We are not the Experts, We Have Never Been the Experts

Despite its fall to grace following the GFC, I’ve always liked the term Financial Engineer to describe actuaries. Like engineering, the heart of actuarial practice is the practical and commercial application of science. Both engineering and actuarial work have been the inspiration for technical developments in science. There is also craft in what we both do; we both have techniques and experience at filling in the gaps where the science is not clear – affectionately known as ‘margins for error’.

Like engineers, we don’t have to be the experts in the relevant science. Actuaries developed life insurance without being experts in medicine and health. Actuaries price and reserve for all forms of liability insurance without being legal experts. Actuaries forecast return to work rates for accident compensation schemes without being experts in psychology. Actuaries value the long term consequences for retirement savings without being economic experts. Actuaries design property reinsurance programs without being experts in the physics of earthquakes or masters of building design. In my own field of general insurance, some of the greatest advances in actuarial practice have come not from developing the science, but understanding the science and applying it to existing problems – the use of generalised linear models in pricing, or stochastic control theory in funding policies, or more complex statistical methods for data analytics.

However, we do have to be experts in understanding, applying and explaining the science – especially to those who may not understand the science, but make all the decisions.

The scientific method has been with us for over 3,500 years, from the Edwin Smith Papyrus through to the philosophical work of Aristotle, Descartes, Galileo, Newton, and Popper and Khun. Even today the frequentists and the Bayesians are waging their academic war and in the process refining our knowledge and understanding. To say the general population hasn’t kept up would be a massive understatement. As recently noted in The Lancet, the scientific examination of thousands of vaccinated and unvaccinated children from all over the world has found no hint of any difference in the incidence of autism in both groups, but this is trumped by a celebrity asserting that her child was vaccinated and later got autism. The consequence? A decline in vaccination rates and the unnecessary deaths of children from measles and whooping cough.

However, we do have to be the experts in understanding, applying and explaining the science – especially to those who may not understand the science, but make all the decisions.

Have we as a profession kept up with science? Consider our lack of engagement with climate science and natural disaster mitigation. There is no doubt that there is demand for the practical application of science in solving financial problems: the Productivity Commission is investigating national disaster funding and mitigation efforts; the Australian Business Roundtable for Disaster Resilience and Safer Committees, which includes major financial institutions such as IAG, Investa, Munich Re and Westpac, has called for research on the allocation of resources and developing policy on mitigation. Actuaries who price property insurance would have a good idea of priority areas for mitigation, and the resulting improvements in affordability of insurance.

To date, cynics have argued that actuaries aren’t experts in climate science or natural disasters and should stay out of this. On the contrary, I think we are exactly the right people to be involved. We don’t need to be experts, we have never been the experts, but we do know how to understand, explain and apply the work of the experts for the benefit of the public, and we should do so.

Edwin Smith Papyrus
Edwin Smith Papyrus

The Edwin Smith Papyrus, the world’s oldest surviving surgical document. Written in hieratic script in ancient Egypt around 1600 B.C., the text describes anatomical observations and the examination, diagnosis, treatment, and prognosis of 48 types of medical problems in exquisite detail. Plate 6 and 7 of the Papyrus, pictured here, discuss facial trauma. – Wikimedia Commons

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