Credit crunch and the future of actuaries

[Inspired]

Hi everyone,

It’s no secret that the global economy is in some serious trouble (i.e. credit crunch), but how will this impact the future of actuaries?

In addition, which areas of actuarial work (i.e. pensions, life, general, investment), and why, will be hardest hit?

Common sense tells me that there will always be a need for insurance. Therefore, I’m thinking the life and general areas may be less severely affected, as opposed to the other areas of actuarial work. Would I be correct in this assumption? Something tells me it’s a lot more complicated than this simple inference.

 

[Cardano]

I suspect the insurance industry will not suffer the "biblical correction" that the banking sector is going to see. However the last two credit crunches (29-33 and 73-75) saw spectacular bear markets in stocks, so the reserves of many insurance companies may be very badly hit.
Unfortunately the "stocks and shares always outperform in the end" brigade that dominate most financial institutions will not be sufficiently fleet of foot to avoid such a calamity.

 

[shyguy]

No one profession is safe

If you assume there is a shortage of capital for ventures and takeovers in an economic downturn. There has been announcements in the press about Norwich Union/Aviva and Zurich reducing numbers and who knows who is going to buy RBS insurance. Professions and individuals will have to sell their skills once given an opportunity to enusre future employment. Even General Insurance is not immune to savings.

The future is uncertain (as we all know) and as the world becomes more competitive we will need other skills (eg foriegn language, exceptional computer skills...). Who knows what will happen? Other than Prophet is in demand.

 

[Inspired]

Thanks for the answers.

Broadly speaking, actuaries manage risk, and given the recent financial troubles, companies are increasingly implementing and improving risk management techniques to cope with the crisis. In light of this, would I be correct in thinking that the future may not actually be that bad for actuaries, and, if anything, the credit crunch may have a positive impact on the future for actuaries? Or is this a rather optimistic approach?

 

[Cardano]

Inspired - Just out of interest how many actuaries or actuarial students do you know who talked about a possible credit crunch before last June?

 

[Inspired]

Inspired - Just out of interest how many actuaries or actuarial students do you know who talked about a possible credit crunch before last June?

None.

I think it was last August when the credit crunch seriously came to light, when Central banks started pumping money into their respective economies. But, yes, better risk management may have alleviated some of the financial crisis.

 

[Cardano]

The problem was obvious in June when Bear Stearns failed to bail out two of its funds.

I don't know any actuaries, but I suspect the vast majority of them are not very financially sophisticated and consequently not very good risk managers.

The ability to pass exams and advanced mathematical skills are not what is important in finance, its knowing when those kurtotic events are likely to occur. These are the events that will bring ruin to anyone with conventional ideas and this includes bankers, quants and unfortunately actuaries too. Staying in the game is more important than maximising returns in good times.

At least twenty of my friends and acquaintances had been discussing a possible credit crunch with me since 2003. None of these people are involved in conventional finance. They are mainly academics, professional gamblers, entrepreneurs or can be loosely described as intellectuals.

The most important thing is knowledge of economic history. The same mistakes are made over and over again

 

[avanbuiten]

If a bank fails then those who work for the bank (actuaries), work indirectly with the bank (actuaries in insurance/pension companies selling products via bank) may lose their jobs.

Work in M&A? Again, expect to see redundancies due to less activity.

Is your company owned by a larger parent company? Don't be surpsired if it's sold off to highest bidder and you lose your job in the new restructure.

That's my opinion, just a guess really.

 

[parnell]

Its knowing when those kurtotic events are likely to occur.

....
The most important thing is knowledge of economic history. The same mistakes are made over and over again

Predicting future corrections based on past patterns is surely the most conventional of all principles and a core of actuarial work...

the more risk the better it is for actuaries - make no mistake - crises will only force more analysts and risk technicians into financial control.

 

[Cardano]

Yep I agree with that Parnell. Horses and stable doors etc etc

 

[Cardano]

I see risk control in finance as counter cyclic. ie there is always plenty of it after a financial crisis when its not necessary and very little when it is required.
There appears to be about a generation between financial crises. This is just enough time for those who were in responsible positions in the previous one to have retired. The lessons are therefore relearned painfully on each occasion
I have no doubt that at the end of this current credit crunch the finance industry is going to be so tightly regulated and subject to such large reserve requirements that nothing serious will go wrong for decades.
And as Parnell says it will give actuaries opportunities in risk control, but at a time when it is least required

 

[parnell]

I agree with you about the cyclicity of concentration on risk issues , I'm not sure if it's "not required" after a crisis - just because crises have in the past been rather discrete events does not mean that this will always be the case - certainly the recently observed (it has long been the case but not often commented upon in the pages of the FT amongst others) notion that retail banks are now little more than leveraged property investors seems to entail significant risk retention - it might also have implications for government control of property prices - e.g. I live in Germany and government control of rental increases has had a marked effect on stopping property bubbles ever surfacing.

Solvency II was on the table long before the crisis and as many reserving actuaries will tell you (off the record of course) , anything that strengthens their hand when persuading boards as to the dangers of under-reserving is welcome - witness the ridiculous cyclical nature of the insurance cycle and in particular the profitability of reinsurers - the most recent sigma report being a cast-iron demonstration of that.

In my view the insurance industry has suffered heavily from poor corporate governance , although I consider myself to be ideologically close to laissez faire economics , the continued and long term failure of successive insurance management to tackle the cycles effectively suggests that such an approach may not always yield the best results , contrary to what Adam Smith suggests.

To summarise : if greater power is invested in actuarial and risk management functions then there is at least a greater opportunity for long standing problems facing financial industries to be addressed - the challenge is to maintain that power in the medium to long term.

 

[Cardano]

Good post Parnell and I am almost certainly guilty of hyperbole when I said "no risk control"

Credit crunches are usually a prelude to a debt liquidation and then debt revulsion. I think we are going to see astonishing defaults over the next 5 years or so, not only in the banking sector but across the personal, corporate and governmental sectors. The consequent culls in the finance sector will leave management much more conservative and older (which automatically makes people more conservative). This can only be good for general risk control.
The problem with corporate governance at the moment is that senior management participate in the upside with incredibly large bonuses, share options etc but do not participate in the downside. It also doesn't seem to matter whether they get it wrong. Look for instance at the payoffs that Adam Applegarth or Chuck Prince got after running their banks into the ground. This merely encourages stupid risk taking
I foresee a change in the reward structure in the finance industry so that bonuses are exactly that ie about 10% of pay. The days when Mr 29 year old investment banker finds a billion pounds worth of investment borrows another 20 billion from a bank and then buys a load of mortgage backs or CDO's and collects 20% of the profit but takes none of the losses are obviously over.

At the end of the 1930's banking disaster the SEC was set up to deal with the abuses in banking and finance that occurred in the 1920's and very strict regulatory requirements were enforced. Consequently there was no problems in banking until 1969. Something similar will probably happen a few years from now.

If the credit crunch is as bad as I think it is going to be then there will be "debt revulsion". This happened after the 1930's when a whole generation simply refused to borrow money and saved and paid cash instead. This will also be a force for stability and conservatism

From a personal point of view I prefer a freemarket approach too, I just don't think it will happen.

 

[parnell]

The problem with corporate governance at the moment is that senior management participate in the upside with incredibly large bonuses, share options etc but do not participate in the downside.

Could.not.agree.more.