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The Actuary The magazine of the Institute & Faculty of Actuaries

Research for a star

A simple idea mooted on a wet Wednesday in
February 2000 led to Simon Perry of Tilling-
hast-Towers Perrin presenting a report at
Staple Inn to an audience of bankers, other lenders, and regulators some 18 months later, not to mention a presentation of the material to an international conference of risk managers in Paris and a write-up in the Sunday Times.
Another case in point is ‘Portfolio risk measurement and reporting standard’ by Malcolm Kemp, which became a companion publication to the NAPF’s ‘Risk made simple’, distributed widely to pension scheme trustees.
Research and strategic objectives
Research is very important to the Finance & Investment Board (FIB), but not only for the opportunities it gives actuaries to gain publicity for their efforts. Research underpins several of the board’s other strategic objectives, including:
– putting the actuarial profession at the forefront of the development of finance and investment theory and methodologies for the benefit of industry and the public;
– supporting the development of the competence of actuaries in finance and investment.

An important link
To ensure that our research programme is at the leading edge, we have formed an ‘academic panel’ of eight leading academics (non-actuaries) in the field see table 1. The panel’s role is to generate research ideas, increase academic involvement in FIB’s work, and widen the audience for our research output. The panel will help FIB build a link between corporate finance, banking, and institutional investment a particularly important link considering the lack of awareness of how the investment process and the market in financial instruments interact with the real economy. A discussion of this topic with the panel in February concluded that greater insights are required into:
– the associated macro-economic factors, including demography;
– the interaction between financial instruments, risk and the mechanics of national investment; and
– behavioural finance and risk.
We have in mind too that individual actuaries carrying out research will have an opportunity to discuss their ideas with one or more of the panel.

Current research
FIB’s Research Committee evaluates all proposals for new research, considering the potential benefit of the research weighed against the required input of resources, and checking that the proposal isn’t going to reinvent any existing wheels. We have an extensive research database which is an ideal source of information for any member who wants to find exactly what research has been, or is being, undertaken in a particular area.
FIB research currently under way (see table 2) includes projects in investment, corporate finance, and banking. An important piece of current research is an appraisal of the investment process in the light of the Myners review.
There are also research programmes jointly with the Life, Pensions, and General Insurance Boards under the ‘value measurement’ and ‘risk and opportunity management’ banners. Rethinking decision-making on strategic risk and opportunities (or STRATRisk for short) aims to provide guidance for prime decision-makers on managing more systematically the most important opportunities and threats to their business with a view to a significant improvement of corporate direction in this area.

Actuaries needed!
Currently we have more ideas for research than we have actuaries to do the work. That doesn’t mean that we are closed to new ideas, but it does mean that actuaries who are keen to participate in research, but don’t have a pet project, can ask us for a list of the current ideas waiting to be pursued. Examples of projects currently in progress but under-resourced are:
– Index-tracking and passive benchmarking.
– Fees and performance.
– Developing a web-based ‘knowledge portal’ everything actuaries ever wanted to know about finance and investment, but didn’t know where to look.
In return for the effort volunteers put in, FIB undertakes to do what it can to facilitate the publication of research output, for example by providing a time slot at the profession’s annual Finance & Investment Conference. Other outlets include professional journals, articles in magazines, seminars, etc. An example was our paper ‘Do actuaries know how to measure value?’, presented to SIAS in February last year.

A collaborative arrangement between the profession and the Engineering and Physical Sciences Research Council (EPSRC), which manages government funding for university research in the financial mathematics area, has resulted in a remarkable leveraging of the profession’s research funds.
For example, in 2002 a total funding of some £427,000 has been made available, of which the profession’s contribution is £30,000. Direct grants from the profession’s general research funds may also be bid for.