Nurturing Breakthroughs: The Role of the University in Creating the Actuarial iPod

by Emily Kessler, SOA Senior Staff Fellow, Intellectual Capital

Emily Much has been said, and debated, in the past year about the role of the universities in the education and qualification of actuaries. But what about the other roles that universities play?

If your experience is like mine, your primary understanding of the university is based on your own educational experience. Universities are places you go to get an education. What you study and how deeply you dive into it are a matter of personal choice (sometimes constrained by available funding, but that’s a topic for a different post). Professors are there to help you learn, teach you critical thinking and send you on your way.

For most individuals, that’s a perfectly reasonable relationship to a university. But not for a profession. Any profession needs to have a constant stream of intellectual capital. Medicine, law, finance, psychology, actuarial science – no profession can move forward without a constant stream of new thinking, from the broad possibilities to the detailed mathematics. I may not understand quantum mechanics, but I know that its theories are the root of modern electronics. I applaud the Nobel-prize winning physicists whose theories (which I don’t understand) paved the way for my iPod.

A few years ago, the SOA Board recognized that we were not developing sufficient intellectual capital for the profession. Actuarial science uniquely synthesizes the disciplines of mathematics, statistics, computing, risk management, economics and demography, among other academic disciplines. We need to ensure that we have a steady stream of new intellectual capital to support the profession. The SOA itself can directly support some of that, particularly through our experience studies. But just as Apple exploited the work of physicists housed at the world’s universities to develop my wafer-thin iPod, we need dedicated academic professionals developing the techniques that will strengthen actuarial science.

As one step, the SOA has established a program to recognize those universities that are moving the boundaries of actuarial science forward through our Centers of Actuarial Excellence program. The specific requirements for the program are constructed to ensure the universities offer the best that actuarial science can be, in both educating the next generation of actuaries in technical and business topics, and in developing research and scholarship. Over the course of the year you’ll meet the first 13 schools to be awarded the honor.

We want to continue to expand the boundaries of the intellectual capital of the profession. While breaking new ground in actuarial science is not recognized by the Nobel Prize committee, we know the value it brings to our members, stakeholders and the public that we serve. As actuaries, we dream of better pension plans, new models for health insurance, better hedging mechanisms for long-term risks, and better models for tail risk. We know the challenges we face, and the breakthroughs we need, to maintain a strong role for actuarial science.

The iPod is a technological and marketing breakthrough, a seamless integration of physics, industrial design and marketing savvy. Actuaries in the marketplace have the marketing savvy and design know-how to create the product. All we need is the technology (e.g. statistical models, mathematic techniques, financial hedges) to make it possible.

There would be no iPod without university-based physics professors creating the science for the applications of tomorrow.

What do you need to create the application of actuarial science that will become as ubiquitous as the iPod? And how can universities help you get that done?

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5 responses to "Nurturing Breakthroughs: The Role of the University in Creating the Actuarial iPod"

  • Eddie says:

    Nice post, Emily. As the actuarial profession seeks to grow, expand, and gain acceptance in non-traditional areas, I think it will be critical to leverage our ability to synthesize disciplines. Actuarial innovation, like any other form of innovation, will occur by combining previously disparate ideas into new concepts. This will require communication and collaboration with professionals from other disciplines. One great way to get started at a personal level is to participate in group discussions on social media platforms like LinkedIn. It’s a great way to connect with other individuals who share common interests and challenges.

    Future actuarial talent (e.g. Gen Y) studying in universities right now will find the collaboration element very natural given their high adoption rate of social media. I think this means good things for the actuarial profession down the road.

  • Mary Pat Campbell says:

    I agree with Eddie — I would like to see more cross-pollination of ideas to the extent we can.

    A lot of the original research being supported by the SOA can, indeed, be very helpful to actuaries, and having general grants for research in actuarial science can be a great way to support exploration of ideas that may [or may not] be useful. Taking the long view of developing theories can pay off big in the end.

    Those of us in companies will have more constraints as the ideas we work on generally need to be immediately applicable. And then, unfortunately, some of the stuff we practitioners see in our own company data we cannot share with the outside world [the experience studies get at it a little…. but some of the policyholder behavior I’ve seen… yowza!]

    I think the Actuarial Practice Forum is trying to bridge that gap to a certain extent, and we get a good mix of presenters at meetings, going from theoretical to very practical business ideas. As Eddie notes, there’s stuff like LinkedIn groups, and blogs, and twitter groups [are you in the #actuary twibe? heh]. A lot of the information is flowing fast, and the perspectives being brought to it are different.

    To make all this information useful to actuaries, both academic and practitioner alike, we need help in filtering this. I think the SOA supports this in its publications and conferences, and I think this blog is a good step in broadening that as well.

  • Steve Strommen says:

    How can universities help add to the intellectual capital of the actuarial profession? The missing link is engagement in the practical problems faced by actuaries.

    For example, a revolution in financial reporting is currently underway, with a new international standard for insurance accounting soon to be exposed for comment. A central part of this development is a new principles-based approach to valuation of insurance liabilities, based fundamentally on financial economics. During the development of the soon-to-be exposed standard, there has been much discussion and much new literature has been developed concerning theoretical topics such as the basis of risk margins and discount rates in liability measurement. But in all of this, the academic branch of the actuarial profession has been almost totally absent – none of the major papers I’ve seen have come from academia. As a result, there is confusion among practitioners on questions as fundamental as how to reconcile traditional actuarial techniques and financial economics. Several different bases for margins in fair valuation of liabilities are discussed without the presence of an academic that could explain the theoretical basis of each and explain which make conceptual sense relative to stated accounting or regulatory goals.

    In short, the profession is foundering, looking foolish, and lacking an agreed conceptual foundation in this area. Development of such a foundation requires bringing together aspects of actuarial science, financial economics, accounting, and risk management. There is an immense opportunity for academics to contribute to development of this conceptual foundation. Yet for the most part they are not engaged. In general, academic actuaries are too specialized to get involved in synthesizing issues in an area that spans so many fields. I don’t know how to change that, but it needs to change.

  • Emily Kessler says:

    Thanks to all who responded to my post, and greetings from South Africa (the quadrennial International Congress of Actuaries just finished today; I attended to speak on the SOA’s Retirement 20/20 initiative). You gave me a lot to think about.

    First, I agree that collaboration is the key. We’ve worked a lot in Retirement 20/20 with professionals in other discipline with retirement expertise to help shape the effort. We’ve found that they value the actuarial perspective as much as we value theirs. And I’ve found that having academics involved – particularly economists of various stripes (labor, behavioral and financial) – has helped clarify and sharpen our thinking. Second, I think collaboration with our own academic base is key. One advantage of attending an international conference is you hear new voices. Paul Embrechts, a professor at ETH in Switzerland and actuary (through the Swiss Actuarial Association) gave one of the keynote addresses and wowed attendees with his analysis of the financial crisis, the early warning signs, and how important it is for actuaries to take an active part in ensuring the financial industry is using models and measures correctly. He easily and clearly explained how specific mathematic formulae failed, and how the seeds of their failure were seen long before the financial crisis. In addition, I attended a breakout session on Model Uncertainty and ERM with Dr. Embrechts and Andrew Cairns, FFA and a professor at Herriot-Watt University in Edinburgh. Was this session as easy to understand as the keynote address? No. Did the slides contain mathematical formulae? Yes. Did I understand all of the mathematics? No, not even close. Did I understand the principles they were using the mathematics to illustrate? Sure. I agree that sometimes academics need to make an effort to put things into non-scientific language. But I can’t let the scientific language scare me away from learning the principles. (If you want to see the presentations, which aren’t posted yet but should be soon, they are at http://www.ica2010.com/abstracts.php. You can look up by first author or reference number. Embrechts reference number for the keynote address is 196. Embrechts reference address for Model Uncertainty and ERM is 195, and Cairns is 258.)

    Finally, I understand the frustration that the academic base hasn’t been able to support the profession with the coming accounting changes. One of the reasons we’ve started the Centers of Excellence Initiative and the PhD Stipend program is that we don’t have enough academics to support what we do. (http://www.soa.org/library/newsletters/the-actuary-magazine/2009/february/act-2009-vol6-iss1-kessler.aspx) We are going to work over the next few years to build links between the academic and business community. It’s a long process, but I hope that we all can realize it’s a conversation that everyone – working practitioners and academics – has to take an active role in.

    Thanks for the comments!

  • […] make an iPod? by Eddie on March 11, 2010 The Speaking of Actuaries blog recently featured a post by Emily Kessler on the role of universities in actuarial education and qualification.  Emily […]

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