April 2015

University of Toronto’s New Course Development: Using Actuarial Software to Explore the Real World of Insurance

By Vicki Zhang

With the generous funding of University of Toronto’s (U of T) Advancing Teaching and Learning award, we recently developed a new capstone course at U of T’s actuarial science program—Insurance Market, Products, and Regulation with AXIS. The course consists of twelve weekly seminars, each lasting for three hours. It is currently in its first pilot year and offered to the fourth-year, graduating class of U of T’s actuarial science program.

In this first pilot year, we strive to achieve three key objectives: (1) to bridge crucial technical gaps in the undergraduate curriculum that addresses current internal risk management and modeling techniques; (2) to introduce reflective topics and improve actuarial students’ independent and critical thinking skills as well as oral and written communication skills; and (3) to learn to model realistic modern insurance products in the widely-used actuarial software, AXIS.

To fulfill the first objective, we developed course readings for the following technical topics that are immensely useful for a future practitioner but rarely covered in undergraduate programs: how to read (and reconcile) a realistic income statement and balance sheet of an insurance company, how to calculate reserves under various methodologies from around the world (e.g., U.S. statutory and GAAP, Canadian PPM, Chinese GAAP, etc.), basic and advanced reinsurance arrangements (e.g., ModCo, PartCo), dynamic hedging of variable annuities with guarantees, pricing VA using a stochastic-on-stochastic model, basics of insurance securitization, derivatives hedging, and so on. Due to the time limit, some crucial topics, such as credit and operational risk modeling, mark to model vs. mark to market asset valuation, are offered as optional readings. Although not required, we encourage students to dive into these readings outside the classroom to gain a broader picture of the current risk quantification and management issues.

As some of the technical topics covered in the course appear to be challenging for undergraduates, we carefully designed many case studies that utilize AXIS and/or Excel to demonstrate the techniques in the context of real-life products or actuarial practices. Students are often required to complete part of the case in their homework to solidify their understanding of the material.

Aside from technical topics that are not typically offered in an undergraduate program, the course also provides an overview and a forum to learn and discuss the history of insurance product evolution and changes in regulatory framework. Students read about the many generations of life and annuity products from traditional to hybrid and variable ones, and the economic environment that had prompted and facilitated the evolution. They are introduced to the basics of rules-based and principles-based regulation and given an update on the recent U.S. reserve and capital standards of variable products and the Solvency II regulation in Europe. Many topics in this component of the course are open-ended or even controversial—the pros and cons of different regulatory systems, the traditional function of insurance and the financial innovation aiming to provide the additional wealth accumulation function, the state vs. federal oversight, the changing risk profile of the insurance sector, the social responsibility of actuaries, etc. Students are required to do the course readings before coming to the seminar, submit reflective comments in the online discussion forum we set up for the course. They are encouraged to exchange thoughts in the online forum, and the discussion and debate continue in the seminar. Towards the end of the semester, each student will also consolidate their thoughts and compose a longer paper on a controversial topic of their choice.

In the final component of the course, students learn to model realistic insurance products (term and whole life, universal life, variable life, fixed and variable annuity, etc.) using the popular actuarial software AXIS. This involves two steps. First they need to understand the myriad of product features and pricing/valuation assumptions and code them into the software. They then need to reconcile the key results provided by AXIS using a spreadsheet. The challenge here is to adapt the teaching of one of the most sophisticated actuarial software packages to an undergraduate seminar setting with time pressure and limited participant knowledge. The key is to start with something simple – a simplified product prototype, and gradually add onto it the bells and whistles of a modern insurance product. Every step of the way we emphasize the understanding of the new feature’s impact on the financial statements. This focus on result reconciliation is especially crucial. As one insurance executive on U of T’s advisory board recently remarked, “It may not be the hardest thing to learn how to use AXIS, but to understand the results is the challenging part and also the most valuable.” 

Given the multiple components and objectives of the course, a typical three-hour seminar is divided into three parts—a lecture on technical topics of the week, student discussions and debates on the reflective topics of the week as a follow-up to their individual reading and writing, and the demonstration of one or two case studies in AXIS. Pop-up “bonus” quizzes are used throughout the seminar to test the students’ understanding of the topic at hand. Students are then given a take-home assignment that is usually an extension of the case study discussed in the seminar, and involves modeling in AXIS and reconciliation in Excel. Although the course is in its early pilot stage, we believe this format is effective to provide students with building blocks to understanding the complexity of today’s insurance products, actuarial practices and regulatory issues. We will be conducting exit reviews with the first graduating class of the course to help us further develop course readings, case studies, and other pedagogical techniques. Current conversations with students have revealed their enthusiasm of learning beyond standard actuarial exams and calculators, of exploring the real world of insurance using sophisticated modern technology, and of challenging themselves to think reflectively and deeply.

Vicki Zhang, FSA, CERA, ACIA, is faculty member and accreditation actuary of U of T's actuarial science program, department of statistical science at the University of Toronto. She can be reached at vicki@utstat.toronto.edu.