Important AAA Letter

If you haven't already, be sure to take a look at this message from the President of the American Academy of Actuaries in response to the recent Society of Actuaries email sent to all credentialed Property & Casualty actuaries. In short, the SOA's claim that the FSA credential would somehow make it easier for an actuary to change practice areas is spurious.

I haven't said too much on this conflict to date. I see a lot of CAS Fellows who come across as tribalist in their defense of the FCAS credential and of the Society generally. I'm not a Fellow, so I don't have that attitude, nor do I approve of it. Despite that, all of the SOA actions I've been aware of since this conflict started, from the SOA offering a P&C credential, to this reciprocity proposal, to the withholding of email lists from the CAS, to the bizarre attempt to use CAS textbooks for competing SOA exams, to the application to the NAIC before any SOA P&C exams even existed yet, have been contrary to the best interests of the profession, in my estimation.

My employer, Aon, and many others have taken a stand against the SOA's attempt to subvert the CAS (and arguably the profession more broadly, given the AAA's public statements). I gladly add myself to the list. Perhaps the aims are noble, and perhaps the SOA could offer a superior credentialing process. But these means don't justify those ends.

Doing the Math

I love it when people use the phrase “You do the math,” because, unlike most people, I enjoy not only doing the math, but figuring out exactly what math ought to be done.

Case in point from social media:

“The U.S. exports 63% of its fish. 91% of the fish eaten in the U.S. is imported. You do the math- we could be doing this very differently.”

Very well, here’s the math:

63% of U.S.-caught fish is exported, therefore 37% is retained for consumption within the U.S.

91% of fish consumed in the U.S. is imported, therefore 9% consists of fish caught in the U.S.

If 37% of U.S.-caught fish equals 9% of U.S.-consumed fish, then the total amount of fish caught in the U.S. equals 24% of the total amount of fish consumed in the U.S.

So even if we exported 0% of our fish, over 75% of the fish we eat would still be imported. Does that constitute doing things “very differently?” Not in my book, and I imagine not in the original poster’s either.

Then there are the things not considered in this simple exercise in arithmetic. Things economists are trained to consider; things that actuaries would do well to be similarly mindful of. The whole, big, macroeconomic picture that is fudged or ignored when simple statistics get thrown around as though they constitute knowledge and reasoning in and of themselves. It’s like reducing The Godfather to a single GIF and calling it Film Studies. Considerations like:

Different types of fish live in different areas of the world. Are Americans with a taste for John Dory wrong?* What justification is there for denying the Russians the Great Lakes sturgeon they’re so fond of? Our ability to trade things we have but don’t want for things places on the other side of the world have that we do want is the chief benefit of living in a global economy. It’s what all of human economic progress to date has been about. To object to a global allocation of resources is, quite frankly, to object to human happiness.

Fishing is also impacted by seasonal changes. Fish populations migrate, hurricane season makes fishing too dangerous, depleted fish populations require time to replenish themselves, etc. In order to smooth our consumption of fish throughout the year, we rely on parts of the world with different seasons than ours. The person who posted this was promoting a fish taco business. Does she realize that every component of a fish taco- fish, onion, cilantro, corn, tomato, avocado, lime, serrano, etc.- is only available locally some of the time? As a one-time gardener, I can tell you that time is often extremely limited. Yet this fish taco business gets to stay open year round, serving pico de gallo in the dead of winter. Again: thank the global economy.

Speaking of the local craze, the idea that U.S.-caught fish is more local than imported fish is flawed, too. One of the consequences of not being able to find other countries on a map is not developing an understanding of just how incredibly, unusually big the U.S. is. We’re basically a continent all by ourselves. The only countries larger than us- Russia, Canada, and China- have substantial uninhabitable areas. Atlantic fish caught by U.S. fishermen and served in San Francisco is not significantly fresher than Pacific fish caught by Japanese fisherman and served in the same place. In fact the third largest foreign supplier of fish to the U.S. is Canada, right next door, and surely as fresh as Seattle fish is to the rest of the country. And if we’re talking about frozen fish, which is exactly what we import from our biggest fish supplier, China, it hardly matters how far that Filet-O-Fish traveled to get to the deep fryer of your local McDonald’s.

In point of fact, not long ago, we were doing things “differently.” We imported less fish, because we ate less fish, and so did the rest of the world. But with new trends favoring fish, like the omega-3 craze and the global sushi obsession, people all over the world want more of the stuff. And they want it more than we, in America, are willing or able to fish for it. Whether this is primarily due to our increasingly white collar society (only 2% of Americans are involved in agriculture of any kind today) or our tight environmental regulations restricting fishing, I don’t know, but both certainly have an impact. Would anyone seriously argue that we ought to ravage our local fish populations before looking to cheaper, more plentiful sources abroad? Even as an anti-environmentalist, that doesn’t strike me as a smart policy.

And here we have the true beauty of not just the global economy but any economy: specialization of labor. Want fish but hate fishing? No problem. There’s a guy in China more than happy to trawl all day in exchange for small, green pieces of paper. Love to live the Deadliest Catch lifestyle despite your shellfish allergy? Not an issue. You can do the work you love and bring home more bacon than those finance yuppies, all because said yuppies can’t get enough Dungeness. Want to bring the joy of fresh, local fish to people who can afford to pay $10 for a taco? Evidence suggests that San Franciscans will quickly line up at your food truck. We’re all getting what we want here, so let’s just set aside the moralizing and the arrogance of attempting to dictate to others what their tastes and values should be.

And for god’s sake, don’t say “Do the math,” unless you’ve actually done the math.

*In this fish-eaters opinion, yes, they care, but as an economist I respect even the most questionable of tastes.

Price Optimization

I'm very late in getting this up, but I wanted to draw some attention to an interesting letter sent by J. Robert Hunter to the Insurance Commissioner of, well, everywhere. The letter makes the case that the well known and pervasive practice of Price Optimization (PO) is contrary to the CAS's established Principles of Ratemaking.

Whether or not PO can be justified under the current Principles has been a matter of debate within the Society for some time, as Mr. Hunter somewhat superciliously documents. Not being an insurance company actuary, I'm only peripherally familiar with the practice, but I do find the overall debate interesting and important from a philosophical perspective. Much in the way that math-averse folks excuse their ignorance by attacking the usefulness of basic algebra or calculus, actuaries and other mathy types tend to dismiss or downplay the importance of non-formal languages and the corresponding ambiguity of meaning. And yet here we see a perfect illustration of why semantics underlie everything we do.

What is a cost? How are costs equitably shared? How is equity balanced against financial and actuarial soundness? What is the difference between ratemaking and setting a final price? These types of fundamental questions are not covered on the actuarial exams, which is why it's no surprise that every actuary answers them slightly differently.

Frankly, actuaries violate the Principles of Ratemaking left and right. We have to by law. Highly effective rating variables like credit score, sex, and race are frequently illegal or not used for public relations reasons. But more importantly, the Principles of Ratemaking are not really used as principles in the fullest sense of the word. Principles are guides to action; the Ratemaking Principles are instead treated as constraints. Put it this way: no one consults the Principles to figure out what should be done; you only look to see if what you already want to do is forbidden.

The real principle at work is, as always, Step 3: Profit.

This is why I have the opposite reaction as Mr. Hunter to the proposed wording change to the Principles, at least in theory. The pricing actuary's role, to me, is mainly to be a check on the tendency of competitive markets to drive prices down. In the short run (the only kind of run consumer groups ever seem to worry about), the actuary is not the customer's friend. The actuary's job is to keep prices high enough for solvency. Everyone else's job is to do whatever drives profits.

When we find ourselves moving away from our stated principles, it's time to ask ourselves whether those principles are still serving their purpose. Have our goals changed? Has the environment? Or maybe, as a heavily regulated industry, we can't afford to ask these questions, lest consumer groups get upset.

Not to snark too much, but I'd also like to note the amusing reference in 2013 to Towers Perrin, a firm I previously worked for but which has not existed since 2009, when it merged with Watson Wyatt to form Towers Watson. In fairness, the citation was from a paper published in 2007, and I'm not entirely sure how the etiquette is supposed to work in these cases (although I'm quite sure that, from an IP perspective, it's Towers Watson's description now.)

I'd appreciate any insight from ratemaking actuaries. How is PO used in practice? Do you feel the Principles are appropriate guides to action?