August 2003 Actuarial Review - Blazing Research Trails at the 2003 Bowles Symposium

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Blazing Research Trails at the 2003 Bowles Symposium by Shaun S. Wang, Chairman, Bowles Symposium and
Donald F. Mango, Member, Bowles Symposium Scientific Committee

The 2003 Bowles Symposium took place on April 10-11 at the Westin Hotel in down-town Atlanta. It was a trailblazing event in actuarial science, marked by important research breakthroughs. According to Sam Cox, the Bowles Chair Professor at Georgia State University, the 2003 Symposium was by far the most successful of the six they have hosted.
The Symposium opened with warm welcomes from Carl Patton, president of Georgia State University, and Sidney Harris, dean of the J. Mack Robinson College of Business. Bob Conger, the CAS immediate past president, gave welcoming remarks on behalf of the CAS.
The 2003 Symposium leader, Shaun Wang, set the tone in his introductory presentation by offering his insights on many key issues and by calling on the audience to "step up to microphones and make your comments heard." The enthusiastic participation of attendees was a key feature of this Symposium. Many participants, intrigued by the speakers' presentations, offered their insights and comments.
Leading researchers Harry Panjer, Gary Venter, David Ruhm, Don Mango, Glenn Meyers, Daniel Isaac, and Nathan Babcock, all spoke on their research in capital allocation and risk measures. Chris Svendsgaard gave a presentation on the infamous "Winner's Curse."
Sam Gutterman led the discussions on the status of Fair Value Accounting, with following discussions by Phil Heckman and Trent Vaughn.
Don Mango spoke on new research frontiers in financial science, followed by Lee Smith's discussion on complexity science and agent-based modeling in insurance.
Two familiar non-actuary names, Richard Derrig and Morton Lane, each presented their latest research.
It was an international event, with participants from nine countries, and speakers Andrew Smith from the United Kingdom and Jean-François Walhin from Belgium. Philippe Artzner (of "coherent risk measure" fame) also attended and provided many unique insights from the audience.
Bill Panning, Steve Philbrick, and Weimin Dong were invited "on the spot" to deliver clutch presentations on "Where Do We Go From Here?" They delivered nothing short of "fireworks" for the closing ceremony of the Symposium.
All the presented papers were of excellent quality and developed from selected proposals in the call for papers. All the papers and presentations can be found at www.casact.com/education/specsem/sp2003/papers/.
The Scientific Committee selected three prize papers:

The first prize ($5,000) was awarded to Phil Heckman for his paper "Credit Standing and Fair Value of Liabilities: A Critique." Heckman's paper sends a strong message to the actuarial and accounting professions about the potential ramifications of the proposed fair value accounting treatment of debtor's own credit standing. It is truly "one for the ages."
The second prize ($3,000) was given to Andrew Smith, Ian Moran, and David Walczak for their paper "Why Can Financial Firms Charge for Diversifiable Risk?" The authors argue that frictional cost and franchise value deserve center attention from researchers.
The third prize ($2,000) went to Richard Derrig and Elisha Orr for "Equity Risk Premium: Expectations Great and Small." Their paper outlines the many approaches, past and present, to estimate the elusive "equity risk premium."

The scientific discussions that took place at the Symposium reinforced our article in the February 2003 issue of The Actuarial Review by stressing the following points:

Actuaries need to get out of their comfort zone of traditional claims modeling and go deeper in understanding major risk drivers and market dynamics. Particularly, actuaries need to focus more on the business process risk, as the true value of actuaries to our employers is measured by how much we can contribute to the business decision-making process.
The very concept of "capital allocation" for insurance is confusing; a clearer distinction needs to be made between "capital consumption" and "capacity allocation." Nevertheless, many existing capital allocation models focus too much on the mathematics of portfolio diversification, ignoring the business process risks and the competitive game aspects of our business. This has contributed to the damage the property/casualty insurance industry suffered over the past several years, as portfolio diversification was used by many companies to justify price-cutting in expanding to new lines of business and new geographic regions.
To dampen the large market swings for the benefit of consumers, the property/casualty insurance industry needs to develop some benchmark risk parameters for capital charges and fair value calculations. These benchmark parameters should reflect the inherent risks for the underlying business and should be updated over time.

The 2003 Symposium marked a new beginning of several research fronts. Some of us will go from here to blaze new paths of research innovation—analyzing business process risks or developing benchmark risk parameters for capital allocation and fair value calculations. Most importantly, as a profession, we will always watch out to defend the public's interest.
The 2003 Thomas P. Bowles Jr. Symposium was sponsored by the Georgia State University Department of Risk Management and Insurance, and cosponsored by The Casualty Actuarial Society and The Actuarial Foundation.