Jan 24, 2009

Longevity escape velocity

Aubrey de Grey, a British biomedical gerontologist, states in his book "Ending Aging," that that the fundamental knowledge to develop effective anti-aging medicine mostly already exists.

In a Ted Show presentation he states:

Why should we cure aging?

Because it kills people!

Age damage
There are seven types of aging damage :

Damage rising with age Proposed as contributing to aging by
Cell loss, cell atrophy Brody (1955) or earlier
Extracellular junk
Alzheimer (1907)
Extracellular crosslinks Monnier and Cerami (1981)
Cell senescence Hayflick (1965)
Mitochondrial mutations Harman (1972)
Lysosomal junk Strehler (1959) or earlier
Nuclear [epi]mutations (cancer) Szilard (1959) and Cutler (1982)

Although, for more than 25 years, science suspiciously didn't seem to develop, all kind of medicines to repair these damages are already within reach for mice.

Age damage for human beings is strongly age related:

As the chairman of the Methuselah-Foundation, De Grey stimulates scientists to develop medicines that repair age damage for this living generation.

Experiments on mouses showed that medicines didn't only slow down the aging process, but could reverse it as well (condition: start in time!). It turns out that every time a new medicine is developed and applied, it restores - above a certain threshold of reserve capacity - the lost reserve capacity for about 50%.

This would imply that if new medicines for human beings would be developed within the next decade and the rate of developing new medicines will be fast enough to stay 'ahead of the game', all people of 50 years and younger would be able to live a thousand years or more and people just slightly older could still live for hundred years or more.

In 2006 Technology Review announced a $20,000 prize for any molecular biologist who could demonstrate that De Grey was wrong. Nobody succeeded!

If De Grey is right, actuaries don't even have to start calculating new life expectancies or other (financial) consequences. Life insurance and pension will have to be redefined.
Even stronger: We'll have to redefine our life!

Sources: Ted Show presentation, Pres. 1, Pres 2

Related links:
A model of aging as accumulated damage matches observed mortality ...

Jan 19, 2009

Table Converter (Free!)

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What should take about two minutes work, ends in frustration. Finally you decide to fill your spreadsheet by hand.

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Jan 10, 2009

Wir haben es nicht gewusst

Let's be humble and take a look at home. The home of actuaries, accountants and last but not least 'quants'.

Gewußt oder nicht gewußt?
Actuaries and accountants have failed in foreseeing the credit crisis. Together, we have greatly underestimated the developments and put our head in the sand. We've also failed to bring the emerging crisis to a possible end through enhanced cooperation with each other or by sending out common strong signals. In short: "Wir haben es nicht gewußt!"

Without an adequate technical substantiation, we have trusted business plans promising ROEs of 15% and more. This, while we all know that the average risk-free rate is still about 10% below this level and that such high returns can certainly not be made without taking additional risk.

VaR Model
As an article in The Actuary shows, we got intimidated and overruled by the quants with their Value at Risk (VaR) models. The consequences of the advices of these magic mathematicians and their VaR models are well explained in an excellent article called 'Risk Mismanagement' in the New York Times.

In another article, Global Association of Risk Professionals Review, David Einhorn explains:

VaR ignores what happens in the tails.

It specifically cuts them off.
A 99% VaR calculation does not evaluate what happens in the last 1%.

This makes VaR relatively useless as a riskmanagement tool and potentially catastrophic when its use creates a false sense of security among senior managers and watchdogs. " Quote:

VaR is like an airbag that works all the time,
except when you have a car accident

Also, according to Bloomberg, the risk-taking VaR model is broken and everyone is coming to the realization that no formula or rating system can substitute for old-fashioned 'due diligence'.

Quantum mechanics
Because of the complexity of these new VaR-like models, experienced actuaries, accountants, managers and supervisors were all afraid to ask deeper questions or to admit that they didn't totally understood these complex models that were presented as 'simple manageable board instruments' with 'simple steering parameters'. Just like nobody is eager to admit that 'quantum mechanics' is hard to understand and therefor every amateur quantum guru can say what he wants, because nobody checks it.

This way, indirect and by our advice and our models, CEOs and CFOs of large companies and pension funds got the (wrong) impression that 'complex financial markets' were based on 'a sound statistical model', where (annual) deficit risks of 2.5%, 0.5% or 0.1% are exactly calculable and moreover also acceptable.

Whatever, lessons learned, new opportunities for actuaries to set a new benchmark for '21 century riskmanagement'.

However..., stay careful, to catch a tiger by the tail is risky!

Jan 7, 2009

Unfair Value

How can you be against something that's fair, like "Fair Value"?
What could be wrong, valuating a company at market value?

IceComp Case
Let me take you along in a story about IceComp, a fictitious ordinary wholesaler in ice creams.

The daily demand for ice creams turns out to be in line with the outside temperature. In an average summer, with an average temperature of 16°C (about 60°F), IceComp sells 10 million ice creams a year. Annual turnover the past 10 years, $ 20 million with a net margin of 10%.

In order to regulate demand and to maximize profit, IceComp defines the daily ice cream selling price (P) in line with the market by the formula:


So at 32°C an ice cream will sell at $ 4 and at 16°C it will sell at $ 2 a piece. To always deliver on time, IceComp keeps an average stock of about 2 million ice creams. Based on on the average selling price of the last 10 years, this stock is valued in the balance sheet at $ 4 million, resulting in a fair and trustworthy P&L, that reflects the actual sales level at current prices.

Two years ago, inventory (stock) valuation based on market prices ('fair value'), i.e. the price daily selling price of an ice cream, became mandatory. From that moment on, things started to go wrong.

Consistent with the daily temperature, the daily inventory value starts to oscillate heavily, with explosions and variations up to $ 6 million per month. To the 'surprise' of all stakeholders, equally strong alternating monthly gains and losses are reported. It's crystal clear, the company is no longer 'in control'.

The national supervisor interferes and demands extra securities (funds). Now the monthly P&L of IceComp starts to oscillate even more, as the investment results of the extra securities, that principally do not have anything to do with the core business of IceComp, also start to vary on basis of 'fair value' (market prices) valuation.

Ultimately, lack of confidence from share- and stakeholders drives IceComp into bankruptcy.

What was meant to be 'intentional Fair', turns out to be 'Unfair' in practice. Valuing balance sheets on bases of daily prices is like playing 'Russian roulette'. It can be compared to making 'climate statements', based on the daily weather forecast.

The analogy to banking, pension and insurance business may be clear. Don't base valuation methods on daily prices, but on a, per product or market defined, 'moving average market price' for a fixed chosen period (depending on product or market cycle).

The current (credit) crisis calls for development of new valuating principles by auditors and actuaries.

Jan 5, 2009

Maarten Dijkshoorn leaves Eureko

Maarten Dijkshoorn steps down as chairman and CEO of the Executive Board of Eureko, effective January 1.

Source: beursduivel, silobreaker

Jan 1, 2009

Happy Actuarial New Year

Did you know there are more than 100 "new year's days" in a calendar year?
It just depends on where you live or what you believe.

Before 1752, Americans celebrated New Year's Day on March 25th (Lady Day according to the old Celtic religion and the Feast of the Annunciation according to the Christian religion).

Great Britain and its colonies changed their New Year's celebrations to January 1st when they changed from the old Julian calendar to the Gregorian calendar in 1751.

How shall we define our actuarial new year?

Read more about it on

Celebrate New Year's Day
Every Month of the Year!