Inside the minds of actuaries

Most, if not all, large companies have very specific policies regarding how many senior execs can travel on the same air plane. The reasons for it are sound: you don’t want a horrific accident also decapitating your company’s brain trust.

“For any given company, you’re going to look at the size of the company,” says Kathryn Hyland, senior vice-president of group risk management for Swiss Reinsurance’s Canadian branch. “What sort of loss is bearable, and its structure.”

At the most senior levels, Swiss Re prohibits even two executives from travelling together. Actuaries would also advise against having a high percentage of any one department going on the same trip.

Lower down the food chain, it becomes a cost issue. Specifically, a multiple of the lost employees’ salaries, plus the cost and time it would take to replace them.

Ironically, it was a car crash that nearly grounded plane manufacturer Piper Aircraft. “They had four executives travelling together in a car that tried to cross the train tracks at precisely the wrong time,” says Fred Kilbourne, co-founder of The Kilbourne Group, a Californiabased actuarial consulting firm. All four died, leading Kilbourne to ask, “Is that a train crash or a car crash?” (Constantly thinking about fatalities can lead to gallows humour.)

For actuaries, figuring out the likelihood of such unusual scenarios is part of the job. And their ability to accurately calculate those odds is key to preventing a worst-case scenario from breaking a brokerage.

One project Hyland is currently working on involves trying to calculate the risk of geographic concentration of individuals under group insurance plans. It’s a well known problem in P&C, so key facilities are often located in different regions to protect from a single event; say, the next “Superstorm Sandy” crippling a company.

“Unlike property, humans are pretty mobile,” says Hyland, “which makes it very difficult to figure out where your geographic concentrations are.” But people who work together will often travel and socialize together, making them subject to a variety of common hazards.

One way to find out is to turn to trusty statistics and simple math. Demographics tell insurers that people working in an office tower in downtown Toronto are likely to have more life insurance than someone in a small town. If you want to know your exposure for the souls working in the 72-storey First Canadian Place, you simply run the number of floors by the number of people per floor.

One of Kilbourne’s more memorable tasks came about in the late 1960s when he was asked to figure out the cost of insurance for an event that would occur on one day, 10 years in the future. It was for a mutual fund company that wanted to provide their customers with a policy guaranteeing that the value wouldn’t drop below the price they’d paid. He looked at the relevant available data dating back to the late 1800s and concluded that “based on the data, it would have been a fairly low cost,” says Kilbourne. But the California Insurance Commission decided it was too risky to approve.

Good thing too. There was a flaw in the calculations. They didn’t account for a combination of rising inflation, the Watergate scandal, and other external variables that helped to bottom out financial markets right when the policy would have come into effect.

“Ultimately, I did not come up with the right answer,” admits Kilbourne. “It happens sometimes.”

He’s not the only one to get the details wrong. According to one industry legend, famed actuary L.H. Longley-Cook was asked to assess the likelihood of U.S. flag creator Betsy Ross’s house catching fire. He worked out that it would happen once every 33 years. The insurer who’d hired him issued a policy, only for the building to catch fire three years later. Longley-Cook supposedly summed up the incident by saying it occurred “thirty years too soon.”

“The hardest thing to get is the timing,” deadpans Kilbourne.

Party Favours

While the stereotype of an actuary may be of a socially inept nerd obsessed with statistics, the job does come with at least one benefit to counter that: interesting small talk at parties.

Kilbourne has a whole collection of answers to the question, “What’s more dangerous, X or Y?” For example, Americans are more likely to die from dog bites (about 20 a year) than snake bites (less than 10 a year) but, since far more people are bitten by dogs than snakes in a given year (roughly four million versus 45,000), snake bites are about 50 times more lethal.

Ever wondered if you’re more likely to be killed by a bear than lightning? Kilbourne has, and lightning is the bigger threat, killing about 100 North Americans a year, compared to one or two fatal bear attacks. (While researching that one, Kilbourne came across a man who’d survived both.)

And, statistically, somewhere in the U.S., someone will kill their parents today. And tomorrow, and the day after, adding up to a little under 400 homicides a year. But parricide pales in comparison to infanticide, with more than half the children under five who are murdered each year being done in by their parents.

Al Weller, chief actuary for CaptiveOne, recalls once getting a call from a journalist who asked “if I could tell him how many people would jump off the Golden Gate Bridge that year.” He had to explain that it’s not an exact science.

Meanwhile, there are a number of big-picture risks that the actuarial industry is trying to understand better. On the life insurance front, Kathryn Hyland says the biggest developing risk is obesity. “Obesity rates are increasing alarmingly, in particular, childhood obesity.” The condition, of course, is notorious for increasing the chance of developing diabetes, heart conditions, and a host of other health problems. While life expectancy rates have climbed over the past century, Hyland speculates that “maybe this is the end of that.”

For P&C, one of the big risks is literally out of this world. Solar radiation flares up in a roughly 11-year cycle. The current one, known as Cycle 24, started in 2008. As a cycle reaches its peak, solar flares increase, sending magnetic blasts out into space. That’s why aurora borealis—the Northern Lights—were spotted across southern Canada in June. But as pretty as they are, their impact on infrastructure can be devastating. On March 13, 1989, the planet lay in the path of a huge flare that knocked out Quebec’s entire power grid for about 12 hours. (So, yes, the sun made the province go dark.) In our increasingly wired world, the financial ramifications of a large-scale outage could be catastrophic.

Solar flare-ups can also impact those execs on a plane. Travelling over the North Pole is the shortest route from many North American destinations—say New York— to Beijing or other stops in China, saving airlines time and fuel.

But there can be downsides to travelling through the thinner protective ozone layer found at the poles. “When airplanes fly over the poles during solar storms, they can experience radio blackouts, navigation errors and computer reboots all caused by space radiation,” said Steve Hill of NASA’s Space Weather Prediction Center in a press release. Even if the plane is unaffected, the passengers can be exposed to high levels of radiation. NASA estimates that travelling across the thin atmosphere of the Arctic exposes passengers to the equivalent of three X-rays, with the levels jumping to potentially lethal amounts during a major solar storm.

So what’s the moral of the story? Even if you’ve got your executive team properly divvied up among different flights, you might want to check what route each of them is taking.

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Copyright 2015 Rogers Publishing Ltd. This article first appeared in the August 2015 edition of Canadian Insurance Top Broker magazine

This story was originally published by Canadian Insurance Top Broker.