Research Outside the Actuarial Comfort
Zone at the 2003 Bowles Symposium
by Shaun S. Wang, Chairperson of the Bowles Symposium, and
Donald F. Mango, Member of the Bowles Symposium Scientific Committee
Like most people, actuaries prefer staying in their "comfort zones," or areas of familiarity, particularly when it comes to research, where most of our efforts are spent digging further into known models and topics. This is important, as a science needs to refine and extend its core knowledge base. But the tendency to stay close to home is fine for the health of a science only as long as the underlying environment itself is relatively stable.
Unfortunately, we are in an unstable, complex, evolving environment. Our employers face serious problems that span insurance, finance, the capital markets, and the economy as a whole. These problems reach across multiple professionsmany comfort zonesand thus have no "owner profession." Being the professionals who, by our own proclamation, "make financial sense of the future," it is incumbent upon us to step up and play a leadership role in formulating research solutions to these problems. At their core, these problems all stem from the same foundation: how to evaluate contingent obligations in any setting?
The 2003 Thomas P. Bowles Jr. Symposium aims to start us down that leadership path. The Bowles Symposium, sponsored by the Georgia State University School of Risk Management and Insurance and cosponsored in 2003 by the Casualty Actuarial Society, is an actuarial research and education seminar that traditionally focuses on issues presented by the complex environment in which the practicing actuary works. The theme of the 2003 Symposium, which is scheduled for April 10-11, 2003 in Atlanta, Georgia, is "Fair Valuation of Contingent Claims and Benchmark Cost of Capital." Under this broad umbrella are many "multi-profession" issues, including:
- The valuation of long-tailed liabilities (including contingent claims in embedded options and guarantees)
- Fair value accounting of insurance liabilities (an important topic for both the insurance industry and the actuarial profession)
- Measures of risk (that can be applied across "comfort zones," for example, assets and liabilities)
- Correlation and cost of capital attribution (including the portfolio "give-and-take" of accumulation and diversification)
Agent-based modeling is another multi-profession issue. Agent-based modeling advances dynamic modeling by allowing participants in a collective effort (a market) to see the interactive effects of their competing strategies and tactics on the collective process itself. The method has been applied successfully within insurance (modeling the behavior of catastrophe insurance and reinsurance markets) and outside it. For example, the NASDAQ leadership used agent-based models of their traders to assess the effect of "decimalization"the change to one-cent price increments.
Actuaries cannot simply import capital market pricing techniques. For example, the CAPM pricing model with zero beta ignores the real cost of doing business with uncertainty and incomplete information. Actuaries must find a way to adapt financial pricing theories to their "over-the-counter" products sold in incomplete, illiquid markets with limited trading (to reinsurers). Even the terminology can sometimes contribute to confusion; we must elaborate on the difference between the price of risk in a market setting and the value of risk to a specific entity.
This is an exciting and difficult time for our industry, profession, and economy as a whole. The 2003 Bowles Symposium will offer a great opportunity for us to stretch beyond our comfort zone and begin building links with other leading risk practitioners. We invite you to attend the 2003 Bowles Symposium and participate in these engaging research discussions.
Registration information for the Bowles Symposium will be available soon on the Web Site. Visit www.casact.org/education/education.htm in the coming weeks for details.