The vital service

A joint venture between the University and actuaries will break new ground in Australia.

David Service says his lectures are known as integral-free zones. This would be less remarkable if he weren’t an expert in actuarial studies, a field that suggests whole forests of statistics and canyons of numerals. But, as the founding director of the ANU Centre for Actuarial Research explains, it’s a common misconception that actuarial work involves lots of complicated mathematics.

“Actuaries deal with future financial events whose occurrence is inherently uncertain,” Service says. “We try to make sense of the uncertainty that lies in financial projections. Insurance is an obvious example. Is your house going to burn down tonight? Some houses will burn down tonight. In Canberra, probably not very many, but in Australia there will be some. We don’t know which ones, but clearly it has a financial effect and people don’t want to carry that risk. They pass it to the insurance company.

“You can apply this concept of uncertainty to anything. Take retirement investments in Australia. Are there sufficient young people working so older people can live in comfort? It’s a financial event and it’s inherently uncertain. Actuaries are singularly qualified to work these things out.”

Service says this ‘working out’ is achieved through the application of maths, statistics, demography and economic theory to long-term financial planning, but “mathematics is involved to a much lesser extent than people think. There’s some tricky stuff to do with statistical analysis, but not much more than that. The issue is not higher mathematics but rather the ability to think numerically. Actuaries must have an intuitive feel for all things quantitative”.

If actuarial work is such a cakewalk, why the need for a special breed of professionals? It may not require a mathematic ability on the level of A Beautiful Mind, but Service argues that it does demand a native aptitude for rigorous analysis, pattern recognition and the ability to predict potential outcomes based on varying levels of data. It’s these skills that are taught and practised by the researchers at the Centre for Actuarial Research in the ANU College of Business and Economics.

“I’m not an academic in the traditional sense. I’m a professional actuary. The actuarial profession in Australia undervalues the research done at universities because it’s perceived to be esoteric and theoretical. I thought it would be much better to do research on real problems that come out of the institutions that actuaries advise.

“We try to make sure that what we do is very much applied. For example, we’ve been looking at the incidence of disability income insurance in Australia. We’re discovering a number of things that nobody appears to have published anything on around the world. For example, there is the observation I’ve christened the ‘Christmas effect’. Disability income insurance will pay you an income until you recover. But no one ‘recovers’ in December. It’s not in the claimants’ interest to do so, but the insurance companies’ assessors seem to take life easy in December too. There’s 18 years of data and the seasonal impact is the same every year.”

Service has stepped back from directing the centre to concentrate on his research, with plans to submit a doctorate next year. He’s also been the key figure in negotiating a new partnership between ANU and prominent actuarial firm Rice Warner. The joint venture will allow ANU researchers to access the broad historical data that Rice Warner has collected over the decades through its work with financial institutions. In return, ANU academics will help build and refine an agile actuarial model capable of forecasting outcomes at a dizzying array of scales.

Michael Rice, Director of Rice Warner, says the joint venture will be of great benefit to the company.

“We do a lot of modelling in superannuation and in the general health sector. Over the last decade we’ve built a lot of spreadsheets, analysing fees, investment allocations, fund changes and industry trends. These spreadsheets are good, but they don’t provide the flexibility that you can get out of databases like those at ANU.

“We feel we can do work on retirement income throughout Asia and we thought the strong reputation of ANU in the region would be useful for us. The Centre for Actuarial Research also has a team of statisticians who have access to a lot more data and their software is much more robust. They have people working full-time on data analysis. The combination of Rice Warner’s commercial knowledge and the specialist statistical skills at ANU will form a good partnership.”

Researchers at ANU are currently developing the software that will underpin the joint venture, with plans to finalise it later this year. Service says the academics involved will also benefit.

“Rice Warner has got lots of historical data and they’ve got strong contacts deep within the bowels of all sorts of organisations,” Service says. “We bring the academic discipline and rigour, along with the ability to build complex models. It will provide support to a number of people doing research here.

“The new joint venture model involves databases and sophisticated software. It’s a set of units in a population, which in the case of this model are individuals, financial institutions, assets, and people who sell and distribute superannuation. Every time that you run the model, certain events happen to individuals which give rise to certain consequences, which then affect the data when you start the next period. Out of all those consequences you get things like the bills for social security.”

By constantly updating the model’s data and its ability to forecast for different outcomes, Service says it will continue to evolve, making it one of the most flexible models of its kind in Australia. He says it will be able to forecast at all scales from the individual through to the entire population.

“It can be as simple or as complex as you like, which is a real advantage,” Service says.

A person who could model the futures of so many individuals and organisations could be forgiven for suffering from severe intellectual vertigo, or perhaps a god complex. But Service remains modest and level-headed, saying that the life insurance component in particular constitutes only a small part of what actuaries study. But he does concede that the actuarial profession has a singular power to forecast for crucial  cogs like social security.

“You can make a difference. Lots of professions claim this, but actuaries make a difference in a unique way. The security of Australia’s post-retirement actually rests in the hands of actuaries. In the end, it all comes back to the people. If your house burns down and your insurance company has gone broke, then people are in a disaster area. Actuaries provide a vital service.”

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ANU Reporter Spring 2006