Chairperson’s Corner
By Hal Pederson
Risks & Rewards, September 2025
As most of you are aware, the Investment Section and Joint Risk Management Section will be merging to form the Investment and Risk Management Community as of November 2025. All of our members will seamlessly be connected to that new Community. These changes were the result of proposals that were presented to and approved by the Board of Directors of the Society of Actuaries. This will be the last issue of Risks & Rewards, and I will be the last chairperson of the Investment Section. As the Investment Section becomes part of the new Investment and Risk Management Community, we’re getting ready to launch a fresh, reimagined newsletter designed to better connect, inform and inspire you. I therefore thought it fitting to offer a brief perspective on some aspects of our section history and my best wishes for continued success in the future.
I began my actuarial education in 1985 when the then-new Bowers, et al. Actuarial Mathematics textbook had just been published in a roughly typeset paperback beta release with a bright lime green cover. It was a big deal at the time. A diverse group of leading international academics had spent years creating a foundational text designed to provide a modern stochastic perspective for actuarial mathematics. The actuarial profession wanted to move from the deterministic world of the older Jordan textbook to a broader range of tools that were better suited to addressing the risks faced by the actuarial profession in the modern risk paradigm. Actuarial Mathematics was difficult, concise, and insightful, but a dedicated student could learn a great deal. It was hard work going through the text, but it is the book that I learned the most from about actuarial techniques. In many ways, the experience of the students of my era with Actuarial Mathematics is symbolic of the process the Investment Section has gone through over the past four decades. The techniques and issues our section focused on in its early days were classical deterministic models such as immunization, capital markets theory, and surplus management, but the evolution in the risks and products we needed to manage as the decades marched on pushed us to understand and apply a range of stochastic models as well as the role and risk management of financial derivatives. In the pension practice area, new investment products and recurring dramatic equity market fluctuations drove the need for better models, simulation tools, and the need for a hard look at the methods for setting actuarial investment return assumptions and asset allocations. It has been hard work for investment actuaries to learn the tools of the trade and adapt to rapid changes in the market, but the skills that investment actuaries have acquired and applied are immensely valuable to our profession and society as a whole.
In 1985, the era of high interest rates and high inflation was foremost in the minds of investment actuaries and the gathering enthusiasm that was to promise a merging of finance and insurance through innovations such as variable annuities and insurance risk securitization was only a few years away. The enthusiasm was not just confined to actuaries; the ill-fated 1998 merger of Citicorp and Travelers Group was a reflection of this trend, albeit rather late to the party. Actuaries were learning about swaps, swaptions, and interest rate caps and floors. Immunization techniques were a standard part of the asset-liability management practices actuaries were involved with. There was a growing interest in interest rate and option pricing models, and the Investment Section was playing an important role in disseminating the practical aspects of these developments through meeting presentations, the Investment Seminar, Risks & Rewards and sponsoring research projects.
Variable annuities proliferated in the early 1990s and rapidly evolved from simple return of premium death benefit guarantees to high-watermark guarantee schemes and a broad range of other GMxB benefit structures that we know today. A lot of blood, sweat and tears were spent in explaining that the principles of diversification actuaries could rely on in issuing life insurance policies were not applicable when writing investment guarantees. Actuaries were drilled in the idea that guarantees were options, options had value, and therefore, these guarantees needed to be priced and charged for. The difficulties in pricing these guarantees were bad enough, but it was the appearance of the ubiquitous risk-neutral measure (also called Q-measure) that thoroughly confused the pricing of investment guarantees and, in my view, has left it in a muddled state for the actuarial profession to this day.
The most subtle part of option pricing theory is that the price of an option only has meaning in the context of the hedging portfolio that is necessary to create the option payoff (i.e., replicate the option). If an insurance company sells an investment guarantee, prices it correctly, and collects the price of the option (i.e., guarantee premium), it still needs to invest the guarantee premium appropriately (i.e., run the hedge) or it will stand to lose a significant amount of money. Unfortunately, this last step was omitted by some insurers and led to significant problems for the insurance industry during the dot-com bust. This same issue recurred to a much greater extent during the financial crisis. Running effective hedges for complex investment guarantees is difficult. Even when set up correctly relative to the underlying market assumptions, the hedge can fail due to market dislocations. The Investment Section has played an ongoing and vital role in educating the actuarial profession on these issues. It may surprise some of you to know that these issues are not fully settled even now. For example, modifications to statutory reserve requirements for variable annuities remain under discussion, and there continues to be extensive research into asset price dynamics across fixed income, equity and credit products. These are all areas wherein the Investment Section has traditionally made major contributions and will continue to contribute.
Throughout the late ‘80s and into the ‘90s there was a growing interest in economic scenario generators (ESGs). So many insurance products simultaneously involved multiple financial economic variables such as interest rates, equity index returns, and inflation, that actuaries needed a coherent and realistic tool for simulating many robust economic scenarios for the broad economy. Other applications of robust economic scenarios include the pricing and analysis of reinsurance treaties. These economic scenarios could be representative of the way an investment actuary might experience an evolving economy (i.e., real-world scenarios) or they could be tilted in such a way that they could be used to price options (i.e., risk-neutral scenarios). A range of models was introduced both in the academic literature and across commercial vendors to address these needs. This trend has continued to the present time and will likely accelerate in importance as the capability of reliably assessing and pricing risks becomes an essential tool for all insurers. A great deal of work has been done by the Investment Section in educating the actuarial profession on how ESGs are selected, built, calibrated and applied. Our section has provided an extensive annual webinar series and some in-person workshops on ESGs. The Investment Section has also provided several meeting presentations on the NAIC GOES project that will replace the American Academy of Actuaries’ economic scenario generator for all US life companies in January 2026. Nowadays, a robust model office analysis should be based on a sound set of economic scenarios. The Investment Section has helped the actuarial profession understand what the stylized facts are for interest rates, equity returns and other key financial economic variables and what a sound set of economics scenarios should look like. These are deep issues and even the seemingly simple question of what the long-term average for the 10-year interest rate should be is nuanced and capable of many different but equally credible responses. Over the years, our section has provided a range of insights into how questions like this should be addressed.
In the latter part of the 1990s, credit products began to rapidly evolve and statistical tools like copulas were used to link default risk across instruments. Securitized credit risk was an important, if not dangerous area, and a suite of new tools and approaches was needed to price and model these risks. Some of these ideas worked better than others. Investment Section members were involved in understanding and modeling these risks and in the use of copulas in particular. The financial crisis created a whole new set of problems and questions that the Investment Section played an integral part in addressing. Investment actuaries in the post-financial crisis world were confronted with the zero interest rate policy (ZIRP) and its many ramifications. How does one model interest rates stuck at zero that can come back to life? Topics such as this were addressed in many contexts by the Investment Section. As we now know, it was a good thing to insist that the interest rates could come back to life, for rise-up they have in the post COVID era. Speaking of COVID, the Investment Section was quick to provide a webinar on the impact of COVID on investments and related topics once the pandemic was under way. That was a tough set of questions to offer insights on. Those were the days when oil traded at a negative price!
When I began my career as an actuary in the mid-1990s, there was widespread belief that financial economics was going to transform the actuarial profession for the better and, in particular, provide a broad range of new practice areas for actuaries based on financial theory. At that time, a prominent life insurance company provided major funding for a textbook on financial economics that I was one of many contributors to. That textbook was given to all actuaries and was also used on a fellowship exam. It was the dawn of a new era, and actuaries were going to capture the opportunity. It saddens me to see that the adoption of financial economics into the actuarial exam curriculum has ultimately faded. The practical impact of this fact is that the actuarial profession has, in my opinion, ceded a large swath of investment expertise back to Wall Street. At the intellectual level, actuaries are at least as qualified as their Wall Street brethren to understand and apply the financial economics necessary to render the investment expertise required by the actuarial profession. In my view, the mathematics needed to really understand financial economics models was too difficult to deliver in an exam setting. Furthermore, the breadth of practical knowledge needed to apply these models effectively was too extensive to learn in any other way than by using the models in application with an experienced mentor. Consequently, actuaries were not able to take the lead in the application of finance to insurance. What once seemed to be a promising and essential opportunity for the actuarial profession has petered out. This has made the role of the Investment Section all the more important. Indeed, the expertise and experience of our section members has become the go-to resource for questions at the nexus of finance and insurance. The financial and investment expertise we see in the members of the Investment Section represents a triumph of determination and learning over the broader challenges mentioned above. The Investment Section has established itself as the premier resource for all questions at the nexus of finance and insurance. Our members will continue to excel in serving this ongoing need under the new community structure.
I was drawn to the Investment Section as a young actuary by some of the articles I had seen in Risks & Rewards. In those days, it was a print version only, and I joined the section so I could receive the mailings of Risks & Rewards. I know that many of my fellow section members greatly value and appreciate Risks & Rewards, too. Please join me in expressing our deepest thanks to all of the editors of Risks & Rewards over the years and to our current editors Nino Boezio and Rich Lauria.
Lastly, please join me in applauding the many decades of dedicated volunteer work and extraordinary achievements of the members of the Investment Section. Our section has consistently shared deep insights into investment and actuarial issues and delivered cutting-edge educational and practical insights to the actuarial profession. Bravo to all! I wish our members continued success in the new community structure.
This article is provided for informational and educational purposes only. Neither the Society of Actuaries nor the respective authors’ employers make any endorsement, representation or guarantee with regard to any content, and disclaim any liability in connection with the use or misuse of any information provided herein. This article should not be construed as professional or financial advice. Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.
Hal Pederson, ASA, MAAA, is chairperson of the SOA’s Investment Section. Hal can be contacted at hpedersen@pstat.ucsb.edu.