Investment Income
Population Stock
+
Investment Income
+
R
Interest Rate
112,000
110,000
108,000
106,000
104,000
102,000
100,000
98,000
96,000
1234
feedback effects and significant time delays. When such dynamic complexity exists, it’s always a good idea to draw out a causal
map to generate strategic insights.
Beyond this point, however, you need to consider the costs
(in terms of time and resources) and the benefits (in terms of
insights). What would the model have to produce to justify
the investment in building it? When modeling the evolution
of the obese population, for instance, the strategic insights are
extremely valuable. When estimating IBNR (incurred but not
reported) reserves, the insights are nonexistent.
Modeling requires, in addition to technical skills, a broad
background that includes knowledge in areas such as regulation, political science, marketing, sociology, psychology, history,
and even literature (although regrettably this background often
is overlooked). We must never lose sight of the fact that the behavior of complex human systems reflects human nature. Just
look at politics, international trade, mergers and acquisitions,
or company morale.
If simulation is essential when experimentation isn’t feasible
or is too costly, and if system dynamics—and, for that matter, other
strategic tools such as game theory, scenario analysis, and decision
making—are so powerful, why is it that actuaries almost never use
them? Is it because our role in strategic analysis has been minimal, or has our role been minimal because we don’t possess the
required analytical tools? Is this a reinforcing loop?
Time
5678910
Exponential Growth
oscillation
CARLOS SANCHEZ-FUENTES is managing partner at Axiom
Actuarial Consulting LLC, a minority-controlled firm that
specializes in the strategic and actuarial aspects of health
care. he is a fellow of the Society of Actuaries and a member
of the Academy, and he holds a master’s in mathematics from
uCLA and a master’s in business administration from Yale. his
professional interest is the use of strategic analysis to tackle
real-world problems. he can be reached at carlos-fuentes@
axiom-actuarial.com.
Growth with overshoot
The information provided in this article should not be construed as
professional advice of any type. The article should not be used as a substitute
for professional advice or services, and the reader is cautioned not to make
business decision or take actions based on the contents of the article. The
author and Axiom Actuarial Consulting, LLC shall not be responsible for any
losses sustained by any person or institution that relies on the information
contained herein. This article is solely the opinion of its author. It does
not express the official policy of the American Academy of Actuaries; nor
does it necessarily reflect the opinions of the Academy’s individual officers,
members, or staff.
