Bradley M. Smith, FSA, MAAA

President, Society of Actuaries

Wow! This is a humbling experience. I'm deeply honored to be chosen to lead such an impressive group of professionals.

This is an important day in my career.

It's also an important day in the Smith Family history. 25 years ago, the SOA had its Annual Meeting in Chicago. Karen and I attended. Program was excellent. Except Tuesday afternoon was a little weak. As a direct result of this, nine short months later our only child, Emily, entered the world.

I don't want you to get any ideas, but there are many forms of continuing education!

The Society of Actuaries has had its typically outstanding year. Exams have been administered, meetings have been offered and attended by its members, continuing education opportunities have been made available, and valuable research has been produced.

Truth be told, this happens year after year, not because of the presidential officers of the SOA, but rather because we are blessed with having a very generous core of volunteers and an excellent staff led by Greg Heidrich and Stacy Lin.

If I asked our volunteers to stand, virtually everyone in the room would, so I won't. However, if you are a member of the SOA's staff, please stand so we can express our appreciation for your continuously excellent effort on behalf of the actuarial profession. Thank you.

I do not intend to take up this valuable time with you outlining the accomplishments of the SOA this past year. Rather, I want to talk about the actuarial profession, the opportunities we have, the challenges we face and the structure we operate under.

I recognize in advance that many of my comments and examples will be more relevant to our US-based members, but I believe the issues I raise and the directions I'm suggesting will, if taken, directly benefit our members in the US, Canada, and the many other parts of the world where we have members or candidates today.

The challenge for any profession is to remain relevant to all of its stakeholders. So it is with the actuarial profession. We do this by committing to life-long learning – replenishing the technical skills that are an amortizing asset, but represent the life blood of our expertise. We also remain relevant by developing skills outside our areas of expertise. Working on our weaknesses as well as our strengths. Improving our "soft skills".

I am reminded of the presentation by Professor Paul Embrechts at last year's annual meeting. Dr. Embrechts is a professor of mathematics and economics. He gave a fascinating presentation on how he used his technical skills to predict the mortgage and financial crisis of 2008 well in advance of its occurrence. He described how he tried to warn regulators and government officials of this impending calamity. How they largely ignored him as being "too academic". In fact he showed a slide with those two words. He wore the label as a badge of honor. It was a fascinating presentation. One well worth our time.

I was certainly impressed, but something bothered me as I left the presentation. I couldn't put my finger on it immediately, but it struck me a few days later. What should have been his most significant professional achievement, predicting and helping to avoid, or at least minimize, the disastrous effects of a coming world-wide financial meltdown turned into a humongous professional failure.

Think about it. He had the skills and technical ability to predict this coming calamity, but because he lacked the ability to communicate effectively with a non-academic audience, he could not help the world avoid the pain and suffering it eventually caused (and is continuing to cause today)!

Have you ever been accused of being "too actuarial"? I certainly have. And I used to wear it as a badge of honor, also. Until someone pointed out to me that they were not criticizing the necessarily highly-complicated and technical nature of the work that actuaries do, but rather, my inability to communicate the issues in a non-technical fashion to non-actuaries.

This represented a professional deficiency as critical as not having the technical ability to develop the solution. If you cannot articulate the problem you are trying to solve and the solution you are proposing, you will fail as a professional – or at least fall short of your potential.

I have been a consultant for over 25 years. Have I had clients ignore my advice? Absolutely.

We need to recognize that we are not always right. That there are elements to any solution that we may not appreciate. That we are not always the "smartest person in the room". Having said that, we must also recognize that if this happens too often, clients will eventually stop asking our opinions. We will become irrelevant.

This is so important now because depending upon your point of view, we are either "blessed" or "burdened" with enormous societal problems that have substantial actuarial components. The funding and potential reform of Social Security... Medicare and Medicaid... Healthcare reform. The underfunding of public pension plans.

Let's talk about some of these issues.

Underfunding of Public Pension Plans. This topic has garnered much publicity over the last year. Many of our largest public pension plans are severely underfunded. This underfunding represents a substantial financial burden on future generations of taxpayers. To formulate a solution, the root causes of the problem must be understood. We know the causes but we have failed to communicate them effectively to the general public.

1. Sponsors have failed to fund their plans at the level recommended by their actuaries.



This is understandable. Tax revenues are down due to the financial crisis. There are pressing needs other than pension plans that must be funded on a current basis... Education, transportation, healthcare, to name just a few. Many of these plans already have billions of dollars of assets invested. Why should they pay more into these plans when they have more pressing current needs? It is our role as their actuaries to answer this question.

Given the reality of funding at a level substantially less than recommended, it is clear that, in some cases, we have not been as effective as we need to be.



2. The investment returns of the past decade have been calamitous.



Equities have severely underperformed from their historical level. Additionally, markets have been very volatile. This has led to an asymmetrical response to these volatile returns by plan sponsors.

What do I mean by this?

In the late 1990s and early 2000s, during the dot-com bubble, investment returns greatly exceeded expectations. This led to the overfunding of some plans. Assuming that those returns were not an aberration, plan sponsors raised benefits, which, once granted, are typically guaranteed. When the bubble IMPLODED, the excess returns disappeared and, due at least in part to increases in benefits that became guaranteed, the plans were left severely underfunded.



3. Politicians appealed to public employees by promising increases in their benefits, knowing that such increases would be substantially funded in the future, after they had left office.


4. Plan administrators of final average pay defined benefit pension plans allowed the "spiking" of benefit levels by permitting employees near retirement to work additional overtime in the years immediately prior to retirement.


5. Early retirements of older, higher-paid employees who were replaced by younger, lesser-paid employees was seen as a way to reduce current payroll, without recognizing the impact that these early retirements would have on the funded status of the pension plan.


6. Post-retirement health costs were either not funded at all or were funded at a level well below their expected cost.

Earlier in the year I was interviewed by a reporter from the New York Times concerning the funding of public pension plans. While I am not a pension actuary by training, my commercial responsibilities require me to be aware of the issues. A 15-minute introductory interview turned into a 90-minute discussion in which we talked about each of these underlying causes. At the end of the interview she told me that she had been working on this story for a number of months and that I was only one of two actuaries willing to discuss the causes of the problem. No one else would discuss it on the record!

In a subsequent conversation, she told me that she understands the underlying reasons for the underfunded status of these plans. But then she said something very interesting. She said, "Brad, you seem like a smart guy. You are a leader of the actuarial profession. You must recognize that once the level of underfunding is understood by the public, people will be pointing fingers at the actuarial profession."

I certainly do and so do you.

All the more reason for the actuarial profession to be a part of the solution, rather than be viewed as part of the problem.

A quick side note. My sister is a middle school teacher in Illinois. I come from a family of teachers. She wrote a letter to her state representative urging her to not reduce the pension benefits she had worked for throughout her career. The representative's response was instructive. She said she was empathetic to my sister's concerns, but the state's finances were so bad, it appeared clear that pension benefits for state employees would have to be reduced. She then made it clear that as a newly-elected representative, she was not responsible for the poorly funded plan. Rather, it was the responsibility of her predecessors and the advisors they relied upon.

Yes, they will blame us.

Healthcare Reform. The Patient Protection and Affordable Care Act (PPACA) is undeniably a very complicated piece of legislation. One of its elements that will affect actuaries and our work are the four primary subsidies the law creates among different constituencies.

Let me preface my remarks by saying that I am in no way criticizing Congress or President Obama. It is the legislature's responsibility to determine who should pay for what and whether differentiation of cost by a given criteria is socially acceptable or desirable.

The four subsidies created by the legislation are:

1. Affluent to poor
2. Healthy to unhealthy (via the elimination of underwriting)
3. Young male to young female (via the elimination of gender-based pricing)
4. Young to old (via the 3 to 1 limitation on pricing)

While any one of us may disagree with the social benefits of such subsidies, it is pretty clear what the underlying thinking was on at least the first three. However, I was having a problem understanding why the fourth subsidy was enacted. After all, many of the uninsured are young adults who feel invulnerable and do not see the need to purchase health insurance.

The new law requires them to purchase insurance or pay a penalty. If we were going to subsidize any age group, shouldn't we be subsidizing them? Instead, not only are we NOT subsidizing them, we are forcing them to pay artificially high premiums that subsidize an older, generally more affluent cohort.

This didn't make sense to me.

I discussed this with someone who works on Capitol Hill. Told him I understood the criteria for the first three, but was struggling to understand the reason for the young to old age subsidy. Were Congress and the President trying to emulate the group insurance market? Were they making a statement about the appropriateness of age-based pricing?

The person just looked at me and smiled. He said, "Brad, you are such an actuary. You try to impute logic where there is none. There is one reason and one reason alone for the 3 to 1 limit that subsidizes the old at the expense of the young." I said, "OK, what is the reason?" He said, "It is the price that AARP (American Association of Retired Persons) extracted for their support of the bill." "It is the price AARP extracted to support the bill." Totally non-actuarial. Totally political. Old people vote, young people don't.

If you are under age 35 this should make you really angry. I'm 56 and it makes me angry.

There is a lesson here for us as a profession. If we are to sit at the grown-ups' table, we have to recognize that not all decisions are driven by actuarial considerations. We are not always "the smartest people in the room." In fact, in some ways we have been the most ignorant, or at least the most naïve.

One final point on this topic. There are ramifications to moving from our current environment to one that is subsidized in a different way, and as professionals we should not be shy about pointing out these ramifications.

The newly subsidizing cohort—young, healthy,middle-class males—are going to be hit with substantial rate increases as a direct result of the mandated subsidies in this legislation. The laws of actuarial science, like the laws of physics and economics, are immutable.

Medicare. Since we are talking healthcare, let's move on to Medicare.

We all know the problem, the current level and trajectory of the growth of healthcare costs are at unsustainable levels. The causes have been well documented. Waste, fraud and overutilization have resulted in healthcare costs in excess of 16 to 17 percent of GDP. Behavioral economics shows that humans react to incentives.

The current healthcare delivery system incents healthcare professionals to provide more, not necessarily more effective, medicine. Advances in medicine and the use of technology allow us to do things medically that were unimaginable even a decade ago. Historically, we have adopted new treatments that were demonstrated to be better than existing treatments regardless of the incremental cost.

One lesson of the financial crisis is we now recognize that we have finite resources. Choices have to be made. The issue is not whether the individual is free to pursue whatever protocol of treatment he or she wishes. The issue is what level of coverage is provided by the publicly provided plan, and what additional coverage is the individual responsible for purchasing.

The issue of making choices is a hot one politically. Death panels come to mind. However, when asked whether Medicare should pay for a 94-year-old patient with severe Alzheimer's disease to have a knee replacement, most people would say no. That is not an efficient use of our finite resources.

Once you have made that decision, you have crossed a conceptual threshold. You have acknowledged that there are certain procedures that will not be performed, based upon a cost-benefit analysis. The only remaining question is where the line is to be drawn.

Difficult questions, difficult choices, but ones that must be asked, answered, and made if we are to control the trajectory of runaway healthcare costs.

Actuaries have the skills necessary to participate in research that will help society make some of these tough choices.

Social Security. Social Security was designed as a pay-as-you-go system. The 1983 reform resulted in increased taxes and decreased benefits to assure the 75-year "solvency" of Social Security. The resultant tax revenue in excess of benefit payments "accumulated" in the Social Security Trust Fund. The federal government "borrowed" this excess revenue to pay current expenses. It also contributed to a reduction in the government's current deficit and external debt.

Nonetheless, the federal government owes this money to the Social Security Trust Fund which now sits at approximately $2.6 trillion.

In the near future, absent reform, Social Security benefit payments will permanently overtake Social Security tax revenue, resulting in an increase in the government's current deficit calculated on a unified basis.

Given the level of the government's deficit this has led some politicians to call for the reform of Social Security. However, we know that any reform of Social Security will not affect the government deficit over the long run as Social Security taxes must be used to pay Social Security benefits. It is a zero sum game.

Likewise, once the "trust fund" is dissipated and the taxes collected are no longer adequate to pay scheduled benefits, benefits will be reduced to the level supported by then-current tax revenue. This is primarily due to the demographic shift generated by the retirement of the baby boomer generation.

Most actuaries understand this. The general public does not.

Reform is necessary, not to help address the deficit issue, but rather to distribute the pain of some combination of increased taxes and reduced benefits more equitably to all taxpaying generations.

Absent such reform, the generations paying taxes through the mid 2030s and receiving the precipitously reduced benefits resulting from the dissipation of the trust fund will bear the economic brunt caused by this demographic shift.

Steve Goss, the Chief Actuary of Social Security, and his staff have done an excellent job of detailing the issue.

The actuarial profession needs to support their efforts to better educate the tax-paying public and lawmakers so that we can create a system that is fair to all.

Conclusion. These societal issues represent a significant and growing opportunity for the actuarial profession.

We are blessed with the superior analytical skills necessary to address these issues. However, because we are blessed we have a tremendous responsibility.

Are we the cause of these problems?

I maintain that we are not. However, if we do not become part of the solution, we risk becoming facilitators of the problems. This is something that few, if any of us, want to live with. We must become more active participants in developing solutions to these problems.

So what am I asking you to do?

I am asking every actuary to speak out about these issues. At cocktail parties. At neighborhood barbeques. At family gatherings. At your place of work. I'm asking you to give presentations to your local community clubs. To write your congressman. To write letters to the editor of your local newspaper. To tap the power of social media, be it Twitter, Facebook, LinkedIn or YouTube to deliver this message.

I have asked the SOA staff to create power point presentations on each of these four topics targeted to non-actuarial audiences that will be made available to you to alter and use as you deem appropriate.

Incidentally, the Academy has developed some very helpful issues papers on these and other topics to help educate you and the general public. They are available on their website. I encourage you to take a look.

One of the impediments to the actuarial profession becoming more substantial contributors to solving these issues is the structure of our professional organizations in the United States.

I completed my term as a Vice President of the SOA in 2003. When I left, the organizations were reasonably cooperative and productive, minimizing the impact of the artificially complex structure. Since becoming more intimately involved this last year, I have observed that our organizations are less cooperative and much more competitive with each other.

The markets our members and candidates face are much more competitive today, both from credentials and training outside the profession (for example, the CFA, an MBA, a Masters in Finance, and other credentials).

And let's face it, the SOA and the CAS compete for students with other global actuarial organizations.

I sat in a meeting a couple of weeks ago in which a leader of another global actuarial organization acknowledged that they have one very distinct competitive advantage over the SOA. Specifically, they offer education and examination for all actuarial disciplines, whereas the SOA does not support the casualty (or non-life insurance) discipline.

They have a similar competitive advantage over the CAS.

Clearly, we are stronger competing together rather than separately.

We must re-structure our organizations in a way that concentrates and focuses our resources on ensuring the profession, our professional associations and our credentials remain strong and grow stronger in the future.

For the profession to have a meaningful impact on critical public policy issues, we must have a highly focused, coordinated effort with the scale and resources necessary to that effort.

We actually already have that scale and those resources, but we divide them among a variety of different organizations.

To be more effective, we should focus and concentrate our efforts.

In the past couple of years we have received a message from many of the large employers of actuaries that our existing structure is both inefficient and ineffective. The markets in which our employers work are highly competitive and becoming more so. Economic pressure for cost savings is requiring a number of our major employers to combine and achieve efficiencies in new ways and they will also (eventually) require it of us.

In the long run, we cannot avoid this economic reality.

At a time when we most need concentrated, focused effort, we spend hours and days of precious volunteer, leadership, and staff time and effort finding ways to collaborate with one another, and we duplicate our spending on many aspects of our separate infrastructures. These efforts are well-meaning, but they are aimed almost solely at making our divided and disparate systems work.

There is a hesitancy to do anything due to a fear of stepping on others' toes.

I believe we can put those volunteer, leader, staff, and financial resources to more effective use and gain important efficiencies as well.

The SOA's members, when asked to vote on a proposal to combine and make more efficient just one aspect of this structure, the recent Joint Disciplinary proposal – voted by a margin of 94% to 6% in favor. Over 80% of the CAS voters had the same view, as did 93% of the Academy members who voted and 93% of CCA voting members.

In other words, you, our members, strongly supported such efficiencies.

Many of the profession's leaders and its employers, in private conversations and public statements, have expressed the view that a more efficient and rational structure for the US profession makes sense. Several of them have tried in various ways over the years to achieve change.

Steve Kellison, former President of the SOA and former Executive Director of the Academy, stated in an article in the October, 2005 issue of The Actuary: "Put simply, there are too many actuarial organizations for a profession of our relatively small size. Our overall organizational structure collectively is too complex and the end result is sub-optimal... I see this largely, perhaps uniquely, as a problem facing the profession in the United States... He went on to say... "There is no strategic vision for the profession as a whole... Despite repeated good-faith attempts to define "who is responsible for what", lack of clarity still pervades everything we do... Effectiveness and efficiency are difficult to achieve under the current structure... the current structure requires a lot of communication and coordination... Every hour spent in coordination and communication activity is an hour NOT spent actually doing something to advance the goals of the profession...competition among the organizations invariably arises... He concluded... To the world outside our profession, we appear to be a fractured, convoluted, even disorganized profession."

That's what Steve said SIX YEARS AGO!

We cannot tolerate or afford to operate under this structure for the NEXT six years!!

The Critical Review of the US Actuarial Profession (CRUSAP) report, prepared by a committee of senior actuaries chaired by Fred Kilbourne to address new challenges facing the profession, and issued in late 2006 stated: "....the organizational structure of the profession results in a significant distraction to the profession's leadership at a time when it is facing unprecedented challenges in meeting its goal of best serving the public... the current organizational structure is an impediment to an effective voice for the profession... Accordingly, we recommend that the actuarial profession establish the consolidation of the actuarial profession as a long-term goal."

In the intervening years, a number of our leaders have attempted to address these issues and in the most recent election, several of our candidates for President-elect also expressed the view that structural change is needed.

Our current structure is not positioned to compete in the global marketplace. It is expensive, inefficient and substantially less effective than it could be. Quite frankly, almost everyone that works and has worked within the system recognizes this... Don Segal calls this the elephant in the room.

It seems clear that 10 years from now, this structure will no longer be in place.

It has been my experience in the commercial world that if you know you are destined to go a certain direction eventually, you are better off getting there sooner, rather than later.

As I have outlined this afternoon, we have much on our plate. We have a great responsibility. In order to meet that responsibility we need to simplify our profession's organizational structure. There is absolutely no need for three separate professional organizations, the SOA, the CAS and the AAA, to exist. They need to consolidate into one efficient, effective organization.

I know there are historical differences among our organizations, and I know there were good reasons many years ago why all were created. However, I believe – and I think the vast majority of you agree with me – that the time is past when we should let our history dictate the future structure of our profession.

The challenges we face, as a profession and as a nation, are simply too great for us NOT to respond with a new approach.

Despite the obvious difficulty, I intend to address this issue. I am prepared to focus energy and time during my term as President seeking this change, even as we continue serving members and candidates in our current structure.

Although the SOA Board has not expressed any view on the matter, I have had significant conversations with a number of our Board Members including all of the Presidential officers, who are fully supportive of this direction.

In the near future, I plan to formally ask our Board to support my efforts to make our professional organization's structure more rational, more efficient, and more effective, much as a previous generation of the SOA's leaders did in 1949.

Based upon discussions and other communications with some of the leaders of the other US-based actuarial organizations over the past year, it is clear that many of them believe this is the time to simplify our profession's organizational structure.

Today, I am asking the leaders of these actuarial organizations – principally the Academy and CAS – to join me in this effort for the good of the profession, its members and candidates, and the stakeholders we serve.

I would also welcome participation in such an effort by CCA and ACOPA at any level they deem appropriate.

Today, I am asking the members of the SOA and the employers of its members – who I believe strongly support this idea – to express their views in support of this objective, both to me and to the leaders of the other organizations, and to encourage them to participate in this effort.

Write emails. Express your views on the various blogs that exist. Contact the members of the boards of these organizations. Get the word out to members NOT at this meeting. Use social media. Call for change.

Let's assure the relevancy of the actuarial profession into the foreseeable future. Let's commit to do more to contribute to the solutions of society's problems.

I'm committed to lead these efforts, but need your help. It is up to you.

Inertia is our biggest obstacle. Those who do not want this change will certainly be the most vocal. Let your voices be heard! I welcome your suggestions.

Let's not leave this earth knowing we could have done better.

Thank you very much.