Some Observations on the Meeting from Chris Madsen

by Chris Madsen

The following opinions are mine and not necessarily those of my employer, GE Insurance Solutions.

In my opinion, if there was a high level theme at the Life Spring Meeting, Hollywood, FL then, it was actuarial methods versus financial engineering. This theme permeated about half of the sessions I attended. Issues such as fair valuation for accounting purposes triggered this discussion as did the UK Morris report on actuaries. The session run by Mary Hardy and I also focused on this issue.

What I found interesting is that it seemed that those who had thought about it had come to the same conclusion:

Traditional actuarial methods are rather absurd. An example would be pension valuations where we treat a dollar in equities as being worth more than a dollar in cash. We do this by allowing the discount rate to be higher, when aggressively invested. So, by taking more risk, we allow the company cheaper funding. This is hardly prudent and completely contrary to all modern portfolio theory. In my opinion, it is exactly this type of "pricing" that has depressed earnings at insurers historically.

It seems to me that the people who are thinking about the issues are on top of them and trying to change things–embracing financial engineering. Personally, I find this encouraging, but my impression is that the majority of the membership is still left behind.

One of the consequences of the "new" world is the fact that life insurance policies in the US can be resold now. Apparently hedge funds are viewing this as an arbitrage opportunity. In my opinion, this is a healthy development in the long run, as it forces fair pricing, though it is clearly unpleasant for the insurers that do not change behavior.

• Chris K. Madsen, ASA, CFA, MAAA
• Chief Actuary – Capital Management Services
• GE Insurance Solutions