By Hans Buehlmann

My speech has two parts.  The first part is about what I decided not to say tonight.  My speech should not be a standard happy birthday speech.  If I has wanted to give such a speech, I would have looked up Phelim Boyle’s web pages and I would have found an impressive list of Phelim’s merits:

• His engagement in 10 editorial boards of highly respected journals,
• His wide range of publications starting with a formula for the length of the hyperbola, then moving to actuarial topics of mortality and demography, with the center of gravity in finance, more specifically in asset and option pricing as well as stochastic interest rates.
• I would have elaborated on the happy fact that Phelim has this rare combination of interests being deeply interested in basic understanding on the one side but on the other one also being in love with procedures to numerically compute quantitative values.
• and I would have mentioned his academic awards and distinctions:
  • the All Star paper award of the Journal of Financial Economics
  • the Redington award of the Society of Actuaries
  • the Centennial Gold Medal for outstanding scientific achievements within the actuarial profession
  • the INA award by the Academia dei Lincei in Rome
  • the David Halmstad prize for the best contribution to actuarial literature
  • the IAFE Financial Engineer of Year award

There is, of course, much more of what I did not want to say, but let me stop here.

Phelim, you are too good a scientist and too strong a character that you would need to listen to all this.

For those guests who want to learn more of what I want not to say:

• http://accounting.uwaterloo.ca/people/pboyle.htm
• http://accounting.uwaterloo.ca/people/pboyle/boyle2.htm

Let me now turn to what I did want to say.

It is nearly 20 years since I published an editorial in the ASTIN Bulletin with the title “Actuaries of the Third Kind?”  For the non-actuaries I should explain that in that editorial

• “Actuaries of the first kind” are the classical life actuaries essentially using a deterministic model
• “Actuaries of the second kind” are the general insurance – (or as they are called here casualty) actuaries using probability distributions of insurance claims as basic paradigm
• “Actuaries of the third kind” I defined the then emerging group of specialists creating a new philosophy for handling investment problems in insurance and beyond.  The basic paradigm of this group is the trajectory of the stochastic process, to which you directly apply new financial instruments like options, futures, etc.  Let me quote one sentence from this editorial: “We, as actuaries, must recognize that with the exception of a few colleagues – Phelim Boyle, David Wilkie, Elias Shiu, …, we are somewhat late in recognizing these new developments.”  So much for this review of the situation 20 years ago.  What has happened since then?  some reflections on this question are appropriate at the 65th birthday party of one of the pioneers of this reorientation.

On a purely organizational level IAA has created AFIR, its Section in financial risk.  It is not clear how well this section has actually performed.  In my understanding it has had an educational role, namely to propagate basic concepts among actuaries, such as the paradigm of hedging, the concept of no arbitrage, and the resulting pricing technique.  Actuaries have also become more aware of implicit options included in insurance products (particularly in life insurance).  But where are the genuine contributions by actuaries to the field of finance, which are due to actuarial thinking?  The founders of AFIR had clearly stated, that actuaries and finance should not be seen as a one way street, where only actuaries learn from finance.  Where has finance learned from actuaries?  The answer to this question is rather negative.

I see another development that is more encouraging.  Many universities have at least made efforts to see education of actuaries and of experts in finance as one single subject – obviously with specializations in different directions, but with one common basic core of courses on which both applications in finance and/or insurance do rely.  We have clearly defined our education syllabus at ETH Zurich based on this understanding.  The University of Waterloo is operating on the same basic principle.  Let me give a specific example of this combined syllabus.  The common course in probability theory should not be purely abstract exercise in measure theory.  It should convey how the abstract probabilistic concepts come to life in insurance and in finance.  And irrespective of whether you choose to specialize as actuary or financial expert you should learn these concepts shape the basic thinking in either area.

Let me make an analogy to the education of civil engineers.  In many places there are separate courses in steel construction, in concrete construction, and in wood construction.  It makes much more sense to educate civil engineers in the common principles of construction independent of the material to which these principles are applied.  Such engineers will be better prepared to face the problems of an ever-changing future.  I think with the foundation of IQFI you are even a step ahead of us.

So much for education.  What about the financial industry?  It is true that 20 years ago the industry worldwide propagated the idea of all-finance.  The same firm would offer the customer all financial products from the check-account, private financial investment to life insurance policies, and automobile coverage.  I think many experiments have been made on the basis of this concept all over the world.  In the majority of cases – as far as I know – these experiments have been rather unsuccessful.  Why?  If one talks to the persons involved in such experiments the typical answer is: bankers think differently than insurers.  Do you believe that?  I don’t believe that it is just the thinking.  Why should our students, as I just said a few minutes ago, be able to think in both directions, while people in practice cannot?  With all respect to our students, they are not so much more intelligent than the rest of the world.  My answer is, bankers and insurers act above all differently, because they have different values (values in the behavioral sense).

Let me give an example.

There is such a thing as a defaultable bond in the finance literature.  You will not find the concept of a defaultable insurance policy in the insurance literature because it contradicts a basic value of the insurer.

Yes, in a nutshell, insurance is much more liability driven than banking.  In the scale of values of the insurer, the promises given to the beneficiary of an insurance policy hold the top position and this position is held irrespective of cost.

Of course, in the practical world, there will be sinners, also among insurers.  I am not talking about them, I am talking about the values needed to recognize them as sinners.  This maybe a delicate point that I am touching here, but – in any case – we should recognize that, differences in values are at the basis of the many failures of all-finance projects in the past years.

Let me turn to the academic side.  I strongly believe that the difficulty of having bankers and insurers under the same corporate roof – as I just described it – should not change our concept of a joint academic education of both financial experts and actuaries.  In a way, it is even a further reason in favor of this concept.  Bur probably we should also offer courses on the values underlying the thinking in finance and insurance.  In any case we should talk about these values within the regular courses.  In a academic environment differences can be worked out and discussed in a more emotionless climate.  Couldn’t it be a clearly recognized goal of our education programs, that students will learn that the whole are of finance and insurance is not one-dimensional and not ony about how to make more money.

I should hope that you all take up this question and discuss it, when you return to you home institution.

Walking up the University Avenue to this campus, you pass the entrance to Wilfrid Laurier University where Phelim is going to teach in the Fall, under its Coat of Arms you can read Veritas Semper Vincit (Truth Always Wins), I like that.  Yes, we need good discussions on values and then let Veritas win.

The third part of my speech is no longer speaking part but doing part.

I was traveling to Waterloo with a rucksack with

• Gerber’s stimulation machine
• additional box

I am happy that the custom’s officer who not looking into the Rucksack and let me through.

This is what Swiss Watchmaker call a Seaman’s Alarm clock.

Why?

First story.  Phelim as invited speaker in Rome.  At the AFIR Colloquium in Rome most of us were staying in the luxurious hotel Excelsior right on Via Veneto.

Phelim was one of the invited speakers but he morning he was supposed to speak he was not there.  Our Italian friends dragged him out of bed and the rumor goes that – in the style of Felini’s La Dolce Vita – Phelim gave his lecture in pajamas.

Second story: Phelim as skier in the Swiss mountains.

As you may guess skiers get up early in the morning.  So when Phelim and Mary came to Switzland I agreed to meet them at the railway station in Chur (my home town in the mountains about 1½ hours train ride away from Zurich).  The train arrived, but Phelim.  When I called his hotel in Zurich, he was still in bed.

I hope, I have made it clear: Phelim needs an alarm clock and one that nobody can overhear.

Of course, nobody is perfect.  But Phelim, be assured, it is our weaknesses that render us human.

So let me say,

Happy birthday Phelim and many happy returns.  Be assured you have many persons who admire you as an academic but even more friends who shall be happy to welcoming you all around the world with or without the alarm clock.