Letters to the editor
The editorial team welcomes readers’ letters but reserves the right to edit them for publication. Please e-mail letters@the-actuary.org.uk
Letter of the month: Risk must be managed
The invitation to submit thoughts on ‘the end of risk management’ (Jan/Feb 2008, p23) could hardly be ignored following my last letter (Actuaries’ need for investment strategy, December 2007). Not wishing to labour the point, I stressed that risk management could only be applied with due consideration of economic/market circumstances.
Indeed, I fear that the term ‘risk management’ in the hands of many actuaries leads them into mathematics, asset/liability modelling and obscure derivative theories. A full understanding of the potential risks (and rewards with equities) is needed at all times, which is often more subjective than hypothetical mathematical theory. To quote examples:
1 The ignored consequences of falling interest rates and increasing longevity — coupled with inadequate reserving for guaranteed annuity rates — caused the collapse of Equitable Life.
2 The strange assumption that aggregating sub-prime mortgages in the US, and selling such mortgage packages, somehow reduced the risks followed by the subsequent contagion of the credit crunch.
3 Northern Rock seemed to forget that its business was borrowing short and lending long. Rather than relying on loyal retail deposits, short wholesale funding dried up in the money market with inevitable consequences.
4 Competition among banks and building societies led to collateral debt obligations, and structured financial instruments with reduced collateral backing exacerbated these situations.
5 The removal of cheap finance has caused large losses in several major hedge funds. Many try to develop parallel switches from A to B, like contracts for difference, but the prospect of major gains in single transactions of selling short or buying increases risks dramatically.
6 The UK has not provided the only example of rogue traders causing major calamities (comparable with some hedge funds’ performance). Independent and continuous auditing is vital.
In summary, risk must be managed but it is not primarily a mathematical problem. It is an organisational, management challenge with the need for an awareness of the possible consequences of one’s decisions. Experience, flair and common sense are particularly important in selecting business models and investment strategy.
Kent Sandom
30 January 2008
The writer of the Letter of the month receives a Venecia fountain pen kindly supplied by HBOS
12 hours to save the universe
In response to Angus Sibley (Letters, Jan/Feb 2008), anyone who ever had a biology lesson should know that the human female is among the most infertile of mammals. She is fertile for only about 4% of her lifetime. Some experts argue there is only a 12-hour ‘window’ in the monthly cycle when conception is possible and even then the probability is in the order of 40% (a wonder any of us made it here at all).
Logic has it, therefore, that conception may be avoided if the fertile times can be identified and the ‘marriage act’ is abstained from during those times. To coin a phrase from an old TV show, ‘we have the technology’. It is known as natural fertility regulation (NFR) and is in fact the most effective family planning method of all (the term ‘rhythm method’ is old hat).
NFR has no associated health risks, abortifacients or unpleasant side effects and certainly isn’t ‘rocket science’ — the late Mother Teresa used to teach it to illiterate women in the slums of Calcutta. With regard to ‘overpopulation’, we need to ignore the spin-meisters and concentrate instead on facts.
Like many other ‘baby boomers’, I lived through the unprecedented doubling of the global population in the second half of the 20th century. Never before in human history had our numbers increased so far, so fast: from three billion in 1960 to six billion in 2000. But our numbers didn’t double because we suddenly started breeding like rabbits. They doubled because we were no longer dying like flies. Fertility was falling throughout this era, from an average of six children per female in 1960 to only 2.6 by 2002.
On the fantasy island of overpopulation, human numbers are always exploding, but a closer look reveals a different picture.The unprecedented fall in fertility rates that began in post-war Europe has, in the decades since, spread to every corner of the globe, including Latin America. Recent UN forecasts indicate that the world’s human population will continue to creep up until about the year 2040, peaking at around 7.6 billion people. It will then begin to shrink.
Many nations, especially in Europe, are already in a death spiral, losing a significant number of people each year. Persistently low birth-rates have serious economic, social and political consequences.
The only future a nation has is its children and any nation where the indigenous people are not having children will, inevitably, become populated by people and races that are.
Patrick McKay
1 February 2008
Bankruptcy costs more
Hiten Nandha’s article was an excellent summary of the state of play with Modigliani and Miller (‘Fifty years and counting’, Jan/Feb 2008, p39). One issue, however, that I still feel is underplayed in qualifying the equivalence of equity and debt financing, is that of bankruptcy risk.
The original theory’s assumption of zero bankruptcy cost was clearly unrealistic in the extreme but even the 5% quoted in the article seems to me to be a serious underestimate, particularly in jurisdictions which, unlike the US, do not make it easy for a company to continue trading towards workout under legal protection from creditors.
My characterisation of the situation in the event of severe financial stress would be that it is embarrassing for an equity-financed company, but prone to prove disastrous for a debt-financed one. This risk should be considered a substantial offset to the case for taking advantage of the tax deductability of debt interest by ramping up gearing, especially for cyclical businesses.
John Bishop
31 January 2008
Commission omission
How could our profession ignore the questions of charges and commission-driven sales when responding to the Financial Services Authority’s review of retail distribution? The FSA’s discussion paper sets out to achieve a fair deal from the financial services industry and clearly describes the problems in the way. Prominence is given to complex charging structures, remuneration-driven sales by so-called advisers and the fact that those giving advice can do so with little training and testing.
The Profession’s response claims to focus specifically on the potential impact on consumers. However, it makes no reference to the above issues and concentrates on the need for event-driven advice, saying that the regulated advice model centres around looking at all areas of financial need. The present set-up, it says, is a counsel of perfection often unavailable or unaffordable.
These are, indeed, valid points but was there really nothing the Profession could say about the commission-led system that pushes people into high-charging products, when true independent advice would send them in a very different direction? Once clients get into the hands of an IFA or provider-salesman, they are unlikely to be pointed towards a non-commission-paying product such as National Savings, a cash ISA or an investment trust. Instead they find themselves in such things as unit trusts whose typical charges reduce the accumulated fund by 30% over a 20-year period.
To conclude on a happier note, readers will find more robust submissions to both the Retail Distribution Review and the Thoresen Review on the website of the UK Shareholders’ Association www.uksa.org.uk with positive suggestions to address these issues. At which point I must confess to having played a significant role in the drafting of those responses!
Roy B. Colbran
13 January 2008
Image problem
May I suggest we try to reduce, or even eliminate, articles that discuss and emphasise the actuary caricature such as the ‘rotating underwear’ debate (Letters, Jan/Feb 2008).
Perhaps the magazine needs to form part of a more ‘strategic’ effort to promote actuaries as both professionals and as commercially minded business people that are engaged in matters of significance?
There is a need and opportunity for actuaries across Europe to position more strongly the role of the actuary in many areas ranging from risk and capital management to customer-facing areas such as product design and portfolio management.
Such positioning needs to be supported by a strong image, and I would discourage ‘nerdy’ or ‘quirky’ articles that reinforce stereotypical views.
Steve Wilson
31 January 2008
Petronas pride
I just want to say thanks for publishing the article about Takaful Insurance (Jan/Feb 2008, p40). When I was flipping through the magazine, I was so proud to see the picture of the Petronas Twin Towers. The article also provided me with some background knowledge for an Islamic Banking and Insurance forum that I am attending at Imperial College.
On another matter — as a first year student in actuarial science, some of the sections are relatively technical to me. Would it be possible to have a section about students looking to pursue a career as an actuary? This could include explanations of some basic facts/ theories (like how a pension fund works), some real-life case studies (application of actuarialrelated theories), and hints and tips about job applications and careers. Keep up the good work with the magazine and the new website.
Leong Hoo
31 January 2008
The editor replies: Thanks for your comments, Leong. The magazine website www.the-actuary. org.uk contains an archive of features on various topics that may prove helpful. An online Career Clinic section is also in development which is intended to act as a source of peer advice. I would also draw your attention to the feature by Johan Strydom in this issue on the development of the online encyclopedia, www.ActuarialWiki.org.
A selection of comments on the new-look magazine and website
May I suggest that on the people moves page (Jan/Feb 2008, p50), it is the individuals that are highlighted in bold, rather than the companies? It would make it much easier to scan for familiar names.
Don Shore
The editor replies: We agree. You can find the new style in this issue.
Just thought I’d let you know I appreciate the new matt paper you’re printing The Actuary on — so much easier to read without reflection from the lights. Wish all the other magazines I subscribe to would go the same way.
Pauline Armitage
Congratulations on the new website. Just one suggestion — for the news section, it would be nice to see a short precis of each story to save clicking on each one.
Ron Engelbert
The editor replies: Thanks Ron — this has now been introduced.
I really like this new format. Well done. It is an excellent new service to FIAs abroad.
Ian Markham
I’m not impressed by the new style. The magazine is reminiscent of an airline magazine and that’s not an image that I want to see our profession projecting. I have to conceal it behind a girlie mag when I’m reading it.
Steve Mills
I love it! It’s a great improvement.
Malcolm Jewell
Thanks for the e-mail alert sent via the Actuarial Profession. It prompted me to have a look at your website and I was impressed. Keep up the good work. E-mail alerts are great.
Maria van Beek
I generally don’t pay much attention to the goings-on of the Profession, as my work is governed by the South African Financial Services Board. However, I am a voracious sudoku player (as is my managing director), and your online sudoku development leaves us feeling far more actuarial than we have in a long time! Congratulations on taking the Profession even deeper into the electronic age.
Alastair John Sellick
Congratulations on the new magazine, it looks really good and is a real move forward for the profession.
Bruce Porteous
The editorial team welcomes readers’ letters but reserves the right to edit them for publication. Please e-mail letters@the-actuary.org.uk
The letter of the month receives a Venecia fountain pen courtesy of HBOS
