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The Actuary The magazine of the Institute & Faculty of Actuaries

Dare to be different

Steve Mills discusses free thinking, Solvency II and bow ties with Deloitte partner Andrew Smith, who was awarded a Finlaison Medal for his actuarial research


Andrew Smith

Andrew Smith is well known internationally for his portfolio of ground-breaking client assignments and extensive published research in the actuarial field.

He has worked on projects in life, pensions, investment and general insurance, as well as less traditional areas such as mortgage credit scoring, economic scenario generators, exotic derivative pricing and the financing of nuclear power stations.

Smith took some time away from his holiday to discuss his distinctive views on the changing actuarial environment.

Could our statements be misconstrued as confusion over whether insurers pose a threat to the financial system?

As we’re catching up with you on your holiday, my first question has to be how is Brazil?

Brazil is great, thanks. After a week of music workshops with slum children in Fortaleza, I’m now relaxing with my family in Jericoacoara, a beautiful village on Brazil’s north coast.

How would you define an actuary?

For me, technical excellence in statistics and finance is fundamental. The Profession has also emphasised softer skills, to help actuaries better communicate with management or improve their personal impact. Actuaries can develop insight into how particular businesses work, or into managing teams. Some may feel that our professional standards set us above those who are merely technically competent. But, in my view, actuaries should seek to be known for their detailed understanding and capabilities in probability and finance. All other skills should be additional to this.

How would you like to develop the profession?

Every twist of the current financial crises has exposed more surprises in areas we thought we understood. I have come to realise how little we understand about risks to the stability of the financial system as a whole; we are good at seeing bits in isolation, but our statements about systemic effects sometimes seem to be opportunistic. For example, in the face of bail-out tax proposals for systemically important financial institutions, we can easily convince ourselves that insurers and pension funds do not fall into this category. On the other hand, we may support the idea of an additional premium to liability discount rates in times of systemic distress in order to prevent a spiral of forced sales of illiquid assets.

Could our statements be misconstrued as confusion over whether insurers pose a threat to the financial system as a whole? I would like to see the actuarial profession develop more carefully reasoned arguments in this area, so we can better understand the impact on society of the institutions we advise.

What celebrity could actuaries learn from?

I’m not sure if he counts as a celebrity, but there’s a lot to learn from the little boy who pointed out the emperor’s lack of clothes.

If you had to build a new solvency regime for insurers, how close would it look to Solvency II?

We still don’t know what the Solvency II regime will look like, with such basic questions as the valuation of fixed cash flows up for negotiation. The previously taboo question of whether Solvency II will ever be implemented is now openly raised.

We need to recognise that we are in a democracy. People have the right to lobby their representatives; MPs can cajole, haggle, obstruct and trade demands in one piece of legislation for carve-outs elsewhere. The outcome of such a process is a mixture of rules and principles, with long lists of exceptions, special treatments and concessions granted in some long-forgotten haggling process. Bismarck said legislation resembles sausages – if you appreciate the end result you should not watch them being made.

I accept that a technically skilled dictator could have done better than current Solvency II drafts in protecting policyholders (and compensation funds) from the effect of insurer failures, as well as being more theoretically elegant and internally consistent. But the dictator might make other demands, such as forcing citizens to wear bow-ties, appreciate jazz and drink Georgian wine. You’d soon be wanting democracy back, even with its ugly regulatory process.

What will actuaries do post-Solvency II?

We don’t yet know when post-Solvency II will actually be. For me, helping to build some firm’s internal models feels like being on the team that developed the first motor car. The models splutter along, but they’re neither fast nor easy to use. I expect to see continued development for many years.

If you hadn’t followed an actuarial career path, what would you be?

At school, I wanted to be a civil engineer, but a summer holiday job at Bacon & Woodrow changed my mind.

Tell us about your first conference presentation.

I was very fortunate as a summer student to be spotted by Sidney Benjamin, who encouraged me to publish some of my work on option pricing at the AFIR colloquium in Paris.

When and why did the bow tie become embedded in your personal branding?

I started wearing bow ties to avoid being confused with other Andrew Smiths. One good thing about actuaries is that they are allowed to be a little eccentric and not get fired. A few colleagues of mine, Tony Salter and Alasdair Brown, used to wear bow ties.

I wish I could quote an image expert endorsing bow-ties to demonstrate intellectual depth, independence of thought and integrity, but the only image consultant I ever asked told me they look ridiculous and that if I wanted to be taken seriously I should wear a navy suit with white double-cuffed shirt and dark tie like everyone else. I’ve never been good at conforming.

Have you ever appeared on television?

Yes, I was on the BBC Business Breakfast at 5am last spring talking about credit default swaps on Greek government bonds. I have also been interviewed on Georgian TV about how to attract more tourists to Batumi, and on Russian TV on the day of our last general election when by chance I was passing the Houses of Parliament on my way home from a concert.

I was once approached to appear in a television programme where I would swap my planned family holiday (in Abkhazia) with a family going to Butlins for a week. I declined.

What is the worst advice you’ve ever been given?

Well-meaning relatives advised me to get my foot on the housing ladder by buying a property in 1990 when I got married. When I bought a house a few years later, every financial adviser tried to sell me a low-cost endowment – advice which I congratulated myself on rejecting in favour of a repayment mortgage. With hindsight, I should have probably taken the bad advice, as it had an inbuilt option to profit if the stock market went up or play dumb and seek compensation if the market went down.

I think both of these elements of poor advice suffered from naïve extrapolation of past trends, and we need to ensure we do not continue to fall into the same trap. Many actuaries work in the savings industry and assume that encouraging people to save is a good thing. However, it makes no sense for me to invest now, at negative prospective real returns, to finance a holiday in my seventies that I could enjoy more now in my forties. Furthermore, anyone with above-average savings is at risk of confiscation by future governments increasingly desperate to tame a ballooning national debt. For some people, it makes sense to save, but for others it may not.

Some of the best advice I was given was to participate in professional research working parties. I have made many friends, learned a great deal and participated as a co-author of several prize-winning papers as a result.

How do you want to be remembered after you retire?

I have a curious mind and I am always intrigued to find out how things work, and then to share that knowledge. I have published many research papers; I like to think that these have pushed the boundaries of our understanding and had a beneficial impact on actuarial practice.

Who/what inspires you?

I’m not really into sport, but even the most cynical spectator cannot fail to have been inspired by the Olympic Games. I cycle to work most days, a round trip of 50km, so it was especially inspiring to watch some of the road cycle races that passed close to my home.

One of life’s most challenging experiences is feeling pressured to make statements you think are not wholly true. It is inspirational to see people who blow the whistle on bad practice, even in the face of commercial pressure or active persecution and sometimes at the expense of their career.

Joe Darby, the US sergeant who revealed the prisoner tortures at Abu Ghraib, Iraq, in 2004 is one example. Another is Craig Murray, the former British Ambassador to Uzbekistan, who revealed appalling human rights abuses and the inconsistency between our apparent support for the Karimov regime while attacking Saddam Hussein. Many Russian journalists have lost their lives reporting abuses that the Kremlin would have preferred to keep quiet, with Anna Politkovskaya perhaps the leading example. In the financial sphere, Jim Demopoulos exposed the Madoff pyramid scam to US regulators who didn’t want to hear it.

What are your passions outside work?

My family is most important to me. I regularly play saxophone and organ. I am also an amateur mycologist and enjoy travel.

This interview records Andrew Smith’s personal views. These are not necessarily the same as those of his employer