Whistleblower Risk Management

We all know Risk Management is key in our business.


Yet, almost all risk models (e.g. Coso) emphasize mainly on known or knowable risks.



Of course, as we could have seen in the 2008 credit crisis, the art of Risk management is in managing the unknown or unknowable risks.

But how?


Let's try to learn from two main major accidents:

I. The Challenger shuttle disaster (1986)
The accident was caused by failing O-Rings. Warnings of many engineers were overruled and ignored. This crash was the consequence of a typical effect called GROUPTHINK. Groups naturally look for consensus and will often come up with a false consensus, even when individual members disagree.
Watch a video of the space shuttle Challenger disaster that illustrates this GROUPTHINK phenomenon.

Other examples are the Columbia shuttle disaster and the 9/11 attacks. In all cases Management failed because the information suggesting a disaster was weakly transmitted within an bureaucratic system, and managers failed to authorize action because of bad communication and performance or time pressure.

II. The 2008 credit crisis

• Underestimating early signals
  The first indication of the coming credit crisis was the collapse of Enron in 2003, uncovered by whistleblower Sherron Watkins.
  
  After the collapse, the FED refused to come out with new 'rules based' guidelines . A Senate investigation showed that - starting already in 2000 - some major U.S. financial institutions had "deliberately misused structured finance techniques". But the Fed and the SEC underestimated the situation, kept to their 'principles based' system and consequently missed the opportunity to to flex their muscle by regulating market conditions for subprime mortgages.
  
  Lesson: It's not about 'rules OR principles', Football Or Soccer, but it's about 'Rules AND Principles'.
  
  

• Mixed Central Banks (FED) responsibilities
  Central Banks, The Fed in particular, have at the same time two main responsibilities with regard to (other) financial institutions:
  1. Supervision
  2. Providing financial (banking) services
  
  Those two functions clearly conflict with each other. It's impossible to independently supervise the financial company you're financing at the same time. Supervisory advises will be suspicious by definition.
  
  Secondly you can't supervise yourself as central bank. Therefore, every country needs an independent (that is 'without central bank board members'), professional supervisory board, that audits and supervises the central bank and the national bailout plan(s).
  
  
• Whistleblowers
  How could the credit crisis technically happen?
  Not an official, but a more outside kind of whistleblower, businessman Warren Buffet, warns in a 2003 BBC article that “Derivatives are financial weapons of mass destruction and contracts devised by madmen". The financial world isn't listening.
  
  Derivatives like Collateralised Debt Obligations (CDO's,) were developed to (re)fund the subprime loans. CDO's are packaged portfolios of credit risk, made up from different sliced and diced loans and bonds. They were hard to uncover without a whistleblower. At last an anonymous banker e-mails journalist Gillian Tett of the Financial Times about the situation. Only after she publices early 2007 what's wrong, the dices start rolling. This case also stresses the important role of journalism and whistleblowers in our aim for a healthy transparent financial market.
  
  
• The Greed Game
  One can argue about the roots of the credit crisis. However, essential in the 2008 credit crisis were, or still are, the excessive remuneration practices at private equity companies, hedge funds and banks. They encouraged unhealthy and excessive risk-taking. Key is the lack of balance between possible earnings and possible losses of board members.
  
  To prevent unhealthy pressure management (with groupthink effects), board members' total rewards should always be in line with the long term realized added value of the company and not be based on yearly P&L profits or short term added value.
  

Manage the unknown risks
Risk Management is not a static, but a dynamic process.

To gain and behold control of the unknown risks, it's necessary to create a transparent organization and company-process that guarantees whistleblowers' and whisperers' (= whistleblowers, that wish to stay anonymous) safety and encourages and even rewards compliance reports from employees, clients or any other stakeholders.

Because of GROUPTHINK and - on the other hand - possible negative employee outcomes (demotion, dismissal, etc) in case a reported compliance issue turns out to be compliant after all, it's important that whistleblowers are always given the opportunity to report directly, anonymously and safely to the independent federal Supervisor. Employees must have the choice to report internal within their company (small compliance matters) or to report directly to the federal Supervisory board.

Conclusions

• Separate the Supervisory and Financial Services functions of the central banks (FED)
  
  
• Redesign whistleblowers management
  Whistleblowers should have the opportunity to report compliance issues directly and anonimously to an independent federal Supervisory board.
  
  Whistleblowers that choose to report within a company, should always directly reporte to the compliance officer, the executive board and the supervisory board. On top of this they should always, especially in case of discharge, dismissal or demotion, have the right to escalate to the federal Supervisor.
  
  
• Change supervisory procedures and criteria
  Approval of (company) board members by the federal Supervisor should als be based upon:
  
  1. The 'ethical track record' of a candidate
  2. The feasibility of, in macro economic perspective, "realistic and balanced" board member performance parameters.
     
     The federal Supervisor should audit and approve the existence of a consistent 'company reward plan' that guarantees a sound and measurable balance between long term company results and board member rewards.
     
     CEO's that haven't established measurable long term added value for their company, shouldn't receive any bonus or golden parachute at all.

The Actuarial Black Eye

In his blog David Merkel gives a fabulous book review of the book:

While America Aged

The book and blog show that actuaries (and accountants as well) were not disciplined enough to resist politicians pressure and large companies board (and shareholder) short-term result demands. As a direct consequence those companies got into serious trouble.

Stick to one's guns, and keeping a save eye on the future, is one of the essentials of the actuarial profession.

Training (not just study alone) in giving the right push back on board level, should therefore be an obligate part of the education (and accreditation) of actuaries and accounts.

As (UK) Sir Derek Morris stated in his "review of the actuarial profession: interim assessment" (2004):

Too much has been expected of actuaries and, explicitly or otherwise, too much has been promised by them.

Clients have looked to actuaries to provide certainty, and actuaries have often appeared to provide it.

For Dutch actuaries, see also Willemse and Wolthuis in: "On the practical meaning of probability based solvency".

Actuaries are almost just like real human beings: after a few years successful studying and modeling, they gain confidence. They start to believe that reality will also act according their models. Moreover, they might get overconfident and think that their view and expertise on reasonably well predictable issues like life, death and disability are - with the same amount of certainty - also applicable on other issues like 'inflation' and the development of the 'stock market'.

This it typically a case of :

That what develops you, eventually might kill you

Practice hasn't shown that good actuaries are,by definition, also good weatherman.

The book also shows that self-regulating without clear targets and constraints is a fairy tale.

Keep in mind the Mongolian Proverb:

Of the good we have an understanding,
for fools we keep a stick upstairs

Success in being a PBA (Push Back Actuary)!

Regret

Bloomberg's Fred Pals reports on Oct. 29 that Rijkman Groenink, the former chief executive officer who earned about $33 million from the sale of ABN Amro Holding NV, said he regrets the takeover and wants to work again for the Dutch lender.

Groenink stated:

• he would really like' to become a supervisory-board member at ABN Amro
  
• "There is no one else in the Netherlands with as much banking experience and specific knowledge of ABN Amro as me,''
• "I'd be more than willing to put my knowledge and experience at the bank and my management experience in the service of the new bank and therefore of the Dutch people.''
• "My reality is one of loathing, sadness, I didn't need the money, I didn't want it. But the reality of public opinion is that I'm a money-grubber and I bargained away the bank.''

Source

Value for Money!

Now that Obama will be the next (44th) US president, confidence will rise and we'll get value for money......

That leads to the question of how you measure the Purchasing Power of Money?


The measure most often used, is the Consumer Price Index (CPI).

Other comparison series might be preferable, depending on the context of the question.

In fact there are:

Six Ways to Compute the Relative Value of a US Dollar Amount, 1774 - 2007

Calculate the actual value of a original year 1900 Dollar, Euro, Guilder or Pound and see how you get value for money.

Shareholder or Stakeholder model?

Does the corporation exist for the benefit of shareholders, or does it have other, equally important stakeholders, such as employees, customers and suppliers?

In a study titled, "Stakeholder Capitalism, Corporate Governance and Firm Value" (2007), finance professor Franklin Allen (e.a.) tackles this issue. In showing the various benefits of the stakeholder approach, he demonstrates that the issue is not as settled as some researchers and business people in the US or the UK might think.

Several conclusions emerge from the study, which uses a mathematical model to explore the advantages and disadvantages of stakeholder-oriented firms. First, stakeholder-oriented companies have lower output and higher prices, and can have greater firm value than shareholder-oriented firms. Second, firms may voluntarily choose to be stakeholder-oriented because it will increase their value, according to the study.

In a recent study (2008) called, "Rhineland Exit", Dutch (CPB) researchers Bovenberg and Teulings defend the victory of the Shareholder model over the stakeholder model (Rhineland model). They also state that the principle of maximization of shareholder value, being the ultimate goal of the firm, is at odds with the Rhineland philosophy of a balanced treatment of the interests of all stakeholders.

Why arguing so much about share or steak? By choosing the "stakeholdermodel with weights" it's simple to accomodate and optimize the final model to the company goals.

Source

Credit Crisis Manageable?

In order to succeed in a certain action, we often develop an action plan, a process that defines sub-actions in terms of who, what, when and where.

To guarantee that we succeed as much as possible, we have to maximize the control of this process of sub-actions. Make the process manageable.



In managing this process it's important to identify the nature and co-dependency of your sub-actions.

In general it's important to characterize sub-actions as follows:

Characteristic	Understandable	Predictable	Solvable
Simple	++	++	++
Complicated	+	+	++
Complex	-	-	+
Chaotic	--	--	-

Examples

Characteristic	Example	Description
Simple	Doorbell	Single component/ process with defined output
Complicated	Watch	Several components working together with defined output
Complex	Weather	Many interdependent components with hardly predictable output.
Chaotic	Clouds (form)	No sub components to identify, output unpredictable

Always analyze and characterize the components or sub actions of your action plan.
Not doing so will certainly cause trouble.

Example
One of the causes of the 2008 credit crisis is that we try to manage an in essential 'chaotic process' as a 'complicated process'. More traditional regulation rules (or governance back up) won't stabilize the banking system on the long run (in fact they make it worse), because these rules would imply that the nature of the financial markets is known and can be captured in a controllable mathematical linear system.

Financial markets are complex and chaotic systems, just like the weather. This implicates that regulation should be much more focused on "Plan B" measures than on detailed rule based regulation.

This means that regulation has to be formulated in such a way that Banks, instead of proving more and more that they will 'never' be insolvent (e.g. calculated risk=0,5%, that can't be calculated!), are forced to deliver Plan B's in which they state how they'll act in the 'unexpected' case of insolvency or iliquidity (average at least once in 200 years).

Just like you've got an umbrella in your car (Plan B), because you know that even though the weather forecast was 'sunny', you never can tell precisely when it's going to rain.

Most processes in life turn out to be chaotic on the long run. Analyze and control them, but don't forget to (always) carry your "Plan B" in your pocket.

---

Credit Crisis caused by Pyramid scheme

"Modern banking principles, as defined in the fractional reserve banking system, are essentially an ordinary (and illegal!) Pyramid scheme based on the arithmetic (geometric sequence) of fractional banking.

In an interview, called The Game Is Over, Michael Hudson states that the Fed and Treasury are following the traditional “Big fish eat little fish” principle of favoring the vested interests.

Just like in another Youtube movie he remarks that instead of bailing out the big financial institutions and rescuing billionaires and private investors, the government should have saved only the savings of savers at the bank, pensioners, Social Security recipients and other small fry.



No doubt, given How The Credit Markets Work, current measures will not solve the credit crisis ( Nothing Proposed Will Solve the Credit Crisis ).

World Facts

Just some DYK's as published by the Harvest Field Index and based on the free downloadable CIA World Fact Book 2008.


Do You Know the worlds population size?



Do You Know the world's Average Life Expectancy at Birth?
Answer: 66 years!

Now do you know the answer to the next DYK's?

- Top 3 of biggest continents?
- Top 3 of largest countries?
- Top 3 of biggest world cities?

Just check if your answers are right and you belong to the worldwide best non introvert actuaries,




Answers!


Biggest continents?
1. Asia 4,002 Million people
2. Africa 934 Million people
3. Europe 730 Million people

Largest countries?
1. China 1,330 Million people
2. India 1,148 Million people
3. United States 304 Million people

Biggest World cities?
1. Tokyo, Japan 35 Million people
2. Mexico City, Mexico 20 Million people
3. New York City, U.S. 19 Million people

Demographic Winter

Are we heading for a demographic winter?

Worldwide, birth rates have declined by more than 50% in the past 40 years.

In most of the industrialized world, birth rates are well below replacement level.

Main issue: The decline of the human family.




View the trailer or the complete movie 'Demographic Winter'.

How European are we?

Two demographers, Wolfgang Lutz and IIASA’s Vegard Skirbekk, teamed up with a political scientist Sylvia Kritzinger investigated (2006) the emergence of a sense of European identity.

On the question "How European are you?" they got these results:

Country	Expressing
	European
	identity
Luxemburg	78%
Italy	72%
France	68%
Spain	64%
Belgium	59%
Netherlands	59%
Germany	56%
Denmark	54%
Ireland	53%
Austria	51%
Portugal	50%
Greece	46%
Sweden	45%
Finland	43%
UK	40%

They analyzed and extrapolated the trends found in the Eurobarometer surveys from 1995 to 2004 for the EU-15.

What they found is that there's an emergence of multiple identities across different age groups in Europe today.

People are increasingly feeling that they are both nationals of their home country and Europeans as well.




Source

About actuary Schmidt!

A movie about an actuary? Yes it's true! Nobody else than Jack Nicholson, alias insurance actuary Warren Schmidt, retires at age 66 in the movie "About Schmidt" (2002).



Plot summary
Schmidt retires from his actuary job at the Woodmen of the World insurance company in Omaha, and is given an impersonal retirement dinner at a local steakhouse. He visits his young successor's office to offer his help, but he is not needed. As Schmidt leaves the building, he sees the contents and files of his office in the basement, set out for garbage collectors.

Schmidt describes to his foster child Ndugu his longtime alienation from his wife, who suddenly dies after his retirement. His friends arrive for the funeral. His only daughter Jeannie and her fiancé Randall. Schmidt finds Randell, a water-bed salesman, mediocre and unsuited to his daughter.

Randall recommends the book "When Bad Things Happen to Good People" [not everything in your life has a purpose: Life(You) = God(You) + Randomness] by Harold Kushner to Schmidt.

Perhaps the opposite view from Kirzner [everything in your life has a purpose: Life(You) = God(You) ] of this book would have helped Schmidt more?

Already interested? Read more at Wikipedia or go and see the movie!

Conclusion
Just as Warren Schmidt, we actuaries want to make the difference in life. To do so we have to 'act' as non-conformists.

Economics: Playing with fire

Read this splendid article by Robert Clarkson.


He discusses the dangerous misuse of modern finance models that sparked the current worldwide credit crisis.

Much of the responsibility for the severity of the present worldwide credit crisis can be attributed to the unthinking use of dangerously unsound financial models by American and European banks.

In July 2008 Clarkson gave a corresponding presentation entitled “Actuarial insights into hedge fund management” at a conference on managing risk in hedge funds.

Some quotes:

• ADAM SMITH
  The chance of loss is by most men undervalued.
• WINSTON CHURCHILL
  The further you look back in history, the further you can look forward.

Enjoy!

Make the world a little better......

The next German (Bayer) advertorial for an actuary, just touches what a lot of Actuaries actually drives: Make the world a little better.

It's wonderful symbolized in two 'peaceful' Indian-like scars on the face.


Lars Achtruth, Datenanalyst bei Bayer, verfolgt täglich ein Ziel: Die Welt ein bisschen besser zu machen. Diese Leidenschaft ist es, die uns verbindet und uns die Suche nach dem Neuen niemals aufgeben lässt. Wir nennen es den Bayer-Spirit. Wenn auch Sie ihn spüren, ist es höchste Zeit, zu uns zu kommen.

Compliments Bayer!

Look it up if it's still actual: Versicherungsmathematiker (m/w)

World Drug Report 2008

The opium/heroin market continues to expand on the
production side. The total area under illicit opium poppy cultivation
increased by 17% in 2007 .

The opium/heroin market continues to be dominated
by the large levels of cultivation and production in
Afghanistan (82% of global production).

Worldwide there are around 16.5 million opiate users (some 12 million use heroin).



More statistics in the World Drug report 2008.

Edelman Trust Barometer 2008

The credibility of a CEO doesn't seem sky high.....

More, in this interesting report of the Edelman Trust Barometer 2008.


What about the trust in Lawyers or accountants?

These are the Coredata results:



Pity an actuary isn't reviewed. So, what about the credibility of an actuary?

In short: It's at steak!

These are the recommendations the "Task Force On Actuarial Credibility"
as advised in a October 2007 presentation, based on the original CAS report 2005.

Task Force Recommendations

1. Enhance transparency of the actuary’s conclusions by identifying differences between the “best estimates” of management and the actuary.
2. Enhance the public’s understanding of actuarial estimates and to refine actuarial methodologies.
3. To improve the transparency of actuarial estimates by providing the changes from one reporting period to the next within the actuarial report.
4. To enhance the quality of corporate governance for property/casualty insurers by educating audit committees and/or boards of directors on the roles and responsibility of the appointed actuary.
5. To enhance self-governance of the actuarial profession with respect to reserve opinions by requiring the appointed actuary to provide an explanatory document with the ABCD whenever the change in the actuary’s reserve estimate over a defined period of time exceeds certain predetermined thresholds.
6. Incorporate the actuarial statement with the Jurat page of each property/casualty insurance company’s Annual Statement.
   

These recommendations could also apply to non-casualty actuarial areas.

European Actuarial Academy

The European Actuarial Academy (EAA) was founded on 29 August,2005, by the Actuarial Associations of Germany, Switzerland, Austria and the Netherlands.

These four associations are also the EAA stakeholders. Its foundation was a response to the increased demand from Central and Eastern European countries for Actuary professionalisation.

EAA strives to become the knowledge centre of European Actuary education.

EAA has on offer:

• Actuarial education, including examination
• Permanent education for (certified) actuaries
• Consulting on Actuarial education.

From October 1st to 3rd 2008, there's an EAA Seminar, ‘Pricing in General Insurance’ in St. Petersburg/Russia.

Read more about EAA.

Simple Banking Basics

A good way to understand how banks work is to imagine starting your own bank.

The first thing you need to do is put up some of your own money. You won’t receive a banking license unless you have your own capital at risk.

After a while your balance sheet and erarnings will look like.

Look HERE to learn more on banking basics!

Lessons from the Credit Crisis

Which car can travel faster around a race track, one with brakes or one without?

A car will face many obstacles, let alone many bends in the track before it reaches the finish line. The ability to brake allows the race car driver to slow down to meet these challenges and to accelerate only when there is the most gain to be had.

Similarly, companies want to be resilient in the face of risk and also to be able to exploit it should opportunities for gain arise. Especially in the financial community, an enterprise risk management system that is quick and responsive to change is central to ensuring success.

More at: Actuaries Abroad: ERM Lessons from the Credit Crisis

However, if you think everything is under control, remember Andretti's one liner:

Even in risk management: Think twice.....

Ageing and the Sustainability of Dutch Public Finances

In a 2006 (but still actual) research called, "Ageing and the Sustainability of Dutch Public Finances", it's stated that the ageing of the population jeopardises the sustainability of public finances in the Netherlands.

The doubling of the ratio between the number of retirees and the number of workers destroys the balance between future public expenditure and tax revenues. Indeed, the increase in expenditure on public pensions and health and long-term care will outweigh the increase in tax revenues.




Budgetary reforms are therefore necessary in order to avoid that future generations will have to raise taxes or economize on public expenditure.

Reforms in the field of social security of the last few years are a step in the right direction, but are insufficient. In particular, the decline of interest rates and the reduced wealth of pension funds have worsened the sustainability of public finances. The effects of reforms on the intergenerational balance are important for the question which further reforms are most attractive.

Netherlands: Rapid increase life expectancy

Last year, female life expectancy at birth was 82.3 years, as against 78.0 years for men. Life expectancy has risen dramatically since 2002.

Life expectancy at birth

Mortality down since 2002

Female life expectancy at birth was 82.3 years in 2007, i.e. 4.3 years more than for men who have a life expectancy of 78.0 years at birth. Since 1980, the gender gap has narrowed. Male and female life expectancy increased by 5.5 and 3.1 years respectively. The situation has improved considerably after 2002. Despite the ageing population mortality has annually declined since 2002. Such a long period of declining mortality is unprecedented in the Netherlands. In 2007, mortality was over 9 thousand (nearly 7 percent) down on 2002.

Declining mortality by age, 2007 relative to 2002

Situation favourable for people in their seventies

The decline in mortality was quite evenly spread across all age groups, but was particularly noticeable among people in their seventies. In 2007, mortality in the age group 70-80 declined by over 5 thousand (nearly 13 percent) relative to 2002. This decline is largely the result of the reduced risk of dying from cardiovascular diseases.

Lower risk of dying by age, 2002-2007

Lower mortality risk for 50 to 80-year-old men

In recent years, the mortality risk declined significantly for both genders. For men aged between 50 and 80, the risk of dying dropped more than for women in the same age bracket. Among the very old, the situation is more favourable for women.

Female life expectancy at birth, 2006

Netherlands not in leading position

Dutch women marginally improved their position on the European record list, but in countries like France and Spain female life expectancy is considerably higher. Belgian and German women also had a somewhat higher life expectancy in 2006. In relative terms, the position of Dutch men on the European life expectancy list is better and comparable to the position French and Spanish men. Swiss, Swedish and Norwegian men, however, enjoy a considerably higher life expectancy.

Source : CBS , by Joop Garssen and Koos van der Togt

Origin of funds?

What's the origin of (mutual) funds?

In 1774 a Dutch merchant Adriaan van Ketwich started an investment trust under the name "Eendragt Maakt Magt" (translated: Unity Creates Strength).
Five years later Van Ketwich starts his second trust under the name 'Concordia Res Parvae Crescunt' (translated: Small things grow in harmony).




If you're interested: Geert Rouwenhorst did a lot of historic research in 'the origins of mutual funds'.

The initial price of volatility

We'll start this blog with some theory about volatility.
A short excerpt form the original interesting article on Estopedia, called "The Uses And Limits Of Volatility" by David Harper,CFA, FRM (Contact Author | Biography)

______________________________________________________________

One of the theoretical properties of volatility may or may not surprise you: it erodes returns.

This is due to the key assumption of the random walk idea: that returns are expressed in percentages. Imagine you start with $100 and then gain 10% to get $110. Then you lose 10%, which nets you $99 ($110 x 90% = $99). Then you gain 10% again, to net $108.90 ($99 x 110% = $108.9). Finally, you lose 10% to net $98.01. It may be counter-intuitive, but your principal is slowly eroding even though your average gain is 0%!

If, for example, you expect an average annual gain of 10% per year (i.e. arithmetic average), it turns out that your long-run expected gain is something less than 10% per year. In fact, it will be reduced by about half the variance (where variance is the standard deviation squared). In the pure hypothetical below, we start with $100 and then imagine five years of volatility to end with $157:


The average annual returns over the five years was 10% (15% + 0% + 20% - 5% + 20% = 50% ÷ 5 = 10%), but the compound annual growth rate (CAGR, or geometric return) is a more accurate measure of the realized gain, and it was only 9.49%. Volatility eroded the result, and the difference is about half the variance of 1.1%. These results aren't from a historical example, but in terms of expectations, given a standard deviation of σ (variance is the square of standard deviation, σ^2) and an expected average gain of μ, the expected annualized return is approximately μ - ( σ^2 ÷ 2).
___________________________________________________________________

The 'hidden secret' in this article is in the last line.

We may define the Volatility Rate Loss (VRL) here as the difference between the Average Annual growth Rate (AAGR) and the (real) Compound Annual Growth rate (CAGR).

VRL = AAGR - CAGR

Let's calculate the VRL for several volatilities:

Volatility	VRL
σ	( σ^2) / 2
3%	0,03%
5%	0,13%
10%	0,50%
15%	1,13%
20%	2,00%
25%	3,13%
30%	4,50%
35%	6,13%
40%	8,00%

From this simple table, and given the fact that actual volatility of several main indexes (shares) are varying around 20-30% and that volatilities of 40 (or more) of investments in individual companies are no exception, it's clear that we can not neglect the influence of VRL.

For example if we take an investment with an average return of 10% and a volatility ( σ ) of 20%, the average return (of 10%) will show 2% too high.

Another way of putting it (in this last case) is that when you decide to step over from a non-volatile investment to a volatility risk type of investment, your investment should return on average 2% higher to give the same return as your non-volatile investment. In a way VRL is the initial price you pay for volatility sec.

So, when judging returns, don't look at average returns, but always look at the Compound Annual Growth Rate.

Longevity risk solved

Holiday news today...

An unknown Dutch actuary (don't quote me !) claims to have found the definitive solution for what's called 'longevity risk'.

Instead of a traditional non-comprehensive actuarial equation, the proof is one of those rare, and sometimes dangerous or wrong, visual proofs in (actuarial) mathematics.



Anyway, have a nice holiday!

Klantenmonitor Zorgverzekeringen®

Resultaten onderzoek Klantenmonitor Zorgverzekeringen® :

gemiddelde marktscore voor:
- dienstverlening aan klanten: 7,4 (2006:idem)
- probleemafhandeling: 4,9 ( 2006: 5,5)

Eindoordeel dienstverlening
Verzekeraar	2007	2008
Pro Life Zorgverzekering	8.0	8,1
De Friesland Zorgverzekeraar	7.7	7.9
Azivo Zorgverzekeraar	7.5	7.8
DSW Zorgverzekeraar	7.8	7.7
IZA	7.5	7.7
ONVZ Zorgverzekeraar	8.2	7.6
Univé Verzekeringen	7.4	7.6
Zorg en Zekerheid Zorgverzekeraar	7.4	7.5
IZZ	7.4	7.5
FBTO	7.5	7.4
Agis Zorgverzekeringen	7.4	7.4
Groene Land Achmea	7.4	7.4
OHRA	7.4	7.4
CZ	7.3	7.4
Trias Zorgverzekeraar	7.4	7.3
Zilveren Kruis Achmea	7.2	7.3
De Goudse	7.4	7.2
AnderZorg	7.3	7.2
VGZ	6.9	7.2
Avéro Achmea	7.0	7.1
Menzis	7.2	7.0

Simpson's paradox

Let's take a look at a simple fund management score card.

	Fund 1			Fund 2			Fund 1+2
	Return	Assets	Rate	Return	Assets	Rate	Return	Assets	Rate
Fund manager A	8	200	4,0%	72	800	9,0%	80	1000	8,0%
Fund manager B	48	800	6,0%	22	200	11,0%	70	1000	7,0%
Total Fund managers	56	1000	5,6%	94	1000	9,4%	150	2000	7,5%

Clearly Fund manager B performs 2% better in both Fund 1 and 2 than Fund manager A. However, across both funds, Fund manager A seems to perform better.

This effect is called Simpson's paradox.

Keep in minds:

• Always be critical in ranking mix funds (managers) on overall performance
• Even if the risk profiles of Fund 1 and 2 are the same, Simpson's paradox may show up
• Besides choosing the right Fund manager, choosing the right asset mix is just as important

Another nice example of Simpson's paradox is:

Good for Men, Good for Women, Bad for People

	Woman			Man			People
	Survived	# Start	Rate	Survived	# Start	Rate	Survived	# Start	Rate
Treatment A	3135	3300	95	4020	6700	60	7155	10000	72
Treatment B	7395	8700	85	650	1300	50	8045	10000	80

A cohort or a series of people receive treatment A, and another cohort receives treatment B. The survival rate of treatment A is better for woman as well as for man, but not for people!

Simpson's Paradox Actuary Links:

1. Ratemaking: The CEO asks the actuary...
2. Smokers and survival rates
3. Credit Score really explains Insurance Losses?

Managing Expectations

Managing Expectations, how do you do that?


Customer: How much is that parrot in the window?

Pet shop owner: Somewhere between $200 and $250

Customer: Erm, OK, I’ll give you $200 for it then!


To manage your stake- or shareholders expectation, it's often not wise to present them the expected project costs. What to do?

Source

DB plans outperforme DC plans by 1%

Watson Wyatt has been comparing rates of return between defined benefit
(DB) and defined contribution (DC) plans for more than 10 years.¹
This most recent comparison finds that between 1995 and 2006, DB plans
outperformed DC plans by an average of 1 percent per year.



Asset-Weighted Median Rates of Returns
DB and 401(k) Plans — 1995-2006

Year	Number of sponsors	DB plan	401(k) plan	Difference
2006	914	12.90%	11.34%	1.56%
2005	2, 584	7.74%	6.69%	1.05%
2004	2,583	11.81%	9.80%	2.01%
2003	2,514	21.35%	19.68%	1.67%
2002	2,085	-8.56%	-10.93%	2.37%
2001	2,239	-3.78%	-6.07%	2.29%
2000	2,058	-0.01%	-2.76%	2.75%
1999	1,472	13.46%	14.41%	-0.95%
1998	2,958	14.25%	15.29%	-1.04%
1997	2,931	18.82%	19.73%	-0.91%
1996	3,034	14.53%	14.10%	0.43%
1995	3,063	21.10%	19.20%	1.90%
Average		10.30%	9.21%	1.09%

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Temperatuur en overlijden

Er blijkt toch een relatie tussen de temperatuur en het aantal overlijdensgevallen.


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Pension differences Japan & U.S.

In Japan, only 30.7% of respondents agreed or strongly agreed that employers will play a less significant role in pension provision in 20 years, the survey found. In comparison, 66.5% of U.S. respondents to an earlier survey agreed or strongly agreed.

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