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term="schmidt"/><category term="schwartz"/><category term="science"/><category term="scrambler"/><category term="sea level"/><category term="search engine"/><category term="self-conscious"/><category term="self-regulation"/><category term="separate"/><category term="shareholder"/><category term="shell"/><category term="smurf.cro"/><category term="soft-risk"/><category term="solve"/><category term="special"/><category term="stakeholder"/><category term="steve jobs"/><category term="storm"/><category term="study"/><category term="subprime"/><category term="succeed"/><category term="supervisory"/><category term="survivor bias"/><category term="sustainability"/><category term="synergy"/><category term="system"/><category term="table"/><category term="table converter"/><category term="tail"/><category term="temperatuur"/><category term="thinking"/><category term="thinking trap"/><category term="time bomb"/><category term="time perspective"/><category term="total loss"/><category term="treasury bonds"/><category term="trend"/><category term="trust"/><category term="tucker"/><category term="uncertainty"/><category term="underestimate"/><category term="underfunded"/><category term="unemployment"/><category term="unfair value"/><category term="unmeasurable"/><category term="uvt"/><category term="vacancy"/><category term="valuation"/><category term="veenhoven"/><category term="virtue"/><category term="visible"/><category term="visual proof"/><category term="visualized"/><category term="vrl"/><category term="warning"/><category term="wealth"/><category term="whistleblower"/><category term="why"/><category term="wiki"/><category term="wiki book"/><category term="wing"/><category term="wisdom"/><category term="wolthuis"/><category term="work"/><category term="world"/><category term="world record"/><category term="youtube"/><category term="zero"/><title type='text'>Actuary Info Blog</title><subtitle type='html'>Actuary Blog. Information and news for actuaries. Risk management and Actuarial News. All about Pension Funds, Insurers, Investments and Confidence.</subtitle><link rel='http://schemas.google.com/g/2005#feed' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/posts/default'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default?alt=atom&amp;redirect=false'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/'/><link rel='hub' href='http://pubsubhubbub.appspot.com/'/><link rel='next' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default?alt=atom&amp;start-index=26&amp;max-results=25&amp;redirect=false'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><generator version='7.00' uri='http://www.blogger.com'>Blogger</generator><openSearch:totalResults>280</openSearch:totalResults><openSearch:startIndex>1</openSearch:startIndex><openSearch:itemsPerPage>25</openSearch:itemsPerPage><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-5518339773712590792</id><published>2022-10-23T10:07:00.000+02:00</published><updated>2022-10-23T10:08:53.662+02:00</updated><category scheme="http://www.blogger.com/atom/ns#" term="actuary"/><category scheme="http://www.blogger.com/atom/ns#" term="longevity"/><category scheme="http://www.blogger.com/atom/ns#" term="model"/><category scheme="http://www.blogger.com/atom/ns#" term="ostrich management"/><category scheme="http://www.blogger.com/atom/ns#" term="risk"/><category scheme="http://www.blogger.com/atom/ns#" term="tail"/><category scheme="http://www.blogger.com/atom/ns#" term="VaR"/><title type='text'>Why VaR fails and actuaries can do better</title><content type='html'>&lt;div style=&quot;background-color: white; font-family: Georgia, serif; width: 490px;&quot;&gt;Perhaps &lt;span style=&quot;font-style: italic;&quot;&gt;the&lt;/span&gt; most important challenge of an actuary is to develop and train the capability to explain complex matters in a simple way.
2.  
3. One of the best examples of practicing this 'complexity reduction ability' has been given by David Einhorn, president of Greenlight Capital. In a nutshell David explains with a simple example why VaR models fail. Take a look at the next excerpt of David's interesting article in <a href="http://mmm.homeunix.com/celebrity/img/1248782388leverage-var--regulation-failure.pdf">Point-Counterpoint</a>.
4.  
5. <br /><br /><div style="border: 1px solid blue; color: #000099; padding: 5px; text-align: center; width: 480px;"><span style="color: #660000; font-size: 180%;"><span style="font-weight: bold;"><u style="line-height: 150%;">Why Var fails</u></span></span>
6. <div style="text-align: justify;"><div style="text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgd6yKB4rbRF95_Y3CPI5unSGWcdhgBXwBFufe3Z8zVrhpwRipNt3Ho8ZOU8aJvf49HmPtCjnjQrzizIKkgVwwwGZM0TLAGqx4xFPbsLrjaR5bSWl7nPk1XjbMUyxe0rEj3Vk5ZDOlMDhA/s1600-h/David-einhorn.jpg"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5434535747750680338" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgd6yKB4rbRF95_Y3CPI5unSGWcdhgBXwBFufe3Z8zVrhpwRipNt3Ho8ZOU8aJvf49HmPtCjnjQrzizIKkgVwwwGZM0TLAGqx4xFPbsLrjaR5bSWl7nPk1XjbMUyxe0rEj3Vk5ZDOlMDhA/s400/David-einhorn.jpg" style="cursor: pointer; float: right; height: 177px; margin: 0pt 0pt 10px 10px; width: 152px;" /></a>A risk manager’s job is to worry about whether the bank is putting itself at risk in unusual times - or, in statistical terms, in the tails of the distribution. Yet, <span style="font-weight: bold;">VaR ignores what happens in the tails</span>. It specifically cuts them off. A 99% VaR calculation does not evaluate what happens in the last1%.
7.  
8. This, in my view, makes <span style="font-weight: bold;">VaR relatively useless as a risk management tool </span>and potentially catastrophic when its use creates a f<span style="font-weight: bold;">alse sense of security</span> among senior managers and watchdogs.
9. </div>
10. <div style="text-align: center;"><span style="font-size: 130%; font-weight: bold;"><span style="color: #cc0000;">VaR is like an airbag that works all the time, except when you have a car accident</span></span>
11. </div>
12. By  ignoring  the  tails,  VaR  creates  an  incentive  to  take excessive  but  remote  risks.
13.  
14. <div style="text-align: center;"><span style="color: #660000; font-size: 180%;"><span style="font-weight: bold;">Example</span></span><span style="font-size: 180%;">
15. </span></div><div style="text-align: left;"> Consider  an  investment  in  a coin flip.  If you bet $100 on tails at even money, your VaR to a 99% threshold is $100, as you will lose that amount 50% of the time, which obviously is within the threshold. In this case, the VaR will equal the maximum loss.<br /><br /><span style="color: #003300; font-weight: bold;">Compare that to a bet where you offer 127 to 1 odds on $100 that heads won’t come up seven times in a row. You  will  win  more  than  99.2%  of  the  time,  which exceeds the 99% threshold. As a result, your 99% VaR is zero, even though you are exposed to a possible $12,700 loss. </span>
16.  
17. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiI-we3Z5ZhNrG5SLHLd5wfL0oF7yfFq8WUta37U09o3NQhImZKfIVDMbc7-gKOTprmboPCigb4reGCeBqkoxybs-5dPnAm_fa39NuI5WdXv_pEAc__ecXTdhfABZ6qf6_5C-W2pupZg6c/s1600-h/jenga-var.jpg"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5435045007946524290" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiI-we3Z5ZhNrG5SLHLd5wfL0oF7yfFq8WUta37U09o3NQhImZKfIVDMbc7-gKOTprmboPCigb4reGCeBqkoxybs-5dPnAm_fa39NuI5WdXv_pEAc__ecXTdhfABZ6qf6_5C-W2pupZg6c/s400/jenga-var.jpg" style="cursor: pointer; float: right; margin: 0pt 0pt 10px 10px; width: 160px;" /></a><br /><br />In other words, an investment bank wouldn’t have to put up any capital to make this bet.
18.  
19. The math whizzers will say it is more complicated than that, but this is the idea. Now  we  understand  why  investment  banks  held  enormous portfolios of “super-senior triple A-rated” whatever. These securities had very small returns.
20.  
21. However, the risk models said they had trivial VaR, because the possibility of credit loss was calculated to be beyond the VaR threshold. This  meant  that  holding  them  required  only  a  trivial amount of capital, and a small return over a trivial  capital can generate an almost infinite revenue-to-equity ratio.
22.  
23. VaR-driven risk management encouraged accepting a lot of bets that amounted to accepting the risk that heads wouldn’t come up seven times in a row.  In the current crisis, it has turned out that the unlucky outcome  was  far  more  likely  than  the  backtested  models predicted.
24.  
25. What  is  worse,  the  various  supposedly  remote risks that required trivial capital are highly correlated; you don’t just lose on one bad bet in this environment, you lose on many of them for the same reason. This is why in recent periods  the  investment  banks  had  quarterly  write-downs that were many times the firm-wide modelled VaR.
26. </div></div>
27. </div>
28. <span style="color: #000066; font-size: 130%;"><span style="font-weight: bold;"><br />The Real Risk Issues</span></span>
29. What. besides the 'art of simple communication', can we - actuaries - learn from David Einhorn?
30.  
31. <img alt="" border="0" id="BLOGGER_PHOTO_ID_5434535852940563330" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMKoZipB4JnMHAf_1hhYxxe_uOJG3vomFhX8Fx9SgakfdDuQCESQN2wZTCr5OkTRY83oVecz_W5UQscDRQ0zqN4tvgoEBUTt86Hi5mqjsFFIx9SzmHLFdurcn8JCjtBGxKjbFIUN39JLk/s1600/actuarial-focus.jpg" style="cursor: pointer; float: right; margin: 0pt 0pt 10px 10px;" />What David essentially tries to tell us, is that we should focus on the real Risk Management issues that are in the x% tail and not on the other (100-x)%.
32.  
33. Of course, we're inclined to agree with David. But are we actuaries truly focusing on the 'right' risks in the tail?
34.  
35. I'm afraid the answer to this question is most often: No!
36. Let's look at a simple example that illustrates the way we are (biased) focusing on the wrong side of the VaR curve.
37.  
38. <br /><span style="color: #000099; font-size: 130%;"><span style="font-weight: bold;"><br />Example Longevity</span></span>
39. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKPat3n-wb14scQ44k4UOznAdyhJnqZKGdq_PqYGlbW7eWbVxvQtcTeep-sB4t8luqwfGtJhOCbrp56IaNNXJZYf9irLhtHV-z5Nbnjx7ImrICNk04qSUXs27BIORTgLYAa2MUHvqjCTM/s1600-h/heat-map.jpg"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5434535953715280530" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKPat3n-wb14scQ44k4UOznAdyhJnqZKGdq_PqYGlbW7eWbVxvQtcTeep-sB4t8luqwfGtJhOCbrp56IaNNXJZYf9irLhtHV-z5Nbnjx7ImrICNk04qSUXs27BIORTgLYAa2MUHvqjCTM/s400/heat-map.jpg" style="cursor: pointer; float: right; height: 400px; margin: 0pt 0pt 10px 10px; width: 262px;" /></a>For years (decades) now, longevity risk has been structurally underestimated.
40.  
41. Yes, undoubtedly we have learned some of our lessons.
42.  
43. Today's longevity calculations are not (anymore) just based on simple straight-on mortality observations of the past.
44.  
45. Nevertheless, in our search to grasp, analyze and explain the continuous life span increase, we've got caught in an interesting but dangerous habit of examining more and more interesting details that might explain the variance of  future developments in mor(t)ality rates.
46.  
47. As 'smart' longevity actuaries and experts, we consider a lot of sophisticated additional elements in our projections or calculations.
48.  
49. Just a small inventory of actuarial longevity refinement:
50. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square"><li>Difference in mortality rates: Gender, Marital or Social status, Income or Health related mortality rates
51. </li><li>Size: Standard deviation, Group-, Portfolio-size
52. </li><li>Selection effects, <a href="http://www.the-actuary.org.uk/853810">Enhanced annuities
53. </a></li><li>Extrapolation: Generation tables, longitudinal effects,  Autocorrelation, '<a href="http://www.jpmorgan.com/cm/cs?pagename=JPM/DirectDoc&urlname=LM_NL_documentation.pdf">Heat Maps</a>'
54. </li></ul><span style="color: #000066; font-size: 130%;"><span style="font-weight: bold;">
55. X-Tails</span></span>
56. In our increasing enthusiasm to capture the longevity monster, we got engrossed in our work. As experienced actuaries we know the devil is always in the <span style="color: #330000; font-style: italic; font-weight: bold;">De-Tails</span>, however the question is: In <span style="font-style: italic;">which</span> details?
57.  
58. We all know perfectly well that probably the most essential triggers for longevity risk in the future, can not be found in our data.
59. These triggers depend on the effect of new developments like :
60. <br /><br /><ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square"><li><a href="http://en.wikipedia.org/wiki/Calorie_restriction" style="font-weight: bold;">Calorie Restriction </a><br />The <a href="http://www.nytimes.com/2009/07/10/science/10aging.html">extend</a> of lifespan due to a '<a href="http://www.blogger.com/%20http://www.crsociety.org/">caloric restriction diet</a>'
61.  
62. <br /><br /></li><li><a href="http://www.sciencebasedmedicine.org/?p=346"><span style="font-weight: bold;">The development of 'Longevity medicines'</span></a>
63. Already medicines are developed that prevent a number of diseases from causing premature demise at 60 or 70.
64.  
65. The risk that an advanced Longevity medicine will be discovered in the near future becomes more and more likely.
66. If you doubt this, just take a look at the <a href="http://en.wikipedia.org/wiki/American_Academy_of_Anti-Aging_Medicine">American Academy of Anti-Aging Medicine</a> (<a href="http://www.worldhealth.net/">A4M</a>), where (global) more than 20.000 professional researchers and members take longevity seriously.<br /><br /></li></ul>
67. It's clear that investigating and modeling the <a href="http://actuary-info.blogspot.com/2010/02/soft-risk-management.html">soft risk indicators</a> of extreme longevity is no longer a luxury, as also an exploding increase in lifespan of 10-20% in the coming decades seems not unlikely.
68. By stretching our actuarial research to the medical arena, we would be able to develop new (more) future- and shock-proof longevity models and  stress tests. Regrettably, we don't like to skate on thin ice.....
69. <span style="font-size: 130%;"><span style="color: #000066; font-weight: bold;">
70. Ostrich Management</span></span>
71. <a href="http://www.ostrichmanagement.com/"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5435148210953328514" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEYjJ5ZdrLX5i1GOqJl4D32RUKX4keXztTVQH2LL8GIt2C6PJHq7FwWO8ZlGTQc7TxLJ8msXSOJsRkwBgWygrEUueTZQGQg1FyfTmNq9GSXKoWaddquCx3_gO_P1Hkoep_QMtPE0NqiFo/s400/ostrich-management.jpg" style="cursor: pointer; float: left; height: 274px; margin: 0pt 10px 10px 0pt; width: 129px;" /></a>If we - actuaries - would take longevity and our profession as 'Risk Manager' more seriously, we would warn the world about the global estimated (financial) impact of these medical developments on Pension- and Health topics. We would advise on which measures to take, in order to absorb and manage this future risk.
72.  
73. Instead of taking appropriate actions, we hide in the dark, maintaining our belief in <a href="http://europe.pimco.com/LeftNav/Viewpoints/2008/Viewpoints+Tail+Risk+Management+Bhansali+12-2008.htm"><span style="color: #330000; font-style: italic; font-weight: bold;">Fairy-Tails</span></a>. As unworldly savants, we joyfully keep our eyes on the research of relative small variances in longevity, while neglecting the serious mega risks ahead of us.
74.  
75. This way of <a href="http://robjelinek.wordpress.com/2009/09/25/crisis-the-true-test-of-a-leader/">Ostrich Management</a> is a worrying threat to the actuarial profession. As we are aware of these kinds of (medical) future risks, not including or disclaiming them in our models and advice, could even have a major liability impact.
76.  
77. In order to be able to prevent serious global loss, society expects actuaries to estimate and advise on risk, instead of explaining afterward <span style="font-style: italic;">what</span>, <span style="font-style: italic;">why</span> and <span style="font-style: italic;">how</span> things went wrong, what we '<span style="font-style: italic;">have learned'</span> and what we '<span style="font-style: italic;">could or should</span>' have done.
78.  
79. This way of denying reality reminds me of an amusing Jewish story of the Lost Key...
80.  
81. <br /><br /><div style="border: 1px solid blue; color: #000099; padding: 5px; text-align: center; width: 480px;"><a href="http://www.jacobklamer.com/blog/?tag=globam-warming"><span style="font-weight: bold; line-height: 150%;">The lost Key</span></a>
82. <div style="text-align: left;"><span style="font-size: 85%;"><span style="font-style: italic;">One early morning, just before dawn, as the folks were on their way to the synagogue for the Shaharit (early morning prayer) they notice Herscheleh under the lamp post, circling the post and scanning the ground.</span>
83. <span style="font-size: 78%; font-style: italic;"> </span>
84. <span style="font-style: italic;">“Herschel” said the rabbi “What on earth are you doing here this time of the morning?”</span>
85. <span style="font-size: 78%; font-style: italic;"> </span>
86. <span style="font-style: italic;">“I lost my key” replied Herscheleh</span>
87. <span style="font-size: 78%; font-style: italic;"> </span>
88. <span style="font-style: italic;">“Where did you lose it?” inquired the rabbi</span>
89. <span style="font-size: 78%; font-style: italic;"> </span>
90. <span style="font-style: italic;">“There” said Herscheleh, pointing into the darkness away from the light of the lamp post.</span>
91. <span style="font-size: 78%; font-style: italic;"> </span>
92. <span style="font-style: italic;">“So why are looking for your key in here if you lost it there”? persisted the puzzled rabbi.</span>
93. <span style="font-size: 78%; font-style: italic;"> </span>
94. <span style="font-style: italic;">“Because the light is here Rabbi, not there” replied Herschel with a smug.</span>
95. </span></div></div><span style="font-size: 85%;">
96. </span><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_fVV8R9QdsdL25L_savr5dcSHtSpV91MDjjJsBmFenaUoaWv_rqk1d8hcYqrty8O1Xvvs2Om2Kmq-u4WqV0TpG6nWpzInyw_UctMAVgUJEhi8Mp2l81sAgzgR9guSylg1IKekBR4kfP8/s236/risk-management-risks-are-always-in-the-dark.jpg" style="font-size: 13.6px; margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="236" data-original-width="236" height="236" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_fVV8R9QdsdL25L_savr5dcSHtSpV91MDjjJsBmFenaUoaWv_rqk1d8hcYqrty8O1Xvvs2Om2Kmq-u4WqV0TpG6nWpzInyw_UctMAVgUJEhi8Mp2l81sAgzgR9guSylg1IKekBR4kfP8/s1600/risk-management-risks-are-always-in-the-dark.jpg" width="236" /></a><br /><br /><br /><br />Let's conclude with a quote, that - just as this blog- probably didn't help either:
97.  
98. <div style="text-align: center;"><span style="font-size: 100%;"><span style="color: #003300; font-weight: bold;"><br />Risk is not always apparent, </span></span>
99. <span style="font-size: 100%;"><span style="color: #003300; font-weight: bold;">but its invisibility is no longer an excuse for ignoring it.<br /><br /></span></span>
100. </div>
101. <div style="text-align: center;"> <span style="color: #003300;">-- Bankers Trust on risk management, 1995 --</span>
102. </div>
103. <u><br /><br />Interesting additional links:</u>
104. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square"><li><span style="font-size: 85%;"><a href="http://www.ipss.go.jp/seminar/program/john.pdf">Increase of Human Longevity: Past, Present and Future (2009)</a></span></li><li><span style="font-size: 85%;"><a href="http://hal.archives-ouvertes.fr/docs/00/41/78/00/PDF/preprint-longevite-chaireFBF.pdf">Understanding, Modeling and Managing Longevity Risk</a></span></li><li><span style="font-size: 85%;"><a href="http://www.the-actuary.org.uk/853810">Mortality: Standard deviation (Stephen Makin, 2009)</a></span></li><li><span style="font-size: 85%;"><a href="http://www.jpmorgan.com/cm/cs?pagename=JPM/DirectDoc&urlname=LM_NL_documentation.pdf">Lifemetrics Netherlands</a>, <a href="http://www.jpmorgan.com/pages/jpmorgan/investbk/solutions/lifemetrics">Lifemetrics J.P. Morgan</a></span></li><li><span style="font-size: 85%;"><a href="http://www.the-actuary.org.uk/790581">Longevity: Mortality improvement (2008)</a></span></li><li><span style="font-size: 85%;"><a href="http://xfi.exeter.ac.uk/documents/conferences/pensions_conference/presentations/david_blake_tom_boardman.pdf"><div class="separator" style="clear: both; text-align: center;"><br /></div>Why governments should issue Longevity Bonds</a>
105. </span></li><li><span style="font-size: 85%;"><a href="http://www1.fee.uva.nl/ke/act/people/wolthuis/Pitacco2003.pdf">Survival models in actuarial mathematics: From Halley to longevity</a></span></li><li><span style="font-size: 85%;"><a href="http://www.nomura.com/resources/europe/pdfs/TheBusinessOfAgeing.pdf">The Business of Ageing (2008) </a></span></li><li><span style="font-size: 85%;"><a href="http://www.scribd.com/doc/19074887/Transforming-Pensions-and-Healthcare-in-a-Rapidly-Ageing-World?secret_password=&autodown=pdf">Transforming Pensions and Healthcare in a Rapidly Ageing World (2009)</a></span></li><li><span style="font-size: 85%;"><a href="http://igkolev.com/index_files/Page690.htm">30 seconds Risk Quiz: What is Risk?</a></span></li><li><span style="font-size: 85%;"><a href="http://ideas.repec.org/p/wpa/wuwpfi/0412014.html">Why VAR Fails (2004 !!!)</a></span>
106. </li><li><span style="font-size: 85%;"><a href="http://www.crsociety.org/">Calorie Restriction (CR) Society International</a></span></li><li><span style="font-size: 85%;"><a href="http://www.scientificpsychic.com/health/cron1.html">Calorie Restriction Calculator</a></span></li><li><span style="font-size: 85%;"><a href="http://www.healthierlongerlife.org/">Online book: Living Healthier and Longer, What Works and What Doesn't</a></span></li><li><span style="font-size: 85%;"><a href="http://www.lmreview.com/">Longevity Medicine Review™</a></span></li><li><span style="font-size: 85%;"><a href="http://www.youtube.com/profile?user=InstaTapesMedia#g/u">Youtube: Insta Tapes Digital Media</a></span></li><li><span style="font-size: 85%;"><a href="http://www.benefits-of-resveratrol.com/benefits-of-resveratrol.html">Medicine: Resveratrol</a></span></li><li><span style="font-size: 85%;"><a href="http://www.jacobklamer.com/blog/?tag=globam-warming">Jacob Klamer: The Lost Key</a></span></li></ul>
107. &lt;br /&gt;&lt;/div&gt;&lt;br /&gt;</content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/5518339773712590792/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2010/02/why-var-fails-and-actuaries-can-do.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/5518339773712590792'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/5518339773712590792'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2010/02/why-var-fails-and-actuaries-can-do.html' title='Why VaR fails and actuaries can do better'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgd6yKB4rbRF95_Y3CPI5unSGWcdhgBXwBFufe3Z8zVrhpwRipNt3Ho8ZOU8aJvf49HmPtCjnjQrzizIKkgVwwwGZM0TLAGqx4xFPbsLrjaR5bSWl7nPk1XjbMUyxe0rEj3Vk5ZDOlMDhA/s72-c/David-einhorn.jpg" height="72" width="72"/><thr:total>0</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-3944608603323340548</id><published>2017-04-16T13:07:00.001+02:00</published><updated>2017-04-16T13:12:25.173+02:00</updated><title type='text'>All Models are Wrong</title><content type='html'>&lt;div style=&quot;background-color: white; font-family: georgia, serif; font-style: normal; font-weight: normal; width: 490px;&quot;&gt;
108. A 2016 paper by James Stuart (et al) from the 'Institute & Faculty of Actuaries' about '<a href="https://www.actuaries.org.uk/documents/ersatz-model-tests-0">Ersatz Models</a>' (Substitute Models) states....<br />
109. <br />
110. Al models are deliberate simplifications of the real world. Attempts to demonstrate a model’s correctness can be expected to fail, or apparently to succeed because of test limitations, such as insufficient data.<br />
111. <br />
112. We can explain this using an analogy involving milk. Cows’ milk is a<br />
113. staple part of European diets. For various reasons some people avoid it, preferring substitutes, or ersatz milk, for example made from soya. In a chemical laboratory, cows’ milk and soya milk are easily distinguished.<br />
114. Despite chemical differences, soya milk physically resembles cows’ milk in many ways - colour, density, viscosity for example. For some purposes, soya milk is a good substitute, but other recipes will produce acceptable results only with cows’ milk. The acceptance criteria for soya milk should depend on how the milk is to be used.<br />
115. <br />
116. <div class="separator" style="clear: both; text-align: center;">
117. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiouBUgBFQm22IjYkb8CHNzodGmnHI2ydIwonTJVhj8JKJ7XXpbXCE2f5nh9JtrYq2MnoJ6eC9eLeMcQqU3pCfSw-qMIGUOYQlBL-8BUaT1qoWQyFvnJu6X7OdIEuXJuT__hWG_bbO6IZU/s1600/fat-kid-drinking-low-fat-milk.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="218" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiouBUgBFQm22IjYkb8CHNzodGmnHI2ydIwonTJVhj8JKJ7XXpbXCE2f5nh9JtrYq2MnoJ6eC9eLeMcQqU3pCfSw-qMIGUOYQlBL-8BUaT1qoWQyFvnJu6X7OdIEuXJuT__hWG_bbO6IZU/s320/fat-kid-drinking-low-fat-milk.png" width="320" /></a></div>
118. <br />
119. <br />
120. In the same way, with sufficient testing, we can always distinguish an<br />
121. ersatz model from whatever theoretical process drives reality. We should be concerned with a more modest aim: whether the ersatz model is good enough in the aspects that matter, that is, whether the modelling objective has been achieved.<br />
122. <br />
123. <b><u><span style="color: #444444;">The Model Problem</span></u></b><br />
124. The paper starts with stories of models gone bad. Can our proposed<br />
125. generated data tests prevent a recurrence?<br />
126. <br />
127. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirFBoIyKNs2KCcNfdyx8lYTmLv14vf-Pd45WzF41zo2cGAxtQ6gdSH1pYWV1ha64nXlEDX4KtX-XkVIOuTxFbLtIY6j1rW-TthNzTKY6j1Mmjg3gzj_3s32Y0w2rOyHh_wPzCd1BV2I9Q/s1600/sharpe.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" height="267" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirFBoIyKNs2KCcNfdyx8lYTmLv14vf-Pd45WzF41zo2cGAxtQ6gdSH1pYWV1ha64nXlEDX4KtX-XkVIOuTxFbLtIY6j1rW-TthNzTKY6j1Mmjg3gzj_3s32Y0w2rOyHh_wPzCd1BV2I9Q/s400/sharpe.png" width="400" /></a><br />
128. <br />
129. The Model Risk Working party has <a href="https://www.google.nl/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwiVztzS46jTAhVKa1AKHb9cALAQFggkMAA&url=https%3A%2F%2Fwww.actuaries.org.uk%2Fdocuments%2Fsessional-paper-model-risk-daring-open-black-box&usg=AFQjCNEQPXm_J2hDzlmLdA9czbnbygmUqA&sig2=3XD6MOA1pIcmhjx6H2Jchg">explained</a> how model risks arise not only from quantitative model features but also social and cultural aspects relating to how a model is used. When a model fails, a variety of narratives may be offered to describe what went wrong. There may be disagreements between experts about the causes of any crisis, depending on who knew, or could have known, about model limitations. Possible elements include:<br />
130. <ul>
131. <li>A new risk emerged from nowhere and there is nothing anyone could have done to anticipate it - sometimes called a “black swan”.</li>
132. <li>The models had unknown weaknesses, which could have been revealed by more thorough testing.</li>
133. <li>Model users were well acquainted with model weaknesses, but these were not communicated to senior management accountable for the business</li>
134. <li>Everyone knew about the model weaknesses but they continued to take excessive risks regardless.</li>
135. </ul>
136. Ersatz testing can address some of these, as events too rare to feature in actual data may still occur in generated data. Testing on generated data can also help to improve corporate culture towards model risk, as:<br />
137. <ul>
138. <li>Hunches about what might go wrong are substantiated by objective analysis. While a hunch can be dismissed, it is difficult to suppress objective evidence or persuade analysts that the findings are irrelevant.<br /></li>
139. <li>Ersatz tests highlight many model weaknesses, of greater or lesser importance. Experience with generated data testing can de-stigmatise test failure and so reduce the cultural pressure for cover-ups.</li>
140. </ul>
141. <i><b><span style="color: #134f5c;">We recognise that there is no mathematical solution to determine how extreme the reference models should be. This is essentially a social decision. </span></b></i><br />
142. <br />
143. Corporate cultures may still arise where too narrow a selection of reference models is tested, and so model weaknesses remain hidden.<br />
144. <br />
145. <ol>
146. <li>Source: Ersatz Model Tests<br /><a href="https://www.actuaries.org.uk/documents/ersatz-model-tests-0"><span style="font-size: xx-small;">https://www.actuaries.org.uk/documents/ersatz-model-tests-0</span></a><br />(Conclusions : page 35)</li>
147. <li>Model Risk Working Party<br /><span style="font-size: xx-small;"><a href="https://www.actuaries.org.uk/documents/sessional-paper-model-risk-daring-open-black-box">https://www.actuaries.org.uk/documents/sessional-paper-model-risk-daring-open-black-box</a></span></li>
148. <li>The skinny kids are all drinking full cream milk<br /><a href="http://heffalumpgeneration.co.za/the-skinny-kids-are-all-drinking-full-cream-milk/"><span style="font-size: xx-small;">http://heffalumpgeneration.co.za/the-skinny-kids-are-all-drinking-full-cream-milk/</span></a></li>
149. </ol>
150. <br />
151. <br />
152. <iframe allowfullscreen="" frameborder="0" height="360" src="https://www.youtube.com/embed/R8KIZ9zz9mI?start=1296" width="490"></iframe>
153.  
154. </div>
155. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/3944608603323340548/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2017/04/all-models-are-wrong.html#comment-form' title='4 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/3944608603323340548'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/3944608603323340548'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2017/04/all-models-are-wrong.html' title='All Models are Wrong'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiouBUgBFQm22IjYkb8CHNzodGmnHI2ydIwonTJVhj8JKJ7XXpbXCE2f5nh9JtrYq2MnoJ6eC9eLeMcQqU3pCfSw-qMIGUOYQlBL-8BUaT1qoWQyFvnJu6X7OdIEuXJuT__hWG_bbO6IZU/s72-c/fat-kid-drinking-low-fat-milk.png" height="72" width="72"/><thr:total>4</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-7486956454286362668</id><published>2017-01-01T18:09:00.001+01:00</published><updated>2017-01-01T18:33:32.830+01:00</updated><title type='text'>Happy Risk New Year 2017</title><content type='html'>&lt;div style=&quot;background-color: white; font-stretch: normal; line-height: normal; width: 490px;&quot;&gt;
156. <div style="font-family: georgia, serif; font-style: normal; font-weight: normal;">
157. <span style="font-family: "georgia" , serif; font-size: medium;">Happy New Year to all Actuary-Info readers.</span></div>
158. <div style="font-family: georgia, serif; font-style: normal; font-weight: normal;">
159. <br /></div>
160. <div class="separator" style="clear: both; font-family: georgia, serif; font-style: normal; font-weight: normal; text-align: left;">
161. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxBldohRIY04Wc8XLT3g8NcIQPuo5roblXCm7rclxbOFos1jIjfXFE8QKrP7-BR4AzkBTpfHcEIY8C5Ix30yrQwe3MlRqER4TqukVbj7PLgs4HWstEMKsZV4YrOyEKATZJA4i2YRZ4px8/s1600/Happy+New+Year+2016.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxBldohRIY04Wc8XLT3g8NcIQPuo5roblXCm7rclxbOFos1jIjfXFE8QKrP7-BR4AzkBTpfHcEIY8C5Ix30yrQwe3MlRqER4TqukVbj7PLgs4HWstEMKsZV4YrOyEKATZJA4i2YRZ4px8/s640/Happy+New+Year+2016.png" width="490" /></a></div>
162. <div class="separator" style="clear: both; font-family: georgia, serif; font-style: normal; font-weight: normal; text-align: center;">
163. </div>
164. <div style="font-family: georgia, serif; font-style: normal; font-weight: normal;">
165. <br /></div>
166. <span style="font-family: "georgia" , serif; font-size: medium;">The year 2017 will be the another year that'll empower us to develop new insights on risk management. Driven by economic turbulence and desperate rule-based regulation we will probably keep trying to capture, control and even eliminate risk, instead of trying to understand and anticipate risk.</span><br />
167. <b><u><span style="color: #783f04;"><br /></span></u></b>
168. <span style="font-family: "georgia" , serif; font-size: medium;"><b><u><span style="color: #783f04;">Dutch Insurance Merger</span></u></b><br />At the end of 2016, two large Dutch insurers - Nationale Nederlanden (NN) and Delta Lloyd (DL) - decided to go ahead with their merger. Formally it's called a take over of DL by NN. <br /><br />Driven by a declining DL-Solvency-II rate and supported by the concerned Dutch regulator (DNB), DL now finds shelter within NN. Besides the take over price of € 2.5 billion, NN Group faces a decline in solvency ratio from around 250% (pre-merger; Q2 2016) to 185 percent </span><span style="font-family: "georgia" , serif; font-size: medium;">(post-merger, Q3 2016)</span><span style="font-family: "georgia" , serif; font-size: medium;">. <br /><br />A strong merger (background) driver is </span><span style="font-family: "georgia" , serif; font-size: medium;">DL's expectation: "Delta Lloyd's 4Q16 Solvency II ratio is to be adversely affected by the LAC-DT review by DNB, the possible removal of the risk margin benefit of the longevity hedge and adverse longevity developments."<br /><br />However, keep in mind that 'all' life insurance companies with 'long tails' have a serious (business case) problem. A problem that's not only solvable with money (capital), but necessitates the formulation of a new strategy that goes beyond just "cost control".<br /><br />As low interest rates will continue and Solvency-II requirements will only increase, more mergers of life companies (with long tail risks) are to be expected.<br /><br /><b><u><span style="color: #783f04;">When is a merger the right solution?</span></u></b><br />Although a merger often looks like a perfect solution for 'the problem', it not always is.....</span><br />
169. <span style="font-family: "georgia" , serif; font-size: medium;"><br />Several studies estimate the failure rate of mergers and acquisitions somewhere between 70% and 90% (at least more than 50%).<br /><br />The most common general merger fallacies and attention points are addressed in a McKinsey presentation:<br /> </span><br />
170. <div class="separator" style="clear: both; font-family: georgia, serif; font-style: normal; font-weight: normal; text-align: center;">
171. <iframe allowfullscreen="" frameborder="0" height="355" marginheight="0" marginwidth="0" scrolling="no" src="//www.slideshare.net/slideshow/embed_code/key/oLEl4udDnPufTJ?startSlide=11" style="border-width: 0px; border: 1px solid #ccc; margin-bottom: 5px; max-width: 100%;" width="430"> </iframe> </div>
172. <br />
173. <span style="font-family: "georgia" , serif; font-size: medium;">When a merger or take over is considered, first check the next key-points from a risk perspective :</span><br />
174. <span style="font-family: "georgia" , serif; font-size: medium;"><br /></span>
175. <span style="font-family: "georgia" , serif; font-size: medium;"><u><b><span style="color: #783f04;">1. Strategy: Bigger is not always better</span></b></u></span><br />
176. <span style="font-family: "georgia" , serif; font-size: medium;">It's surprising how inherently correct analyzes always lead to 'bigger' is 'better', while we know that "bigger" contributes to 'too big to fail ',' decreasing cost efficiency ',' less flexibility (less agile) and 'less innovative capacity ' (like Fintech applications).<br /><br />For successful mergers or take-overs, </span><span style="font-family: "georgia" , serif; font-size: medium;">just applying traditional capital management (and Solvency II rules) just isn't enough. In all cases a well defined </span><span style="font-family: "georgia" , serif; font-size: medium;">checked and supported 'new strategy' (plan) including a strong 'business case', are a first requirement. </span><span style="font-family: "georgia" , serif; font-size: medium;">  <br />   </span><br />
177. <div class="separator" style="clear: both; text-align: center;">
178. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0fo9MRhc6rLzvv_Z38LSpvDE2Or0qtKR9c88IJg6wNCzv5onp_FGVh00ydQdL0CPXU8LPEDkc2fSgrTtiqI5DvGjQFFEwOsxSKp8XchYEyOVrAiSk8iCRaZzevjZpeew0KoYFYuuQ5NI/s1600/bigger-better.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0fo9MRhc6rLzvv_Z38LSpvDE2Or0qtKR9c88IJg6wNCzv5onp_FGVh00ydQdL0CPXU8LPEDkc2fSgrTtiqI5DvGjQFFEwOsxSKp8XchYEyOVrAiSk8iCRaZzevjZpeew0KoYFYuuQ5NI/s640/bigger-better.png" width="490" /></a></div>
179. <div class="separator" style="clear: both; text-align: center;">
180. </div>
181. <span style="font-family: "georgia" , serif; font-size: medium;"><br />Always investigate these (adverse) merger effects and concept new strategy in the due diligence phase of a merger.</span><br />
182. <span style="color: #783f04; font-family: "georgia" , serif; font-size: medium;"><b><u><br /></u></b></span>
183. <span style="font-family: "georgia" , serif; font-size: medium;"><b><span style="color: #783f04;"><u>2. Increasing complexity effects</u></span></b></span><br />
184. <span style="font-family: "georgia" , serif; font-size: medium;">Is the change in complexity (IT, communication, products, distribution channels, etc.) measured and addressed in the merger/'take-over? If the complexity increases beyond certain  levels, targeted cost reductions may not be met. Often these costs are underestimated.<br /><br />Always try to measure and address complexity</span><span style="font-family: "georgia" , serif; font-size: medium;"> </span><span style="font-family: "georgia" , serif; font-size: medium;">in the due diligence phase of a merger.</span><br />
185. <span style="font-family: "georgia" , serif; font-size: medium;"><br /></span>
186. <span style="font-family: "georgia" , serif; font-size: medium;"><b><u><span style="color: #783f04;">3. Consistency </span></u></b></span><br />
187. <span style="font-family: "georgia" , serif; font-size: medium;">Always check upon the consistency of (financial) analyses. If certain (actuarial) analyses, audits or valuation methods are only applied (one-sided) for the to be acquired company and not  for the acquiring company, consistency clearly fails and merger conclusions are probably biased. <br /><br />Whether it's a "takeover" or 'merger', or how the power in the board is managed, doesn't really matter. Both companies should be compared on the same basis.</span><span style="font-family: "georgia" , serif; font-size: medium;">Always check on consistency</span><span style="font-family: "georgia" , serif; font-size: medium;"> </span><span style="font-family: "georgia" , serif; font-size: medium;">in the due diligence phase of a merger.</span><br />
188. <span style="font-family: "georgia" , serif; font-size: medium;"><br /></span>
189. <span style="font-family: "georgia" , serif; font-size: medium;"><b><u><span style="color: #783f04;">Finally</span></u></b><br />Success with risk is on your merger-table in 2017 !! </span><br />
190. <u><br /></u>
191. <span style="font-family: "georgia" , serif; font-size: medium;"><u>Links/Sources:</u></span><br />
192. <span style="font-family: "georgia" , serif; font-size: medium;">- <a href="http://www.stortz.ca/bigmouth~inc./3183-gigantic-wine-glass--bigger-is-always-better.html">Bigger is better wine glass</a></span><br />
193. <span style="font-family: "georgia" , serif; font-size: medium;">- <a href="https://hbr.org/2011/03/the-big-idea-the-new-ma-playbook">The Big Idea: The New M&A Playbook</a></span><br />
194. <span style="font-family: "georgia" , serif; font-size: medium;">- </span><span style="font-family: "georgia" , serif; font-size: medium;"><a href="https://www.researchgate.net/publication/305406845_Mergers_and_Acquisitions_failure_rates_and_perspectives_on_why_they_fail">Mergers and Acquisitions failure rates and perspectives on why they fail</a></span><br />
195. <span style="font-family: "georgia" , serif; font-size: medium;">- <a href="http://tinyurl.com/NNDLtakeover">http://tinyurl.com/NNDLtakeover</a></span><br />
196. <span style="font-family: "georgia" , serif; font-size: medium;">- <a href="https://www.nn-group.com/Media/Article/NN-Group-and-Delta-Lloyd-agree-on-recommended-transaction.htm">NN Group and Delta Lloyd agree on recommended transaction</a></span><br />
197. <span style="font-family: "georgia" , serif; font-size: medium;">- <a href="http://www.dnb.nl/en/binaries/Working%20Paper%20376_tcm47-289626.pdf">DNB esearch; Bikker; </a></span><a href="http://www.dnb.nl/en/binaries/Working%20Paper%20376_tcm47-289626.pdf"><span style="font-family: "georgia" , serif; font-size: medium;">Is there an optimal pension fund </span><span style="font-family: "georgia" , serif; font-size: medium;">size?</span></a><br />
198. <span style="font-family: "georgia" , serif; font-size: medium;">- <a href="https://www.dnb.nl/en/news/dnb-nieuwsbrieven/nieuwsbrief-banken/newsletter-banks-april-2016/dnb340680.jsp">DNB examination into complex IT environments</a></span><br />
199. <span style="font-family: "georgia" , serif; font-size: medium;">- <a href="http://www.slideshare.net/aipmm/70-26633757">70% of Transformation Programs Fail - McKinsey</a></span><br />
200. <span style="font-family: "georgia" , serif; font-size: medium;">- <a href="http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/where-mergers-go-wrong">McKinsey: Where mergers go wrong</a></span><br />
201. <div style="font-family: georgia, serif; font-style: normal; font-weight: normal;">
202.     </div>
203. <div style="font-family: georgia, serif; font-style: normal; font-weight: normal;">
204. <br /></div>
205. </div>
206. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/7486956454286362668/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2017/01/happy-risk-new-year-2017.html#comment-form' title='1 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/7486956454286362668'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/7486956454286362668'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2017/01/happy-risk-new-year-2017.html' title='Happy Risk New Year 2017'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxBldohRIY04Wc8XLT3g8NcIQPuo5roblXCm7rclxbOFos1jIjfXFE8QKrP7-BR4AzkBTpfHcEIY8C5Ix30yrQwe3MlRqER4TqukVbj7PLgs4HWstEMKsZV4YrOyEKATZJA4i2YRZ4px8/s72-c/Happy+New+Year+2016.png" height="72" width="72"/><thr:total>1</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-9215115514017606632</id><published>2016-10-02T13:32:00.000+02:00</published><updated>2018-05-21T11:43:53.887+02:00</updated><title type='text'>Leadership and Actuaries</title><content type='html'>&lt;div style=&quot;background-color: white; font-stretch: normal; line-height: normal; width: 490px;&quot;&gt;
207. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
208. It's more than a year now, since I've posted a blog at Actuary-Info. During this year I fully focused on the market launch of the Fintech startup <a href="http://www.symetrics.eu/">Symetrics</a>. Now, with more time in pocket I'll pick up 'actuarial blogging' again.</div>
209. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
210. <br /></div>
211. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
212. Last summer <a href="https://www.linkedin.com/in/reinierroosen">Reinier Roosen</a>, Managing director of FTE in the Netherlands, asked me to give a presentation about Leadership and Actuaries at the yearly seminar of 'Actuarieel Podium' (translated: 'Actuarial Stage') on september 27, 2016 in Zeist, the Netherlands.</div>
213. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
214. <br /></div>
215. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal;">
216. <u><b><span style="color: #783f04;">Incomplete data</span></b></u></div>
217. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
218. One of the key slides of this presentation discusses the power of actuaries to cope with incomplete data (missing information) in big data sets. here it is, take good look!</div>
219. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
220. <br /></div>
221. <div class="separator" style="clear: both; font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal; text-align: left;">
222. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5P3x5a6pmIbs2sG8T00xz9NWLeN3H0bC9X8RDZr10mivwz8EYb-bgfogiHmFJetDdwUdB1wAvoA1eiQTYQEN3ocJMUnz5F6BcaurbUjpteZhcTQKoXEJiBrToNHDmrKQ5btU4kh4KRHI/s1600/actuary-leadership1.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5P3x5a6pmIbs2sG8T00xz9NWLeN3H0bC9X8RDZr10mivwz8EYb-bgfogiHmFJetDdwUdB1wAvoA1eiQTYQEN3ocJMUnz5F6BcaurbUjpteZhcTQKoXEJiBrToNHDmrKQ5btU4kh4KRHI/s1600/actuary-leadership1.png" width="490" /></a></div>
223. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
224. <div class="separator" style="clear: both; font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal; text-align: left;">
225. </div>
226. <br /></div>
227. <div style="font-family: georgia, serif; font-size: small; font-style: normal;">
228. <h4>
229. <b><span style="color: #990000;">Do you think something's missing in the above slide?</span></b></h4>
230. <h4>
231. <b><span style="color: #990000;">Think again please....</span></b></h4>
232. </div>
233. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
234. <br />
235. <br /></div>
236. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal;">
237. <b><u><span style="color: #783f04;">Presentation</span></u></b></div>
238. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
239. Altough a presentation is in no way ever represented by the corresponding slides (slides are always just supportive), I would like to give you an impression of my presentation in PowerPoint style.</div>
240. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
241. <br /></div>
242. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
243. In the coming blogs I'll discuss the main topics that are mentioned in this presentation, more in depth.</div>
244. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
245. <br /></div>
246. <div style="font-weight: normal;">
247. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
248. <b><u><span style="color: #783f04;">Main Messages</span></u></b><br />
249. Summarized my main messages in this presentation are:</div>
250. <br />
251. <ol style="font-family: "georgia" , serif; font-size: small; font-style: normal; font-weight: normal; margin: 3px 2px 3px 18px; padding: 0px;" type="square">
252. <li><span style="font-family: inherit;">Take more responsibility: Socially, Personally</span></li>
253. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square">
254. <li><span style="font-family: inherit;">Widen the area of influence</span></li>
255. <li><span style="font-family: inherit;">Grow and spend more time on your personal and professional network</span></li>
256. <li><span style="font-family: inherit;">Intensify cooperation with other disciplines<br /> </span></li>
257. </ul>
258. <li><span style="font-family: inherit;">Strengthen ‘Soft Skills’</span></li>
259. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square">
260. <li><span style="font-family: inherit;">Communication skills, power to convince, master principles, self-reflection</span></li>
261. <li><span style="font-family: inherit;">Empathy power: understanding social dynamics, stakeholders & clients<br /> </span></li>
262. </ul>
263. <li><span style="font-family: inherit;">Innovation</span></li>
264. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square">
265. <li><span style="font-family: inherit;">Build up new client-central products with new adequate regulation principles</span></li>
266. <li><span style="font-family: inherit;">Innovation can be stimulated by making implicit conditions, explicit<br /> </span></li>
267. </ul>
268. <li><span style="font-family: inherit;">Adjust professional methods and education</span></li>
269. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square">
270. <li><span style="font-family: inherit;">Develop new ‘board decision models’</span></li>
271. <li><span style="font-family: inherit;">From ‘Believes’ to ‘What If, Given Conditions x|y|x’</span></li>
272. <li><span style="font-family: inherit;">From ‘Long term uncertain estimates’ to ‘Short term recipes’</span></li>
273. <li><span style="font-family: inherit;">Including systemic, parameter and model risk</span></li>
274. <li><span style="font-family: inherit;">Anticipating on economic and behavioral effects and scenarios</span></li>
275. <li><span style="font-family: inherit;">Based on early warning indicators instead of trigger points</span></li>
276. </ul>
277. </ol>
278. </div>
279. <br />
280. <div style="font-family: georgia, serif; font-size: small; font-style: normal;">
281. <b><u><span style="color: #783f04;">Final Presentation</span></u></b></div>
282. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
283. Enjoy the presentation and give me feedback at <a href="mailto:jos.berkemeijer@gmail.com">jos.berkemeijer@gmail.com</a>.</div>
284. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
285. <br /></div>
286. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
287. <iframe allowfullscreen="" frameborder="0" height="410" marginheight="0" marginwidth="0" scrolling="no" src="//www.slideshare.net/slideshow/embed_code/key/IYnz92ku1m98P7" style="border-width: 1px; border: 1px solid #ccc; margin-bottom: 5px; max-width: 100%;" width="490"> </iframe> <br />
288. <div style="margin-bottom: 5px;">
289. <strong> <a href="https://www.slideshare.net/berkemeijer/leadership-actuaries-actuarieel-podium-presentation-jos-berkemeijer" target="_blank" title="Leadership & Actuaries | Actuarieel Podium | Presentation by Jos Berkemeijer">Leadership & Actuaries | Actuarieel Podium | Presentation by Jos Berkemeijer</a> </strong> from <strong><a href="https://www.slideshare.net/berkemeijer" target="_blank">Jos Berkemeijer</a></strong> </div>
290. </div>
291. <br />
292. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
293. <br />
294. <div style="font-family: georgia, serif; font-size: small; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal;">
295. The presentation is best (better) viewed: <br />
296. <br />
297. - at Slideshare at <span style="color: #444444; font-family: "roboto" , "helvetica" , "arial" , sans-serif; font-size: 13px;"><a href="https://goo.gl/ZT4wWM">https://goo.gl/ZT4wWM</a></span><br />
298. - as a movie on Youtube: <a href="https://www.youtube.com/watch?v=B4StprG3YaI">https://www.youtube.com/watch?v=B4StprG3YaI</a><br />
299. <br /></div>
300. </div>
301. </div>
302. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/9215115514017606632/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2016/10/leadership-and-actuaries_2.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/9215115514017606632'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/9215115514017606632'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2016/10/leadership-and-actuaries_2.html' title='Leadership and Actuaries'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5P3x5a6pmIbs2sG8T00xz9NWLeN3H0bC9X8RDZr10mivwz8EYb-bgfogiHmFJetDdwUdB1wAvoA1eiQTYQEN3ocJMUnz5F6BcaurbUjpteZhcTQKoXEJiBrToNHDmrKQ5btU4kh4KRHI/s72-c/actuary-leadership1.png" height="72" width="72"/><thr:total>0</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-8086916179306486109</id><published>2015-07-09T15:42:00.000+02:00</published><updated>2015-07-09T16:16:45.977+02:00</updated><category scheme="http://www.blogger.com/atom/ns#" term="ABP"/><category scheme="http://www.blogger.com/atom/ns#" term="agent based"/><category scheme="http://www.blogger.com/atom/ns#" term="behavioral"/><category scheme="http://www.blogger.com/atom/ns#" term="model"/><category scheme="http://www.blogger.com/atom/ns#" term="PFZW"/><title type='text'>Optimal Pension Fund Investment Returns</title><content type='html'>&lt;div style=&quot;background-color: white; font: small Georgia,Serif; width: 490px;&quot;&gt;
303. <div style="background-color: white; font: small Georgia,Serif; width: 490px;">
304. How to manage a pension fund investment portfolio in economic uncertain times and shifting financial markets? Let's try to answer this question from a more practical point of view instead of a pure scientific approach......<br />
305. <br />
306. <b><u><span style="color: #0c343d;">Historical Performance</span></u></b><br />
307. <div style="font-weight: normal;">
308. Let's take a look at the performance of two large and leading Dutch pension funds</div>
309. <br />
310. First of all we take a look at the historical (1993-2014) yearly returns of both pension funds and try to figure what n-year moving averages results in a stable and mostly non-negative yearly performance.</div>
311. <div style="font-weight: normal;">
312. <br /></div>
313. <div class="separator" style="clear: both; float: left; font-weight: normal; text-align: center;">
314. </div>
315. <div class="separator" style="clear: both; float: left; font-weight: normal; text-align: center;">
316. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWiz9u1MJ0qXt2KaB2__SpK7ShI7oHsOgypF9vwhz0hXrNXnntlzpdi0F4qjUzKwB9rXmWfA6jq5J3p-GrVM_cIhUK9hU_u3oq9uDhxR6kZRjhAsSMThTz6TTgEOPxn1lj5iT84loNJWI/s1600/ABP-PFZW-RETURNS-2015-a.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWiz9u1MJ0qXt2KaB2__SpK7ShI7oHsOgypF9vwhz0hXrNXnntlzpdi0F4qjUzKwB9rXmWfA6jq5J3p-GrVM_cIhUK9hU_u3oq9uDhxR6kZRjhAsSMThTz6TTgEOPxn1lj5iT84loNJWI/s1600/ABP-PFZW-RETURNS-2015-a.jpg" /></a></div>
317. <b><u><span style="color: #0c343d;"><br /></span></u></b>
318. <span style="color: #0c343d;">  </span><br />
319. <b><u><span style="color: #0c343d;">Smoothing Returns</span></u></b><br />
320. <div style="font-weight: normal;">
321. If our goal is to 'smooth' returns to pension fund members and to prevent negative returns as much as possible, a '3-year moving average return approach' as basis for sharing returns to pension fund members, could be a practical start. </div>
322. <div style="font-weight: normal;">
323. <br /></div>
324. <div style="font-weight: normal;">
325. In this approach, a single maximum cut of around 3.3% is largely compensated by the returns in other years as the next chart of  '<span br="">3 Year Backward moving</span> Average Yearly Return' shows:</div>
326. <div style="font-weight: normal;">
327. <br /></div>
328. <div class="separator" style="clear: both; float: left; font-weight: normal; text-align: center;">
329. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBhTAmL4CRw2QZbxPM-mOrmnMaYZOAl4CuSJEey_FL1QNk8Tprrt8lzrCSuUfOor4RqxTv8JzQuX2jh07yHtBPt1FzT-AytoXzHS5Q_jczuhLJklhJaNWdYKSz-rU05N_H64SR19UOuuI/s1600/MAV-3Y+Return.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBhTAmL4CRw2QZbxPM-mOrmnMaYZOAl4CuSJEey_FL1QNk8Tprrt8lzrCSuUfOor4RqxTv8JzQuX2jh07yHtBPt1FzT-AytoXzHS5Q_jczuhLJklhJaNWdYKSz-rU05N_H64SR19UOuuI/s1600/MAV-3Y+Return.png" /></a></div>
330. <div style="font-weight: normal;">
331. <br /></div>
332. <div style="font-weight: normal;">
333. <span br=""><br /></span>
334. <span br=""><br /></span>
335. <span br=""><br /></span>
336. </div>
337. <div class="separator" style="clear: both; float: center; text-align: center;">
338. </div>
339. <div style="font-weight: normal;">
340. <span br="">Of course if we want to protect pension members also against systemic risk and crises, an additional investment reserve of around 15%-20% would be necessary.</span></div>
341. <div style="font-weight: normal;">
342. <span br=""><br /></span></div>
343. <div style="font-weight: normal;">
344. <span br="">The  next slide gives an impression of the effects of a 10 year moving average approach. I'll leave the conclusions up to the readers. of this blog.</span></div>
345. <div style="font-weight: normal;">
346. <span br=""><br /></span></div>
347. <div class="separator" style="clear: both; font-weight: normal; text-align: center;">
348. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrjkGSMv6porDPwR61UWMShtBQErRPVLMpGSoGv03oyCYuadvZ8LqlPQWkC3FFxSAakHdq1kKI46zkzxnEB9TefhbUF3cE-IiqgPFDDF6rWLil675FL_IIQeJV74jrLtYUynLTMLSJ82Y/s1600/MAV-10Y+Return.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrjkGSMv6porDPwR61UWMShtBQErRPVLMpGSoGv03oyCYuadvZ8LqlPQWkC3FFxSAakHdq1kKI46zkzxnEB9TefhbUF3cE-IiqgPFDDF6rWLil675FL_IIQeJV74jrLtYUynLTMLSJ82Y/s1600/MAV-10Y+Return.png" /></a></div>
349. <div style="font-weight: normal;">
350. <span br=""><br /></span></div>
351. <div style="font-weight: normal;">
352. <span br=""><br /></span></div>
353. <div style="font-weight: normal;">
354. <span br=""><br /></span></div>
355. <div style="font-weight: normal;">
356. <span br=""><br /></span></div>
357. <div style="font-weight: normal;">
358. <span br=""><br />Main conclusion is that the analysed pension funds ABP and PFZW are able to generate a relative stable overall portfolio return over time. They manage to do so, despite the fact that their liabilities yearly fluctuate as a result of the fact that they have to be discounted by a risk-free rate. </span></div>
359. <div style="font-weight: normal;">
360. <span br=""><br /></span></div>
361. <span br="">A risk free rate that itself isn't risk free at all and - on top of - is continuously 'shaped'(manipulated ) by the central banks to artificially low interest levels.<br /><br /><b><u><span style="color: #0c343d;"><br /></span></u></b></span><br />
362. <span br=""><b><u><span style="color: #0c343d;">Managing Volatility instead of Confidence Levels</span></u></b><br />A strategy based on managing the funding ratio of a pension fund given a certain confidence level and given the actual method of risk-free discounting of liabilities, is doomed to fail in a low interest environment. Discussions about confidence levels are also a waste of time, as long time confidence - at any confidence level - eventually will turn out to be an illusion.<br /><br />As long as pension funds are able to demonstrate that that they are able to manage and control the volatility of their assets within chosen limits (risk attitude 1; e.g. 10%) and within a chosen time horizon </span>(risk attitude 2; e.g. 20 years) , they will be able to fulfill their pension obligations, or to timely adapt their chosen risk-return strategy to structural market changes.<br />
363. <br />
364. <b><u><span style="color: #0c343d;"><br /></span></u></b>
365. <b><u><span style="color: #0c343d;">How to curb volatility?</span></u></b><br />
366. Managing the volatility of an pension fund investment portfolio within a certain risk attitude is one of the greatest challenges of a pension fund board.<br />
367. <br />
368. In short, the traditional instruments to curb volatility are:<br />
369. <br />
370. <ol>
371. <li>Diversification<br />With the help of diversification the asset mix of a  pension fund can be tuned to optimize long term risk-return in relatively 'normal' market circumstances.<br /> </li>
372. <li>Capital Requirements & Management<br />By defining and maintaining a well quantitative risk-based capital and investment reserve policy, a relatively smooth yearly return available for pension fund members can be achieved in a systematical risk environment.<br /> </li>
373. <li>Economic Scenarios<br />By studying portfolio outcomes under different economic scenarios, a short term 'best fitting' near future volatility asset strategy can be developed.<br /> </li>
374. <li>Trigger points<br />By defining asset portfolio actions that will 'fire' once particular trigger points of specific asset classes are met, all measures based on 'damage control' are in place.<br /> </li>
375. </ol>
376. Unfortunately the above measures all fall short in case of systemic market events.<br />
377. <br />
378. In case of crises, like the current Greece crisis, <a href="http://www.newscientist.com/article/dn27847-greece-crisis-better-models-can-show-how-to-stabilise-eurozone.html#.VZ5qXfntlBd">agent based models</a>, also called behavioral models, can help to manage systematic volatility.<br />
379. <br />
380. <br />
381. <b><u><span style="color: #0c343d;">Behavioral Asset Management</span></u></b><br />
382. A way to minimize systemic volatility in an investment portfolio is to apply new 'Behavioral Economic Stress Test' models. These kind of tools, as provided y a <a href="http://fintechcity.com/the-fintech50-2015/4588027339">FinTech50 2015</a> company called <a href="http://www.symetrics.eu/">Symetrics</a>, enable pension boards and investment managers to model and to anticipate crises.<br />
383. <br />
384. More is explained in the next short presentation "<a href="http://www.slideshare.net/berkemeijer/pension-conferentie-2015-presentation-jos-berkemeijer-20150402-final">The value of economic scenarios from a risk perspective</a>" by Jos Berkemeijer, one of the four managing partners of Symetrics.<br />
385. <br />
386. <br />
387. <div class="separator" style="clear: both; font-weight: normal; text-align: center;">
388. </div>
389. <div style="font-weight: normal;">
390. <b br="">
391. </b>
392. <iframe frameborder="0" height="400" marginheight="0" marginwidth="0" scrolling="no" src="https://www.slideshare.net/slideshow/embed_code/key/3RSwXbkp2UNSlM" width="476"></iframe>
393.  
394. </div>
395. <br />
396. <br />
397. <u>Used Links</u><br />
398. - <a href="http://www.newscientist.com/article/dn27847-greece-crisis-better-models-can-show-how-to-stabilise-eurozone.html#.VZ5qXfntlBd">Agent based Models</a><br />
399. - <a href="http://www.symetrics.eu/">Behavioral Models by Symetrics</a><br />
400. - <a href="https://sites.google.com/site/boooming/Home/ABP%20PFZW%20Returns%202014%20JB%2020150625.xlsx">Spreadsheet wit data used in this blog</a><br />
401. - <a href="http://www.slideshare.net/berkemeijer/pension-conferentie-2015-presentation-jos-berkemeijer-20150402-final">Presentation: The value of economic scenarios from a risk perspective</a><br />
402. <br /></div>
403. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/8086916179306486109/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2015/07/optimal-pension-fund-investment-returns.html#comment-form' title='1 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/8086916179306486109'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/8086916179306486109'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2015/07/optimal-pension-fund-investment-returns.html' title='Optimal Pension Fund Investment Returns'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWiz9u1MJ0qXt2KaB2__SpK7ShI7oHsOgypF9vwhz0hXrNXnntlzpdi0F4qjUzKwB9rXmWfA6jq5J3p-GrVM_cIhUK9hU_u3oq9uDhxR6kZRjhAsSMThTz6TTgEOPxn1lj5iT84loNJWI/s72-c/ABP-PFZW-RETURNS-2015-a.jpg" height="72" width="72"/><thr:total>1</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-3303490036022163821</id><published>2015-06-13T22:58:00.001+02:00</published><updated>2015-06-13T23:01:34.186+02:00</updated><category scheme="http://www.blogger.com/atom/ns#" term="actuary"/><category scheme="http://www.blogger.com/atom/ns#" term="empathy"/><category scheme="http://www.blogger.com/atom/ns#" term="humor"/><category scheme="http://www.blogger.com/atom/ns#" term="professional"/><title type='text'>Professional Empathy of an Actuary</title><content type='html'>&lt;div style=&quot;background-color: white; font-stretch: normal; width: 490px;&quot;&gt;
404. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
405. The most important hard skill in any profession is a soft skill called Empathy.</div>
406. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
407. Without empathy, any project or business goal is doomed to fail. </div>
408. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
409. <br /></div>
410. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
411. Just a small humorous illustration to get the picture....</div>
412. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
413. <br /></div>
414. <div style="border-image-outset: initial; border-image-repeat: initial; border-image-slice: initial; border-image-source: initial; border-image-width: initial; border: 1px solid blue; font-size: small; padding: 10px; width: 470px;">
415. <b><u><span style="color: #783f04;">Adding Rabbits</span></u></b><br />
416. <div style="font-weight: normal;">
417. <br /></div>
418. <div style="font-weight: normal;">
419. One day, the math teacher asks six year old Johnny, "If you have 200 rabbits and you add another 100 rabbits, how many rabbits would you have?" </div>
420. <div style="font-weight: normal;">
421. <br /></div>
422. <div style="font-weight: normal;">
423. Johnny thinks for a moment and then answers: "I think the answer is 337 Sir".</div>
424. <div style="font-weight: normal;">
425. <br /></div>
426. <div style="font-weight: normal;">
427. "No, Johnny. That's the wrong answer. Try again. <br />
428. <br />
429. Johnny takes another five seconds and answers: "Still probably 337 Sir" "</div>
430. <div style="font-weight: normal;">
431. <br /></div>
432. <div style="font-weight: normal;">
433. Now the math teacher slightly loses his temper and baffles: "No Johnny, wrong again. You know nothing about mathematics!". </div>
434. <div style="font-weight: normal;">
435. <br /></div>
436. <div style="font-weight: normal;">
437. Immediately Johnny answers: "And you know nothing about rabbits Sir"</div>
438. </div>
439. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
440. <br /></div>
441. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
442. <b><u><span style="color: #0c343d;">Actuarial Skills</span></u></b></div>
443. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
444. A recent (May 2015) <a href="http://www.investopedia.com/articles/investing/052015/top-5-skills-every-actuary-needs.asp">Investopedia article</a> sums up the five skills every actuary needs</div>
445. <ol style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
446. <li>Analytical Problem Solving Skills </li>
447. <li>Math and Numeracy Skills </li>
448. <li>Computer Skills </li>
449. <li>Knowledge of Business and Finance </li>
450. <li>Communication and Interpersonal Skills</li>
451. </ol>
452. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
453. Although in a classical sense this powerful summary of an actuary's professional competences is perfectly in line wit more detailed descriptions as given by several actuarial associations, something essential is missing.</div>
454. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
455. <br /></div>
456. <div style="font-family: Georgia, serif; font-style: normal; font-variant: normal; line-height: normal;">
457. <div style="font-size: small; font-weight: normal;">
458. To be successful as an an actuary you'll need to develop what is called</div>
459. <div style="font-size: small; font-weight: normal;">
460. <br /></div>
461. <div style="text-align: center;">
462. <b><span style="color: #990000;">Professional Empathy</span></b></div>
463. </div>
464. <div>
465. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
466. <br /></div>
467. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
468. <b><u><span style="color: #0c343d;"><br /></span></u></b>
469. <b><u><span style="color: #0c343d;">What is Professional Empathy?</span></u></b></div>
470. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
471. Professional empathy is the ability to see the world through the eyes of other professionals.</div>
472. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
473. <br /></div>
474. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
475. As actuaries we're trained to view and resolve our projects, challenges and issues in a primarily quantitative manner with the help of actuarial techniques, models and formulas.</div>
476. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
477. <br /></div>
478. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
479. Through study and experience we can develop "Professional Empathy" that allows us to look through the eyes of other professionals or clients and feel and understand what their view and perceptions are.</div>
480. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
481. In doing so, we're able to optimize our advice, support or project performance.</div>
482. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
483. <br /></div>
484. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
485. <b><u><span style="color: #073763;">Understanding and response</span></u></b></div>
486. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
487. Professional empathy implies two elements: understanding and response.</div>
488. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
489. <br /></div>
490. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; line-height: normal;">
491. <b><u><span style="color: #783f04;">Understanding</span></u></b><br />
492. To understand other professionals and clients, we need to develop the ability to be sensitive to the needs and feelings of others. To do so, it helps to develop technical skills in other professional fields, read other than just actuarial literature and join other than pure actuarial conferences.</div>
493. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
494. <br /></div>
495. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
496. As graduated actuaries we already developed a broad multi-professional basis that includes professional areas as: mathematics, statistics, finance, insurance, asset management, pricing, administration, business analytics, ict, organization, marketing, etc. Therefore, if we continue to develop this multi-professional ability, we - as actuaries - are are ideally suited to organize combined professional expertise (innovation) projects.<br />
497. <br />
498. Besides the traditional actuarial areas as insurance, pensions, statistics, and actuarial techniques we'll have to focus and develop skills in the surrounding areas of the actuarial work field:</div>
499. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
500. <br /></div>
501. <div class="separator" style="clear: both; font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; text-align: center;">
502. </div>
503. <div class="separator" style="clear: both; float: left; font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; text-align: center;">
504. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgK1ey4CRsbMjgzvklQThA2z-4ndujoz-C2OK8bVHeZhXoWdxtb6Fw8U8Lp0fOrk2lM_6Fa0qvGbZeSL1KwsVamZ8tUIPLVeJJ3J8peA-yK2Da7J4KHlrn7tfq_HWpXJGw5vltc0G9QfCg/s1600/actuary-skills.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgK1ey4CRsbMjgzvklQThA2z-4ndujoz-C2OK8bVHeZhXoWdxtb6Fw8U8Lp0fOrk2lM_6Fa0qvGbZeSL1KwsVamZ8tUIPLVeJJ3J8peA-yK2Da7J4KHlrn7tfq_HWpXJGw5vltc0G9QfCg/s400/actuary-skills.png" width="400" /></a></div>
505. <div class="separator" style="clear: both; font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; text-align: center;">
506. </div>
507. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
508. <br /></div>
509. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
510. <br /></div>
511. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
512. In order to understand we need to develop the ability to read verbal, paralinguistic and non verbal cues of professionals in other professional fields.</div>
513. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
514. <br /></div>
515. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; line-height: normal;">
516. <b><u><span style="color: #783f04;">Response</span></u></b><br />
517. Secondly, our response and attitude to other professional should be in such a way that other professionals recognize that we understand them, appreciate that we speak their (professional) language and invite us to share their professional issues or doubts with us.</div>
518. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
519. <br /></div>
520. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; line-height: normal;">
521. <b><u><span style="color: #444444;">Interpersonal communication skills</span> </u></b><br />
522. This way of responding requires to bring out a professional attitude that's based on interpersonal communication skills like:</div>
523. <ol style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
524. <li>showing interest, respect and appreciation</li>
525. <li>active listening</li>
526. <li>showing understanding, being accessible, </li>
527. <li>having a flexible attitude </li>
528. <li>operate steady on basis of ethical principals.</li>
529. </ol>
530. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
531. <br /></div>
532. <span style="color: #444444; font-family: Georgia, serif;"><b><u>Intrapersonal skills</u></b></span><br />
533. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
534. It also forces us actuaries to continuously work on our <a href="http://materialminds.com/management-training/learning/intrapersonal-skills/">intrapersonal skills</a> like: </div>
535. </div>
536. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
537. <ol>
538. <li>Knowing what drives, angers, motivates, frustrates, inspires you</li>
539. <li>Knowing your own strengths and limitations</li>
540. <li>The ability to stay calm and balanced in stressful situations</li>
541. <li>Self confidence</li>
542. </ol>
543. <br />
544. <b><u><span style="color: #073763;">How to start with Professional Empathy?</span></u></b><br />
545. You can start with developing your professional Empathy as follows:<br />
546. <ol>
547. <li>simply pick out one of the communication issues as mentioned above (e.g. 'active listening')</li>
548. <li>After a conversation with a trusted professional you work with, simply ask for honest feedback by asking for example: "I try to develop a more active listening style. May I ask you: Do you think I really listened to your arguments. If so, in what way? If not, 'why' and 'when' not? What would you have expected of me?</li>
549. </ol>
550. <br />
551. If it seems difficult for you to ask these questions, congratulations! You now know for sure this approach is applicable to you.<br />
552. <br />
553. If you think it makes no sense to ask these questions once in a while. Just keep doing what you always did until the final reality check!<br />
554. <br />
555. <b><u><span style="color: #073763;">SOA Self Assessment</span></u></b><br />
556. The Society of Actuaries has developed a Competency Framework <a href="https://www.soa.org/professional-development/competency-framework/self-assessment-tool.aspx">Self-Assessment</a> Tool. The self-assessment asks you to rate a series of statements about the skills that actuaries should have to be valued for their professionalism, technical expertise and business acumen. <br />
557. <br />
558. It's a 45 minute test that gives first impression of you improvement areas. However, interpersonal en intrapersonal skills are only limited measured.........<br />
559. <br /></div>
560. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
561. </div>
562. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
563. <br />
564. <u>Used Sources / Related Links</u><br />
565. - <a href="https://books.google.nl/books?id=WrPiVD39XBwC&pg=PA68&lpg=PA68&dq=%22Professional+Empathy%22&source=bl&ots=HzmebDsqwB&sig=z5-GwIwK721IShLR5bpf6xQpJmY&hl=nl&sa=X&ved=0CE0Q6AEwBWoVChMI9tPIi4-NxgIVyJIsCh2DnAOK#v=onepage&q=%22Professional%20Empathy%22&f=false">E-Book: Developing Professional Behaviors</a><br />
566. - <a href="http://materialminds.com/management-training/learning/intrapersonal-skills/">Material Minds</a><br />
567. - <a href="file:///C:/Users/berkemeijer/Downloads/Professional_and_Competence_Profile__070330.pdf">Dutch Actuarial Association: Professional and Competence Profile</a><br />
568. - <a href="https://www.soa.org/competency-framework/">SOA: Competency Framework</a><br />
569. - <a href="https://www.soa.org/professional-development/competency-framework/self-assessment-tool.aspx">Actuary Self Assessment </a></div>
570. </div>
571. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/3303490036022163821/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2015/06/professional-empathy-of-actuary.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/3303490036022163821'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/3303490036022163821'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2015/06/professional-empathy-of-actuary.html' title='Professional Empathy of an Actuary'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgK1ey4CRsbMjgzvklQThA2z-4ndujoz-C2OK8bVHeZhXoWdxtb6Fw8U8Lp0fOrk2lM_6Fa0qvGbZeSL1KwsVamZ8tUIPLVeJJ3J8peA-yK2Da7J4KHlrn7tfq_HWpXJGw5vltc0G9QfCg/s72-c/actuary-skills.png" height="72" width="72"/><thr:total>0</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-6477080337475938219</id><published>2015-05-14T23:23:00.000+02:00</published><updated>2015-05-15T00:53:16.161+02:00</updated><category scheme="http://www.blogger.com/atom/ns#" term="blank space"/><category scheme="http://www.blogger.com/atom/ns#" term="meta"/><category scheme="http://www.blogger.com/atom/ns#" term="risk management"/><title type='text'>Risk Management Ground Rule</title><content type='html'>&lt;div style=&quot;background-color: white; font-family: Georgia, serif; font-size: small; font-stretch: normal; font-style: normal; font-variant: normal; line-height: normal; width: 490px;&quot;&gt;
572. <div style="font-weight: normal;">
573. Risk Management is a awkward and hard to grasp discipline. Not only in boardrooms, but also in the practice of our professional risk management discipline. </div>
574. <div class="separator" style="clear: both; float: right; text-align: center;">
575. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCh182rgJ7iPIusONmwXoy4PxyAP4bP6rnmvQL1ZWxLgDFT_CksPppqHOKgz-qQR4Jk1XI6RAO0lt34SzaqKPxht_AJQIS4UrlZPmg98T_JJ0FdWI6x58QQkjyEAvK4_Y91EgR-SRa1Pw/s1600/riskmanagersfailjpg.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCh182rgJ7iPIusONmwXoy4PxyAP4bP6rnmvQL1ZWxLgDFT_CksPppqHOKgz-qQR4Jk1XI6RAO0lt34SzaqKPxht_AJQIS4UrlZPmg98T_JJ0FdWI6x58QQkjyEAvK4_Y91EgR-SRa1Pw/s200/riskmanagersfailjpg.png" width="180" /></a></div>
576. <br />
577. Once you think you've captured risk management, it captures you...... again and again...<br />
578. <div style="font-weight: normal;">
579. <br />
580. By definition risk management is a paradox. <br />
581. <br />
582. Once you fully 'control' and 'manage' a certain risk, it's no longer really a 'risk' in the sense that it can surprise you.</div>
583. <div style="font-weight: normal;">
584. <br /></div>
585. <div style="font-weight: normal;">
586. However..., did you check and do you manage the following risks?</div>
587. <div style="font-weight: normal;">
588. <br /></div>
589. <div style="font-weight: normal;">
590. <b><u><span style="color: #783f04;">Meta Risk Management Risks</span></u></b></div>
591. <div style="font-weight: normal;">
592. <br /></div>
593. <ol style="margin: 3px 2px 3px 21px; padding: 0px;">
594. <li><span class="underline"><u>Risk Framework Risk</u></span><br />All (regulatory) rules and principles you apply in risk management are filters that cause new risks. Therefore every kind of risk management framework is also a source of risk and should be part of your risk management framework.<br /><em style="font-weight: normal;"><span style="color: #990000;">Have you identified weak spots in your risk management framework?</span><br /> </em></li>
595. <li style="font-weight: normal;"><span class="underline"><u>Risk Measures Risk</u></span><br />Every risk measure taken, causes a new risk.<br /><em><span style="color: #990000;">Have you identified what the risks of risk management measures are?</span><br /> </em></li>
596. <li style="font-weight: normal;"><span class="underline"><u>Model Risk</u></span><br />All models you use in risk management are dangerous and risky approximations. <br />Therefore, always use at least a second 'Challenger Model' to fully understand, check, calibrate and control your risks and risk measures.<br /><em><span style="color: #990000;">Do you have at least one challenger risk model in place?</span><br /> </em></li>
597. <li style="font-weight: normal;"><span class="underline"><u>Unknown Risk Preparedness</u><em><br /></em></span>In the heart of the matter 'managing risk' is not primarily  'risk management'. Preparing for unknown risks is what risk management is really about.<br /><em><span style="color: #990000;">Do you have a procedure in place for managing unknown risk events?</span></em></li>
598. </ol>
599. <div style="font-weight: normal;">
600. <br /></div>
601. <div style="font-weight: normal;">
602. Congratulations if you have successfully passed the above Meta Risk Management Test. </div>
603. <div style="font-weight: normal;">
604. <br /></div>
605. <div style="font-weight: normal;">
606. <br /></div>
607. <div style="font-weight: normal;">
608. <b><u><span style="color: #073763;">Ground Rule</span></u></b></div>
609. <div style="font-weight: normal;">
610. Yet, there's still one risk management  ground rule you could have violated.... Denying this ground rule is the same as the ground rule itself!</div>
611. <div style="font-weight: normal;">
612. <br /></div>
613. <div style="font-weight: normal; text-align: center;">
614. <em><strong><span style="color: #990000;"><span style="font-size: 120%;">Never classify any event or reported risk as not relevant</span> </span></strong></em> </div>
615. <div style="font-weight: normal; text-align: center;">
616. <span class="underline" style="color: #073763;"><u><b><br /></b></u></span></div>
617. <div style="font-weight: normal;">
618. <span class="underline" style="color: #073763;"><u><b><br /></b></u></span>
619. <span class="underline" style="color: #073763;"><u><b>Examples</b></u></span></div>
620. <div style="font-weight: normal;">
621. <br /></div>
622. <div style="font-weight: normal;">
623. <span class="underline" style="color: #783f04;"><u><b>A. Example Challenger</b></u></span></div>
624. <div style="font-weight: normal;">
625. One of the most classic examples of violating this ground rule is the disaster of the space-shuttle <a href="http://www.history.com/topics/challenger-disaster" rel="nofollow" target="_blank">Challenger</a> back in 1986. Engineer reports about the failing two rubber O-rings that caused the accident, where denied by management.</div>
626. <div style="font-weight: normal;">
627. <br /></div>
628. <div style="font-weight: normal;">
629. <br /></div>
630. <div style="font-weight: normal;">
631. Just recently we can observe another possible example of violation.</div>
632. <div style="font-weight: normal;">
633. <span class="underline"><br /></span>
634. <span class="underline" style="color: #783f04;"><u><b>B. Stress Test  </b></u></span></div>
635. <div style="font-weight: normal;">
636. On 11 may 2015 the supervisory authority <a href="https://eiopa.europa.eu/Pages/News/EIOPA-launches-pensions-stress-test-and-quantitative-assessment-on-solvency-for-occupational-pension-funds.aspx" rel="nofollow" target="_blank">EIOPA</a> launched its first '<a href="http://www.theactuary.com/news/2015/05/eiopa-launches-stress-test-for-pension-funds/" rel="nofollow" target="_blank">stress test</a>' for European pension funds (IORPs;Institutions for Occupational Retirement Provision).</div>
637. <div style="font-weight: normal;">
638. <br /></div>
639. <div style="font-weight: normal;">
640. Now take a look at the initial response of a spokesman of the Dutch pension fund association (Source: <a href="http://fd.nl/economie-politiek/1103829/pensioenkoepel-vindt-europese-stresstest-fondsen-onnodig" rel="nofollow" target="_blank">IPE</a>; translated):</div>
641. <div style="font-weight: normal;">
642. <br /></div>
643. <ol style="font-weight: normal; margin: 3px 2px 3px 21px; padding: 0px;">
644. <li><em>Not happy</em><br />The Dutch pension sector is not happy with a stress test for pension funds, as issued by the European regulator EIOPA.<br /> </li>
645. <li><em>Unnecessary</em><br />According to the Pension Federation the test is 'not necessary' for Dutch pension funds and the test could lead to "unnecessary European rules'. The test is just a burden for the funds. A waste of their time. Besides the Pension Federation fears that the results lead to all kinds of EU rules which do not require in the Netherlands. We must be careful that there will not draw the wrong conclusions.<br /> </li>
646. <li><em>Dutch Pension funds cannot Topple</em><br />From a Dutch perspective, the test unnecessary,<b><i><span style="color: #20124d;"> because Dutch funds cannot topple</span></i></b> by what is regulated here in The Netherlands. </li>
647. </ol>
648. <div style="font-weight: normal;">
649. <br /></div>
650. <div style="font-weight: normal;">
651. It's clear that this kind of reactions are counterproductive and violate the ground rule of risk management.</div>
652. <div style="font-weight: normal;">
653. <br /></div>
654. <div style="font-weight: normal;">
655. To put it in a different way: Perhaps Dutch pension funds cannot topple, but they sure can collapse!</div>
656. <div style="font-weight: normal;">
657. <br /></div>
658. <div class="separator" style="clear: both; float: left; font-weight: normal; text-align: center;">
659. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiW9QT7Jz1T8aCfXjVj9SCXsjlLpT8gtXao9fndUnenkCri7W4xp90wnOchgGiiWaBvOKz82NDSRW0VM_EHkooSb-EGln14ct_MBqNA2wOSViXGhp6S4mkPsqifqHeWhZDZnG7vFkvNh44/s1600/pensionfundcollapse.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiW9QT7Jz1T8aCfXjVj9SCXsjlLpT8gtXao9fndUnenkCri7W4xp90wnOchgGiiWaBvOKz82NDSRW0VM_EHkooSb-EGln14ct_MBqNA2wOSViXGhp6S4mkPsqifqHeWhZDZnG7vFkvNh44/s400/pensionfundcollapse.png" width="490" /></a></div>
660. <div style="font-weight: normal;">
661. <br /></div>
662. <div style="font-weight: normal;">
663. <span class="underline"><br /><br /><u><b><span style="color: #073763;">Conclusion</span></b></u></span></div>
664. <div style="font-weight: normal;">
665. As experts in risk management we're all confident that we can identify, understand and manage risks. Unfortunately, nothing less is true...</div>
666. <div style="font-weight: normal;">
667. We all have our blank space.......</div>
668. <div style="font-weight: normal;">
669. <br /></div>
670. <div style="font-weight: normal;">
671. <iframe allowfullscreen="" embed="" frameborder="0" height="270" sfhmrlfkj4="" src="https://www.youtube.com/embed/NsFhmRLfKj4" width="480" wmode="transparent" www.youtube.com=""></iframe>
672.  
673. </div>
674. </div>
675. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/6477080337475938219/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2015/05/risk-management-ground-rule.html#comment-form' title='1 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/6477080337475938219'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/6477080337475938219'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2015/05/risk-management-ground-rule.html' title='Risk Management Ground Rule'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCh182rgJ7iPIusONmwXoy4PxyAP4bP6rnmvQL1ZWxLgDFT_CksPppqHOKgz-qQR4Jk1XI6RAO0lt34SzaqKPxht_AJQIS4UrlZPmg98T_JJ0FdWI6x58QQkjyEAvK4_Y91EgR-SRa1Pw/s72-c/riskmanagersfailjpg.png" height="72" width="72"/><thr:total>1</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-1510087396030458344</id><published>2015-04-06T22:14:00.004+02:00</published><updated>2015-04-06T22:14:45.003+02:00</updated><title type='text'>Indecisiveness: the Risk of Risk</title><content type='html'>&lt;div style=&quot;background-color: white; font-family: Georgia, serif; font-stretch: normal; font-style: normal; font-variant: normal; line-height: normal; width: 490px;&quot;&gt;
676. <div style="font-size: small; font-weight: normal;">
677. <i>Behavioral Economic Stress Testing</i> at <a href="http://www.symetrics.eu/welcome/#home">Symetrics</a>, a <a href="http://fintechcity.com/the-fintech50-2015/4588027339">FinTech50</a> company that keeps me on the flow of life, kept me from blogging last months. Nevertheless, here's a new blog to chew on.....
678. </div>
679. <div style="font-size: small; font-weight: normal;">
680. <br /></div>
681. <div style="font-size: small; font-weight: normal;">
682. <b><u><span style="color: #134f5c;">Low Interest Rates</span></u></b></div>
683. <div style="font-size: small; font-weight: normal;">
684. In traditional investment models, low and even negative interest rates are seen as simple stochastic outcomes, that eventually converge to the mean of the historical data as time progresses.</div>
685. <div style="font-size: small; font-weight: normal;">
686. <br /></div>
687. <div style="font-size: small; font-weight: normal;">
688. The well-known answer to the question "how long will interest rates stay low?" is mostly: don't worry, interest rates will rise again!</div>
689. <div style="font-size: small; font-weight: normal;">
690. <br />
691. In our long term investment models the output equals the input. If we 'believe' that the average interest rate is 5%, than on the long term that's where we we'll be at....<br />
692. At least, in our model, certainly not in reality.</div>
693. <div style="font-size: small; font-weight: normal;">
694. Unfortunately, there is no such thing as 'mean reversion'. The reason why interest rates got down, is due to monetary, regulatory and economic drivers, that will keep and push interest rates down, as long as there's no substantial debt relief in combination with real (not paper-financed!) economic growth.</div>
695. <div style="font-size: small; font-weight: normal;">
696. <br /></div>
697. <div style="font-size: small; font-weight: normal;">
698. In a world with extreme low and even negative interest rates, financial (long term saving) institutions have no future. Based on one year default probabilities, traditional regulatory frameworks eventually force those long term guarantee institutions (e.g. mortgage banks, life-insurers and pension funds) to derisk their balance sheets and raise the price of their products. However, consumers are prepared to make a risk-return assessment on different grounds and are no longer willing to pay the price for risk.</div>
699. <div style="font-size: small; font-weight: normal;">
700. <br /></div>
701. <div style="font-size: small;">
702. <b><u><span style="color: #134f5c;">Example</span></u></b></div>
703. <div style="font-size: small; font-weight: normal;">
704. Let's illustrate this risk-return dilemma with a simplified practical example in a (unlikely?) long low interest world.</div>
705. <div style="font-size: small; font-weight: normal;">
706. <br /></div>
707. <div style="font-size: small; font-weight: normal;">
708. We consider the following portfolio investment case:</div>
709. <ol style="font-size: small; font-weight: normal;">
710. <li>Bonds (US) with average return of 1% and a standard deviation of 4%</li>
711. <li>Stocks (S&P 500) with an average 8% return and 16% standard deviation</li>
712. </ol>
713. <div style="font-size: small; font-weight: normal;">
714. <br /></div>
715. <div style="font-size: small; font-weight: normal;">
716. Next, we take a look at the Efficient Frontiers of the asset-mix combinations of Bonds and Stocks:</div>
717. <div style="font-size: small; font-weight: normal;">
718. <br /></div>
719. <div class="separator" style="clear: both; font-size: small; font-weight: normal; text-align: center;">
720. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_Lnk85jQS0oM44FibTjJRxxqHx0GPz3W9JDMzA8jP4hrWPH-LD2OPPukKwEyoWtN9dLH5pPBNDiIQ3O0qb8U3gEEAghcUhlI96kXW8c1xEyX2XIW5YDPg_KWzziseVERui5cn7msMI-c/s1600/EF-EXAMPLE1.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_Lnk85jQS0oM44FibTjJRxxqHx0GPz3W9JDMzA8jP4hrWPH-LD2OPPukKwEyoWtN9dLH5pPBNDiIQ3O0qb8U3gEEAghcUhlI96kXW8c1xEyX2XIW5YDPg_KWzziseVERui5cn7msMI-c/s1600/EF-EXAMPLE1.png" /></a></div>
721. <div style="font-size: small; font-weight: normal;">
722. <br /></div>
723. <div class="separator" style="clear: both; font-size: small; font-weight: normal; text-align: center;">
724. </div>
725. <div style="font-size: small; font-weight: normal;">
726. To prevent endless discussions we simply compare two possible portfolio investment strategies:</div>
727. <ol style="font-size: small; font-weight: normal;">
728. <li>Portfolio A: 80% Bonds & 20% Stocks</li>
729. <li>Portfolio B: 20% Bonds & 80% Stocks</li>
730. </ol>
731. <div style="font-size: small; font-weight: normal;">
732. Obviously Portfolio A (PF-A) with an annual expected return of 2.4% and a (non-correlated) risk of 4.6%  looks less risky than PF-B. On the other hand PF-B with an expected 6.6% return and a (non-correlated) risk of around 13% looks promising on the long run. What to do? What is more or less risky?</div>
733. <div style="font-size: small; font-weight: normal;">
734. <br /></div>
735. <div style="font-size: small;">
736. <b><u><span style="color: #134f5c;">The Risk of Risk</span></u></b><br />
737. What is more risky, also depends on the risk premium. One traditional way to judge the pay out on risk, is to compare the '<a href="http://www.investopedia.com/terms/s/sharperatio.asp" style="font-weight: normal;">Sharpe ratios</a>' of the two portfolios. Major problem is to determine the appropriate 'risk free interest rate level', as the risk free rate is risky (volatile) itself and declining on average the last years.</div>
738. <div style="font-size: small;">
739. <br /></div>
740. <div style="font-size: small;">
741. So in fact we have to judge:</div>
742. <div style="font-size: small;">
743. <br /></div>
744. <div style="font-size: small; text-align: center;">
745. <b><span style="color: #134f5c; font-size: 130%;">The Risk of Risk</span></b></div>
746. <div style="font-size: small;">
747. <br /></div>
748. <div style="font-size: small; font-weight: normal;">
749. To get an impression of the risk of risk free interest rates, we calculate the Sharpe ratios of the efficient frontiers.<br />
750. <br /></div>
751. <div style="font-size: small; font-weight: normal;">
752. Here are the outcomes:</div>
753. <div style="font-size: small; font-weight: normal;">
754. <br /></div>
755. <div class="separator" style="clear: both; font-size: small; font-weight: normal; text-align: center;">
756. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHrBfNLNb0Ec9nhMcF0i6xCsT0GsECtqYfmYQ3sFnurcKl9hOG6Ju3d5enD30HrPiie81ZXMkStZhuY9XQw1XlSFuZcbxo1C4ZpxsQ42OPYT9zR-bZXwNTD-9qG4ZBjK7h6cO9uXXXNgY/s1600/sharpe-EF.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHrBfNLNb0Ec9nhMcF0i6xCsT0GsECtqYfmYQ3sFnurcKl9hOG6Ju3d5enD30HrPiie81ZXMkStZhuY9XQw1XlSFuZcbxo1C4ZpxsQ42OPYT9zR-bZXwNTD-9qG4ZBjK7h6cO9uXXXNgY/s1600/sharpe-EF.png" /></a></div>
757. <div style="font-size: small; font-weight: normal;">
758. <br /></div>
759. <div style="font-size: small; font-weight: normal;">
760. The above charts illustrate that at nearly every (0% - 3%) free risk interest rate, Sharpe ratios of PF-A are lower or somewhat equal to those of PF-B. Only in the case that Bonds are clearly negatively correlated with Stocks at a 0% or 1% risk free interest level, a PF-A strategy is less risky than PF-B.</div>
761. <div style="font-size: small; font-weight: normal;">
762. <br /></div>
763. <div class="separator" style="clear: both; font-size: small; font-weight: normal; text-align: center;">
764. </div>
765. <div class="separator" style="clear: both; font-size: small; font-weight: normal; text-align: center;">
766. <a href="http://www.rba.gov.au/publications/bulletin/2014/sep/pdf/bu-0914-8.pdf" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgB8wQiWpJZmQaV-E_4ZeYVN1gMzUI91d6YFZCGkQPexXnhwEZi_2jjqSenvmdoKi3_yChgFo0Vxr58rmVwBJye8MRLXm4zPiXN6QHccq3nIp4-PdVIJ2MzI1qL3b9TOqgaVoAkRR4kQYs/s1600/bondstock.png" height="302" width="320" /></a></div>
767. <div style="font-size: small; font-weight: normal;">
768. <br /></div>
769. <div style="font-size: small; font-weight: normal;">
770. <br /></div>
771. <div style="font-size: small; font-weight: normal;">
772. As in 'normal' crisis situations most asset-classes (excluding Gold of course...) tend to be extremely positively correlated, PF-B is - also in this case - the preferred strategy. In other situations, the Bonds-Stocks correlation only changes incrementally, so your portfolio asset-mix can be adapted timely. There's no need for anticipation.</div>
773. <div style="font-size: small; font-weight: normal;">
774. <br /></div>
775. <div style="font-size: small; font-weight: normal;">
776. <br />
777. Another remark is that in case of an 0% risk free interest rate and an expected neutral to positive correlation between Bonds and Stocks, the Sharpe ratio values all converge between 0.4 and 0.5.<br /></div>
778. <div>
779. <div style="font-size: small; font-weight: normal;">
780. This implies that a clear criterion for taking an underpinned investment decision is absent. Investors become indecisive and that's just the situation we're in mid 2015, where all we seem to have are </div>
781. <div style="font-size: small; font-weight: normal;">
782. <br /></div>
783. <div style="font-weight: normal;">
784. <br /></div>
785. <div style="font-weight: normal; text-align: center;">
786. <span style="color: #134f5c; font-size: large;">Investment Beliefs</span></div>
787. <div style="font-weight: normal;">
788. <br /></div>
789. <div style="font-weight: normal;">
790. <br /></div>
791. <div style="font-size: small; font-weight: normal;">
792. <br /></div>
793. <div style="font-size: small; font-weight: normal;">
794. Wrap up:</div>
795. <div style="font-size: small; font-weight: normal;">
796. <br /></div>
797. <div class="separator" style="clear: both; font-size: small; font-weight: normal; text-align: center;">
798. </div>
799. <div class="separator" style="clear: both; font-size: small; font-weight: normal; text-align: center;">
800. </div>
801. <div class="separator" style="clear: both; font-size: small; font-weight: normal; text-align: center;">
802. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgaTUfGyAgoWOf4XkO7SjG47KCnT3aRqn8pqUL6aTLBs1BUaDjAaw6HY0Yyr4y80m7LSLsVoIOMHEJ9AbLLpbeNY6FhUfEKT7RlDuTDWR5phgjFcbnxqW3UMCA4RV2YkHMUSz_t9_7rp_U/s1600/EFTAB1.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgaTUfGyAgoWOf4XkO7SjG47KCnT3aRqn8pqUL6aTLBs1BUaDjAaw6HY0Yyr4y80m7LSLsVoIOMHEJ9AbLLpbeNY6FhUfEKT7RlDuTDWR5phgjFcbnxqW3UMCA4RV2YkHMUSz_t9_7rp_U/s1600/EFTAB1.png" /></a></div>
803. <div style="font-size: small; font-weight: normal;">
804. <br /></div>
805. <div style="font-size: small;">
806. <div style="font-weight: normal;">
807. <br /></div>
808. <b><span style="color: #134f5c;">Return Analysis</span></b><br />
809. <div style="font-weight: normal;">
810. On top of, it's interesting to analyse how PF-B makes its return as opposite to PF-B.</div>
811. </div>
812. <div style="font-size: small; font-weight: normal;">
813. Without further comments, I'll give some illustrations. Make your own analysis with help of the Excel spreadsheet.</div>
814. <div style="font-size: small; font-weight: normal;">
815. <br /></div>
816. <div class="separator" style="clear: both; font-size: small; font-weight: normal; text-align: center;">
817. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_7EklNWL_UYhz4FbinJFJwD_vZhL1mTfngOG87aUnBWiYu9q0hJh9a9KOuqVKx1IKkMVKOrcdKhXELqypEnWyXFYm_bpEPuPLMlUDMpoUcwjcOGdMbEnTLxRKZ84DzZK69du-UsOcCgA/s1600/EF-analyse1.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_7EklNWL_UYhz4FbinJFJwD_vZhL1mTfngOG87aUnBWiYu9q0hJh9a9KOuqVKx1IKkMVKOrcdKhXELqypEnWyXFYm_bpEPuPLMlUDMpoUcwjcOGdMbEnTLxRKZ84DzZK69du-UsOcCgA/s1600/EF-analyse1.png" /></a></div>
818. <div style="font-size: small; font-weight: normal;">
819. As expected the PF-B performs better in the [9%,∞] segment. PF-A gets its returns in the [0%,9%] segment and quite surprisingly PF-B performs better in the [-5.25,0%] segment.....</div>
820. <div style="font-size: small; font-weight: normal;">
821. <br /></div>
822. <div style="font-size: small; font-weight: normal;">
823. <br /></div>
824. <div style="font-size: small; font-weight: normal;">
825. All this reasoning leads to a kind of 'informed decision' conclusion that in the current economic situation PF-B would be the best (preferred) strategy. However, there's another question to be answered....</div>
826. <div style="font-size: small; font-weight: normal;">
827. <br /></div>
828. <div style="font-size: small; font-weight: normal;">
829. Key question with regard to PF-B:</div>
830. <div style="font-size: small; font-weight: normal;">
831. <i><span style="color: #0b5394;"><b><br /></b></span></i>
832. </div>
833. <div style="font-size: small; font-weight: normal; text-align: center;">
834. <i><b><i><span style="color: #134f5c; font-size: 130%;"><b>Can you absorb the extra yearly volatility?</b> </span></i></b></i></div>
835. <div style="font-size: small; font-weight: normal;">
836. <br /></div>
837. <div style="font-size: small; font-weight: normal;">
838. <br /></div>
839. <div style="font-size: small; font-weight: normal;">
840. In 'normal'' regulatory frameworks, like Basel-III, Solvency-II and the upcoming 'Holistic Balance Sheet' for pension funds, the answer will mostly be:</div>
841. <div style="font-size: small; font-weight: normal;">
842. <i><b><span style="color: #0b5394; font-size: 130%;"><br /></span></b></i>
843. </div>
844. <div style="font-size: small; font-weight: normal; text-align: center;">
845. <i style="font-size: x-large;"><b><span style="color: #134f5c;">NO</span></b></i><span style="font-size: large;"> </span></div>
846. <div style="font-size: small; font-weight: normal;">
847. <br /></div>
848. <div style="font-size: small; font-weight: normal;">
849. <br /></div>
850. <div style="font-weight: normal;">
851. <div style="font-size: small;">
852. One of the big issues in all of these frameworks is that risk and solvency margins are defined on basis of a one year default probability. This leaves no room to absorb one year standard asset deviations of around 12%. A commonly used solution is to 'hedge' these risks 'away'. However, hedging has its price and introduces new (collateral, clearing, systemic) risks. Hedging 'one deep' could perhaps be a solution, but as the market changes, soon you'll be </div>
853. <div style="font-size: small;">
854. <br /></div>
855. <div style="text-align: center;">
856. <span style="color: #134f5c; font-size: large;">Hedged to Hedging...</span></div>
857. </div>
858. <div style="font-size: small; font-weight: normal;">
859. <br /></div>
860. <div style="font-size: small; font-weight: normal;">
861. A better approach than hedging or the alternative of deleveraging balance sheets, would be to adapt and redesign our regulatory frameworks to the long term scope of financial institutions. This could be done by stretching the 'one year default criterion' to an 'n-year default criterion', where "n" is in line with a financial institution's ability to timely readjust company's liabilities and assets.</div>
862. <div style="font-size: small; font-weight: normal;">
863. <br /></div>
864. <div style="font-size: small; font-weight: normal;">
865. For a mortgage bank, a life insurer, "n" could in the order of 5 years. In case of a pension fund, "n" could vary between 5 and 10 years.</div>
866. <div style="font-size: small; font-weight: normal;">
867. <br /></div>
868. <div style="font-size: small; font-weight: normal;">
869. In this approach, the current different 'one year default probabilities'</div>
870. <div style="font-size: small; font-weight: normal;">
871. <br /></div>
872. <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse; font-size: small; font-weight: normal; width: 285px;">
873. <colgroup><col style="mso-width-alt: 5705; mso-width-source: userset; width: 117pt;" width="156"></col>
874. <col style="mso-width-alt: 4717; mso-width-source: userset; width: 97pt;" width="129"></col>
875. </colgroup><tbody>
876. <tr height="20" style="height: 15.0pt;">
877.  <td height="20" style="height: 15.0pt; width: 117pt;" width="156"><i><u><span style="color: #0b5394;">Financial
878.  Institution</span></u></i></td>
879.  <td style="width: 97pt;" width="129"><i><u><span style="color: #0b5394;">Default Probability</span></u></i></td>
880. </tr>
881. <tr height="20" style="height: 15.0pt;">
882.  <td height="20" style="height: 15.0pt;">Banks</td>
883.  <td align="right" class="xl66">99.90%</td>
884. </tr>
885. <tr height="20" style="height: 15.0pt;">
886.  <td height="20" style="height: 15.0pt;">Insurers</td>
887.  <td align="right" class="xl66">99.50%</td>
888. </tr>
889. <tr height="20" style="height: 15.0pt;">
890.  <td height="20" style="height: 15.0pt;">Pension Funds (Dutch)</td>
891.  <td align="right" class="xl66">97.50%</td>
892. </tr>
893. </tbody></table>
894. <div style="font-size: small; font-weight: normal;">
895. <br /></div>
896. <div style="font-size: small; font-weight: normal;">
897. could be replaced by one uniform default probabilities of (say) 99.9% for n-years.</div>
898. <div style="font-size: small; font-weight: normal;">
899. <br /></div>
900. <div style="font-size: small; font-weight: normal;">
901. Here's the wrap up outcome for a 5 year average:</div>
902. <div style="font-size: small; font-weight: normal;">
903. <br /></div>
904. <div class="separator" style="clear: both; font-size: small; font-weight: normal; text-align: center;">
905. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj84EKfjZ5Y8xzNjpto-i-9Wj8URuuaVuTTaKIPtuGk9QvdoO_iIGowUvcC16MyR0gf5Mfc9BjlWUP-IvyCqiYFo7u_qW-Ehdxt-eKsGv7WkBsq6oRWdjvpbg8uSGbUptDhbRdJ6yrRAs8/s1600/EFTAB2.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj84EKfjZ5Y8xzNjpto-i-9Wj8URuuaVuTTaKIPtuGk9QvdoO_iIGowUvcC16MyR0gf5Mfc9BjlWUP-IvyCqiYFo7u_qW-Ehdxt-eKsGv7WkBsq6oRWdjvpbg8uSGbUptDhbRdJ6yrRAs8/s1600/EFTAB2.png" /></a></div>
906. <div style="font-size: small; font-weight: normal;">
907. <br /></div>
908. <div style="font-size: small; font-weight: normal;">
909. Notice that the expected average 5-year risk (standard deviation) has declined from 12.8% to 5.7% (= 12.8/ (<span style="color: #545454; font-family: arial, sans-serif; font-size: x-small;"><span style="line-height: 14.5600004196167px;">√ </span></span>5)). This would roughly (rule of thumb) reduce capital requirements to a level of 19% (=5.7*<a href="http://financetrain.com/topic/confidence-interval-population-mean-known-population-variance/">3.27</a>) of the balance sheet net-total, which is of course still substantial.</div>
910. <div style="font-size: small; font-weight: normal;">
911. <br /></div>
912. <div style="font-size: small; font-weight: normal;">
913. <br /></div>
914. <div style="font-size: small;">
915. <b><u><span style="color: #134f5c;">Conclusions</span></u></b></div>
916. <div style="font-size: small; font-weight: normal;">
917. Low interest rates force financial institutions and regulators to rethink and redesign their business model. <br /><br />Regulatory default rates have to be uniformed and the regulatory (EIOPA) system of 'one year default rates' has to be extended to a 'n-year default approach', where "n" is in line with a financial institution's ability to timely readjust company's liabilities, assets and capital.</div>
918. <div style="font-size: small; font-weight: normal;">
919. <br /></div>
920. <div style="font-size: small; font-weight: normal;">
921. After all these technical adjustments, also our investment models and methods have to be redesigned. Models, like demonstrated in this blog, that only rely on past observations are too limited for sound investment analysis. <br /><br />Traditional investment models cannot cope with current market conditions and lead to indecisiveness or the next best alternative : 'Investment Beliefs'.<br /><br />We have to develop models where we can risk risk...<br /><br />How can we build more expressive models? Well, that's something for my next blog.....</div>
922. <div style="font-size: small; font-weight: normal;">
923. <br />
924. Until then.... Keep believing...<br />
925. <br />
926. <iframe allowfullscreen="" frameborder="0" height="270" src="https://www.youtube.com/embed/G_ycWN9vg6Q" width="480"></iframe>
927.  
928. <br />
929. <br />
930. <br />
931. <u>Links</u><br />
932. - <a href="https://sites.google.com/site/boooming/Home/Blog-Actuary-Info%20Asset-Mix-Devils%20Dilemma-20141229-1.xlsx">Excel Spreadsheet Risk Analysis Portfolios</a></div>
933. <div style="font-size: small; font-weight: normal;">
934. <br /></div>
935. </div>
936. </div>
937. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/1510087396030458344/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2015/04/indecisiveness-risk-of-risk.html#comment-form' title='2 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/1510087396030458344'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/1510087396030458344'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2015/04/indecisiveness-risk-of-risk.html' title='Indecisiveness: the Risk of Risk'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_Lnk85jQS0oM44FibTjJRxxqHx0GPz3W9JDMzA8jP4hrWPH-LD2OPPukKwEyoWtN9dLH5pPBNDiIQ3O0qb8U3gEEAghcUhlI96kXW8c1xEyX2XIW5YDPg_KWzziseVERui5cn7msMI-c/s72-c/EF-EXAMPLE1.png" height="72" width="72"/><thr:total>2</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-7032566808946714660</id><published>2015-01-01T19:40:00.004+01:00</published><updated>2015-01-01T19:40:33.162+01:00</updated><title type='text'>2015? Happy Binary!</title><content type='html'>&lt;div style=&quot;background-color: white; font: small Georgia,Serif; width: 490px;&quot;&gt;
938. </div>
939. <div class="separator" style="clear: both; text-align: center;">
940. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjkk4jl1Z9YPQGadZoA2aKRin6KaSoIJKp_VnedzR6KYiy23fqIMOnx39ruIef5bVmA4YjHRMtIiYmjqA-qVSV52ObOHkbmvVtoe_k_mYNxhtnkhb1_mOEO82QeQCVaCXHYL9Khb67bl7Q/s1600/happy-2015.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjkk4jl1Z9YPQGadZoA2aKRin6KaSoIJKp_VnedzR6KYiy23fqIMOnx39ruIef5bVmA4YjHRMtIiYmjqA-qVSV52ObOHkbmvVtoe_k_mYNxhtnkhb1_mOEO82QeQCVaCXHYL9Khb67bl7Q/s320/happy-2015.png" width="490" /></a></div>
941. <br />
942. <div class="separator" style="clear: both; text-align: center;">
943. </div>
944. <br />
945. &lt;a href=&quot;http://dft.ba/-binary-convert&quot;&gt;Solution?&lt;/a&gt;</content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/7032566808946714660/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2015/01/2015-happy-binary.html#comment-form' title='1 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/7032566808946714660'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/7032566808946714660'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2015/01/2015-happy-binary.html' title='2015? Happy Binary!'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjkk4jl1Z9YPQGadZoA2aKRin6KaSoIJKp_VnedzR6KYiy23fqIMOnx39ruIef5bVmA4YjHRMtIiYmjqA-qVSV52ObOHkbmvVtoe_k_mYNxhtnkhb1_mOEO82QeQCVaCXHYL9Khb67bl7Q/s72-c/happy-2015.png" height="72" width="72"/><thr:total>1</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-1837113804002125121</id><published>2014-12-30T13:13:00.004+01:00</published><updated>2014-12-30T13:15:54.916+01:00</updated><title type='text'>Human Development Index 1980 - 2013</title><content type='html'>&lt;div style=&quot;background-color: white; font: small Georgia,Serif; width: 490px;&quot;&gt;
946. Now that the year 2014 is coming to an end, let's take a look at the Human Development Index (HDI) over the years 1980 - 2014.<br />
947. <br />
948. <a href="http://www.investopedia.com/terms/h/human-development-index-hdi.asp">DEFINITION OF 'HUMAN DEVELOPMENT INDEX</a><br />
949. The HDI is a tool developed by the United Nations to measure and rank countries' levels of social and economic development.<br />
950. <br />
951. The HDI is based on four criteria:<br />
952. <br />
953. <ol style="margin: 3px 2px 3px 23px; padding: 0px;">
954. <li>Life expectancy at birth </li>
955. <li>Mean years of schooling </li>
956. <li>Expected years of schooling </li>
957. <li>Gross national income per capita. </li>
958. </ol>
959. <br />
960. <br />
961. The HDI makes it possible to track changes in development levels over time and to compare development levels in different countries.
962.  
963.  
964. <br />
965. <br />
966. How does your country rank on HDI?<br />
967. <br />
968. Wish you all a nice Sylvester evening tomorrow!<br /><br />
969. <iframe frameborder="0" height="490" marginheight="0" marginwidth="0" scrolling="no" src="http://www.google.com/publicdata/embed?ds=bqed7l430i2r6_&ctype=b&strail=false&bcs=d&nselm=s&met_x=indicator_137506&scale_x=lin&ind_x=false&met_y=indicator_103606&scale_y=lin&ind_y=false&idim=country:14503:4103:9203:7703:2703:3:17203&ifdim=country&tunit=Y&pit=346978800000&hl=en_US&dl=en_US&ind=false&icfg=bqed7l430i2r6_%253A7%253Acountry%26%2615703:10:-28:%7Cbqed7l430i2r6_%253A7%253Acountry%26%2618803:8:-31:%7Cbqed7l430i2r6_%253A7%253Acountry%26%2610103:9:-29:" width="490"></iframe>
970.  
971. &lt;/div&gt;</content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/1837113804002125121/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2014/12/human-development-index-1980-2013.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/1837113804002125121'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/1837113804002125121'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2014/12/human-development-index-1980-2013.html' title='Human Development Index 1980 - 2013'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><thr:total>0</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-4330918210436411390</id><published>2014-12-21T22:29:00.001+01:00</published><updated>2014-12-21T22:29:56.136+01:00</updated><category scheme="http://www.blogger.com/atom/ns#" term="communication"/><category scheme="http://www.blogger.com/atom/ns#" term="test"/><title type='text'>Actuarial Readability</title><content type='html'>&lt;div style=&quot;background-color: white; font-stretch: normal; width: 490px;&quot;&gt;
972. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
973. As an actuary, accountant or financial consultant, deep knowledge, expert skills and experience are key to writing an interesting article or paper advice.</div>
974. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
975. <br /></div>
976. <div class="separator" style="clear: both; float: right; font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; text-align: center;">
977. <a href="http://www.slideshare.net/IrHakimi/economy-with-words" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFmPSXMbsVmxs96uE8CHIsjYwidGCdu9QIBIGcV7jnoBs8F6xFNsDgHJZO_ZsRIVgD7NMN5Xk00byEpdJbGbjK7m1BHxUZBr4oFk1erumkU6DQB1jZ2FEVz49NkM8BcXCtzGIwU4KTcUM/s1600/words.png" height="140" width="200" /></a></div>
978. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
979. However, no matter how much you're an expert, finally you're as good as you can get your message across to your audience.</div>
980. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
981. <br /></div>
982. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
983. The art of the expert is to simplify the complexity of his/her research into simple, and for the audience understandable text.</div>
984. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
985. <br /></div>
986. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
987. In practice this implies that the expert will have to measure the readability of his papers before publishing.</div>
988. <div class="separator" style="clear: both; font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; text-align: center;">
989. </div>
990. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
991. <br /></div>
992. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
993. The two most important issues to tackle are 'readability' and 'text-level'.</div>
994. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
995. <br /></div>
996. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
997. Although there are many sorts of tests, both topics are simply covered by the so called  <a href="http://en.wikipedia.org/wiki/Flesch-Kincaid_Readability_Test" target="_blank">Flesch-Kincaid Readability Test</a>.</div>
998. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
999. <br /></div>
1000. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1001. Let's take a look ate the two simple test formulas of this test:</div>
1002. <center style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1003. <br /><br /><table bg="bg" cellpadding="8" clear="ALL" style="border-color: rgb(80, 0, 80); border-style: outset; color: beige; font-family: verdana; font-size: 10pt; width: 440px;" valign="TOP"><tbody>
1004. <tr><td width="440"><br />
1005. <center>
1006. <span style="color: darkblue;"><a href="http://www.measurementexperts.org/term_pop.asp?ID=112" target="_blank"><big><b><u>Flesch-Kincaid Readability Test</u></b></big></a></span></center>
1007. <br />
1008. <br />
1009. <br />
1010. <center>
1011. <u><b style="color: maroon;">Flesch Reading Ease Score</b></u><br /><span style="color: #20124d;"><br /><b>FRES = 206.835 – (1.015 x ASL) – (84.6 x ASW)</b></span><br /><br /><br /><u><b style="color: maroon;">Flesch-Kincaid Grade Level</b></u><br /><span style="color: #20124d;"><br /><b>FKGL = (0.39 x ASL) + (11.8 x ASW) – 15.59</b></span></center>
1012. <span style="color: #20124d;"><br /></span>
1013. <br />
1014. With:<br />
1015. <span style="color: grey; font-family: verdana; font-size: 8;">ASL  = average sentence length</span><br />
1016. <span style="color: grey; font-family: verdana; font-size: 8;">number of words divided by the number of sentences</span><br />
1017. <span style="color: grey; font-family: verdana; font-size: 8;"><br />ASW = average number of syllables per word</span><br />
1018. <span style="color: grey; font-family: verdana; font-size: 8;">number of syllables divided by number of words</span></td></tr>
1019. </tbody></table>
1020. </center>
1021. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1022. <br /></div>
1023. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1024. <br /></div>
1025. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1026. Texts with a FRES-score of 90-100 are easily understandable by an average 5th grader and scores between 0 and 30 are best understood by college graduates.</div>
1027. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1028. <br /></div>
1029. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1030. Some examples of readability index scores of magazines:</div>
1031. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1032. - Reader's Digest Magazine: FRES = 65</div>
1033. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1034. - Time magazine: FRES = 52</div>
1035. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1036. - Harvard Law Review: FRES = 30</div>
1037. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1038. <br /></div>
1039. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1040. The FRES-test has become a U.S. governmental standard. Many government agencies require documents or forms to meet specific readability levels. Most states require insurance forms to score 40-50 on the test.</div>
1041. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1042. <br /></div>
1043. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1044. <br /></div>
1045. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1046. <b><u><span style="color: #073763;">Where to test your documents?</span></u></b></div>
1047. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1048. It's easy to <a href="https://readability-score.com/" target="_blank">test your text online</a> or even in a <a href="https://support.office.com/en-au/article/Test-your-document-s-readability-85b4969e-e80a-4777-8dd3-f7fc3c8b3fd2" target="_blank">Microsoft Word-Document</a>.</div>
1049. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1050. <br /></div>
1051. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1052. Besides matching the FRES and FKTL scores in your document, as a guideline try to establish the next English text-test-characteristics</div>
1053. <ul style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1054. <li>Average sentence length 15-20 words, 25-33 syllables and 75-100 characters.</li>
1055. <li>Characters per word: < 7</li>
1056. <li>Syllables per word: 1.5 - 2.0</li>
1057. <li>Words per sentence: 15 - 20</li>
1058. </ul>
1059. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1060. <br /></div>
1061. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1062. This blog text resulted in scores: </div>
1063. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1064. - Flesch-Kincaid Reading Ease 64.7</div>
1065. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1066. - Flesch-Kincaid Grade Level<span class="Apple-tab-span" style="white-space: pre;"> </span>7.2</div>
1067. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1068. - Characters per Word 4.4</div>
1069. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1070. - Syllables per Word 1.5</div>
1071. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1072. - Words per Sentence 11.8</div>
1073. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1074. <br /></div>
1075. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1076. <b><u><span style="color: #073763;"><br /></span></u></b>
1077. <b><u><span style="color: #073763;">Example</span></u></b></div>
1078. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1079. As an example we test the readability of one of the articles of the <a href="https://www.soa.org/Library/Essays/inv-essay-ebook-fallacies-2014-toc.aspx" target="_blank">Investment Fallacies e-book</a>, as published by the Society of Actuaries (SOA) : </div>
1080. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1081. <br /></div>
1082. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1083. <i><a href="https://www.soa.org/library/essays/inv-ebook-2014-rudolph.pdf" target="_blank">The Best Model Doesn’t Win</a></i>.</div>
1084. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1085. By Max J. Rudolph, published in 2014</div>
1086. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1087. <br /></div>
1088. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1089. The readability outcome is as follows:</div>
1090. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1091. <br /></div>
1092. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1093. <br /></div>
1094. <div id="stats" style="border-color: rgb(80, 0, 80); border: 1px solid darkblue; font-family: verdana; font-size: 10pt; padding: 10px; width: 430px;">
1095. <span style="font-size: 120%;"><u><b><span style="color: #660000;">Readability Score 'The Best Model Doesn’t Win'</span></b></u></span><br />
1096. <br />
1097. <b><u><span style="color: #073763; font-size: 130%;">Reading Ease</span></u></b><br />
1098. A higher score indicates easier readability; scores usually range between 0 and 100.<br />
1099. <table border="0" cellpadding="5" cellspacing="0">
1100.  
1101.                <tbody>
1102. <tr>
1103.                    <th style="width: 75%;"><div style="text-align: justify;">
1104. <span style="color: #073763;"><u><br />Readability Formula</u></span></div>
1105. </th>
1106.                    <th style="width: 25%;"><div style="text-align: justify;">
1107. <span style="color: #073763;"><u>Score</u></span></div>
1108. </th>
1109.                </tr>
1110. <tr>
1111.                    <td><div style="text-align: justify;">
1112. <a href="http://en.wikipedia.org/wiki/Flesch-Kincaid#Flesch_Reading_Ease" target="_blank">Flesch-Kincaid Reading Ease</a></div>
1113. </td>
1114.                    <td id="flesch_kincaid_reading_ease"><div style="text-align: justify;">
1115. 48.1</div>
1116. </td>
1117.                </tr>
1118. </tbody></table>
1119. </div>
1120. <div id="stats" style="border-color: rgb(80, 0, 80); border: 1px solid darkblue; font-family: verdana; font-size: 10pt; padding: 10px; width: 430px;">
1121. <b><u><span style="color: #073763; font-size: 130%;"><br />Grade Levels</span></u></b><br />
1122. A grade level (based on the USA education system) is equivalent to the number of years of education a person has had. Scores over 22 should generally be taken to mean graduate level text.<br />
1123. <br />
1124. <table border="0" cellpadding="5" cellspacing="0" style="text-align: left;">
1125.  
1126.                <tbody>
1127. <tr>
1128.                    <th style="width: 75%;"><div style="text-align: left;">
1129. <u><span style="color: #073763;">Readability Formula</span></u></div>
1130. </th>
1131.                    <th style="width: 25%;"><div style="text-align: left;">
1132. <u><span style="color: #073763;">Grade</span></u></div>
1133. </th>
1134.                </tr>
1135. <tr>
1136.                    <td><div style="text-align: left;">
1137. <a href="http://en.wikipedia.org/wiki/Flesch-Kincaid#Flesch.E2.80.93Kincaid_Grade_Level" target="_blank">Flesch-Kincaid Grade Level</a></div>
1138. </td>
1139.                    <td id="flesch_kincaid_grade_level"><div style="text-align: left;">
1140. 10.3</div>
1141. </td>
1142.                </tr>
1143. <tr>
1144.                    <td><div style="text-align: left;">
1145. <a href="http://en.wikipedia.org/wiki/Gunning-Fog_Index" target="_blank">Gunning-Fog Score</a></div>
1146. </td>
1147.                    <td id="gunning_fog_score"><div style="text-align: left;">
1148. 12.9</div>
1149. </td>
1150.                </tr>
1151. <tr>
1152.                    <td><div style="text-align: left;">
1153. <a href="http://en.wikipedia.org/wiki/Coleman-Liau_Index" target="_blank">Coleman-Liau Index</a></div>
1154. </td>
1155.                    <td id="coleman_liau_index"><div style="text-align: left;">
1156. 14.2</div>
1157. </td>
1158.                </tr>
1159. <tr>
1160.                    <td><div style="text-align: left;">
1161. <a href="http://en.wikipedia.org/wiki/SMOG_Index" target="_blank">SMOG Index</a></div>
1162. </td>
1163.                    <td id="smog_index"><div style="text-align: left;">
1164. 9.5</div>
1165. </td>
1166.                </tr>
1167. <tr>
1168.                    <td><div style="text-align: left;">
1169. <a href="http://en.wikipedia.org/wiki/Automated_Readability_Index" target="_blank">Automated Readability Index</a></div>
1170. <div style="text-align: left;">
1171. __________________________</div>
1172. </td>
1173.                    <td id="automated_readability_index"><div style="text-align: left;">
1174. 10.2</div>
1175. <div style="text-align: left;">
1176. ____</div>
1177. </td>
1178.                </tr>
1179. <tr>
1180.                    <td><div style="text-align: left;">
1181. <strong><span style="color: #073763;">Average Grade Level</span></strong></div>
1182. </td>
1183.                    <td><div style="text-align: left;">
1184. <strong id="average_grade_level"><span style="color: #073763;">11.4</span></strong></div>
1185. </td>
1186.                </tr>
1187. </tbody></table>
1188. </div>
1189. <div id="stats" style="border-color: rgb(80, 0, 80); border: 1px solid darkblue; font-family: verdana; font-size: 10pt; padding: 10px; width: 430px;">
1190. <br />
1191. <b><u><span style="color: #073763; font-size: 130%;">Text Statistics</span></u></b><br />
1192. <table border="0" cellpadding="5" cellspacing="0" class="last_table">
1193.                <tbody>
1194. <tr>
1195.                    <td style="width: 75%;">Character Count</td>
1196.                    <td id="letter_count" style="width: 25%;">7,611</td>
1197.                </tr>
1198. <tr>
1199.                    <td>Syllable Count</td>
1200.                    <td id="syllable_count">2,531</td>
1201.                </tr>
1202. <tr>
1203.                    <td>Word Count</td>
1204.                    <td id="word_count">1,495</td>
1205.                </tr>
1206. <tr>
1207.                    <td>Sentence Count</td>
1208.                    <td id="sentence_count">98</td>
1209.                </tr>
1210. <tr>
1211.                    <td>Characters per Word</td>
1212.                    <td id="letters_per_word">5.1</td>
1213.                </tr>
1214. <tr>
1215.                    <td>Syllables per Word</td>
1216.                    <td id="syllables_per_word">1.7</td>
1217.                </tr>
1218. <tr>
1219.                    <td>Words per Sentence</td>
1220.                    <td id="words_per_sentence">15.3</td>
1221.                </tr>
1222. </tbody></table>
1223. </div>
1224. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1225. <br /></div>
1226. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1227. <b><u><span style="color: #073763;"><br /></span></u></b></div>
1228. <div style="font-family: Georgia, serif; font-size: small;">
1229. <b><u><span style="color: #073763;">Actuarial Texts</span></u></b></div>
1230. <div style="font-family: Georgia, serif; font-size: small;">
1231. With regard to public financial or actuarial publications a FRES-score of around 50 assures, that your publication reaches a wide audience. Even in case you're publishing an article at university level, try to keep the FRES-score as high as possible.</div>
1232. <div style="font-family: Georgia, serif; font-size: small;">
1233. <br /></div>
1234. <div style="font-family: Georgia, serif; font-size: small;">
1235. If you write an academic paper, you may use the online application <a href="http://www.wordandphrase.info/analyzeText.asp" target="_blank">Word and Phrase</a> to measure the percentage of academic words. Try to keep this percentage below 20% to keep your document readable. The publication 'The Best Model Doesn’t Win' would score 17% on academic words......</div>
1236. <div>
1237. <br /></div>
1238. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1239. <b><u><span style="color: #073763;"><br /></span></u></b></div>
1240. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1241. <b><u><span style="color: #073763;">Finally</span></u></b></div>
1242. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1243. Next time you write a document or make a PPT presentation, don't forget to</div>
1244. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1245. <br /></div>
1246. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; text-align: center;">
1247. <a href="https://readability-score.com/" target="_blank">Test Your Documents's Readability</a></div>
1248. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1249. <br /></div>
1250. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; text-align: center;">
1251. <a href="http://www.wordandphrase.info/analyzeText.asp" target="_blank">Measure the Percentage of Academic Words</a></div>
1252. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1253. <u><br /></u></div>
1254. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1255. <u><br /></u></div>
1256. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1257. <u>Links:</u></div>
1258. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1259. - <a href="https://readability-score.com/" target="_blank">Test your text online</a></div>
1260. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1261. - <a href="https://support.office.com/en-au/article/Test-your-document-s-readability-85b4969e-e80a-4777-8dd3-f7fc3c8b3fd2" target="_blank">Readability of a Microsoft Word-Document</a></div>
1262. <span style="font-family: Georgia, serif; font-size: x-small;">- </span><span style="font-family: Georgia, serif; font-size: x-small;"><a href="http://www.wordandphrase.info/analyzeText.asp" target="_blank">WORD AND PHRASE</a></span><br />
1263. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1264. - <a href="https://strainindex.wordpress.com/2008/07/28/the-average-sentence-length/" target="_blank">The Average Sentence Length</a><br />
1265. - <a href="file:///C:/Users/berkemeijer/Downloads/Mathworks_Readability_Report_2012.pdf" target="_blank">Results of Readability Tests for Mathworks Math Explorations Textbooks </a><br />
1266. - <a href="http://www.renaissance.com/products/accelerated-reader/atos-analyzer" target="_blank">ATOS Text Level Analyzer</a><br />
1267. - <a href="http://www.online-utility.org/english/readability_test_and_improve.jsp" target="_blank">Readability Calculator</a></div>
1268. </div>
1269. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/4330918210436411390/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2014/12/actuarial-readability.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/4330918210436411390'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/4330918210436411390'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2014/12/actuarial-readability.html' title='Actuarial Readability'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFmPSXMbsVmxs96uE8CHIsjYwidGCdu9QIBIGcV7jnoBs8F6xFNsDgHJZO_ZsRIVgD7NMN5Xk00byEpdJbGbjK7m1BHxUZBr4oFk1erumkU6DQB1jZ2FEVz49NkM8BcXCtzGIwU4KTcUM/s72-c/words.png" height="72" width="72"/><thr:total>0</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-7049687273612549999</id><published>2014-11-09T23:59:00.002+01:00</published><updated>2014-11-10T00:08:34.562+01:00</updated><title type='text'>Retirement Age Development</title><content type='html'>&lt;div style=&quot;background-color: white; font: small Georgia,Serif; width: 490px;&quot;&gt;
1270. Due to the continuous ageing process and a strong ongoing growth of life expectancy, countries need to increase their formal retirement age.<br />
1271. <br />
1272. Actuarial calculations show  in general that - in order to keep pensions affordable - the formal pension age for future generations will eventually have to increase to the age of 71 or even 75 years.<br />
1273. <br />
1274. However, lifting up the retirement age is not an easy process, as people have grown up with the concept of a steady retirement date, all their life. As if 'work is slavery' and life only really starts at your pension date, when you abruptly stop working and live a life behind the window of your apartment...<br />
1275. <br />
1276. However <i>THE</i> pension date doesn't exist, it's an illusion, a fata morgana...<br />
1277. <br />
1278. <div class="separator" style="clear: both; float: left; text-align: center;">
1279. <a href="http://heri-shinato.deviantart.com/art/The-Tower-beyond-desert-horizon-329310441" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiow7qZ6RUOyzxb2Ex4IAwocaVGJsojQeCyh2yUhM9PuHfy0QnpKyhYq6m3v0wj6nHAvIIheOcAZBMImMEIUpmhpzmWLX3StL7reN8Bh1z3E8jW_5AdpEynxgY5faF0w1x-nRZMj1T4TZQ/s1600/pension-fata-morgana.png" width="490" /></a></div>
1280. <br />
1281. <br />
1282. Not only that retirement increases the <a href="http://www.eief.it/files/2014/09/wp-09-unhealthy-retirement.pdf" target="_blank">age-related decline of health</a> and cognitive abilities for most workers, it also increases your mortality rate, as a RP-2000 Mortality Study shows:<br />
1283. <br />
1284. <div class="separator" style="clear: both; float: left; text-align: center;">
1285. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIEIVqx1kbeLuA2ASWHBTsqTtHGMVX20RFJEjs_-q7HNUCwxkz_U7_BiVtyoJWVHZX5fISDwcPU_6grzTJCIKTbRyBl3NFoUySm4mHaaYm6ZKQropc3Pn-iFZTcJOteh0LTqepj_-aNoQ/s1600/working-vs-not-working-full.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIEIVqx1kbeLuA2ASWHBTsqTtHGMVX20RFJEjs_-q7HNUCwxkz_U7_BiVtyoJWVHZX5fISDwcPU_6grzTJCIKTbRyBl3NFoUySm4mHaaYm6ZKQropc3Pn-iFZTcJOteh0LTqepj_-aNoQ/s1600/working-vs-not-working-full.jpg" width="490" /></a></div>
1286. <br />
1287. Secondly, nobody - not even an actuary - can predict the outcome of a pension plan over a period of 60-70 years. Pension dates and and long term pension outcomes are by definition unsure.<br />
1288. <br />
1289. <b><u><span style="color: #073763;">OECD Retirement Ages</span></u></b><br />
1290. What we <i>can</i> do is keeping the retirement age in pace with the development of our life expectation. This is exactly what some OECD countries have done, as the next chart shows:<br />
1291. <br />
1292. <div class="separator" style="clear: both; float: left; text-align: center;">
1293. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQepM-fscMzo02duYrsVzZOj7803hcrDRP3jCjE4HTzkd4ZOtZqD-UlYlxkxcFglnTzEw8h-rKB_1vRzKsXF2xp5EJMJgd3kqVwVJq1GKMP85VYzFF7k61N7_UvbnHxmpDC0y5Fl9F5Ls/s1600/retirement-age.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQepM-fscMzo02duYrsVzZOj7803hcrDRP3jCjE4HTzkd4ZOtZqD-UlYlxkxcFglnTzEw8h-rKB_1vRzKsXF2xp5EJMJgd3kqVwVJq1GKMP85VYzFF7k61N7_UvbnHxmpDC0y5Fl9F5Ls/s1600/retirement-age.png" width="490" /></a></div>
1294. <br />
1295. Of  course, the optimal retirement planning depends on several economic en demographic developments in a country.<br />
1296. <br />
1297. <div class="separator" style="clear: both; float: left; text-align: center;">
1298. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbaK3hJDiUhH4-dQafmokGbj2njD1NiKG7YDZF49PaKOFVrwl4BaiblkywCwZZ1fSCVNwBMHtFUlfg-XE761K0uusYDVmePiIbtj0_6OX1cevqwOTIVOn1QSzIZ0G93QyK1ZWqanHvfoM/s1600/compare-nl-oecd.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbaK3hJDiUhH4-dQafmokGbj2njD1NiKG7YDZF49PaKOFVrwl4BaiblkywCwZZ1fSCVNwBMHtFUlfg-XE761K0uusYDVmePiIbtj0_6OX1cevqwOTIVOn1QSzIZ0G93QyK1ZWqanHvfoM/s1600/compare-nl-oecd.png" width="490" /></a></div>
1299. <br />
1300. On the <a href="http://www.oecd.org/pensions/pensionsataglance.htm#.VF_IQ6u1XKQ.twitter" target="_blank">OECD page</a> you can play and compare several pension-related variables across different countries.<br />
1301. <br />
1302. Enjoy playing and learning from these OECD data.<br />
1303. <br />
1304. <u>Links</u><br />
1305. - <a href="http://www.eief.it/files/2014/09/wp-09-unhealthy-retirement.pdf" target="_blank">Unhealthy Retirement (2014)</a><br />
1306. - <a href="http://www.cbsnews.com/news/does-working-longer-increase-your-lifespan/" target="_blank">Does working longer increase your lifespan? (2010)</a>
1307.  
1308. <br />
1309. - <a href="http://www.oecd.org/pensions/pensionsataglance.htm#.VF_IQ6u1XKQ.twitter" target="_blank">OECD Page</a></div>
1310. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/7049687273612549999/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2014/11/retirement-age-development.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/7049687273612549999'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/7049687273612549999'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2014/11/retirement-age-development.html' title='Retirement Age Development'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiow7qZ6RUOyzxb2Ex4IAwocaVGJsojQeCyh2yUhM9PuHfy0QnpKyhYq6m3v0wj6nHAvIIheOcAZBMImMEIUpmhpzmWLX3StL7reN8Bh1z3E8jW_5AdpEynxgY5faF0w1x-nRZMj1T4TZQ/s72-c/pension-fata-morgana.png" height="72" width="72"/><thr:total>0</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-494444241494979873</id><published>2014-10-06T01:17:00.000+02:00</published><updated>2014-10-06T17:22:27.762+02:00</updated><category scheme="http://www.blogger.com/atom/ns#" term="Nerd"/><category scheme="http://www.blogger.com/atom/ns#" term="Stereotypes"/><title type='text'>Future Role of THE Actuary</title><content type='html'>&lt;div style=&quot;background-color: white; width: 490px;&quot;&gt;
1311. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1312. To quote a leading Dutch actuary (<a href="https://twitter.com/actuva" target="_blank">Jeroen Tuijp</a>):</div>
1313. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1314. </div>
1315. <h3 style="font-family: Georgia, serif; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; text-align: center;">
1316. <br />
1317. <b><span style="color: #990000; font-size: large;"><i>THE</i> Actuary doesn't Exist!</span></b></h3>
1318. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1319. <br />
1320. But what is, or could be the role of an actuary in the next decade?</div>
1321. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1322. <br /></div>
1323. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; line-height: normal;">
1324. <b><u><span style="color: #073763;">Perception: What's an actuary?</span></u></b></div>
1325. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1326. The answer to the question "What's an Actuary?", strongly depends on <i>who</i> you are asking.</div>
1327. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1328. <br /></div>
1329. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1330. Some examples of possible answers:</div>
1331. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1332. <br /></div>
1333. <ul style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; margin: 3px 2px 3px 18px; padding: 0px;">
1334. <li><u>Accountant</u>: An Actuary helps to estimate and understand discounting the assets and liabilities</li>
1335. <li><u>Board Member</u>: My Actuary is my premium and liability adequacy advisor, he manages risk</li>
1336. <li><u>Risk Manager</u>: Our Actuary helps me to identify hidden risks and estimate embedded options</li>
1337. <li><u>Investment Manager</u>: Our Actuary helps me to define ALM and investment models</li>
1338. <li><u>Administration Officer</u>: I ask our Actuary for advice on how to administrate in an efficient way</li>
1339. <li><u>ICT Manager</u>: The actuary is responsible for defining the equations in our system</li>
1340. <li><u>Marketing Manager</u>: Our actuary is the driving force behind product development</li>
1341. <li><u>Supervisory Board Member</u>: Our Actuary is the lock on the door</li>
1342. </ul>
1343. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1344. <br /></div>
1345. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1346. The perception of the professional  contribution of an actuary not only depends on the view in the eye of the beholder, but also on the wide variety of roles that actuaries fill in all kind of organisations.</div>
1347. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1348. <br /></div>
1349. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1350. Some examples of the endless list of the many different (actuarial) roles and positions that actuaries fill in:</div>
1351. <ol style="font-family: Georgia, serif; font-size: small; font-variant: normal; font-weight: normal; line-height: normal; margin: 3px 2px 3px 23px; padding: 0px;">
1352. <li style="font-style: normal;">Certifying Actuary, Advisory Actuary, Valuation Actuary</li>
1353. <li style="font-style: normal;">Pension Actuary, Investment Actuary, General Insurance Actuary, Health Actuary, Life Actuary, Claims Actuary, Public Pension Actuary, Reinsurance Actuary</li>
1354. <li style="font-style: normal;">Risk Manager, Capital & Solvency (II) Manager, </li>
1355. <li style="font-style: normal;">Marketing Manager, Head Product Development, Head Financial Control</li>
1356. <li>CEO, COO, CFO, CIO, CRO, C<i>XX </i></li>
1357. </ol>
1358. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1359. <br /></div>
1360. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1361. On top of, the actuarial work field comprises a list of detailed professional disciplines, such as:</div>
1362. <ul style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; margin: 3px 2px 3px 18px; padding: 0px;">
1363. <li>Regulation: Solvency (II) , Basel,</li>
1364. <li>Technical Life Topics: Mortality, Longevity, Healthy Life years, </li>
1365. <li>Technical Non-Life Topics: Car & House Insurance, Catastrophe Risk, Health Insurance, </li>
1366. <li>Investment Topics: ALM, Risk Return Policies, Tail Risks, Economic Risks</li>
1367. <li>Long list: Compliance, Resilience, Tax, Ethics, Financial Reporting,  Reinsurance, etc...</li>
1368. </ul>
1369. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1370. <br /></div>
1371. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1372. All of these viewpoints and wide professional manifestations make it hard to classify and compartmentalize actuaries, especially in and around boardrooms. Yet, actuaries are nearly in every field present, often without being identified or recognized as such! <br />
1373. <br />
1374. An actuary is what we call 'The Elephant in the Room', or perhaps better formulated:</div>
1375. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1376. <br /></div>
1377. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; text-align: center;">
1378. <b><i><span style="color: #0b5394;">THE Actuary is the Multi-Perceived Elephant in the Boardroom</span></i></b></div>
1379. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1380. <br /></div>
1381. <div class="separator" style="clear: both; float: left; font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; text-align: center;">
1382. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyF2AptYeHqpjV_02xAS-yVO87cpbvbHl6Ef76TY6_YXn8Wtr2TPvy5wKThp8cGS93CGeOtP8jyv386wYGE6Rb8XeQJzGqndYQZdLpO7r78w6NYDuRdqx05Ju3kZhulh-Xq6OkQIe1cFk/s1600/Actuary-in-the-boardroom.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyF2AptYeHqpjV_02xAS-yVO87cpbvbHl6Ef76TY6_YXn8Wtr2TPvy5wKThp8cGS93CGeOtP8jyv386wYGE6Rb8XeQJzGqndYQZdLpO7r78w6NYDuRdqx05Ju3kZhulh-Xq6OkQIe1cFk/s1600/Actuary-in-the-boardroom.png" width="490" /></a></div>
1383. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1384. <br /></div>
1385. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1386. <b><u><span style="color: #073763;"><br /></span></u></b>
1387. <b><u><span style="color: #073763;">Stereotypes</span></u></b></div>
1388. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1389. Despite of the wide range of positions actuaries can fulfill, it becomes harder and harder for actuaries to follow a career path that leads to a boardroom position as CXX...</div>
1390. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1391. <br /></div>
1392. <div class="separator" style="clear: both; float: left; font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; text-align: center;">
1393. <a href="http://www.slideshare.net/berkemeijer/from-backroom-to-boardroom-duc" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYXk3VVvFj3yAb411V23mH85VCppM2m3VhPKLUlzpytMkLu62UwgeXzBEFA28wCbYC3qBTN0pJLYCFnnyC1QemvEgVVuLJOCKTi0Gmky6YKHjZ5TAyM8_b05SsHBaZiTfOeaU4L8jXOWc/s1600/boardroom.png" width="490" /></a></div>
1394. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1395. <br /></div>
1396. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1397. Why is it so hard for an actuary to end up as CEO or COO of a company?</div>
1398. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1399. <br /></div>
1400. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1401. The simple answer to this question is:</div>
1402. <h3 style="font-family: Georgia, serif; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; text-align: center;">
1403. <br />
1404. <b><span style="color: #990000; font-size: 150%;"><i>Thinking in Stereotypes</i></span></b></h3>
1405. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1406. <br />
1407. Because actuaries are good at mathematics, people in general as well as professionals continue to view and stigmatize them as Overspecialized Nerds and Brilliant Autistics. This way of (wrong) stereotype thinking identifies actuaries often as 'problematic communicators' and 'non-managers'. As a consequence, the managerial qualifications of a lot of actuaries are unfortunately overshadowed by their outstanding professional technical skills.</div>
1408. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1409. <br /></div>
1410. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1411. Thinking in stereotypes is a phenomenon that is around us everywhere, as is shown in Herge's comic book "<a href="http://jockosjungle.tripod.com/books/cobra/cobra.htm" target="_blank">The Valley of the Cobras</a>". In this book the (quixotic) 'Maharajah of Gopel' is vacationing in the french ski-resort of Vargése. Suddenly the Maharajah discovers his pearl necklace has been stolen and he needs a detective to track down his necklace.The rest of the story is shown in the short comic strip below (<i>click to enlarge</i>):</div>
1412. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1413. <br /></div>
1414. <div class="separator" style="clear: both; float: left; font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; text-align: center;">
1415. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhX3kwKXOVUIGzyAn7pGZNCxPZcYQo6LGMUXmivPrfmy5cSPXDXFgBPZrOp6yFUrdD1UZVep78I2o5BqsV5xKs8iYVioOddqBAIltO6Ly6XsM975Owo5NbMuFNUHvqVE3SmN-AZUn-UFVk/s1600/detective-herge.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhX3kwKXOVUIGzyAn7pGZNCxPZcYQo6LGMUXmivPrfmy5cSPXDXFgBPZrOp6yFUrdD1UZVep78I2o5BqsV5xKs8iYVioOddqBAIltO6Ly6XsM975Owo5NbMuFNUHvqVE3SmN-AZUn-UFVk/s1600/detective-herge.png" width="490" /></a></div>
1416. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1417.  
1418. </div>
1419. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1420. '
1421. <b><u><span style="color: #073763;"><br />Conclusions and lessons Learned</span></u></b></div>
1422. <span style="font-family: Georgia, serif; font-size: small;">THE future role of THE Actuary doesn't exist. As an actuary, fill in every professional role that attracts and fits you. Try it out, to discover you can fill in more than one role in the many healthy life years  ahead of you......<br /><br />Finally some wrap up ground rules to keep in mind:</span><br />
1423. <ol style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; margin: 3px 2px 3px 23px; padding: 0px;">
1424. <li style="font-style: normal;">Never think in stereotypes as an actuary!</li>
1425. <li>If you are an actuary and have the ambition to become a CEO, CFO or CRO of a company: Act, Dress, Speak and Behave accordingly, as other people probably <i>will</i> keep thinking in stereotypes</li>
1426. <li style="font-style: normal;">If you meet other actuaries: Talk and behave like an actuary</li>
1427. <li style="font-style: normal;">Ground Rule Number One: Always Stay Yourself!</li>
1428. </ol>
1429. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1430. <br /></div>
1431. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1432. <br /></div>
1433. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1434. <u>Links</u></div>
1435. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1436. - <a href="http://www.beanactuary.org/jobs/?fa=jobs-by-type-of-employer" target="_blank">Actuary jobs by type of employer</a></div>
1437. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1438. - <a href="http://www.slideshare.net/berkemeijer/from-backroom-to-boardroom-duc" target="_blank">Actuary: From Backroom to Boardroom (In Dutch), Jos Berkemeijer</a></div>
1439. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1440. - <a href="http://sdrv.ms/1dXKvPW" target="_blank">Complete e-book: The Valley of the Cobras"</a></div>
1441. <div style="font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">
1442. <br /></div>
1443. </div>
1444. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/494444241494979873/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2014/10/future-role-of-actuary.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/494444241494979873'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/494444241494979873'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2014/10/future-role-of-actuary.html' title='Future Role of THE Actuary'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyF2AptYeHqpjV_02xAS-yVO87cpbvbHl6Ef76TY6_YXn8Wtr2TPvy5wKThp8cGS93CGeOtP8jyv386wYGE6Rb8XeQJzGqndYQZdLpO7r78w6NYDuRdqx05Ju3kZhulh-Xq6OkQIe1cFk/s72-c/Actuary-in-the-boardroom.png" height="72" width="72"/><thr:total>0</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-2295756249685233223</id><published>2014-07-06T22:17:00.000+02:00</published><updated>2014-07-06T22:17:09.102+02:00</updated><category scheme="http://www.blogger.com/atom/ns#" term="default"/><category scheme="http://www.blogger.com/atom/ns#" term="solvency"/><title type='text'>Understanding Confidence Levels in Time</title><content type='html'>&lt;div style=&quot;background-color: white; font: small Georgia,Serif; width: 490px;&quot;&gt;
1445. What's the right understanding of the concept of 'confidence level' for a financial institution?<br />
1446. <br />
1447. <div class="separator" style="clear: both; float: right; text-align: center;">
1448. <a href="http://www.zazzle.nl/de_echte_definitie_van_vertrouwen_speldbutton-145935395556106255" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhmh9xBIJ4zSjw-vwPou9XNuQMXs1qs55pY1_w9UFmhExhOFUsu3K8MD_pbqA6NrCD7W1oE2z-Rz7bEoSw07brrth_iPXXucniVszDEFcAdfUQ0gitqOFauJNmMfTuZ0F8Quc0SALxxrP0/s1600/confidence.png" /></a></div>
1449. That's not an easy question....<br />
1450. <br />
1451. A short (popular) definition of confidence level in terms of Solvency and Basel regulation would be:<br />
1452. <i><br />The probability that a financial institution doesn't default within a year.</i><br />
1453. <br />
1454. <br />
1455. In this blog I'll discuss and compare three more or less accepted confidence levels (CFLs):<br />
1456. <br />
1457. <ol style="margin: 3px 2px 3px 23px; padding: 0px;" type="square">
1458. <li>Dutch Pension Funds: CFL= 97.5% </li>
1459. <li>Life Insurers (Solvency II): CFL = 99,5%</li>
1460. <li>Banks (Basel II/III): CFL = 99.9%</li>
1461. </ol>
1462. <br />
1463. <u><span style="color: #073763;"><b>Understanding Confidence Level</b></span></u><br />
1464. Before we get into the details, let's first shine a light on a widespread misunderstanding regarding the concept of 'confidence level'.<br />
1465. <br />
1466. To make the concept of confidence level more understandable, one might argue as follows:<br />
1467. <br />
1468. <ol style="margin: 3px 2px 3px 23px; padding: 0px;" type="square">
1469. <li>The confidence level of a Dutch pension fund is defined as 97.5%</li>
1470. <li>This implies that there's a one years probability that the pension fund has an one year default probability of 2.5% (= 100% - 97.5%)</li>
1471. <li>This implies that the pension fund on average defaults once every 40 years (= 1 / 0.025)</li>
1472. </ol>
1473. <br />
1474. This method of reasoning is completely<br />
1475. <b><span style="color: #990000;"><i><br /></i></span></b>
1476. <br />
1477. <div style="text-align: center;">
1478. <b><span style="color: #990000;"><i><b><span style="color: #990000; font-size: 130%;"><i>WRONG</i></span></b></i></span></b></div>
1479. <br />
1480. <br />
1481. The mistake that's been made is more or less the same as the next two fallacies:<br />
1482. <ol style="margin: 3px 2px 3px 23px; padding: 0px;" type="square">
1483. <li>If one ship crosses the ocean in 12 days. 12 ships will cross the ocean in one day</li>
1484. <li>I fit in my jacket, my jacket fits in my suitcase, therefore I fit in y suitcase</li>
1485. </ol>
1486. <br />
1487. <br />
1488. <b><span style="color: #073763;"><u>Explanation</u></span></b><br />
1489. The probability of a pension fund with a confidence level of 97,5% going default, can be approximated by a simple Poisson distribution as follows:<br />
1490. <br />
1491. <div class="separator" style="clear: both; float: left; text-align: center;">
1492. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYu1gCYFhLkFl6U74NfcpJRPqfi89MVkAhIIBKA7fzlL-nqxfShkNqhLLYDqJPF5sttTpgmxjoWGbHn1qdXkkNy1tQcayBtCIR6ZMWFqgOIkfotZuYOzsKIAKrr4QhgGAgFtZY6hmIh5w/s1600/default-pension-fund.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYu1gCYFhLkFl6U74NfcpJRPqfi89MVkAhIIBKA7fzlL-nqxfShkNqhLLYDqJPF5sttTpgmxjoWGbHn1qdXkkNy1tQcayBtCIR6ZMWFqgOIkfotZuYOzsKIAKrr4QhgGAgFtZY6hmIh5w/s1600/default-pension-fund.png" /></a></div>
1493. <div class="separator" style="clear: both; text-align: center;">
1494. </div>
1495. From this we can conclude:<br />
1496. <br />
1497. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square">
1498. <li>In 40 years the pension fund has a 63% default probability.</li>
1499. <li>The probability that the pension fund defaults more than once is 26%</li>
1500. <li>The probability that the pension fund defaults exactly once in a 10 years period is 19.47% </li>
1501. </ul>
1502. <div>
1503. <br /></div>
1504. <div>
1505. </div>
1506. <b><u><span style="color: #073763;">Insurer Confidence Level</span></u></b><br />
1507. For an insurance company with a confidence level of 99.5% the results are:<br />
1508. <br />
1509. <div class="separator" style="clear: both; float: left; text-align: center;">
1510. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEik2DSOswEVYfw-5IKLcitin3UvtJfxd0mTrXQEnUDstllByZbhvXWhHP3TzMIv8Y43lcbvSeVh0WSHBiD8__ZiOZJU4mQPhZAvD3q6oHz18oljvCiq0JIkxV-IWE5xzfHDjPSOGnt21V8/s1600/default-insurer.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEik2DSOswEVYfw-5IKLcitin3UvtJfxd0mTrXQEnUDstllByZbhvXWhHP3TzMIv8Y43lcbvSeVh0WSHBiD8__ZiOZJU4mQPhZAvD3q6oHz18oljvCiq0JIkxV-IWE5xzfHDjPSOGnt21V8/s1600/default-insurer.png" /></a></div>
1511. <div class="separator" style="clear: both; text-align: center;">
1512. </div>
1513. <br />
1514. <br />
1515. So even an insurer has a 4.88% default probability in a 10 years period on basis of a 99.5% confidence level. Keep this in mind if you take out a life insurance policy!!!<br />
1516. <br />
1517. <br />
1518. <b><u><span style="color: #073763;">Banking Confidence Level</span></u></b><br />
1519. It starts getting serious when it comes down to a 99,9% confidence level for banks:<br />
1520. <br />
1521. <div class="separator" style="clear: both; float: left; text-align: center;">
1522. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjIlfeyKRY13W2uVnyv-XZJsv1z-Kiua2T7HNATHaiAP6_uI7oIjslhFfIN0uxncRcvrQ_qlZ9KUEB0AZ7y2sTvfMEVAJ-zdCn-F8AnQfWEUzqyGZZ1o-sxd10sAz-S555BhryDaEY47s/s1600/default-bank.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjIlfeyKRY13W2uVnyv-XZJsv1z-Kiua2T7HNATHaiAP6_uI7oIjslhFfIN0uxncRcvrQ_qlZ9KUEB0AZ7y2sTvfMEVAJ-zdCn-F8AnQfWEUzqyGZZ1o-sxd10sAz-S555BhryDaEY47s/s1600/default-bank.png" /></a></div>
1523. <div class="separator" style="clear: both; text-align: center;">
1524. </div>
1525. <br />
1526. <b><u><span style="color: #073763;">Comparison</span></u></b><br />
1527. Comparing the default probability of (Dutch) pension funds, insurers and bank on the long run:<br />
1528. <br />
1529. <div class="separator" style="clear: both; float: left; text-align: center;">
1530. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhURkaNa-YFmNJPo2WCy6B1T56peNzu3RzWAW_hn9Sd_X7qCLy7PzWjRVmC6rwEA5R7hgBEaTzFuzCH-mWFtbRRrrgYZZYGmbJK_FJJ5r9PcsvzG8fULsyVRcR0ocgYBFGWhAaa7qeRh4k/s1600/default-inance.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhURkaNa-YFmNJPo2WCy6B1T56peNzu3RzWAW_hn9Sd_X7qCLy7PzWjRVmC6rwEA5R7hgBEaTzFuzCH-mWFtbRRrrgYZZYGmbJK_FJJ5r9PcsvzG8fULsyVRcR0ocgYBFGWhAaa7qeRh4k/s1600/default-inance.png" /></a></div>
1531. <div class="separator" style="clear: both; text-align: center;">
1532. </div>
1533. <br />
1534. <b><u><span style="color: #073763;">Finally</span></u></b><br />
1535. Although this blog gives some more insight about the consequences of confidence levels on the long run, the real question of course is: <i>what's the price you have to pay to avoid default risks?</i><br />
1536. That's something for another blog.....<br />
1537. <br />
1538. <br />
1539. <u>Sources/Links</u><br />
1540. - <a href="https://sites.google.com/site/boooming/Home/default.xlsx" target="_blank">Spreadsheet with tables used in this blog</a><br />
1541. <br /></div>
1542. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/2295756249685233223/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2014/07/understanding-confidence-levels-in-time.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/2295756249685233223'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/2295756249685233223'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2014/07/understanding-confidence-levels-in-time.html' title='Understanding Confidence Levels in Time'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhmh9xBIJ4zSjw-vwPou9XNuQMXs1qs55pY1_w9UFmhExhOFUsu3K8MD_pbqA6NrCD7W1oE2z-Rz7bEoSw07brrth_iPXXucniVszDEFcAdfUQ0gitqOFauJNmMfTuZ0F8Quc0SALxxrP0/s72-c/confidence.png" height="72" width="72"/><thr:total>0</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-5414551960767149387</id><published>2014-05-18T00:39:00.001+02:00</published><updated>2014-05-18T00:45:58.700+02:00</updated><category scheme="http://www.blogger.com/atom/ns#" term="bonds"/><category scheme="http://www.blogger.com/atom/ns#" term="Euro"/><title type='text'>Bonds: a Crisis Risk Indicator? </title><content type='html'>&lt;div style=&quot;background-color: white; font: small Georgia,Serif; width: 490px;&quot;&gt;
1543. As a risk professional you've learned to classify an increase in bond's interest volatility (or standard deviation) as an indicator that bonds have become more risky. Right you are....<br />
1544. <br />
1545. Now, with this knowledge, let's take a look at the next chart, presenting the long-term (10Y) interest rate of some of the leading EU member states from January 1993 to April 2014:<br />
1546. <br />
1547. <div class="separator" style="clear: both; float: left; text-align: center;">
1548. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAswORJ6ycZJKRM1SoXN1aJq8LoiuQfEYKGNpRTJYBDlSqEwOnyWTTeCdX-OiC1vpCxeUeI1MW9W7yaBQk0UFyU8JkF2jeDEoYohjKqQWUsHcU6QREQQxXbYEknArXwg28wDUdXyqpbUQ/s1600/eurobonds-1.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAswORJ6ycZJKRM1SoXN1aJq8LoiuQfEYKGNpRTJYBDlSqEwOnyWTTeCdX-OiC1vpCxeUeI1MW9W7yaBQk0UFyU8JkF2jeDEoYohjKqQWUsHcU6QREQQxXbYEknArXwg28wDUdXyqpbUQ/s1600/eurobonds-1.png" /></a></div>
1549. <div class="separator" style="clear: both; text-align: center;">
1550. </div>
1551. This chart clearly shows that :<br />
1552. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square">
1553. <li>Since the introduction of the Euro in 1999, country spreads start declining</li>
1554. <li>Interest rates converge to the year of the famous (Lehman) crisis in 2008</li>
1555. <li>After the 2008 crisis, rating agencies wake up and spreads explode again</li>
1556. </ul>
1557. <br />
1558. Let's take a look in more detail, by some log scale zooming......<br />
1559. <br />
1560. <div class="separator" style="clear: both; float: left; text-align: center;">
1561. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjn1rE9FELPt-jfPDD39fyPwln4QIeU3arS9xASVNDIUBygwW1dAHNe2jQUfXP2qGG_sJ2LQ7oc3kBS6OBezn6989yl3XWiIf5s3l2uNjL9IfWFl8DZUmKeI1A2Gs6KPoQOInCOD081fiY/s1600/eurobonds-2.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjn1rE9FELPt-jfPDD39fyPwln4QIeU3arS9xASVNDIUBygwW1dAHNe2jQUfXP2qGG_sJ2LQ7oc3kBS6OBezn6989yl3XWiIf5s3l2uNjL9IfWFl8DZUmKeI1A2Gs6KPoQOInCOD081fiY/s1600/eurobonds-2.png" /></a></div>
1562. <div class="separator" style="clear: both; text-align: center;">
1563. </div>
1564. To find out if the convergence of interest rates really is a kind of early warning crisis indicator, let's add some more EU countries to the chart.<br />
1565. <br />
1566. <div class="separator" style="clear: both; float: left; text-align: center;">
1567. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgK6spRJAazO39KSReUH5PwqWcefzHngIMcydtG-_DCYHZeL5XQ_bOs7SF5ny7OK8cweFzIMFav-lwb0ENGxtW0fk2s4FCHr2lWQL5k42hFPpFw1vq9HeP8iflzjWcZkoR9MJn5ohFoE6A/s1600/eurobonds-4.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgK6spRJAazO39KSReUH5PwqWcefzHngIMcydtG-_DCYHZeL5XQ_bOs7SF5ny7OK8cweFzIMFav-lwb0ENGxtW0fk2s4FCHr2lWQL5k42hFPpFw1vq9HeP8iflzjWcZkoR9MJn5ohFoE6A/s1600/eurobonds-4.png" /></a></div>
1568. <div class="separator" style="clear: both; text-align: center;">
1569. </div>
1570. <br />
1571. Now the picture becomes clear: A structural decline in bond's standard deviation is not a decline in risk, but more the opposite....<br />
1572. <br />
1573. As standard deviation decreases, (crisis) risk increases!<br />
1574. <br />
1575. We can check this by looking at the cross-country standard deviation development in time:<br />
1576. <br />
1577. <div class="separator" style="clear: both; float: left; text-align: center;">
1578. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjh0m3eHLxsnDVV7B23LgeADpRXPRo7E08Dtn_Ey8bVPWIq_peD8vIypNMyGALAVJ21tNAZo4AgqndbzgkRXBD4JuLG2ANllEHe_O06vhK7j6G_Ol1PCg6y665MFv4GdUKTta7idtM5NmE/s1600/eurobonds-standard-deviation.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjh0m3eHLxsnDVV7B23LgeADpRXPRo7E08Dtn_Ey8bVPWIq_peD8vIypNMyGALAVJ21tNAZo4AgqndbzgkRXBD4JuLG2ANllEHe_O06vhK7j6G_Ol1PCg6y665MFv4GdUKTta7idtM5NmE/s1600/eurobonds-standard-deviation.png" /></a></div>
1579. <div class="separator" style="clear: both; text-align: center;">
1580. </div>
1581. These charts, presented on a vertical linear and log scale basis, clearly  illustrate that as soon as the standard deviation hits the 0.2% level, crisis can be expected soon.<br />
1582. <br />
1583. Not only is the 0.2% SD-level an early warning indicator for the 2008 crisis that started with the bankruptcy of the Lehman Brothers bank, but it's also an indicator of 'Dot Com' crisis in 2000....<br />
1584. <br />
1585. <b><u><span style="color: #073763;">Finally</span></u></b><br />
1586. Meanwhile... as from February 2012, standard deviations are declining  again. Time to worry?<br />
1587. <br />
1588. Key questions are:<br />
1589. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square">
1590. <li>when will standard deviation hit the 0.2% floor again? </li>
1591. <li>and when it does, will there be another crisis?</li>
1592. </ul>
1593. <br />
1594. Remember lesson number 1 in risk management: Crises are unpredictable!<br />
1595. Nevertheless, once 0.2% SD  turns up: fasten your investment seat bells....<br />
1596. <br />
1597. <div class="separator" style="clear: both; float: left; text-align: center;">
1598. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRaiEqBZ9_rWnTnpNqFgc-unTMOms5gR9c6mOm9RhbAsb8qMpCwrTSHhVSmj1x7bXxEu1rz08AAiBFrBEZ5WG5CfZFSQ5ZGNSE76oGv0RGphpoMXwo2MHz_sUVVTVbLZ4HYM414p2igHY/s1600/attention.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRaiEqBZ9_rWnTnpNqFgc-unTMOms5gR9c6mOm9RhbAsb8qMpCwrTSHhVSmj1x7bXxEu1rz08AAiBFrBEZ5WG5CfZFSQ5ZGNSE76oGv0RGphpoMXwo2MHz_sUVVTVbLZ4HYM414p2igHY/s1600/attention.png" /></a></div>
1599. <div class="separator" style="clear: both; text-align: center;">
1600. </div>
1601. <br />
1602. <u>Links/Sources:</u><br />
1603. - <a href="https://sites.google.com/site/boooming/Home/INterest-rates-eu.xlsx" target="_blank">Spreadsheet of charts used in this blog</a><br />
1604. - <a href="http://sdw.ecb.europa.eu/browseTable.do?node=SEARCHRESULTS&REF_AREA=*EU&q=IRS.M.BE.L.L40.CI.0000.EUR.N.Z+IRS.M.DE.L.L40.CI.0000.EUR.N.Z+IRS.M.IE.L.L40.CI.0000.EUR.N.Z+IRS.M.GR.L.L40.CI.0000.EUR.N.Z+IRS.M.ES.L.L40.CI.0000.EUR.N.Z+IRS.M.FR.L.L40.CI.0000.EUR.N.Z+IRS.M.IT.L.L40.CI.0000.EUR.N.Z+IRS.M.CY.L.L40.CI.0000.EUR.N.Z+IRS.M.LV.L.L40.CI.0000.EUR.N.Z+IRS.M.LU.L.L40.CI.0000.EUR.N.Z+IRS.M.MT.L.L40.CI.0000.EUR.N.Z+IRS.M.NL.L.L40.CI.0000.EUR.N.Z+IRS.M.AT.L.L40.CI.0000.EUR.N.Z+IRS.M.PT.L.L40.CI.0000.EUR.N.Z+IRS.M.SI.L.L40.CI.0000.EUR.N.Z+IRS.M.SK.L.L40.CI.0000.EUR.N.Z+IRS.M.FI.L.L40.CI.0000.EUR.N.Z&sfl2=4&SERIES_KEY=229.IRS.M.AT.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.BE.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.CY.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.DE.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.ES.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.FI.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.FR.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.GR.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.IE.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.IT.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.LU.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.LV.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.MT.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.NL.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.PT.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.SI.L.L40.CI.0000.EUR.N.Z&SERIES_KEY=229.IRS.M.SK.L.L40.CI.0000.EUR.N.Z&DATASET=0&periodSortOrder=ASC" target="_blank">EU Interest Rates</a><br />
1605. - <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJcu1zhnw97IXNG84_U_b1MIzNcTf44yCnDtPToZqkNWrimuKUUZEfHvTJ7xicZCZZQDuRS9BxTog0lhYoMJVZ9BuKf3YSmqB47cLE-qeNcrc8YOsI_37EyJ0HNrsbwYQPUiNWgfRUO0I/s1600/eurobonds-3.png" target="_blank">Big Picture Chart</a><br />
1606. <br /></div>
1607. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/5414551960767149387/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2014/05/bonds-crisis-risk-indicator.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/5414551960767149387'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/5414551960767149387'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2014/05/bonds-crisis-risk-indicator.html' title='Bonds: a Crisis Risk Indicator? '/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAswORJ6ycZJKRM1SoXN1aJq8LoiuQfEYKGNpRTJYBDlSqEwOnyWTTeCdX-OiC1vpCxeUeI1MW9W7yaBQk0UFyU8JkF2jeDEoYohjKqQWUsHcU6QREQQxXbYEknArXwg28wDUdXyqpbUQ/s72-c/eurobonds-1.png" height="72" width="72"/><thr:total>0</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-4084715168737368563</id><published>2014-05-04T01:30:00.000+02:00</published><updated>2014-05-04T09:17:37.388+02:00</updated><category scheme="http://www.blogger.com/atom/ns#" term="actuarial"/><category scheme="http://www.blogger.com/atom/ns#" term="collective"/><category scheme="http://www.blogger.com/atom/ns#" term="investment"/><title type='text'>Discussing Life-Cycle Pensions &amp; Longevity</title><content type='html'>&lt;div style=&quot;background-color: white; font-family: Georgia, serif; font-size: small; font-style: normal; font-variant: normal; line-height: normal; width: 490px;&quot;&gt;
1608. <div style="font-weight: normal;">
1609. In this blog I'm going to discuss two persistent pension topics:</div>
1610. <div style="font-weight: normal;">
1611. <br /></div>
1612. <ol style="font-weight: normal; margin: 3px 2px 3px 23px; padding: 0px;">
1613. <li>One of the most common misunderstandings in pension fund land is that an individual (member) investment policy weighs up to a collective investment approach.</li>
1614. <li>Is there a rule of thumb that expresses 'longevity risk' in terms of the yearly return?  </li>
1615. </ol>
1616. <div style="font-weight: normal;">
1617. <br /></div>
1618. <b><u><span style="color: #073763;">1. Collective vs. Individual Investing Approach</span></u></b><br />
1619. <div style="font-weight: normal;">
1620. In case of a 'healthy pension fund', new members will join as time continues. In a mature pension fund the balance of contributions, investment returns, paid pensions and costs will stabilize over time.</div>
1621. <div style="font-weight: normal;">
1622. <br /></div>
1623. <div style="font-weight: normal;">
1624. Therefore the duration of the obligations of a pension fund will more or less stabilize as well. The duration of an average pension fund varies often between 15 and 25 years. Long enough to define a long term investment strategy based on a mix of risky equities (e.g. 60%) and fixed income (e.g. 40%). Regardless of age or status, all members of a pension fund profit from this balanced investment approach.<br />
1625. <br />
1626. <br /></div>
1627. <div style="font-weight: normal;">
1628. <div class="separator" style="clear: both; text-align: center;">
1629. <a href="http://www.crothall.com/celebrations/2011/12/features/synergy/" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisQ17434qJRgjQHWYnvk0KE-lDNDlXLYU3-LavU5B9er_wjIoFboKfdISf50YWT_mDUkOX6ymggER941b2vRh-OkcLZpeb0NX9ZZBjSZJEoKQ3XKbNylucxZYn-kbrZVXPFmEBLORFrio/s1600/DIY-Investments.png" /></a></div>
1630. <br />
1631. <div class="separator" style="clear: both; text-align: center;">
1632. </div>
1633. <div class="separator" style="clear: both; float: left; text-align: center;">
1634. </div>
1635. <br />
1636. In case of an individual (member) investment strategy, the risk profile of the individual investments has to be reduced as the retirement date comes near. In practice this implies that 'equities' are reduced in favor of 'fixed income' after a certain age. As the age of a pension member progresses, the duration of the individual liabilities also decreases, with an expected downfall in return as a consequence.</div>
1637. <div style="font-weight: normal;">
1638. <br /></div>
1639. <div style="font-weight: normal;">
1640. Let's compare three different types of investment strategies to get a clear picture of what is happening:</div>
1641. <div style="font-weight: normal;">
1642. <br /></div>
1643. <ol style="font-weight: normal; margin: 3px 2px 3px 23px; padding: 0px;">
1644. <li><u>Collective Pension Fund Strategy Approach: Constant Yearly Return</u><br />40% Fixed Income à 4% return + 60% Equities à 6% = 5.2% return yearly<br /> </li>
1645. <li><u>Life Cycle I Approach ('100-Age' Method)</u><br />Yearly Return (age X): X% Fixed Income à 4% + (100-X)% Equities à 6%<br /> </li>
1646. <li><u>Life Cycle II Approach (Decreasing equities between age 45 and age 65)</u><br />Yearly Return (age X) = MIN(MAX((6%+(44-X)*0.1%);4%);6%)</li>
1647. </ol>
1648. <div style="font-weight: normal;">
1649. <br /></div>
1650. <div style="font-weight: normal;">
1651. All visually expressed in the next chart:</div>
1652. <div style="font-weight: normal;">
1653. <br /></div>
1654. <div class="separator" style="clear: both; float: left; font-weight: normal; text-align: center;">
1655. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfu3TD_uz02GG7NgFN7M4OQAB-Y9Vcv4LXuOWF5OxfpwDFxAzJmHfG8ekfsjLClBuLYGYarfWqKWX9sjntHHI90QXvQlK7jSqXkVj2ZE928OjlVgznJ5dzQoe0RUUJ8cUdHxrEoIYRF7E/s1600/compare-type-investment-strategy.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfu3TD_uz02GG7NgFN7M4OQAB-Y9Vcv4LXuOWF5OxfpwDFxAzJmHfG8ekfsjLClBuLYGYarfWqKWX9sjntHHI90QXvQlK7jSqXkVj2ZE928OjlVgznJ5dzQoe0RUUJ8cUdHxrEoIYRF7E/s1600/compare-type-investment-strategy.png" /></a></div>
1656. <div class="separator" style="clear: both; font-weight: normal; text-align: center;">
1657. </div>
1658. <div style="font-weight: normal;">
1659. <br /></div>
1660. <b><u><span style="color: #783f04;">Pension Outcomes</span></u></b><br />
1661. <div style="font-weight: normal;">
1662. Now lets compare the pension outcomes of these three different investment strategies with help of the Pension Excel Calculator on basis of the next assumptions:</div>
1663. <div style="font-weight: normal;">
1664. - Retirement age: 65 year</div>
1665. <div style="font-weight: normal;">
1666. - Start ages 20 and 40</div>
1667. <div style="font-weight: normal;">
1668. - 3% and 0% indexed  contributions and benefits</div>
1669. <div style="font-weight: normal;">
1670. - Life Table NL Men 2012 (NL=Netherlands)</div>
1671. <div style="font-weight: normal;">
1672. <br /></div>
1673. <div style="font-weight: normal;">
1674. Results Pension Calculations (yearly paid pension):<br />
1675. <br />
1676. <div class="separator" style="clear: both; float: left; text-align: center;">
1677. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCB45BElz4dMOCgib4OjuVYGqCi4Md1UnLiSpiMWRsSRgu0gApy0NojFm9D7OJyoYlWKAvPeC1zLwtxzzVvbmtiZQbc3BHvusXwsy0b3WBHbXmoVMT3lcOxzM94EGXy3Uq8MjnA2PC1ek/s1600/pension-outcome-life-cycle-1.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCB45BElz4dMOCgib4OjuVYGqCi4Md1UnLiSpiMWRsSRgu0gApy0NojFm9D7OJyoYlWKAvPeC1zLwtxzzVvbmtiZQbc3BHvusXwsy0b3WBHbXmoVMT3lcOxzM94EGXy3Uq8MjnA2PC1ek/s1600/pension-outcome-life-cycle-1.png" /></a></div>
1678. <br /></div>
1679. <div style="font-weight: normal;">
1680. <div class="separator" style="clear: both; float: left; text-align: center;">
1681. </div>
1682. <br /></div>
1683. <div class="separator" style="clear: both; font-weight: normal; text-align: center;">
1684. </div>
1685. <br />
1686. <b><u><span style="color: #783f04;">Conclusion  I</span></u></b><br />
1687. <div style="font-weight: normal;">
1688. From the above table we can conclude that switching from a collective investment approach to an individual investment approach will decrease pension benefits with roughly 10%. Think twice before you do so!<br />
1689. <br />
1690. <br /></div>
1691. <div style="font-weight: normal;">
1692. <br /></div>
1693. <div>
1694. <b><u><span style="color: #073763;">2. Longevity Risk Impact</span></u></b></div>
1695. <div>
1696. <div style="font-weight: normal;">
1697. To get an idea of the longevity impact on the pension outcomes, yearly paid pensions are calculated for different forecasted Dutch life tables (Men).</div>
1698. <div style="font-weight: normal;">
1699. <br /></div>
1700. <b><u><span style="color: #783f04;">Life Tables</span></u></b><br />
1701. <div class="separator" style="clear: both; float: left; font-weight: normal; text-align: center;">
1702. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioeelOZot6O1NiChFVg6_0qRAvlHR8tp1HKNobXPeekYmY9N94i5QeYiMWoDLupY6KmUGFt_a1XA4rFysuvuJYQDlSKUdTyeKkykNQLPwZC1ZmbdZq173Jg3n2lw48eC6LPEDQG2K3IwM/s1600/life-tables-2062-2112.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioeelOZot6O1NiChFVg6_0qRAvlHR8tp1HKNobXPeekYmY9N94i5QeYiMWoDLupY6KmUGFt_a1XA4rFysuvuJYQDlSKUdTyeKkykNQLPwZC1ZmbdZq173Jg3n2lw48eC6LPEDQG2K3IwM/s1600/life-tables-2062-2112.png" /></a></div>
1703. <div class="separator" style="clear: both; float: left; font-weight: normal; text-align: center;">
1704. </div>
1705. <div style="font-weight: normal;">
1706. <br /></div>
1707. <div style="font-weight: normal;">
1708. <br /></div>
1709. <div style="font-weight: normal;">
1710. <br /></div>
1711. <div style="font-weight: normal;">
1712. Forecast Life Table 2062 is calculated on basis of a <a href="http://www.ag-ai.nl/download/14130-Prognosetafel+AG2012-2062.pdf" target="_blank">publication</a> of the Royal Dutch Actuarial Association.</div>
1713. <div style="font-weight: normal;">
1714. <br /></div>
1715. <div style="font-weight: normal;">
1716. The Forecast Life Table 2112 is (non-official; non scientific) calculated on basis of the assumption that for every age the decrease in mortality rate over the period 2062-2112 is the same as over the period 2012-2062.</div>
1717. <div style="font-weight: normal;">
1718. <br /></div>
1719. <div style="font-weight: normal;">
1720. <b><u><span style="color: #783f04;">Pension Outcomes per Life Table</span></u></b></div>
1721. <div style="font-weight: normal;">
1722. Here are the yearly pension outcomes on basis of the forecasted life tables:</div>
1723. </div>
1724. <div style="font-weight: normal;">
1725. <br />
1726. <div class="separator" style="clear: both; float: left; text-align: center;">
1727. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7KDl_Wnb2D8Us6FoM-vBy6fpK3pfLIkgCVp4yPRTezBsnKR_EED9KlrGP9GHBHU2QuNX6iuQjHO2SutSyZeAwrV6HHtlvUweRsOMo4qI8p_zx9zWNQEKVhly7dgDHQIrN1xolEFDBIg8/s1600/pension-outcome-life-cycle-2.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7KDl_Wnb2D8Us6FoM-vBy6fpK3pfLIkgCVp4yPRTezBsnKR_EED9KlrGP9GHBHU2QuNX6iuQjHO2SutSyZeAwrV6HHtlvUweRsOMo4qI8p_zx9zWNQEKVhly7dgDHQIrN1xolEFDBIg8/s1600/pension-outcome-life-cycle-2.png" /></a></div>
1728. <br /></div>
1729. <div class="separator" style="clear: both; float: left; text-align: center;">
1730. </div>
1731. <br />
1732. <br />
1733. <br />
1734. <br />
1735. <br />
1736. <br />
1737. <br />
1738. <br />
1739. <br />
1740. <br />
1741. <br />
1742. From the above table, we may conclude that the order of magnitude effect of longevity over a fifty to seventy year period is that pensions will have to be cut  roughly by 25%-30%.<br />
1743. <br />
1744. <br />
1745. Another way of looking at this longevity risk, is to try to fund the future increase in life expectation from the annual returns.<br />
1746. <br />
1747. <div style="font-weight: normal;">
1748. The next table shows the required return to fund the longevity impact for different forecasted life tables:<br />
1749. <br />
1750. <div class="separator" style="clear: both; float: left; text-align: center;">
1751. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTTVKs-tPaY4CoyjDeeCOeHiCv8-QmusIcdIcq9uE4fniu00KYNsHACIZhL-WV4TJ7Mw4BYDsrQq_X6kyhHFe64cGqxdZyGZNLIp2hlSVwvneCgOAQDA8JgHD2RhSbHP1aUHorwHl2nDE/s1600/pension-outcome-longevity.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTTVKs-tPaY4CoyjDeeCOeHiCv8-QmusIcdIcq9uE4fniu00KYNsHACIZhL-WV4TJ7Mw4BYDsrQq_X6kyhHFe64cGqxdZyGZNLIp2hlSVwvneCgOAQDA8JgHD2RhSbHP1aUHorwHl2nDE/s1600/pension-outcome-longevity.png" /></a></div>
1752. <br />
1753. <div class="separator" style="clear: both; float: left; text-align: center;">
1754. </div>
1755. <br /></div>
1756. <div class="separator" style="clear: both; font-weight: normal; text-align: center;">
1757. </div>
1758. <div style="font-weight: normal;">
1759. Roughly speaking, the expected long-term longevity effects take about 0.7%-1.2% of the yearly return on the long run.<br />
1760. <br /></div>
1761. <div>
1762. <div style="font-weight: normal;">
1763. <br /></div>
1764. <b><u><span style="color: #073763;">Finally</span></u></b><br />
1765. <div style="font-weight: normal;">
1766. Instead of developing a high tech approach, this blog intended to give you some practical insights in the order of magnitude effects of life-cycle investments and longevity impact on pension plans in general. <br />
1767. <br />
1768. Hope you liked it!</div>
1769. <div style="font-weight: normal;">
1770. <br /></div>
1771. <div class="separator" style="clear: both; float: left; text-align: center;">
1772. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjq_K5GwL_PF4Gyo21BTcwPtMeoniOcf2b9Ny-qb1wJi2_Yb0PL9w5iuZmIs-Qr2IZeZyBEYbV6NkPWOzCjqWPmGp6FiQQeHBLXD-vfwbJ2VuMRyhQcbrKo77F8PemZEMBqohVgcXXfaqQ/s1600/money-root-all-evil.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjq_K5GwL_PF4Gyo21BTcwPtMeoniOcf2b9Ny-qb1wJi2_Yb0PL9w5iuZmIs-Qr2IZeZyBEYbV6NkPWOzCjqWPmGp6FiQQeHBLXD-vfwbJ2VuMRyhQcbrKo77F8PemZEMBqohVgcXXfaqQ/s1600/money-root-all-evil.png" /></a></div>
1773. <div style="font-weight: normal;">
1774. <br /></div>
1775. <div style="font-weight: normal;">
1776. <br /></div>
1777. <div style="font-weight: normal;">
1778. <br /></div>
1779. <div style="font-weight: normal;">
1780. Links/Downloads:</div>
1781. <div style="font-weight: normal;">
1782. - <a href="https://sites.google.com/site/boooming/Home/pension-planner-2014.Update-Life-Tables-jos-berkemeijer%20%281%29.xlsm?" target="_blank">Excel Pension Calculator including Dutch Life Tables 2012-2062</a> </div>
1783. <div style="font-weight: normal;">
1784. - <a href="https://sites.google.com/site/boooming/Home/life-cycle-example.xlsx" target="_blank">Excel Tables of this Blog</a><br />
1785. - <a href="https://sites.google.com/site/boooming/Home/Forecast-life-tables_AG2012-2062.xls" target="_blank">Forecasted NL Life Tables  2012, 2062, 2112</a></div>
1786. <div style="font-weight: normal;">
1787. - <a href="http://actuary-info.blogspot.nl/2012/03/excel-pension-calculator.html" target="_blank">Original Pension Excel Calculator</a></div>
1788. </div>
1789. <div style="font-weight: normal;">
1790. - <a href="http://www.ag-ai.nl/download/14130-Prognosetafel+AG2012-2062.pdf" target="_blank">Publication Dutch Life tables 2012-2062 (Dutch)</a></div>
1791. <div style="font-weight: normal;">
1792. - <a href="http://www.ag-ai.nl/download/14131-Prognosetafel+AG2012-2062.xls" target="_blank">Excel Spreadsheet Forecast Dutch Life Tables 2012-2062</a></div>
1793. <div style="font-weight: normal;">
1794. <br /></div>
1795. </div>
1796. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/4084715168737368563/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2014/05/discussing-life-cycle-pensions-longevity.html#comment-form' title='1 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/4084715168737368563'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/4084715168737368563'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2014/05/discussing-life-cycle-pensions-longevity.html' title='Discussing Life-Cycle Pensions &amp; Longevity'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisQ17434qJRgjQHWYnvk0KE-lDNDlXLYU3-LavU5B9er_wjIoFboKfdISf50YWT_mDUkOX6ymggER941b2vRh-OkcLZpeb0NX9ZZBjSZJEoKQ3XKbNylucxZYn-kbrZVXPFmEBLORFrio/s72-c/DIY-Investments.png" height="72" width="72"/><thr:total>1</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-5842926992422841998</id><published>2014-03-30T15:04:00.000+02:00</published><updated>2014-03-30T15:04:20.146+02:00</updated><category scheme="http://www.blogger.com/atom/ns#" term="cro"/><category scheme="http://www.blogger.com/atom/ns#" term="Governance"/><category scheme="http://www.blogger.com/atom/ns#" term="risk"/><title type='text'>Chief Actuary Officer</title><content type='html'>&lt;div style=&quot;background-color: white; font: small Georgia,Serif; width: 490px;&quot;&gt;
1797. Let's take a look at the governance of financial institutions from a risk management perspective:<br />
1798. <br />
1799. <div style="float: left; text-align: center;">
1800. <b><span style="color: #990000; font-size: large;">Governance Risk Management</span></b><br />
1801. <b><span style="color: #990000; font-size: large;"><br /></span></b></div>
1802. <div class="separator" style="clear: both; text-align: center;">
1803. <a href="http://www.toddnielsen.com/international-leadership-blogathon/risky-business-the-art-of-making-great-decisions-while-not-forgetting-about-risk/" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiSalVgx2_Z7j5YoBNL6v513yDC4GBDE3XL1KsfFmwf0g2JEQ3mWRzT2HkyC1gjBLAl2B2jhW-gdL2IYJBRGa2bJdHd9A_krUjr5gmXlKrbudBuyeUHIp1pPxXjJC8QdCfwAOrafHWfDXE/s1600/Governance-risk-management.png" /></a></div>
1804. <br />
1805. <div class="separator" style="clear: both; text-align: center;">
1806. </div>
1807. <br />
1808. Traditional governance focuses on the organisation-structure, decision-structure, influence and power-weights of all stakeholders. <i>Governance Risk Management</i> focuses on how to optimize and monitor risk and value creation for all stakeholders.<br />
1809. <br />
1810. <b><u><span style="color: #073763;">Financial Risk Management Monitoring</span></u></b><br />
1811. After defining a companies Mission, Risk Appetite and Strategic Plan, the year-targets and key indicators are not only translated into a tight budget (b) of 'sales targets' and 'profits', but also into 'balance sheet budget targets' (b). <br />
1812. <br />
1813. It takes a real well defined 'Governance Risk Management' to split the balance sheet into such parts (Assets, Liabilities & Capital) that responsible officers in the company are able (and can take responsibility) to monitor the actual values (a) monthly or quarterly to the final or adjusted budget values (b).<br />
1814. <br />
1815. <div class="separator" style="clear: both; float: left; text-align: center;">
1816. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizbNoxaPcrTL1iHGrJw-hEvbbEpP60m_2PEgqyyfXB3_s1YQM3ksLZJ3bYDRDtc_ZU6HW6jGYKNJ9iEvPhVxEkOHXAjpyOhS08_IiBjf5FHAyn2oaqujQZT4BppM1V1VxXdocyhUmYRrI/s1600/risk+management+monitoring.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizbNoxaPcrTL1iHGrJw-hEvbbEpP60m_2PEgqyyfXB3_s1YQM3ksLZJ3bYDRDtc_ZU6HW6jGYKNJ9iEvPhVxEkOHXAjpyOhS08_IiBjf5FHAyn2oaqujQZT4BppM1V1VxXdocyhUmYRrI/s1600/risk+management+monitoring.png" /></a></div>
1817.    <br />
1818. <div class="separator" style="clear: both; text-align: center;">
1819. </div>
1820. <br />
1821. <b><u><span style="color: #073763;">Officer Role Division</span></u></b><br />
1822. In a well managed and structured financial company the risk-financial roles of the companies officers can be defined as follows:<br />
1823. <br />
1824. <ol style="margin: 3px 2px 3px 23px; padding: 0px;">
1825. <li><u>CIO</u><br />The Chief Investment Officer is primarily responsible for managing the asset actuals A(a) versus the (adjusted) budget A(b). So the CIO has to manage [A(a)-A(b)] in terms of value and within defined  the investment risk budget.<br /> </li>
1826. <li><u>CAO</u><br />Although often unremarked, an important part of the role of the Chief Actuary Officer is to manage the actual liabilities L(a) versus the (adjusted) Liabilities budget L(b). <br />This is no easy job, as most longevity and (risk free) discounting of the liabilities are hard to influence.<br />Wrapping up: The CAO is responsible for managing [L(a)-L(b)].<br /><br /><i><span style="color: darkblue;">Often the role of the CAO seems to be limited to insurers or pension funds. However, also <b>banks</b> need an actuarial officer, as more and more (product) risks on the bank's balance sheet become economic, demographic and bio-related (mortality, disability, lifestyle).  </span></i><br /> </li>
1827. <li><u>CRO</u><br />Often the Chief Risk Officer is seen as someone at arms length reporting about risks to the (supervisory) board. However, one of the main roles of the CRO is to monitor Capital and Capital Requirements. He/She is responsible for realizing the sustainability of the company by managing the (adjusted) Capital budget C(b) while being confronted with continuously changinge Capital actuals C(a). So the CRO is responsible for monitoring [ [C(a)]-C(b)].  </li>
1828. </ol>
1829. <br />
1830. <b><u><span style="color: #073763;">AIRCO Management</span></u></b><br />
1831. Once the targets are set and responsibilities are defined, the hard part of managing a financial institution starts: Cooperation between the Actuarial, Investment, Risk and Capital Organisation (AIRCO) Chiefs.<br />
1832. <br />
1833. During a budget year, all individual defined AIRCO budgets and actuals continuously change in practice.<br />
1834. As capital risk development is the complex result of Asset and Liability volatility, capital management and monitoring by (primarily) the CRO manager becomes extra complex. Especially in market crises situations (tail risks), where traditional (linear) correlations between AIRCO components fail by definition. It's the responsibility of the CRO to <u>continuously</u> balance between all stakeholders interests in narrow cooperation with the CAO and CIO, while staying on track with regulatory requirements.<br />
1835. <br />
1836. This task is not easy, as AIRCO Management is not a one dimensional mission or game:<br />
1837. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square">
1838. <li><u>Run-off</u><br />Often AIRCO Management is merely based on regulatory AIRCO requirements, based on run-off portfolios and one-year period confidence levels (e.g.<a href="http://www.palgrave-journals.com/gpp/journal/v37/n3/fig_tab/gpp20123t1.html" target="_blank"> 99.5% [Solvency-II] or 99,9% [ Basel-II/III] </a>).<br /> </li>
1839. <li><u>Continuous business model </u><br />However this run-off approach is only based on a kind of default situation with a very low probability (< 1%). It's much more likely (> 99%) that a financial company will exist for more than one year. <br /><br />Therefore, adding one or more variations of 'continuous business model approaches' to the existing run-off approach on a board's table, will give the board a more (realistic) insight on the heavy an balanced decisions to be taken to continue and control a sustainable risk-return strategy. </li>
1840. </ul>
1841. <br />
1842. <b><u><span style="color: #073763;">ALC-Team</span></u></b><br />
1843. To manage the complex of AIRCO effects, it's often helpful to set up an Asset Liability Capital Team (ALC-Team) within a financial institution. Main task of this team is to manage risk and returns across all AIC-axes in line with the strategic plan, the defined risk-return appetite and actual regulatory requirements.<br />
1844. <br />
1845. <div class="separator" style="clear: both; float: right; text-align: center;">
1846. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBgLtSeU-__WFzbZr3F15tNFpw48IzLLm-QbOe3cESnbdYTXVHAw6083p8JMCVmLBYsuh6TfHCn4Q6lxA5fhFDWTgIlc0_lR1dtPj8mGvvHSN76iVxlnjjH1p68pUtZjYf4wIDeHLj9_k/s1600/ALC-Team.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBgLtSeU-__WFzbZr3F15tNFpw48IzLLm-QbOe3cESnbdYTXVHAw6083p8JMCVmLBYsuh6TfHCn4Q6lxA5fhFDWTgIlc0_lR1dtPj8mGvvHSN76iVxlnjjH1p68pUtZjYf4wIDeHLj9_k/s1600/ALC-Team.png" /></a></div>
1847. The ALC-Team consists of the CAO, CIO an CRO and could in practice be chaired by the board's CFO, or CFRO.<br />
1848. <div class="separator" style="clear: both; text-align: center;">
1849. </div>
1850. This ALC-Team :<br />
1851. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square">
1852. <li>proposes board adjustments and monitors the risk-return targets and matching policy</li>
1853. <li>makes clear what the often paradoxical and/or conflicting effects of risk-return management are for <u>all stakeholders</u> on basis of different future business continuity models (e.g. Run-off, Continuous business, etc.)</li>
1854. <li>Makes clear and advises what measures the board can take due to the impact on ALC of different business models views, changes in economic risks and changes in regulation.</li>
1855. <li>operates on basis of ALC reporting information,"Own Risk Assessment" reports, external Economic Risk Reports and external Regulatory Change Information.</li>
1856. </ul>
1857. <br />
1858. <br />
1859. <b><u><span style="color: #073763;">Pitfalls</span></u></b><br />
1860. <div class="separator" style="clear: both; float: right; text-align: center;">
1861. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaXPLQS_mZhGXzepXkYNAm_P3yJxfByTMLVTpT_eIO_FB6viOugFF65VRH6TNPllDrZZfITTLiNy4Ic0e9HnHz2P6OPQA9e7N742Y0VcTU4klnZSXhSrD-20mU81I10O2KyeJc2IT8hhE/s1600/POPEYE-ASSETS.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaXPLQS_mZhGXzepXkYNAm_P3yJxfByTMLVTpT_eIO_FB6viOugFF65VRH6TNPllDrZZfITTLiNy4Ic0e9HnHz2P6OPQA9e7N742Y0VcTU4klnZSXhSrD-20mU81I10O2KyeJc2IT8hhE/s1600/POPEYE-ASSETS.png" /></a></div>
1862. One of the most tricky pitfalls in capital management is that a financial institution tries to solve all budget variances and regulation changes only by adjusting its investment policy. <br />
1863. <br />
1864. If adjusting is done 'on the fly', without considering the risk-return targets and (even worse) through the mental filter of just one of the stakeholders interests (e.g. 'shareholder value), a financial company implicitly risks to lose track of the overall strategic business targets.<br />
1865. <br />
1866. If an economic or regulatory change influences the risk-return objectives, <i>all possible instrumental options</i> to respond, have to be taken into account. One of the most forgotten instruments to respond to market changes, is 'product management' or (new) 'product development'. <br />
1867. <br />
1868. Yet, nevertheless the fact that existing (product) contracts are (short term) often hard to adapt, 'product management' is one of the most vital instruments to apply regarding the management of long term risk-return objectives.<br />
1869. <br />
1870. Therefore AIRCO Management requires a planned an controlled Stakeholder Management Process in a financial institution.<br />
1871. <br />
1872. <u><b><span style="color: #073763;">Stakeholder Value (Risk) Management</span></b></u><br />
1873. Managing a company's stakeholder value implies that the effects of the economic, regulatory and own-company changes on the risk-return objectives are continuously balanced across all stakeholders (Shareholders, Clients, Asset Managers, Board/Employees).<br />
1874. <br />
1875. Apart from 'HR value management', regarding possible board and employee reward and benefits adjustments, the instruments to manage and  balance Stakeholder Value:<br />
1876. <br />
1877. A-1  Asset Value management<br />
1878. C-1. Capital Management<br />
1879. C-2  Shareholder Value management<br />
1880. L-1  Product Value Management<br />
1881. L-2  Client Value management<br />
1882. <br />
1883. are presented in the next chart:<br />
1884. <br />
1885. <div class="separator" style="clear: both; float: left; text-align: center;">
1886. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgTUxfhHAj2SY_17hUiVYRrJZ0l2Kenlk0d-hZFrTvD8gJ19R9Vd0OghB86Xvn1JDKhjQrZUzdFsAJrvSnyj8D7MCy-WP2085kqx2HRLVxyyE7oCxXFwAAIqHJ6G1C-3cPrPWpygJg9WK4/s1600/Stakeholder+Value+management.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgTUxfhHAj2SY_17hUiVYRrJZ0l2Kenlk0d-hZFrTvD8gJ19R9Vd0OghB86Xvn1JDKhjQrZUzdFsAJrvSnyj8D7MCy-WP2085kqx2HRLVxyyE7oCxXFwAAIqHJ6G1C-3cPrPWpygJg9WK4/s1600/Stakeholder+Value+management.png" /></a></div>
1887. <div class="separator" style="clear: both; text-align: center;">
1888. </div>
1889. <b><u><span style="color: #073763;">Conclusion</span></u></b><br />
1890. Managing a financial institution in this challenging financial decade (2010-2020) is a complex operation with multidimensional regulation and business risk-return targets. Financial Boards have to manage more truths at the same time in a highly volatile economic risk-return environment.<br />
1891. <br />
1892. Surviving in this complex world urges boards to step from a traditional <i><b><span style="color: blue;">predictable managing approach</span></b></i> to a more <i><b><span style="color: blue;">responsive managing approach</span></b></i>, where stakeholders value is continuously monitored and adapted to the real world environment.<br />
1893. <br />
1894. This new 'survival approach' urges to improve communication, process information and reporting across Assets, Liabilities and Capital Management within the organisation. <br />
1895. <br />
1896. Establishing an ALC-Team approach could be a first step to improve the control on risk-return management within the organisation across all stakeholders and actively using all 'stakeholders value tools' in a balanced way.<br />
1897. <br />
1898. Last but not least, the role of the Chief Actuary Officer should be more clearly defined. The CAO is, in line with Client Value objectives, primarily responsible for an adequate liability en product management, that's key in balancing the risk-return objectives of a financial institution.<br />
1899. <br />
1900. Success!
1901. <br />
1902. <br />
1903. <u>Links/Sources</u><br />
1904. - <a href="http://www.toddnielsen.com/international-leadership-blogathon/risky-business-the-art-of-making-great-decisions-while-not-forgetting-about-risk/" target="_blank">Cartoon: Government Risk Management by Todd Nielsen</a><br />
1905. - <a href="http://www.toddnielsen.com/international-leadership-blogathon/risky-business-the-art-of-making-great-decisions-while-not-forgetting-about-risk/" target="_blank">Risky Business – Making Phenomenal Decisions</a> <br />
1906.    (While Not Forgetting the Risk)</div>
1907. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/5842926992422841998/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2014/03/chief-actuary-officer.html#comment-form' title='1 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/5842926992422841998'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/5842926992422841998'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2014/03/chief-actuary-officer.html' title='Chief Actuary Officer'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiSalVgx2_Z7j5YoBNL6v513yDC4GBDE3XL1KsfFmwf0g2JEQ3mWRzT2HkyC1gjBLAl2B2jhW-gdL2IYJBRGa2bJdHd9A_krUjr5gmXlKrbudBuyeUHIp1pPxXjJC8QdCfwAOrafHWfDXE/s72-c/Governance-risk-management.png" height="72" width="72"/><thr:total>1</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-5648341560186760502</id><published>2014-03-01T23:13:00.000+01:00</published><updated>2014-03-01T23:13:18.808+01:00</updated><category scheme="http://www.blogger.com/atom/ns#" term="antifragile"/><category scheme="http://www.blogger.com/atom/ns#" term="black swan"/><category scheme="http://www.blogger.com/atom/ns#" term="Taleb"/><title type='text'>Too Big to Tail</title><content type='html'>&lt;div style=&quot;background-color: white; font-family: Georgia, serif; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal; width: 490px;&quot;&gt;
1908. <div class="separator" style="clear: both; float: right; font-size: small; text-align: center;">
1909. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgp7aPcfVdUQ15LccTQM5KhsRpsRgi-JMkpTOaLiU6aKoQqkFZNO9zvaZJ9MxZ868NcLqHwvKmJyT6kwNCx2TFXTFufTsOYHIRFn5-HzwvSOBT_5oxhPZ2sdEYkIOSlRauwEmxSNSseAu4/s1600/taleb.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgp7aPcfVdUQ15LccTQM5KhsRpsRgi-JMkpTOaLiU6aKoQqkFZNO9zvaZJ9MxZ868NcLqHwvKmJyT6kwNCx2TFXTFufTsOYHIRFn5-HzwvSOBT_5oxhPZ2sdEYkIOSlRauwEmxSNSseAu4/s1600/taleb.jpg" /></a></div>
1910. <div style="font-size: small;">
1911. At the end of 2012 the author of the famous book <i><a href="http://www.amazon.com/The-Black-Swan-Improbable-Robustness/dp/081297381X" target="_blank">The Black Swan</a></i> and professor of risk engineering at the <a href="http://www.poly.edu/user/ntaleb" target="_blank">NYU</a>, Nassim Nicholas Taleb, published his new book <i><a href="http://www.amazon.com/Antifragile-Things-That-Gain-Disorder/dp/1400067820" target="_blank">Antifragile</a>.</i></div>
1912. <div style="font-size: small;">
1913. <br /></div>
1914. <div style="font-size: small;">
1915. Antifragile is a term Taleb defines to describe things that benefit more (have more upside) from random events or shocks, than they are harmed by (have downside). <br />
1916. <br />
1917. In other words, antifragile things are those that benefit from stress and disorder.</div>
1918. <div style="font-size: small;">
1919. <br /></div>
1920. <div style="font-size: small;">
1921. Inevitably, this  ' E=MC<sup>2</sup> ' book will change the foundations of Risk Management coming decade. <i><a href="http://www.amazon.com/Antifragile-Things-That-Gain-Disorder/dp/1400067820" target="_blank">Antifragile</a></i> should be qualified as 'compulsory reading' for all actuaries, CFO's, CEO's and risk or investment managers.</div>
1922. <div style="font-size: small;">
1923. <br /></div>
1924. <div style="font-size: small;">
1925. It's impossible to summarize Taleb's Antifragile insights in a single blog, Therefore I'll focus on some examples and the major principles.<br />
1926. <br />
1927. Also I would like to point at two more less known and 'mathematical based' text-books(<a href="http://www.fooledbyrandomness.com/FatTails.html" target="_blank">downloadable</a> and in progress) that are related to his popular (non-mathematical) book Antifragile: </div>
1928. <ol style="font-size: small;">
1929. <li><a href="https://docs.google.com/file/d/0B_31K_MP92hURjZxTkxUTFZnMVk/edit?pli=1" target="_blank">Taleb Textbook: Fat Tails Math, Probability and Risk in the Real World</a></li>
1930. <li><a href="https://docs.google.com/file/d/0B_31K_MP92hUTENCVTVwSThfaWM/edit" target="_blank">Taleb Textbook: Fat Tails and (Anti)fragility</a> </li>
1931. </ol>
1932. <div style="font-size: small;">
1933. <b><u><span style="color: #073763;"><br /></span></u></b></div>
1934. <div style="font-size: small;">
1935. <b><u><span style="color: #073763;">What's Investment Risk?</span></u></b></div>
1936. <div style="font-size: small;">
1937. In a presentation ("<a href="http://www.slideshare.net/berkemeijer/from-backroom-to-boardroom-duc" target="_blank">Actuaris: From Backroom to Boardroom</a>"; Dutch) to over 200 actuarial professionals at 'Actuarieel Podium' on October 1st 2013 in Utrecht, Jos Berkemeijer discussed, questioned and challenged some major actuarial profession principles. One of these actuarial principles is the:</div>
1938. <div style="font-size: small;">
1939. <br /></div>
1940. <div style="font-size: small; text-align: center;">
1941. <span style="color: #990000; font-size: large;"><b>Concept of Investment Risk</b></span></div>
1942. <div style="font-size: small;">
1943. <br /></div>
1944. <div style="font-size: small;">
1945. Inspired by Taleb's view on investment risk, I asked my audience to rank the next randomly presented stock charts in order of decreasing risk.</div>
1946. <div style="font-size: small;">
1947. <br /></div>
1948. <div style="font-size: small;">
1949. Can you manage?</div>
1950. <div style="font-size: small;">
1951. <br /></div>
1952. <div class="separator" style="clear: both; float: left; font-size: small; text-align: center;">
1953. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6fQk-Hu7HFnkKvstJkfhTBpoWYKxwrFms6yWbAoi5SB4_PGPGzAcpDx6Zf52YTgHiYai2SuPYFvL7bNw_SZ2KfumP0C8XLw0Pht3ka45Ob59l_MtXS79s31ZoPMma3U9DKlY858i5wYc/s1600/Stockchoice.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6fQk-Hu7HFnkKvstJkfhTBpoWYKxwrFms6yWbAoi5SB4_PGPGzAcpDx6Zf52YTgHiYai2SuPYFvL7bNw_SZ2KfumP0C8XLw0Pht3ka45Ob59l_MtXS79s31ZoPMma3U9DKlY858i5wYc/s1600/Stockchoice.png" /></a></div>
1954. <div class="separator" style="clear: both; font-size: small; text-align: center;">
1955. </div>
1956. <div style="font-size: small;">
1957. <br /></div>
1958. <div style="font-size: small;">
1959. As expected, most actuaries chose Stock Chart I or II as 'most risky'. Apart from a few Taleb-conscious actuaries, all of them chose Chart III as 'least risky'.</div>
1960. <div style="font-size: small;">
1961. <br /></div>
1962. <div style="font-size: small;">
1963. And that last choice is indeed the choice we're trained to qualify as least risky. The way we're brought up, is that risk equals volatility, ultimately resulting in a dangerous and wrong conclusion: non-volatility = 'no risk'.</div>
1964. <div style="font-size: small;">
1965. <br /></div>
1966. <div style="font-size: small;">
1967. However, according to Taleb, the opposite is true: Chart III represents the most risky stock.</div>
1968. <div style="font-size: small;">
1969. <br /></div>
1970. <div style="font-size: small;">
1971. <span style="color: #990000; font-size: large;"><b>Why?</b></span></div>
1972. <div style="font-size: small;">
1973. <br /></div>
1974. <div style="font-size: small;">
1975. Because the company or investment fund that's behind Stock Chart III doesn't have any real experience with 'managing risk' at all !!<br />
1976.   </div>
1977. <div class="separator" style="clear: both; float: left; font-size: small; text-align: center;">
1978. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-Pz8UjM-Mn1iEvDTGHipUB01inGwliVQ1btDdlWSl0ovjhyphenhyphenP-hlCeGkrPtCFLvvv6eCsYnYNV_rOdZfABZGASRst3uW9qbSNYiDDv_Jb4A7VcwQxSU_YowD2b2vEQbBpTaQQNAumuts0/s1600/stocks-doom.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-Pz8UjM-Mn1iEvDTGHipUB01inGwliVQ1btDdlWSl0ovjhyphenhyphenP-hlCeGkrPtCFLvvv6eCsYnYNV_rOdZfABZGASRst3uW9qbSNYiDDv_Jb4A7VcwQxSU_YowD2b2vEQbBpTaQQNAumuts0/s1600/stocks-doom.png" /></a></div>
1979. <div class="separator" style="clear: both; font-size: small; text-align: center;">
1980. </div>
1981. <div style="font-size: small;">
1982. <b style="background-color: white; font-family: georgia, serif; font-size: 14px; line-height: 18px;"><u><span style="color: #b45f06;"><br /></span></u></b></div>
1983. <div style="font-size: small;">
1984. <b style="background-color: white; font-family: georgia, serif; font-size: 14px; line-height: 18px;"><u><span style="color: #b45f06;">Taleb's Turkey</span></u></b></div>
1985. <div style="font-size: small;">
1986. In another way, Stock Chart II is risky as well. Chart III shows limited risk and exponential growth.</div>
1987. <div style="font-size: small;">
1988. As Isaac Newton already stated: <span style="background-color: white;"><span style="color: #181818; font-family: georgia, serif;"><span style="font-size: 14px; line-height: 18px;">“</span></span><i style="color: #181818; font-family: georgia, serif; font-size: 14px; line-height: 18px;"><a href="http://www.goodreads.com/quotes/433926-what-goes-up-must-come-down" target="_blank">What goes up must come down</a></i><span style="color: #181818; font-family: georgia, serif;"><span style="font-size: 14px; line-height: 18px;">”</span></span><br /><span style="color: #181818; font-family: georgia, serif;"><span style="font-size: 14px; line-height: 18px;">Therefore Stock III is a risky investment as well, despite it's limited volatility.</span></span></span></div>
1989. <div style="font-size: small;">
1990. <span style="background-color: white;"><span style="color: #181818; font-family: georgia, serif;"><span style="font-size: 14px; line-height: 18px;"><br /></span></span></span>
1991. <span style="background-color: white;"><span style="font-family: georgia, serif;"><span style="font-size: 14px; line-height: 18px;"><span style="color: #181818;">The fact that Chart II Stocks must come down is well illustrated by Taleb's Turkey example   </span></span></span><br /><span style="color: #181818; font-family: georgia, serif;"><span style="font-size: 14.44444465637207px; line-height: 17.98611068725586px;"><br /></span></span></span></div>
1992. <div class="separator" style="clear: both; float: left; font-size: small; text-align: center;">
1993. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEha87KTnScX02_Ofuy5DYnBYep_59zi9GIwtETt1uIzeBomGI1O9bXcP5ByGafC37LlC3Mr_F7UbTGUfWM6Ob_Oze10QHEYvELYobqe2ETtAXnJYc7hKjgvgLtjlDrvf2VEAVQDJXmpqcE/s1600/turkey-taleb.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEha87KTnScX02_Ofuy5DYnBYep_59zi9GIwtETt1uIzeBomGI1O9bXcP5ByGafC37LlC3Mr_F7UbTGUfWM6Ob_Oze10QHEYvELYobqe2ETtAXnJYc7hKjgvgLtjlDrvf2VEAVQDJXmpqcE/s1600/turkey-taleb.png" /></a></div>
1994. <div class="separator" style="clear: both; font-size: small; text-align: center;">
1995. </div>
1996. <div style="font-size: small;">
1997. <span style="background-color: white;"><span style="color: #181818; font-family: georgia, serif; font-size: 14.44444465637207px; line-height: 17.98611068725586px;">"<i>A turkey is fed by a butcher.  Every day it is confirmed to the turkey and the turkey’s economics department and the turkey’s risk management department and the turkey’s analytical department that the butcher loves turkeys. And every day brings more confidence to that statement. </i></span><span style="background-color: transparent; color: #181818; font-family: georgia, serif; font-size: 14.44444465637207px; line-height: 17.98611068725586px;"><i><br /></i></span></span></div>
1998. <div style="font-size: small;">
1999. <span style="background-color: white;"><span style="background-color: transparent; color: #181818; font-family: georgia, serif; font-size: 14.44444465637207px; line-height: 17.98611068725586px;"><i>The butcher will keep feeding the turkey until a few days before Thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. <br /><br />So with the butcher surprising it, the turkey will have a revision of belief—right when its confidence in the statement that the butcher loves turkeys is maximal and “it is very quiet” and soothingly predictable in the life of the turkey. </i>"</span></span></div>
2000. <div style="font-size: small;">
2001. <span style="color: #181818; font-family: georgia, serif;"><span style="font-size: 14.44444465637207px; line-height: 17.98611068725586px;"><br /></span></span>
2002. </div>
2003. <div style="font-size: small;">
2004. <span style="color: #181818; font-family: georgia, serif;"><span style="font-size: 14.44444465637207px; line-height: 17.98611068725586px;">This example also makes clear that </span><span style="font-size: 14.44444465637207px; line-height: 17.98611068725586px;">black swans are not just big negative impact events. The events of a black swan event depend on the position of the observer.</span></span></div>
2005. <div style="font-size: small;">
2006. <span style="color: #181818; font-family: georgia, serif;"><span style="font-size: 14.44444465637207px; line-height: 17.98611068725586px;"><br /></span></span>
2007. <span style="background-color: white;"><br /><span style="font-family: georgia, serif;"><span style="font-size: 14px; line-height: 18px;"><b><u><span style="color: #b45f06;">Least Risky</span></u></b><br /><span style="color: #181818;">At the end we have to conclude that, despite the largest volatility, Stock III is the least risky investment, because the company or investment fund behind this stock chart, has learned to 'deal' with risk.</span></span></span></span></div>
2008. <div style="font-size: small;">
2009. <span style="background-color: white;"><span style="font-family: georgia, serif;"><span style="font-size: 14px; line-height: 18px;"><span style="color: #181818;"><br /></span></span></span></span>
2010. <span style="background-color: white;"><span style="font-family: georgia, serif;"><span style="color: #181818;"><span style="font-size: 14px; line-height: 18px;">Dealing with investment risk is just like raising your child. You try to protect your child against life threatening events (defaults), while at the same time you encourage it to take limited (non life </span><span style="font-size: 14.44444465637207px; line-height: 17.98611068725586px;">threatening</span><span style="font-size: 14px; line-height: 18px;">) risks, so it may learn to prevent and absorb damages (losses) in order get better in resisting future other risks. </span></span></span></span></div>
2011. <div style="font-size: small;">
2012. <span style="background-color: white;"><span style="font-family: georgia, serif;"><span style="font-size: 14px; line-height: 18px;"><span style="color: #181818;"><br /></span></span></span></span>
2013. <span style="background-color: white;"><span style="font-family: georgia, serif;"><span style="font-size: 14px; line-height: 18px;"><span style="color: #181818;">Or.., to put it in a philosophical way, as defined by rabbi </span></span></span></span><span style="background-color: white; color: #181818; font-family: georgia, serif; font-size: 14.44444465637207px; line-height: 17.98611068725586px;">Anthony Glickman:</span></div>
2014. <div style="font-size: small;">
2015. <span style="background-color: white; color: #181818; font-family: georgia, serif; font-size: 14.44444465637207px; line-height: 17.98611068725586px;"><br /></span>
2016. </div>
2017. <div style="text-align: center;">
2018. <span style="background-color: white; font-family: georgia, serif; line-height: 17.98611068725586px;"><b><span style="color: #990000;"><span style="font-size: 14.44444465637207px;"> “Life is long gamma.” </span><br /><span style="font-size: x-large;">= </span><br /><span style="font-size: 14.44444465637207px;">“Life benefits from volatility and variability”</span></span></b></span></div>
2019. <div style="font-size: small;">
2020. <span style="background-color: white;"><span style="font-family: georgia, serif;"><span style="font-size: 14px; line-height: 18px;"><span style="color: #181818;"><br /></span></span></span></span>
2021. </div>
2022. <div style="font-size: small;">
2023. <span style="color: #073763;"><b style="text-decoration: underline;">Antifragile Essentials</b><br />Now after this popular intro, let's conclude with some fundamental principles of Taleb:</span></div>
2024. <ol style="font-size: small;">
2025. <li><u>Antifragile</u><br />An investment portfolio (strategy) can be qualified as 'Antifragile' if it benefits more form shocks (high-impact events or extreme volatility, up to a certain level) than it suffers.<br /><br /><div class="separator" style="clear: both; text-align: center;">
2026. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOyOB9zmvTwaolD3eLAac0j4ZFaxyMkmGtDoLS3B5Ng7Le8C8paWnMsW7ytJW00SOzc60ydv6iYtAR4gcfF_IMNKCawDXeQaqgyXfaSgNq69KTMpNr-aUuQM7j9QCwWqoP-DID6hXRHo8/s1600/convexity-taleb.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOyOB9zmvTwaolD3eLAac0j4ZFaxyMkmGtDoLS3B5Ng7Le8C8paWnMsW7ytJW00SOzc60ydv6iYtAR4gcfF_IMNKCawDXeQaqgyXfaSgNq69KTMpNr-aUuQM7j9QCwWqoP-DID6hXRHo8/s1600/convexity-taleb.jpg" /></a></div>
2027. <div class="separator" style="clear: both; text-align: center;">
2028. <br /></div>
2029. </li>
2030. <li><u>Optionality & Investment Strategy</u></li>
2031. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="disc">
2032. <li><i><span style="color: #0c343d;">What makes you antifragile?</span></i><br />Executing a option strategy<br /> </li>
2033. <li><i><span style="color: #0c343d;">Traditional investment strategies: 'too much focus'</span></i><br />Traditional investment strategies (e.g. Mean-Variance optimization, profit maximization or risk budgeting) all have explicit goals ('focus') that make their performance outcomes very parameter and model dependent. Because 'medium' risks can be subjected to huge measurement errors, the often 'medium' or 'moderate' risk attitude of these strategies can become catastrophical. <br /><br />Traditional investment strategies are not designed to explicitly cope with Negative Black Swans events. Neither are they designed to profit from 'disorder clusters': volatility, uncertainty, disturbances, randomness and stressors. <br /><br />Most important: traditional investment strategies are not set for maximal profiting of Positive Black Swans!<br /> </li>
2034. <li><i><span style="color: #0c343d;">Barbell strategy</span></i><br />The essence of an 'optionality investment strategy' ('barbell strategy') can be formulated as a 'dual attitude' of extreme risk aversion by playing it ultimate safe in some areas (robust to negative Black Swans) and extreme 'risk loving' by taking a lot of small risks in others (open to positive Black Swans), hence achieving antifragility.<br /><br />As a consequence this barbell-strategy reduces the downside risk, e.g. the elimination of the risk of ruin. In fact any strategy that removes the risk of ruin is a kind of barbell strategy. It's a strategy of limited loss and large possible outcome.<br /> </li>
2035. <li><i><span style="color: #073763;">More Data, Better Outcome?</span></i><br />Quit contrary to what we as actuaries would expect, Taleb explains in his book Antifragile that the more data you get, the less you know what’s going on, and the more iatrogenics (damage from treatment in excess of the benefits) you will cause.</li>
2036. </ul>
2037. </ol>
2038. <div style="font-size: small;">
2039. <br /></div>
2040. <div style="font-size: small;">
2041. <b><u><span style="color: #073763;">Finally</span></u></b></div>
2042. <div style="font-size: small;">
2043. Some risks are simply too small or too big to Tail. Try to approach them in an Antifragile way.....<br />
2044. <br />
2045. Although the new insights and theories of Taleb are quit appealing, there's still a lot of work to do to make it work in practice.</div>
2046. <div style="font-size: small;">
2047. <br /></div>
2048. <div style="font-size: small;">
2049. Fortunately, you may read Taleb's book Antifagile online, or simply download it.</div>
2050. <div style="font-size: small;">
2051. <br /></div>
2052. <div style="font-size: small;">
2053. Enjoy!</div>
2054. <div style="font-size: small;">
2055. <br /></div>
2056. <div style="font-size: small; text-align: center;">
2057. <a href="http://www.riosmauricio.com/wp-content/uploads/2013/05/Taleb_Antifragile.pdf" target="_blank"><span style="font-size: 130%;">Download (PDF) Taleb's Book Antifragile</span></a></div>
2058. <div style="font-size: small;">
2059. <br /></div>
2060. <div style="font-size: small;">
2061. <u><br /></u>
2062. <u><br /></u>
2063. <u>Taleb Links</u></div>
2064. <div style="font-size: small;">
2065. - <a href="http://www.fooledbyrandomness.com/" target="_blank">Homepage Taleb</a></div>
2066. <div style="font-size: small;">
2067. - <a href="https://twitter.com/nntaleb" target="_blank">Taleb on Twitter</a></div>
2068. <div style="font-size: small;">
2069. - <a href="http://www.ft.com/cms/s/2/d538a45a-4871-11e2-a1c0-00144feab49a.html#axzz2Z2Yg5a6H" target="_blank">FT Interview Taleb (2013)</a></div>
2070. <div style="font-size: small;">
2071. - <a href="http://globalguerrillas.typepad.com/globalguerrillas/talebs-rules.html" target="_blank">Taleb's Rules</a></div>
2072. <div style="font-size: small;">
2073. - <a href="http://www.fooledbyrandomness.com/OxfordBTLecture.pdf" target="_blank">Convexity, Robustness and Model Error inside the FourthQuadrant</a></div>
2074. <div style="font-size: small;">
2075. - <a href="http://www.fooledbyrandomness.com/">http://www.fooledbyrandomness.com/</a></div>
2076. <div style="font-size: small;">
2077. - <a href="http://www.edge.org/conversation/understanding-is-a-poor-substitute-for-convexity-antifragility" target="_blank">Understanding is a poor substitute for convexity (Antifragility)</a></div>
2078. <div style="font-size: small;">
2079. - <a href="http://condoroptions.com/2012/11/26/why-taleb-is-wrong-about-markets-and-uncertainty/" target="_blank">Why Taleb is wrong</a></div>
2080. <div style="font-size: small;">
2081. - <a href="https://dl.dropboxusercontent.com/u/50282823/ft.pdf" target="_blank">Financial Times: The Inventory: Nassim Nicholas Taleb</a></div>
2082. <div style="font-size: small;">
2083. - <a href="http://www.volcube.com/resources/options-articles/the-difference-between-long-gamma-and-short-gamma/" target="_blank">The difference between long gamma and short gamma</a></div>
2084. <div style="font-size: small;">
2085. <br /></div>
2086. <div style="font-size: small;">
2087. <u>Other Link</u></div>
2088. <div style="font-size: small;">
2089. - <a href="http://www.slideshare.net/berkemeijer/from-backroom-to-boardroom-duc" target="_blank">Presentation by Jos Berkemeijer: Actuaris from Backroom to Boardroom</a></div>
2090. <div style="font-size: small;">
2091. <br /></div>
2092. </div>
2093. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/5648341560186760502/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2014/03/too-big-to-tail.html#comment-form' title='1 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/5648341560186760502'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/5648341560186760502'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2014/03/too-big-to-tail.html' title='Too Big to Tail'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgp7aPcfVdUQ15LccTQM5KhsRpsRgi-JMkpTOaLiU6aKoQqkFZNO9zvaZJ9MxZ868NcLqHwvKmJyT6kwNCx2TFXTFufTsOYHIRFn5-HzwvSOBT_5oxhPZ2sdEYkIOSlRauwEmxSNSseAu4/s72-c/taleb.jpg" height="72" width="72"/><thr:total>1</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-8805782182905108368</id><published>2014-02-02T12:38:00.000+01:00</published><updated>2014-02-02T12:38:37.047+01:00</updated><category scheme="http://www.blogger.com/atom/ns#" term="work"/><title type='text'>Elderly Pension Income Funding</title><content type='html'>&lt;div style=&quot;background-color: white; font: small Georgia,Serif; width: 490px;&quot;&gt;
2094. One of the main issues in our aging-society is to achieve an adequate retirement income level for the elderly. <br />
2095. <div class="separator" style="clear: both; float: right; text-align: center;">
2096. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRMOo3D7aygNaMYgqW_0lzwW4edFKi2Ko7Yz4uHrY1Duq67IFODP1K8u4HwEpUqWdbd04K04U3-_p_jleCYNb6Pev_vYWFr56Z6FJWvcjtUtUxLMaV-fmex-YePhfLxM4NhnaMrhBd_lE/s1600/pension-atm.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRMOo3D7aygNaMYgqW_0lzwW4edFKi2Ko7Yz4uHrY1Duq67IFODP1K8u4HwEpUqWdbd04K04U3-_p_jleCYNb6Pev_vYWFr56Z6FJWvcjtUtUxLMaV-fmex-YePhfLxM4NhnaMrhBd_lE/s1600/pension-atm.png" /></a></div>
2097. <br />
2098. A recently published OECD report called '<a href="http://www.oecd-ilibrary.org/finance-and-investment/pensions-at-a-glance-2013_pension_glance-2013-en" target="_blank">Pensions at a Glance 2013</a>' gives a detailed insight in how we are doing.<br />
2099. <br />
2100. 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 .<br />
2101. <br />
2102. <br />
2103. <b><u><span style="color: #073763;">Relative incomes of people 65-years and older</span></u></b><br />
2104. Let's take a look at the relative incomes of people 65-years and older, per country, in the 'late 2000s' (2007-2010):<br />
2105. <br />
2106. <div class="separator" style="clear: both; text-align: center;">
2107. </div>
2108. <div class="separator" style="clear: both; float: left; text-align: center;">
2109. <a href="http://www.jantoo.com/lowResView.php?cat_num=03536855&keyword=atm&doNotInclude=&caption=&categories=All+Categories&artists=All+Artists&colorOption1=colour&colorOption2=blackWhite&orientationOption1=portrait&orientationOption2=landscape&cp=0&limit=12" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipY1KnnfegaR8V7sw3Vmbtn_LKf_itu3qgmB7LkfeQpUQnOW62n_Z6nju1Ke-uBRAn0MJHz310XZo-XqtOtLFubJ8siL5df09DR9Uz9W5Pdo4B7hMvLmxkWHkdEsY1E80m4v0WDFVxVKw/s1600/pension-income-oecd-1.png" /></a></div>
2110. <div class="separator" style="clear: both; text-align: center;">
2111. </div>
2112. 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.....<br />
2113. <br />
2114. <b><u><span style="color: #073763;">Elderly: Sources of Income</span></u></b><br />
2115. The next graph makes perfectly clear in which countries the elderly still have to work for the main part of their income.<br />
2116. <br />
2117. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDNAxq2z3SnC3p56H4xJVcY0qVbDmB8ElGhqiwmUyxqeVTrW-zocGiko_NpUs1h5siF85BUJPEBORSFAvDnUGh67BkP5INIgP02Bj9QGXncuwi-WROTzUeAfVP9mZPs2tAxL2i1E7SIGc/s1600/pension-income-sources-oecd-2.png" imageanchor="1" style="clear: left; display: inline !important; margin-bottom: 1em; margin-right: 1em; text-align: center;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDNAxq2z3SnC3p56H4xJVcY0qVbDmB8ElGhqiwmUyxqeVTrW-zocGiko_NpUs1h5siF85BUJPEBORSFAvDnUGh67BkP5INIgP02Bj9QGXncuwi-WROTzUeAfVP9mZPs2tAxL2i1E7SIGc/s1600/pension-income-sources-oecd-2.png" /></a><br />
2118. <div class="separator" style="clear: both; text-align: center;">
2119. </div>
2120. <br />
2121. 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.<br />
2122. <br />
2123. 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.<br />
2124. <br />
2125. For more interesting conclusions, download the OECD report.<br />
2126. <br />
2127. Links/Sources:<br />
2128. - <a href="http://www.oecd-ilibrary.org/finance-and-investment/pensions-at-a-glance-2013_pension_glance-2013-en" target="_blank">OECD Pensions at a Glance</a>
2129. - <a href="http://www.jantoo.com/lowResView.php?cat_num=03536855&keyword=atm&doNotInclude=&caption=&categories=All+Categories&artists=All+Artists&colorOption1=colour&colorOption2=blackWhite&orientationOption1=portrait&orientationOption2=landscape&cp=0&limit=12">Jantoo Cartoons</a>
2130. </div>
2131. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/8805782182905108368/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2014/02/elderly-pension-income-funding.html#comment-form' title='2 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/8805782182905108368'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/8805782182905108368'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2014/02/elderly-pension-income-funding.html' title='Elderly Pension Income Funding'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRMOo3D7aygNaMYgqW_0lzwW4edFKi2Ko7Yz4uHrY1Duq67IFODP1K8u4HwEpUqWdbd04K04U3-_p_jleCYNb6Pev_vYWFr56Z6FJWvcjtUtUxLMaV-fmex-YePhfLxM4NhnaMrhBd_lE/s72-c/pension-atm.png" height="72" width="72"/><thr:total>2</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-1673219614646760963</id><published>2014-01-19T22:51:00.001+01:00</published><updated>2014-01-19T22:56:03.572+01:00</updated><title type='text'>Are Health Expenditure &amp; Life Expectancy Related?</title><content type='html'>&lt;div style=&quot;background-color: white; font: small Georgia,Serif; width: 490px;&quot;&gt;
2132. Does life expectancy depends on how much is invested in in Health?<br />
2133. 'Of course' one would say as a first response. But on second thought the relationship between healthcare and life expectancy is rather complex:<br />
2134. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square">
2135. <li>More basic healthcare improves the quality of life and therefore life expectancy</li>
2136. <li>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</li>
2137. <li>Developed countries that invest a lot in health might invest more than is needed for an optimal life expectancy</li>
2138. </ul>
2139. <br />
2140. Let's take a look at the last available (2011) Top-20 figures:<br />
2141. <div class="separator" style="clear: both; float: left; text-align: center;">
2142. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyfbOZwzlLvf-7IKzQNZ2yeuCMsyDpYPxcR8ttfrulPlQo2hyphenhyphen9EQlHfA7yiQ8COMl7uS3pXKrOAVc6YDZKf_ynyRIqRpq-VFiiOmrN4834kxdi53J8Go-EZmoDJ3U2KDyyOmVhn4VR8b0/s1600/HE-LE-2011.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyfbOZwzlLvf-7IKzQNZ2yeuCMsyDpYPxcR8ttfrulPlQo2hyphenhyphen9EQlHfA7yiQ8COMl7uS3pXKrOAVc6YDZKf_ynyRIqRpq-VFiiOmrN4834kxdi53J8Go-EZmoDJ3U2KDyyOmVhn4VR8b0/s1600/HE-LE-2011.png" /></a></div>
2143. <div class="separator" style="clear: both; text-align: center;">
2144. </div>
2145. <br />
2146. 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.<br />
2147. <br />
2148. <div class="separator" style="clear: both; text-align: center;">
2149. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRtaPX9uuHw1zOW8vgY5J2kreQA3j5n5wfJsVsbur4M1O6wL6pOA64FBGiEfGuHrJg8qs-uU5E3Uc9seHMNNCZGh-gO_Xu-UYrp9p_gZVeGts72XSSzHxREZPH5cvRoU3TLE1CBDZoM1w/s1600/HE-LE-Global.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRtaPX9uuHw1zOW8vgY5J2kreQA3j5n5wfJsVsbur4M1O6wL6pOA64FBGiEfGuHrJg8qs-uU5E3Uc9seHMNNCZGh-gO_Xu-UYrp9p_gZVeGts72XSSzHxREZPH5cvRoU3TLE1CBDZoM1w/s1600/HE-LE-Global.png" /></a></div>
2150. <br />
2151. <div class="separator" style="clear: both; text-align: center;">
2152. </div>
2153. <b><u><span style="color: #073763;">Healthcare Investment Optimum?</span></u></b><br />
2154. If you could speak of a HE-optimum, it would be somewhere around 10,6%.<br />
2155. Higher Health Expenditure costs than 10.6% do not seem to contribute to an increase in life expectancy.<br />
2156. <br />
2157. Let's conclude with an interactive chart from Tableau Public:<br />
2158. <script src="http://public.tableausoftware.com/javascripts/api/viz_v1.js" type="text/javascript"></script><br />
2159. <div class="tableauPlaceholder" style="height: 575px; width: 480px;">
2160. <noscript><a href='#'><img alt=' ' src='http://public.tableausoftware.com/static/images/He/HealthExpenditureLifeExpectancy/Dashboard1/1_rss.png' style='border: none' /></a></noscript><object class="tableauViz" height="575" style="display: none;" width="480"><param name='host_url' value='http%3A%2F%2Fpublic.tableausoftware.com%2F' /> <param name='site_root' value='' /><param name='name' value='HealthExpenditureLifeExpectancy/Dashboard1' /><param name='tabs' value='yes' /><param name='toolbar' value='yes' /><param name='static_image' value='http://public.tableausoftware.com/static/images/He/HealthExpenditureLifeExpectancy/Dashboard1/1.png' / > <param name='animate_transition' value='yes' /><param name='display_static_image' value='yes' /><param name='display_spinner' value='yes' /><param name='display_overlay' value='yes' /><param name='display_count' value='yes' /></object></div>
2161. <div style="color: black; font: normal 8pt verdana,helvetica,arial,sans-serif; height: 22px; padding: 0px 10px 0px 0px; width: 480px;">
2162. <div style="float: right; padding-right: 8px;">
2163. <a href="http://www.tableausoftware.com/public/about-tableau-products?ref=http://public.tableausoftware.com/views/HealthExpenditureLifeExpectancy/Dashboard1" target="_blank">Learn About Tableau</a></div>
2164. </div>
2165. <br />
2166. <u>Sources/Links/Downloads</u><br />
2167. - <a href="http://data.worldbank.org/indicator/SH.XPD.TOTL.ZS" target="_blank">Health expenditure, total (% of GDP)</a><br />
2168. - <a href="http://data.worldbank.org/indicator/SP.DYN.LE00.IN" target="_blank">Life expectancy at birth, total (years)</a>
2169.  
2170. </div>
2171. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/1673219614646760963/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2014/01/are-health-expenditure-life-expectancy.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/1673219614646760963'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/1673219614646760963'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2014/01/are-health-expenditure-life-expectancy.html' title='Are Health Expenditure &amp; Life Expectancy Related?'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyfbOZwzlLvf-7IKzQNZ2yeuCMsyDpYPxcR8ttfrulPlQo2hyphenhyphen9EQlHfA7yiQ8COMl7uS3pXKrOAVc6YDZKf_ynyRIqRpq-VFiiOmrN4834kxdi53J8Go-EZmoDJ3U2KDyyOmVhn4VR8b0/s72-c/HE-LE-2011.png" height="72" width="72"/><thr:total>0</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-3008800935973108501</id><published>2014-01-13T12:22:00.001+01:00</published><updated>2014-01-13T12:24:11.856+01:00</updated><title type='text'>Not-Working Rate instead of Unemployment Rate</title><content type='html'>&lt;div style=&quot;background-color: white; font: small Georgia,Serif; width: 490px;&quot;&gt;
2172. The <a href="http://www.tradingeconomics.com/united-states/unemployment-rate" target="_blank">unemployment Rate</a> in the United States decreased from 7% in November of 2013 to 6.7% in December of 2013.  Good news! Or not? <br />
2173. <br />
2174. <div class="separator" style="clear: both; float: right; text-align: center;">
2175. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirGAncOp-VgULiKMxbXRv3dNVeY0oU1yl2pUthkQ2wDhVqKaI0IX4rGVkI3lIMDGC5_Y5SDj2DDfI5xqhDQgOBjSNF5qLZOOyLoejLun9vUSgtABkgzA3NBb3kcllvggj_bF7Tkg9_taI/s1600/unemployment-cartoon.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirGAncOp-VgULiKMxbXRv3dNVeY0oU1yl2pUthkQ2wDhVqKaI0IX4rGVkI3lIMDGC5_Y5SDj2DDfI5xqhDQgOBjSNF5qLZOOyLoejLun9vUSgtABkgzA3NBb3kcllvggj_bF7Tkg9_taI/s1600/unemployment-cartoon.jpg" height="209" width="320" /></a></div>
2176. Unfortunately the unemployment rate is not a beatific 'economy health indicator'.<br />
2177. <br />
2178. How come?<br />
2179. <br />
2180. Unemployed who no longer search for a job are not 'counted in'. <br />
2181. <br />
2182. Do we have a better labor economy health indicator?<br />
2183. <br />
2184. 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.<br />
2185. <br />
2186. In fact we can define the 'Not-Working Rate' more or less as 100% minus the 'Employment-population rate'.<br />
2187. <br />
2188. <b><span style="color: #073763;">'Not Working Rate' = 100% - 'Employment-population rate'</span></b><br />
2189. <br />
2190. 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.<br />
2191. <br />
2192. Enough index-talk discussions... let's look at the Not-Working Rate outcomes.<br />
2193. <br />
2194. <b><u><span style="color: #073763;">Not-Working Rates 1948-2013</span></u></b><br />
2195. Let's compare the Not-Working (NW) Rates with the Unemployment  (UE) Rates.<br />
2196. <br />
2197. The next chart clearly shows that the NW-Rates are about 4 times the UE rates.<br />
2198. In other words: Unemployment is only a small part of 'Not Working'...... <br />
2199. <br />
2200. <div class="separator" style="clear: both; text-align: center;">
2201. </div>
2202. <div class="separator" style="clear: both; float: left; text-align: center;">
2203. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgPim7cZRki9FIPANQJv2hk-dNcPUp3ogMxGlvmpPa2Cruf_Y9rDcjCd03EhZtEhT4B844cowUGM9DPmzTCyzoiVdNpolN2RNAFKIL8G1IbvoklwuIAZCrIW0MJWxVsKd1vg-w_bPnRiFg/s1600/unemployment-nwr-1.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgPim7cZRki9FIPANQJv2hk-dNcPUp3ogMxGlvmpPa2Cruf_Y9rDcjCd03EhZtEhT4B844cowUGM9DPmzTCyzoiVdNpolN2RNAFKIL8G1IbvoklwuIAZCrIW0MJWxVsKd1vg-w_bPnRiFg/s1600/unemployment-nwr-1.png" /></a></div>
2204. <div class="separator" style="clear: both; text-align: center;">
2205. </div>
2206. <b><u><span style="color: #073763;">Not-Working Rates 2000-2013</span></u></b><br />
2207. Let's zoom in to the development of the 2000-2013 rates.<br />
2208. <br />
2209. <div class="separator" style="clear: both; text-align: center;">
2210. </div>
2211. <div class="separator" style="clear: both; float: left; text-align: center;">
2212. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvJXV94i2jMNVSAdM_SjiwRLjI8D-YKXTUHXh65YihRnLt_pInoXc_Md-sSl04DQ4ptuZbA8SoL7VahUc-atmwaSE09Dbl8CymzVZ3A4vwD8asHzU0JvkOSW7R53axyJWyFv8Ow-EPqVg/s1600/unemployment-nwr-2.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvJXV94i2jMNVSAdM_SjiwRLjI8D-YKXTUHXh65YihRnLt_pInoXc_Md-sSl04DQ4ptuZbA8SoL7VahUc-atmwaSE09Dbl8CymzVZ3A4vwD8asHzU0JvkOSW7R53axyJWyFv8Ow-EPqVg/s1600/unemployment-nwr-2.png" /></a></div>
2213. <div class="separator" style="clear: both; text-align: center;">
2214. </div>
2215. 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!<br />
2216. <br />
2217. Let's zoom in to detect this remarkable development..<br />
2218. <br />
2219. <div class="separator" style="clear: both; text-align: center;">
2220. </div>
2221. <div class="separator" style="clear: both; float: left; text-align: center;">
2222. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZK4oDGPg-pjWERqC7ySi_xZTSBsERxbeJXktW5nUeN0f2oRUlbM7TYRHYkj9mW3nauoQS3GBpUnQ2tivjhNG6feIK8tafYE_dwiCRkkvreYPATfMP74JLXiDCDKP2QADsLYs8WzOAJqI/s1600/unemployment-nwr-3.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZK4oDGPg-pjWERqC7ySi_xZTSBsERxbeJXktW5nUeN0f2oRUlbM7TYRHYkj9mW3nauoQS3GBpUnQ2tivjhNG6feIK8tafYE_dwiCRkkvreYPATfMP74JLXiDCDKP2QADsLYs8WzOAJqI/s1600/unemployment-nwr-3.png" /></a></div>
2223. <div class="separator" style="clear: both; text-align: center;">
2224. </div>
2225. <br />
2226. <b><u><span style="color: #073763;">Conclusion</span></u></b><br />
2227. I'll leave the detailed conclusions up to you. <br />
2228. My main advice is to introduce the 'Not-Working Rate' as an indicator for the labor health of the U.S. economy.<br />
2229. <br />
2230. Despite all this labor math, let's hope and pray that people find a job and that the U.S. economy recovers!<br />
2231. <br />
2232. <br />
2233. <u>Sources/Links:</u><br />
2234. - <a href="http://data.bls.gov/timeseries/LNS12300000" target="_blank">BLS Employment-population ratio</a><br />
2235. - <a href="http://data.bls.gov/timeseries/LNS14000000" target="_blank">BLS Unemployment rate</a><br />
2236. - <a href="http://en.wikipedia.org/wiki/Employment-to-population_ratio" target="_blank">Wikipedia Employment-to-population ratio</a><br />
2237. -  <a href="http://www.tradingeconomics.com/united-states/unemployment-rate" target="_blank">Actual U.S. Unemployment Rate</a>
2238. <br />
2239. - <a href="http://www.veteranstoday.com/2012/02/10/the-2012-voting-experience-the-most-important-of-a-lifetime/unemployment-cartoon/" target="_blank">Cartoon</a></div>
2240. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/3008800935973108501/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2014/01/not-working-rate-instead-of.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/3008800935973108501'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/3008800935973108501'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2014/01/not-working-rate-instead-of.html' title='Not-Working Rate instead of Unemployment Rate'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirGAncOp-VgULiKMxbXRv3dNVeY0oU1yl2pUthkQ2wDhVqKaI0IX4rGVkI3lIMDGC5_Y5SDj2DDfI5xqhDQgOBjSNF5qLZOOyLoejLun9vUSgtABkgzA3NBb3kcllvggj_bF7Tkg9_taI/s72-c/unemployment-cartoon.jpg" height="72" width="72"/><thr:total>0</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-4411645855688700413</id><published>2014-01-06T11:13:00.000+01:00</published><updated>2014-01-06T11:13:01.751+01:00</updated><title type='text'>Transparency in a World of Bribery?</title><content type='html'>&lt;div style=&quot;background-color: white; font: small Georgia,Serif; width: 490px;&quot;&gt;
2241. To create a world that is less vulnerable to systemic risk, it's important that financial markets become more transparent.<br />
2242. <div class="separator" style="clear: both; text-align: center;">
2243. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjoVOJpPLBXuCcpPIeecyx9sNQxgdfAm283NdFCxNKFLGBcSrVphcaNu8MdRy1CtOUefo_e7FmWq05xXY6W5pFOdUfj0scv6nJ9pjatbl8y-pALqzJtWB3-cvg-G0wAPWjS3LvO5OFulv4/s1600/bribe.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjoVOJpPLBXuCcpPIeecyx9sNQxgdfAm283NdFCxNKFLGBcSrVphcaNu8MdRy1CtOUefo_e7FmWq05xXY6W5pFOdUfj0scv6nJ9pjatbl8y-pALqzJtWB3-cvg-G0wAPWjS3LvO5OFulv4/s1600/bribe.png" height="100" width="200" /></a></div>
2244. <br />
2245. One of the main issues in becoming transparent is the fact that there's still a lot of corruption in the world.<br />
2246. <br />
2247. According to '<a href="http://www.transparency.org/" target="_blank">Transparency International</a>', more than 1 in 4 people around the world report having paid a bribe.<br />
2248. <br />
2249. <b><u><span style="color: #073763;">The Netherlands</span></u></b><br />
2250. Even in a  perceived 'low bribery country' as The Netherlands, bribery is a serious issue that still isn't seriously approached. According a <a href="http://www.oecd.org/daf/anti-bribery/netherlandsmustsignificantlystepupitsforeignbriberyenforcementsaysoecd.htm" target="_blank">OECD report</a>, The Netherlands is failing to vigorously pursue foreign bribery allegations and must do more to enforce its foreign bribery laws.<br />
2251. <br />
2252. 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.<br />
2253. <br />
2254. <b><u><span style="color: #073763;">Transparency Rules</span></u></b><br />
2255. It's useless to set up (financial) transparency rules (like in <a href="http://www.afm.nl/en/professionals/regelgeving/european/emir.aspx" target="_blank">EMIR</a>) if bribery is still a substantial part of our culture.<br />
2256. <br />
2257. The '<a href="http://www.transparency.org/news/feature/cpi_2013_now_is_the_time_for_action" target="_blank">Corruption Perceptions Index 2013</a>' 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:<br />
2258. <br />
2259. <i><b><span style="color: #990000; font-size: large;">Words must be backed by action</span></b></i><br />
2260. <br />
2261. 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.<br />
2262. <br />
2263. <iframe frameborder="0" height="470" src="http://media.transparency.org/maps/cpi2013-470.html" width="470"></iframe><br />
2264. <br />
2265. <br />
2266. 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.<br />
2267. <br />
2268. <iframe frameborder="0" marginheight="0" marginwidth="0" scrolling="auto" src="https://docs.zoho.com/sheet/publishrange.do?id=3b46e8d322a6904b7a6d05ab6d85b7ac" style="height: 350px; width: 472px;"> </iframe>
2269.  
2270. <br />
2271. <b><u><span style="color: #073763;"><br /></span></u></b>
2272. <b><u><span style="color: #073763;"><br /></span></u></b>
2273. <b><u><span style="color: #073763;">Finally </span></u></b><br />
2274. 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<br />
2275. <br />
2276. <u>Relevant links and Sources</u><br />
2277. -<a href="http://www.transparency.org/gcb2013/results" target="_blank"> </a><span style="background-color: white; color: #5d5d5d; font-family: HelveticaNeueW01-55Roma; font-size: 13px;"><a href="http://www.transparency.org/gcb2013/results" target="_blank">Institutions perceived by respondents to be among the most affected by corruption</a> </span><br />
2278. <span style="background-color: white; color: #5d5d5d; font-family: HelveticaNeueW01-55Roma; font-size: 13px;">- <a href="http://www.transparency.org/research/" target="_blank">Complete Oversight of Indexes</a></span>
2279. <br />
2280. - <a href="http://www.transparency.org/topic" target="_blank">Corruption by TOPIC</a><br />
2281. - <a href="http://www.oecd.org/daf/anti-bribery/netherlandsmustsignificantlystepupitsforeignbriberyenforcementsaysoecd.htm" target="_blank">OECD: Netherlands must significantly step up its foreign bribery enforcement</a><br />
2282. - <a href="http://www.oecd.org/daf/anti-bribery/Netherlandsphase3reportEN.pdf" target="_blank">Bribery Report The Netherlands</a><br />
2283. <br />
2284. <a href="http://www.transparency.org/" target="_blank"><img border="0" src="http://www.transparency.org/images/uploads/icons-logos/banner-blue-468x60.jpg" /></a>
2285. </div>
2286. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/4411645855688700413/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2014/01/transparency-in-world-of-bribery.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/4411645855688700413'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/4411645855688700413'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2014/01/transparency-in-world-of-bribery.html' title='Transparency in a World of Bribery?'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjoVOJpPLBXuCcpPIeecyx9sNQxgdfAm283NdFCxNKFLGBcSrVphcaNu8MdRy1CtOUefo_e7FmWq05xXY6W5pFOdUfj0scv6nJ9pjatbl8y-pALqzJtWB3-cvg-G0wAPWjS3LvO5OFulv4/s72-c/bribe.png" height="72" width="72"/><thr:total>0</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-5849468958095917461</id><published>2014-01-01T17:39:00.002+01:00</published><updated>2014-01-01T17:41:50.836+01:00</updated><title type='text'>Happy 2014 !!!</title><content type='html'>&lt;div style=&quot;background-color: white; font: small Georgia,Serif; width: 490px;&quot;&gt;
2287. Happy New Year to all Actuary-Info Readers!!<br />
2288. <br />
2289. May 2014 become a fabulous Risk Management Year.<br />
2290. <br />
2291. <div class="separator" style="clear: both; text-align: center;">
2292. <a href="http://tmcms.techmethods.com/hucklebe/Gonsalves_Deluged.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://tmcms.techmethods.com/hucklebe/Gonsalves_Deluged.jpg" /></a></div>
2293. <br />
2294. <br />
2295. <div class="separator" style="clear: both; text-align: center;">
2296. </div>
2297. <br />
2298. Wonderful Art by Rob Gonsalves  ("Deluged").
2299. <br />
2300. <br />
2301.  Link: <a href="http://huckleberryfineart.com/Rob-Gonsalves-prints/">Rob Gonsalves</a>
2302. </div>
2303. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/5849468958095917461/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2014/01/happy-2014.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/5849468958095917461'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/5849468958095917461'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2014/01/happy-2014.html' title='Happy 2014 !!!'/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><thr:total>0</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-3127562768356329693</id><published>2013-12-26T20:50:00.002+01:00</published><updated>2013-12-27T15:12:55.100+01:00</updated><title type='text'>What&#39;s your Pension Fund Confidence Level? </title><content type='html'>&lt;div style=&quot;background-color: white; font: small Georgia,Serif; width: 490px;&quot;&gt;
2304. In my last blog I discussed the relationship between 'Fund Ratio' (FR) and 'Confidence Level' (CL), mainly for Dutch pension funds. <br />
2305. <br />
2306. Some bloggers asked me to visualize this FR-CL relationship also for some other important pension countries.<br />
2307. <br />
2308. 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.<br />
2309. <br />
2310. Here it is!<br />
2311. <div class="separator" style="clear: both; float: left; text-align: center;">
2312. </div>
2313. <div class="separator" style="clear: both; float: left; text-align: center;">
2314. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTaA5AO-pYdQ79S57SsOBn0zh-znAH8NBt1VObOA6fw7sJ0ibFWViDnJokfg9Wx1-tsziSxwsrIkpaVH7FKs6yTI1zP5bTsQDGIiPGsJXdd2yqo8x7iTxYumI2gpRVrehjHnAFI_UPKMc/s1600/FR-CL-International-700px.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijVYeZr54h4MFqWIm-GPCzEfeUwz7ECYLL76m-4M73TF6cCTQK4R1LtxDhXgw3pchQcXhpowXxPyvpJO1M65itjZOfNybBxaH9ZPqCLurn3ds8PWAscHFV_dPi6HPPCExjoyXj0wmUehQ/s1600/FR-CL-International-490px.png" /></a></div>
2315. <div class="separator" style="clear: both; float: left; text-align: center;">
2316. </div>
2317. <br />
2318. 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!<br />
2319. <br />
2320. <i>"No!"</i>, my English business friend answered me, <i>"I don't believe in miracles, I rely on them!"</i> .<br />
2321. <br />
2322.   
2323. <iframe allowfullscreen="" frameborder="0" height="276" src="//www.youtube.com/embed/4M2hQRqjYZo" width="491"></iframe>
2324. <br />
2325. <br />
2326. It still sounds as in the good old days, it's just the view that differs.....
2327. </div>
2328. </content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/3127562768356329693/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2013/12/whats-your-pension-fund-confidence-level.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/3127562768356329693'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/3127562768356329693'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2013/12/whats-your-pension-fund-confidence-level.html' title='What&#39;s your Pension Fund Confidence Level? '/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijVYeZr54h4MFqWIm-GPCzEfeUwz7ECYLL76m-4M73TF6cCTQK4R1LtxDhXgw3pchQcXhpowXxPyvpJO1M65itjZOfNybBxaH9ZPqCLurn3ds8PWAscHFV_dPi6HPPCExjoyXj0wmUehQ/s72-c/FR-CL-International-490px.png" height="72" width="72"/><thr:total>0</thr:total></entry><entry><id>tag:blogger.com,1999:blog-7960555158916992002.post-1931321543199973390</id><published>2013-12-20T23:26:00.000+01:00</published><updated>2013-12-26T21:04:06.847+01:00</updated><category scheme="http://www.blogger.com/atom/ns#" term="actuarial science"/><category scheme="http://www.blogger.com/atom/ns#" term="pension fund"/><category scheme="http://www.blogger.com/atom/ns#" term="strategy"/><title type='text'>Relationship Confidence Level &amp; Funding Ratio </title><content type='html'>&lt;div style=&quot;background-color: white; font: small Georgia,Serif; width: 490px;&quot;&gt;
2329. 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?<br />
2330. <br />
2331. 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.<br />
2332. <br />
2333. <span style="color: #073763;"><u><b>Confidence and Equity</b></u></span><br />
2334. The required confidence level for Dutch pension funds is anchored in the <a href="http://www.toezicht.dnb.nl/en/binaries/dnb_tcm51-221651.pdf" target="_blank">Dutch Pension Act</a> (Pensioenwet), at a 97.5 %  level.<br />
2335. <br />
2336. Article 132 , paragraph 2 of the Pension Act  states:<br />
2337. <i>A pension fund will set the regulatory own funds so that the probability of the pension fund having </i><br />
2338. <i>less assets at its disposal than the amount of the Technical Facilities (TF) within a year is reduced to 97 1/2 %</i><br />
2339. <br />
2340. <b><u><span style="color: #073763;">Funding ratio</span></u></b><br />
2341. 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.<br />
2342. <br />
2343. 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%.<br />
2344. <br />
2345. In practice, calculations show that the required funding ratio of most Dutch pension funds has an outcome somewhere between 120% and 130% .<br />
2346. <br />
2347. <b><u><span style="color: #073763;">Funding Ratio and Investment Risk</span></u></b><br />
2348. 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) :<br />
2349. <br />
2350. <div class="separator" style="clear: both; text-align: center;">
2351. </div>
2352. <div class="separator" style="clear: both; float: left; text-align: center;">
2353. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTaA5AO-pYdQ79S57SsOBn0zh-znAH8NBt1VObOA6fw7sJ0ibFWViDnJokfg9Wx1-tsziSxwsrIkpaVH7FKs6yTI1zP5bTsQDGIiPGsJXdd2yqo8x7iTxYumI2gpRVrehjHnAFI_UPKMc/s1600/FR-CL-International-700px.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbvpfTHTqZAxDlhcetEM2z9Yl0Y4V1D9QEAvDZzyvdnr7_TmpYT-Nr5UTxAzJVp9H4vlOnGnvcxNHRDGFR0f8f9gsX7h8df2_RqHUNNt1TshCwElSv1u8sjbSphhyphenhyphen5NIouOBkSXP4aB9Q/s1600/abp-return-volatility.png" /></a></div>
2354. <div class="separator" style="clear: both; text-align: center;">
2355. </div>
2356. The average ABP annual return over the past 5 years was about 5 % with a volatility of 15.9%.<br />
2357. <br />
2358. <b><u><span style="color: #073763;">Volatility Funding Ratio</span></u></b><br />
2359. <div class="separator" style="clear: both; text-align: center;">
2360. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUGTlWR87b9Y1gyEkD-_Ztg4KjPgsI8q_VYfIepm8oyPuSNCw_zjfis8aN2leLYx3PetKAXzjybFhyT4cm1XseXyP83WrqnWySv9QOdtIi5UKQ7GGergrt8Dgu2zeoY3zIwD23CYHNank/s1600/abp-FR.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUGTlWR87b9Y1gyEkD-_Ztg4KjPgsI8q_VYfIepm8oyPuSNCw_zjfis8aN2leLYx3PetKAXzjybFhyT4cm1XseXyP83WrqnWySv9QOdtIi5UKQ7GGergrt8Dgu2zeoY3zIwD23CYHNank/s1600/abp-FR.png" /></a></div>
2361. 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).<br />
2362. <br />
2363. On balance, the ABP's annual funding level volatility over the past 10 years turns out to be approximately 17 % .<br />
2364. <br />
2365. This percentage has the same order of magnitude as the annual funding level volatility of an average pension fund in the Netherlands .<br />
2366. <br />
2367. 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 .<br />
2368. <br />
2369. 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 :<br />
2370. <ol>
2371. <li>The 'current risky' investment strategy with an expected investment volatility of 15 %</li>
2372. <li>A 'risk-averse' investment strategy with an expected investment volatility of 4%</li>
2373. </ol>
2374. Here are the results :<br />
2375. <br />
2376. <div class="separator" style="clear: both; text-align: center;">
2377. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLF6N9GYBSOtPaGoQMZo2FlIsgCGE0Rx01K5oGbP1wTTZuKLzsqiClRpKiphO94nddNEBiFT9RDkmFMMHldIPtMQDsuBidPRkQ_27LFMAwnnFxONCN8xSHByuHk1ulMtC6-KoM0KR6zCo/s1600/Funding-Ratio-1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLF6N9GYBSOtPaGoQMZo2FlIsgCGE0Rx01K5oGbP1wTTZuKLzsqiClRpKiphO94nddNEBiFT9RDkmFMMHldIPtMQDsuBidPRkQ_27LFMAwnnFxONCN8xSHByuHk1ulMtC6-KoM0KR6zCo/s1600/Funding-Ratio-1.png" /></a></div>
2378. <br />
2379. On the basis of graph above a first serie of important conclusions can be drawn:<br />
2380. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square">
2381. <li>A 100% funding ratio corresponds with a 50% confidence level</li>
2382. <li>If the funding ratio exceeds 100%, the 'current risky' investment strategy results - as expected - in a lower confidence level than a risk-averse strategy.</li>
2383. <li>Although perhaps at first sight surprising, the reverse is also true:<br />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.</li>
2384. </ul>
2385. To draw some more specific conclusions, we zoom in on the graph:<br />
2386. <br />
2387. <div class="separator" style="clear: both; text-align: center;">
2388. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNSHSzbrh0hCbnHZ4F8iKSkn7CSyh18PF3GJHDYbQKCU-bL042o_LzoQDY2xFU_BI20mEn-bRrsLpeLf0EYQJlw48AkCu2sJnMx5WCZc99c95g-vHfG_PffPiY6kspGYHrPLK_5srQ6cU/s1600/Funding-Ratio-2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNSHSzbrh0hCbnHZ4F8iKSkn7CSyh18PF3GJHDYbQKCU-bL042o_LzoQDY2xFU_BI20mEn-bRrsLpeLf0EYQJlw48AkCu2sJnMx5WCZc99c95g-vHfG_PffPiY6kspGYHrPLK_5srQ6cU/s1600/Funding-Ratio-2.png" /></a></div>
2389. <br />
2390. Now, a second set of interesting conclusions becomes visible:<br />
2391. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square">
2392. <li><u>Required Funding Ratio</u><br />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 % .<br /> </li>
2393. <li><u>Actual Confidence Level</u><br />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 . <br />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.<br /> </li>
2394. <li><u>Maximum Confidence Level Decline?</u><br />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%.<br /> </li>
2395. <li><u>Indexation Potential?</u><br />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.<br /> </li>
2396. <li><u>Partial Indexation?</u><br />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 .</li>
2397. </ul>
2398. <u><b><span style="color: #073763;">Solvency II to pension funds ?</span></b></u><br />
2399. 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:<br />
2400. <br />
2401. <br />
2402. <div class="separator" style="clear: both; text-align: center;">
2403. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwqjsWFcXNwDcFfwlV8QvNvbU3Qje4LmiVaLEy-43iscQXnWJOLOnO4D3_y1KnznV7QmhlF3BvfcZti0f0AKI59RgjkvfVzeTD1US7_rsJcbcQxuZajO9Rx_QsV6QmZoJsSfF5GQ8KNk8/s1600/Funding-Ratio-3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwqjsWFcXNwDcFfwlV8QvNvbU3Qje4LmiVaLEy-43iscQXnWJOLOnO4D3_y1KnznV7QmhlF3BvfcZti0f0AKI59RgjkvfVzeTD1US7_rsJcbcQxuZajO9Rx_QsV6QmZoJsSfF5GQ8KNk8/s1600/Funding-Ratio-3.png" /></a></div>
2404. A final set of key conclusions now becomes visible :<br />
2405. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square">
2406. <li><u>Solvency II</u><br />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.<br /> </li>
2407. <li><u>Unrealistic Solvency-II Growth Path</u><br />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'.<br /> </li>
2408. <li><u>Basel</u><br />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).<br /> </li>
2409. </ul>
2410. <span style="color: #073763;"><b><u>Reflection</u></b></span><br />
2411. The question is whether it's wise to judge pension funds with long term liability structures and corresponding investment policies, on basis of a <i>one-year</i> 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:<br />
2412. <br />
2413. <div class="separator" style="clear: both; text-align: center;">
2414. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjiem0tjNDh35g9vCjehJ1vFNZneFOegW03iF3NsYT0bKGcP7zI-QzYCIw4xrmMRBNIf44XwqCE9ieIBZcYf2a9dzn2SwX3ydy1x-BOlWQOTaNdmty0q9hatraZp_s2G6NZi8eyOeeTQFM/s1600/Funding-Ratio-4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjiem0tjNDh35g9vCjehJ1vFNZneFOegW03iF3NsYT0bKGcP7zI-QzYCIw4xrmMRBNIf44XwqCE9ieIBZcYf2a9dzn2SwX3ydy1x-BOlWQOTaNdmty0q9hatraZp_s2G6NZi8eyOeeTQFM/s1600/Funding-Ratio-4.png" /></a></div>
2415. <br />
2416. <br />
2417. 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 % .<br />
2418. <br />
2419. <b><u><span style="color: #073763;">Conclusions</span></u></b><br />
2420. Based on the global approach above, the following conclusions can be drawn:<br />
2421. <ul style="margin: 3px 2px 3px 18px; padding: 0px;" type="square">
2422. <li>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).<br /> </li>
2423. <li>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%).<br /> </li>
2424. <li>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'.<br />  </li>
2425. <li>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.</li>
2426. </ul>
2427. <u><b><span style="color: #073763;">Blog-Disclaimer</span></b></u><br />
2428. 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!<br />
2429. <div>
2430. <br />
2431. <b><u><span style="color: #073763;">Aftermath: International Funding Ratios Comparison</span></u></b><br />
2432. 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!<br />
2433. <br />
2434. In an excellent rare <a href="http://arno.uvt.nl/show.cgi?fid=114214" target="_blank">Netspar thesis</a>  (2010) the diverse funding ratios of public sector pension funds are compared regarding three kinds of Methods:<br />
2435. <ol>
2436. <li><u><i>Reported Ratio</i></u>: Funding ratios officially reported by each scheme.</li>
2437. <li><u><i>Fair Value</i></u>: 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</li>
2438. <li><i><u>Expected Return</u></i>: 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.</li>
2439. </ol>
2440. Here are the results:<br />
2441. <br />
2442. <div class="separator" style="clear: both; text-align: center;">
2443. </div>
2444. <div class="separator" style="clear: both; float: left; text-align: center;">
2445. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqAjBCFq9zrprWuHjVCB9cuvNf1lHl2TePnGuK1CYEW7Zfy4_jGSbMy7KQfxmH3KG1PomT4SH2E_vgwG3T1ICORwqKeiukYVNdAI_16PeNZQ5Xtd6_d5hmwecYLVAfY17eT4htpGsyrYY/s1600/pension-fund-ratios-international-2010.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqAjBCFq9zrprWuHjVCB9cuvNf1lHl2TePnGuK1CYEW7Zfy4_jGSbMy7KQfxmH3KG1PomT4SH2E_vgwG3T1ICORwqKeiukYVNdAI_16PeNZQ5Xtd6_d5hmwecYLVAfY17eT4htpGsyrYY/s1600/pension-fund-ratios-international-2010.png" /></a></div>
2446. <div class="separator" style="clear: both; text-align: center;">
2447. </div>
2448. 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!<br />
2449. <br />
2450. But let's stay optimistic about US pension funds, the funding ratio ofl US corporate plan's is already rising!<br />
2451. <br />
2452. <a href="http://www.ubs.com/us/en/asset_management/institutional_investors/consultant-quarterly-microsite.html" target="_blank">US Pension Fund Fitness Tracker</a><br />
2453. <br />
2454. <div class="separator" style="clear: both; text-align: center;">
2455. </div>
2456. <div class="separator" style="clear: both; float: left; text-align: center;">
2457. <a href="http://www.static-ubs.com/us/en/asset_management/institutional_investors/consultant-quarterly-microsite/_jcr_content/par/columncontrol_81a8/col2/table_7c2.1944057871.file/dGFibGVUZXh0PS9jb250ZW50L2RhbS9zdGF0aWMvYXNzZXRfbWFuYWdlbWVudC91c2EvdXMtY29uc3VsdGFudC9wcm9maWxlLXJlcG9ydHMvVVMtUGVuc2lvbi1GdW5kLUZpdG5lc3MtVHJhY2tlci5wZGY=/US-Pension-Fund-Fitness-Tracker.pdf" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="170" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg23AkoJgA-8wcorTSTg6nEiE3zevHx9MqlOFU_n63jBsMV0hP2ZNjAxM3LiPoVLWI35CdhfKHx-8fsZxcV3SWP61WiXrSgdmBt1KeoHlr-wcJwFGOU-8w3HDVsGdjhxr2Voi3x_zoZknw/s400/funding-artio-2013-us--ubsgraphic.png" width="400" /></a></div>
2458. <div class="separator" style="clear: both; text-align: center;">
2459. </div>
2460. Find out what your actual pension confidence level is!!!<br />
2461. <br />
2462. <br />
2463. <u>Used Links & Sources</u><br />
2464. - <a href="http://www.toezicht.dnb.nl/en/binaries/dnb_tcm51-221651.pdf" target="_blank">Dutch Pension Act (in English)</a><br />
2465. - <a href="http://www.government.nl/files/documents-and-publications/publications/2013/10/06/advisory-report-of-the-ufr-committee/advisory-report-of-the-ufr-committee.pdf" target="_blank">Advisory Report of the UFR Committee</a><br />
2466. - <a href="http://www.solvencyiiwire.com/fixed-ufr-costly-mistake/119088" target="_blank">A fixed UFR, a costly mistake?</a><br />
2467. - <a href="http://www.russell.com/us/institutional-investors/documents/institutional-investors/research/long-duration-bond-benchmarks-for-corporate-pension-plans.pdf" target="_blank">Long duration bond benchmarks for U.S. corporate pension plans</a><br />
2468.  - <a href="http://arno.uvt.nl/show.cgi?fid=114214" target="_blank">Netspar Thesis (2010): What Explains the Diverse Funding Ratios..</a><br />
2469. - <a href="http://www.ubs.com/us/en/asset_management/institutional_investors/consultant-quarterly-microsite.html" target="_blank">US Pension Fund Fitness Tracker</a><br />
2470. <br />
2471. <br /></div>
2472. &lt;/div&gt;</content><link rel='replies' type='application/atom+xml' href='http://actuary-info.blogspot.com/feeds/1931321543199973390/comments/default' title='Post Comments'/><link rel='replies' type='text/html' href='http://actuary-info.blogspot.com/2013/12/relationship-confidence-level-funding.html#comment-form' title='0 Comments'/><link rel='edit' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/1931321543199973390'/><link rel='self' type='application/atom+xml' href='http://www.blogger.com/feeds/7960555158916992002/posts/default/1931321543199973390'/><link rel='alternate' type='text/html' href='http://actuary-info.blogspot.com/2013/12/relationship-confidence-level-funding.html' title='Relationship Confidence Level &amp; Funding Ratio '/><author><name>Maggid</name><uri>http://www.blogger.com/profile/01922778308627968310</uri><email>noreply@blogger.com</email><gd:image rel='http://schemas.google.com/g/2005#thumbnail' width='16' height='16' src='https://img1.blogblog.com/img/b16-rounded.gif'/></author><media:thumbnail xmlns:media="http://search.yahoo.com/mrss/" url="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbvpfTHTqZAxDlhcetEM2z9Yl0Y4V1D9QEAvDZzyvdnr7_TmpYT-Nr5UTxAzJVp9H4vlOnGnvcxNHRDGFR0f8f9gsX7h8df2_RqHUNNt1TshCwElSv1u8sjbSphhyphenhyphen5NIouOBkSXP4aB9Q/s72-c/abp-return-volatility.png" height="72" width="72"/><thr:total>0</thr:total></entry></feed>

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