Quick: what’s one of the top five most common causes of
insurer insolvency? If you’ve taken Exam 6, hopefully you remember that “rapid
growth” is on that list, which seems strange at first. Growth is what investors
come to market for. We treat it as a fundamental measure of economic health,
whether it’s growth in the S&P 500 index or growth in GDP. For the insurer,
however, idiosyncrasies of the insurance product turn growth into a mixed-blessing.
Premium growth can be a sign that management is attempting to pay existing
liabilities with new premium dollars, an unstable situation that could lead to
insolvency. Growth is therefore not always a blessing in the insurance market.
Even for a non-insurance product, though, growth can turn
out to be a curse. While companies must innovate and improve their products in
order to stay competitive, fundamentally changing a product can ultimately
cause a loss of market share if existing customers don’t take to the new product.
Whenever a company tackles a radical new path and succeeds, analysts praise the
bold vision. More frequently, however, you hear analysts declaring that the change
was too bold, that it alienated the existing customer base, and that, in the
long run, growth was not achieved. Product shifts have high rewards, but also
high degrees of risk.
Two ongoing product shifts come to mind: Facebook and the
Casualty Actuarial Society. Facebook pushes major changes on its users so
frequently that the company’s name has become synonymous with unnecessary and
unwanted “improvements.” As a less extreme example, the CAS constantly keeps
two items on its agenda: solidifying the current base of actuarial services,
and expanding the actuary’s role into new areas.
Facebook is a particularly good example of the risk posed by
a changing product, because a social networking site, of whatever kind, can
really only be one product at a time (at least, so it appears thus far). You’re
either a dating site, or a “find friends from high school” site, or a business
networking site, or a place to post pictures of cats. Over its history,
Facebook has tried to be nearly all of these things, but at any given point in
time, it has only been one.
At the start, Facebook was exactly what it sounds like: a
facebook. In fact, at the time, it was referred to as “the Facebook,” and that
was it. It wasn’t a verb or a place where things happened. It was a virtual
Rolodex and little else. Being “Facebook friends” with someone had no moral
significance. I ended up “friends” with every person I went to high school
with, essentially just to keep track of where everyone was going to college. It
had all the personal significance of a PDA.
Then came “poking” and “messaging.” I still don’t know what
poking is about, but messaging quickly became cruising for dates if you friended
any “friends of friends” (at least if you were foolish enough to list yourself
as “single”). Feeling like I’d been tricked into joining an online dating site,
I started avoiding the site, checking in only when I needed to find someone’s
contact information, which was fine by me, given that the whole reason I joined
was to absolve myself of the responsibility of keeping an address book.
The whole paradigm shifted, however, when “status updates”
and “News Feed” were introduced. Facebook stopped being about enabling
individuals to connect when they felt like it and instead became a platform for
individuals to inject themselves into the spheres of others, almost forcibly.
The Rolodex became a forum combined with Reddit, and that’s fine, too. But in
executing this change, the original purpose was lost. I didn’t want to send
such personal information, whether it’s where I’m having dinner or who I’m
(not) voting for, to every person in my Rolodex. Further News Feed subjected me
to similar information about others, information I was most often not eager to
see (there are only so many pictures of food I can take).
This is when “Facebook purges” began. I couldn’t be Facebook
friends with just anyone if I was going to be sharing photos and personal
thoughts with all of them. It started with “no friends from work,” expanded to
“no friends who creep me out,” and ultimately rose to the level of “no friends
who cannot spell.” The set of Facebook friends contracted and contracted,
shrinking closer and closer, until finally it became identical to the set of
actual friends.
The original Rolodex model is completely gone, but in its
place is a new product. At the end of it all, did Facebook grow? It would be
sacrilege to answer “no.” The degree of investor confidence in Facebook is
astounding. However if we take the limited view of Facebook’s original product,
we have to answer “no.” The Facebook I joined before heading off to college is
in bankruptcy, and has been for some time. This isn’t a problem if the new
Facebook creates more value than the old Facebook (and it probably does), but
it should give us pause to see such a radical shift. The kind of 180 that
Facebook has made is not common. From a production perspective, it’s comparable
to Coca-Cola ending production of regular Coke after introducing Diet Coke.
From a risk perspective, it’s comparable to starting a totally new company,
with a little bit of risk mitigation due to the inertia that will keep existing
customers around temporarily.* It’s certainly not the obviously safe bet most
investors seem to think it is.
For now, Facebook sits in this new equilibrium as a place
where actual friends interact in ways that friends normally would, only faster
and more easily. But Timeline is coming, and that means the product is changing
once again. If the past is any indicator, that means the current model will
soon have to go, in which case anyone joining the upcoming IPO will be
investing not in a tried-and-true product with known demand, but in yet another
speculative product, the market for which is unknown. Add to this growing
privacy concerns and employers demanding access to employees’ Facebook
accounts, and I see a very uncertain future.
As for the CAS, as I mentioned earlier, the organization is
constantly looking for ways to grow the actuarial market. Most recently the CAS
started offering the Chartered Enterprise Risk Analyst credential. While still
an actuarial credential, CERA does expand the actuary’s focus into broader
business concerns. The CAS’s interest in these general business risks is
evident in the exam process, where Enterprise Risk Management topics are
covered through papers written by non-actuaries and published in major business
journals.
ERM certainly seems like a blossoming field, but there is
still a trade-off to pursuing it. What more traditionally actuarial papers did
the ERM-related papers replace? What topics related to our tried-and-true areas
of expertise have been omitted from the education of new actuaries? Although we
hold some monopoly power when it comes to statutory opinions, we don’t enjoy
demand as inelastic as that of doctors or lawyers, nor does the CAS have as
much legislative influence as the American Medical or BAR associations. While
we’re plotting our expansion into non-actuarial territory, who is planning to
invade our traditional areas?
As a profession, we’re taking a risk by moving into new
areas, but as the Society of Actuaries likes to remind us: risk is opportunity.
Without risk, there is no reward (or at least not much of a reward.) With the
exam process doing a possibly too good job of restricting supply, maybe now is
actually the perfect time to take a demand-side gamble. Our risk expertise
should enable us to sort out the good gambles from the bad, after all. The
opportunity cost, however, cannot be ignored, especially with the SOA ready and
waiting to gobble us up. The time we spend sharpening our non-actuarial tools
is time we don’t spend developing our traditional skills.
Speaking of opportunity cost, we could all take our
membership dues and buy Facebook shares instead. Just a thought.
*I’m skeptical of how much this can help Facebook when its
users are not the ones paying money. Unless a user is active on Facebook, it’s
likely that Google has much better data on that person than Facebook does.
