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SOA - Principles in the Actuarial Profession

Principles in the Actuarial Profession
by Narayan Shankar

Principles serve as signposts of practice. They can be a combination of core truths, values, heuristics and paradigms that collectively encapsulate the theoretical underpinnings, mental processes and attitudes of the practitioner.

Arguably, for any profession, a small number of well–chosen principles can be articulated, based on which the majority of professional issues can be resolved. By appealing to the principles, a practitioner can usually find a reasonable approach to address new problems. When presented with conflicting options, identifying the one that is most consistent with the principles can be a quick way to figure out the "right" thing to do. Properly designed, professional education serves to anchor a practitioner to the principles. In this framework, work experience deepens the insight into the principles by providing the opportunity to consistently apply them to a range of increasingly complex problems.

Principles In Other Prominent Professions
The above framework applies to prominent professions today. Accountants, for instance, begin their education with a solid grounding in generally accepted accounting concepts and principles. While thousands of pages of detailed guidance have been developed by accountants to address a variety of specific accounting problems, accountants know that this consists mostly of rules derived from the foundational concepts and principles. The principles don't lead to a unique answer, but to a reasonable answer. Thus, the debate is often one of determining the most feasible, simple and practical among competing approaches that are consistent with the principles.

Similarly, the law profession has its concepts and principles. Fundamental notions in law include due process, precedent, burden of proof and presumption of innocence, right of cross–examination, statute of limitations, relevancy, non–prejudicial presentation, hierarchy of legal authority and jurisdiction. Development of new laws and enforcement guidelines look to consistency with foundational concepts and principles.

What about the actuarial profession? Undoubtedly, there are principles, but in my years of exam–taking, they were not articulated to me in the readings. This appears to be a significant gap. Since the actuarial profession is multi–disciplinary–deriving its body of knowledge from areas such as mathematics, statistics, economics, finance, behavioral science and business law–some important concepts are probably absorbed directly from other disciplines. Other concepts and principles might be unique to actuarial science, resulting from the particular blending and integration of many disciplines that gives rise to our profession.

Benefits of Articulating Principles
There are benefits to defining the concepts and principles that lie at the heart of the actuarial profession. The most obvious one is the education of actuaries. With a set of principles to refer back to, the material we study as actuaries falls into place naturally and the various inter–connections become clear, making it easier to master the knowledge base. Professionalism will improve, since we will have the "signposts" we need to navigate through problems and find reasonable solutions to them.

Another benefit will be the enhancement of practice standards. Currently, ASOPs tend to be procedural, providing an idealized list of considerations and available methodologies that may or may not be relevant in a given situation. They seldom offer insight into the relative importance of the considerations and the range of acceptable solutions. Nor is it clear how the techniques described solve the underlying problem. Relating the solution back to core principles can help clarify the recommended practice.

Defining Our Professional Identity
But most exciting of all is the fact that we may be able to explain our profession and what it stands for to the lay public. When we outline a consistent basis for our work and all actuaries know and understand what that is, we reach a tacit agreement among ourselves as to who we are and what we do. This will give us a common framework and a common language for describing our profession. Most actuaries I know struggle to answer the question "So, what is an actuary?" As you will easily agree, "we are experts in the measurement and management of risks and contingent events" doesn't sound as snappy as "we cure sick people," "we help people with legal problems" or "we are bean counters."

By most criteria, the actuarial profession has been hugely successful. Most actuaries are highly–paid professionals with a reputation for being "smart." The number of actuaries, if measured by membership in the SOA, has grown from about 2,000 in 1960 to about 17,000 in 2005–a rate of growth that overwhelms the rate of population growth in the United States and Canada, and the rate of growth in most other professions. The demand for actuaries has never been stronger. The potential for future growth remains strong, since there are new and exciting areas of application for actuarial concepts and techniques, which are only just beginning to be explored. This potential can become a reality faster if the public understands our profession better. The key to that lies completely in our hands.

The first step toward these exciting possibilities might well be for us to understand ourselves better. Can an actuary explain to fellow actuaries in clear and simple language what he or she does? What are the core concepts of our profession? There is a jumble of ideas embedded in terms such as the time value of money, law of large numbers, pooling, diversification, hedging, no–arbitrage principle, moral and morale hazards, insurable interest, loss sharing, risk–return tradeoff, models, materiality and credibility of experience. From this jumble we might be able to fashion a set of principles in plain English. I think it will be worth the effort.