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7/23/2019 4001 Lecture 1
http://slidepdf.com/reader/full/4001-lecture-1 1/28
Business School
Actuarial Theory & Practice A - Week 1
Introduction and review
Anthony Asher 2015
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Agenda
Introducing myself
The actuarial control cycleWhat the course is about
Your role in developing judgement
The financial services industry
Activity Details Hours
Preparation: Read course outline & skimlecture, movie reviews
1
Attendance: 2
Reading: UAM1 and readings 1½
UAM19 and readings 1½
IAAust Syllabus ½
Background – Bellis (2000) When you have time
Exercise Map syllabus to ACC ½
On line quiz ½Prepare
presentation/portfolio2
TOTAL 10
Next week
readingsUAM 3 and 5 2
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Introducing myself
• 17 years lecturing
• Chief actuary of life insurer in South Africa,
& worked for APRA and Deloitte in Australia (and Singapore remotely)
• Served on a number of Audit and Investment committees• Many professional actuarial committees, currently:
• Convenor of Retirement Incomes Working Group
• Editorial Board of Australian Journal of Actuarial Practice
• Research interests in retirement income products, financial advice, ethics and
governance,
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The actuarial control cycle
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So what questions do you need to address?
The Australian Capabilities Framework
1. Contribution to Business Strategy
2. Leadership
3. Actuarial Approach to Problem Solving
4. Valuing Uncertain Future Cash Flows
5. Risk Management6. Professional Governance
7. Product Development Management and Pricing
8. Investment Advice and Governance
http://www.actuaries.asn.au/Library/Education/Other%20Education/2012/Actu
arialCapabilitiesForTheFuture.pdf
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The Control Cycle: what is the problem?
Analyse
Experience
Insurance CT4
Lapses CT4
Expenses CT2
Investments CT7,8
6
Value liabilities
Profit test, model office
Analysis of surplus
(CT1,3,5,6)
Recommendations Insurance Super Mortgages
Risk management
- Capital
- Reinsurance
- Underwriting
- Claims- Policy conditions
- Investments All issues
apply for
life, general
and health
insurance
Trivial for
Australian
DC funds,
but
investmentrelevant to
members
All relevant
Marketing
- Product design
- Pricing
- Promotion/place
Growing
importance All apply as
for insuranceExpenses All apply as
for
insurance
Data
Investment Not relevantBusiness operations
- management
The purpose is tomanage future cashflows. Problems may
arise at any point
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The control cycle: what management does
Analyse Experience
Insurance CT4
Lapses CT4
Expenses CT2
Investments CT7,8
Value liabilities (CT1,5,6)
Analysis of surplus
Model office
Recommendations Insurance Super Mortgages
Risk management
- Capital
- Reinsurance
- Underwriting
- Claims
- Policy conditions
- Investments All issues
apply for
life, generaland health
insurance
Trivial for
Australian
DC funds,
but
investment
relevant to
members
All relevant
Marketing
- Product design- Pricing
- Promotion/place
Growingimportance All apply as
for
insuranceExpenses
All apply as
for
insurance
Data
Investment Not
applicable
Organizing
Marketing
Finance
Administration
Investment
Context
Part III
Strategic
planning
LeadingThe managerial functions can be divided intoplanning, leading, organising and controlling.
In their formal role, actuaries assist management
in the control process.
In their wider roles, the actuaries’ understanding of
the control cycle gives them a unique perspective
on general management issues.
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Actuarial Control Cycle
A framework for thinking about and dealing with dynamic financial problems
About identifying variables
Modelling interactions
Monitoring results
Making recommendations
Modifying models
Considers all elements of the problem
• Sub group analysis
• Whole system analysis
• Experience & external factor changes
• Modification of modelling for sub group and whole system
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Discussion topic
What makes the actuarial control cycle particularly actuarial?
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The course – developing actuarial judgement
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The aim of the course
“During Part II students are expected to develop a holistic approach to practical problem solving, anddevelop a level of judgement and professional skills required to successfully apply actuarialprinciples.” ( Actuaries Institute Syllabus)
But “holistic”, “judgement” and “professional” are not easy to define. Using tightdefinitions may be counter-productive, as our definitions may exclude elements or instances thatwe want to retain.
What are your definitions? …
There may be many right and wrong answers ... Your objective is to learn to recognise the wronganswers, and construct better right answers.
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What the Course is About
Bringing together the techniques you studied in ACTL courses
How actuaries relate and manage diverse functions in financial institutions
• Acting as a professional
• The operating environment
• The financial services industry
− Its structure
− Product development and pricing
− Risk management
• Inter relationship of financial product pricing, capital, reinsurance, underwriting and
profits
To do well in this course, you need to be able to marshal the relevant facts and then
apply appropriate general principles to develop a prudent and professional answer.
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Your 10 hours a week course
Reading
You are required to read the material before class and answer the multiple choice questions. This will
help you to get the full benefit from the discussion
You need to summarise the readings and link to course outcomes
Tutorials require your participation:
The formal presentations and responses
Questions and comments in class
Lectures will cover Issues from previous week
Highlight main issues to be covered and learning outcome expected (guest lecturers from industry will
provide background information)
Important announcements
Small group discussions
Exercises and assignmentThe UAM exercises, multiple choice questions and work on your portfolio and the assignment
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Presentations
You are not being evaluated on the completeness of your answer, but on whether you have somethingworthwhile to say and say it convincingly. Do not try to say too much.
Most important is to know what you want to say. Once you have prepared the content for the first time,
write down what you want to say in one sentence. Then check that is what you are saying. Then
rewrite your content, and do it all again.
You are being evaluated by the extent to which you engage with the audience.
• Look at them. Do not spend too much time looking at the screen or your notes. Look into their eyes
• Connect with them by telling them something you think is worthwhile and interesting. If you do not
find it interesting, you can be sure that they do not either. Think whether they will understand all the
terms you use
• Communicate your feelings by using your voice and body language. A little bit of exaggeration may
be fine – look at yourself speaking in the mirror to get an idea of how you are coming across.
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Collaboration
Working together with someone is normally more productive and more fun.
In actuarial work, as in many other types of work, it is imperative that at least one other
person checks your work for mistakes and to add a second opinion.
Studying together is no different. You encourage each other to do more work and learn
particularly when you are trying to answer someone else question or explaining things to
each other. Have the first draft of your presentation, your summary notes and your
answers to the text book questions checked by a buddy.
In classes, you will be asked to contribute to large group and small group discussions.
The more you put into them the more you will learn.
In the assignment, you are being asked to work formally together, which means that you
will each need to be given a role in the group and also to keep records of what happens
in the group.
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Your role in developing actuarial judgement
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Thinking logically
Need valid assumptions and argument Assumptions
– Need evidence if possible
– Noise to signal ratios
Argument
– Correlation and causation
– Induction and projecting into the futureConclusion
– Fallacy of composition
Actuaries have to be able to identify and communicate risks and uncertainty
Analyse the arguments that might have been made for the following conclusions:
“Consumers are becoming increasingly aware of inflation”
“50% of Australians are underinsured for death of the breadwinner”
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Thinking virtuously
Virtues are not primarily altruistic, but are the elements of building a good character which leads to agood life
Holistic, professional judgements require some of the main virtues that are primarily self centred:
Integrity
Self-control, to make sure you have all the necessary skills and informatio
Wisdom, which is the ability to make good judgements under conditions of uncertainty and conflict
Courage, to stand up when other people are putting pressure on you
But it also has an element that must consider others:
Justice, to ensure that you give your clients and colleagues their due – their fair share
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Positive psychology
The 120 question VIA Inventory of Strengths (VIA-IS) survey has been completed by over a million respondents
from 75 countries and finds significant convergence of responses: “Even the smallest correlation with the US
profile of ranked strengths that emerged in this study meets the common standard for a large effect” (Mcgrath,
2015, p51)
He finds 23 virtues or strengths that are “clustered” into five “factors”:
• Interpersonal: Fairness, Forgiveness, Kindness, Receptivity, Teamwork, Modesty, Love
• Emotional: Humour, Social IQ, Creativity, Bravery
• Intellectual: Prudence, Intellectual Pursuits, Love of Learning, Beauty, Curiosity
• Restraint: Judgment, Perseverance, Perspective, Honesty
• Future Orientation: Positivity, Future-Mindedness, Self-Regulation, Spirituality
McGrath, R. E. (2015). Character strengths in 75 nations: An update. The Journal of Positive Psychology 10:1, 41-52.
These fit well with the traditional virtues …
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The technical virtues
• Virtues are largely aspirations not rules• We acquire them by reflective practice• Communities can encourage them and shame their absence• They bring a sense of identity and self-efficacy
• And we have to learn to deal with human error …
Social knowledgeand skills
Relating to others
Communicating, leadingand following
Technical knowledgeand skills
Judgement
Applying what we knowlogically and productively
Objective is
human
flourishing:Meeting social
needs …
What
we do
Who
weare
Professionalism holds identity & vocation together – rewards are primarily intrinsic
P
e r s o n a l … … … … … . .
S o c i a l r e l a t i o n s h i p
s
Being ………………………..………………………………….Doing
Why we
do it
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The cardinal virtues
• Virtues are aspirations not rules• We acquire them by reflective practice• Communities can encourage them and shame their absence• They bring a sense of identity and self-efficacy
• But we have to learn to forgive ourselves and others …
To these, we need to add
love, which transforms who
we are, what we do, and why
we do it.
Courage
confronts social pressures
Justice
governs the social impactsof our actions
Self-control
governs our personalappetites and inclinations
Prudence
ensures the personalconsequences of our
actions are productive
Objective ishuman
flourishing:
friendship,peace,
prosperity,beauty …
Whatwe doWhowe
are
Integrity holds character & vocation together – rewards are primarily intrinsic
P
e r s o n a l … … … … … . .
S o c i a l r e l a t i o n s h i p
s
Being ………………………..………………………………….Doing
Why we
do it
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Thinking holistically
Mental models• Assumptions
• Internal relationships
Context
• In your organization
• Management
• Systems
• Culture
• In the wider world
• Physical Environment• Economy
• Society
• Politics
As part of the process of
integrating your thinking, the
portfolio exercise will be a
systematic way of thinking of
what you have learnt in the part
I and how it applies to part II
and the real world!
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The context – the financial services industry
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Need to
allocate
capital for
business &
housing
FamiliesFamilies
Government:
- Social security
Government:
- tax
- infrastructure
- direct
Banks
Banks
Insurance
companies &
mutual funds
Capital and stock
markets
Retirement
funds
Peoples’need for
financial
security
Personal initiatives:
- Entrepreneurial
- Ethical- Everyday maintenance
Economic & Social history governs:
- Law, regulation, institutional forms, conflict resolution (formalization)
- Market size and shape: products, prices, promotion and place
- Physical, technological & social capital (eg accountants & actuaries)
- Narratives of value and power
Standards:
- Just: freedom & equality
- Effective & efficient
- Robust
Systematic risks:
- Economic (Oil, China …)
- Societal (Families, war …)
- Physical (Global warming …)
Real
economySocial life
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Wall street movies
I do not recommend you watch either – and would actually suggest you give Wolf a miss, but thereviews can do no harm.
Margin Cal l http://www.newyorker.com/arts/critics/cinema/2011/10/31/111031crci_cinema_denby?currentPage=all
Do you think it is exaggerated?
What were the key moments?
What are the institutional structures that create and allow such things?
Does John Tuld have any redeeming features?
Would you work for him?
Wolf of wal l streethttp://www.smh.com.au/entertainment/movies/the-wolf-of-wall-street-review-lies-and-avarice-20140123-319ov.html
Do you think it is exaggerated?
What were the key moments?
What are the institutional structures that create and allow such things?
Does Jordan have any redeeming features?
Would you work for him?
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Working in Finance
• Hugely powerful: 35% of the Australian stockmarket• Reputation for bright people, highly paid
• Interesting work & important for financial security and productive investment
• Reputation for greed and deception
• ANZ and other Australian banks required to
repay hundreds of millions that they illegallycharged credit card customers in “penalty
fees”
• Large wealth managers have reportedly been
making a secret profit by putting
superannuation money on deposit with banks
in their group at lower interest rates
• In the UK, insurers have been forced to pay
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Finally, a word of encouragement
Being an actuarial student should be very challenging. Thechallenges can range from those which arise from School
requirements - academic issues, getting things in on time,
understanding the material and so on – and those which come
from life in general – how are you feeling today? Have things
happened which are interfering with your ability to study or feel
OK, do you know what you are doing or where you are going?
Do you feel in control of things or not and so on. All these things
are important and attention needs to be paid to both aspects of
life as a student.When one is able to rise to a challenge it can be exhilarating and
exciting. We hope that that is your major response to your time
as a student. However, if the challenge feels overwhelming, take
comfort that all your colleagues will have felt this at some point
or other …
Adapted from: http://www.law.unsw.edu.au/current-
students/surviving-thriving/when-things-go-wrong
The site has some helpful tips if you are feeling totally over-
whelmed, but remember the Actuarial learning cycle on the right!
1. This is easyand boring;
just a repeat of…
2. Oops, Imissed the
point last timeand I do notthink I am
clever enoughto catch up
3. Eureka!Now I see
what it is allabout
4. Thissubject hasgot somebeautiful
elements and Ireally love it