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The Actuary The magazine of the Institute & Faculty of Actuaries

A partnership approach to research

Over the past three years, almost £1m has been awarded under the Quantitative Finance programme to support long-term actuarial research projects with a strong mathematical content. The typical award has been around £100,000, with 10% being funded by the actuarial profession. To put this in context, the actuarial profession awards around £50,000 in total research grants each year.

How did the collaboration start?
A co-funding partnership between the actuarial profession and the EPSRC was formed with the objective of supporting innovative research in quantitative finance that is directly relevant to the long-term business needs of the finance and insurance sector. This followed the UK government’s efforts to improve the effect of public spending on research. Following a round table discussion of a report on this subject from the Centre for the Study of Financial Innovation, the actuarial profession was identified as being an ideal partner to help the EPSRC.
It seems hard to believe that another body has been willing to help sponsor actuarial research so generously. So what is it about the actuarial profession that the EPSRC liked so much? Apparently, it was a combination of our status as a ‘learned’ profession, our commitment to the public interest, and the existing involvement in funding research with a longer time horizon.
Indeed, we should be confident in our research credentials. Research is central to the functioning of our profession: in problem-solving for clients, through actuaries working in academia, and in research working parties, whose work culminates in sessional papers brought before the profession. This diverse activity is central to the maintenance and development of the profession’s intellectual capital, the essence of which is formalised through our exams and CPD activities.
Together, the actuarial profession and the EPSRC encourage innovative research which:
– deepens mathematical or statistical knowledge and understanding of existing actuarial skills and techniques in core areas;
– develops new mathematical and statistical skills and techniques of relevance to existing fields of actuarial work;
– extends the use of new and existing mathematical and statistical knowledge and techniques into developing areas; and
– relates to the long-term business needs of the insurance sector.

Types of research
Each year, the actuarial profession considers the long-term research needs of the sector and identifies those themes falling within the scope of the EPSRC, before issuing calls for research proposals from academic researchers. Outline proposals are then selected by the actuarial profession’s Research Steering Committee, the resulting full proposals being peer reviewed by a panel of academics under the auspices of the EPSRC.
The fourth and final year of awards has just passed. The fourth call was based around the following:
– Risk and regulation in financial organisations eg exploring the potential benefits to customers of a financial economics approach to the behaviour of assets and liabilities.
– Retirement issues eg modelling of savings for the individual, including investment strategies.
– Analytical tools for ‘the actuary of the future’ eg the development of new analytical tools for improving the understanding of risk.
In December, the shortlist of proposals from the actuarial profession will be presented in Swindon, the home of the EPSRC. This process can sometimes be a little testing for the two actuaries attending (we speak from personal experience!), particularly when fielding questions from academics specialising in a field of mathematics to which most actuaries have had little exposure. However, the natural communication skills of an actuary come to the rescue we knew there was some use for that communications examination paper!

What next?
Knowing this was the final call, the Research Steering Committee needed to decide how to build on the experience of the past three years and develop the relationship between the profession and the EPSRC still further. The result was a networking workshop to raise awareness within the academic community and businesses within the City about the opportunities for funding research through the EPSRC.
A diverse group of research specialists, representatives from the actuarial profession, and bankers attended the workshop held at Staple Inn on 3 March 2004. Interestingly, those attending were drawn mainly from business, including hitherto unknown institutions such as the Institute of Operational Risk, whose membership is comparable to that of the actuarial profession.
The workshop included short presentations from recent beneficiaries of the Quantitative Finance initiative. These included professors Lyn Thomas (Southampton University), who talked about customer value management, and Mark Davis (Imperial College), who talked about a statistical approach to default correlation.
Perhaps the most interesting aspect to the workshop was the discussion about how City businesses can locate the academics with the specific expertise and mathematical tools needed to solve their problems. In this area, the Swiss experience of RiskLab over the past ten years was described by Professor Paul Embrechts and this presentation sparked much discussion. With our ability to break down complex problems, one couldn’t help wondering if the actuarial profession might be useful intermediaries in the process of taking the problems from business and directing them to the right academic researchers. o

The Research Committee would be delighted to hear of any ideas you may have for developing our relationship with the EPSRC or other research partners please contact Diane Wilson at the Institute of Actuaries (email dianew
@actuaries.org.uk). For more information about the EPSRC, visit www.epsrc.ac.uk.