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Random Sampler
Navigating the Seas of Risk 
by Stephen P. D’Arcy, CAS President-ElectThousands of years ago, long before recorded history, a nomadic people first approached the shores of the Mediterranean Sea, perhaps the first body of water they had ever encountered that ran out to the horizon and beyond. This sight must have generated a wonderful sense of awe. It would not have taken long for these people to take to the sea, to fish, to transport themselves and their belongings, to explore. At first they likely stayed close to shore, so they could recognize landmarks and return home. Eventually, though, some intrepid, or careless, sailor ventured out of sight of land, and by necessity became a true navigator—one who relied on knowledge of currents and winds, the sun and stars, water color and depths to estimate the location of the vessel and set a course to travel across the open sea.
Open sea sailing required much greater skills than simply sailing along a coastline. To sail within sight of land allows the sailor to know where the boat is at all times. Once the land disappears over the horizon, the sailor must deal with uncertainty by estimating where the boat is and approximating how to arrive at the destination. Sailing out of sight of land required navigational skills to increase the chance of a successful voyage. Navigating the open sea required the ability to develop charts and maps, to measure the speed and course of the vessel without a fixed frame of reference, to predict the weather with greater accuracy to provide time for retreating to the safety of land in the face of approaching storms. Navigators gradually developed tools and techniques to measure the height of the pole star to determine their latitude, a compass to determine direction, scale measurement to draw more accurate maps, weighted ropes to measure the water’s depth, and floating ropes to measure vessel speed. Navigators became adept at predicting inclement weather and attentive to details about birds, wave patterns, and other signs that would help locate their position. Early navigators did not know exactly where they were when venturing out into the Mediterranean, but they gradually acquired the skills that fostered commerce across the sea leading to the development of great civilizations in Phoenicia, Egypt, Troy, Athens, Carthage, Rome, and many other locales. Navigational skills were essential to develop and maintain these civilizations; a sailing specialty developed to meet this need. In many cases, navigational skills were learned under an apprentice system, in other cases by trial and error. Although ships were still lost at sea—some by storm or other peril, some by ineffective navigation—navigators were successful enough at their task to advance civilization around the Mediterranean.
Much later, sailors and navigators expanded to the Atlantic Ocean. Once again, open ocean sailing required navigational skills, but the skills honed in the Mediterranean were not sufficient for Atlantic sailing. New charts and maps had to be developed, new currents and wind patterns learned, new wildlife signs noted, new weather patterns mastered, and adjustments to compass readings had to be made. To encourage Atlantic sailing, in the early 15th century Prince Henry the Navigator developed a center of navigational studies at Sagres, Portugal, where more precise maps were drawn, instruments improved, and navigation skills taught. Atlantic navigators used the same basic tools and skills developed by their Mediterranean colleagues, but they had to learn new applications of these devices and skills. They did—the Atlantic Ocean was explored, trade facilitated, colonization endeavored, and civilizations rose and fell, all fostered by the navigator.
Within only the last 500 years, sailors first circumnavigated the globe. Once again, these voyages relied upon the skills of the navigators, but the navigators once again had to adapt to this new application. Many ships were lost and expeditions foundered as navigators honed their skills in circumnavigation. It took hundreds of years before accurate charts were developed for many areas. The increased importance of ascertaining accurate positions for these voyages in order to land on a relatively small island in the vast Pacific Ocean spurred a competition to develop an accurate technique to measure longitude, which eventually led to success in the 18th century. Navigational skills advanced in the face of these challenges, and eventually mastered this ocean as well.
Why a rambling about navigation in an actuarial publication? To make this analogy: Casualty actuaries are the Mediterranean navigators, adept at sailing this important, but restricted, area of the globe. The Mediterranean can be compared to hazard risk, the traditional domain of casualty actuaries. Actuaries, like these early navigators, deal with uncertainty and have become skilled at using tools and techniques necessary to approximate a company’s position when fixed landmarks are not available. Within the last 30 years, the world began to navigate the seas of financial risk, our Atlantic Ocean. To sail this sea, actuaries must master some new terminology and new risk management tools. However, the basic approach is the same, quantifying and coping with uncertainty. Financial derivatives were created within the last three decades to cope with interest rate, foreign exchange rate, and other financial risks; these instruments have grown to become major risk management tools. Although different from the traditional actuarial tools, these derivatives have a similar function and require a similar mathematical expertise. As Mediterranean navigators could learn to navigate the Atlantic, so casualty actuaries can learn to cope with financial risk.
Within the last decade, the seas of risk have expanded to encompass enterprise risk management. Integrating hazard, financial, strategic, and operational risk has become the new challenge for risk navigators, akin to circumnavigating the globe. Once again, this new area presents new challenges and requires new applications of our skills at quantifying and managing risk. As actuarial navigators, we are well suited to take up this challenge, but it will require us to learn new terminology, develop new techniques, and master new approaches. We now have the opportunity to sail the “world of risk,” relying on the basic skills we developed in the “sea of hazard risk,” but applied to a much broader context. Bon voyage!
