ISSUE 126 | DECEMBER | 2007


As I write my final editorial for the year it’s interesting to reflect on what has changed in the last 12 months. The most recent change of significance must be the new Rudd government although it is a little early for the impact of this to be felt. One thing within the profession that stands out for me this year has been the increased discussion within most practice areas of enterprise risk management (ERM) and with no predetermined plan this issue of Actuary Australia demonstrates the trend. Richard Lyon reports on the new Institute-run CPD course on ERM, which he recently attended over five separate days; Andrew Matthews has contributed an article on ERM and exploring best practice in commercial pricing and underwriting; Fred Rowley tells us how the global profession has agreed, in principle, to move to a global ERM qualification and the review of the strategic plan by Greg Martin, our President for 2008 has ERM as one of its key imperatives. I also recommend reading Kirsten Armstrong’s article on micro insurance and her experience of working as a volunteer in India. It is inspiring and reminds me that that the rewards to the person giving can be at least as much as to the recipients and that an apparently small contribution today will have ongoing and potentially increasing benefits. Finally I’d like to take the opportunity to thank all the contributors to the magazine without whom my job would be much more difficult – keep those articles, letters and comments coming. When Barry Rafe persuaded me to take on the role of Editor he promised me the work would not be too onerous. It turns out that with the great Editorial Committee and the support from the Secretariat this is actually true! Happy Christmas!. ▲
Jenny Lyon

Actuary Australia
CONTRIBUTIONS Contributions should be sent to The Institute of Actuaries of Australia, marked to the attention of Katrina McFadyen (Program Manager). When sending contributions please supply text in Microsoft® Word format. Illustrations and photos should be supplied as JPEG, TIFF, EPS or PDF files at a resolution of 300dpi. (Note: GIF files are generally unacceptable because of low resolutions). Prior to supply of material, please confirm supply specifications, copy limits and relevant details with Katrina McFadyen. Email: Magazine design: Kirk Palmer Design 57 Griffin Street Surry Hills NSW 2010 Tel /Fax (02) 9332 1223 Email NEXT EDITION Publication date: March 2008 AA127 March 2008 Deadline for contributions: 1 February 2008 AA128 April 2008 Deadline for contributions: 1 March 2008 ACTUARY AUSTRALIA EDITORIAL COMMITTEE JENNY LYON EDITOR Tel (02) 8235 7901 Email PROGRAM MANAGER KATRINA MCFADYEN Tel (02) 9233 3466 Email ASSISTING EDITOR STEPHEN WOODS Tel (02) 9086 6310 Email ASSISTING EDITOR CATHERINE WATSON Tel (02) 9248 4102 Email ASSISTING EDITOR VIVIAN TSE Tel (02) 8295 6881 Email ASSISTING EDITOR MATTHEW WOOD Tel (02) 9995 1857 Email DIRECTOR, PRACTICE DEVELOPMENT DARREN DAVIS Tel (02) 9233 3466 Email OTHER CONTACTS ANDREW LEUNG (Editor of AUSTRALIAN ACTUARIAL JOURNAL) Tel (03) 9270 8262 Email THE INSTITUTE OF ACTUARIES OF AUSTRALIA
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What’s New on the Web

AA No 126, DECEMBER 2007

4 6 9

Micro Insurance – Helping the world’s poor through insurance
Report Kirsten Armstrong Member survey Jenny Lyon Fred Rowley

Presidential Address One recurrent issue running across a number of our current strategic initiatives is “What is an actuary?” Greg Martin is particularly keen to discuss and debate this and other issues with members and looks forward to members participation. 007 Annual Review, Financial Statements and Directors’ Report Now available Annual General Meeting will be held on Wednesday 19 December 2007. Notice of AGM available at

The Actuarial Pulse Notes from the President’s Blog Enterprise Risk Management Course
Review Richard Lyon Sim Ng

10 11 12

Actuary Unearthed The Stern Review’s Assessment of the Economic Costs of Climate Chage
Report Jill Green

Presidential Address – What is an Actuary? 17 December 2007, Sofitel Melbourne 19 December 2007, Angel Place Conference Centre, Sydney Melbourne Christmas Dinner 17 December 2007, East Tower Suites, 35th Floor, Sofitel Melbourne Sydney Christmas Dinner 19 December 2007, Prime Restaurant at GPO, Sydney Private Health Insurance Online CPD Course Enrolments open 4th Financial Services Forum 19 – 20 May 2008 Crown Promenade Hotel , 8 Whiteman Street, Southbank VIC 3006 Channel Crossing for Life July 2008


Stategic Plan and Vision for the 2008 Presidential Year
Report Greg Martin


Contrasting Financial Management Practices in Banking and Wealth Management
Review Robert Daly / Anton Kapel

18 20 22 23 24 26 28 29 30 32 34

2007 Actuary Australia Index
Resource News

Introducing our New Council Members Two Ducks Swimming
Stephen Woods

Ask Gae

Answers to life’s serious and not-so-serious questions Gae Robinson

Actuary Australia, Issue 126, December 2007 Australian Actuarial Journal Volume 13, Issue 2 PHI Newsletter No.181 General Insurance Practice Committee Newsletter (August edition) Actuarial Practice of General Insurance 7th Edition, Available at

Enterprise Risk Management

Paper from the recent Biennial Convention Andrew Matthews

Once Upon a Time…

Paper from the recent Biennial Convention Ian Robinson

Education Update
Board of Examiners / Staff actuaries / Enrolments / Edcation expenses Philip Latham

Student Column
Report from the University of NSW Simon Crawford-Ash / Elanor Sautelle

Actuaries on the Move
Corporate Change No changes this period

Report from the CEO
John Maroney Report Bevan Damm

Change of Business Details from xxxx007

General Insurance Pricing Seminar

Members are encouraged to advise if they would like to be included in Actuaries on the Move Members’ details are available via the search function on the Institute website –


Investment Guarantees / Farewell to Old England / Close Affinity / Remembering Sid / No More Global Warming Barker / Lewis / Sawkins / Sawkins / Carrol


D E C E M B E R 2 0 07 


Micro Insurance
– Helping the world’s poor through Insurance

Women learn about micro insurance at an induction meeting.


icro credit hit the news last year when the Nobel Peace Prize was awarded to Mohammad Yunus and his organisation, the Grameen Bank of Bangladesh, a pioneer in providing ‘micro’ loans to help poor people start their own businesses. Now micro insurance is emerging as the new way for financial services to help the poor and it’s here that actuaries can make a difference.

insurer, Uplift provides micro credit and micro insurance in the slums and organises a range of health and childcare services. My work in India focused predominantly on health insurance, where micro insurers are tapping into a major gap in the market. India has no public health financer like our own Medicare and traditional private health insurance is limited to employees of the government and a few large companies. As a result, over 80% of India’s health costs are paid directly out-of-pocket, compared to just 15% in Australia. For the 300 million Indians living below the poverty line, health costs often mean borrowing money from a loan shark at extortionate interest rates or deciding to forgo health needs entirely. This is where micro insurance can help. For just $2 a year, Uplift provides basic health insurance, part-reimbursing expenditure on hospitalisation and some other health services.

What is Micro-insurance?
Put simply, micro insurance is providing low-cost insurance to low-income households. In developing countries, micro insurance is usually provided by NGOs (non-government organisations) often working in conjunction with local insurance companies. The most common form is term life insurance to cover funeral benefits or the value of loans taken through a micro credit scheme. Crop insurance and health insurance are also growing. Micro insurers have learned from micro credit providers, who complement the financial services they offer with advice and support to help loan recipients run their businesses. In micro insurance, the options for providing advice and support are far broader and can lead to a win-win for both the poor and insurers. In Zambia last year, I saw how crop insurance combined with the right advice on warehousing of crops and timing of sale could improve the price farmers fetched for their crops and also minimise risk for insurers - helping keep premiums low. While many micro insurers consider themselves self-financing, they often rely on aid monies and volunteers to get the start-up funds and technical advice they need. This is how I came to work with one micro insurer, Uplift, in India earlier this year.

Not just Insurance
Members of the scheme receive more than just financial reimbursement. Once a month, Uplift arranges GPs and other doctors to offer their services free of charge to members in the slums. Discounts have been negotiated with a range of health providers, not just hospitals, to make healthcare more affordable. A 24 hour hotline has been established, so that members can receive basic health advice, transfers to appropriate hospitals and help in choosing the right healthcare at the right price. This makes a big difference in India. One private hospital told a member it would cost 17,000 rupees ($470) to treat his broken arm. Uplift was able to negotiate more appropriate treatment through a public hospital for just 2,000 rupees ($55).

Health Insurance in India’s slums
Uplift India Association is a network of NGOs supporting the livelihoods of people earning less than 2500 indian rupees ($70) a month in the slums of Pune, Mumbai and Kolkatta. With financial backing from the French Government and MACIF, a French

Teaching Communities about Insurance
Uplift uses a community-based mutual fund model, emphasising to communities that they own the mutual fund money and must be involved in decisions about claims. Indirectly, this is helping many in the community to learn just what insurance is. Induction




meetings for new members, wall charts with up-to-date fund information and monthly claims meetings all help the education process. Francois-Xavier Hay, a French actuary working in India, told me of explaining earned/unearned premium in a rural village using 12 stones! On my arrival in Pune, I attended one of the monthly claims meetings. Riding side saddle on the back of a scooter in my skirt and sandals and clinging to my notes, I was driven to one of Pune’s many slums. This was one of the ‘better’ slums; it’s recognised by the government and so is privileged to have a handful of running water taps scattered between the makeshift buildings. Sitting on the dirt floor that afternoon, I watched the local community representatives discuss the financial position of the fund, then discuss each claim in turn, voting on whether a claim should be paid and how much the member should receive. Of course the claims could be handled far more efficiently in a central administration office but this way the community learns how insurance works and claimants – many of whom cannot read – learn firsthand why their claim has been accepted or rejected.

These charts are used to display the performance of each branch’s mutual fund.

accounts and propose minimum solvency requirements. Other Australian actuaries have reviewed new database software. Micro insurance is rapidly evolving, as the insurers better adapt the simple products they first introduced to suit the needs of the poor. Options that we take for granted – deductibles, periodic premiums, insurer to hospital direct payment rather than member reimbursement – are now being incorporated into the products. Actuaries can help by bringing developed country ideas and adapting them to this new environment. Working here is personally rewarding, as it contributes directly to lifting people out of poverty. The work can be professionally rewarding too, thanks to the rapid pace with which new ideas are incorporated into these small, agile organisations and shared with the growing network of micro insurers. The people I worked with were intelligent, competent and highly motivated; they just needed some actuarial know-how. Working in an environment like this does present challenges but these are not insurmountable. Often there is little or no legislation with which to comply, so the actuary can fall back to basic actuarial principles and their own country’s practices to guide their advice. The key is to understand that the needs of the insured and the risks to the insurer may be very different in a developing country... and to ask a lot of questions.

Community representatives vote on whether to pay a health claim at the monthly claims meeting.

Expect Rapid Growth
The micro insurance industry is growing rapidly and the potential is enormous. In just one state in India, Maharashtra, 5 million people inhabit its slums. Last month, the government there agreed to promote the Uplift model amongst rural and slum communities and is considering matching insurance contributions to help boost the benefits insurance can provide.

For more information on micro insurance see the Resource Centres at Click on Organisations to see who’s involved. The International Actuarial Association has an Actuaries Without Frontiers section, see To learn about the work of Uplift India Association, go to And if you’re serious about getting involved, please get in touch. ▲
Kirsten Armstrong

In this growing environment, there are many opportunities for actuaries to lend their support. In my 3 weeks in India, I was able to develop a pricing model, help design a new health insurance product, implement performance monitoring measures, review


D E C E M B E R 2 0 07 

Kirsten Armstrong

How Actuaries can help

members’ survey

The Actuarial Pulse
Next Survey A new set of questions will be available in the
first 10 days of each month. Please login to the Members’ area of the Institute web site ( and select The Pulse. The next survey will be available in February 2008.

The Actuarial Pulse is an anonymous web-based survey of Institute members, run on a monthly basis, giving members an opportunity to express their opinions on a mixture of serious and not-so-serious issues.

What would you like to know? If you have a question
you would like to put to the membership, email it to

existed and “Actuaries are the custodians of the financial services industry”… And finally the future opportunities: ● “This is an expanding profession. As risks become more complex over time, risk analysis and mitigation become equally more complex thus increasing the demand for actuaries and other lesser-qualified risk professionals.” ● “The skills acquired in obtaining the actuarial qualification are transferable to non-traditional areas of actuarial employment”
Question 2 . Is the UAI a good measure of ability to qualify?
Apology: Well I have managed to offend most people who


● ●

218 responses Presentation generated on 13 November 2007.

Question 1. What do you believe are the key messages
about the profession we should be using to attract?
Choice Offers broad-based business career For those of strong intellectual ability High mathematical component Broad-ranging opportunities related to financial management of risk Well-paid Influential with government Makes a difference to people Springboard to senior management Global profession 149 125 25 49 79 152 68.3% 57.3% 11.5% 22.5% 36.2% 69.7% Count 130 142 102 % Answering 59.6% 65.1% 46.8%

do not live in NSW by using a NSW centric term UAI. For the record it stands for University Admissions Index and is a measure of performance in the Higher School Certificate which NSW students sit in year 12. An oversight, I can only say the sooner Australia has a central education system the better!

Yes: .% No: 4.%

A few themes ran through the comments. The main one was that communication skills were important for success and that we should emphasise this more in our marketing if we want to attract the right people into the profession. Secondly, you emphasised that the profession was ‘well-regarded’ and that it was about ‘integrity, impartiality, professionalism and ethics’. There was some dispute about the financial rewards, some commented on the potential for high salaries and others disputed this: ● “Not: You will have a guaranteed job upon graduation. Not: You will receive a 6-figure salary upon graduation.” ● “It is more important to build awareness of the profession, an actuary’s skills and what an actuary is and does, rather than general statements about pay and influence.” and ● “Cannot promise a good income any more – starter salaries are the same in $ terms as 20 years ago. Only senior people get paid well.” There was also a sense that we offer a valuable service with it being suggested that ‘contribution to the community’ was the reason we 

My understanding is that an academic measure of this nature while not perfect gives a reasonably strong correlation with success in the exams.
Question . Is the UAI on its own, a good measure of ability to develop into a well-rounded and influential actuary?

No: 9.9% Yes: 7.1%

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Call: +61 2 9262 1612 •

Question 4. What other criteria might be useful? (Check all that apply)
Other possible criteria Written communication Oral communication Ability to work as part of a team Interpersonal skills Leadership potential Drive and ambition Count 167 161 110 135 68 83 % Answering 76.6% 73.9% 50.5% 61.9% 31.2% 38.1%










Having upset so many people with my UAI gaffe I at least managed to achieve one of my objectives – lots of comments. Not everyone thinks we should be trying to be all things to all people: “Not everyone wants to be ‘a well-rounded and influential actuary’, some may just want to be an actuary” ● “Actuaries are actuaries – the majority are not well-placed for a broader role. The world does need specialists so should not be kidding ourselves that actuaries are the best people for all jobs”. While agreeing that other skills are important for success you noted it may be difficult to assess those skills at entry to university or that this was the best time to make that assessment: ● “It’s my view that the course should aim to develop these skills, not necessarily require them on entry. It is easy to criticise the use of UAI but it is much more difficult to identify a fair and objective alternative that can be applied at age 18 for merit-based entry. ‘Soft skills’ can be developed with time. I think it is much rarer for academic aptitude to develop ‘late.’”
Question 5. It is increasingly common for other professions to recruit graduates from a wider range of disciplines. From which of the following degrees do you feel it is appropriate to recruit?
Choice Mathematics Economics Law Arts Medicine Finance Science Engineering Marketing Politics Count 198 161 58 33 45 177 131 166 34 30 % Answering 90.8% 73.9% 26.6% 15.1% 20.6% 81.2% 60.1% 76.1% 15.6% 13.8%


The strong message was that in principle people from all backgrounds should be welcomed although there was recognition that they needed to have the ability to qualify, that we should recognise what it takes intellectually and in particular that they have the analytical and problem solving skills. You saw advantages in people having a different background as it could make for a “vibrant, exciting, innovative environment”: ● “It is appropriate to hire actuaries from any discipline as long as they have the desire and aptitude to qualify.…” ● “Best way to broaden the profession is to have people from wider backgrounds.” However some noted that it was more efficient to have students completing an actuarial degree: ● “The exams are time-consuming and onerous if done post-grad. Combined degrees should be encouraged and available, particularly non-financial fields” ● “Why should we recruit from other fields when there are so many actuarial grads? Is this practice fair given the profession actively attracts young students to actuarial uni courses and gives them hope for an actuarial career – then wants to give jobs to ‘other fields’?” Some of you feel there is an over reliance on the university system in Australia and that a more general degree first would be an advantage: ● “I think serious consideration should be given to the scrapping of Part 1 education requirements and allowing any reasonably quantitative degree as a substitute – Part 1 syllabus is both hopelessly outdated and irrelevant... while not giving anywhere near enough mathematical background to allow the students to understand current research in financial economics, operations research etc... why not admit anyone with broadly compatible background... and suitable alterations to Part 3 exams can ensure the ongoing value of the professional qualification.” And finally: ● “Don’t recruit anyone from Medicine – the world could do with more doctors.”
A C T U A RY A U S T R A L I A D E C E M B E R 2 0 07 7






members’ survey (continued)

Question 6. Board Membership: Which, if any, of the following roles have you had?
Choice Director – listed company Director – private company Director – not-for-profit org. Male Count 2 42 28 % Ans. 1.2% 25.4% 17.0% Female Count 0 4 2 % Ans. 0% 8.3% 4.2%

litigious” ● “Director’s take on too much responsibility – it seems like an easy job but the consequences of getting it wrong are huge!” Those of you with some interest in board membership saw the Institute as having a role in either providing CPD or at least “... in highlighting the potential using examples of Members on Boards and perhaps promoting the broad virtues of an Actuary as a Director.” However you also felt that the AICD (Australian Institute of Company Directors) provided the best route for those aspiring to be Directors and we should not be trying to reinvent the wheel. Actuarial skills were clearly only part of the skill set and there was strong sense that having the broad commercial experience was vital too. Some of you felt that actuaries were only appropriate as directors of financial services organisations ● “Irrelevant except for insurance and pension companies”. Whereas others thought... ● “I am not limiting my aspirations to be a board member just to financial services organisations – in fact in many ways would like to use the opportunity to be a board member as a means of experiencing other industries.”
Question 8. If you are or have been a director of a not-for -profit organisation what were your motivations?

Question 7. Do you aspire to board membership of a financial services organisation?
Choice Yes, believe I could contribute Yes, a goal I’m working towards Yes, but don’t see how No, responsibilities too onerous No, no interest Other – please comment Male Count 22 43 31 17 40 9 % Ans. 13.5% 26.5% 19.1% 10.5% 24.7% 5.6% Female Count 4 7 7 9 19 2 % Ans. 8.3% 14.6% 14.6% 18.7% 39.6% 4.2%


30 Yes, working towards


Yes, but how No, onerous No interest

Count 25 2 2 5 12

% Answering 54.3% 4.3% 4.3% 10.9% 26.1%


Yes, I could

Particular interest in the goals

of the organisation Family member or friend involved or linked with the organisation Increase links with local community Personal development Other (please expand)


The statistics for Australian companies suggest that around 8% of board members are female. Comparing the results above we see that this is reasonably true of the respondents to the survey, 8.7% for public companies and 7.1% for not for profit organisations while no females responding have been directors of listed companies. When comparing their ambitions, 39% of females who responded had some ambition to be on a board compared with 63% of males who responded. Some of you have little respect for boards, their members and the selection process: ● “Board memberships depend on who you know, rather than what you know” ● “Boards don’t do anything – the whole thing is a scam” ● “I maintain that most board members are mediocre individuals compared with most actuaries who are better-suited in every way but less well-connected”. There is also a sense of the responsibilities that go with being a director ● “Responsibilities are too onerous and society is too

The other reasons typically included directorships that had arisen via work such as for a superannuation fund or a combination of the reasons listed above. ▲
Jenny Lyon 




from the President’s Blog
Fred Rowley

Another Brick in the Wall!
Students of Roman mythology (and players of certain computer games) will know why January is the month to look both forward and backward in time. However, those familiar with Institute governance and publishing schedules will know I can’t wait until then!

By the time this edition of Actuary Australia hits your mailbox, I will be about to stand down at the end of my term as President – and Greg Martin will be about to feel the (quite considerable) weight of the presidential medallion around his neck. Trevor Thompson will be stepping up one rung on the ladder, and a new candidate will be learning yet more about the fascinating and rewarding road to the presidency. Having lived on our ‘Presidential ladder’ for three years now, I see it as a very strong element in our governance system. It brings continuity of Institute policy without stagnation; a wider range of skills and experience within the Executive Committee than any single President can encompass; resilience against changes in personal circumstances; and enough checks and balances to encourage Presidential leadership that sits within the broad consensus. Long may it continue!

During the year, I have tried to emphasise the continuing need to renew and update the profession’s skills and value offerings, so that we and future actuaries can prosper from opportunities in new fields and new markets. On the outer frontiers of actuarial practice, the comments on climate economics in my Presidential Address seem to have been to the point. During the year I have been impressed not only by the many practical ways in which actuaries have been involved in this field but by the degree to which their hearts and minds have been engaged by the topic. This is especially true of our younger members but by no means exclusively so. More centrally for our profession, I have been delighted to see the ‘quantum leap’ we have made this year, in boosting our efforts in the rapidly developing field of enterprise risk management (ERM). The most visible and concrete achievement in this area was to present our first CPD module in October/ November and we have plans for much more here in Australia and overseas. I am also very pleased to report that a Statement of Intent was signed at the Dublin meetings of the International Actuarial Association by representatives of eight major actuarial bodies internationally – including myself on behalf of the Institute. The statement records our intention to work towards an ERM credential for actuaries that will be recognised globally. This is a truly exciting move that deserves our concerted attention in the coming years.

Where ERM will lead us is still an unknown but it must be regarded as a key issue in re-launching the actuarial profession into a broader and deeper understanding of quantifiable and/ or controllable risks and their interactions and the techniques available to manage them. The intention of course is that this will lead to a wider commercial recognition of the value of our members’ services, well beyond compliance roles. The aim is to position actuaries to take a wide range of major roles in the management and supervision of the financial institutions we are so familiar with – and some new ones too. What may not be so clear is how far these developments will reach into our traditional practice areas. Living in the past appears not to be an option, though. For the past decade Australia has been in the forefront of realistic reporting and realistic risk measurement but that may be about to change. We know that the International Association of Insurance Supervisors is already working towards an ERM approach to solvency supervision and regulation, and that the requirements of the forthcoming EU Solvency II regime will make new technical demands on actuaries that will be felt around the world. These factors will be especially important in an insurance context. The Basel II framework already makes considerable demands on banks but in the light of recent events it seems likely to need further update to deal with the quantification and control of liquidity risks in ways we haven’t yet seen. On top of that, the trend towards ‘fair value’ measurement in financial reporting appears to be established irrevocably. The problems of implementing and unifying these systems globally, while dealing with the constant flow of financial innovation and the constant presence of systemic risks, will bring new challenges of increasing complexity. Those technical demands are coupled with a greater emphasis on the skills needed to deliver important advice of this nature with integrity or to manage the risks in a hands-on fashion. Clearly there will be no shortage of challenges for actuaries in the future. It is in our interests, both as individuals and collectively, to ensure we remain fit to take them on – for our own sake and for the actuaries who will follow us. In conclusion… I am proud and happy to have been allowed the privilege of making my contribution to this great profession in this very enjoyable year as President. My particular gratitude goes to the members of Council, the Vice-Presidents and the Chief Executive for their energetic and positive co-operation and support – and for putting me right from time to time! I am confident that my successors will take us forward energetically into a bright future. I know you will give them your support in the same generous way you have given it to me. ▲
Fred Rowley


D E C E M B E R 2 0 07



ERM Course Participants

Enterprise Risk Management


oogle “enterprise risk management” (ERM) and you will find our Institute on the first page. Not surprising, you might think. After all, enterprise risk management is simply the latest name for what actuaries have been doing for more than a century. In fact, Google has merely recognised the seminal importance of the Institute’s first CPD course in ERM.

promised attendance certificate will be really impressive…

What’s it like?…
No one really knows what to expect. Lecturers Pat and Frank clearly know their stuff but this is a new course – and a tough audience of generally quite senior people. We learn that the current demand for ERM is being driven by regulators, largely as a result of applying 20:20 hindsight to some high-profile corporate disasters. This is a pity because it is likely to lead to box-ticking ‘solutions’, when what is required is a deep cultural embedding of risk management. Naturally, these corporate disasters are fertile ground for case studies and we also have guest speakers in to recount their own war stories. And to illustrate how hard it can be to learn from experience, one player obligingly suffers another small disaster in the middle of the course. As actuaries, we are very familiar with the trade-off between risk and return, especially in financial risks. We have also come across most of the ’softer’ risks, such as operational risk and strategic risk. What we lack most is a framework in which to place and develop that understanding. We discuss the Australian risk management standard (AS/ NZS 4360:2004), which takes an appealing operational approach to the topic. It summarises the risk management process in a diagram that looks almost identical to the Actuarial Control Cycle. Actuaries clearly belong in this space! So, we are now equipped with a framework and the tools to assess and analyse risks. Has it been worthwhile? I think so. While there are clearly some rough edges to this new course, it is essentially complete and coherent and is a ‘must do’ for any actuary seeking to develop specific capability in this area. ▲
Richard Lyon
Richard Lyon

So, why attend this course?…
As the course flyer put it, “The aim is that the knowledge obtained will assist actuaries in their current roles as well as providing a foundation for pursuing opportunities as they emerge in the risk management field.” This – or the lack of anything to do on five consecutive Wednesdays – has attracted more than twenty actuaries to Macquarie University’s Applied Finance Centre in the Sydney CBD. Most are Approved Actuaries or Appointed Actuaries but the group also includes academics, superannuation and risk consultants. I won’t even try to estimate the combined retail value of the hours committed to attendance at this course. Looking around, I realise that many of my fellow students are there because their statutory roles require them to opine on an insurer’s risk management in a financial condition report. Some already work specifically in risk management and are looking for a new edge. And one or two, like me, simply want to learn what is so special about this topic; why is it so different from what we had thought lay at the heart of being an actuary? I am there to understand the relevance of ERM (you quickly learn that everything has to have an acronym in this subject area) to actuaries. I also want to understand current ERM thinking and practice; and, for good measure, I hope that the course will equip me to practise in ERM. I don’t really think that I can get a job as a CRO (that’s chief risk officer) on the strength of it – but then again maybe the

Course Presenters (standing L to R) Pat McConnell and Frank Ashe




actuary unearthed

Sim Ng

Title... Regional General Manager – Finance, Risk and Compliance Organisation... Commonwealth Bank Group My favourite energetic persuit... Skiing My favourite meal... Rosti and sausages in the Swiss Alps The sport I most like to watch... The luge The last book I read (and when)... It’s too long ago to remember… My favourite CD... Queen’s Greatest Hits My favourite film... Indiana Jones My Interesting/quirky hobbies... None of my hobbies are quirky… I enjoy ordinary things such as travelling and cooking My ideal weekend day... Having Devonshire tea in the Dandenong Hills If stranded on a desert island, I’d take... My husband! He would know how to survive better than me The person I’d most like to meet... Margaret Thatcher. We both started off life as graduates in chemistry and we were both born under the Libra zodiac sign. She went on to do a law degree and I changed to an actuarial career What gets my goat... Poor service and incompetence What I wanted to be when I grew up... Owner of a chocolate factory

Why I decided to become an actuary... I could not see a future in negative film or in high technology manufacturing in Australia. Hence I made the decision to change careers Where I studied... I did it by correspondence, which is unheard of these days Degree/qualifications obtained... B.Sc (Hons), Ph,D, FIAA, FSA My work history... Is varied. I started off in a manufacturing environment. For the past 12-13 years, I have been with the Commonwealth Bank Group / Colonial What’s interesting about my role... Staff development. (i.e. seeing them develop and continuously strive for more) My role’s greatest challenges... Learning a new language (viz. Mandarin) on the job Who’s been the biggest influence on my career (and why)... My husband who has supported me though my career changes My most important decision... To do my tertiary studies in Australia. I have been living away from home and family since then My biggest regret... That I am an only child I’m most passionate about… Being fair and equitable. Perhaps, this is due to the Libra zodiac sign. However, it does help when considering policyholders versus shareholders interests! I’d like to be brave enough to… Be a passenger in a F-18 that is landing on an aircraft carrier

My proudest moment(s)… Are those when I have made a difference to someone The Olympic sport I’d like to be in... Curling. It’s probably the only sport where I would have a chance to make it to the Olympics! The best party I’ve had… On a junk at night with friends, enjoying the sea breeze and the stars If I were a car, I would be a... Stretched limousine My earliest memory... Being scared on my first day at kindergarten My most embarrassing moment... I choose to forget these! In my life I’m planning to change... To have a better life-work balance The age I would like to stay... 35 At least once in their life, every actuary should... Work in sales or customer service My next holiday destination is... Berlin, Prague & Vienna 4 words that sum me up... Customer-focussed, goal-orientated, caring, diverse ▲
Sim Ng


D E C E M B E R 2 0 07


The Larsen-B Ice Shelf on the Antarctic Peninsula collapsed over 35 days in early 2002, prompted by 3°C of warming since the 1940s. (NASA image by Jesse Allen, based on MODIS data.)

Economic Costs of Climate Change
0 20km

The Stern Review’s Assessment of the

● ●

he Stern Review set out to assess the long-term global economic impacts of climate change. There are two main areas of economic analysis undertaken:

Future changes in greenhouse gas emission levels.

the cost of climate change if no action is taken to reduce greenhouse gas emissions – called business as usual (or BAU) cost; and the net benefit of the reduction in climate change impacts, if actions are taken to reduce emissions to a level where impacts are ‘acceptable’, after allowance is made for the cost of these actions.

The Review selected a scenario (A2) from the Intergovernmental Panel on Climate Change (IPCC) studies as the basis for predictions of future population and economic growth. These future growth rates determine the expected increases in greenhouse gas emissions. The long term rate of real growth in incomes globally was predicted to be 1.3% pa. Population was projected to grow by 0.6% pa up to 2200. In the nearer future, variations in the growth rates between countries were allowed for.
Allowance for uncertainty in predictions of temperature increases. The Review established a probability distribution of

Many difficult issues had to be resolved in setting the assumptions for the Review’s analysis. Some of these are not unfamiliar to actuaries. The allowances made for discounting and future changes in relative incomes within and between generations have been the subject of much controversy in economic circles. Some critics consider that the results are compromised, or even invalidated, by the assumptions used. The major elements of the methodology applied by the Review are outlined below.
The projection period. Whereas most studies completed to

possible climatic responses to the levels of greenhouse gases in the atmosphere. A second set of projections (called the High Climate scenario) allowing for climate feedback effects such as melting of the permafrost was then added. The range of possible outcomes was simulated by running 1,000 stochastic projections through a model called PAGE2002 (Policy Analysis of the Greenhouse Effect 2002)1. A comparison of incomes resulting from simulated climate outcomes against predicted incomes under business as usual (with no climate change)scenarios forms the basis for the assessment of the cost of climate change.
Allowance for other economic factors. The Review makes

date have examined the cost of climate change over the next century, the Review has made projections over more than 200 years. This is because of the time required to implement emission reduction measures, for the greenhouse concentration to stabilise and then for climate systems to stabilise. It is expected that climate change will continue for more than 100 years after the concentration of greenhouse gases in the atmosphere has been stabilised.

allowance for a broader range of economic factors than previous studies. This includes an assessment of the effect of climate change on market sectors of the economy, catastrophic events such as storms and flood and non-market impacts on human health and the environment. The overall costs of all the factors allowed for is illustrated in the graph below. Significantly, reductions in incomes do not start to occur until towards the end of this century.




to take action that would stabilise the concentration of GHG in the atmosphere to 550 ppm2 would be 1% (range -2% to 5%) of world GDP. The Review concluded that any more stringent goal would be hard to achieve and too expensive. If emissions can be stabilised at this level, the Review concluded that the cost of climate change would be reduced from 10.9% to 1.1% ‘now and forever’.

Conclusions of the Review
The Review provides a comprehensive quantitative analysis of the potential impact of climate change. However, the difficulty of quantifying such uncertain long term information and the shortcomings associated with trying to convert social and environmental impacts into monetary amounts is emphasised. The qualitative descriptions of the potential climate change impacts, particularly those for more extreme temperature increases, provide the strongest argument for a precautionary approach. Nevertheless, many policymakers place a great deal of importance on understanding the economic impacts of climate change and actions to reduce emissions. Some critics have labelled the Stern Review’s results as exaggerated, mainly because of the assumptions used 3. Notwithstanding this, most agree that the application of alternative assumptions does not alter the conclusions that urgent action is required. ▲
Jill Green
Jill Green

Method of comparing wealth at different points in time.

A source of controversy in the Review is the method used to convert future levels of income to utility or relative value. The conversion is made using a factor called the elasticity of marginal utility of consumption. Many economists have argued that the level of the elasticity assumption used does not make sufficient allowance for future increases in wealth and hence the ability of future generations to adapt and respond to climate change.
Discounting of future incomes. The Review adopted a

discount rate of 0.1% pa. It argued strongly that any higher discount rate would mean placing a lower value on future generations compared to the present generation.
Definition of loss of income. The Review calculated the

reduction in current incomes required (which then increase in line with the BAU projection with no climate change effects) in order to obtain the same value of future incomes net of climate change impacts. This reduction is described as the loss of income ‘now and forever’.
Costs of Business as Usual. The Review calculated the overall

This article provides an overview of a paper written for the Christchurch Convention. For more detail please see the Convention paper. It follows on from an article in the April 2007 issue of Actuary Australia written by Jill Green and Pauline Durant.


worldwide loss of income now and forever as 10.9% (with a 5 to 95 percentile range of 2.2% to 27.4%). This range of results increases to 14.4% (2.7% to 32.6%) under the High Climate scenario. If losses are assessed for various regions of the world and then combined using a population weighting, the results could increase by more than 25%.
Benefits of Actions to Reduce Emissions. The Review did

1. PAGE2002 was developed by Professor Chris Hope at Cambridge University. 2. A level that should limit the risk of temperature increases of more than 3 degrees Celsius above pre-industrial levels. 3. A detailed summary of the debate about the assumptions has been published by Frank Ackerman, Director of Global Development and Environment Institute (see reference below). He concludes that the Review “has decisively laid to rest the notion that standard economics somehow counsel timidity in the face of global crisis.” Frank Ackerman July 2007 Debating Climate Economics: The Stern Review vs. Its Critics, Report to Friends of the Earth –UK, Global Development and Environment Institute, Tufts University, Medford MA USA ttp:// The Review report is available from

a meta-analysis of several studies on the cost of taking action to reduce emissions. The conclusion reached was that the cost


D E C E M B E R 2 0 07



Institute Goals

and Vision

for the 2008 Presidential Year
he Institute Council recently adopted an updated Strategic Plan for the next three years (2008-10). The plan was finalised following consultation with members by the Strategic Planning Taskforce during the middle of 2007. While the draft plan was discussed with members at Horizon meetings in July, December is a good time to review the main aspects of the overall plan and some of the specific activities planned for 2008. Further detail on the 2008 activity plans are discussed in the Presidential Address.

The actuarial profession is growing and diversifying with Increasing Influence. Actuaries have a strong reputation for ethics and sound advice. The profession and the Institute are broadly recognised and actuaries have a reputation for highly-skilled advice. The Institute is valued and highly-regarded by its members, with high member capture and retention rates. The actuarial profession is enjoying global and regional success.

What Success Looks like

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■ ■ ■ ■ ■ ■

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The number of actuaries is sound and growing, including in new areas. Sound remuneration. Senior role numbers increasing. Good flow of quality and diverse new entrants, Associates and Fellows. Limited negative press. Actuaries recognised by business and public sector for ethics and reliability. Actuaries valued for their contribution to business. Institute sought for contribution to public debate. Sound flow of R&D. Members value Institute services and education. High membership take-up. Low lapses. Volunteer numbers are maintained. Volunteers are effective and feel valued. Regional societies meeting the demand for actuaries. Institute contributing to and shares in regional success. Good global progress by the profession.

What is our aim?
The overall objective of the plan is to determine the high-level strategic focus areas and initiatives for the Institute, together with broad action plans that will be targeted over the next three years. More detailed and specific actions are developed from these within the Institute’s annual business planning process. Using the Institute’s vision and mission as a base, the taskforce started its work by revisiting the questions:

The taskforce then assessed the gap between where we are now and where we want to be and developed the key strategic imperatives, opportunities and high-level actions that form the backdrop for the evolution of the profession and Institute over the next three years.

The Big Picture
The taskforce has produced a ‘Strategic Plan on a Page’. This offers a high-level summary of the overall goals, risks, strategies and key actions emerging from the strategic plan review. It tells us “what is important” and, used as a reference point, will help ensure ongoing and strong focus on the outcomes desired, rather than allowing the detail to take charge or less important things to take priority. The Strategic Plan on a Page identifies the following four key imperatives:

What do we want to achieve? What does the vision mean? If we achieved our vision, what would it look like, how would we know we had got there, how do we know if we are getting closer?

As a result of their consideration, five goals were established (See box 1) and a picture of what success looks like mapped out (see box 2)




1. Institute as a ‘Service Provider’
The Institute itself needs to be more clearly-focussed on being a service provider. Its culture, modus operandi and drivers of behaviour need to be more clearly focused on its member value proposition, not just on providing an ‘actuarial licence’.
Imperative: Opportunity: Responsive to change and resilience to licence loss risk. Maximise actuarial community attraction and retention.

4. Relevance and Quality
The existing important focus areas of ‘relevance’ (R&D), ‘quality assurance’ (professional standards and professionalism) and ‘regional engagement’ (involvement, support and co-operation) remain strategic priorities.
Imperative: Opportunity: R&D to maintain our position. Reputation is crucial. R&D to expand domains. Regional success opportunities.

To achieve this, the Institute needs to provide membership value across the range of different member segments. This will include addressing education and designations issues, geographical service delivery (CPD etc), an efficient and cost effective Secretariat, adequate user friendly IT infrastructure.

Without adequate R&D to maintain and develop our science and skills or maintaining our reputation success will be shortlived. Involvement, support and co-operation in our region is an imperative to underpin our long-term global relevance and future.

2. Enterprise Risk Management (ERM)
ERM as a speciality is a clear growth opportunity relative to the vision and its place in our existing skill set is a risk to our existing brand if we take too little action.
Imperative: Opportunity:

Key Action Areas for 2008
Some of the key strategic implementation focus areas for 2008 will include: ■ Implement outsourcing the Investment and Finance Courses (for 2009). ■ Implement ‘insourcing’ the remaining Part III courses within the Institute. Pilot program for Semester II in 2008. ■ Commence a review of all our education syllabi. ■ Run the new five-day CPD in ERM multiple times in 2008. ■ Progress ERM syllabus for Part III. Plans for embedding ERM in other courses. ■ Operationalise the global ERM designation Statement of Intent. ■ A Member Services and Educator Taskforce has been appointed. This will investigate what change is needed, how to implement it, change management and transition risks. The taskforce is to complete its work in 2008. ■ Progress PS400 review and the plethora of superannuation guidance notes. ■ Employer visits program. Collecting feedback. Market the profession. ■ Investigate and implement promotion to school students and careers advisors. ■ Extend regional liaison and engagement. Support development of regional associations. Look to establish a regional cooperative for IAA involvement. ■ Support of key IAA initiatives (e.g. international accounting standards and IAIS initiatives). China liaison and support for full IAA membership (China and others). ■ Continue with the IT infrastructure investment for Institute. 2009 completion target.
Greg Martin

Protecting our existing ‘brand’ requires recognition in ERM.
Broader success in ERM is a clear growth opportunity.

If we are going to succeed in delivering high value professional ERM skills to the marketplace and not be ‘pushed aside’ we need to apply serious effort to establish our presence and win a satisfactory place in the marketplace.

3. Pre-Fellowship Education
We need to rethink our overall pre-qualification education (Parts I, II, III). Current Part III delivery issues (volunteer strains and pass rates), increasing university interest, the desire to improve communication and other skills of new actuaries, positioning ERM within our base skills, all point to a reassessment.
Imperative: Opportunity: Part III delivery sustainability. Overall quality maintenance / building. Better outcomes (skills, pass rates etc).

Align content, methods, delivery and examination standards and approaches with the clear outcome wanted. Think strategically about our education products.

It looks like another busy year! ▲
Greg Martin


D E C E M B E R 2 0 07



Contrasting Financial Management Practices
in Banking and Wealth Management

has a regulatory capital requirement that can be thought of as comprising two components: ● a buffer to cover adverse experience, related to in-force volumes; and ● a component to eliminate the recognition of margins that are expected to be earned out of future premiums, which declines over the lifetime of a contract. Hence, the aggregate regulatory capital requirement for insurance business declines as the business matures, which makes return on capital measures difficult to interpret.


he Australian wealth management industry differs from the global industry in that a relatively high proportion of the industry is owned by banks. This has arisen both because the major Australian banks have acquired established wealth management businesses and because of the success that banks have had in distributing wealth management products to their customers.
This is the first of two articles, in this first instalment we focus on a number of specific aspects of financial management for wealth management businesses; contrast the historical practices of banks and wealth managers in these areas; and consider whether there is a best practice approach that could be applied to both types of businesses. In the second instalment we will focus on risk management for wealth managers and banks.

Financial Management Metrics
Cost Ratios

The cost-to-income ratio (‘CIR’, the ratio of operating expenses to operating income) is a standard metric in banking that is used to track relative expense efficiency over time at a business line level (or at an aggregate level if business mix is relatively stable). However, it is not universally used in wealth management (and currently there is no universal definition of either costs or income for wealth managers). Other cost ratios (expenses as a % of a relevant measure of business volumes) are more commonly used. The table below provides an outline of current market disclosures from a number of wealth managers.
Cost Ratio Disclosure Practices
Company Business Line Cost Ratio

Financial Management Practices
For the financial services industry there are a small number of headline measures that are focussed on for public reporting and that form the basis for benchmarking performance against peers. Some of these measures are common across industries (such as operating profit), others are industry-specific (such as net interest margin in banking). The differences in these measures between banks and wealth managers have arisen partly due to historical reasons that are no longer valid but also partly due to real underlying differences in the businesses. These include:
Incidence of Revenue vs Expenses: In general, banking and


Aggregate business Aggregate business Aggregate business Investment business

CIR (equal to ‘controllable’ costs divided by gross margin) CIR CIR Operating costs to net operating income Total costs to average funds under management

Life insurance business Cost to average in force premiums MLC Investment business Cost to average funds under management and administration

Life insurance business Cost to average in force premiums

funds management products do not have high variable acquisition costs (or they are matched by upfront fees), which leads to a reasonable matching of revenue and expenses. Life insurance business (particularly retail insurance business) generally has high variable acquisition expenses, which generates a significant mismatch and leads to a long expense recovery period.
Pattern of Capital Utilisation: Banking business and funds

Source: Based on the authors’ interpretations of detail provided in published investor reports.

management business both have capital requirements that are closely correlated with business volumes. Life insurance business

We recognise that there are difficulties in setting appropriate universal definitions of cost and income for wealth managers. However, we consider that there is scope to develop a standardised definition for investment business comparable to the ratio used in banking. For risk business, the nature of the business tends to suggest that alternative measures, such as expenses as a percentage of premium revenue, would be more appropriate.




Return on Equity

Return on Equity (‘RoE’) has not received much focus historically in wealth management. For life insurers, this is possibly because of weaknesses with accounting profit measures and also because of the widespread use of value-based performance measures. In funds management, this may be due to the fact that very high values are attainable given the ability to generate significant profits with virtually no capital. While return on equity (ratio of operating profit to balance sheet equity) can be applied across all business lines, there are two issues to recognise: ● for insurance business, there is an uneven pattern of RoE over the life of a contract, implying that the RoE for a portfolio should change as that portfolio matures (see the diagram below); and ● levels of RoE are very dependent on the peculiarities of each business line and cannot be directly compared across business lines.

In contrast, value-based performance measures are not commonplace in banking. Some banks have used proxies for value-based measures (for example, measures such as EVA); however, these have not had universal appeal. A number of banks have also considered alternative return on capital measures that incorporate a measure of risk; such measures include RAROC (risk-adjusted return on capital) and RORAC (return on risk-adjusted capital). Given the discussion above on RoE, we do not consider that there is a case to downplay the use of value metrics in wealth management. They serve an important role in focussing management on long-term value creation. We also consider that these measures could be applied selectively in banking or stand-alone funds management businesses where profit profiles are expected to be uneven. However, we do not see a compelling argument to introduce broad-based use of value measures in banking, primarily due to the difficulties of broad-scale implementation and the modest improvement in information that such an approach would provide to management.

We conclude that funds management business lends itself to the application of financial performance metrics that are aligned with those used in banking. However, this is less the case with life insurance business, where there are practical difficulties in coming up with a cost-to-income measure and where a measure such as RoE requires careful interpretation. These issues stem from the fact that retail insurance business, in particular, has high variable acquisition costs that are recovered over an extended period. Given this, value-based metrics will continue to be key performance measures for such business. Finally, while there may not be a strong case for the widespread application of value-based metrics in banking, these measures could provide valuable additional insights for activities where there is a mismatch between the incidence of fees and expenses. ▲
Robert Daly

Value Measures

Value metrics have been the primary measure of financial performance in life insurance and are widely applied to funds management businesses within wealth management groups. The life insurance industry has historically used value of new business and embedded value metrics as its primary measure of financial performance. While life insurance accounting methods have improved, value measures are still widely used: ● Despite improvements in accounting methods, some of the historical problems remain. For example, in some situations, high levels of policy surrenders can lead to accounting profits, whereas the reality is that these surrenders are destroying value. ● Value-based performance measures create a strong alignment of interest between management and shareholders. ● There are wide variations across product types in the relationship between “value of new business” and first year reported profit.

Robert Daly

Anton Kapel

Copyright 2007, the Tillinghast business of Towers Perrin. All rights reserved. A licence to publish is granted to the Institute of Actuaries of Australia.


D E C E M B E R 2 0 07


Anton kapel


Actuary Australia Index

Titles Articles Micro Insurance – helping the world’s poor through insurance The New Super Landscape A Marriage Made in Heaven Target Capital in General Insurance 20 Years On… Anniversary of the Stock Market Crash Experience Investigations How Far Can Australia Reduce its Greenhouse Emissions? Maximum Event Prevention Contrasting Financial management Practices in Banking and Wealth Management Business Luncheon with John Trowbridge Living With Your Superannuation Lump Sum Rich Retirees Rich Retirees – Achieving A Balance Whither Pension and Annuity Products Stern Review on the Economics of Climate Change Quantitative Risk – Actuaries’ new sister profession? Stern Review on the Economics of Climate Change The Stern Review’s Assessment of the Economic Costs of Climate Change Superannuation Benefit Projections – Sensitivity Testing Green Fields: Greenhouse Gas – how much more can we emit? Hello Dolly Contrasting Financial management Practices in Banking and Wealth Management Risk – What Risk? 1987 – Crashing the Convention A Swim for Life Actuaries and Risk Management Coffee With the President Strategic Plan and Vision for the 2008 Presidential year The Australian Government Actuary Product Development – The Battle for Baby Boomers Enterprise Risk Management and Exploring Best Practice in General Insurance Pricing and Underwriting Birth of the Managed Fund Quantitative Risk – Actuaries’ new sister profession? Postcards from the edge – modelling in the tail Superannuation Fees Broad Horizons Once upon a time… Modelling Climate Economics: We Need Better Radar Unit Pricing Guide to Good Practice: A year on Hello Dolly Knowledge or Skills...or Both? Financial and Actuarial Mathematics Do Accident Compensation Schemes need an Approved Actuary? Postcard from Italy International Recruitment Superannuation Benefit Projections – Sensitivity Testing Communication as a Key to Success Communication as a Key to Success Just An Actuary Minute! Market Value of General Insurance Liabilities Actuaries in Super It’s Time to abolish Superannuation Trustees? Superannuation Benefit Projections – Sensitivity Testing Actuaries in the Media Governance Actuarial Activities in Western Australia – Curtin University Accreditation Public Affairs Update Changes to the Code of Professional Conduct Council comings and goings Council Gets on Board CPD Compliance Survey Ever thought about joining Council? Introducing our new Council Members Communications Taskforce Report and Update Practice Committees, Courses and Conventions 10th Commonwealth Study Conference – Part II Adventures in Risk – 2007 Biennial Convention Update from the Risk Management Practice Committee The Final Step Adventures in Risk – 2007 Biennial Convention Biennial Convention 2007 – Adventures in Risk General Insurance Pricing Seminar ASTIN 2007 Commercial Actuarial Practical Course 10th Commonwealth Study Conference – Part I





Author Armstrong, Kirsten Asher, Anthony Atkins, Geoff Atkins, Geoff Barker, Mike Brien, Anthony Burge, Andrew Cockburn, Alex Daly, Robert (co–author) Davis, Darren Dunsford, Geoff Dunsford, Geoff Dunsford, Geoff Dunsford, Geoff Durant, Pauline (co–author) Franklin, James (co–author) Green, Jill (co–author) Green, Jill Grenfell, Colin (co–author) Hickling, Martin Jones, Chris (co–author) Kapel, Anton (co–author) Kerr, David Lyon, Jenny Lyon, Jenny Lyon, Jenny Lyon, Jenny Martin, Greg Martin, Peter Matterson, Wade Matthews, Andrew McDonald, Ron Mike, Sherris (co–author) Neels, Heathcliff Rice, Michael Roberts, Zac Robinson, Ian Rowley, Fred Rush, David Shaw, Rick (co–author) Sheperd, John Sherris, Michael Simpson, Lisa Smee, Alan Spink, Karen Stevens, Ray (co–author) Sun, Yan (co–author) Teh, Sulyn (co–author) Traverso, Lesley Truslove, Allen Walker, Wayne Wickham, Darren Wickham, Darren (co–author) Wilson, Rebecca Bowman, Kevin French, Philip Peters, Anne Peters, Anne Peters, Anne Peters, Anne Peters, Anne Peters, Anne Traverso, Lesley Batliwalla, Sarosh Bayliss, John (co–author) Bennet, Caroline Campbell, Donald Collins, Elaine (co–author) Convention Organising Committee Damm, Bevan Finnis, Dave Higgins, Andrew Linfoot, Andrew

Edition December March November May October May September November December September September October November March April March April December May June August December November October October July March December April October December November March June September September December May June August March June July April August May July July November July July August May May June October May July April July June December April July October August April October August December March May June

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Titles Practice Areas, Courses and Conventions (continued) Enterprise Risk Management Course Professionalism Course XIth Accident Compensation Seminar 2007 Enterprise Risk Symposium Commerce Actuarial Practice – Residential Course Letters to the Editor Actuaries in Superannuation Investment Guarantees Defined Benefits Unwelcome Adventure No More Global Warming Superannuation Benefit Projections Stern Rebuke for Stern Review Total Shareholder Return and Return on Capital Riches to Rags Farewell to Old England Agreement to end of Super Trustees Old Actuaries – imbibing away, not fading away Actuaries in Super Close Affinity Remembering Sid Super History Lessons Marked to market Actuaries Unearthed Greg Brennan Andrew Brown Peter Brown Bevan Damm Elaine Collins James Hickey Sim Ng Trevor Thompson Ramani Venkatramani Chris White Obituaries Richard Bruynel Sidney William Caffin Keith Jones William David Owen Les Oxby Colin James Stevens Student Columns Report from UNSW The Trowbridge Deloitte Problem–Solving Competition at Macquarie University Actuarial Studies at UNSW ANU Student Activities Melbourne University Actuarial Students’ Society Bowling Night Actuarial Students’ Society Report from UNSW ANU Student Activities Epidemic strikes Macquarie University Announcements, Media, & Notices Actuary of the Year Appointment – Actuarial Education Consultant Appointment: Director of Professional Education ARCA – Position Vacant Call for Expressions of Interest Casualty Actuarial Society Annual Prize Geneva Association / International Insurance Society Research Award GIPC Newsletter IAA Highlights Media Snapshot Media Snapshot Melville Financial Services Forum Prize Prizes and Awards Provisional Accreditation – Curtin University Public Eye Monthly Columns Ask Gae CEO Report Editorial Education Update Media Snapshot Notes from the President’s Blog The Actuarial Pulse Two Ducks Swimming

Author Lyon, Richard Meyricke, Ramona Reeves, Scott Whiting, Bronwen Wong, Jennifer Asher, Anthony Barker, Mike Block, Richard Brien, Anthony Carroll, Peter Dunsford, Geoff Dunsford, Geoff Fitzherbert, Richard Jones, Eddie Lewis, Graham Lewis, David Loader, Derek McNeice, David Sawkins, Roger Sawkins, Roger Sawkins, Roger Wakeling, Andrew

Edition December September May May October March December March November December September August July August December October October September December December August November October June August September July May December March November April

Page 10 4-6 12,13 16,17 10 29 34 29 30 35 28 27 29 26 34 30 30 28 34,35 25 27 30 11 7 11 11 7 7 11 7 13 11 31 31 30 29 30 29 29 29 30 24 24 30 29 24 30 28 3 30 31 28 28 30 31 19 30 30 30 7 28 28

Geisler, Richard Trowbridge, John de Villiers, Jacques White, Chris Salmon, Ian Salmon, Ian Crawford–Ash, Simon Dunn, Robert Hunt, Laura Mallet, Joel Ong, Christopher Ong, Christopher Sautelle, Eleanor Yang, Yuuichi Weiwei Zhang, Wei

August October September April April September December November July October September June December October May October July March September April August June September June October August March April April November

Robinson, Gae Maroney, John Lyon, Jenny Latham, Philip Rowley, Fred Editorial Committee Woods, Stephen


D E C E M B E R 2 0 07



New Council Members
■ Mark Baxter
Mark has over 25 years’ experience in the financial services industry in a variety of senior roles in the United Kingdom, Hong Kong and Australia. Mark has recently taken on the position of Group Head of Compliance for CBA after running Operational Risk and Compliance for the Premium Business Services Division of CBA. His current role encompasses the regulatory and compliance risks across the entire CBA Group. Prior to joining CBA, Mark was part of the leadership team of the Australian Prudential Regulatory Authority (APRA). He was responsible for the overall supervision of a portfolio of major banks and insurers and was a member of APRA’s Basel II governance committee. Mark’s responsibilities at APRA also included managing the liaison between APRA and ASIC (Australia’s securities regulator) and serving as APRA’s representative on the Joint Forum (a global committee of regulators reviewing various aspects of conglomerate and cross sectoral supervision – the members include the FSA, the SEC, the OCC, the US Federal Reserve and regulators from across Europe and Japan). Mark also spent 12 years with Mercer Human Resources Consulting which included six years as Managing Director of the Hong Kong, Beijing and Shanghai operations. His specialties during that time were investment, employee benefit and pension fund consulting as well as developing a range of human resource and consulting offerings for the mainland China market place. While in Hong Kong, Mark was a member of the Hong Kong Government’s ‘Panel of Experts’ who advised on the development of Hong Kong’s Mandatory Provident Fund system. Mark graduated in 1983 from Macquarie University with a Bachelor of Economics after being awarded a number of prizes for academic excellence. He qualified as a Fellow of the Institute of Actuaries of Australia in 1988. Mark and his partner Geoff collect contemporary Chinese and Australian art and are keen cyclists.

Introducing our

■ Anthony Carey
Anthony is currently the General Manager, New Customer Solutions at MBF, Australia’s second largest provider of Private Health Insurance, designing and developing new customer focused product and service solutions across MBF’s various lines of business. He has previously been MBF’s General Manager Actuarial Services, Appointed Actuary for MBF Life Ltd and Head of Strategy for MBF’s financial services businesses. Prior to joining MBF, Anthony has held various senior roles in actuarial, product development & management, strategy and consulting. He has previously worked at Tower Australia as National Manager Product Strategy, the Commonwealth Bank in two roles as Deputy Chief Actuary and Executive Manager Personal Life Insurance Products, in consulting roles at both Tillinghast and PwC and in various actuarial and product 




management roles at Prudential Australia. Anthony has been actively involved in the Actuarial education process, including membership of the Institute’s University Accreditation Committee. He is currently Chief Examiner for the Part III Life 2B course, having previously been External Examiner for the Part II Exams at Macquarie University and the University of NSW for several years. Anthony has been a member of the IFSA Life and Risk Management Board Committee since 2005 and has served on several IFSA working groups. Anthony qualified as a Fellow in 1995 and has a Bachelor of Economics from Macquarie University (1991) and a Masters of Management from the Macquarie Graduate School of Management (2000). Anthony and his wife Marina have a 21/2year old daughter and an eight-month-old son – ensuring they get very little sleep!

■ John Newman
John is a Director and Principal of Professional Financial Solutions (PFS). He holds an Honors degree in Business Science and qualified as an FIAA in 1982. He started his actuarial career with E S Knight & Co, which was acquired by Mercer in 1985. He became a worldwide partner and was the head of the Retirement practice in Australia and New Zealand until 2004 when he left and joined PFS. John has extensive experience in superannuation and benefits, having consulted to a wide range of stakeholders in this area throughout his career and been involved in the establishment of a major commercial master trust. He advises on strategic and operational issues in the Financial Services industry, specialising in superannuation and insurance and has a particular focus on risk management and governance matters. He is married and has three sons and is a keen sailor.

■ Chris Latham
Chris has worked in general insurance and accident compensation since 1980, after starting his career in superannuation and pensions. He admits that the transition to general insurance was a bit of a struggle as he tried to accept the replacement of the deterministic view of life with a stochastic one. He was fortunate enough to work with Greg Taylor for some 13 years at various consultancies and has been with PricewaterhouseCoopers since 1989. He has provided advice to major insurers, reinsurers and accident compensation schemes. At some stage or another he has advised accident compensation schemes in almost all Australian jurisdictions, as well as in New Zealand, PNG and South Africa. He says that he actually enjoys involvement with public servants, who have the luxury of being able to think beyond an annual profit figure. In 1992/93 he spent a year in London trying to understand the reinsurance market and its peculiar jargon, becoming involved in many post-Hurricane Andrew insurer collapses. He also tried to introduce his colleagues to modelling techniques beyond chain-ladder and Bornheutter-Ferguson and to the logic of a present value approach to reserving. He is keenly interested in the role of the actuarial profession in society. Our current position is one to be valued and about which we should not be complacent. We should make a greater effort at effective communication with our employers/clients and in ensuring that we are seen to be making a positive contribution to solving real problems.

■ Blair Nicholls
Blair is the Chief Actuarial Officer for the QBE Group. He is part of QBE’s Group Executive and is involved in areas such as business planning, reserving and pricing, catastrophe aggregate accumulations, reinsurance management and purchasing, commutations, investor relations, acquisitions and DFA. Blair has been with QBE for around 14 years and has undertaken a variety of roles. These include having recently spent three years in QBE’s London office as the Chief Actuary for QBE’s European Operations and seven years in QBE’s Australian operations. Prior to working at QBE, Blair was at a consulting firm. He has developed knowledge of QBE’s worldwide operations and the general insurance markets in the many countries in which QBE operates and writes business. Blair has authored and co-authored a variety of papers including one on DFA at the recent Institute of Actuaries of Australia Biennial Convention in Christchurch, New Zealand. He has also presented at a variety of general insurance forums both in Australia and overseas. Blair has a Bachelor of Economics from Macquarie University, AMP from INSEAD, is a Fellow of the Institute of Actuaries of Australia and the Institute of Actuaries (UK) and member of the Institute of Directors (UK). Blair and his wife Kate have three children. ▲


D E C E M B E R 2 0 07 


Older and wiser

Two Ducks Swimming

with Swoodsy

Omega (AA 124) – Solution
What is the next number in this (ongoing) series: 10, 9, 60, 90, 70, 66, 96, … ? Omega is the last letter of the Greek alphabet and therefore this was a fitting title for the last puzzle of the year, which was based on letters. The number of letters to be precise. Written in full, the list becomes: Ten Nine Sixty Ninety Seventy Sixty-six Ninety-six The series lists the largest ‘common’ numbers with an increasing number of letters in their name. Having identified the progression, the next challenge is to find the largest number with 10 letters. Strictly speaking, that number is ninety-nine. Without quibbling over what constitutes a ‘common’ number, I also accepted ten billion – arguably the list could then have included “ten dozen” or even “ten gross” but why fret over semantics? The following readers had my number: Jason Yeung Michael Kogan Chris Wood Matthew Kippen Tony Wang Phil Hitchcock David Thé Kelvin Hii John Seenan Mark Heydon Mark Robinson Shane Ewen Charles Qin Paul Emanuel Andrew Parker Leo Economides Steve O’Reilly Roger Bohlsen Ninety-nine bonus points were available for noting that if ninety were replaced with googol, an alternative solution to the puzzle is googolplex. And a googolplex bonus points were available for noting that seventy ought to be replaced by the largest defined number of all: the Swoodsy (AA 91). Disappointingly, no one scored the googolplex bonus points! The final Two Ducks puzzle winner for the year was David Thé, who scored $150 to spend at the restaurant of his choice (courtesy of the Institute).

A study published in the June 2007 issue of Science magazine has concluded that firstborn children are smarter than their younger siblings.* IQs of firstborns were statistically higher (103.2 on average compared to 100.9 for second-borns, 99.1 for third-borns and so on). Data for subsequent siblings have been withheld as they probably wouldn’t understand anyway. The study covered 250,000 Norwegian army draftees – who must take mandatory IQ tests. It corroborated the results of a separate 1973 Dutch study of 400,000. Several theories are posited as to why this occurs: ● The confluence model suggests that older children benefit from tutoring younger siblings. ● The dilution model suggests that firstborns benefit from more attention and money before parental resources become shared with subsequent siblings. ● ‘Niche partitioning’ suggests that because firstborns are treated as leaders within the family, younger siblings look for other ways in which to be noticed (eg sports) So what is 2.3 IQ points between siblings anyway? According to US scholars, this translates into 20-30 SAT points (scores out of 800) or about a 30% increased chance of getting into an Ivy League university.

The Dead Pool 2008
My other pet competition The Dead Pool is about to kick off another year. Simply nominate 10 famous people you think may die during the year in order to be in the reckoning for substantial cash prizes. For more information, email me at: <>.

I’ll be back
A special vote of thanks is extended to the Institute for providing the prizes for the column each month. Whilst the Omega puzzle was originally intended to herald a definitive end to this column, after some coercing and convincing, I have agreed to return in 2008 for a final year of Two Ducks. So I look forward to one more season of swimming. Until then, best wishes for a happy and safe new year. ▲
Stephen Woods

* Swoodsy is a firstborn child. His IQ-challenged younger brother is a mere doctor. 



with Gae Robinson
G a e . R o b i n s o n @ f i n i t y. c o m . a u
Gae answers your serious and not-so-serious questions about life in the office, career, study and coping as an actuary in the real world

Saving the Planet (Not)
Despite accepting that global warming is real and that significant action is desperately needed, I find myself making absolutely no changes to my life. I read all the articles in the papers about what I should be doing and all I do is feel guilty. Can you help me? Join the club! I reckon at least 50% of the population is in the same boat. We’ve seen the news, read The Weather Makers, been bombarded with information about practical steps we should be taking – green electricity, hybrid cars, solar cells, rainwater tanks etc. And because we are all so busy and because it seems so hard to decide what to do first or how to do it, we put it all off. There are days when you think “well, it’s up to the government to just make all our electricity green and then we’ll all be fine won’t we?” And (increasingly rarely) days when you hope that perhaps that the members of the Flat Earth Society are right and it’s really not as bad as all the scientists make out. Or that there’ll be some miracle of carbon sequestration that makes the problem go away! But if you accept that sooner or later we all have to take drastic steps (and we possibly can’t trust any government to do enough…) there’s still other factors that prevent us from acting. If all my friends and neighbours aren’t changing their lives, why should I change mine? Or, if I’m the first one in my street to make radical changes to my life, won’t that make me look like a total weirdo? I can only encourage you to take the steps that are the easiest, like: ● make a few phone calls and switch to green electricity (boy, did that feel good!) ● consume a bit less of the things that you don’t really need – meat, clothes, plastic toys for the kids, soft drink (if I were running the world, soft drinks would be gone tomorrow – so much energy and resources spent on making people fatter and unhealthier!) ● use your car a bit less For the harder things that require more research – what about joining forces with a few friends and pooling your efforts? One can look into rainwater tanks, one solar cells, etc. And hopefully you will find some save-the-planet measures that are fun for you – share a shower, don’t shower at all (some days), grow your own vegies, whatever!

Generation Clash?
I’m in my 40s and I manage a small team of actuarial people, most of whom are in their 20s. We get on well most of the time but sometimes we have issues. Could it be all this Generation X and Y business?

In the current workforce we’ve got people from four ‘generations’: pre-Boomers, Baby Boomers (born 1946 to 1964), and Generations X (1965-1980) and Y (1981-1995). A Google search yields plenty of reading material about the generations and your HR person will have some too. You’ll read about the background of each generation – the world they grew up in – and how it has shaped their attitude to life and to work. You’ll learn that: ● Boomers often get ‘sandwiched’ – having to care for both elderly parents and young children at the same time. And they often experience high anxiety about aging and death and live in denial of them ● Gen X were the first ‘latchkey children’ and are marked by their lack of optimism for the future, nihilism, cynicism, scepticism, alienation and mistrust in traditional values and institutions ● Gen Y are ambitious, hardworking, technically-savvy and reward-driven but have been found to be demanding, impatient and bad at communicating Of course it is an oversimplification to attempt to explain any individual’s behaviour and attitudes solely by the decade when they were born. It’s a bit like astrology – as you read a description of your own generation, you’ll say “yes, that’s me!” to some bits and “no way!” to others. But much of it makes sense and it may help you look at the world through your younger colleagues’ eyes. All of this will get you only so far with your team, though. Rather than go to the textbooks to understand what they’re looking for in their work and careers, talk to them. If you find their behaviour odd – ask them about it! And give them opportunities to give you feedback and ask you questions too. ▲


D E C E M B E R 2 0 07 


Adapted from a paper presented at the recent Institute Biennial Convention in Christchurch, NZ.

Enterprise Risk Management
and Exploring Best Practice in General Insurance Pricing and Underwriting

attention. For example, commercial lines insurance with greater heterogeneity of risk has higher underwriting and acceptance risk at point of sale no matter how sophisticated the pricing than personal lines where the risk focus may be more monitoring accumulations to storm and other perils. We looked at two empirical studies showing that for insurance companies the company to company variation tends to be greater than year-over-year variation for a representative company. This speaks of the importance of pricing and underwriting practice and highlights the need to identify industry best practice.

2. Right Conversations
What are the possibilities? What is the best ‘fit for purpose’ action? “The possibility conversation focuses on what we want our future to be as opposed to problem solving in the past…This frees people to innovate, challenge the status quo and create new futures that make a difference” – Peter Block, Author, Flawless Consulting ERM is about learning so we can create the best possible outcome. This can be achieved by having the challenging conversations, facilitated by ERM models, to identify the possibilities. Our approach consisted of interviewing a range of industry participants with a particular focus on the question, “What is best practice in commercial insurance underwriting and pricing and what is cost benefit of achieving best practice?” One of our overall insights from the interviews was that best practice focuses on a range of issues and not technical pricing alone. Indeed, best practices focus on the whole risk-acceptance decision-making process. (see Fig 1)


or general insurers enterprise risk management (ERM) in pricing and underwriting is paramount to success. Our paper focuses on ERM ‘from the trenches’ and specific to pricing and underwriting in three parts:

1. Communicating the ERM Territory
What is the goal? Are we acting congruently? “The man who is tenacious of purpose in a rightful cause is not stricken by the frenzy of his fellow citizens” – Horace, 1st Century BC ERM starts with achieving clarity of the object or goal. Whatever the object, ERM offers an approach to minimise dissipation of effort and ensure highest efficient use of energy directed to that aim. By looking at the whole business decision-making process and the relative impacts on the financial performance, we can gain insights on which part of the process require more
Figure 1 




The insights from the interviews resulted in us developing a framework in the form of a best practice radar to evaluate and understand best practice. Below is an illustration of the radar with a hypothetical assessment of an insurance practice against best practice. The spokes of the wheel represent areas of best practice. The wheel is divided into four quadrants with the top half representing capabilities supporting judgment and the bottom half of the circle representing implementation capabilities. The T 4 model we adapted from some of the theory of Elliot Jaques and models of work based on conversations with Andrew Olivier of The Working Journey.
1. Technical (Know How) – This is the area actuaries focus on

most. It includes – data, risk pricing and analytics firepower and exposure information. It is a competitive disadvantage to be behind the market but sophistication in this quadrant alone will not create long-term sustainable competitive advantage.
2. Tending (Applying the Know How) – Characteristics included

world risk parameters (qualitative/intuitive). Aspects of the transactional excellence to get results include: ● Basing holistic decisions on lead indicators of: volumes, rate per exposure adequacy and portfolio performance in frequency, size and loss ratio. ● Avoiding the ‘winners curse’ – “Mis-pricing has an insidious dimension called the ‘winners curse’ because the likelihood of ‘winning’ severely under-priced business is many times the hit ratio for fully priced business. Under-priced business may represent 5% of quotes but 20% of your portfolio.” McKinsey&Company, The Journey Revisited, 2004 ● Entrepreneurial underwriting with an external focus involving innovation and adaptation and being willing to sit with uncertainty and look for creative solutions when times are tough, not abdicate pricing accountability. ● High training standards supplemented by great tools and by clear communication of objectives and constraints.

“The only secure relationship we can have with the future is on the footing that we cannot foresee it… If we cannot foresee the future then we cannot! No proliferation of polysyllables or multivariate analysis will succeed (other than in deceiving ourselves)… we should be able to home upon our targets with alertness and sensitivity. And that is all we can hope for.” – Frank
Redington, UK Actuary

close ‘centre’ and ‘point of sale’ underwriting communication. Best practice showed a willingness to try things on a small scale, learn and adapt. ‘Adapting’ and ‘Lead Indicators’ were key words mentioned.
3. Tasking (Clarity of Goal) – This one was frequently

summarised as ‘discipline’. Clarity of the ‘right goal’, acting congruently with the goals in areas such as resources or knowing where to ‘draw the line’ in considerations such as price versus growth.
4. Trusting (Culture) – Key mentions were around: Right

empowerment – point of sale decision support, Right Spirit – ‘trust and verify’, a welcoming of scrutiny and a learning approach not ‘binary’ around price and technical but the capacity to sit with uncertainty resulting in creative solutions.

3. Producing Results:
What are the ‘lead’ indicators? How can we adapt and be resilient not perfect? “T.E. Lawrence (of Arabia)’s aphorism that ‘Making war upon insurgents is messy and slow, like eating soup with a knife’ is difficult to appreciate until you have done it…Knowing how to win is a different thing from implementing the measures required to do it” – John A Nagl, Author – Learning to Eat Soup with a Knife,
Lessons in Counter Insurgency.

ERM is an approach that is about maximum efficiency and minimum dissipation of effort towards achieving goals. Applied to pricing and underwriting in commercial insurance ERM can contribute to a well-organised framework that enables teamwork. We did not write this article with a ready-made solution to ERM and applying it to commercial pricing and underwriting. We did have some great conversations and input from many in the industry that helped establish a useful framework for assessing the holistic range of best practice and facilitating discussions. We wrote the paper to put some of the lessons and stories together and express our gratitude to those who contributed their insight and wisdom. ▲ Presenters: Andrew Matthews Tony Newton Paul Cassidy Shaun Wang Robert Faber
Andrew Matthews

Implementation is hard work. Underwriting is the application of actuarially developed information (quantitative) to the real


D E C E M B E R 2 0 07 

Andrew Matthews

paper report

Once upon a time…

marketing department have advised you that unless we can sell it for $5, we shouldn’t bother. Your advice is $5 might ensure we hit sales targets but we’ll end up losing money. Is that right?

IAN Yep, spot on Maggie. $5 is enough to meet the direct costs of
manufacturing, marketing and selling still leave you with a margin of perhaps $2 but that’s nowhere near enough to cover your unit overhead costs – you know: finance people, CEO, legal, HR and so on. What I mean is that I reckon the unit overhead costs of the business are about $4 per sale and so each sale would lose $2. And by the way Maggie, don’t get any ideas about just ignoring overheads for this product and taking the $2 straight to the bottom line. That’s called marginal pricing and is a big ‘no-no’ because it’s the road to ruin. Ask my boss, he’s seen it all before.
MAGGIE Oh, you’re absolutely right about that Ian. You wouldn’t catch me there.

Maggie is the vivacious and gorgeous product manager. Ian is the dashing and handsome pricing actuary. They’re meeting to discuss Ian’s advice regarding a pet product initiative of Maggie’s.

But look… coming back to your first point: you do realise that I wouldn’t expect our cost base to increase because of this new product. So wouldn’t increased volumes mean the unit cost would be lower than $4?

MAGGIE Ah Ian, hi! Thanks for coming so soon. Help yourself

IAN Yeah, strictly you’re right Maggie but I reckon we need to
err towards conservatism since, who knows, you could end up dropping one or more of the other products and then you would be left charging too little for the product.
MAGGIE But Ian, didn’t you just say that the Marketing

to the bar.

IAN Thanks Maggie. Cheers!
MAGGIE Now Ian, thanks for your report. Very... um…

very… interesting reading. Very… detailed. Not what I wanted to hear, mind you, I’m sure you’d realise [chuckles] but… yes… interesting. And detailed, of course! Yes, very detailed.

Department reckon we can’t charge any more than $5? So what we would need to do in that case is find some other sources of revenue to replace the ones lost. In fact that’s what we should be doing anyhow so we can leverage our competitive advantage.

IAN Thanks Maggie and, yeah, I suppose it’s not what you
were expecting but you understand that that’s how I see it. You wouldn’t want me to be anything but straight with you, would you? Professionalism and all that! Ha!
MAGGIE Yeah, absolutely. You know me. But I do have some questions – you know, just so I’m sure I fully understand where you’re coming from.

IAN Yeah, I suppose so. But Maggie you should remember
something else. Don’t forget that when the product profit measures are reported, you’ll find that the profit of the other products has increased. It’s just how expense apportionments work. Your new product will pick up some of the allocation that they currently bear. The other product managers will love you! So I suppose if you want to take that into account – and I haven’t, I must admit, measured the impact – perhaps you could get away with… um… $5.
MAGGIE Now you’ve actually highlighted two things I wanted

IAN Sure Maggie. Go for it!
Okay. Now, as I understand it, you’re saying this – correct me if I’m wrong. You estimate that a proper price for this new product would be $10 using assumptions about expenses that you derived from looking at our existing volumes and expense base and then adding our minimum profit margin. But the

to mention. Firstly, why should they? I mean, why should the other product managers get kudos for something that they didn’t contribute 



to? Wouldn’t it be much simpler just to look at the net revenues they deliver to the business – after backing out the costs they have control of – and sidestep the noise of allocating overheads? And secondly, when looking at pricing, wouldn’t it be simpler just to look at the incremental profit effect of the new product, ie let’s not worry about the overheads since they don’t affect the go-nogo decision?

or features etc etc. Who knows? But whatever I do, it will be still be driven by the business goal of maximising profit – and doing so in a sustainable way. And listen Ian, if the market reduces prices, it may be perfectly rational. There may be a message there. Maybe it’s telling us our expense base is no longer giving us competitive advantage. We’re inefficient. Could be! But in any event, I don’t believe our response should have anything to do with any notion of “covering overheads”. It just doesn’t work that way. It never has. Not in this business nor any other that I’m aware of.

IAN Look Maggie, it’s just the way the numbers work out, I
don’t have anything to do with it. This is the way the accountants always do it. And it’s the way we look at pricing and profitability of new products. But I don’t have to tell you that. You know these other effects exist. I suppose I do Ian but I’ve often wondered why I have to go through mental gyrations to clear the fog? Can’t we just produce numbers which tell me what’s really going on?

IAN So what are you telling me Maggie? Do you want to sell the
product at $5 despite my advice? Are you really prepared to take the risk?
MAGGIE What risk’s that, Ian?

IAN It’s not so simple Maggie, anyhow… IAN That… um… [in sudden realisation] you’ll get cherrypicked!
MAGGIE And another thing, aren’t you double counting

expenses? What I mean is if you add up all the expense allowances multiplied by expected volumes you’ll be over-providing for the expense base, won’t you? Am I missing something?

Some competitor will undercut your full-cost-priced products and you’ll be left with just marginally-priced products with nowhere else to go but out of business. Again Ian, I can only sell what I can only sell. The market is the market. We’re not a monopoly. Gee, we don’t even know who our competitors will be tomorrow. But that doesn’t mean I’ll just sit back. What I’ll do is continue to do what I do now: look for ways to differentiate our product offering, better segment our market, differentiate our offerings or look for new sources of revenue or distribution. The list goes on.

IAN Yes… I mean no. No, I mean I suppose that’s possible…
[thinking] But look [perking up], the alternative is that we ignore overhead costs entirely but then that would really concern me since it could lead to marginal pricing of the product. In other words, we’ll just charge the price which is enough to cover direct costs and the profit margin. There will be no contribution to overheads. If this becomes a major product, it could spell ruin if we don’t sell enough of the other products. In other words, it won’t be pulling its weight.
MAGGIE Come on Ian. What you’re saying is that I’m driven

IAN Yeah, I understand that.

Anyhow Ian, I think your whole argument might

be flawed. If competitors can charge lower prices for any of our products – full cost priced or not as you call it – ultimately we still have the same problem. The market reigns. Doesn’t this just prove that any notion of ‘covering overheads’ in pricing is fundamentally flawed? A competitive market won’t allow us to get away with it. It’s not interested in our overheads. In a pricing sense I’m not either but I am of course interested in overheads from a company perspective. And, by the way, as I said before, I do not ‘marginally-price’ products. I want them to be priced competitively so we maximise our profit. You know, the volume-margin game.

solely by sales growth and am prepared to give away margin unnecessarily just to maximise that. But you know and I know the only thing that matters to this company is profit maximisation. That’s a function of both volume and margin.

IAN Mmmm. Okay Maggie, how about this: Suppose one of
your competitors severely undercuts your price, what would you do to protect sales and profit? What would stop you just cutting prices to the bone?
MAGGIE Maybe I would cut prices. Maybe I wouldn’t. It depends. I might decide to follow suit or stand pat. Or I might decide to pull other non-price levers such as promotion of services


D E C E M B E R 2 0 07 



And this does not mean prices are lower than they otherwise would be – they could be higher.


If you can’t make sense of it Ian, I don’t know

who can!

IAN Okay…okay. I see what you’re getting at. But I need to
think about this some more.
MAGGIE [leaning forward] Ian, could you have another look at this. I need you to think about it again but – and no disrespect intended – I need you to think beyond those actuarial text books. Sorry, you understand. Look, I think we’re at the same dance but I’m doing the jive and you’re doing a waltz.

IAN Thanks. By the way, there was an actuarial conference a
little while ago in New Zealand where I think this subject was discussed. Very timely, as they say. I’ll do bit of research and report back.
Ian Robinson Philip Lathatm

MAGGIE You do that but real soon please. I need answers! …Another drink? ▲
Ian Robinson

Ian, I need you to help me make sense of all this. All I want to do is make the decision that maximises shareholder wealth. What is the right way to look at this problem that achieves that end?
This script (slightly edited) was delivered in the form of a role play as part of the presentation of the paper Pricing Wealth Products in Competitive Markets at the Institute’s Biennial Convention in Christchurch, New Zealand in September. Ian’s paper can be downloaded from

IAN I understand Maggie. I’ll take a fresh look at it for you.
Maybe we’ll learn something that we’ll help us better respond to the competition we’re facing.

education update
Board of Examiners
In the August Education Update I wrote about the relaunch of the Board of Examiners and our plan to recruit two teams of examiners to serve in alternative semesters for the next three years. We are now seeking to fill these places for the next three semesters only, due to a plan to introduce staff actuaries (see below). The benefits of being involved include:
● ● ● ● ● ● ●

Enrolment period for semester one 2008
To allow more time for finalising results, changes have been made to the structure of the Part III semester for 2008. Exams will be held one week earlier than usual and the enrolment period will be reduced from three to two weeks. In semester one, however, the enrolment period will commence on December 21 and will close on January 13. Enrolments will still be processed while the Institute office is closed for Christmas and students will be emailed instructions on how to access digital versions of the course materials in the online learning management system at the end of each day.

contributing to the profession networking opportunities full CPD credit increased payment Board of Examiners Handbook folder folder of printed course materials for the subject invitation to the annual Volunteers Cocktail Party

Education revenue and expenses in the Annual Report
Following the publication of the Annual Report, I have received a query asking whether a substantial profit is being made on the Institute’s education program. The figures on the education revenues are correct, however, the figure for education costs includes only direct expenses. This means that the salaries of the Institute’s education team and the apportionment of overheads, such as rent also need to be considered. The annual grant to universities could also be included as an education expense. If there were excess revenues in education these would be invested back into improving the program. ▲
Philip Latham

If you are interested in becoming a member of the Board of Examiners please contact me via

Staff actuaries plan
Approval in principle has been received from Council on a plan to employ part-time staff actuaries to work on the Part III Education Program. The primary aims of the plan are to increase the number of teaching hours and improve the quality of teaching. These staff actuaries would take over much of the work currently being performed by contracted course leaders and some other volunteers. The details of the plan are still being finalised. 

student column

report from the University of New South Wales


here was an atmosphere of excitement amongst the actuaries at UNSW leading up to our final event for 2007, the inaugural ASOC trivia night! The executive wanted to end our successful year with something new and fun, giving students the opportunity to unwind before exams came around and the opportunity to thank our sponsors. We kicked off at 6.00pm with over 80 students arriving to chat and mingle amongst themselves and representatives from three of our sponsors. Pizza (all students love a free dinner!) arrived as everyone formed teams and took their seats. We ran four rounds of not-your-usual-run-of-the-mill questions, ranging from identifying songs, movie clips, locations or people to solving sudoku and other riddles as quickly as possible (we needed something to test our actuarial minds!) The most entertaining moments occurred between rounds where various challenges were held for bonus points or prizes. We saw a three-way tie for the ‘who-can-hold-the-most-lolliesin-your-mouth-while-still-being-able-to-recite-complicatedformulae’ competition with somehow well over a dozen lollies! This was followed by impromptu recitals of theme songs from cartoons or movies we grew up to (even a sponsor grabbed the mic at one point!). Aladdin was a big favourite; I don’t think anyone anticipated we’d have such a multi-talented and uninhibited bunch!
One of the teams enjoying the night

The final challenge was one that teams had been working on throughout the night. Understanding how tough actuarial studies can be, it was noted that perhaps some students were thinking of a career change. In the interest of trialling such a decision, each team was to create a doctor or nurse costume using only newspaper and sticky tape. The results were impressively elaborate – books, stethoscopes, full coats and skirts, syringes and hats all fashioned from The Australian! These were showcased with style and much enthusiasm from the crowd before the final round of questions. The results were tight, with a team of cheerful first-year students taking home the pride of first place (and movie and ice cream vouchers!), closely followed by a wise old third-year team. It was wonderful to see everyone enjoying a night of trivia and fun shared with friendly sponsors. Not to mention prizes, pizza and the surprising reveal of a few new musical, design and lolly eating talents! ▲
Simon Crawford-Ash

Eleanor Sautelle

Some very artistic actuaries


D E C E M B E R 2 0 07 



from the Chief Executive

● ● ● ● ● ●

veryone is looking for good CPD opportunities these days. I found a great opportunity last month by being invited to chair a two-day conference on professional associations in St Kilda. About 30 professional associations attended the conference, including: CFA Institute Australian Institute of Company Directors Professions Australia Australian Property Institute Engineers Australia Law Institute of Victoria

Our Institute belongs to several networks aimed at improving the role and functions of professional associations:

● ●

Professional Associations Research Network (PARN) ( – the leading global research and benchmarking group; Professions Australia (; Associations Forum Pty Ltd (

Key speakers and topics included:

● ●

Emilio Gonzalez, Chairman, CFA Institute (Global Rebranding) Professor Andy Friedman, Executive Director, Professional Associations Research Network, UK (Ethics and CPD, Inaugural Survey of Australian Professions) Frank Payne, President Professions Australia (Governance) Michael Young, Chief Executive Officer, Law Institute of Victoria (Regulation) John Maroney, Chief Executive, Institute of Actuaries of Australia (Future Directions) John Peacock, GM Associations Forum (Professionalisation of Associations) Philippa Seagrave, Executive Office Professional Standards Council (Professional Standards Schemes)

Each of these networks provides a range of services, activities, publications and other resources that help us provide services to our members and to the public. For example, PARN has just published the first benchmarking survey Distinguishing Australian Professional Bodies, which was launched at last month’s conference. The survey covers 250 respondents from Australia, UK, Ireland and Canada and was compiled with assistance from both Professions Australia and Associations Forum and our Institute (thanks to Darren Davis!). The 180 page survey will provide very useful input for several current Institute activities, including the Member Services and Education (MSE) Taskforce and the various initiatives being driven by the Executive Council Committee in accordance with the Strategic Plan. Copies of the survey are available for interested members in the Institute’s library.
Some of the more interesting findings from the survey of Australian Professional Bodies are:
● ● ● ●

Professional associations conference (L to R): Andy Friedman, Jane Mason, John Maroney, Emilio Gonzalez and John Peacock

76% have a CPD policy (compared to 85% in UK) 55% deliver CPD online (compared to 43% in Canada) 31% used internal audit (compared to 47% in UK) 43% had risk management plans (compared to 52% in UK)

Professions Australia
Professions Australia is a national organisation of professional associations. These associations represent more than 400,000 professionals across Australia and cover the professions in three broad areas: the built environment; business services; and health. Professions Australia aims to be the champion for professions in the service of the community and its voice to government. Their vision is for world class professions in Australia to make an optimum contribution to the economic, social and 




environmental well-being of Australia by providing: a forum for members to interact with peers; information on current issues; and influence we:

– – – –

Overseas members Non-Sydney members Non-actuaries Other groups needing separate identification

communicate with and facilitate the sharing of ideas among members for the advancement of the Professions; promote the interests and welfare of the Australian community through the combined influence and expertise of the Professions; maintain and advance the standards of the Professions consistent with the public interest;

consider all relevant dimensions of member services, including: – CPD (face to face, publications, on-line, etc) – Events (seminars, conferences, on-line, etc) – Research and development – Representation – Knowledge management review recent and expected developments in basic prequalification education in Australia and other English speaking countries via input from existing groups focussed on education. review ERM educational developments in Australia and overseas and any changes to designations that are expected. Benchmark comparative organisations (in Australia and overseas) should be undertaken to help identify best practice models, suitable performance measures and potential collaboration partners (if appropriate), including: – User-pays structures – General structure and levels for fees – Organisational structures – Special interest group structures – Utilisation of on-line networking systems – Facilities, products and services provided

● ●

promote and advance ethical and responsible behaviour to foster community confidence in the integrity of the Professions; and act as the national peak body for communicating with government on issues of concern to the Professions.

Their Strategic Priorities are:

1. 2. 3. 4. 5. 6.

Skills Education Accreditation Standards Environment Globalisation

Apart from obtaining useful information on how other professional associations are structured and operate, our involvement with Professions Australia and similar bodies helps promote the role and value of actuaries to other professions we currently work with or could work with in the future.

Developing best practice
Over the next three years, we plan to reshape the way our Institute operates to seek best practice in all we do. The newly-established MSE Taskforce will drive the initial stages of the change process. Key aspects of its terms of reference include:

The MSE Taskforce will be supported by the CEO and the new Director, Operations who should be appointed early in 2008, plus other secretariat resources as required. Wide consultation will be undertaken with the membership. Please ensure you have your say.
Best wishes to all members for the new year! ▲
John Maroney Chief Executive

develop value propositions for each of: – Current members – Students – Current ‘wider field’ members

John Maroney


D E C E M B E R 2 0 07 



General Insurance Pricing Seminar
Sydney, November 007


one-day seminar focussing on pricing and related issues for general insurance was held at the Four Seasons Hotel in Sydney on 30 November.

was remarkable in its simplicity. Yet another elegant result from Greg.
James Goodchild discussed various approaches to determining

The seminar was opened by Fred Rowley who noted that the high attendance (over 180 delegates) was an indication of the increasing role of actuaries in the general insurance industry.
Tim Andrews and David McNab then outlined their investigations

profit margins in short tail business. While there appears to be no specific measure used across the industry, there was a definite acknowledgement that a consideration of the spectrum between theoretical pricing and commercial reality was required. This was followed by a lively panel debate, chaired by Adam Driussi, answering questions from the floor. One question posed the unspeakable – of whether actuaries are even required in the pricing domain.
Charles Pollack looked at the trends in personal lines rating

into the claims costs associated with weather-related claims. For their study, the overall average weather-related impact contributed 20% to the loss ratios but with significant variation as a result of the three natural weather cycles. An example was provided of the pricing differentiation between property building and contents policies, where building coverage was far more sensitive and potentially less profitable when weather claims costs were allocated correctly.
Don Johnstone presented the finding of the GRIP study,

an investigation into the role of actuaries in the premium rating process in the UK. A key area of consideration was the communication between the actuaries and key stakeholders in the pricing process. One of the outcomes of GRIP has been the establishment of a ‘Premium Rating Manual’ Wiki to provide a common language across the industry (
Greg Taylor presented a simplified approach to numerically

sophistication and examined a number of possible consequences of those trends, including actuarial impacts (complexity vis à vis value), industry impacts (large insurers with data versus others) and the outcomes for customers. He also presented an alternative to implementing higher prices for customers. This alternative involved monitoring the mix of business closely and using risk index to premium index comparisons to determine if issues were appearing in the portfolio.
David Isaacs and Chris Hope illustrated the application of

determining credibility coefficients within a hierarchical rating framework. The resulting use of the regression F statistic

data mining techniques in portfolio monitoring. The case study showed the performance of the portfolio changing through changes in exposure that may have gone unnoticed using more traditional monitoring methods. 



Stephen Wilson and Yan Zhao covered four strategies that can

be employed in commercial lines to maximise portfolio value under the difficult soft market environment. The issue of the enduring soft market was also discussed with capital availability and underwriting practices forming the key influences.
Andrew Harford gave a broad overview of commercial pricing

considerations with examples of differing policy types, coverage and profit measures. Andrew also illustrated the choices required for the key claims distribution assumptions. The last two plenary sessions of the day covered the hot topic of price optimisation. Nelson Henwood and John Yick gave a broad introduction to the topic and covered the views of the different stakeholders. They also introduced the high level concepts of continuous price testing and the efficient frontier for pricing. Adam Driussi further examined some aspects of these topics and gave examples from other industries, one of which was live price testing of eggs in the supermarket. He then demonstrated how the efficient frontier analysis could be implemented in a software solution to determine an appropriate optimum rate set based on rating table constraints. The afternoon topics obviously hit a chord with the audience who put forward more than twenty questions for the final panel discussion chaired by Craig Price. The key outcome was clearly that the while maximising profit can be a goal of many organisations, the sustainability of the profit and the maintenance of ownership value over extended periods was considered an optimal approach. In closing, Fred Rowley commented on the collaborative contribution provided by both corporate and consultant presenters and recognised the efforts of the organising committee comprising Kevin Gomes, Charles Pollack, Bevan Damm, Darren Davis and Stephanie Brennan. For more information, visit: ▲
Bevan Damm

(L to R): Tim Andrews, Don Johnstone, James Goodchild, Greg Taylor

James Goodchild

Adam Driussi

Bevan Damm (L to R): Matthew Gold, Geoff Mallon, Mitchell Prevett

Event Sponsors


D E C E M B E R 2 0 07 


Investment Guarantees
Dear Editor, Wade Matterson’s article in the October edition of Actuary Australia rings some alarm bells. The so-called ‘arms race’ to develop products that remove some or all of the investment market risk from customers is very aptly-named. If the arms race continues to develop apace, we need to worry about the collateral damage to innocent noncustomers and indeed worry about the survival of the financial world itself. We are told that there is now more than USD 1 trillion subject to various varieties of guarantee, growing fast. My understanding is that they generally involve some form of downside protection, which can be modelled into ‘Greeks’ and thus turned into a daily (or more frequent) need for rebalancing hedge positions. This hedging will either be carried out by the life companies themselves or by their investment bank counterparties if the life companies have chosen to use OTC options to effectively outsource the process. We cannot, of course, know what the day-to-day hedging needs will be but we can be sure that a sharp fall in the equity market will lead to selling by the hedgers. The issue is whether there will be buyers waiting to take the other side of these trades. In October 1987, when this process was in prominent use under the marketing name ‘portfolio insurance’, once it became obvious that the hedging need was of a particularly large size, the buyers stood back. Some waited for higher management approval before wading into a highly-volatile market. Others are believed to have profited by front-running the hedging activity, ie short-selling and then re-purchasing after the market fell. I have spoken to several actuaries involved in the new products. They appear to believe that the volume of hedging required will be comfortably within normal market volumes. That may well be the case with only USD1 trillion guaranteed but no-one I have spoken to has indicated at what level the hedging need could become destabilising. It seems to me that the number of natural counterparties, ie market participants who need to buy equities as the market falls, is seriously limited. It used to be asserted that rebalancing activity by funds tracking a strategic allocation would provide natural counterparties. I explored this notion in my 1999 paper to the Institute and found it greatly overstated in magnitude. Are the promoters of these new guaranteed products too young to remember 1987, or are they waiting to learn the lesson the hard way by growing the business until the ‘arms race’ self-destructs?
Mike Barker

Farewell to Old England
Dear Editor, I qualified 40 years ago as an FIA and became an FIAA when the Australian institute formed. I’ve been retired for some years but have continued as a member of both institutes. In the case of the London institute, that’s been basically for sentimental reasons – the only contacts in recent years have been subscription notices! In the case of the Australian institute, I was a member of the Future of the Profession Committee chaired by past president the late Ray Craig, which led to the establishment of our Institute. Later I was involved in writing the initial superannuation text for the Australian examinations and was the initial chief examiner in that subject. Those links, together with regular items of some interest in Actuary Australia and The Pulse, keep me an interested member of the institute, despite not having worked as an actuary for 27 years. I have however today decided to flag away my membership of the London institute. There’s a limit to sentimental value and in that institute’s case the increase in subscription from £32 to £69 was well past the tipping point. It’s difficult to see how either of the two councils involved can justify that price for sending me no more than an annual subscription notice. Nor how they can see financial benefit in bringing me to this decision. More importantly, it demonstrates scant regard for the interests of retired members.
Graham Lewis

Close Affinity
Dear Editor, I was dismayed to read Anthony Brien’s letter about his partner being subjected to homophobic comments at the 2007 Convention but I suppose the actuarial profession is still fairly conservative. Many years ago when I was President of the Association of Superannuation Funds of Australia I managed to get them to change the name of their ‘Wives programme’ at their Annual Conference to one for ‘Accompanying persons’. At about that time the Institute produced a list of attendees at their annual convention that indicated those delegates who were accompanied. Most had the description ‘wife’ against their name (one had ‘daughter’). Against my name was the description ‘female’ as we weren’t married at the time. I found it amusing rather than insulting; I have always found it interesting watching conservative organisations deal with change! For most of my gay relationship I have not been involved in work or Institute affairs, although in the early discussions about the AIDS virus I was once described at an Institute conference as ‘having a close affinity with the gay community’, which I thought was a neat way of getting around the topic. I have also been 




described as having expertise with ‘special populations’, which reminded me of my student days when one had to study the effects of selection and other population criteria. It all demonstrates that intelligence does not necessarily bring with it broad mindedness, nor tact. If ever you are tempted to make a homophobic remark, just remember that someone in the group you are talking to may very publicly take you to task, which you might find rather embarrassing. After all, we are everywhere!
Roger Sawkins

Remembering Sid
Dear Editor, I worked for Sid Caffin in the Commonwealth Actuary’s Office in the late ’60s when I first came to Australia and agree with the comments made by John Trowbridge in his obituary (AA October 2007). I have two particularly fond memories of that time. As John mentioned, Sid was keen on computers and used them even in the days when it was a matter of putting plugs in sockets to program them. When the Treasury Department finally got the most up-to-date model, Sid used it for valuing the Defence Forces Retirement Benefits Fund. His assumptions included rates of promotion from rank to rank and salary progressions in each rank as well as the conventional assumptions about inflation, interest and decrements. The result was that the program ran for around 72 hours. It was set going on a Friday with the hope that, power cuts, computer breakdowns, program errors and God willing, it would conclude correctly on the following Monday! My other memorable experience was being responsible for buying the first electronic calculator available in Australia. It was larger than a current laptop computer, had two memories and a square root key and cost around $950 – a very large sum in those days. It’s only drawback was that it didn’t always get the right answer! The problem was that if it went into overflow (I think it could handle 10-figure numbers) it simply truncated the number and continued calculating. My time with Sid taught me many things, not least about integrity and clarity in reporting to clients.
Roger Sawkins

CPD Opportunity
The Actuarial Society of Hong Kong brings to you its premier Regional Conference on Risk Management in Financial Services which will take place from 28-29 January 2008 at the new and exciting Venetian Macao-Resort-Hotel. The Conference will feature noted speakers from the Institute of Actuaries of Australia, Faculty and Institute of Actuaries and Society of Actuaries, and from industries such as insurance, retail banking, investment banking, pensions and rating agencies. A key objective of the Conference is to introduce actuaries to a broader spectrum of risk management in their work and industries where they can contribute to further benefit their employers, the industry, the actuarial profession and the community. Over 150 professionals from Hong Kong and the region are expected to participate in this 1.5–day event to discuss and debate issues on risk management and how it can provide a potential future for the actuarial profession.

No More Global Warming
Dear Editor, So some 35.4% of respondents within the profession do not believe anthropogenic global warming is happening at all. It is very heartening that some actuarial common sense is quietly surviving amid all the groupthink and zealotry. ▲
Peter Carroll

The Conference will be followed by Sponsors Events in the afternoon of 29 January 2008. For details, please email or visit the Conference website at Deadline for registration is 24 December 2007.


D E C E M B E R 2 0 07 

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