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The Perfect Storm of Actuarial Consolidation

Editorial

By Max Rudolph

The Perfect Storm Of Actuarial Consolidation

The recent financial crisis has been repeatedly described as a "Perfect Storm." This term was coined when Sebastian Junger's award-winning book of the same name—later made into a movie—was written in 1997. In the past decade, practically every financial setback has been followed by an explanation that this combination of events could never have been anticipated. Rather than apologizing for lack of foresight regarding such emerging risks and promising to do better, the preference has been to provide clients/employers with excuses; in short, actuaries and others in the financial services industry are copping out!

Many so–called financial experts were caught off guard when the popular NASDAQ stock market index reverted to the mean after reaching astronomical price/earnings ratios, when interest rates returned to long–term averages, and when New Orleans took a direct hit from a hurricane. In addition, very few considered that more than one of these events could happen at the same time. Having a more skeptical attitude toward current biases, along with a better understanding of history, will help actuaries better manage risk in the future.

Who Should Lead the Charge?

We can't alter the past, but we need to do a better job of anticipating the financial impacts of both unanticipated events (e.g., global warming and nanotechnology) and unintended consequences of current decisions (e.g., ethanol subsidies and tax policy). Actuaries should lead the charge. We should identify and publicize these types of emerging risks, going beyond recent historical data to seek out novel conclusions and solutions. We should proactively provide this information to employers and clients in addition to complying with regulatory requirements. In other words, we should use common sense and judgment to do what's right!

The Perfect Storm analogy can also be used in a positive context, reflecting a unique set of circumstances that allow an outcome previously deemed impossible. The U.K.–based Morris Review of the Actuarial Profession provided an opportunity for actuaries around the world to take a fresh look with regard to improving our practices. With five independent professional organizations serving actuaries just in the United States, the time is right for consolidation to move forward.

The Morris Review was the impetus for the CRUSAP (Critical Review of the U.S. Actuarial Profession) report. When commenting on the current five U.S.–based actuarial organizations that sponsored the report, it states, "In addition to being a distraction to the leadership, the current organizational structure is an impediment to an effective voice for the profession in the internationalization of actuarial practice and in maintaining effective discipline within the profession. Accordingly, we recommend that the actuarial profession establish the consolidation of the actuarial profession as a long–term goal."

Projecting a Unified Front

When I was elected to the SOA Board of Governors in 2004, I stated—somewhat naively—that there were three issues I hoped to impact: helping actuaries gain a foothold in enterprise risk management, enacting compulsory continuing education and consolidating the professional actuarial organizations. We've made great strides with regard to the first two issues but, as I see it, the window of opportunity is closing with regard to the third.

Over many years as a volunteer, I have witnessed financial inefficiencies and redundancies as the various actuarial professional organizations did their best to interact. Both staff and volunteers are trying hard to make it work, and recent initiatives are moving in the right direction by having more interaction between organizations. In my opinion, both the public and members need better clarity about how to engage the actuarial profession. Transparency is often lacking regarding decisions, which makes it hard to have alternative opinions heard. There is redundancy in both volunteers and staff, and costs are high relative to similar professional organizations. I belong to only two of the five organizations and yet pay over $1,300 annually, versus approximately $300 for other professional organizations I belong to. I believe that, through consolidation, dues could be reduced, the actuary's image with the general public could be improved, and better decisions could be made. While primarily a U.S.–based effort, outside organizations such as the Canadian Institute of Actuaries and the International Actuarial Association should also be engaged.

There are many initiatives under way behind the scenes to help the organizations, volunteers and staff work more closely together. Certainly the collaboration of the Canadian Institute of Actuaries, Casualty Actuarial Society and the Society of Actuaries to form the Joint Risk Management Section and sponsor the ERM Symposium has been a success, and I am proud to be a part of these initiatives. While there have been occasional cultural struggles, it works because everyone wants it to work.

Independence of Leadership Teams is Critical

These successful collaborations should certainly be applauded. But we need to keep the momentum going at every level, making sure that efforts are streamlined and make sense. At board meetings, it's often extremely confusing to know what hat a volunteer is wearing on a given issue. Because there are not enough engaged volunteers at the highest levels of the actuarial profession, many are solicited by multiple organizations and concurrently take on conflicting leadership positions.

At a time when the organizations should be considering consolidation, the independence of boards and leadership teams is critical. Volunteers should complete their terms on one board before accepting a position on another board. It may be beneficial to take a hiatus, so to speak, between volunteer appointments. A break like this will give frequent volunteers a chance to regroup and newcomers an opportunity to participate and provide a fresh set of ideas. The profession needs varied input—each actuary reading this can bring something unique to the table.

Integrity, Transparency and Credibility

As much as the public deserves better than to be told of yet another financial Perfect Storm, they also deserve an actuarial profession that acts with common sense and passion to serve the public good. Integrity, transparency and credibility should be integrated into all our initiatives. Our focus needs to be on addressing the pressing issues of the day, not deciding which professional organization gets to deal with a specific issue.

The ideas of consolidation, joint efforts and volunteering are not new concepts. As he completed his year as SOA president, Steve Kellison stressed the importance of grassroots involvement and the power of individual action in his August 2005 article in The Actuary magazine. Current President Bruce Schobel encouraged this process to continue in the April 2008 issue of this publication. The current leadership teams are encouraging the professional organizations to work together. Indeed, these efforts have made it easier to move forward. But the window is closing fast.

Earlier consolidation efforts died with the passage of time. Some power will need to be shared, shifted or given up if we want collaboration efforts to be successful. Great leadership is needed, and egos will need to be left at the door, giving way to a true sense of cooperation. Let's get on with it. If we don't, the Perfect Storm created by the Morris Review and forward thinking leadership will have been for naught.

Max Rudolph

Rudolph Financial Consulting, LLC

max.rudolph@rudolphfinancialconsulting.com