A Model Risk Taker

Tom Terry, FSA, FCA, MAAA, EA, founded Chicago Consulting Actuaries in 1991. The company is an employee benefits and actuarial consulting firm with approximately 150 employees in nine cities in the United States. Terry, an active consultant with several CCA clients, leads the firm's executive and operational leadership team. Terry joined Towers Perrin in Chicago as an associate in 1975 and was a principal and vice president of Towers Perrin when he left in 1991.

What inspired you to start Chicago Consulting Actuaries?

Well, for one thing, I thought it was possible. That might sound like an odd reason, but the perspective is important. I "grew up" in a large, successful multi-national consulting firm. It was really easy to conclude that career satisfaction could only be achieved in such a firm. I thoroughly enjoyed the clients with whom I worked and had no picture that that could be replicated elsewhere.

I recall one of my clients sharing with me a marketing letter from an actuarial software firm espousing the potential for desktop valuation processing for pension and retiree health plans. On the surface, this wasn't so unusual because PCs had been around for several years already. But this letter had not gone to me, the actuary–it had gone straight to the plan sponsor! I was offended, amazed, scared–but ultimately extremely curious. What possible use would a plan sponsor have for actuarial software?

This signaled to me that the future had the potential to be very different from the past. It opened up possibilities that I hadn't envisioned before, including starting a firm to explore alternative service delivery models based on emerging technologies.

What innovations have you introduced?

We've done a lot with technology, but I know that, in different ways, everyone has. Maybe the bigger innovation is in how we use the technology. We've been experimenting with a different way of working with clients. In the pension actuarial field, the traditional game is that the actuary uses the technology, plays the "what if?" scenarios, and builds huge insight and intuition. The actuary then presents to the client as a real expert.

We've been working with an alternative model that looks like this: The actuary shares the technology with the client. The actuary and client then build the insight and intuition together. It's very different from the expert model–it's very empowering to the client and a lot more interesting for us as actuaries. Smarter clients raise more interesting issues to dig into–and we both get a chance to learn. As much as anything, this "learning model" (which is what we call it for lack of a better term) is a different mind-set.

What are the most significant risks taken in your career and how have they paid off?

The one thing that stands out was leaving the security of a well-defined position with a top firm and moving into an ill-defined role leading a small start-up. Our success was never assured. I look back and realize that we had some good breaks. But what's interesting is that we've been successful in creating good luck ever since.

What about your actuarial training and experience has been most helpful in your career?

I've had access to solid technical training throughout my career and this has certainly been helpful. And, I gained an early appreciation of what it means to be a professional. I regularly attend professional conferences with the objective of meeting new people, staying current, and hearing what others have to say about where our practice is going.

What new skills have you had to learn and how did you learn them?

I've had to learn a lot of non-technical skills along the way–listening, providing feedback, creative problem-solving, etc. For the most part, I've learned these by working with others who are good at those things.

I've been fortunate to have identified good mentors. Early on, I had a boss who was good at solving problems where there were no apparent right answers. Retirement plan strategy and design projects present such problems routinely. I went to school on him and I still use what I learned from him today–decades later. In fact, getting comfortable operating in the "unknown" was a critical early lesson for me.

What are the biggest challenges you have had to overcome and how did you overcome them?

Well, an obvious one is that I was never trained to run a business. I always thought that good companies always ran perfectly smooth. So, every time we hit a bump in the road, I took it as a personal indictment. Talking with other successful business leaders has been extremely helpful. I did an about face several years ago when I realized that on some level, my job as president of a company is to deal with problems. I began to realize that if we're going to reach our full potential as a company, we're going to hit lots of bumps in the road along the way. So I started viewing the stream of problems as simply growing pains–evidence that we're stretching into new territory.

What are the three things an actuary should do if he or she wants to start their own business?

First, I'd say talk to people who have done it before. And then, sort through all the advice you get and separate the good from the bad. Second, do an honest appraisal of your strengths and weaknesses. Build on your strengths, but don't think for a minute that you can ignore your weaknesses. Finally, I'd say work on your people skills. As a small business owner, you will be highly dependent on others–clients, other professionals, referral sources, and eventually co-workers and employees.

The theme of the image campaign for the actuarial profession is "Turn Risk Into Opportunity." How did you turn risk into opportunity for your clients?

A risk we took that turned into opportunity was when we started sharing actuarial modeling software directly with our clients. The risk was the client would say "thank you, sir, now that we know how to push the button we don't need you anymore." The reality was our actuarial insights couldn't be replicated by modeling software and the client still valued and needed our expertise. By opening the curtains and letting the client behind the scenes we didn't devalue our expertise, but actually broadened it.

How would you explain your profession to a child?

I've been working on this one for years and I've tried several approaches. I've come at it from the standpoint of flipping coins–showing how the role of chance or risk shows up in everyday life. I've also compared it to building models. Starting with a physical model that is a representation of a real thing–like a model car. I've done the same thing with a financial concept - building a small model with a few numbers and arithmetic and showing how it can be a representation of a larger financial system.

When one of my sons was in junior high, he had a science experiment that involved taking temperature readings as some chemical reaction was occurring. He recorded these readings and he was writing up a poster board that included all of his data points. Well, he had missed a few readings and he had some gaps in the data. So, he started to fill in numbers. I just happened to be watching what he was doing and so I stopped him. We had a great conversation that I still remember vividly several years later. We talked about the difference between scientific research, where the integrity of the data is absolute versus building a model or interpolating based on an underlying hypothesis or underlying principles. He was doing the latter, but the project was calling for the former. It was interesting that he so instinctively wanted to fill in the missing pieces. He already had an underlying understanding of a relationship or an expected result based on the other data points.

This led to a conversation about actuaries. We do the latter. We will take a principle or a trend and we'll attempt, from imperfect data perhaps to extrapolate it into the real world, so that individuals and businesses can meaningfully make decisions on the basis of that scant data. It was a very memorable exchange, and he got a strong sense of what actuaries do as a result.

What did you have to learn the hard way and why?

What immediately comes to mind is that computers don't always tell the truth. I can remember doing my first actuarial evaluation of a pension plan back in 1975 and I labored over coding up the valuation system that we were using at the time. I worked on the data. I worked on the plan provisions. And I worked on the actuarial assumptions. I carefully set and ran the program. I dutifully looked at the results, summarized them, and interpreted them. I worked on these things for a couple weeks. I showed them to my boss and he stared at them for a few seconds, grimaced, shook his head and said, "These aren't right."

I was stunned! How could somebody in ten seconds obliterate two weeks worth of work? It was a huge lesson to me about garbage in, garbage out, about developing an instinct, about realizing that you can't believe everything that comes off of a computer just because it's already printed out on a nice piece of paper. It was a tough lesson that I had to learn over and over again. And in fact, I prided myself after some years of being able to do exactly the same thing my boss did and I still do that today.

What's the best reward for a job well done?

Well how can you answer that in any other way than the clich�: the best reward for good work is more work. As a consultant, that's absolutely the case. There is a dedication to service that any good consultant has and in my view, there's no better reward for doing a good client project than having the opportunity to do more, which is exactly why we exist as a business.

What is your personal motto?

I'm constantly asking myself, "What's the right thing to do here?" I think I'm a smart guy, and I can see lots of possible solutions to any problem or situation. Sorting through the pathways can be pretty overwhelming. Inevitably, there's the easy way, the expeditious way, the lucrative way, the short term advantage way, the "win at any cost" way, etc. The allure of some of these pathways can be strong and they are always present. But I know that when I'm on my game, I'm really paying attention to the question, "What's the right thing to do here?"