulsory. out of paying. ● Standard definition of ‘flood’ in the industry would
increase competition and remove ambiguity. Let’s not try to trick
Q4: For home owners who live in flood-prone areas, should customers into thinking they are getting more than what they paid
they be compelled to obtain flood insurance akin to the for by having slight tweaks to terms and conditions.
requirement for car owners to have CTP insurance?
Here are the ‘no’ respondents’ comments: ● Each insurer should
be able to issue whichever type of cover they like. If people can’t
No. % be bothered to find out what their policy covers, they shouldn’t
Yes 158 50% complain. ● Riverine, flash and rain flooding are different types
No 156 49% of risk. ● No, but they should make it part of the compulsory
disclosure to explain which floods are covered and which are not.
Actuaries can’t be more divided on such a question! Let’s hear
from the respondents who think it should be made compulsory: ● Q6: Should each insurer wishing to be in the market have
The current situation where people choose not to insure because to provide flood cover at the same premium rate for all its
they assume the government will bail them out is not sustainable. customers – i.e. community rating which involves cross
● However, this would probably require some sort of government subsidy (but able to compete with each other)?
subsidy or support. Would still probably be cheaper than current
levies. ● I don’t see why my taxes should pay for someone who No. %
chooses to live in a flood-prone area and then refuses to obtain Yes 40 13%
flood insurance. No 272 87%
A C T U A RY A U S T R A L I A ■ April 2011
Clearly a lot of ‘no’ responses to the suggestion of community on acceptable grounds, I will consider it my own fault for not
rating involving cross subsidies for flood insurance. Some of the reading the terms carefully. ● Absolutely not. Some customers have
arguments were: ● This would encourage building in flood prone knowingly elected to not to purchase flood cover – this turned out
areas. ● Surely cross subsidy isn’t going to work because those to be an expensive mistake. For those who were unaware it was not
who know they are of less risk are discouraged to buy flood cover, covered – an expensive lesson in reading your PDS.
whilst those who are of more risk know they are getting a discount,
and so will be encouraged to do so. ● With community rating, ● On this basis, Westinghouse should be compelled to give a new
the government (i.e. taxpayers) ends up picking up pieces when fridge to people who have lost their fridge in the flood. ● Ex-gratia
the pricing is deficient. ● I think if you are in a fire prone (bushfire) payments set a precedent in the market and would encourage
area your premium could be higher so the same should be said purchasing insurance in the market based on the cheapest price
for those prone to flood. ● Look where community rating has got as opposed to coverage provided. ● Unless public relations /
us with health insurance – inefficient funding of health services via risk of being sued for non-disclosure encourages them to take a
piecemeal notionally private sector insurers supported by the threat softer stance.
of punitive taxes in order to compel purchase of their product by
those whose interests would clearly be better served by not buying On that last point, one ‘yes’ respondent had this argument: “Yes,
health insurance. ● Community rating with self selection is a recipe if the customers in the selling process were not clearly told they
for disaster. were subject to flood and they would not be covered.” So, whose
responsibility is it? Should insurers disclose every single detail at the
Q7: With the recent flood events in mind, should insurance point of sale including what is NOT covered explicitly? Would this
companies be expected to pay claims under cover which make the policy terms and conditions an even longer document than
has not been paid for? it already is? Remember that only 30% of the survey respondents
read their policy conditions thoroughly!
Yes 24 8% Thank you to all respondents for your contributions and thoughtful
No 288 91% opinions in this survey. One actuary has already made his opinion
known to the Queensland government on this very debatable issue
As actuaries, the majority of respondents don’t think the insurers through a submission – I refer you to Peter Vinson’s article opposite. ▲
(most likely their employers or clients) should pay for claims that
were not covered: ● Develop unrealistic expectations of what Kitty Ho
insurance is. Insurance isn’t charity. ● If my current claim is refused KHo@munichre.com
Classic Queenslander style houses flooded in Brisbane, 2011 Source: iStockphoto © Andrew Clelland
AC TUARY A U S T R A L I A ■ April 2011
lessons for the Future – the thoughts of one actuary
Peter Vinson gives an overview of his recent submission
to the Queensland Floods Commission of Inquiry
am a retired actuary living on the Gold Coast. I was
not physically or financially affected by the recent floods.
However, as the drama unfolded, I got increasingly upset and
angry about (a) the appalling way in which the media was
attacking the insurance industry, and (b) the cause and effect of
the flood in Brisbane.
As a result, I decided to lodge a submission to the Queensland
Floods Commission of Inquiry. Unfortunately this will not be
published on their website because I could not resist including
inflammatory comments. I can provide a copy of my submission
to anyone who asks me for one. The submission is specifically in
the context of the Queensland floods. However, the issues are of
national importance and the insurance issue applies equally to
bushfires and cyclones.
Flooded Eagle Street in Brisbane Source: Wikimedia Commons, photo taken by Bidgee
A C T U A RY A U S T R A L I A ■ April 2011
Brisbane River in flood Source: Wikimedia Commons, photo taken by Bidgee
Flood Insurance I basically believe in ‘freedom with disclosure’. I am generally opposed
Many people in Brisbane were not covered for the flood which to compulsion. However I do think that there are some circumstances
occurred when the river level rose. Many claimed they thought they which justify restriction of freedom in the interest of community
did have flood cover. Many others claimed they could not get the protection. A good example is compulsory CTP insurance.
cover. There was much emotion. The media inflamed this along the
lines that the insurance industry was avoiding moral obligations by the I came to the conclusion that the disasters caused by major floods
use of ‘small print exclusions’. There was clamour for the introduction justify statutory compulsion for all homeowners to have insurance
of standardised definitions. covering all types of floods. As an extension it should also apply to
bushfires. I am confident that if this compulsion occurs, the general
I am not a general insurance actuary but, by reading a few PDS’s, insurance industry will be completely capable of providing this viably.
my understanding is that companies typically do not define flood as a
single risk but as three separate ones (flash flood, riverine flood, storm I further believe that the requirement should be that insurance is
surge or sea incursion) with different definitions and separate pricing. obtained at ‘location specific premiums’. I am opposed to cross
They then decide which of the three types they wish to offer. That is subsidy. I believe that if people choose to live on high ground
how choice and competition works. nowhere near a river or a stormwater channel, it would be very unfair
for them to have to subsidise people who choose to live in a flood
It seems to me that the fundamental problem is that the public does prone location. Beachfronts or river banks are premium locations, as
not understand that there are three different risks. They mostly think well as being high risk, and owners should not be subsidised. There
that a flood is a flood is a flood, however caused, and that insurance is a lot of moral risk involved in subsidisation.
should be structured that way. The clamour for standardised definitions
is really a clamour for flood insurance to always cover all types of flood The result would be that people would be incurring a properly priced
and not the three types separately. For reasons actuaries understand, yearly cost, up to several thousand dollars (reflecting the actual
the insurance industry is reluctant to do this voluntarily. risk), rather than the huge capital cost when the event occurs. If
people want to live in high-risk areas, then they would have to take
Nevertheless, the recent floods caused a lot of suffering. There was into account the insurance cost of living there together with other
loss of life, injuries and huge financial loss. There was anger and maintenance costs when making the choice. This would have the
despair. Some people were made unexpectedly destitute – generally further advantage of assisting councils with the dilemma which they
the weaker members of the community. To me, this was all an have when deciding whether to approve such developments. The
avoidable tragedy. issues would be transparent to everyone.
AC TUARY A U S T R A L I A ■ April 2011
The Brisbane Flood always the possibility of accident or mismanagement and it will not
Wivenhoe Dam Mismanagement prevent flooding during the inevitable really major event.
There is no doubt in my mind that the January 2011 flood in
Brisbane should not have happened, or at the very worst should The result should have been that, in those flood prone areas,
have been minimal. either building was not allowed, or it was only allowed subject to
construction methods which ensured that living areas were above
The dam is intended to manage both storage for city water supplies likely maximum flood levels. There should also have been regular
and also flood mitigation. It has two notional ‘compartments’. It has a public reminders about the issues of floods so that newcomers
storage compartment of 1.15 MML (million megalitres). Above that, it buying existing properties in flood prone areas should understand the
has a flood compartment of 1.20 MML. When full it is 2.35 MML risks they were taking. It seems to me that none of this happened.
Conceptually the idea is that once the storage compartment is full, The Future
any further inflow should be released as it arrives but with a daily ‘cap’ I proposed that, by taking the following steps, the Queensland
(being the maximum amount which the Brisbane River can pass out to Government can progressively reduce the consequence of weather
sea without causing floods in Brisbane City) until overflow prevention disasters and especially the financial pain when they occur:
becomes necessary. There is no official statement of what this cap is
but a number of newspaper articles have said it is 0.30 MML. 1. Make home insurance compulsory at location specific
From records available on their own website it is clear that SEQ water This is the single most important step to transform the psychology
did not do this. Early on Friday 7 January 2011, the dam level was around weather disasters and risk taking. Homeowners should
1.22 MML and there was a near certain forecast of very heavy rain be required to insure their home against fire, storm, and all types
for the next several days in the catchment area. Early on Monday 10 of flood.
January the dam level was 1.71 MML. Over the weekend there had
been significant inflow which had only been partially released. That This will have the following effects:
meant there was only 0.64 MML still available for flood mitigation. On ● It will make the risk levels transparent;
Monday and Tuesday there were massive inflows and, on Tuesday ● It will mean that people who choose to live in premium, or
11 January, SEQ Water had no option but to release 0.645 MML to other, locations which are high risk know what the costs are
prevent the dam overflowing (which would have been catastrophic). and incur those costs themselves;
This caused the massive flood downstream in Brisbane City, two ● It will not reduce the repair costs from disasters but it will
days later. spread them evenly over time thus eliminating financial
suffering to individuals;
I did calculations (included in my submission) to see what would have ● It will eliminate claims of misunderstanding;
been the position if 0.30 MML had been released each day from ● It will eliminate the problem of which type of flood caused
Friday 7 January onwards. There would have been no need for a the damage;
massive release on Tuesday 11 January and there would have been ● It will eliminate moral risk;
no flood in Brisbane City. ● It will give people a strong incentive to use building methods
to minimise the likely effects and costs of a disaster to obtain
I repeated the calculations with a daily reduced premiums.
release of 0.25 MML. The conclusion is
the same, although the dam level would
have reached 2.18 MML which is not
particularly comfortable. Nevertheless it
would have done its job.
The buildings in the flooded areas
The question has to be asked -- how
were they allowed to be built? All
building has to be approved by the
council. Brisbane City Council knew full
well which suburbs had been flooded
during the famous 1974 flood. They also
knew that such events had occurred
from time to time over history and were
certain to recur in future. They did not
know when or how often. Even though
Wivenhoe Dam had been constructed
since then, any competent risk manager
should have known that the dam might
mean less frequent floods but there is Wivenhoe Dam spilling with all five floodgates open Source: Wikimedia Commons, photo taken by Ezykron
A C T U A RY A U S T R A L I A ■ April 2011
Evacuating from Rosalie in the Brisbane suburb of Paddington Source: Wikimedia Commons, photo taken by Rae Allen
Also, determine a process for dealing with the transitional will simply cost them. That is ‘freedom with disclosure’ working.
problems. This will include the need for land resumption in cases
where the total maintenance costs become uneconomic. If, on the other hand the government does not have the courage
to make home insurance compulsory, it will be essential to
2. Urgently complete and publish ‘flood mapping’of all flood strengthen the regulations so that people are forced to use lower
prone areas risk building methods. For example:
This will be needed to facilitate item 1.
● Require living areas to be raised to a level above likely
3. Provide a priority budget allocation for flood mitigation maximum flood level;
After a disaster the Government has to repair infrastructure at ● Require the use of materials which will not deteriorate if
massive cost. The severity of this, as well as the damage caused immersed in water for several days but can simply be hosed
to individuals, could be reduced significantly by taking physical off afterwards.
flood mitigation steps progressively. I suggested an allocation,
across Queensland, of between $1 billion and $2 billion 6. Accept the moral liability for the damage caused in the
each year. recent Brisbane flood
Make a decision to reimburse all damage repair and replacement
4. Insist that Wivenhoe Dam is managed properly costs (including to insurance companies) without the need for
Once the storage compartment is full, any further inflow should massive legal battles as these costs were the direct result of
be released as it arrives but with a daily cap (being the maximum mismanagement by Government entities. ▲
amount which the Brisbane River can pass out to sea without
causing floods in Brisbane City) until overflow prevention Peter Vinson
becomes necessary, when flood becomes inevitable. This will email@example.com
optimise the use of the flood compartment.
5. Review building regulations in flood prone areas
If the Government has the courage to make home insurance
compulsory then this may not be necessary. People will have a The opinions expressed in this article are those of the author. They
strong incentive to use building methods which will reduce their do not represent those of The Institute of Actuaries of Australia, its
insurance premiums. If they want to use higher risk methods it officers, employees or agents.
AC TUARY A U S T R A L I A ■ April 2011
not updated in real time, they are typically taken to be a reliable
indicator of the probability of default. This assumption appears to
be reasonable based on analyses of so-called Gini coefficients, as
reported in a paper by Standard & Poor’s (S&P)1. If this assumption
holds, one merely needs to find a mapping from credit ratings to
default probabilities in order to pin down or parameterise models for
the frequency of default.
One problem with this approach is that credit ratings are not stable;
A General they evolve over time. The next section will look at global rates and
their properties in more detail.
Insurance Stability in Credit Rating Transitions
Ample data are available on credit rating transition rates. Our first
question relates to the stability of these rates over time. If they
Approach are not reasonably stable, then modelling default frequencies for
a portfolio on an ex-ante basis may prove problematic. S&P has
calculated average credit transition rates for the period from 1981
to 2009. Their stability can be investigated in different ways. These
include measuring the variation in these rates over time and verifying
that single-year rates are consistent with longer term rates.
The following table extracted from the S&P paper gives global,
average transition rates for corporate credit over the period
mentioned. The numbers in parentheses give the standard deviation
of the rates, as calculated by S&P.2
One observation that can be made immediately is that the credit
ratings appear to be very ‘sticky’, as the one year invariance rates
along the lead diagonal are all quite close to one. Further, the better
Introduction the credit rating is, the stickier the invariance rates are, as the rates
Corporate bonds, corporate credit, or just ‘credit’ for short, is gently reduce down the diagonal. The chances that a rate will
attracting increasing attention as an asset class in its own right. change by one full notch or more over a single year (off-diagonal
This article aims to take an incisive look at the nature of the default entries) are correspondingly very small, although they increase as
risk associated with a portfolio of corporate bonds, with a focus the initial rating worsens.
on credit rating evolution. Given that many investors seek global
exposure to this sort of investment, our analysis will be global in The standard deviations of the invariance transition rates do not
perspective. However, the underlying principles can be generalised appear to be grossly disproportionate. However, we note that the
to more focused portfolios (and arguably should be) or investment coefficients of variation are not small in general, particularly for
in other forms of debt. smaller cross-rating transition rates e.g. AA to AAA (coefficient of
variation greater than 0.5).
A portfolio of corporate debt issues
is not unlike a portfolio of non-life
insurance policies. Claims may or
may not happen, according to some
statistical frequency process. This
is analogous to the frequency of
default occurring. Once a claim on
an insurance policy is made, we are
interested in the size of the claim,
in some cases relative to a sum
insured. This can be likened to the
conditional size of the credit default
compared to the nominal value of
the bond, be it total or partial.
Our analysis below will focus on
the frequency or probability of
default. Although credit ratings are
A C T U A RY A U S T R A L I A ■ April 2011
At a cursory glance, all of this might tend to suggest that the We can apply the classic no claims discount (NCD) problem from
significant transition rates and ratings themselves should remain general insurance here, where we wish to solve for the equilibrium
fairly stable over time. proportions in each NCD state. Here, we wish to solve for the
vector Πof equilibrium proportions of credit issues in the portfolio in
Markov Analysis each rating state. Recall that this is done by solving the system of
The actuarial eye will immediately see this matrix as a representation equations T.Π = and imposing the condition that the sum of the
of a Markov chain. The states of the Markov chain are simply the elements of must equal one.
S&P credit ratings. If we invert the matrix, so that the columns,
rather than the rows, sum to one, then standard Markov analysis This problem can be solved by finding the inverse of the matrix T ',
can be carried out. We shall do this, rounding all of the historical which is identical to T except that one is deducted from each of the
average rates to the nearest 0.01 to avoid spurious accuracy, and entries along the lead diagonal and one of the rows is replaced by a
where the columns do not sum to 1, we adjust the transition rates row of ones, as shown in the table (bottom left).
to NR (not rated) to ensure they do. The S&P study does not give
rates for transitions away from the states D (default) or NR, so we The vector will appear in the last column of the inverse of T ',
shall assume for now that all rates away from these are zero and the which, in this case, turns out to be a column of zeroes with a final
invariance rate is one in both cases (i.e. an issue that has defaulted entry of 1. This implies, of course, that all issues will end up being
remains in default indefinitely and non-rated issues remain non- non-rated in the long run – arguably a foregone conclusion.
rated). The following transition matrix results:
This was, of course, an exercise in futility: transition rates of 1
Transition matrix, T appearing in the matrix where they
do act as ‘traps’ for migrating issues.
FROM Setting these to 1 in the first place
is highly questionable. For example,
TO AAA AA A BBB BB B CCC/C D NR an issuer might default on a single
AAA 0.88 0.01 0 0 0 0 0 0 0 coupon once and then never default
again and a given issue may remain
AA 0.08 0.87 0.02 0 0 0 0 0 0 temporarily non-rated for any number
A 0.01 0.08 0.87 0.04 0 0 0 0 0
BBB 0 0.01 0.05 0.84 0.05 0 0 0 0 Be that as it may, longer term
empirical statistics produced by
BB 0 0 0 0.04 0.76 0.05 0.01 0 0 S&P do suggest a very strong ‘pull’
B 0 0 0 0.01 0.07 0.73 0.11 0 0 toward default and non-rated status.
Average 20-year global corporate
CCC/C 0 0 0 0 0.01 0.05 0.45 0 0 transition rates from 1981 to 2009
show significant proportions in default
D 0 0 0 0 0.01 0.05 0.28 1 0
and very large proportions settling in
NR 0.03 0.03 0.06 0.07 0.10 0.12 0.15 0 1 non-rated territory – above 0.5 for
all initial states other than AAA and
CCC/C. So, while the analysis above
may seem spurious, there is some
Modified Matrix representing Markov equilibrium equations, T ' empirical confirmation that its results
make some sense.
-0.12 0.01 0 0 0 0 0 0 0
We can simplify our problem by
0.08 -0.13 0.02 0 0 0 0 0 0 focusing on the preoccupations of
most institutional investors: ensuring
0.01 0.08 -0.13 0.04 0 0 0 0 0 that their portfolio, or at least the bulk
of it, remains rated investment grade
0 0.01 0.05 -0.16 0.05 0 0 0 0
i.e. BBB – or better. We, therefore,
0 0 0 0.04 -0.24 0.05 0.01 0 0 need to truncate the matrix T and in
doing so make another assumption,
0 0 0 0.01 0.07 -0.27 0.11 0 0
i.e. that all of the transition rates
0 0 0 0 0.01 0.05 -0.55 0 0 below BBB can be aggregated into
one ‘super state’ – sub-investment
0 0 0 0 0.01 0.05 0.28 0 0 grade – of BB+ or worse. For
simplicity, this super state includes
1 1 1 1 1 1 1 1 1
the ratings NR and D in the following
simplified transition matrix:
AC TUARY A U S T R A L I A ■ April 2011
Truncated matrix, U Conclusion
Our observations of credit investment, partly from an actuarial
perspective, have uncovered the following insights:
AAA AA A BBB Sub-IG ● Credit ratings themselves appear to be fairly stable in the short
run, with invariance transition rates having high probabilities in
AAA 0.88 0.01 0 0 0 general. The chances of ratings moving by a full notch or more
over a single year are generally low.
AA 0.08 0.87 0.02 0 0
A 0.01 0.08 0.87 0.04 0 ● The error in average, ex-post transition rates appears to be
reasonably low for invariance rates but it is comparatively high
BBB 0 0.01 0.05 0.84 0.05 for the others. This is of lower significance in Markov analysis,
Sub-IG 0.03 0.03 0.06 0.12 0.95 where the larger transition rates will dominate equilibrium
Solving for the Markov equilibrium state probabilities, as described ● A simple Markov chain analysis indicates that a significant slide
above, renders the vector: to poor credit quality on a laissez-faire basis can be expected
to occur in long-run equilibrium. This appears to be confirmed
[0, 0.01, 0.08, 0.24, 0.67] t by longer term transition statistics. This validates claims that
active management of credit portfolios is essential to ensure that
In other words, a portfolio left to run its own course is expected quality criteria are met and default risk is adequately controlled.
to experience a marked degradation in credit quality in the long
run, based on ex-post transition statistics. About two-thirds of the ● As in general insurance, risk management could be further
portfolio can be expected to end up in junk bond or non-rated enhanced by the use of ‘reinsurance’ e.g. by means of credit
territory on this basis. default swaps or other derivatives, where viable.
Fanciful number-crunching of this kind has its weaknesses, but it We would suggest that further research on the extent of capital
does provide some support for claims often made by professional losses given default would be useful in this context, provided that
fund managers. For example, they insist on active management good data to support the analysis of them can be obtained. This
and specialist analysis for credit portfolios, emphasising that the first could facilitate aggregate loss modelling, especially if it turns out that
priority of good credit management lies not so much in chasing the severity distributions can be modelled reasonably well using simple
upside but rather in avoiding downside events. If there is something probability density functions. ▲
in the naïve numerical analyses above, these claims would seem to
be justified. Daniel Mussett
In practice, it is unusual for a portfolio to be constructed and then
managed on a buy-and-hold basis. As issues mature or fall out of Daniel is Russell’s Head of Consulting
favour they would need to be replaced by other issues in a much in New Zealand. A specialist investment
more dynamic way. However, the use of focused, skilful active actuary, Daniel is particularly well-versed
management of such portfolios, especially where based on clear in the theory and practice of asset-liability
and enforced construction rules, may justify the use of equilibrium management and governance solutions
credit rating exposure assumptions. If so, mapping from credit for institutional investors.
rates to default probabilities is a simple task, as corresponding
default probabilities are well documented and seem to exhibit 1 See pp. 6, 61-66 and Appendix III, Vazza, D. et al 2009 Annual
fairly consistent patterns over time e.g. very low rates of default Global Corporate Default Study and Rating Transitions, Standard
for investment grade ratings, which become material and increase & Poor’s, March 2010.
significantly as the rate sinks to BB and lower.3 2 Ibid, p. 53
3 See for example Ibid, p. 9.
On another note, risk management techniques for credit portfolios
might also take some inspiration from those used in non-life
insurance. When risks become ‘bad risks’; that is, where the
probability of claim becomes large, an insurer is likely to avoid them,
decline to renew coverage of them or reinsure them. The lesson
for portfolio management is that default probabilities, both now
and in future should be modelled and monitored. Risk avoidance
would take the form of deciding not to buy the issue, declining
renewal would correspond to selling the offending issue; and using
reinsurance might be mirrored by the purchase of loss mitigating
derivatives, such as credit default swaps, where the price is right.
A C T U A RY A U S T R A L I A ■ April 2011
Finding and Working with
he Leadership Committee of the Institute of Actuaries your IQ. The mentoring could especially benefit your self-awareness
of Australia is a subcommittee of the Education Council (through exposing you to a more external view of yourself) and
Committee. It is focussed on initiatives to help build the your empathy (through seeing your mentor’s frame of reference for
leadership capabilities of the profession and its members. viewing events). You may also benefit from an outsider’s view of
The purpose of this article is to inspire interest by members in the your recent performance review or other feedback you’ve received
potential of being mentored and of mentoring. – perhaps about a challenging blind spot.
What is a mentor? Are mentors only of value for young
A wise and trusted advisor or teacher who brings experiences which actuaries?
may be of value to another person (their mentee). The capacity of Actuaries of all ages are exposed regularly to challenges of which
the mentor and mentee to build mutual trust is fundamental and the they have no prior experience. No matter what your position or
key dimension of the wisdom is more in the nature of worldliness professional role, you can benefit from having a mentor. Most chief
and experience than technical or intellectual knowledge. executives in Australia would have mentors or coaches who help
them to reflect on recent decisions or events and the upcoming big
How might an actuary benefit from having points in their professional or personal lives. Even if you have been in
a mentor? the same position for a period of time and are very comfortable with
The formal education and qualification process for actuaries it, there are big benefits from someone challenging your comfort
emphasises technical skills, professional and ethical judgement zone and its implications, including for your professional satisfaction.
applying those skills and the ability to communicate recommendations
in writing. In an actuary’s professional life they are required to apply Does your mentor have to be much older
these learnings in commercial and industry environments and in and much more experienced than you?
management frameworks in which they may have limited experience. Not necessarily. In fact there can be benefits in finding someone of
They may also, because of their strong and relevant technical skills, your own age with whom you can regularly exchange experiences
be promoted to a management position at an early age and face and learnings – effectively mutual learning. They will regularly bring a
challenges and opportunities for which they are not well prepared. different experience curve and perspective to you.
Whether it is because of promotion beyond your years, the Does your mentor need to be an actuary?
complexities of the modern business environment or the rate of Not necessarily. Recognising that your challenges and therefore
change, you will always be facing challenges you have not faced your opportunities through mentoring are most likely to be about
before. Hopefully your career path will be one where you are always less technical issues such as communications, interpersonal skills,
finding yourself in the biggest job of your career, where the challenge management and leadership skills, your mentor need not be an
for you and your boss is to set you up for success. One element of actuary. For example, if you are working in an actuarial services
this, and a very valuable one, is for you to have someone you can firm, you may benefit from dialogue with a mentor who has deep
talk to in complete confidence of confidentiality, non-judgemental experience in some other type of professional services firm.
responses and relevant advice or challenges.
How might an actuary benefit from being
No matter who you are, having a mentor can accelerate a mentor?
development of your emotional intelligence, which can be a far The most obvious benefit of being a mentor is the satisfaction of
greater determinant of your professional or business success than playing a valuable role in the personal and professional development
AC TUARY A U S T R A L I A ■ April 2011
of another person. But the rewards run much deeper. A mentor How do I find a mentor?
inevitably learns a great deal from the experiences, work environment A good start is to spend some time reflecting on your current
and perspective of the mentee and finds themselves thinking ambitions, priorities and challenges. Ask yourself: “What will be the
through challenges which may be quite remote from their own things I will most need someone experienced but non-judgemental
environment. The perspective of a Gen Y mentee can be highly to talk to about?” Talking to peers in the profession may help you
enlightening, healthily challenging and consequently valuable to a clarify this. The next step is to search for someone who roughly
baby-boomer. Mentoring is not generally a one-way street. fills the brief. Don’t expect or waste time searching for a perfect fit.
Your employer may be able to help through an existing mentoring
Should I have just one mentor at a time? program. Alternatively you may spot an appropriate target from
It is potentially valuable and logical to have more than one mentor reading an article they have written in Actuary Australia or from a
because one mentor may not bring all the range of experiences paper they have presented to the Institute. Or one of your peers may
you would like to capitalise on. For example it could be logical to suggest someone from their firm who they respect.
have one mentor who is an actuary and one who is not; or one
who works with your employer and one who does not; or one who The more you attend professional or industry functions or serve
is a leader in their business or their field and one who is of your on Institute committees or industry forums, the more likely you are
own age. There is no “one size fits all” approach to mentoring. The to meet a potential mentor. In the end a key factor will be having
benefits actuaries can derive from mentoring are very individual and the courage to ask and you will do that more effectively the better
will change over time. you have been able to think through your objectives. You may find
that the person is unable to be your mentor but is happy to have
How long would a mentor relationship a cuppa to discuss where you’re headed. If you get your thoughts
typically last? and questions clear and engage professionally, you never know
Some mentor relationships last years. Some of these develop what serendipity might arise – ideas, opportunities, visions, even an
into mutual mentor/confidant relationships and may last decades. introduction to someone else.
Others might last six months to a year while the mentee is going
through a particularly challenging period (e.g. after promotion to Don’t fear lots of angry knockbacks – perhaps the most exciting
a new role). While it may not constitute a mentoring relationship, aspect of the Pulse Survey was that 80% of respondents
just a one hour cuppa with someone who has previously been would consider becoming a mentor if asked.
where you are aspiring to go, can be a valuable part of your
mentor framework. Most people get meaning from helping others and especially
professional colleagues. It is one of the very foundations of
Will the Institute be setting up a mentor a profession.
The Leadership Committee is focussed on initiatives to help build How do I know if the mentoring is
the leadership capabilities of the profession and its members – working for me?
leadership in its many dimensions – from self-leadership to people Trust your own judgement. Is it offering what you hoped to take out
leadership and from thought leadership to strategic leadership. In of it? Above all, do you feel the trust is growing soundly? Do you feel
assessing any initiative we believe that we have three alternatives: your mentor is engaged when you are together? Are you comfortable
to do nothing; to establish an Institute-led project; or to focus on discussing tough issues? Do you look forward to the time with the
building the awareness of actuaries to the importance of the issue mentor? Does it enhance your perspective of your own potential and
or opportunity and then leave it to the initiative of individual members your buy-in to investing time and energy in your personal growth? Is
to take their own direction. it helping you grow and to become more curious? Does the mentor
offer a healthy balance of challenging questions, alternative solutions
In the case of mentoring we are convinced of the importance of it and practical advice or is the conversation dominated by immodest
to the future of our members and our profession but believe it is stories of the mentor’s own experiences?
something best driven or initiated by the individual member to fit
their own objectives and context. It’s also important to ask yourself what you can offer to the mentor
– even if you can’t think of anything tangible, it’s a great start just to
Our purpose then is to inspire interest by members in the potential be prepared, on time, fully engaged, open-minded and respectful
of being mentored and of mentoring so that they can determine the of their time. ▲
best options to suit their own needs, which will inevitably change
over time. Institute Leadership Committee:
Peter Hodgett (Convenor) firstname.lastname@example.org
In this context we were heartened by the results of the recent Andrew Brown email@example.com
Pulse Survey which showed that 68% of the respondents Tony Cook firstname.lastname@example.org
had experience as a mentor and 66% of the respondents had Anthony Ford Anthony.Ford@macquarie.com
experience of being mentored. Furthermore, the majority of Dick Morath email@example.com
those experiences were positive (rated 4 or 5 out of 5) for 61% Martin Mulcare firstname.lastname@example.org
of mentors and 59% of mentees. The survey also revealed that Ian Pollard (overseas from April 2011 to March 2012)
22% of respondents are currently looking for a mentor.
A C T U A RY A U S T R A L I A ■ April 2011
“I have discovered a truly marvellous proof of this, which this margin is too narrow to contain” – Fermat
In the Margin with Genevieve Hayes
“I have discovered a truly marvelous proof of this, which this margin is too narrow to contain” – Fermat.
with Genevieve Hayes
i n t h e m a rg i n @ a c t u a r i e s . a s n . a u
My Word! (AA156 Solution) 1.
The answers to the five questions posed in AA156 are given
below: x =
1. ONE BILLION (1,000,000,000) contains ten letters and ten digits. 2.
2. This question was first posed in Alice’s Adventures in Wonderland,
in which no answer was given. However, in the preface to a + =?
later edition of the book, author Lewis Carroll gave the solution
‘Because it can provide a few notes, tho they are very flat; and 3.
it is nevar put with the wrong end in front!’ Sam Loyd’s famous
solution, “Because Poe wrote on both”, was also accepted. + + =?
4. The vowels (this riddle was written by Jonathon Swift, author of
• + =?
Five readers scored five out of five. The winner of this month’s
In the Margin prize, selected randomly from among these entries,
was Georgina Dircks, who will receive a $50 book voucher.
Allan closed his phone and looked at the village around him. – + =?
Tonight’s going to be my last night in civilization for quite a while,
he thought to himself, maybe forever. Better make the most of it. 7.
That was why he had taken the time to make his final farewells
to everyone he knew. The satellite phone was meant to work –
• – +
anywhere on Earth, but experience had taught him that ‘anywhere’
didn’t necessarily include the most remote areas of Africa.
In fact, it was sheer good fortune that calls could be made from
the village at all, but there had been a multinational gathering there
earlier that month and the delegates had insisted on it. The flags
from the gathering were still up in the village square.
– x – =?
Having finished with his phone calls, Allan decided to take a
better look at the flags. Watching them waving and flapping in the
breeze, it seemed to Allan as if they were almost trying to send him
a message. 10.
Ten equations are given opposite. In each case, the question
mark can be replaced by a particular flag, different in each
+ + + –
case, to make the equation balance (the first answer has been
given as a hint). For your chance to win a $50 book voucher, =?
identify the nine missing flags and email your solution (with
working) to: email@example.com ▲
AC TUARY A U S T R A L I A ■ April 2011
hat happens when too many different won’t be able to resist the temptation of seeing what the message
communication messages are bombarding you? is about.
Many people find that regular interruptions –
phone calls, emails, visitors – prevent them An alternative is to impose some self-discipline and only check
making progress with their important tasks. This means that your emails when you have completed your very important task.
they are less effective and it often leads to feelings of stress This may require some management of other people’s expectations
and annoyance. This doesn’t apply to everyone and if you if you are used to replying to them within 10 minutes. I can assure
are comfortable with your multi-tasking skills and enjoy such you that it is possible to maintain a healthy business relationship
interruptions then don’t bother with this month’s column. For without responding immediately to someone’s emails.
everyone else, please read on…
3. Manage Your Telephone
1. Practice Saying “No” The same principle applies here: if you are engaged in a very
Most actuaries are, in my experience, important task then why would you risk being interrupted by a
friendly and helpful people. You can telephone call? You have the option to turn off your mobile and
certainly have worse problems but forward your landline. Most modern telephones have answering /
it usually results in an inability to message capability and I suggest that you use it when you are
say “no”. Clients, colleagues, team focused elsewhere.
members, friends and family are
after a chunk of your time because If you are going to be more dependent on your answering service
they respect you and your talents. then please check your recorded message to improve the
Your response is usually “sure, no chances of a successful return call. Try something like: “Sorry I am
problem, happy to help”. But where does this leave your priorities? unavailable. Please let me know what you are ringing about and
a good time to call back.” This helps you assess their purpose
It is important to practice saying “no”, politely and respectfully. You and perhaps prepare for the return call. It also reduces the risk of
have probably built up a store of goodwill from your history of being telephone tag by finding a suitable time to call back rather than
friendly and helpful – so use it. When someone seeks your input, experience the frustration of a series of unsuccessful attempts
and it is not directly aligned with your immediate objectives, here when they are unavailable.
are some options:
What are the benefits of making these controversial changes to your
● Find someone else to help them. working practices? Your time is used more effectively, with fewer
● Challenge them to solve it themselves. interruptions. When you catch up with your manager / colleagues /
● Find a later time that suits you both to address the issue. clients / team members you can provide your full attention rather
than be pre-occupied or, worse, annoyed with them.
I understand that this can be a challenge in this wonderful era of
open plan office design. So if you do have an office, it’s a good It takes more than maths to manage your communication
idea to selectively close the door. interruptions and to feel in control of your working life. ▲
Please ensure that the majority of your time is devoted to what is Martin Mulcare
important to you – not someone else. firstname.lastname@example.org
2. Manage Your Email
The fundamental principle here is that if you are engaged in a
very important task then don’t be interrupted by a machine. If
your email system signals you when an email arrives, by sound or
symbol, I suggest that you turn it off. The distraction of the email
notification can interrupt your thinking and, of course, you probably
A C T U A RY A U S T R A L I A ■ April 2011
ctuaries are becoming the first port of call to identify One specific criticism that can be levelled at many players in the
and manage risk appetite. We look at the steps re/insurance industry is that their risk taking is not always aligned
actuaries can take to evaluate capital considerations with their risk appetite i.e. they need to reconcile their individual and
and achieve reinsurance optimisation. aggregate risk limits with their overall appetite for risk. If we take a
step back, many re/insurers are not even able to fully quantify their
The process of transferring risk has become both increasingly simple risk appetites because they don’t possess the appropriate tools and
and increasingly complex for corporations in recent years. This methods to evaluate the capital considerations associated with risk
apparent duplicity was brought into focus during the global financial taking and risk transfer.
crisis that began in 2007 and unravelled over the following two years.
The crisis revealed how quickly and easily financial institutions had It is notable that across the industry, those with strong Enterprise
been able to allocate and reallocate capital many times over, creating Risk Management frameworks tend to have a well-defined risk
a highly complex web of transactions often involving esoteric financial appetite framework, which in turn supports the active management
instruments. These instruments were so abstruse that companies’ of the acquisition and cession of risks (and also appropriate
exposures only came to light when the unravelling began. compensation structures). This includes qualitative and quantitative
statements which relate the solvency, earnings, and/or dividend
While blame for the financial crisis has been apportioned and distribution ability of the re/insurer. It should be remembered that
reapportioned ad nauseam, it is easy to relate to the human failings certain key statements are probabilistic in nature, reflecting that
that caused the troubles. When capital is allowed to flow this freely, breaches of some risk tolerances cannot be prevented altogether.
it makes sense that in a highly competitive capitalist environment,
individuals and companies will continually seek ways to optimise The first step towards capital optimisation therefore is to develop
their own use of capital and earnings volatility, and that banks will a clear risk appetite framework in consultation with the different
always be trying to develop innovative financial products that can stakeholders. Business units should then be engaged in translating
help their clients achieve this aim. the relevant aspects of the risk appetite framework into their daily
activities, so as to embed the framework across the whole of
The desire for capital optimisation is understandable, and while the operation.
there have been steps to regulate the financial environment (quite
rightly) to avoid another global collapse, companies should continue Optimisation Through Definition
to try to make the very best use of the capital under their control. Developing the idea further, reinsurance optimisation is a critical part
of an insurer’s risk appetite framework. But it cannot be achieved
This is especially true for insurers and reinsurers, whose very in isolation – a clear link with the organisation’s objectives needs to
product is the capacity, or capital, they provide to clients. be defined.
While re/insurers largely performed well during the financial crisis The reinsurance optimisation framework will include qualitative
– indeed, their capital levels quickly rebounded and eventually and quantitative criteria. Quantitative criteria should capture the
breached the record levels set in 2007 – many still fail to make the risk and reward trade-offs of the firm and the goal is to find an
grade when it comes to optimising their capital deployment. While optimal balance between them. Once this has been achieved, the
their more conservative risk strategies ensured that they remained firm needs a professional with the appropriate tools to generate a
more robust as the unravelling took place, prudence in the long term capital model to effectively assess the risk and reward trade-offs
does not always translate to superior capital performance. of a variety of reinsurance alternatives.
AC TUARY A U S T R A L I A ■ April 2011
The types of risk and reward depend on the nature and objectives Besides risk reduction, value can be added by introducing an
of the business. Large listed companies generally focus on optimisation framework and savings optimised by redesigning entire
improved return on equity, stability of earnings or dividends. On reinsurance structures. In contrast, improper use of reinsurance can
the other hand, non-profit-organisations would express their risk destroy value on the short and long term, even when risk seemed
appetite differently such as protecting policyholders’ capital or price to reduce. Actuaries are ideally placed to quantify the risk reduction
of products. and importantly the value created.
Strategies – Similar
While no two capital optimisation strategies are
the same, there are certain factors common to
all capital strategies:
● Understanding model risk and limitations in
connection with the broader capital picture
● The modelling of extreme events needs
special care and attention – in this regard,
increasingly comprehensive catastrophe
models are allowing for hugely improved
● Actuaries need to actively engage
with reinsurance managers and other
reinsurance experts so as to consider the
implications of non-quantitative factors
● Due to the scarcity of extreme events, re/
insurers need broad access to market or
A firm’s capital structure is further influenced by the ever increasing ● To be successful, the framework needs support from
scrutiny of international regulators, whose focus on all sectors management and the board, be aligned with the company’s
of the financial services industry has been sharpened since the objectives and be embedded in the organisation’s culture
financial crisis took hold.
The process helps to determine which reinsurance structure
Regulatory protocols such as Solvency II in the European Union is beneficial to an insurer’s portfolio and helps to foster value
have increased the demand for actuaries, and the profession is creation. It measures the risk and return in dollar amounts, using
well positioned to articulate a reinsurance optimisation framework various reinsurance structures, and it is therefore concrete and
in line with a company’s risk appetite. In this way, actuaries have financially valuable when properly executed.
been provided an opportunity to position themselves at the very
centre of a firm’s overall reinsurance strategy. In addition, it encourages communication between directors,
investors and rating agencies – the latter party is less likely to
While reinsurers were long considered a source of capacity and provide favourable opinions when a re/insurer cannot articulate
cost for their cedents, they are becoming increasingly viewed as a its risk limits, given its risk appetite (e.g. the business units are
source of capital and earnings management, making them a vital managed to a set of objectives determined remotely from the
link in the overall performance optimisation process. This critical risk appetite).
transformation in perception will gain added momentum with the
advent of Solvency II and other solvency regulations worldwide In conclusion, reinsurance optimisation
and, over time, this will lead to improved capital structures and encourages companies to better articulate
resilience to risk. their business models and understand
how apparently distinct decisions affect
Early optimisation frameworks have often concluded that less the firm as a whole. ▲
reinsurance should be purchased, but modern optimisation
frameworks consider the entire risk appetite framework, key risk
drivers, correlations and the short term earnings implications. They David Maneval
are becoming more robust and cross-discipline oriented. email@example.com
A C T U A RY A U S T R A L I A ■ April 2011
Chief and Assistant Examiners
Examiners are recruited for all subjects in each semester. The key
responsibilities for the Chief Examiner are to attend BoE meetings,
liaise with the Course Leader, Assistant Examiners and BoE Chairs
on the exam development and review process and final sign-off on
the paper. In terms of exam marking, the Chief Examiner and his/
her assistants are also required to customise marking templates,
review borderline candidates, recommend passes to the BoE,
complete the examination report template and conduct any exam
Chief Examiners can have up to two assistant examiners to help
complete the above tasks. Payment for Examiner roles for courses
delivered by the Institute are paid on a tiered basis according to
enrolment numbers, which can range between $10,000 and $20,000
BoE Chair and Assistant Chairs
One Chair and nine assistant chairs provide expertise across
a range of practice areas in relation to the Part III Education
Program. Once exams have been drafted by the Course Leader,
reviewed by the scrutineer, reviewed and approved by the Chief
Examiner, they are then ready for BoE review. Their role is to
ensure there is consistency across the exams, whether they have
been drafted in line with the criteria as highlighted in the BoE
Handbook and signed off with the respective Chief Examiner. The
Chair also writes an administration section of the BoE report each
semester, including recommendations, and then presents this in a
he Part III Education Program is very complex and meeting to the Education Council Committee.
requires approximately 300 volunteers per year. The
Institute relies on the goodwill and support from the Scrutineers
membership to help ensure there is a quality program A recently qualified Fellow is recruited for each subject to
with industry relevance for our up and coming Fellows. Here is an scrutineer the exam. The role of the Scrutineer is to first sit the
overview of some of the key roles, what the responsibilities are and exam under exam conditions and complete the Scrutineer Review
how they contribute to the Part III Education program. Form providing comments on clarity, coverage, difficulty and time.
Following this, the scrutineer is sent the draft exam solutions and
Faculty Members asked to also comment on these. Scrutineers receive a payment
A Faculty is an education sub-committee that has been put in place of $300 for their services. Recently qualified Fellows are also
for each of the specialist area Practice Committees. Their primary recruited for each topic in the Commercial Actuarial Practice
responsibility is to ensure the course notes and assignments are Course (CAP) however they are not expected to sit the exam under
current and consistent with industry practice. They review and exam conditions but rather attempt any analysis required by the
approve course materials and textbooks along with assignments case, check that it makes sense and identify the main points they
before publishing to students. would make in their report. CAP scrutineers receive a payment of
$150 for their services.
Course Leaders are recruited for all subjects in each semester. They Assignment Markers
are responsible for drafting assessments and solutions (assignments Approximately four to eight markers are required per subject for
and examinations), scaling and finalising results for assignments, assignments. This is determined by the number of enrolments.
delivering tutorials, monitoring online discussion forums and Once assignment markers are confirmed they receive access to
responding to posts. There is a lot to cover in this position however the Learning Management System (LMS) where the students’
there is scope for this role to be shared. As this is a paid contracted assignments are uploaded. They receive notification from the
role Course Leaders can earn approximately $20,000 per year. Institute on their candidate allocation along with instruction
documents, solutions and templates. Assignment markers also
Board of Examiners (BoE) provide comments to each candidate via the LMS.
The BoE Team is comprised of Chief and Assistant Examiners for
each subject, Chair and Assistant Chairs and Institute staff. They As a result of the assignment process being completely electronic,
meet three times throughout the semester to discuss examination markers can be located anywhere in the world to participate!
processes such as the exam development and review, examination Assignment markers receive approximately $50 per one assignment
reports, borderline candidates and pass lists. marked.
AC TUARY A U S T R A L I A ■ April 2011
Approximately ten to twelve markers are required per subject for Anthony Brien
exams. This is determined by the number of questions in the exam. Chair, Board of Examiners
The exam marking process is based on a partnership of two markers
who are responsible for marking one question for all students. “By volunteering, I contribute to the
quality and decision making within
We try and recruit marking partners who work in the same company, the profession and help maintain its
so should they wish to meet and discuss marking it is easier for standing in the community.”
them. We also try and match an experienced marker with someone
who is new to the process. All exams are scanned, password
protected and uploaded onto an internal website in batches.
This ensures markers have access to exam answers as soon as
possible. For those who prefer a hardcopy, we will also split the Assistant Chair,
exam papers in half and courier to you and your partner.
Board of Examiners
“I adore the role of Assistant Chair
Following the completion of the exam, markers receive an electronic (though I have been petitioning for a
exam package containing customised marking templates, instruction name change – how about Executive
documents, solutions and templates. Marking pairs must agree on Education Adviser?). I get to mould the
results before submitting their completed combined template to the structure of the exams, attend Board
Chief Examiner. Like the assignments, the exam process can be of Examiners meetings, and influence the decision
completed entirely online and markers can be located anywhere over borderline candidates – makes me feel very
in the world to participate! Approximately $50 is allocated for each responsible for the next generation of actuaries. With
candidate and depending on the number of enrolments this is then two young children and a full-time job you may wonder
divided among the markers accordingly. how I fit this in. It’s not easy but I make time because I
see it more as a hobby than work.”
How Important are our Volunteers?
Our members volunteer for many reasons as you can see from
some of the comments here. Giving back to the profession and
participating in the improvement of the delivery of the education
process seem to be two of the most prominent factors. Course Leader
The Part III Education Program would not exist if it was not for
“I like the interaction with students,
all of the hard work our volunteers put in. I would like to take
and I’m getting a lot of support
this opportunity to acknowledge and thank all of you who have
from colleagues and the Institute
contributed (and those who continue to do so).
staff, which is a great opportunity to
renew acquaintances. My aim is to
Your enthusiasm, energy and time means a great deal to us in
get the pass rate up to 100%, and then aim a bit higher,
the secretariat and your support and expertise are crucial to our
maybe re-assess a few past failures, including myself.”
success in every way. Grateful thanks are also extended to the
many volunteers outside of the Education Program who assist in
other areas from event-related projects to those who are connected Julia Lessing
through committees. Scrutineer
We are always looking for ‘new recruits’, if you are interested in “We all study so hard to get
volunteering and would like to get involved, please do not hesitate through the Part III exams
to contact me, I would love to hear from you! ▲ and we expect a level playing
field when it comes to the
Rebecca Moore exam paper. I love being
Volunteer Manager a scrutineer because I can help to reduce the risk of
firstname.lastname@example.org students failing due to ambiguity in a question or the
paper being unfairly difficult. I also love talking to high
school students in my role as Chair of the Talent Finders
Committee. The Committee and its volunteers talk to
high school students about what actuaries do and the
pathways to become an actuary. This helps raise the
profile of the profession and lets us dispel the myths
and stereotypes about actuaries, to help encourage
bright students into the profession.”
A C T U A RY A U S T R A L I A ■ April 2011
28 student column
barely kicked off. It was much too late to cancel the event so we
decided to wait it out in hope that the weather could improve over
the next few hours.
Lunch time was drawing near and there were many hungry actuarial
students awaiting the sausage sizzle. We encountered a slight
problem, the BBQ cooking area was unsheltered and it was still
raining. This was not going to stop us from having our BBQ. Alex,
our Social Director gathered a couple of us to form an umbrella
shelter over the BBQ so that we could start cooking. The shelter
held up quite well however the persistent rain managed to find its
way onto the hot plate. “We might be having boiled sausages today”
exclaimed Alex, whilst the rest of us laughed and huddled around
the warm BBQ area. We must have looked quite ridiculous holding
a BBQ in the rain, as people passing by stared at us in awe.
The sausages ended up tasting like any ordinary sausage sizzle
should taste. It was nothing like a boiled sausage (not that I have
ever tasted a boiled sausage). There was plenty to go around and
the seagulls even managed to get hold of some leftover sandwich
bread. Everyone felt warm and happy, after satisfying their hunger.
The turnout was better than expected, given the forecasted weather of
scattered showers. The rain can be seen in a positive light. It brought
us together as a small group under the only possible shelter. Time flew
Going Against the odds by as stories were passed between students and we got to know one
another better. It was still raining when we decided to go our separate
t was clear blue skies on the Saturday morning of 19th March
2011. There was not a grey cloud in sight. The conditions
were perfect to host the ASOC Beach Day. This event is the
first of many events ASOC organises for its members over the
course of the year. Beach Day was created as an opening event
for members across all years to get to know one another in an
environment outside of university study. More importantly it is a day
to let loose, have some fun in the sand, surf and sun after a tiresome
week at university.
The week leading up to Beach Day was filled with lecture
announcements informing the students of tthe fabulous day that
ASOC had planned. On the agenda were icebreaker activities, logic
puzzle games, beach sports and the highlight of any university
student’s day, a free BBQ.
Executives arrived at Coogee Beach sporting our bright blue ASOC
shirts alongside the ASOC banner hung up high to lure in arriving
members. A soccer ball was taken out to pass some time whilst ways but everyone left knowing that we braved the relentless rain and
members starting arriving in small groups. It was going to be a slow succeeded in the main objective of today which was to have fun. The
morning. 10am seemed to be too early for the average university thought that remained in everyone’s mind was the one remark made
student to be up and about on a Saturday morning. by a master’s student: “We’re actuarial students, you would think that
we would be able to calculate the probability of rain”. The lesson that
All of a sudden George, our Sports Director stopped in the middle of I learnt from this experience is that sometimes
kicking the ball. He held out his hand and said “hey guys it’s starting you just have to go against the odds and make
to sprinkle”. All of us looked in dread as we peered into the distance the best of what you’ve got, regardless of what
and saw ominous rain clouds heading towards us. Not long after may happen. ▲
everyone headed for shelter, it started to pour down on us. Students
were still arriving by public transport and the rest of the day was not Jenny Trinh
looking too good at this point. The grey clouds were not going to Publications Director
leave us alone. The rain began to get heavier and Beach Day had email@example.com
AC TUARY A U S T R A L I A ■ April 2011
CEO’s Column 29
technical stuff in language our audience (other business people) can
understand. However the picture that employers paint of actuaries
in regard to our communication skills is sobering. There were some
common themes from the interviewees: that actuaries are arrogant;
do not respect the opinions of non-actuaries (because we think we
are smarter) ; and can not explain things to people “the recipient’s
way – can only explain things their way”.
It was also pointed out by one interviewee that actuaries are not
Melinda Howes good at stakeholder management i.e. consulting before meetings to
increase chances of reaching consensus in meetings.
n last month’s column I was talking about the results of a survey b) People skills – Building emotional intelligence
we commissioned on employers’ views of actuaries. This Comments included:
survey was undertaken by Beaton Consulting, and amongst “Actuaries are typically very rational – right brain”, “Improve on
other things we asked what competencies they require to people and communication skills – they need to learn how to
obtain senior management positions. Here is what they said. understand that people can be driven by emotions – sometimes
to get people to react you need to appeal to their emotions”,
1. Soft skill development “People who are more social succeed more”, “Actuaries have
the right technical skills. The issue is the ability to be really
This was seen as our number one development need. A number of persuasive and understand the broader commercial issues and to
respondents pointed out that actuaries are rewarded for our technical appreciate the perspectives that other people are coming from”,
skills and not our soft skills. It was suggested that managers should “Emotional intelligence”.
set goals for actuaries and reward them on soft skills as well.
Actuaries need to be empathetic towards others and understand
a) Communication is the top priority area for improvement. Key where others are coming from. Even though some people
skills we need are: associate actuaries with being extroverted, there is a perception
that these actuaries also lack in people skills.
● Interaction with others and listening.
“Flexibility to listen to others opinions and take these on board”, Although people skills can often be something that is hard to
“Understand what other parties are wanting from the model”, learn there are steps actuaries can take to improve relationships
“Tailor their skills to the people”, “Sometimes they are great on within business:
the technical side but cannot communicate to their audience ● Being aware that people skills can help with development
so the information they are giving is of no value”, “Need to and success.
understand their audience”. ● Being conscious of where others are coming from.
● Understand that others think differently.
● Verbal communication
“Talk the way I would like you to explain things – I feel I have c) Self promotion
to milk answers out of them”, “They are not the best verbal Comments included:
communicators, the way they address people verbally needs “Very few of the outstanding actuaries around that made the
work, and their own marketing skills need work”, “Learn to jump from head of actuary team to a line of business manager. It
speak up for yourself, being able to influence with confidence is like they are pigeon holed in this area”, “To transition to these
(not arrogance).” “Picking up the phone and talking to people, areas, actuaries need to play to their strengths – which come
not sending email, answering the phone when it rings...”, “Key from their skill set. Use their skill set as an advantage – knowing
thing is to get out into the business more and understand how to their strengths but also knowing that their strengths may limit
communicate things that mean things to the business. The best them”, “They need to better represent themselves and the value
ones are the ones who can explain things to the person they are they bring”, “Leadership is a weakness, even amongst some of
explaining to rather in their own way”. the leaders of actuaries – they do not promote their team well
enough”, “To some extent they are not self aware and then have
● Written communication to rely on feedback. It’s about encouraging managers to create
“Need to be able to articulate things in a concise manner. feedback programs and take it on board”.
Understand things so well, but also be able to communicate this.
Presentations skills are an area to focus on, and then everything Employers have also noticed that actuaries are much less
else comes with experience and confidence.”, “‘Making the likely than other employees to put themselves forward for
technical understood’ Can’t rise up the ranks unless they management development or leadership programs. We have
can communicate”, “Stakeholder management presentations”, found the same thing – the Institute is now running our one-year
“Business writing courses”. intensive management development program (Step Up) less
frequently because we do not have enough people interested
Actuaries are supposed to be the translators who can explain the in participating.
A C T U A RY A U S T R A L I A ■ April 2011
30 CEO’s Column / notice
2. Commerciality have a strong market awareness and awareness of competitive
position to be successful”, “Business acumen, understanding the
a) The internal environment end customer perspective”, “Understand what challenges we
● Getting to know other parts of the business. face, what the competitors are doing, how they are pricing, what
● Be aware of business issues. profit issues we are under”, “Business acumen is not generic, it
● Understanding P&L. does vary by the commercial environment that people are in”.
“Need commercial knowledge of the internal environment – e.g. It was pointed out by banking managers that to further improve
spending more time with the product team to understand how business acumen and become more commercial, understanding
things work”, “Do not tend to think about the business as a the banking industry in more detail would be of benefit
whole”, “Thinking outside the box – being able to understand the to actuaries.
broader business context”, “Need to know about the business
structure”, “Curiosity – need to want to learn, and understand In the wake of this survey, we are analysing the implications for our
things and learn more about the business”, “It is a commercial educational and CPD systems. We are also going to be talking to
side to interpretation that is often lacking – do not understand the key personnel (such as HR managers) in banks and other “wider
business issue”. field” employers, to make them aware of the complementary skills
actuaries can bring to cross-disciplinary teams.
b) The external environment / the industry
● Knowing the competitive environment. I would welcome any comments from you on this survey or our
● Understanding external market factors. planned initiatives. ▲
● Understanding the customer.
“Need good knowledge of commercial environment – need to firstname.lastname@example.org
Risks, Mitigation and Funding Solutions
ONE-DAy SEMINAR Monday, 16 May 2011
HERITAGE BALLROOM, WESTIN HOTEL, 1 MARTIN PLACE, SYDNEY 2000
ecent events have highlighted the need for a national discussion about Who Should Attend
floods, how we as a nation can prepare for them, mitigate their impact This seminar will be valuable to local councils,
and fund the repair bill that results from floods and other natural disasters. state and federal governments, insurers, actuaries,
The Institute will host a one-day seminar on Monday 16 May 2011 to engineers, hydrologists, financial services executives
discuss the key issues relating to flood including Australian and international and the general public. It will provide invaluable
approaches to: insights into flood mitigation and funding options for
those interested in building Australia’s resilience to
● flood mitigation floods and other natural disasters
● flood mapping Supporting Partners
● national funding solutions
The seminar will feature The Hon Robert McClelland MP, Attorney-
General, followed by expert speakers from the engineering, banking,
consumer welfare, insurance and actuarial professions.
REGISTER NOW! For more information or to register go to www.actuaries.asn.au
AC TUARY A U S T R A L I A ■ April 2011
Strategically placing Actuaries
around the globe.
Sydney – New Zealand – Sydney –
Senior Actuary, Pricing Actuary, Actuarial Analyst,
Life Insurance Life Insurance Financial Reporting
This major corporate life insurer has created a new An experienced Pricing Actuary is required for this A number of analyst positions are available within the
leadership role to work closely with the AA to provide dynamic insurer in New Zealand. The Actuarial financial reporting area of this large Sydney based
financial information to the business and assist with function is very well respected and plays a very insurer’s actuarial team. Primarily working on the
executive decision making. Solid life insurance significant part of the strategic and risk management valuation of insurance or investment products the
experience including capital management, valuations decision making in this organization. Overseas successful candidates will need between 2-5 years
and reporting is required. The real key to this role is candidates are particularly welcomed to apply for this of actuarial experience within a similar function
leadership, with a good quality team that is growing role and every assistance will be given to ultimately and be working towards or have already attained
you should be able to coach, mentor and guide achieve Permanent Residency. This is a new role their Associateship. Other required experience is as
up and coming talent as well. Your presentation requiring the incumbent to interact with re-insurers, follows:
skills will be first class as regular Board reporting and underwriting and sales to design new products and • Ability to interact with peers, management and
presenting to management will be required. With re-price existing ones. You should have an interest team members
some key projects due for delivery over the next in mentoring others and be focused on continuous
12 months this is a key role for the organization. improvement and seeking ways to drive the business • Strong analytical skills with the ability to
forward. communicate results effectively
• Life Actuary, 10 plus years
• 3-5 years post Fellowship experience • Commitment to work to deadlines and to deliver
• Solid leadership experience high quality information
• Reporting and capital experience • Life risk products preferred
• Working knowledge of Prophet
• Strategic and commercial focus • Solid pricing background
• Overseas experience welcomed • Adaptable and commercial
• Very competitive remuneration structure
Contact Lesley Traverso for more information. Contact Lesley Traverso for more information. Contact Claire Street for more information.
Hong Kong – Hong Kong – Hong Kong –
Director & Financial Director, Actuaries & Associates,
Actuary, Life Insurance Life Consulting Life Insurance
Working with the Regional Chief Actuary in the A global actuarial and insurance consulting practice Due to the rapid expansion and future growth
Regional Office of a large International Insurer, you is searching for a senior actuary with ambitions to prospects for this leading European based insurer,
will be responsible for ensuring that local actuarial become a partner in the near future. You will have we are looking for both qualified and associate
practices in assigned countries are in compliance responsibility for the continued growth of the practice actuaries to be based in Hong Kong. Working within
with Company’s standards by providing peer review as well as practice management. either the local or regional teams this is an ideal
and training at the local level where required. • Business Development – actively seek and opportunity for someone looking to develop a long
• Peer reviews on the actuarial processes – generate new opportunities term career in a cutting edge environment.
valuation, analytics, experience studies and provide • Manage and develop existing client relationships • Knowledge of actuarial modelling processes
insights on results for assigned business units and financial reporting
• Qualified Actuary with demonstrable track
• Provide support to start up operations in setting record of success • Solvency II and MCEV experience would
up the infrastructure for the on going actuarial be a bonus
management of the practice • Senior role requiring excellent
management capabilities • Excellent English verbal and written skills
• Ad hoc actuarial support to business units in the • Project and people management skills for more
region • Experience of some of the following actuarial
techniques: ALM, stochastic modelling, EV, senior positions
• Fellow of a recognised actuarial institute with USGAAP, IFRS, realistic balance sheet, ICA, asset • Great career development opportunities
at least 5-7 years of actuarial Life Insurance modelling, capital management, distribution,
experience M&A / structuring
• Strong technical actuarial and communication skills
Contact James Lecoutre for more information. Contact James Lecoutre for more information. Contact Claire Street for more information.
Lesley Traverso James Lecoutre Claire Street
T: +61 (0)2 9226 7459 T: +61 (0)2 9226 7412 T: +61 (0)2 9226 7418
M: +61 (0)433 129 390 M: +61 (0)404 397 503 M: +61 (0)401 606 171
email@example.com firstname.lastname@example.org email@example.com
1300 22 88 279 (1300 ACTUARY) www.dwsimpson.com
EUROPE | ASIA | AUSTRALIA & NEW ZEALAND | MIDDLE EAST | NORTH AMERICA | SOUTH AMERICA
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London Dublin Sydney Hong Kong
firstname.lastname@example.org email@example.com firstname.lastname@example.org asiapaciﬁc@acumen-resources.com
Tel +44 20 3189 2900 Tel +353 1 6099 400 Tel +61 2 9262 1612 Tel +852 3051 980