Editorial - Sidestreet, Interstate or Autobahn

Editorial: Sidestreet, Interstate or Autobahn
by Sue Reitz

Not too long ago my daughter and I took her newly minted driver's permit for its first spin on the interstate. This wasn't the first time I had done this, so I was expecting the whole "introduction to on-ramps" experience.

It wasn't as stressful as I remembered. In fact, once we finished the "You're only allowed to use one lane at a time" lesson, my heart rate was almost back to normal and I was able to make a couple of observations. The first was that sort of euphoric "I'm alive!" rush most parents of new drivers are familiar with. The second was that my daughter's interpretation of speed limit is, "You can go any speed greater than the minimum and less than the maximum." Frankly, I'm not sure where this interpretation came from.

So, what is a parent to do? She is absolutely correct about what speed limit means. But she was going 10 miles below the maximum speed limit and she was causing a lot of havoc and consternation on the highway. My heart rate started climbing up again. Large trucks were looming over us, unable to pass because the other lane was full of a lot of frustrated drivers. We were not safe and neither was anyone else on the road. On the other hand, the words, "Honey, you need to start speeding," stick in a parent's throat.

I compromised by suggesting that she bring her speed up to the limit and pointing out the dangers of driving too slowly on the interstate. Just to make sure she didn't get the wrong message, I tacked on a bit about how driving too fast was also very dangerous. At that point, I got the, "Yeah, yeah, yeah, Mom, I've heard that one before" grunt and eye roll.

When teenagers grunt and roll their eyes, they're signaling that they want you to be quiet. Since this teenager was driving on a newly minted permit, I decided to be quiet.

I started to think about how so much of life is kind of like the children's story "Goldilocks and the Three Bears." Some people like to drive too fast, some people like to drive too slow, but most people want to drive just right. Some people want to talk too much when they're in a car with a brand new driver, some people are too scared to talk at all, but most people want to talk exactly as much as the brand new driver wants them to talk.

Actuarial work is no different. If we price products too aggressively, they won't be profitable. If we price products too conservatively, they won't sell. If we set reserves too high, we let unused capital sit around dragging down returns. If we set reserves too low, we may not be able to meet our obligations when they come due. If we fill our communications with too much technical detail and data, our audience may start to grunt and roll their eyes. If we limit our reports to a single number or two, we can leave out crucial information and project a false aura of precision.

Most actuaries spend their days striving for that "just right" balance. Historically, we've relied on regulations to act kind of like speed limit signs to let us know how we're doing. But, over the last few years, starting with XXX and moving onto the new principles-based reserve approach, life actuaries, at least, have seen a dramatic shift in the regulatory approach. Regulations are starting to look more like speed suggestions than speed limits. I understand why this is happening and I support the direction we're moving in, but in some ways it feels like we're all driving up an on-ramp to the actuarial equivalent of the Autobahn. It will be very interesting to see what speed everyone settles on!