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An Interview with Dr. Phelim Boyle, IAFE/SunGard Financial Engineer of the Year

An Interview with Dr. Phelim Boyle,

IAFE/SunGard Financial Engineer of the Year

By Robert Beuerlein

He's an educator, actuary, PhD, author, financial engineer and recipient of the IAFE/ SunGard Financial Engineer of the Year Award. His name is Phelim (pronounced fell–im) Boyle, and you may know him best for his research into Monte Carlo methods.

In February he was recognized by the International Association of Financial Engineers and SunGard for his contributions to the field of financial engineering. Dr. Boyle is scientific director of the Institute for Quantitative Finance and Insurance at the University of Waterloo. Recently, The Actuary discussed with him the award, his career and his inspirations.

What made you decide to become an actuary? I actually didn't decide. I got my PhD in physics in the '60s, but as it turned out there were no jobs for people in physics at the time. After looking around, actuarial science appealed to me because I assumed it would use some mathematics.

Did you know what actuarial science was at first? I had a vague knowledge of it. I knew it was involved with insurance, but no, I didn't really know the nuts and bolts of it. Not at all.

But it appealed to you? It took a while before it began to appeal to me—the exams are not fun and the insurance companies were not particularly enlightened in the '60s. But later on, I found it much more interesting.

What made it become more interesting? You get to know more and the problems are a little more challenging. The work becomes less boring and you're being pushed a little further, so it's like any job, I guess. You start at the bottom and it takes a while, I think, to become interesting.

Were you on the life insurance side?I started in life insurance in Dublin, then I moved to Liverpool, England and did consulting. In that case it was pensions, and I found that interesting as well.

Was that a tough jump to make, going from life to pension? Not particularly—I think you have a little more responsibility as a consultant. More was delegated to you. You have more control over your own work in a sense.

At what point did you decide to enter the academic world? As a consultant, I had just qualified and become a Fellow of the Institute of Actuaries. I definitely liked the work. I liked the people in Liverpool, not just the people I worked with, but the people—the real people. But when you qualified you were given a partnership or, to be honest, you left the firm. When I qualified I didn't get the feeling that I was going to be offered a partnership. I had a PhD, and I wanted to see a bit of the world, so I obtained an academic job in Canada at the University of British Columbia.

Obviously, you've come to the forefront recently because of the award you received. What does the title "2005 IAFE/SunGard Financial Engineer of the Year" mean to you? They've been giving this award for the last 12 years. The other award winners are pretty eminent and distinguished people who have made big contributions to the field. Three of them have Nobel Prizes, just to give you a sense of who they are. They're from universities like Yale, MIT and Stanford, so it's a big honor. The other neat thing about this award is that the previous winners have a say in who is chosen, which makes it even more special.

How do you define financial engineering? Financial engineers use mathematics and probability and ideas from finance to structure products and hedge them or reserve for them. They try to make sure that the company makes money on the new products, and then they're responsible for the design and the execution and the mathematical modeling that underpins these products.

In the announcement of your award, you said that you acknowledge support from "SSHRC and NSERC, two Canadian government funding agencies, in backing ideas that might have had trouble getting support from the private sector." Why do you think you would have had trouble getting support from the private sector? The thinking here is that sometimes when you get support from the private sector, they tend—understandably—to have a very short–run focus. And it's not that my research is specially theoretical or esoteric. When I did this work, the paper I wrote that helped get me the award wasn't viewed at the time as particularly useful or particularly practical. Then, as often happens in science and engineering, time passed and suddenly it became useful.

The focus of industry is really short–term, it's tomorrow, and the focus of academia is longer–term, and that's how it should be, so that's the difference. If the private sector knew at the time certain research would be useful, they would support it, but it's hard to make the case because a lot of research doesn't end up being useful. Industry tends to support research where the payoff is more immediate and obvious.

You mentioned the paper you wrote. What else contributed to your receiving this award? I wrote quite a few papers, actually. One in particular is the paper I wrote on Monte Carlo simulation, "Options: a Monte Carlo Approach," and that turned out to be a very useful paper because it enabled people to do very complex problems. It also made use of computers, so that became a very useful tool in the modern financial industry. It's also widely used in insurance as well. In addition, some of my other work has introduced ideas from financial engineering into actuarial science concerning pricing and hedging and risk management of long–term embedded insurance products of these embedded options. Some ideas from finance are helpful and useful there, so those are some of the things that probably helped.

It says in the author bio of your book, "Derivatives," that you became "enchanted" with options. How so? Options are kind of neat things in their own right. They're elegant. I love their beauty. They have the power to transform payouts. Furthermore, the math is quite beautiful as well. They can lead to challenging computational problems. It's quite a nice area to do research in. It's challenging; it's interesting; it's exciting; and there are numerous practical applications.

You co–authored the book with your son, Feidhlim. What was it like to write a book with your son? It was pretty neat. He was no longer a teenager—that made it easier. He comes from an arts background and he has an MBA from Cornell, so he knew finance. I was probably the math geek—but he's a better writer with an undergrad in history and political science, so he brought those skills. We worked well together. It was a good bonding relationship. I'd like to write a book with my other son as well. His name is Lochlann and he is a lawyer in Washington, D.C.

You're married to an actuary as well. How does that partnership work? It works great. Mary Hardy, my wife, is also an academic, so she totally understands me. We have written a few papers together and this has been great fun. Her own research on regime–switching models has had a big impact on the actuarial profession, and I am delighted she gets recognition for this work. We live in a big, old rambling house in Waterloo with squirrels in the attic and have conversations about all sorts of topics— even actuarial ones.

What would you consider some of your greatest career accomplishments? This always sounds so pretentious. I suppose one would be helping to establish a master's program in finance at the University of Waterloo. That was a pretty good accomplishment because we've graduated 100 students and they've done really well. We established the program 10 years ago.

Another accomplishment is working on research ideas and helping— not really to solve something new, but just maybe to push the envelope a little bit for new ideas. I see myself more as a translator—not a creator. I take the ideas that other people have discovered and try to bring them to the next stage, from the theoretical framework to something more applied and then use them to solve problems in actuarial science and finance, helping to bridge that gap.

What are your plans for the future?I will continue to do research and some teaching. I am also helping my son Feidhlim with the new hedge fund he is starting in Waterloo. I am developing quantitative strategies that will help the fund make money and I am also advising on the risk management side. In addition, I have three captivating grandchildren to dote upon.

What have you learned from your students? Patience (laughing). You learn when you're teaching, because students ask you some real great questions that make you think about things you never thought about. Sometimes you think you know the answer when the student asks the question, then you realize, "Boy, I really don't know that."

I think the students inspire you. They have a wonderful attitude. It is amazing how hard they work. Some of the PhD students are so sharp that they open new areas of research for you. I've been pretty lucky—I've learned a lot from them.

Do you have a personal motto? I'm having some trouble with this one because it looks like a mission statement and the like, but it's "Do your best each day." I try to do a good job in my teaching career, research and in my relationships with other people.

Which historical figure do you admire the most? It's a guy named John Harrison, a clockmaker in England, who was born in 1693. There is a book about him called "Longitude" by Dava Sobel. He took on the toughest scientific problem of the age. At the time people used sailing ships, but they didn't have good maps. They needed to know the longitude precisely because that would tell them where they were. It turned out that the way to solve that was to invent a very accurate clock, which would help you figure out the longitude. It took Harrison 30 or 40 years, but he ended up solving the problem. He encountered a lot of ridicule because he was outside the scientific establishment—he wasn't in the "in" group. He was just a normal, simple clockmaker. He showed enormous dedication and perseverance against the odds, so he's someone I admire. Galileo is someone else I admire because he got beaten up by the establishment as well.

Is being "outside the establishment" something you've encountered as well? I have sometimes been frustrated by the initial lack of acceptance of finance ideas by the actuarial profession. However, looking back now at some of my papers, I can see they were not very user friendly. I did not make enough effort to sell these ideas to the profession. In my academic career I have, on a few occasions, raged against the administration where I perceived injustice or hypocrisy. I tend to be very stubborn when I think I am right, but most of the time I am a very easygoing guy.

What's the most enjoyable book you've read recently? I'm reading "Don Quixote," the story about the famous Spanish knight, and it's an incredible book. There have been many translations, but the one I'm reading is by Edith Grossman. It's a beautiful book. "Don Quixote" is well– meaning, but people are making fun of him because he's kind of out of kilter with the world around him.

What's the best piece of advice you would give to an aspiring actuary? My advice would be to "speak up and speak out." Do not be afraid to challenge conventional wisdom, particularly if it comes from on high. I have certainly never regretted speaking out, but I sometimes look back and regret occasions when I didn't speak out. Stand up and be counted.

If you know an actuary who has blazed a trail for other actuaries by creating a new application for actuarial science, or you know someone who has been among the first to apply the actuarial skill set in a nontraditional setting, nominate him or her to be a Pioneer. Just send an e–mail to pioneers@ soa.org.

Phelim Boyle is Dir. Centre/Advanced Studies in Finance at the University of Waterloo. He can be contacted at pboyle@waterloo.ca.

Glenda Maki is senior communications associate for the Society of Actuaries. She can be contacted at gmaki@soa.org.