FEBRUARY/MARCH 2013 VOLUME 10 ISSUE 1 ACTUARIES

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FEBRUARY/MARCH 2013 VOLUME 10 ISSUE 1ACTUARIESWITHOUT BORDERSHelping mankind, promoting the actuarial professionTHE SOA EDUCATIONDEPARTMENTStructuring the general insurancefellowship trackSTRATEGIC RISKMANAGEMENTA robust yet practical approach

‘COVER STORY24ACTUARIES WITHOUTBORDERSDo you have a desire to helpmankind while promoting theactuarial profession? Read thisarticle to find out how otheractuaries are accomplishingthese goals.By Alan CookeFEATURE16A NEW PARADIGMFOR STRATEGIC RISKMANAGEMENTIf you are looking for a robustyet practical approach to the riskmanagement of strategic objectives,you’ll want to consider theframework presented in this article.By Damon Levine

DEPARTMENTS8EDITORIALTHE NEW NORMAL AND THEACTUARIAL BUBBLESOA PRESIDENTTonya B. ManningFSA, MAAA, EA, FCAtmanning@soa.orgSOA STAFF CONTACTSPatrick GouldManaging Dir. of Marketing& Communicationspgould@soa.orgLisamarie LukasDir. of Communicationsllukas@soa.orgKaren PerryPublications Managerkperry@soa.orgJacque KirkwoodSr. Communications Associatejkirkwood@soa.orgSam PhillipsMagazine Staff Editorsphillips@soa.orgErin PierceGraphic Designerepierce@soa.orgThe Actuary is published bi-monthly (February,April, June, August, October, December) by theSociety of Actuaries, 475 N. Martingale Rd., Suite600, Schaumburg, IL 60173-2226. Periodicals postage paid at Schaumburg, IL, and additional mailing offices. USPS #022-627.This publication is provided for informationaland educational purposes only. The Society ofActuaries makes no endorsement, representation or guarantee with regard to any content,and disclaims any liability in connection withthe use or misuse of any information providedherein. This publication should not be construedas professional or financial advice. Statements offact and opinions expressed herein are those ofthe individual authors and are not necessarilythose of the Society of Actuaries.The Actuary is free to members of the Society ofActuaries. Nonmember subscriptions: students, 22; North American 43; Int’l 64.50. Please sendsubscription requests to: Society of Actuaries, P.O.Box 95600, Chicago, IL 60694-5600.POSTMASTER: Send address changesto the SOA, c/o CommunicationsDepartment, 475 N. Martingale Rd.,Suite 600, Schaumburg, IL 60173-2226.CONTRIBUTING EDITORS12Rod BubkeFSA, MAAArod.l.bubke@ampf.comCarl HansenFSA, EA, FCA, MAAAchansen@bwcigroup.comJay JaffeFSA, MAAAjay@actentltd.comCOLLABORATION, COMMUNITYAND THE COMMON GOOD1430INSURANCE FELLOWSHIP TRACK34Kurt WrobelFSA, MAAAkjwrobel@yahoo.comThe Actuary welcomes both solicited and unsolicited submissions. The editors reserve the right toaccept, reject or request changes to solicited andunsolicited submissions, as well as edit articlesfor length, basic syntax, grammar, spelling andpunctuation. The Actuary is copyedited accordingto Associated Press (AP) style.For more information about submitting an article,please contact Sam Phillips, magazine staff editor,at (847) 706-3521, sphillips@soa.org or Societyof Actuaries, 475 N. Martingale Rd., Suite 600,Schaumburg, IL 60173-2226.2013 Society of Actuaries. All rights reserved. Nopart of this publication may be reproduced in anyform without the express written permission of theSociety of Actuaries.SECTION HIGHLIGHTSFOCUS ON THE ACTUARY OFTHE FUTURE SECTION AND THEPRODUCT DEVELOPMENTSECTION36OUT OF THE OFFICEACTUARIES ON THEIR OWN TIMELloyd SpencerFSA, CERA, MAAALloyd.Spencer@HLRAmerica.comLarry SternFSA, MAAAlarry stern@earthlink.netEDUCATIONSTRUCTURING THE GENERALTimothy ParisFSA, MAAAtimothyparis@ruarkonline.comJames RamendaFSA, CERAjramenda@sscinc.comINSIDE SCOOPSOCIAL LEARNING WITH THE SOAWilbur LoFSAwilbur.lo@hannover-re.comKarin Swenson-MooreFSA, MAAAkarin.swenson-moore@regence.comLETTER FROM THE PRESIDENT42A LOOK INTO ERMHELP WANTED: RISK TOLERANCE44A POINT OF VIEWWHERE IS OUR NATE SILVER?46SOA AT WORKOUR 2013 INITIATIVES48BOOK REVIEWMONEY FOR LIFE, TURN YOURIRA AND 401(K) INTO A LIFETIMERETIREMENT PAYCHECK ADVERTISING INFORMATIONINQUIRIES ABOUT ADVERTISING SHOULD BE DIRECTED TO:February/March 2013issue of The ActuaryM.J. MRVICA ASSOCIATES, INC.2 WEST TAUNTON AVENUEBERLIN, NJ 08009[PHONE: (856) 768-9360; FAX: (856) 753-0064; EMAIL: DMATHER@MRVICA.COM]

THE ACTUARY N

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EditorialTHE NEW NORMALAND THE ACTUARIAL BUBBLEBY JAMES RAMENDATHE NEW NORMAL ONLY FEELS NEWif you don’t remember the “old normal.”For example, it’s not really a new conceptamong banks that “you need good creditto get a loan.” It’s not new for consumersto spend less than 100 percent of theirincome. In fact, there was even a time when“consumers” was not our collective name;we were called, well, just people.For sure, most of the new normal doesn’tseem nearly as fun as the bubble thatpreceded it. Yet there is some satisfactionthat comes to an actuary in recognizing howmuch of the economic bubble was really anactuarial bubble—not that actuaries wereresponsible for the bubble, but that theunderlying causes were actuarial in nature.Conventional wisdom regarding the bubblesays that 30 years of declining interest ratesand easing credit led to highly leveragedconsumption and highly leveraged economicgrowth. All of which, in turn, led to therealization of bad credit, reduced spending,deleveraging and low growth. Throw in alittle fraud, a good measure of self-delusion,and a lot of bad risk management, and acredit cycle turned into a systemic crisis.But how much of the bubble was reallyactuarial in nature? For starters, there arethe demographics. There is no better readon demographic changes affecting growthcycles than Nino Boezio’s February 2011article in Risks & Rewards, “Taking Stock:What is the Real Problem with EconomicGrowth.” To grossly oversummarize one ofthe article’s key points, when a populationbulge hits its high earnings and highconsuming years, growth will be good, but asthe bulge moves into retirement, growth willsuffer. The 20 to 30 years prior to the crisiswere the baby boomers’ high earning andhigh consuming years. It was a long stretchof generally increasing corporate earnings,increasing leverage, higher returns onequity, and generally inflating asset values.During that time, much of the economy’ssuccess was attributed to technology,financial innovation, and assorted businesssuperstars—but how much of the boomyears’ apparent success was simply being onthe right side of demographics?More pointedly for the U.S. corporatesegment, how much of the earnings growthwas due to shedding defined benefit pensionplans and other post-retirement benefits(remember those?) in favor of 401(k) plans? Ithas been estimated that the once-traditionalpackage of post-retirement benefits foraverage workers could account for up to30 percent of total compensation costs. It’sa big drop from there to today’s 401(k)plans. The difference—a pay cut really, andlargely uncontested at that—fell directly tothe corporate bottom line over the pastthree decades. There was no great productinnovation associated with this earningsboost, no technological breakthrough, justa big transfer of expense and investment riskfrom the corporate sector to individuals.Of course, some of the gains that corporationsrealized through pension savings were offsetby rapidly rising health care costs. Thisincreasing expense was itself partly offsetby employers shifting costs to employees inthe form of increased contributions. Howwere employers able to shift costs backon to employees? This goes right back todemographics. The opening up of global labormarkets, including developing countrieswith relatively younger populations, helpedshift the bargaining power to the employers’favor. Who knew the math of non-stationarypopulations would be so relevant to globaleconomics back when we were studying it?Actuarial realities unfold very graduallyover many years and decades, a muchlonger time frame than the typical companyor employee considers in their planning.Investment returns earned during years ofCONTINUED ON PAGE 1008 THE ACTUARY FEBRUARY/MARCH 2013

EDITORIAL FROM PAGE 08rapid population growth, with leveragedbalance sheets and inflating asset valuesmay seem normal at the time. So it’sunderstandable that behavioral adjustmentcan lag ongoing long-term shifts.For example, even with the pressure on realwages, the evaporation of pension plans,and the widespread awareness of increasinglongevity, individuals kept increasing theirborrowing and their consumption (actuallybringing the overall savings rate belowzero), fueling the bubble. This spendingboosted corporate earnings and overalleconomic growth statistics, but from anactuarial perspective what was happeningwas that individuals were de-fundingthe third leg of their retirement—privatesavings. Many remaining pension plans,both private and public, have since had toquestion whether their assumptions reflectthe future, or a historical averages that maynot be relevant.Private savings rates are now trending solidlypositive, but the generally inadequate fundscommitted to this third leg of retirement,together with the weakening of employeeretirement plans and ever-increasing longevity,seem to make it likely that the “new normal”of constrained consumer spending will bea long-term reality. How different might theeconomic contours of the past 30 years look ifindividuals had saved something on the orderof their “normal cost” of retirement annually,rather than take savings rates down to zero?It is hard to measure the shortfall in privateretirement savings because there are nounfunded liabilities to amortize, no trust fundsto run down. The impact will be gradual—anincreasing number of older people withoutenough money to sustain the spending that oureconomy has been built upon. But they willnot be completely out of luck. What they lackin economic power they will make up for inpolitical power. If you think that Social Securityand Medicare, so central to the spending sideof the fiscal cliff, are tough political issues totouch now, remember that the baby boomersare just getting into their retirement years. Itis a discomforting fact that the financial crisisWE ARE ALL STRONGERTOGETHERYou’re just one click away from paying your SOA andprofessional interest section membership dues online.Sections are the grassroots communities that help buildyour personal brand. And now you’ll get even more.Join a section or renew a section membership andreceive 25 off one section-sponsored webcast.Sign up and renew today at http://dues.soa.org.10 THE ACTUARY FEBRUARY/MARCH 2013began to break notlong after the first babyboomers went onSocial Security.It’s probably human James Ramendanature to see the issues of the day through thelens of one’s own profession. Still, it’s hardto avoid the conclusion that many of oureconomic challenges have at their roots—alack of policymakers’ understanding (orperhaps willful ignoring) of intergenerationaltransfers, and long-term demographic shifts.While many of the aftereffects of the bubbleare unpleasant, actuaries can take pridethat our training is so relevant to the currenteconomic situation and perhaps affordourselves some optimism that we will becritical to developing future solutions. AJames Ramenda, FSA, CERA, is senior vice president,Enterprise Risk, with SS&C Technologies, Inc. He can becontacted at JRamenda@sscinc.com.

DON’T DELAYTHERE’S STILL TIME TO ATTEST!THERE ARE THREE EASY STEPS:1. Log on to the SOA membership directory and click theSOA CPD Requirements button on the main page.2. Indicate whether you have met the SOA CPD Requirement.3. Identify which method of compliance was used.You must attest compliance with the SOA CPD Requirement or be considerednon-compliant. Go to SOA.org/attestation for more information.The membership directorywill be updated with your CPDattestation status March 1.

Letter From The PresidentCOLLABORATION, COMMUNITYAND THE COMMON GOODBY TONYA B. MANNINGWELCOME TO THE FEBRUARY/MARCH ISSUE of The Actuary magazineand happy 2013. It has been an incrediblybusy few months since I took office inOctober. We have turned the page on thecalendar, made (and possibly broken)New Year’s resolutions and if we tooktime off for the December holidays, we’velaunched back into work, hopefullyrested and refreshed, after spending timewith family and friends.Reflecting on my first few months asthe president of the SOA, it has been agreat dialogue around the SOA’s strategicinitiatives, including expanding supportfor candidates taking our exams, and therecent addition of the General Insurancetrack. In December, I participated in oursemiannual Employers Council, where wereceived important input on how the SOAis supporting and serving its members andtheir employers. Immediately after that, Iattended my first Fellowship AdmissionsCourse as president. It was a great honorto participate in such an important dayfor the new fellows and I am certainthis will be one of my favorite eventsThe SOA board remains fully committed topromoting the profession and being a goodpartner to the global profession.whirlwind of activity. In addition to holdingdown a challenging and interesting dayjob, I have been honored to representthe SOA and the actuarial professionat numerous meetings and events. Forinstance, I attended an InternationalActuarial Association (IAA) meeting, wherethe first International Standard of Practice(ISAP-1, General Actuarial Practice) wasapproved. In October, I met with theCincinnati Actuarial Club, where we had12 THE ACTUARY FEBRUARY/MARCH 2013as president. In January, I attended ameeting of the Council of U.S. Presidents(CUSP), where we discussed how thatgroup might respond to the United StatesActuarial Profession-Wide Task Force’srecommendation to develop a strategyfor the profession. I then visited my almamater, the University of North Carolina atChapel Hill, to meet with actuarial studentsfrom both UNC and Duke University. Notmuch has changed since I was a student—the SOA exams are still viewed as toughand free pizza is highly valued. Finally, Iattended a dinner with members of thecommittee on Post Retirement Needs andRisks, led by Anna Rappaport, committeechairperson and past SOA president. All ofthis in just four months!My travels and many conversationsthese past months have strengthened myconviction that the actuarial communityis passionate about its profession, andis genuinely engaged in an enthusiasticdialogue about the external andinternal issues and opportunities we areaddressing now and in the years to come.I am so proud to be a representative forour profession. Thank you to everyonewho has offered insights, concerns andcompliments. I’ve been pleased to shareyour candid and thoughtful feedbackwith my fellow board members and theSOA staff.As I cannot converse directly with eachof you, I’d like to take this opportunityto address a recent viewpoint that hascome to light. Some feel that the SOA’srecent launch of our new mission andstrategic plan, and our direction over thispast year, has diminished our focus on theadvancement of the profession. While most

reaction from our members and candidateshas been positive, the concerns I’ve heardare understandable.I’d like to focus on the SOA’s recentlyupdated mission: “The SOA, throughresearch and education, advancesactuarial knowledge and improvesdecision making to benefit society. Weenhance the ability of actuaries to betrusted financial and business advisorson problems involving uncertain futureevents. We provide and ensure the integrityand relevance of our credentials.” Thismission, in my view, includes a strongfocus on promoting the profession. Ourprofession cannot be sustained withoutgrowing and adapting as businesses andthe financial sector change around us.And, this cannot be done without forwardlooking research and the advancement ofactuarial knowledge, both key elementsof our mission. Such work will enableus to find new ways to apply actuarialprinciples. Through adaption andexpansion, our profession will remainstrong and relevant.One example is recent researchregarding climate change. The report,“Determining the Impact of ClimateChange on Insurance Risk and theGlobal Community,” was a collaborativeeffort by The Casualty Actuarial Society,Canadian Institute of Actuaries, Societyof Actuaries and the American Academyof Actuaries’ Property/Casualty ExtremeEvents Committee. Climate change is animportant, emerging risk, and actuariescan be key in understanding andmitigating it.Another example is an ongoing jointstudy conducted by the SOA and LIMRAInternational of individual life insurancelapse experience in the United States. Inthis study, whole life, term life, universallife and variable universal life experienceare summarized and analyzed along manykey policy and product factors. Premiumpayment mode, underwriting method andrisk class are just a few of the factorsreviewed in the study. The latest study isbased on experience data from 2007 to2009 from 27 life insurance writers.The SOA board remains fully committedto promoting the profession and being agood partner to the global profession. TheSOA’s international membership growthhas been steady, with the fastest-growinginternational constituent group locatedin mainland China and Hong Kong. Wecontinue to find avenues for relevantknowledge sharing and networkingopportunities. For example, in 2012 sevenface-to-face events were held in the AsiaPacific region.The SOA also continues to support thefollowing organizations and initiatives: Actuarial Foundation Council of U.S. Presidents North American Actuarial Council(including its collaborative researcheffort) International Actuarial Association Joint Risk Management Section ERM Symposium BeAnActuary.org website Collaboration with the AmericanAcademy of Actuaries and theCanadian Institute of Actuaries onresearch that informs policy makers Partnership with the CanadianInstitute of Actuaries to develop anddeliver professional developmentseminars Efforts to promote diversity in the sTonya B. Manning(ICA) 2014Partnership with the AmericanCouncil of Life Insurers on ReFocus2013, an industry conferencefocusing on insurance issues thatimpact the life insurance industryLOMA and LIMRA (includingconferences such as the LifeInsurance Conference and theRetirement Conference)We are committed to supporting any otherareas where our members and candidatescan benefit from such work.Let’s keep the conversation going. If youhave ideas on how the SOA can continueto advance its mission, please drop me anote at tmanning@soa.org.Thanks for your time and consideration.And, in honor of Spring Festival, betterknown as Chinese New Year—I wish yougood fortune, health and longevity.Warm regards! ATonya B. Manning, FSA, MAAA, EA, FCA, is presidentof the Society of Actuaries. She can be contacted attmanning@soa.org.FEBRUARY/MARCH 2013 THE ACTUARY 13

Inside ScoopSOCIAL LEARNING WITH THE SOABY LESLIE FAUSHERTO DATE, nearly 20,000 candidates andmembers have traveled through thousandsof pages of e-Learning content in the Societyof Actuaries’ (SOA) e-Learning system.Fundamentals of Actuarial Practice (FAP) andfellowship modules, end-of-module exercisesand assessments have been read, absorbed,downloaded, uploaded, passed and failed.Engagement initiative to more effectivelysupport candidates as they journey towardEach candidate began the journey alone at adesk, logging into the unknown and only awarethat the time remaining to complete his courseor module had already begun its descent.As the pages slid by, he may have begun towonder: “What resources are available to helpme? I’ve read the online links. I’ve thoughtabout the Thought Questions. I’ve ‘Asked AnActuary.’ But is there anyone around me alsoenrolled in the FAP course? Can anyone helpme understand the Control Cycle? Are thereany actuaries nearby I can consult?”“The top three benefits of leveraging a moresocial approach to learning are:1. Learning from other

social learning with the soa 30 e ducation structuring the general insurance fellowship track 34 s ection highlights focus on the actuary of the future section and the product development section 36 o ut of the office actuaries on their own time 42 a loo

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