Fortunately, there is a solution to the dilemma just posed. It consists in adopting a pricing strategy that substantially alters the sensitivity of a firm’s total economic value to changes in interest rates. In the example give earlier, where a = 15% and b = 0, the duration of the firm’s franchise value and total economic value are 17.62 and 6.70, respectively. But suppose we alter the firm’s pricing policy by changing these parameters to a = 10% and b = 1. In this case the target return on surplus remains at 15% (given that the risk-free yield remains at 5%), but the durations change from 17.62 to 7.62 for franchise value, and from 6.70 to 3.27 for total economic value. The key insight here is that a firm’s pricing strategy can significantly affect the duration of its franchise value and, consequently, the duration of its total economic value.
This insight suggests a more systematic approach to managing the duration of total economic value: find a combination of the strategy parameters a and b such that the return on surplus and the duration of total economic value are both acceptable. This can be done either by systematic numerical search or by constrained optimization procedures. For example, if the firm in our example wanted a target return on equity of 15% but a total economic value with a duration of zero, it should implement a pricing strategy with the parameters a = 6.2% and b = 1.763 to achieve those objectives. The consequences of this and the two previously mentioned pricing strategies are shown in Figure 3 for the three different pricing strategies just described.
Author(s): William H. Panning
Publication Date: 2006
Publication Site: Casualty Actuarial Society (for exams)
Actuaries quantify risk. One of their riskiest endeavors is trying to become one.
Among people taking at least one exam from the Society of Actuaries—the field’s biggest U.S. credentialing body—15% eventually pass the multiple tests required to become an Associate, one of two designations allowing them to practice. Just 10% pass those and additional tests to become a Fellow, the group’s higher designation, which affords bigger responsibilities and salaries.
It’s such an arduous process that the number of test-takers has been declining in recent years, and the society is making changes to keep candidates from dropping out of the gantlet. It is also adding new “predictive analytics” tests to adjust to the massive amounts of data insurers now have.
There is no limit to how many times a candidate can take the tests. It took one man 50 years to become a Fellow, says Stuart Klugman, an official at the society. The society says a candidate typically takes seven to 10 years to become a Fellow. They must pass 10 exams plus other coursework and requirements.
SOA leadership and members discuss the University-Earned Credit (UEC) program. Watch this recording of the May 24 member town hall about UEC. If you have any additional questions email us at firstname.lastname@example.org. Learn about the UEC program by visiting https://www.soa.org/education/resources/uec/uec-program/