“You can’t price anything if you don’t know the risks around it.”
Indeed you can’t. And here we have Steve, a pricing actuary. After a loooong wait, we finally can tell his story; from his humble beginnings in Europe, to his 1st few years in the insurance industry, to how you would price, to his take on the insurance industry here in Australia and his very bold predictions for the industry.
And as an added bonus, we have a killer question for him in the end!
Without further ado, let’s hear it from Steve and get on with this long-awaited interview..
IN THE BEGINNING
MMA. Steve – whats going on? It’s been what..a couple of weeks since we bumped into each other?
Steve. I’m going well.
It would have been at least 3 weeks . Good to bump in to you that Friday too!
MMA. So let’s start this interview; you are an Actuary focussing on Pricing. You didn’t really see yourself doing this when you were young did you?
Steve. To be very honest, when I was young I wanted to deliver mail like Postman Pat!
I wanted to deliver mail like
MMA. Hahaha! Well there you go. Postman Pat, every kid’s hero. I’ve heard it all now!
Steve. I don’t remember what it was about him but I sure did want to be like him!
MMA. He had the x-factor! Of course you grew out of that right? Maybe when you were 21?
Steve. Well…I am pretty sure it was much earlier than that! But yes I did grow out of it. As I was growing up, I was quite good with numbers as my grades attested to.
MMA. Is that something that runs in the family?
Steve. That really comes from my father’s side of the family. My dad didn’t get to go to university but nevertheless he always displayed the ability to work through numbers naturally.
MMA. And so the point here is that you were born with this gift which you obviously grew to what you have today.
Steve. Yes and I did financial mathematics in university. That also had a component of actuarial maths to it.
MMA. Fair enough. All that number crunching I remember you for! So tell me what technical skills did they teach you? Any specific everyday software? Excel?
Steve. Strangely enough, they did not teach us the most commonly used application in business today! There was no Excel as part of my curriculum. Go figure. Excel was something I had to learn on the job, over the years. Of course I am quite proficient with it now.
We got taught C++ at university.
MMA. Ahh the old “C” language. So how did that pan out for you in the real world? Was it also part of your university to do an internship of some sort?
Steve. Yes that was also part of the deal. I did mine at an Actuarial consultancy shop. Like most internships, you really do the grunt work when you start; the data clean-ups, documentation and all the other tasks that most of the more senior guys try to avoid! Its funny but I do the same to fresh grads that come on board.
MMA. Hey, you have to start from somewhere. And so after university, you started working full-time at one of the largest insurers in the world. Was that process of applying after university easy?
Steve. Well back in my home country, and I’ll leave that by saying it’s somewhere in Europe, there were more opportunities for people like me to apply for a job straight out of university. The balance of jobs to number of candidates worked well in my favour.
I would imagine that there would be more competition in other countries like UK or US. So I definitely think that the opportunity was working on my side.
In terms of the getting that first job, it was just an application-interview process. I guess I did have it good compared to what the job-seekers out there today where there are fewer opportunities. So to answer your question straight, it’s a combination of where I came from and the sign-of-the-times back then.
MMA. I was going to get to that. So it was both the opportunity at that point in time, where you were, as well as your academic path that served you well.
Can we talk a little more about your first full-time role – what did you exactly?
Steve. I started of working in a Product Development and Marketing role where my work was more in the more technical side of pricing products and the numerical side of marketing material i.e. making sure that the numbers in the marketing material were accurate.
I also had dealings with IT to make sure the systems were up to scratch. It was things like a quote calculation engine. So very client-facing, front-line kind of systems.
And so with that, there was also some basic pricing work involved to make sure our pricing was profitable.
Finally I did some market analysis which was comparing our products to the rest of market.
MMA. That’s a lot of work right there.
So you were with that company for almost 4 years. Did you move in other areas within the company and did you change roles?
Steve. Yes, I did transition into a risk management role when I was there too which was more on the investment management side dealing with funds.
So I started within product development – pricing, then moved to the risk management and investment side.
MMA. So pricing and risk, there are obviously a lot of similar skills..
Steve. ..you can’t price anything if you don’t know the risks around it.
MMA. You sure can’t.
So at a high level, can you tell us about the methodology of pricing as an Actuary.
Steve. Sure. Any insurance product will have a proportion of claims associated with that product. At a basic level you project what your claims are going to be. You look at historical claim rates and understand variability. Going forward, you look ahead and say ‘what’s going to change’ and compare that to what happened historically – and once again you would be very interested in what the variability around it is. So if it’s something you’re very certain about like someone ‘dying’ and you know you’re not going to be far out because you have great data and you have mortality rates for past 100 years…then there’s less variability there which means less margin on those claim costs.
On the flip side, you might be pricing a product where you go “oohh it looks like it may be a bit like this…we’re not too sure and the data it not that great” – those are the ones you need to be a bit more careful about and they turn out to be riskier products. And of course, that’s priced accordingly.
MMA. So when an insurance company gives you data which stretches 10 years, you would price it more than another company that gives you data that stretches 30 years…
Steve. Yes, but it’s not just the number of years as the volatility around that comes in to play.
So for example if you look at providing unemployment insurance, then that’s going to be very economically driven; you can have good years and bad years.
In terms of mortality, the only thing that will really put it out by a few % either way – not considering things like underwriting and other factors for the moment – for a population is going to be things like pandemic…or war…or a terrorist attack and things of that nature generally speaking. Those are events that are easier to predict now. But, that doesn’t make life easy on those as that’s where the big money is anyway. What I mean by that is, unemployment benefits might account for 1% of all your business but the life business i.e. mortality, will be a large chunk of your book. So if you’re out by a few percentages, then that’s worth a lot of money!
Key takeout there for budding actuaries/analysts:
So if you’re out by a few percentages, then that’s worth a lot of money!
MMA. Fair enough. So there wouldn’t be a lot of price differences between life products right?
Steve. No, there wouldn’t be a lot of differences…
MMA. ..because you would have seen all the data Australia has anyway.
Steve. That’s right. Life products will be closer in pricing than Trauma products.
Trauma products have different benefit structures, they’re underwritten differently, they have different target markets – so there are a lot of different reasons. There’s also a lot of different practices on paying claims.
With a Life product, if someone dies, you get a death certificate and you go “ok they’re dead”.
With a Trauma product, it’s dependent on a ‘condition’. So they must have a condition to get paid and there’s a bit more judgment involved with that. You try to eliminate the judgment; but there’s just naturally more judgment involved in a disability type of claim.
So the claims management unit is really involved with those products and we do work closer with them on these. Once again, where there’s a lot of variability, there’s more risk and therefore we would price it accordingly.
But back to these conditions; we need to project these over the long-term future. Then you need to understand and project how many policies may lapse…what interest rates are going to be, what you may receive with your investment returns and all those other things come into play.
MMA. A lot of params.
Steve. Yep. So basically you have to project all of those and then make sure you’re making enough profit out of it all.
MMA. So that’s how you price it and sell it to the greater fool.
MMA. I’m kidding.
With a Life product, if someone dies, you get a death certificate and you go “ok they’re dead”.
MMA: And so this is pretty binary 0 and 1, yes/no, black/white or alive/dead as the case may be
With a Trauma product, it’s dependent on a ‘condition’.
MMA: This basic concept of modelling conditions where the likelihood of being called to pay isdependent on some future event conceptually looks like this:
So can I ask – what is the connection between that role and your move to the land down under?
Steve. No connection. My better half and I decided to go back-packing like most young adults. We found ourselves here with our backpacks and I found an opportunity to work with one of the insurance companies here – a contract opportunity.
Here again it was a straight application process for a pricing actuary which I am still today but with a different company.
MMA. So we mentioned previously the difference between a valuation and a pricing actuary. Can you give us your definition of each?
Steve. Sure thing. Obviously the fundamentals in terms of base knowledge is the same. The key difference is that the valuation folks are a more standalone group; they can work on valuing different businesses with less interaction from other business units or from clients direct. This role would suit people who like working with less interference from any external factors. They usually already have all inputs supplied to them and it’s just a process of doing modeling work; plugging assumptions, looking at the data then the results and eventually reconciling the numbers. In terms of where it sits within an insurance organisation, it’s very back office type stuff.
Within Pricing however, we have more interaction with other business units and clients directly so I guess you can consider us being front line. So in order for us to price new businesses, there’s inevitably more interaction with business development, marketing, finance, legal and talking to our clients regarding data files or documentation. It’s inherently more dynamic with a larger variety mix to the working week which is why I enjoy it.
MMA. That’s a good distinction of each. And so you were with this company for a year. What were the highlights of your time there?
Steve. It was a really good place to know the local market. The work itself was similar to what I was doing previously but there were differences in practices, the market was obviously different and it was small things like not even knowing about the company I was working for – I never heard about them in Europe.
There were cultural differences too.
MMA. And now we arrive to your present company – a reinsurance firm. How did you find yourself there?
Steve. It was actually a job advert from the institute of Actuaries. In reality someone I worked with in my old role who pointed it out to me. It was probably not the best thing for them to do..
Steve. I should clarify and remind that my first job was on contract. They knew I was looking for a full-time job.
MMA. Ahh, ok then. That’s a bit different now.
Can I just ask the dummy-down version of the difference between an insurance company and a reinsurance company for those that are not within the insurance space.
Steve. In simple terms – a reinsurance company insures insurance companies. They don’t deal with the general public. They’re a step away from the general population and generally brought in to try to manage insurance companies risk and provide them with capital.
If an insurance company has new business, they need a lot of money to pay for the advice process, marketing, underwriting and everything else. They quickly run through their available capital and if they’re good at selling things, then they need more finance. Quite often they get that through a reinsurance arrangement.
Also having reinsurance in place can reduce their risks especially around large claims. Reinsurance is usually large global organisations who have businesses in a few places in the world. The theory is if there is a bad experience here in Australia, then the theory is that it should be smoothed out by good experiences elsewhere in the world. So the broader the more diversified your book is, then the better you are able to handle risks. A local insurance company may not have that.
And when I say local insurance companies, it’s the likes of the bank owned insurers – CommInsure, MLC etcetera.
MMA. And as we know, you are still within pricing. You have a small team of pricing analysts working under you. What is that like leading a team of actuaries?
Steve. Well it’s more guidance and direction rather than hands-on management of other actuaries. I mean the guys we have are not clueless and are not there to be spoon fed. Its more the case of making decisions based on my working knowledge of a particular case or by virtue of my relationships with clients.
Of course there is that component of peer review which I do prior to the release of our work to other areas and/or to clients.
MMA. So on a percent-basis, how much of your day is taken up by what activity?
Steve. Let me try to give this as weekly percentages instead of a day break. So it would be approximately 20% on my desk doing some client file analysis. Another 20% of my time would be taken doing corro with the clients themselves clarifying information they have provided.
Another 20% of my time will be working with internal business units – the business development managers who are usually client-facing. At times, the marketing actuary would also be thrown in the mix depending on the scenario. And of course we have legal, finance, operations and everyone else under the sun!
What % was I up to?
MMA. You have 40% to go. Come on, aren’t you keeping track of your numbers?
Steve. Haha. You know I usually do!
So let’s say another 20% would be spent doing some business planning type activities with the remaining 20% spent performing administration type activities and management reporting.
But you know if you ask me this question next week, those percentages may vary. So yes it varies by the week.
MMA. Not a problem then. So out of these weekly activities, what do you enjoy best and what don’t you enjoy?
Steve. Definitely working with clients and internal colleagues. This is one of the reasons I prefer pricing more than valuation.
MMA. ..and I can tell that it suits your personality!
Steve. Cheers. And on that note, what I don’t enjoy is probably doing the administrative type activities. Its one of those necessary evils that needs to be done but it’s just sooo mundane and time-consuming. But that’s just part of life.
MMA. So Steve, at this stage of the interview I always like asking “where do you see yourself in the next 3 years and the next 5-10 years?”
Steve. Maybe between 3 to 5 years, you will still see me in the industry –probably still with my current employer but doing something different.
In the 5-10 year range however…maybe, sitting on the beach somewhere, retired!
But seriously I’m not sure. It’s very hard to see that far ahead.
MMA. I know. My crystal ball gets all clunky that far ahead too.
So what are the big industry changes you can see in the future?
Steve. Acquisitions and consolidations should still continue by and large for numerous reasons. An international company might want to sell Australian assets to realize some value and focus in their home country. On the flip side, Australian companies might want to grow their assets and welcome opportunities to grow by acquisition. So not to long ago we saw the Aviva-to-MLC and AXA-to-AMP transactions take place. And it probably won’t stop there you know.
Similarly, I believe that certain foreign companies will also want to grow their respective businesses over here such as the Dai-Ichi Life takeover of Tower. So just because funding is tough doesn’t necessarily mean that you will see less of these deals. If an international company decides they want assets here, they will find a way to make it work.
And of course you have your Basel 3 in banking and all those other changes.
MMA. Fair enough.
So who do you admire professionally? Or, who do you strive to be?
Steve. Hmmm. Let me think…
MMA. I would imagine that a lot of people would say Steve Jobs for example, due to his influence and legacy.
MMA. Indeed he did. So for our readers out there who are considering to be an actuary, what do you think are the core skills they need?
Steve. Obviously the mathematical skills. The technical skills are the obvious ones which probably is not worth pointing out. But the communication and the softer skills are becoming more important. And its part of the Actuarial training, there are communication courses.
MMA. Is that a new subject?
Steve. Well…its been in the UK system for years. But in the Australian system, it’s not quite dubbed a comms course but you have to do a lot of presentations. I guess the function of an actuary is changing more and more to advise the board rather than to make the decisions.
So the board is responsible for making the decision; the actuary is independent and one step away from the decision-making. These are very large decisions of course.
MMA. I’m glad you mentioned that. A lot of people overlook the soft skills area.
Steve. Yes they do.
When I was doing the UK exams, quite a few years now, I had to write a letter the letter would be like your grandmother received this statement from her bank. Basically you had to explain it without jargon. It was to test your ability to explain technical concepts in a clear and basic way so that people understand them. As an actuary, you are naturally involved more with the technicals so it’s an absolute skill to translate that into everyday language.
And as we were saying before, I believe there’s a move towards more presentation to people – not just written letters.
Steve. Fair enough. So how do you wind down from a busy day and/or working week?
Steve. Well..it depends. We’re coming up to summer so I’ll be hitting the beach. But during winter, it’s Soccer!
MMA. Of course! Hey, we have the Italian god here at the moment.
Steve. Indeed we have and I’ve seen a few of the games. It’s a good atmosphere in those games.
MMA. Yes, I really need to get myself watching a game soon. I’ll touch base again with you when I do.
And my last question is a bit silly but I need to ask it anyway – are we going to get lumped with a premium due to end of the world according to the Mayans?
Steve. Well….I don’t think we ever factored that in our models. Look, I think we are all stuffed if that eventuality happened anyway!
Let us all rejoice; the actuaries will not charge an extra premium to cover December 2012!
We’ll put together a nice infographic at some point to cover this interview as there are a fair few points in here worth highlighting. That said, we have sourced an infographic worth sharing from a policy holder’s point of view i.e. the general public.
Steve’s identity has been masked upon her request. This blog uses real people who have worked for more than 5 years in the Australian Banking and IT industry.