Elderly Pension Income Funding

One of the main issues in our aging-society is to achieve an adequate retirement income level for the elderly.

A recently published OECD report called 'Pensions at a Glance 2013' gives a detailed insight in how we are doing.

OECD's report analysis a lot lot of interesting 'pension income' and 'poverty-index' developments. In this blog we'll focus on the relatively income of elderly people as a percentage of the national mean income of the total population .


Relative incomes of people 65-years and older
Let's take a look at the relative incomes of people 65-years and older, per country, in the 'late 2000s' (2007-2010):

Although the OECD-average income level (86.2%) of elderly as a percentage of the national mean income of the total population of a country is (surprisingly?) quite high, there are still some countries, like Australia (65.4%) at the bottom where you wouldn't expect them.....

Elderly: Sources of Income
The next graph makes perfectly clear in which countries the elderly still have to work for the main part of their income.

A lot of countries where people don't have to work for their income depend on a substantial (often not capital funded) public pension system. They are 'at risk' as ageing increases in the next decades.

Relatively robust elderly income countries are countries like The Netherlands, Canada and Israel, where elderly people have a substantial part of their income funded by private pensions or non-pension saving returns.

For more interesting conclusions, download the OECD report.

Links/Sources:
- OECD Pensions at a Glance - Jantoo Cartoons

Are Health Expenditure & Life Expectancy Related?

Does life expectancy depends on how much is invested in in Health?
'Of course' one would say as a first response. But on second thought the relationship between healthcare and life expectancy is rather complex:

• More basic healthcare improves the quality of life and therefore life expectancy
• However, countries with relative bad health conditions urge for relative extra investments in health that at first do not directly pay back in extra  life expectancy
• Developed countries that invest a lot in health might invest more than is needed for an optimal life expectancy

Let's take a look at the last available (2011) Top-20 figures:

As discussed, the relationship between Health Expenditure (HE) as a percentage of a country's GDP from a global point of view, is not directly related to Life Expectancy (LE) at birth in a specific country.

Healthcare Investment Optimum?
If you could speak of a HE-optimum, it would be somewhere around 10,6%.
Higher Health Expenditure costs than 10.6% do not seem to contribute to an increase in life expectancy.

Let's conclude with an interactive chart from Tableau Public:

Learn About Tableau

Sources/Links/Downloads
- Health expenditure, total (% of GDP)
- Life expectancy at birth, total (years)

Not-Working Rate instead of Unemployment Rate

The unemployment Rate in the United States decreased from 7% in November of 2013 to 6.7% in December of 2013.  Good news! Or not?

Unfortunately the unemployment rate is not a beatific 'economy health indicator'.

How come?

Unemployed who no longer search for a job are not 'counted in'.

Do we have a better labor economy health indicator?

An index that would probably be better related to the health of the U.S. economy would be something like the 'Not-Working Rate', implicating the partition of all the people (age 16 or above) that are not working, divided by the number of people that potentially could work.

In fact we can define the 'Not-Working Rate' more or less as 100% minus the 'Employment-population rate'.

'Not Working Rate' = 100% - 'Employment-population rate'

According to chief North American economist for Capital Economics Paul Ashworth,, the employment population ratio is one of the best measures of labor market conditions. This ratio is a statistical ratio that measures the proportion of the country's working-age population (ages 15 to 64) that is employed, inlcuding people that have stopped looking for work.

Enough index-talk discussions... let's look at the Not-Working Rate outcomes.

Not-Working Rates 1948-2013
Let's compare the Not-Working (NW) Rates with the Unemployment  (UE) Rates.

The next chart clearly shows that the NW-Rates are about 4 times the UE rates.
In other words: Unemployment is only a small part of 'Not Working'......

Not-Working Rates 2000-2013
Let's zoom in to the development of the 2000-2013 rates.

Now it becomes clear that the UE Rate keeps up with the NW Rate approximately until the UE Rate in October 2009 hits the 10% ceiling. After that (coincidence?) the UE Rates starts a spectacular downfall from a 10% to a 6,7% level at the end of 2013. However the percentage of people that are not working stabilizes around 41.5% and doesn't  decline!

Let's zoom in to detect this remarkable development..

Conclusion
I'll leave the detailed conclusions up to you.
My main advice is to introduce the 'Not-Working Rate' as an indicator for the labor health of the U.S. economy.

Despite all this labor math, let's hope and pray that people find a job and that the U.S. economy recovers!


Sources/Links:
- BLS Employment-population ratio
- BLS Unemployment rate
- Wikipedia Employment-to-population ratio
-  Actual U.S. Unemployment Rate
- Cartoon

Transparency in a World of Bribery?

To create a world that is less vulnerable to systemic risk, it's important that financial markets become more transparent.

One of the main issues in becoming transparent is the fact that there's still a lot of corruption in the world.

According to 'Transparency International', more than 1 in 4 people around the world report having paid a bribe.

The Netherlands
Even in a  perceived 'low bribery country' as The Netherlands, bribery is a serious issue that still isn't seriously approached. According a OECD report, The Netherlands is failing to vigorously pursue foreign bribery allegations and must do more to enforce its foreign bribery laws.

Fourteen out of 22 foreign bribery allegations have not triggered the opening of an investigation, calling into question the Netherlands’ ability and proactivity in investigating and prosecuting theses crimes.

Transparency Rules
It's useless to set up (financial) transparency rules (like in EMIR) if bribery is still a substantial part of our culture.

The 'Corruption Perceptions Index 2013' shows that even in countries where one would expect a low corruption rate, there's still a lot to improve. Despite of all actions and intentions: worldwide corruption still increases. Therefore it's time for action:

Words must be backed by action

The Corruption Perceptions Index scores 177 countries and territories on a scale from 0 (highly corrupt) to 100 (very clean). Not one country has a perfect score. Two-third of all countries have a score below 50. This indicates a serious, worldwide corruption problem. Hover on the map above to see how your country fares.




What follows are the more detailed scores in a complete list of all countries. Just Scroll down to your own country to find out there's still room for improvement.




Finally 
It will not be easy to achieve an adequate transparency level in a world full of Bribery. Let's discuss what we - actuaries - can do to stimulate integrity and accountability, as these values are crucial to a more risk free world

Relevant links and Sources
- Institutions perceived by respondents to be among the most affected by corruption 
- Complete Oversight of Indexes
- Corruption by TOPIC
- OECD: Netherlands must significantly step up its foreign bribery enforcement
- Bribery Report The Netherlands

Happy 2014 !!!

Happy New Year to all Actuary-Info Readers!!

May 2014 become a fabulous Risk Management Year.

Wonderful Art by Rob Gonsalves ("Deluged").

 Link: Rob Gonsalves

What's your Pension Fund Confidence Level?

In my last blog I discussed the relationship between 'Fund Ratio' (FR) and 'Confidence Level' (CL), mainly for Dutch pension funds.

Some bloggers asked me to visualize this FR-CL relationship also for some other important pension countries.

From a Tilburg University thesis (2010) we can make a comparison. Not for all pensioen funds, but at least for some major public sector pension funds.

Here it is!

Although Dutch pension funds are still discussing whether they should cut existing pension rights or not , US and UK public sector pension funds still believe that as bad dreams have become reality, miracles can also happen!

"No!", my English business friend answered me, "I don't believe in miracles, I rely on them!" .

  

It still sounds as in the good old days, it's just the view that differs.....

Relationship Confidence Level & Funding Ratio

Dutch Pension funds constantly keep their members informed about the development of the funding ratio. But actually..., what is the confidence level that belongs to a certain funding ratio?

The answer to this question varies greatly by pension fund. To create some sort of insight in the relationship between the Funding Ratio (FR) and confidence level, we will discuss a highly simplified, but certainly realistic example.

Confidence and Equity
The required confidence level for Dutch pension funds is anchored in the Dutch Pension Act (Pensioenwet), at a 97.5 %  level.

Article 132 , paragraph 2 of the Pension Act  states:
A pension fund will set the regulatory own funds so that the probability of the pension fund having 
less assets at its disposal than the amount of the Technical Facilities (TF) within a year is reduced to 97 1/2 %

Funding ratio
Under the Dutch Pension Act, the required one-year confidence level of 97.5 % is directly related to the Regulatory Own Funds (ROF) and thus to the Required Funding Ratio (RFR). In a simplified formula stated: RFR = (ROF + TF) / TF.

At higher funding ratios than the RFR, the actual confidence level will be more than 97.5 % and vice versa: if the actual funding ratio is lower than the RFR, the corresponding confidence level will be less than 97.5%.

In practice, calculations show that the required funding ratio of most Dutch pension funds has an outcome somewhere between 120% and 130% .

Funding Ratio and Investment Risk
The fluctuation of the funding ratio depends largely on the investment risk that a pension fund is willing to take. Netherland's largest pension fund, ABP, adopted an investment policy that aims at roughly 40% fixed income and 60% equities. This policy resulted in the next yield and 5-year backward moving annual volatility (risk) :

The average ABP annual return over the past 5 years was about 5 % with a volatility of 15.9%.

Volatility Funding Ratio

The volatility of the funding ratio depends not only on the volatility of investments, but also on the volatility of the discounted liabilities. In the Netherlands, liabilities are discounted at a risk-free rate, with help of the so-called 'ultimate forward rate' (UFR).

On balance, the ABP's annual funding level volatility over the past 10 years turns out to be approximately 17 % .

This percentage has the same order of magnitude as the annual funding level volatility of an average pension fund in the Netherlands .

As the funding volatility has the same order of magnitude as the investment volatility, we may conclude that the confidence level that corresponds to a certain funding ratio is mainly determined by the investment risk .

To get sight at the 'one year confidence level' for various funding levels, please take a look at the the next chart that's based on a highly simplified approach. We do not seek exactness, but want to get an impression of the confidence sensitivity. Therefore, we abstract from the additional volatility effects that may arise from other risks (like liabilities and expenses ). The calculation is performed for two different risk strategies of a pension fund :

1. The 'current risky' investment strategy with an expected investment volatility of 15 %
2. A 'risk-averse' investment strategy with an expected investment volatility of 4%

Here are the results :

On the basis of graph above a first serie of important conclusions can be drawn:

• A 100% funding ratio corresponds with a 50% confidence level
• If the funding ratio exceeds 100%, the 'current risky' investment strategy results - as expected - in a lower confidence level than a risk-averse strategy.
• Although perhaps at first sight surprising, the reverse is also true:
  If the funding ratio falls to a level less than 100% , a risky investment strategy results in a higher confidence level than the 'risk-averse' investment strategy. And this is exactly the situation in which a number of Dutch pension funds, but also many foreign pension funds, are in.

To draw some more specific conclusions, we zoom in on the graph:

Now, a second set of interesting conclusions becomes visible:

• Required Funding Ratio
  The 'current risky' investment strategy of Dutch pension funds in combination with the legally required confidence level of 97.5 %, urges a funding ratio of about 130 %.  In a risk-averse strategy the required funding ratio would be somewhere around 110 % .
   
• Actual Confidence Level
  A legally required confidence level of 97.5% with a funding ratio of 110% for a risk-averse fund would result in an actual confidence level of about 75% in case of a risky investment strategy .
  As most Dutch pension funds have adopted a risky investment strategy, the actual average confidence level is about 75% in case of a 110% funding ratio and about 50% in the case of a 100% funding ratio.
   
• Maximum Confidence Level Decline?
  There's a maximum decline of 24% in confidence level in case of a transition from a risk-averse to a risky investment. The maximum decline corresponds with a funding ratio of approximately 108%.
   
• Indexation Potential?
  The current average funding ratio of Dutch pension funds fluctuates around 100%. This implies that as far as future actual annual returns result in an excess return above the required return on liabilities, this so-called 'excess-return' should first be used to achieve the required funding ratio of about 130%.  In most cases this leaves no room for indexation in the coming 10 years.
   
• Partial Indexation?
  It's quite common to apply 'partial indexation', above a 105% funding ratio. However, if the actual funding ratio is still below the minimum required confidence level (of 130%), "partial indexation" lowers the funding ratio and diminishes the recovery-rate. In this case, the (partial) indexation policy should be tested for feasibility. The expected return minus the (future expected) indexation and minus the required return on liabilities, should be sufficient to grow to the required funding ratio of 130% within the statutory recovery period of 10 years .

Solvency II to pension funds ?
Finally, we zoom in on the possible introduction (IORP legislation) of a required 99.5% confidence level, as is valid for insurers under Solvency-II:

A final set of key conclusions now becomes visible :

• Solvency II
  Increasing the current confidence level of 97.5 % (Pensions) to 99.5% (Solvency II ) implies an increase of the required funding ratio from 110% to about 113% for risk-averse pension funds and an increase from 129% to 139%  for pension funds with a (current) risky investment policy.
   
• Unrealistic Solvency-II Growth Path
  Based on the current average funding ratio of around 100%, pension funds should be able to climb to a funding ratio of around 139% within a (statutory limited) 10 years period to reach a Solvency-II confidence level of 99,5%. I think most of us will agree that this is a complete unrealistic scenario. In this case pension funds will ultimately be forced (by the regulator) to de-risk their investment portfolio. De-risking will result in lower (expected) returns and further loss of indexation potential.  Implementing Solvency-II requirements will turn pension funds into 'nominal pension insurers'.
   
• Basel
  Confidence levels in the financial markets seem to know no end. If, in the long term, the confidence level requirement of 99.9 % ( Basel banking regulations requirement) should become obligatory for pension funds, things would really get out of hand. In this case, the funding ratio requirement would increase further to 116 % ( risk-averse strategy ) or even 147 % ( risky strategy).
   

Reflection
The question is whether it's wise to judge pension funds with long term liability structures and corresponding investment policies, on basis of a one-year 97,5% confidence level. It would probably be more realistic and practical to scale up to a 99.5 % confidence level on basis of a 5 or 10-years period:

Illustration: In case of a portfolio with a 15% risky investment strategy, the 5-year average 99.5 % confidence level would lead to a required funding ratio of 118 % .

Conclusions
Based on the global approach above, the following conclusions can be drawn:

• The actual confidence level of Dutch pension funds is far below the (statutory) required confidence level of 97.5 %. For pension funds with a risky (= 15% volatility) investment strategy and a funding ratio between 100% and 110%, the actual confidence level varies from 50% (at a 100 % funding ratio) to 75%  (at a 110 % funding ratio).
   
• There's only very limited indexation potential for pension funds with a funding ratio between 100% and 130 %, due to the obligation to grow the actual funding ratio (with priority) to the statutory required level (130%).
   
• Introduction of an IORP risk framework based on a Solvency-II confidence level of 99.5% would imply that pension funds are forced to de-risk their portfolio. De-risking will result in lower (expected) returns and further loss of indexation potential. Implementing Solvency-II requirements will turn pension funds into 'nominal pension insurers'.
    
• Due to their long-term obligations and corresponding investment strategies, pension funds can be more adequately controlled and steered on basis of a five-year average 99.5 % confidence level, instead of the actual one-year 97.5% confidence level.

Blog-Disclaimer
The calculations and conclusions in this blog are very rough approximations which by definition do not apply to an individual pension fund and are only intended for discussion purposes. Please consult your own pension fund if you are interested in the confidence level results regarding your own pension fund. In this case don't forget to ask your pension fund to report according the template style of this blog!

Aftermath: International Funding Ratios Comparison
The funding ratio's and mentioned statutory requirements in this blog are based on the actual situation in the Netherlands. Funding ratio's in other countries vary considerably!

In an excellent rare Netspar thesis  (2010) the diverse funding ratios of public sector pension funds are compared regarding three kinds of Methods:

1. Reported Ratio: Funding ratios officially reported by each scheme.
2. Fair Value: This method, inspired by Dutch plans, uses a market discount rate to account for pension liabilities. Dutch pension industry refers discount rates to nominal swap rates since the market of government bonds is not deep enough for the industry. 30-year nominal swap rate, which roughly has the same duration of 15 years as a typical pension fund, is used as the market discount rate for nominal liabilities
3. Expected Return: This (actuarial) method, following the U.S. practice, is based on an assumed discount rate of 8% which reflects the American’s expectation of annualized long term pension asset return.

Here are the results:

For example: if you would like to compare the Netherlands with the US on basis of Fair Value (the Dutch mandatory method), the funding ratio of the US would be 31% compared to around 90% in the Netherlands. Please keep this in mind if you examine the above charts in this blog!

But let's stay optimistic about US pension funds, the funding ratio ofl US corporate plan's is already rising!

US Pension Fund Fitness Tracker

Find out what your actual pension confidence level is!!!


Used Links & Sources
- Dutch Pension Act (in English)
- Advisory Report of the UFR Committee
- A fixed UFR, a costly mistake?
- Long duration bond benchmarks for U.S. corporate pension plans
 - Netspar Thesis (2010): What Explains the Diverse Funding Ratios..
- US Pension Fund Fitness Tracker

Country Corporate Tax Competition Market

The global competition on corporate tax rates is 'on'.

More and more countries use corparate tax as an instrument to attract international companies to stimulate economic growth in their country.

Let's suffice with a sectional view of some remarkable corporate tax outcomes and developments on basis of KPMG's excellent Corporate Tax Oversight.

I'll leave the interpretion up to you.

	Corporate Tax Rates in Year
Location	2006	2007	2008	2009	2010	2011	2012	2013
Top-3 Max. Corp. Tax
United Arab Emirates	55,0%	55,0%	55,0%	55,0%	55,0%	55,0%	55,0%	55,0%
United States	40,0%	40,0%	40,0%	40,0%	40,0%	40,0%	40,0%	40,0%
Japan	40,7%	40,7%	40,7%	40,7%	40,7%	40,7%	38,0%	38,0%
Region Average Corp. Tax
Global average	27,5%	27,0%	26,1%	25,4%	24,7%	24,5%	24,4%	24,1%
OECD average	27,7%	27,0%	26,0%	25,6%	25,7%	25,4%	25,2%	25,3%
Europe average	23,7%	23,0%	22,0%	21,6%	21,5%	20,8%	20,4%	20,6%
North America average	38,1%	38,1%	36,8%	36,5%	35,5%	34,0%	33,0%	33,0%
Asia average	29,0%	28,5%	28,0%	25,7%	24,0%	23,1%	22,9%	22,5%
Europe: Competition
Switzerland	21,2%	20,6%	19,2%	19,0%	18,8%	18,3%	18,1%	18,0%
Netherlands	29,6%	25,5%	25,5%	25,5%	25,5%	25,0%	25,0%	25,0%
Italy	37,3%	37,3%	31,4%	31,4%	31,4%	31,4%	31,4%	31,4%
Sweden	28,0%	28,0%	28,0%	26,3%	26,3%	26,3%	26,3%	22,0%
Ireland	12,5%	12,5%	12,5%	12,5%	12,5%	12,5%	12,5%	12,5%
United Kingdom	30,0%	30,0%	30,0%	28,0%	28,0%	26,0%	24,0%	23,0%
Germany	38,3%	38,4%	29,5%	29,4%	29,4%	29,4%	29,5%	29,6%
Non-Europe: Competition
China	33,0%	33,0%	25,0%	25,0%	25,0%	25,0%	25,0%	25,0%
Kuwait	55,0%	55,0%	55,0%	15,0%	15,0%	15,0%	15,0%	15,0%
Greece	29,0%	25,0%	25,0%	25,0%	24,0%	20,0%	20,0%	26,0%
Indonesia	30,0%	30,0%	30,0%	28,0%	25,0%	25,0%	25,0%	25,0%
Israel	31,0%	29,0%	27,0%	26,0%	25,0%	24,0%	25,0%	25,0%

Global Oversight
Here's the complete global oversight of Corporate Tax Rates in 2013.

Learn About Tableau

More information about 'individual income tax rates' is also available at KPMG.

History

The corporate tax rates competition is not just a last decade issue.

Ever since the eighties of the last century, corporate average OECD tax rates declined.

Only the US, as the world's strongest economy (but for how long?), could affort it to stay at a traditional more or less constant 40% tax level from 1987 to 2013.

Finally

Of course, as we all know, big 'smart' companies like Goole hardly pay any tax...
Famous is the so called "Double Irish Dutch Sandwich"

Source KPMG Tax

Links:

- Monitoring the OECD’s Campaign Against Tax Competition

- US senator deems Ireland the ‘Holy Grail of tax avoidance’ 

- iTax Avoidance 

- OECD Tax Reforms in time

- US Officially Has Highest Corporate Tax Rate In The World

QIS: Longevity Risk Sharing

In a recent discussion about the future and fundamentals of the Dutch pension system I discussed the importance of solidarity.

As expected, the participants quickly came up with the various forms of solidarity, including solidarity between:

– higher and less educated people

– women and men

– old versus young people

Longevity Risk Sharing

Remarkably non of the participants had any idea about the financial impact of one of the most fundamental forms of risk sharing in case of a life annuity: Longevity Risk Sharing. Let's call it in general 'mortality solidarity'.

When asked, most participants strongly underestimated the impact of mortality (mortality share) as part of the yearly payment in the form of a life annuity. On the other hand, they overestimated the impact of 'return'.

Some of the participants had the idea that they would be 'better of' with a traditional individual investment plan in combination with a little more investment risk (and return) ...

Life Annuity Composition
So let's do a mini QIS (Quantitative Impact Study) of 'mortality solidarity' by examining the development of the composition of an annual lifetime annuity, regarding three basic elements: Mortality, Return and Desaving.

Here is the result for a Dutch man, age 65, with a lifetime annuity based on an average 5% yearly return:

Translated in table form:

	Yearly Payment Composition				Cumulative Composition
Age	Mortality	Return	Desaving		Mortality	Return	Desaving
65	16%	51%	33%		16%	51%	33%
66	17%	50%	34%		16%	50%	34%
67	18%	48%	34%		17%	50%	34%
68	19%	46%	34%		17%	49%	34%
69	21%	45%	35%		18%	48%	34%
70	22%	43%	35%		19%	47%	34%
71	24%	41%	35%		20%	46%	34%
72	26%	39%	35%		20%	45%	34%
73	28%	38%	35%		21%	45%	34%
74	30%	36%	34%		22%	44%	34%
75	32%	34%	34%		23%	43%	34%
76	34%	33%	33%		24%	42%	34%
77	36%	31%	33%		25%	41%	34%
78	38%	30%	32%		26%	40%	34%
79	41%	28%	31%		27%	40%	34%
80	43%	27%	30%		28%	39%	34%
81	45%	25%	29%		29%	38%	33%
82	48%	24%	29%		30%	37%	33%
83	50%	22%	28%		31%	36%	33%
84	52%	21%	27%		32%	36%	32%
85	55%	20%	26%		33%	35%	32%
86	57%	18%	25%		34%	34%	32%
87	60%	17%	23%		35%	33%	31%
88	62%	16%	22%		36%	33%	31%
89	65%	15%	20%		37%	32%	31%
90	67%	14%	19%		39%	31%	30%
91	69%	13%	17%		40%	31%	30%
92	72%	13%	16%		41%	30%	29%
93	73%	12%	15%		42%	29%	29%
94	75%	11%	14%		43%	29%	28%
95	77%	11%	12%		44%	28%	28%
96	78%	10%	12%		45%	28%	27%
97	79%	9%	11%		46%	27%	27%
98	80%	9%	11%		47%	26%	26%
99	82%	8%	10%		48%	26%	26%
100	83%	8%	10%		49%	25%	25%
101	84%	7%	9%		50%	25%	25%
102	85%	7%	9%		51%	25%	24%
103	85%	7%	8%		52%	24%	24%
104	86%	6%	8%		53%	24%	24%
105	87%	6%	7%		54%	23%	23%

Observations

As is clear from the table above :

• Already at the start the start of the annuity, at age 65, 16% of the yearly payment is due to mortality risk sharing and 'only'  51% is related to the 'return'.
• As a pension member continues to live, the  'mortality share' of the annual payment increases. At the age of 83 already 50% of his annuity is due to mortality effects and the 'return share'  is already down to 22%.
• As from age 77 of, the 'mortality effect' on the annual payment exceeds the 'return effect'.
  
  

Conclusion

From some simple calculations, we can conclude that longevity (mortality) solidarity is a fundamental part of a life annuity.
 

AfterMath

Make your calculations with other interest rates, ages or life tables with the Pension Calculator (Excel).

You may download the pension calculator HERE

Links/Sources

- Solidarity: Sticking together or ..(Google Books, P. de Beer)

- Benefit of collective schemes (IPE)

- HFC: Pension Challenge

- Download the Excel Pension Calculator

Global Country Perspective

Do you find it - just like me - hard to get a clear picture of a country's impact and contribution from global perspective? Here's some help...

GCI
The Global Competitiveness Index (GCI) is a comprehensive tool that measures the microeconomic and macroeconomic foundations of national competitiveness. It is composed of 12 "pillars", or categories.

Competitiveness is the set of institutions, factors and policies that determine the level of productivity of a country taking into account its level of development.

Charts

With the help of the free Tableau (visual) software I've created several charts that give an rough idea of a country's competitiveness an productivity in relation with it's relative global size (% of total world GDP).

The last rectangle chart 'Country GDP world Share' shows in a scaled way the GDP proportions of all 148 measured countries in the world. The color of each rectangle represents the GCI-level of each country (dark red=poor, dark green = splendid).

Remarks

If you look specifically for the Netherlands in the first chart.... Click (or double click) on the word 'Netherlands'. In general, move you mouse across the different circles and rectangles to view more detailed information.

Enjoy!

Source World Economic Forum,

The Global Competitiveness Report 2013-2014

Base period 2013-2014

Learn About Tableau

Test: Rational Thinking in a Crisis

End October 2007 my wife and I were flying from New York to San Diego. Due to an overheated engine our Captain took the one and only right decision: an emergency landing (at Chicago). Thankfully, a successful emergency landing.

Although - for a split second - we were disappointed that we would not arrive at San Diego that night, we immediately realized that our goal was no longer arriving at time, but surviving!

 How do we respond in crises situations? Take the next simple test to find out.

Original Source: Risk & Return

Estimating Bubbles

In a presentation for more than 200 actuaries at 'Actuarieel Podium" (actuarial Platform) on October 2 (2013) (Actuary Day) in the Netherlands, I tested the ability of Dutch actuaries to estimate the number of bubbles in a bottle of champagne.


Take the Test
Test your own bubble estimation ability. Think for a while:

How many bubbles are in a bottle of Champagne?

If you think you've got the right answer, check it by clicking on the picture below...

Conclusion 
If the order of magnitude of your answer was right: Congratulations!
If not, like most actuaries at my presentation, one thing is clear:

As actuaries we fall short in estimating bubbles!!!! (crises)

Key question is: why can't we estimate bubbles?

Short answer: because we have been only professionally trained in estimating relatively small numbers and small risks, not (systemic) crises.

One thing is sure: we need to fix this educational bubble-lack in our professional actuarial training.

Links
- Beekman Wines: Champagne - How Many Bubbles?
- Application of Actuarial Science to Systemic Risk Report (2013)
- Actuarial Viewpoints on and Roles in Systemic Risk Regulation
- Actuarieel Podium (Dutch)

Aftermath
49 Million Bubbles in a bottle of champagne may seem much, it's nothing compared to the U.S. Debt:



Learn more (in Dutch) on how we can do better as actuaries in the next presentation: 'From Backroom to Boardroom' (in Dutch) by Jos Berkemeijer

From Backroom to Boardroom (Dutch) from Jos Berkemeijer

7 Principles of an Effective Capital Adequacy Process

The Federal Reserve Bank not only fights inflation, but also unmanaged risk and  systemic risk.

Recently the FED  announced seven new Capital Adequacy Process (CAP) Principles for complex bank holding companies (BHCs).

Although these principles only intend to effect BHC's with a consolidated assets of $50 billion or more, they are in fact a simple and adequate guideline for any Financial Institution (FI) that takes risk management and its stakeholders seriously.

The new principles emphasize that managers, risk managers and actuaries not only have to focus on technical risk, but also on the implementation of a sound risk framework, including an effective risk control and a transparent risk governance.

Here are the Seven Principles of an Effective Capital Adequacy Process:

1. Sound foundational risk management
   The FI has a sound risk-measurement and risk-management infrastructure that supports the identification, measurement, assessment, and control of all material risks arising from its exposures and business activities.
    
2. Effective loss-estimation methodologies
   The FI has effective processes for translating risk measures into estimates of potential losses over a range of stressful scenarios and environments and for aggregating those estimated losses across the FI.
    
3. Solid resource-estimation methodologies
   The FI has a clear definition of available capital resources and an effective process for estimating available capital resources (including any projected revenues) over the same range of stressful scenarios and environments used for estimating losses.
    
4. Sufficient capital adequacy impact assessment
   The FI has processes for bringing together estimates of losses and capital resources to assess the combined impact on capital adequacy in relation to the FI's stated goals for the level and composition of capital.
    
5. Comprehensive capital policy and capital planning
   The FI has a comprehensive capital policy and robust capital planning practices for establishing capital goals, determining appropriate capital levels and composition of capital, making decisions about capital actions, and maintaining capital contingency plans.
    
6. Robust internal controls
   The FI has robust internal controls governing capital adequacy process components, including policies and procedures; change control; model validation and independent review; comprehensive documentation; and review by internal audit.
    
7. Effective governance
   The FI has effective board and senior management oversight of the CAP, including periodic review of the FI's risk infrastructure and loss- and resource-estimation methodologies; evaluation of capital goals; assessment of the appropriateness of stressful scenarios considered; regular review of any limitations and uncertainties in all aspects of the CAP; and approval of capital decisions.

ORSA for European Insurers
A lot of the above mentioned principles are embedded in the 'Own Risk and Solvency Assessment' (ORSA) for European Insurers  as part of Solvency II regulation:

Implementing ORSA
It's our dedicated mission as actuaries to guide management on the implementation of ORSA or any other risk implementation program. And yes... it won't be easy.....

Links & Sources

- FED's 7 Principles Publication

- Solvency II & ORSA

- Dilbert & Risk

Actuarial Cookery in the Boardroom

Suppose your friend gave you the recipe for a delicious 'Paleo Tomato Soup'.

Does that recipe also guarantees you a delicious meal ?

Undoubtedly you answered this question with a clear "no".

Why?

As we all know, it is the 'touch of the chef' that determines the quality and final taste of the meal. The recipe is the score and the chef the performer of the culinary piece of music, that will end up on your plate.

Although the above example probably sounds logical to us, the actuarial cooking practice appears different. Let's take a look at the next example.

An Excellent ALM Advice

What about a 'plate of five' asset mix advice that's on the board's breakfast table, as the ultimate outcome of your excellent ALM analysis...

Illustration: Colin Daniel

Does this ' computer recipe' actually guarantees a sound decision about an adequate investment policy?

Actually, the answer to this question can hardly be other than 'NO'.

Your advice is a static advice in a dynamic world and - on top of - the final question remains whether the asset manager is able to 'spice up' your recipe.

The actuary as Risk-Director

Key question is whether we as a profession - keeping ourselves inadvertent in the role of  'technical experts' - merely feel responsible for delivering the recipe for a cold asset mix salad on basis of 'expected values' ​​and variances.

Or ... that we actuaries are willing to act as 'risk-director' in the interactive process of creating a dynamic investment policy that's based on a nonlinear constructed healthy and varied based asset mix over time. Albeit..., without taking the driver's seat in the advice process, but with the obligation to report the eventual existence of any GMCs ('Genetically-Modified Cickens') in the asset-mix.

Economic Risk Management or ALM?

In the thorough process of adopting a dynamic investment policy, financial boards more and more take decisions based on the study of different future economic scenarios.

This development challenges actuaries to invest more in the development of "Economic Risk Management" (ECRM) models instead of traditional ALM modeling. In ECRM 'asset class data' (as in ALM) and economic data (GDP, inflation, consumer confidence, etc) are mixed in an integral set of data, that's analysed and - with future expectations, 'stress-test conditions' or of 'believes' -  (nonlinear) translated and optimized in a dynamic asset mix.

This economic risk approach requires new nonlinear economic-asset models that urge for a close cooperation between economists and actuaries, resulting in an serious interactive board discussion (board members and economical & actuarial experts) of the ECRM models.

This approach is not limited to the well-known three or four so-called 'muddle through scenarios', but covers the outcome and impact of a large number of more precise formulated possible economic scenarios on the asset mix and the investment strategy.

Scenarios that help determine the overall risk appetite and result in a major impact on the composition of the strategic asset mix.

New Q&A's

In other words, new scenarios that give answers to questions like:

• What happens if China suddenly withdraws from U.S. bonds?
• What happens when the U.S. Fed stops its QE program?

As with the current ALM approach, the focus should not be only on the quantitative outcome of the ECRM model, but more on the discussion and wider perception of how economic risk affects the optimal asset mix and the dynamic asset policy, allowing boards to take more informed and underpinned investment policy decisions.

In this approach, ALM and ECRM are helpful but not dominating decision support tools in the creation of the final investment policy and not an unintended consultant's dictate that's implicitly adopted ("take note") by the board and then subsequently implemented.

How to Check the Quality of your ALM or ECRM Advice?

Fortunately, it is easy to check whether your ECRM or ALM advice is actually a good quality decision document or just a bite-sized chunk.

If your advice offered only 'one option' or was adopted without a serious debate or any amendments, then -  to put it euphemistically - your advice is 'ready for improvement'.

Actuaries: Backroom to the Boardroom

Finally, it all comes down together whether we as actuaries want to profile ourselves as 'recipe writers' or pick up the 'risk-director role' as an 'actuarial chef'. If you choose the latter, please stand up and help to bring out actuaries from the Backroom to the Boardroom. Success!