Showing posts with label history. Show all posts
Showing posts with label history. Show all posts

Oct 31, 2009

The first Actuary

As the story goes, insurance began around 1688 at a coffeehouse in London called Lloyds, where shipman discussed and divided their risks.

That 'explains' the birth of non life insurance.

But what about life insurance?

Who developed the first life table?

The answer to this question depends on who you ask...
  • Definitely Graunt in 1662 (statistical analyzes of data)
  • Surely De Witt in 1671 (life insurance tables)
  • Undoubtedly Halley: 1693 (life insurance tables)

Depending on what you define as a life table, answering this question often leads to a never ending semantic discussion.

Don't worry, there's help... In his Google-book, "A history of probability and statistics and their applications before 1750", Anders Hald explains the origin and development of life tables.

First Life Tables
An indeed, the 'first' life tables, based on more or less empiric data and interest rates were developed at the end of the 17th century.
The first actuary....
However, already in the 3rd century the Roman jurist Ulpian devised a table for the legal conversion of a life annuity to an annuity certain.
It was pointed out by Greenwood that the valuation (duration) of the annuities was deliberately chosen to high, in order to protect the interests of the legal heir.

This would implie that Ulpian not only did a tremendous job by estimating life annuities, but also developed and applied the first primitive 'Solvency Zero' principles...

With his 'simple table', Ulpian was more than ahead of his time.

So, we may rightfully conclude that the one and only first actuary was a jurist: Domitius Ulpianus, alias Ulpian

Strange that it took more than 1500 years to develop more sophisticated life- and annuity tables.

Related links & Sources:

Jun 30, 2009

Central Bank Risk Management

Facing 2009, leads us back 300 years in history, when funding 'credit demand' was one of the main reasons for founding Central Banks in England (1694), the USA (1790) and the Netherlands (1814).

Let's go back in history and have a short look at the situation in the Netherlands 200 years ago...

More history DNB
English, Dutch

Monetary Stability

Nowadays the importance of monetary stability is just as important as a few eras ago. It cannot be underestimated.

The years of the gold standard are behind us. Question is: are there any stable new alternatives?

Learning from the past, one way or the other, we will have to introduce new trustful standards. Maintaining the current situation will probably not lead to a sustainable financial system on the long term.

To stress the importance of a stable standard, just take a look at the development of the next Federal Reserve Balance Sheet:

The above graph clearly shows that Central Bank Risk Management is not an unimportant issue....

Fed Example
Example: As more 'bad loans' and up on the U.S. federal balance sheet, to prohibit downgrade U.S. credit rating , the FED - one way or the other - will have to standardize itself.

Central Banks are monitoring themselves
The past has shown that self-regulation in private financial markets doesn't work. Be confident, it won't work on a Central Bank level either: balance size figures and federal stakeholder interests have grown to enormous proportions.

Central Banks are in fact regulating and monitoring themselves and - except for the Eurosystem - they don't fully comply to international accounting standards as well, a risk society clearly cannot permit itself.

Split up Central Banks
To regain control of central banks, governments will have to split their Central Banks into:
  • A regular "Reserve Bank" (monetary function) and a
  • An objective independent Regulator, that regulates private banks as well as the State Bank.

If a Central Bank is also operating as a State Bank, this Bank should also be separated from the Reserve Bank business, to guaranty an objective monetary policy by the Reserve Bank in a specific country.

In the mean time, Central Banks will have to become innovative and come up with a collectively supported new standard alternative. They have to act fast, before the market creates his own new wild and probably risky standards out the financial market chaos.

Actuaries and Economists could work together to develop such a stable risk-free standard.

Mar 10, 2009

How Defined Benefit Plans work(ed)

Pension plans suffer, from a rare disease....

According to IPE more than 90% of UK Defined Benefit (DB) schemes are underfunded. The aggregate funding position of almost 7,800 schemes reported a deficit of £218.7bn at the end of February 2009.

The situation in the Netherlands is hardly better.Figures from the Dutch regulator,DNB, show around half of the country’s 650+ pension schemes are under-funded. The Dutch government has extended the recovery period for pension funds from three to five years. The main question is: "Is that long enough?"

How Defined Benefit Plans work(ed)

Pension funds, especially DB schemes, have to face that their worst dreams, a complete doom scenario, is becoming true :
  • First the subprime market collapsed
  • Then, as trust broke down, the stock market went down as well
  • On top of that Interest rates dropped dramatically

Titanic lessons
Just like the 'unsinkable' Titanic was protected by compartments, we had protected our pension schemes with diversification. And just like the Titanic, we actuaries, asset managers, and quants made a fundamental mistake. We underestimated the correlation between the different compartments (bonds, subprimes, stocks). One hit in the vital front compartment was enough to draw our pension dreams to the bottom of the ocean.

Optimistic view
But let's not stay pessimistic.

Do you know how long it took the market to recover after 1929? .....


Global Investment Returns Yearbook 2009
And there are more reasons to stay positive about the equity results on the long term, as is shown in the very interesting downloadable Credit Suisse Global Investment Returns Yearbook 2009, that analysis returns from 1900 until the end of 2008.

As this yearbook shows us in more detail, it is only a matter of statistical faith, that equity performance on the long term will recover.

So the only thing we can do is, just like a sick patient: stay cool, rest (don't move), don't panic and wait until trust and the markets recover.

God bless you....