Powerpoint Mortality

Whether you're an actuary, accountant, consultant or salesman, when we take up a new challenging project, we're inclined to spend most of our time on data mining, modeling, reconsidering, detailing, arguing, making things perfect and finally, drawing the conclusions and writing the exhaustive proposal report....

Fortunately - in this case - your right on schedule! You've got exactly one day left before your Board presentation of the project. Still completely in a rush and overexcited about the stunning results of your successful investigation, you start up your laptop to wrap up your proposal report in a full flash Powerpoint presentation.

That night at 01.00 AM, you successfully finish your ppt presentation. Just in time! Completely satisfied about this phenomenal achievement, you e-mail the ppt to Nosica, the Board's secretary you know well. She, as well as the Board, will be impressed by your 'night shift work'. Who said that actuaries had a 9 to 5 job?

The next day, at 14.00 AM you enter the Board room, full of confidence. Your presentation is start-ready, the beamer glows, you're fully concentrated on your audience and in a 'cashing' flow....

After 20 minutes of presentation, including your ten recommended practices and some questions, you leave the 26th floor. All went well...
Time for a drink and a well earned good night sleep...

Next morning, 09.00 AM, the Board's secretary replacement calls you: Your proposal has been declined....

You're flabbergasted, how could this happen? After all this work you've been through.

What went wrong?

The answer is simple, you denied Wayne Burggraff's Law of Presentation:

It takes one hour of preparation
for each minute of presentation time

So next time, in case of a 20 minutes presentation, invest 20 hours of your time in research, development, organizing, outlining, fleshing out, and rehearsing your presentation.
In essence: if you fail to prepare well, you are well prepared to fail.

Tips.....
Here are some practical tips that might help you with your preparation:

1. Ask yourself: ''If I had only sixty seconds on the stage, what would I absolutely have to say to get my message across."
   -- Jeff Dewar --
2. The simplest way to customize is to phone members of the audience in advance and ask them what they expect from your session and why they expect it. Then use their quotes throughout your presentation."
   -- Alan Pease --
3. No one can remember more than three points.
   -- Philip Crosby --
   
   

Fear of presentation
As actuaries it's surprising to see that people are more afraid (41%) of speaking to a group than of death (19%).
Now it's clear why we search the help of Powerpoint to 'survive' on stage.

Powerpoint Mortality
We all know Powerpoint..... Powerpoint itself is not good or bad, it's the way you use it.

The mortality rate of Powerpoint is humorously demonstrated by Don McMillan:

Life after death by Powerpoint

Who Needs Powerpoint?
Last January I was heading for a presentation with the help of Powerpoint. Full house. However, on the supreme moment the local beamer gave up. I simply decided to bring my message in an interactive session with my audience, without the help of Powerpoint.

Yes, it was different, challenging and even fun! Because of my thorough preparation - I was able to concentrate on almost everyone of my audience. So...., another Maggid's tip could be:

Prepare your presentation without Powerpoint!

A presentation try out
In the mid nineties my employer's company was heading to get listed at the stock exchange. I remember I had to give a presentation before a panel of 70 international analysts, who would probably raise all kind of difficult questions. In order to prepare 'abap', I called my strategy director as well as my CFO and asked them to act as my 'try out analysts audience'.

I told my colleagues I would give the presentation three times in a row. In the first two presentations they were obliged to interrupt me as much as possible, to raise difficult or weird questions and to put me to test (keeping my humor and concentration). During the third presentation they had to act as normal audience.

To make a long story short: after three presentations, my two colleagues kept their breath in combination with a desperate look in their eyes. I told them not to worry and reassured them my presentation at the analyst session would be successful.

And so it was, as I was fully prepared on every possible question and didn't had the need to look at my ppt presentation, I could fully focus on my audience. Lesson: Make the preparation tough, you'll benefit from it in the final presentation.

The actuarial master
Yes, there are a lot of rules, regarding the use of Powerpoint.
The Golden Rule is that all PowerPoint presentation rules, principles, and guidelines are just secondary to doing what is ultimately right for your audience. Critical point is, you can only break the presentation rules if you know them .

It's just like in actuarial science, once you've become an actuary (a master) the real art of your profession is not anymore in applying equations and methods 'by the book'. Now it comes down to break the existing rules and conventions in a such a professional way, that new risk and social challenges are being (re)solved in a different way. Key point here is that not only your professional skills have to be outrageous, but your presentation skills as well. As the success of a good peace of actuarial craftsmanship, is completely dependent on the way it is presented.

Mindmapping
Let's conclude with some practical free(ware) presentation tips.
Although you're probably aware not to overuse clip art, it's good practice to set up your presentation in a consistent and well polished style.

Of course you can use expensive business packages to illustrate your presentations, but there's also an excellent freeware application called: EDraw Mindmap 4

With the help of Edraw, creating presentations and mind-mapping is a question of minutes.

Enjoy preparing and giving presentations, learn to be(come) yourself on stage and overcome any possible fear of speaking to groups......

Related links:
- EDraw Mindmap 4 (Completely freeware!)
- EDraw Mind Map 1.0
- Edraw Max (not freeware)
- Lovelycharts (free, one application; online)
- Presentation skills (youtube)
- The New Office Math (youtube;Don McMillan )
- Presentation skills (ppt)

Soft-Risk Management

Never heard of of Soft-Risk Management? After this blog you'll never forget!

Google
This month Google's world class co-founders Page and Brin announced (SEC filing) they'll sell 17% of their shares (at today’s prices valued at $5.5 billion) in the next five years.

As a consequence their voting rights will be reduced to 48%, implicating they will no longer have a majority control. “They are both as committed as ever to Google...”, Google said in an e-mailed statement.
Why this statement? Was there anyone who doubted this?

Of course Google is still and will hopefully stay a strong company and a strong brand. Nevertheless - without jumping the conclusions - it's clear that this low-key announcement, although it doesn't seem to have any direct financial consequences, might turn out to be the straw that breaks the camel's back in Google's life cycle development. This kind of company press release is in fact a 'disguised risk indicator', or in other words a :

Soft-Risk Indicator (SRI)

A SRI may be defined as 'knowable' information about a company, that could influence the company's value now or in the future , but doesn't seem to have enough (financial) power to do so now or on its own

Although just one ignored SRI could already be fatal, a combination of two or more SRIs could become a severe risk. A bunch of SRIs could create a chain reaction and lead to a kind of supernova explosion.
It's just like a grain dust explosion. A few grains are no risk, they don't explode. However in an accumulation of grains, one innocent 'hot' grain or a small environmental change in dust concentration, is enough to create a mega explosion. Just like grain dust, SRIs can become a severe risk when the environment (suddenly) changes.
Consequently, an out of the blue 'change of environment' is also a Soft-Ris Indicator on its own.

Don't mix up Soft-Risk with Systemic Risk. Dust particles don't directly 'participate' in one another, in fact they build up to a certain critical density. Soft Risk Loss
SRL = E( SRI_i=1,2..n )It's just the composition of SRIs in combination with the special SRI of 'the change in environment' that creates a major accumulated (explosion) Soft-Risk that may eventually result in a Soft Risk Loss (SRL). However, once the SRL has occurred and has been measured, the corresponding SRI becomes a 'normal' Risk parameter.

Are there more Google SRIs?
Yes! One of the best Soft-Risk Indicator blogs of 2009 is written by Googles leaving lead visual designer Doug Bowman, it's called:

Goodbye, Google

Please read the next extract of Bowman's blog from a risk management perspective, as he explains his decision to leave Google after three years.

- 20 Mar 2009 -

Goodbye, Google

Without a person at (or near) the helm who thoroughly understands the principles and elements of Design, a company eventually runs out of reasons for design decisions. With every new design decision, critics cry foul. Without conviction, doubt creeps in. Instincts fail. “Is this the right move?” When a company is filled with engineers, it turns to engineering to solve problems. Reduce each decision to a simple logic problem. Remove all subjectivity and just look at the data. Data in your favor? Ok, launch it. Data shows negative effects? Back to the drawing board. And that data eventually becomes a crutch for every decision, paralyzing the company and preventing it from making any daring design decisions.

Yes, it’s true that a team at Google couldn’t decide between two blues, so they’re testing 41 shades between each blue to see which one performs better. I had a recent debate over whether a border should be 3, 4 or 5 pixels wide, and was asked to prove my case. I can’t operate in an environment like that. I’ve grown tired of debating such minuscule design decisions. There are more exciting design problems in this world to tackle.

I can’t fault Google for this reliance on data. And I can’t exactly point to financial failure or a shrinking number of users to prove it has done anything wrong. Billions of shareholder dollars are at stake. The company has millions of users around the world to please. That’s no easy task. Google has momentum, and its leadership found a path that works very well. When I joined, I thought there was potential to help the company change course in its design direction. But I learned that Google had set its course long before I arrived. Google was a massive aircraft carrier, and I was just a small dinghy trying to push it a few degrees North.

I’m thankful for the opportunity I had to work at Google. I learned more than I thought I would. I’ll miss the free food. I’ll miss the occasional massage. I’ll miss the authors, politicians, and celebrities that come to speak or perform. I’ll miss early chances to play with cool toys before they’re released to the public. Most of all, I’ll miss working with the incredibly smart and talented people I got to know there. But I won’t miss a design philosophy that lives or dies strictly by the sword of data.

The resemblance between Google and the financial sector is striking.
Can you see it?

Simply replace the next words in the above 'Google, Goodbye' article:

Google => X-Bank, Engineer => Accountant, blue => risk strategy
Design => Risk, border => uncertainty, pixels wide => promille

To help you, just press the next 'replace button' to change the text in the article and read the text again. This looks astonishing familiar, doesn't it?

Replace

More Soft-Risk Indicators
Bowman's blog makes clear that there's another Soft-Risk Indicator, called:

Data Decision Tunnel Vision

• Every decision in only based on data and models.
• Intuition and Fingerspitzengefühl are banned.
• Craftsmanship is not respected, but must be proved in detail with evidence based on facts and data.
• Possible events that can't be translated into (financial) data are not recognized as risk and are ignored.
• Events that don't fit into the data model are reformed until they do fit in
• Micro management confines the development of a helicopter view on the main risks

Although the list of Soft-Risk Indicators is endless, I'll try to list some common examples (mail me if you have more SRIs examples).

Examples of SRIs

• Frequent or unexpected change of CEO or other board members
• Unexplainable or untimely Actuary or Accountant change
• Intentions of board members not in line with policy
• Too good to be true revenues, profits, reporting or communication
• Delay in reporting or publishing
• Lack of transparency
  
• Conflicting statements or publications
• Main (unexplainable) shareholder changes
• Over-explaining by board members
  
• Unexpected main reallocation of assets
• Vacancy or Recruitment stop; Reorganizations
• A company takes extremely more risk after a HQ-Risk Analysis
• Increasing customer dissatisfaction
  

Soft-Risk or Risk?
Most of the SRIs are not present or recognized as Risk in our models. Why? Simply because SRI losses are not in the data we analyze. This could be (1) because of the very low occurrence probability of a SRI loss (the loss simply didn't occur yet), or (2) because most of the SRIs aren't identified as SRI or Risk at all, as they simply do not exist yet. Just like a sleeping virus, they might come into Risk Existence on basis of (unknown) future (environmental) changes.

The key difference between 'Risk as we now it' and a SRI is that a SRI is by definition 'not measurable'. SRIs manifest themselves directly in practice as a (non-directly traceable) loss occurrence.

VaR Models fail
This also implicates that our traditional VaR models are definitely wrong, because they only include 'risks of the past' en no 'future risks', e.g. Soft-Risks. These VaR-models significantly underestimate the risk in the tail.
Problem is that as VaR-probabilities are getting smaller and smaller (0.5% or less) it also gets increasingly more difficult to prove the models are right. Consequently the VaR-model loses his power.
Backtesting and recent studies show that we ought to be able to identify most bad VaR models, but the worrying issue is that we can't find any good models, moreover because SRIs are not in the model.

Denying Soft-Risk Indicators: The Meltdown
You might think 'Who cares about SRIs if you can't measure them?". Well, let's see what happens if we deny Soft Risk Indicators.

The most likely dead-end meltdown scenario of denying Soft-Risk Indicators goes something like this:

• The first years of a company's life is a race for revenues. Risk Management is on the second plan, as there's little to lose.
  
• After a few years revenues and profits grow, but become vulnerable and volatile. A new Board is appointed and a Risk Management Plan (RMP) comes in place to stabilize and improve results and to guarantee continuity.
• After the RMP has shown fantastic results for some years, some strange unexpected serials of events (SRIs) happen. The Board consciously discusses the effects of these events and concludes their company's results are not infected by the events. Moreover, company results are better than ever and the company's RMP has proven to be (Titanic) watertight.
  
• To be sure and transparent the Board checks its conclusions by ordering an external risk audit. The external auditor is just as biased as the Board and confirms the Board's conclusions: RMP is O.K.!
  
• Suddenly there's a totally unexpected big accident, a substantial one of loss. At first things still look under control, but soon the situation takes over. The board is no more in control. The company is lost.
  
• Soon all stakeholders are flabbergasted. How could this happen?!

Well it's clear, what happened is that the Board misinterpreted and neglected early warning signs and SRIs, resulting in a company meltdown.

How to prevent a melt down?
To prevent a situation like the one above, the board should

1. Set up a SRI-Register
   
2. Order the RM-Department to include SRIs in their risk model
3. Discuss the integral SRI-register monthly in the Board meeting
4. Interprete the SRIs, and take proactive actions to prevent the SRIs from becoming critical. This is Board's Craftsmanship!

As continuity is a company's main goal, managing uncertainty is the Board's main responsibility.

Redefining Risk
Once we realize that Soft-Risks are crucial in Risk Management, how can we include them in our Integral Risk Model (IRM)?
First we'll have to redefine Integral Risk as follows:

(1) I-Risk = Integral Risk = Measurable Risk + Unmeasurable Risk
(2) I-Risk = Integral Risk = Hard Risk + Soft Risk
(3) I-Risk = ∑( Threat_j x Vulnerabilityj x Cost_j ) +∑ E(SRI_i=1,2..n)

Keep in mind that the Integral Risk is not a number, as the SRL is not measurable. If you can't force your brain to 'quantum think' this way, just imagine the Integral Risk as the total company value (at stake).

Cleaning up
First 'cleaning up' action we can do is to investigate the relationship (correlation, covariance matrix, etc.) between each past assumed Soft-Risk event and the Vulnerability of each Hard Risk event. This tells us probably something of the influence (correlation) of certain (combination of) SRIs on the traditional Hard Risk parameters.

Probably this research will show that some of the SRIs could even be defined as Hard Risk variables. Unfortunately this investigation - as explained -won't tell us anything about the real unmeasurable Soft-Risks. The problem remains.....

Managing Soft-Risk
The real main problem is : If you can't measure Soft-Risk, how can you be sure your 'Soft-Risk Management' (SRM) is successful, as you can't measure the effects of your actions either?

This seems to be an insolvable problem. Insolvable because of what Bowman in fact calls our 'mono data mind set'. We are not trained in taking decisions without data. As we are not trained, we become unsure. Unsure about the risk of the impact of our decision, that is unmeasurable as well. Full circle, we're back where we started.

However, there's a way out of this paradox, it's called

Principle Based Risk Management

Before we dive deep, let's first take a step back and have a look at two important actual developments, (1) the Global Warming Problem and (2) Solvency II.

(1) Global Warming Problem
During recent decades scientists have developed different global warming models that contradict each other. The real climate is far too complex to be modelled. We could spend millions of dollars on research to find the ideal model, we will never succeed!

Step by step the leaders of this world recognize that they'll have to manage the global warming in a different way. It's no longer important whether or not there exists a provable global warming problem. The main question is whether we are willing to live up to the principle: "You don't foul your own nest"

This way of principle-based thinking requires reflection on the level of 'spaceship earth', on a 'global' level. However, simultaneously, it urges for acting in line on a 'local' level.

Although related with The Precautionary Principle, Principle Based Risk Management is much more fundamental. It's an adequate tool for fighting Soft-Risks.

(2) Solvency II
In our aim to strengthen the insurance industry solvency, implementation of Solvency II bears the a risk of an overshoot. Instead of managing risks first and in a better way, we translate every risk into capital requirements, consequently increasing the cost of doing business and insurance premiums. It's the perfect example of putting the cart before the horse. Although we expect Solvency II measures to work out in a better solvency, in reality we don't know, as this 'capital-increase scenario' hasn't been tested before and can't be tested. The presumed positive effect could just as well be adverse.

In our aim to avoid risk, we've created another additional risk. A risk we can't measure (yet). Yes, unfortunately, Solvency II is a SRI as well.

Instead of making Solvency II obligatory, a far more effective Principle Based response from the Regulator would have been:

"Prove us that you manage your own risks"

Back to Soft-Risk Management
It's not that difficult managing Soft Risks Principle Based. In fact we all have experience with Soft Risk Principle Based decisions when we decided to have friendship, marry, or to have a child. Or did you calculate the 'lifetime present value' of your child?

Try to apply the above principles in your own company or in your own department. Just start by investigating your Soft-Risk Indicators and start managing soft and hard risks Principle Based.

What principles can we formulate to manage Soft-Risk?

Well actuarial folks.... that's food for another blog as this blog is getting far too long..... O.K. .... I wont keep you waiting, just one Principle Based one-liner that tackles a whole bunch of SRIs at once

Bonuses are only paid in case of
High Customer Satisfaction

Related (additional) Sources:
- Unmeasurable measures: The lawlessness of great numbers
- The Risk Equation
- An Additional Way of Thinking... :The Quantum Perspective
- From Principle Based Risk Management to Solvency Requirements
- Measuring the unmeasurable
- Managing Extraordinary Risk (2009, Towers Perrin)
- Measuring the Unmeasurable: Balanced Scorecard
- NYT: Risk Mismanagement
- Backtesting Value-at-Risk Models (2009)
- Quality control of risk measures: backtesting VAR models
- Metrics: Overmeasuring Our Way to Management

Once-in-a-Century Credit Tsunami

When will the next crisis happen and what magnitude will it be?
Investor or actuary, this question puzzles our mind, isn't it?

In the Financial Analysts Journal (January/February 2010) professors Guofu Zhou and Yingzi Zhu raised a similar key question:

“Is the Recent Financial Crisis Really a ‘Once-in-a-Century’ Event?”

Actually Zhou and Zhu did research on a 'October 2008 congress quote' by Alan Greenspan:

We are in the midst of a 'once in a century' credit tsunami
--------------------------------------------------------

--------------------------------------------------------

Zhou and Zhu Research
Given the fact that the Dow Jones Industrial Average (DJIA) dropped more than 50 percent, from 14,164 on 9 October 2007 to 6,547 on 9 March 2009, Zhou and Zhu answered the question whether a drop of 50% would be likely to occur once in a century.

Using daily data on the DJIA from 26 May 1896 to 19 June 2008, Zhou and Zhu estimated the long-term average DJIA-return (sample) at µ = 7.4% (excluding dividends) and the long-term volatility, known as the sample standard deviation, at s = 18.2% a year.

DowJones Industrial Average
May 1896 - June 2008
Average return: 7,4%
Standard deviation: 18.2%

On basis of the long-term data, Zhou and Zhu calculated the probability for the market to drop more than 50 percent from a high to a low over a 100-year horizon, considering two different models:

1. Random Walk Model, excluding dividend
2. Long Run Risks Model: complex dynamic simulation model, including consumption growth, dividend growth and asset prices

Here is the summarized outcome of their calculations:


As is clear on basis of the Long-Term Risks Model (LTR-Model), no matter what average return or standard deviation, the probability of a 50% draw down over a 100-year horizon is practically almost 100%.

50% draw down over an n-year horizon?
Given these results of Zhou and Zhu, we can now easily and (very) roughly approximate the probability, P(n), of a 50% draw down over an n-year horizon.


with r= P(1). We now roughly 'fit' P(n) to the results of the Long-Term Risks Model as follows:


It turns out the LTR-Models roughly corresponds with one year '50% draw downs probabilities' between r=4% and r=10% [r=P(1)].
As is clear from the table above, even over a 10-year period there's a substantial probability, somewhere between 33% and 65%, of a 50% market breakdown.

Also we can be more than 90% sure to become a witness of a market tsunami once in a lifetime......

The next market tsunami
Up to the next market tsunami, I would guess...., as tsunamis don't have a memory or allow themselves to fit into statistics or models like the ones mentioned above. Unlike natural sea-tsunamis, we - ourselves - are responsible for creating these 'financial tsunamis'.

Irrational Risk Attitude
But even if we are aware of the risk and are not responsible for creating the risk, we have an irrational risk attitude as human beings.
With the recent (2010) Haiti earthquake fresh in mind, let's take a look at the way we deal with the probability of an earthquake.

Los(t) Angeles .....................?
According to the 2007 Working Group on California Earthquake Probabilities (WGCEP 2007) the probability of a magnitude 6.7 or larger earthquake over the next 30 years striking the greater Los Angeles area is 67% (mark the similarity in our P(n) table!).

Yet we deny this reality and 'hope' for the better. Perhaps if every city would have to value the estimated fair value of this earthquake expectation in his balance sheet, things would change. However, I doubt.....

People act irrational with regard to Risk. If we can't manage it, we deny it. If we can manage it, we screw it up!

Sources
- Article Is the Recent Financial Crisis Really a ‘Once-in-a-Century’ Event?
- Wall Street Journal article, October 2008: Greenspan
- Credits: CFA Institute
- California Earthquake Probabilities
- Download Spreadsheet of tables used in this blog

US Employment Rate Halleluja

As a professional actuary, just take a look at the next selected "Dave Rosenberg's charts" , showing:

• Chrt2: The true measure of US Joblessness end 2009: 17%
• Chrt3: Median duration of unemployment rose to 20.5 weeks
• Chrt5: Overall employment rate is 58%, lowest since 1983

You don't have be an actuary to understand the importance of a healthy Employment-to-population ratio, given the increase of the 'aging population' in the next decades....

As an expert in statistics, would you say we're on the right track?
What would you advice US?

Used Sources:
- Excellent original article by Dave Rosenberg (pdf)
- The lost decade
- Forget Unemployment, The Real Nightmare Is EMPLOYMENT
- Dutch: De Amerikaanse banenhoax

Actuary - Best Job in the World

'Actuary' ranks as the best job for 2010, based on research into 200 different positions in this year's exclusive CareerCast.com Jobs Rated report and published by The Wall Street Journal.

Using five key measurement criteria – stress, working environment, physical demands, income and hiring outlook – the Jobs Rated report seeks to compare and contrast careers across a multitude of industries, skill levels and salary ranges, sorting them into a definitive ranked list of jobs.

So why is Actuary rated number one?
For starters, the position ranks especially well for its low physical demands and stress levels, finishing 2nd and 3rd, respectively, out of all 200 jobs. But more importantly, it is actuary's consistently strong performance overall that helped the job rise to the top of the 2010 Jobs Rated list.

Who says being an actuary is boring?
Interested in a zero unemployment profession?

Risk Management Humor

Happy new year! At the start of 2010 let's have some 'serious fun' with the next

Actuarial Risk Management Puzzle Joke

Three actuaries and three accountants are traveling by train to visit a 'Risk Management Conference'. At the station, the three accountants each buy tickets and watch as the three actuaries buy only a single ticket.

"This looks very risky. How are three people going to travel on only one ticket?", one of the accountants asks.

"Watch and you'll see! Take notice of our brand new risk management approach", one of the actuaries answers.

They all board the train. The accountants take their respective first class seats, but all three actuaries cram into a restroom and close the door behind them.

Shortly after the train has departed, the conductor comes around collecting tickets. He knocks on the restroom door and says, "Ticket, please." The door opens just a crack and a single arm emerges with a ticket in hand. The conductor takes it and moves on.

The accountants were deeply impressed by the actuarial approach and agreed it was - after all - quite a clever idea without any substantial risk.

So, completely confident and with even more Risk Management skills gained at the inspiring Conference, the accountants decide to copy the actuaries new risk approach on the return trip and save some money (accountants have always been clever with money!). When they get to the station they buy a single ticket for the return trip.

To their astonishment, this time the actuaries don't buy a ticket at all. "This is reckless, how are you going to travel without a single ticket?", one of the perplexed accountants asked. "Watch and you'll see! Take full notice of our latest risk management approach" answered an actuary.

When they board the train the three accountants cram into a restroom and the three actuaries cram into another one nearby. The train departs.

Stop
Here the story stops for a moment. Let's find out if you qualify as a Actuary Risk Manager (ARM) or - otherwise - could better have become an accountant.

Can you finish the story? What was the alternative Risk management Plan of the actuaries?

Just check the next box (or go to the original Actuary-Info Blog site) to find the right answer.......

Solution

Shortly afterward, one of the actuaries leaves his restroom and walks over to the restroom where the accountants are hiding. He knocks on the door and says, "Ticket, please."

Conclusions
What conclusions can we draw from this simple story?

• Risk Management is a game without end
  
  
• The effect of Risk Management Conferences is threefold:
  
  1. Some attendants get smarter
  2. Others get overconfident
  3. Final result: Increasing Risk, instead of decreasing Risk
  
  
• There's an old Dutch saying that expresses the danger of increased Risk Management :
  
  
  "A warned man counts for two"
  
  
  
• If we want to reap the fruits of Risk Management, accountants and actuaries have to start working together, instead of struggling and competing each other.
  
  
• Risk Manager Profile and qualifications
  Insight, creativity and integrity are important requirements to become a professional Risk Manager. Unfortunately, this is not enough.
  
  To tackle Risk Management in a company, you need the best potential crook around. One who's willing to settle his salary and earnings for a little less than he would have earned as a real crook, in return for having a respectable job and not risking to end up in jail. You could call it the Personal Risk management of the Risk manager. Employers that settle for an inferior Risk Manager, know one thing for sure: someday somebody more 'crooky' than 'your risk manager' will tear your company down!

With some humor, we've gained new insights in the challenging world of Risk Management. Anyway, a Happy & Healthy 2010 !

Out of the Box Actuary

So you're one of those rare actuaries who thinks he really can think outside of the box?

Well, this is your lucky day. Out of the dark chambers of Actuarial Science, professors developed a brand new test for financial experts like actuaries, to find out if you qualify for the new title

Actuarial Master
Out of the Box Thinking

Most remarkable is that this test consists of only one simple question.

If you manage to give the right answer to this question within 10 seconds you'll qualify for the title. If it takes up to one minute, you'll qualify for your bachelor's degree. If it takes longer, don't be ashamed, just stay "Qualified Actuary".

However, if you don't succeed at all, simply change your title to Actuweary...., nobody will notice ;-).

In case you need help to find the right answer, you are allowed to use this tip.

Now, I will no longer keep you in suspense, here is the key question:

Just click the picture, to find out the right answer!

If you unexpected failed to come up with the right answer, please read the next fabulous blog to escape your expert view:

Are you stuck in a rut? Run from the experts!

Invest or laugh

Every crisis generates his own new quotes. Currently, investment quotes are the top.

Perhaps two of the best investment quotes ever are from AIG Vice Chairman Jacob Frenkel:

"The left side of the balance sheet has nothing right and the right side of the balance sheet has nothing left. But they are equal to each other. So accounting-wise we are fine."

--------------------------------------------

"Credit markets do not function. Why not, because the word credit comes from credibility"

But there's more... A nice summary of investment ROFL quotes can be find on Ian Thomson's blog Investor Jokes.

As actuaries, let's profit from Ian's latest insights and gain some extra education points by studying the next new investment definitions:

• A long term investment: Short term investment that failed.
• Momentum Investing: The fine art of buying high and selling low.
• Value Investing: The art of buying low and selling lower

Probably investors and actuaries will have a hard time understanding each other, as the difference between them is in the 'tail' .....

Also large-cap fund managers have a hard time these days. No wonder everybody starts looking for a small-cap fund manager....
But how do you find one? Ians' answer is simple: Find a good large-cap fund manager, and wait...

Anyhow, keep up your good mood and laughs, as more investment 'animals' will show up next months.....


Let's conclude this blog with an old actuarial warning:

"Where there's smoke, someone gets fired"

P.S. For some more 'serious' investment quotes take a look at 52 Must Read quotes from the legendary Investor Warren Buffett. I'll quote some of the best here:

• I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
• If past history was all there was to the game, the richest people would be librarians (actuaries?).
• It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.
• It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.
• It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
• Price is what you pay. Value is what you get.
• Risk comes from not knowing what you’re doing.
• Risk is a part of God’s game, alike for men and nations.

How can actuaries profit from Buffett's quotes?

Sources:
- Greekshares Jokes
- Ian's Investor Jokes
- Warren Buffett: 52 Must Read quotes

Risk IQ Test

What's your Risk IQ?

In a few minutes you'll know by taking this RISK IQ Test.

Actuaries are often born CROs (Chief Risk Officers), so this test will probabely be a peace of cake for any actuary with CRO aspirations.....

Simply scroll through the next Powerpoint presentation from Fintools.

Each slide contains a multiple choice question.
Think about the answer and then scroll (click on the right part of the presentation) to the next slide for the final answer...
RiskIQ

Hope you succeeded....

If not... get some training at Fintools

Original Source: Fintools

The first Actuary

As the story goes, insurance began around 1688 at a coffeehouse in London called Lloyds, where shipman discussed and divided their risks.

That 'explains' the birth of non life insurance.

But what about life insurance?

Who developed the first life table?

Answers...
The answer to this question depends on who you ask...

• Definitely Graunt in 1662 (statistical analyzes of data)
  
• Surely De Witt in 1671 (life insurance tables)
• Undoubtedly Halley: 1693 (life insurance tables)

Depending on what you define as a life table, answering this question often leads to a never ending semantic discussion.

Don't worry, there's help... In his Google-book, "A history of probability and statistics and their applications before 1750", Anders Hald explains the origin and development of life tables.

First Life Tables
An indeed, the 'first' life tables, based on more or less empiric data and interest rates were developed at the end of the 17th century.
The first actuary....
However, already in the 3rd century the Roman jurist Ulpian devised a table for the legal conversion of a life annuity to an annuity certain.
It was pointed out by Greenwood that the valuation (duration) of the annuities was deliberately chosen to high, in order to protect the interests of the legal heir.

This would implie that Ulpian not only did a tremendous job by estimating life annuities, but also developed and applied the first primitive 'Solvency Zero' principles...

With his 'simple table', Ulpian was more than ahead of his time.

So, we may rightfully conclude that the one and only first actuary was a jurist: Domitius Ulpianus, alias Ulpian

Strange that it took more than 1500 years to develop more sophisticated life- and annuity tables.

Related links & Sources:

• Early uses of Graunt's Life Table
• A history of probability and statistics and their applications before 1750
• Early Insurance Mechanisms and Their Mathematical Foundations

Actuagram

If you want something to chew on, something that challenges your actuarial brain and associative power, try to solve the next Actuagram.
This actuarial brain teaser is a mix of an actuarial crossword puzzle and a cryptogram.

How to play the puzzle:

1. Click on the word you would like to solve.
2. Fill in your suggestion, click on OK
3. Only if you do not know the answer, click on the 'solve button'

Can you manage, without using the 'solve button' ?

Congratulations! Actuaries, have fun!

[ If your browser doesn't allow you to play here, click on this link]

Actuagram

by Joshua Maggid
EclipseCrossword © 2000-2007

This interactive crossword puzzle requires JavaScript and a reasonably recent web browser, such as Internet Explorer 5.5
or later, Netscape 7, Mozilla, Firefox, or Safari. If you have disabled web page scripting, please re-enable it and refresh
the page. If this web page is saved to your computer, you may need to click the yellow Information Bar at the top of
the page to allow the puzzle to load.

Actuarial Sustainability Alarm

Recently the European Commission launched the 'Sustainability Report 2009", investigating the long-term (2010-2060)sustainability of public finances.

This report clearly shows the long-term economic effects of the aging society and the continuous increasing life expectancy.

Financing increasing pension and health costs in the next decades, will be a real challenge for almost all European countries. Even more, the current financial crisis and unsure financial outlook urge for severe short term measures in order to prevent much more unpleasant other measures in the next decades.

The report claims that the ability to meet public pensions liabilities is a higher long-term risk for governments than ever before and in most cases reform of member states’ pensions systems is 'must' and can no longer be delayed.

Although the report manly focuses on the increase (the so called delta) of the sustainability gap, I would like to take a look at the development of the aging costs in relation to the debt development of each country.

Development Aging costs
Let's start to take a look at the development of the public pensions liabilities (pension costs) and health costs from a slightly different angle as published in the report:

On average the total aging costs are increasing from 25% in 2010 to about 30% in 2060 on bases of a no-policy-change assumption.But there a countries (BE, EL, LU, SI) that grow way above this average to a level that's even above the current level of countries with high social standards, like Sweden and Finland.

To conquer this development, some member countries are trying to tackling the longevity issue by raising retirement ages.
Not only the pension costs increase, but also the projected long-term increase in healthcare spending is large and constitutes on its own a risk to sustainability.

Countries whose regimes are listed by the report as 'high-risk' in terms of sustainability are: The Czech Republic, Cyprus, Ireland, Greece Spain, Latvia, Lithuania, Malta, the Netherlands, Romania, Slovakia and the UK. In many countries the age-related expenditure is expected to climb quickly against existing financial imbalances.

Development gross debt ratio
As is clear from the next table, the mentioned next decades increase in health and pension costs, in combination with the unhealthy financial situation - due to the credit crisis - cumulates in a clear desperate debt situation for most of the European countries:

The table shows the government gross debt ratio in 2008 and 2009, and the projections for 2010, 2030 and 2060, once the costs of servicing debt and paying for age-related expenditure are taken into account.

As mentioned before, the long-term debt projections have been prepared under a no-policy-change assumption and in partial equilibrium. Given these assumptions, the projections are not robust forecasts and are not meant to be realistic scenarios of what may happen in the future.

The aim of the debt projections is to illustrate the long-term trends and the size of the required remedial action to avoid government debts to enter into an exponentially increasing spiral.

Actuary Involvement
It's clear that the debt and social costs developments are not heading in the right direction..... Actuary involvement to analyze, advice and create new social systems seems necessary.
Actuaries on the bridge, please!

Sources
- IPE
- EC
- Sustainability Report 2009
- Report 2009
- Download: Maggid Excel tables Aging Costs and Debt Development

Humor: Actuary Solves Credit Crisis

One upon a time there was a small village depending on only one source of income, tourism... the only problem was - due to the 'crisis' - there were no tourists left...

Every villager had to borrow from an other in order to survive.. several months passed .. everyone felt miserable.

One day a cost conscious actuary, visiting a Risk Conference nearby, arrived in the village.

Heading for a cheap overnight stay, he booked a small room in the only available local hotel. He paid in advance with a 100 dollar note and went to his room to prepare for the conference.

Before the actuary could unpack his bags, the hotel owner had already taken the 100 dollar note, heading his way to pay the butcher.. to whom he owed precisely 100 dollar.

The butcher, in his turn, immediately ran off with the 100 dollar to see the local farmer and paid his debt for all the meat he'd been supplied with...

With the same 100 dollar note, the farmer immediately paid the seed salesman who, right at that time, was visiting the farmer to collect the unpaid 100 dollar bill.

Back in his hotel, the seed salesman closed the circle. In order to settle the hotel bill for that night, he dropped the 100 dollar note on the counter. Just at that moment, the actuary - who'd come down to tell the hotel owner that he didn't like his room - arrives at the counter, picks up his 100 dollar and disappears.

Nothing was spent,
nothing was gained,
nothing was lost.
Nonetheless, thanks to the actuary, nobody in the village had any debts!

Moral
This story shows why it's important for actuaries to attend Risk Conferences and illustrates how actuaries can actively contribute to solving the credit crisis.

Original Sources: Free after newciv, Dutch source Aardbron

Polya: Actuaries Good or Bad

As an actuary, were you born 'Good' or 'Bad'? The answer to this question can be given with help of mathematics!

Let's start with a simple model. When you, as a prospective actuarial talent, were born, you had only a limited number of experiences. Let's assume you came to earth quite neutral, with one 'Good' (G) and one "Bad" (B) experience.
At this point in time, your (still unconscious) attitude and therefore expectation of a 'Good' (B) outcome of your next experience, will be 50%.

In line with the expression "You'll always reap what you sow" (Gal 6:7), or associative translated "You'll become what you X" (with X ='Think', 'Eat', 'Are', etc.)", your next experience will indeed turn out to be equally G or B.

Let's assume that providence decided, the outcome is G. Now you've become a more optimistic baby actuary. Your experience-bucket is now filled with two G's and one B (experience), so your subjective 'colored' outlook on G's is 66,66% (2/3=[2 G's/(2 G's + 1 B)]) . You also look back on a relatively Positive Life Score of PLS=66,66% G's.
Would you have experienced a 'B score' instead, it would be the other way around and as a potential pessimist your outlook and PLS would have been lowered to 33,33% .

But happily you're a 66,66% (!) G-Score-optimist and life goes on. According to the same principles, the probability of scoring a new G-experience is now 66,66% instead of 50%.

As you may already notice, your PLS will more and more develop according your personal historical G- an B-experience track record.

A few questions that may rise, are:

• Does your Positive Life Score (PLS) has a limit? And if so, what's that limit?
• Once you're in a pessimistic phase, what are the changes of getting out?

Here is were the help of a great mathematician, George Pólya,

comes in, by modeling the above situation in what is called:

Polya's Urn model
An urn contains G₀ Green (Good) and B₀ Black (Bad) balls. One ball is drawn randomly from the urn and is then placed back in the urn together with an (extra) ball of the same color.

Our Good&Bad exercise turns out to be a simplified two color Polya Urn Model (G₀=1,B₀=1) that is part of a large family of General Urn Models.

Properties
It turns out that this model has the following (translated)properties:

• On any given moment in your life if you do not know what kind of balls have been drawing before, the expectation of drawing a Good or Bad ball (experience) is always G₀ =G0/(G₀ +B₀) =50%.
  
  
• On any given moment in your life, gaining a Good or a Bad experience depends on the track record of G&B experiences in your life. So if you've experienced G Good experiences and B Bad experiences, your changes of experiencing a next Good experience are equal to the track record of your Positive Life Score : PLS_(G+B)=G/(G+B)
  
  
• The relative influence of a G or B experience on the PLS decreases rapidly as the number of total experiences increases. Your PLS has a definitive limit in (life)time with equal changes of outcome on the interval [0,1].
  
  
• As is clear from some simulations, the first 10 to 20 experiences in our life determine whether we'll become an optimist (PLS_(∞)> 0.75) or an pessimist (PLS_(∞)<0,25).
  
  
  
  
  
  
  
  
  
  
• Moreover, the first 5 to 10 experiences in your life already determine the direction of our PLS in life. This means that our parents and teachers have an important role in guiding us in our baby and youngster phase to a positive balanced number of experiences (a more than average PLS).
  
  For example if on a given moment in life you have had 4 Bad experiences and 1 Good, the probability of having a next Good experience is 20%. What's more frustrating is that the probability in this case to get in three steps to a 50% level is only about 3% (=1/5*2/6*3/7) . This illustrates the heavy responsibility of our parents and teachers.
  
  That's why it's for example so difficult to change your religion. Once the first 50 religion experiences have been brought in by your parents, it's hard to change from Budha to Allah or Christ, or the other way around.
  
  The same is true with regard to our actuarial education and experience. Once we've experienced more than 10 years in a row that longevity increases slowly, it will hard to be convinced that longevity will explode one day. As a consequence, the way we are formed - per definition - causes that we will always underestimate the risk of a change, as we unconsciously relate risk more to our paste experience more than (we can) to the future. .
  
  
• Once a more than average PLS in our life is achieved, we're more likely to absorb a Bad experience without getting unbalanced. Parents and teachers can 'let go'.

Keep in mind, Polya's Urn is only a think-model to help you to become aware of the important mechanisms that play a role in becoming 'who you are' or 'what you'll be'.

Change?
Once you become experienced in life and your PLS direction has been set, you can only change this by either a Professional De or Re-programming (PDR) or a, what is called, Life Changing Experience (LCE). In PDR Bad experiences are taken away (i.e. out of the urn) and replaced by Good experiences, to regain trust and a higher confidence (PLS) level. In LCE's, your environmental or physical circumstances suddenly chance in such a way that you are forced to experience only just B (or just G) experiences. Another LCE is created by the change of context. What before were B experiences now turn out to be G experiences (or the other way around).

What if?
There are many other aspects that could be studied in relation to the Polya model. For example:

• What would be the effect if an experience is not just only Good or Bad, but a mix.
• What if a 'Good experience' doesn't trigger extra positive confidence (an extra G) but a negative experience (an extra B).

The answer in both cases is that almost always the PLS-limit=50% !, in other words: You'll become average.

But how does a little bit of extra Bad (or Good) influence the PLS limit? If you want to experiment (online) and learn more about Good and Bad, go and visit

Polya's Urn Experiment

and look up the Math behind Polya's Urn (attachments).

Perhaps Polya's Urn is also a good start to model the stock market.
I'll leave that up to you.
Math helps us to discover who we are or what we become...