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Who’s Managing the Risk Anyway?

Who’s Managing the Risk Anyway?. Actuaries, Risk & Risk Management. Choose 1. or 2. 1. 4,000 with probability .20. 2. 3,000 with probability .25. Choose A. or B. A. 2,500 with probability .33 2,400 with probability .66 0 with probability .01. B.

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Who’s Managing the Risk Anyway?

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  1. Who’s Managing the Risk Anyway? Actuaries, Risk & Risk Management

  2. Choose 1. or 2. 1. 4,000 with probability .20 2. 3,000 with probability .25

  3. Choose A. or B. A. 2,500 with probability .33 2,400 with probability .66 0 with probability .01 B. 2,400 with certainty

  4. Choose C. or D. C. 2,500 with probability .33 0 with probability .67 D. 2,400 with probability .34 0 with probability .66

  5. Choose X. or Y. prior to Stage 2 Stage 1 75% chance of stopping with nothing 25% chance of moving on to Stage 2 Stage 2 X. 4,000 with probability .80 Y. 3,000 with certainty

  6. One of the major biases in risky decision making is optimism. Optimism is a source of high-risk thinking. (Daniel Kahneman)

  7. Financial Risk Actuaries as Risk Managers

  8. You only learn who has been swimming naked when the tide goes out. (Warren Buffet)

  9. To create rules that require professionals to learn and follow? • For professionals that can find ways to take risk, following the rules? • To manage risk to make systems sound & sustainable? Risk is Opportunity!

  10. Prerequisites for Managing Risk Risk takers accept being managed + Risk managers not conflicted or Very good rules and regulations

  11. Actuaries as ... Advocate or Auditor ?

  12. Case study: corporate pensions • Plans grew big during 80’s/90’s bull market • Original ERISA rules didn’t encourage low risk • Clients not asking for risk management • Client advocacy creates conflict for actuaries • No goal of sustainability

  13. Case study: public pensions • Easy to make promises that someone else needs to keep • Few rules • Actuarial methods not focused on risk • Client advocacy creates conflict for actuaries • No goal of sustainability

  14. Better Risk Management Comes From . . . Know the assets AND the liabilities Establishsurvivaland sustainabilityas objectives Tilt balance away from advocate toward auditor Principles-based rather than rules-based

  15. Actuaries as caretakers, working to ensure the long-term survival of insurance and pension systems

  16. But Do Better OUTCOMES Come From . . . RULES or REASON ?

  17. 1. Psychological biases impact choices 2. Risky positions are not always easy to identify (until the tide goes out) 3. Being an advocate may compromise risk management 4. Know the assets AND the liabilities 5. Think about sustainability of the system

  18. Make a decision about both of these choices Choice 1. Sure gain of $240; or 25% chance to gain $1,000 75% chance to gain $0 Choice 2. C. Sure loss of $750; or D. 75% chance to lose $1,000 25% chance to lose $0

  19. AD. 25% chance to win $240 & 75% chance to lose $760 BC. 25% chance to win $250 & 75% chance to lose $750

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