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The time has come for actuaries

The combination of the retirement income challenge and the big data opportunity will create the age of the actuary. The skill set possessed by actuaries is central to delivering solutions in both these complex areas. An actuary’s toolbox contains a unique combination of technical and problem solving skills. Successful firms will make the most of their talents and skills.

But first, two disclaimers. Firstly, I am not the David Bell who is the CEO of the Actuaries Institute (though I am helping his cause here!). Secondly, I am not an actuary so my views are strategic and come from the outside looking in.

Sometimes the training and skill set of an actuary are not well understood or appreciated. This is partly because of stereotyping and partly because we are all too quick to pull out actuary jokes (which I have banned myself from making in this article, for a change).

Actuaries are equipped with the highest quality technical tool kit for quantitative financial analysis, drawing on mathematical, statistical, economic and financial analysis techniques. This may not surprise most readers. In my view the skill sets are more technical and advanced than most other finance-related professions.

What is not well understood is the emphasis on application, communication and problem-solving. A large part of the training program for actuaries is focused on developing the ability to apply their tool kit of skills to real world problems.

Insurance has been the stereotypical occupation of actuaries due to their abilities in risk modelling and pricing; the Actuaries Institute note that around half of their members work in the insurance sector. However, the skill set of actuaries means they are valuable for many other industries, finance and non-finance.

The retirement income challenge

The superannuation industry faces many challenges, with the largest surely the retirement income challenge, ensuring that the industry delivers appropriate and sustainable retirement incomes. While undoubtedly a multi-faceted problem, at the heart of this challenge lies a highly complex problem with many moving parts, most notably variability in investment and mortality outcomes.

Despite the undoubted appeal of adding actuarial talent, the superannuation industry appears anchored to acknowledging investment risk while directing little attention towards mortality risk. With a clean sheet of paper, would the ratio of investment professionals to actuaries be as it currently is? I would hazard a guess at a ratio of 10:1 minimum.

Why is this so? My view is that it is because the complexity of a whole new range of technical risks and terms is daunting for senior management and trustee boards (for example ‘idiosyncratic mortality risk’ isn’t exactly an easy term to get your head around, but it is one of the most crucial risks to a member’s retirement outcome). A recent example illustrates my concerns. I attended an industry conference on post-retirement. The conference started at a technical level, but acknowledged the communication challenge (to members). The challenge of keeping the communications simple somehow morphed into the need for simple solutions and the banning (somewhat lightheartedly) of important words for the rest of the day such as ‘stochastic’. If the industry is not ready to address a complex problem within closed doors, how can it be solved in a public environment?

Consider the way the major asset consultants are structured. Two have significant actuarial capabilities (it was a separate business line) while the other two less so. If solving the retirement outcome challenge is a top priority for super funds, which asset consultants are best placed to deliver a holistic solution? The interesting challenge being addressed by the two consultants with significant actuarial and investment skill sets is to ensure these two areas work together on solutions rather than working down traditional business line silos.

As all these barriers erode away it is likely that super funds will increase the actuarial headcount within their business.

Big opportunities in big data

The world of big data creates big opportunities for actuaries. Big data applications cross many industries and sectors and it is likely that more actuaries will find a home in big data roles than in retirement outcome work.

Big data refers to the collection and analysis of large amounts of data and analysing it to make predictions and design responses and activities. The data sets can be huge, as can the applications. Speed and accuracy are both important. What is notable, particularly from a strategic perspective, is that no single career discipline is recognised as the go-to for big data analytics. Big data is a relatively new industry and it takes time for undergraduate degrees to accommodate these changes. Programmers, statisticians, econometricians and marketers would all stake a claim and in many cases add much value. However, actuaries are potentially the best resource of the lot: they have many of the technical skills found in each of the other disciplines. Incoming changes to the actuarial undergraduate degree curriculum will make data analytics a greater component of the actuarial degree.

To become a fully qualified actuary is a difficult path. The typical path is a degree and then attainment of the full actuarial qualification takes a further three years of part-time study. Last year, the ATAR entry requirement for the Bachelor of Actuarial Studies was 97.5, so the filtering process is strong.

The strategic opportunity for business leaders is to make sure they have the right amount of actuarial skills in the business, and give them the opportunity to use the unique skills they have developed.

 

David Bell is Chief Investment Officer at Mine Wealth + Wellbeing. He is working towards a PhD at University of New South Wales.

 

4 Comments
Stefano
May 18, 2016

I am not an actuary.

However using an actuary should be mandatory, in previous times where the investment and life risk was borne by the employer/fund, actuaries played an important role. In current environment were investment and life risk is borne by the individual, this need to work out these variables have evaporated.

Asset managers and financial planners, bear no risk in the post defined benefit environment, and current industry view (dangerous to generalise) is the pension will be there.

Attitudes need to change, lots of talk and not much action across all sectors of the post retirement sector. We may need to combine some of the defined benefit features with defined contributions?

Quercus
April 23, 2016

The problems of investment and mortality are TOTALLY different.

Mortality is a biological problem. Biological problems are suited to actuarial analysis because many things in nature are normally distributed.

Investing is a behavioural problem. Advanced statistics and higher maths are of limited use in trying to solve Keynes "beauty contest".

"Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it" - Peter Lynch

Ramani
April 21, 2016

Peter & David

Despite the global decline of DB funds, the ingredients of long term, investment, human contingencies and probability make the dominant DC sector ideally suited for actuarial analysis.

My joint paper 'Actuarial Challenges in DC Schemes' (2012, Actuaries Institute: http://www.actuaries.asn.au/Library/Events/FSF/2012/FSF2012PaperChandraVenkatramani.pdf) expounded this and recommended along with other professions (auditors, CFAs...) actuaries should a movement of financial ecumenism focused on member interests rather than professional turf lines.

I believe the exhortation remains valid.

Peter Vann
April 21, 2016

Hi David
Re: recent conference on post-retirement. I think of this analogy!

At the recent ABS (Antiskid Braking Systems) conference the techo experts are all talking about their latest wheel lock up detectors, the new feedback loops to take action on wet roads etc etc, and how fast their new widget with the new fangled release valve (sorry for the techo speak) releases a bit of the brake fluid pressure to prevent the wheels skidding under heavy braking. The jargon abounds. Fortunately they all realise that when it comes to explaining this to car drivers, all they need to say is “our ABS delivers a safer driving experience by preventing skidding”.

Apply that analogy to the super fund industry . What is something that all members understand? One word pops into my mind “paycheque”. Members don’t need much financial literacy to understand that. So I challenge the industry to start thinking about expressing the outcome of super in terms of a retirement paycheque, members will understand that. The actuaries that prospered in the DB days still may have a role in the DC funds re retirement outcomes, but I also know that some math modelling skills help here too.

Cheers, Peter

Ps I’m aware that some funds are thinking down this line (incl yours). Keep up the good work.

 

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