October 29, 2029: Black Hole Monday, Part 2 – The Impacts on Insurance
By Bryon Robidoux
Actuary of the Future, January 2024
Continuation of “October 29, 2029: Black Hole Monday, Part 1 – The Future Environment” from the October 2023 issue of Actuary of the Future.
Dad continues somberly, "Those were nightmare years for insurance companies, the economy, and me. Due to regulations, companies had to immensely increase their capital, which killed their surplus and profit. Companies started laying off people and running bare bones, which is how your Aunt Betty lost her job. This gutted actuarial consulting firms because the projects dried up overnight, which killed my job. Given the deficit misinterpretation I discussed earlier, unemployment benefits were non-existent.
Before COVID-19, life insurance companies discussed the acceleration of technology and mortality improvement. But in 2027, the profession started talking about mortality deterioration instead. The labor shortages exacerbated the medical profession's existing issues. After COVID-19, finding medical professionals was a real struggle - especially nurses and doctors. At the same time, the Baby Boomers needed an increasing amount of care. The labor shortages let people go to well-paid professions that were less stressful and time-consuming. Leading to your Uncle Marty not finding a doctor, which led to his eventual death.
Mortality deterioration directly caused havoc for insurance companies. It increased the velocity of death claims, so companies were paying life insurance claims much faster than ever expected. It crippled any company that offered Long Term Care (LTC) because of the rampant medical and general inflation that no one saw coming. The LTC companies tried to raise rates, but given the struggle of the times, the regulators were not going for it. No one wanted to touch those jobs due to the stress and dismal outlook.
The employee benefits space was an odd beast. Premiums rapidly decreased due to layoffs due to a poor economy. They rapidly increased because companies used employee benefits as incentives to find people with the skills they needed. The ones with benefits had better, more expensive benefits. In total, premiums stayed flat.
Amazingly at that time, Obama Care was still around somewhat in its original form. Given the stock market was down and the US citizens' debt intoxication, people could not afford COBRA, so they flocked to Obama Care. The political tension caused a see-saw between parties, and they used Obama Care features and benefits as ammo. The rapid changes kept the health actuaries extremely busy and pulling out their hair!
The twisted saving grace of insurance companies was that many pension and annuity liabilities rolled off their books much quicker than expected. Given a large number of Baby Boomers, this kept the industry afloat. Employers reluctantly brought back defined benefit (DB) plans to entice workers due to labor shortages. The defined contribution fell out of favor because:
- The current generation saw their parent's lack of retirement savings in their 401K and,
- The ones that did save got decimated because they stayed in equities trying to squeeze return instead of converting to an annuity.
The DB plan revival increased the demand for pension actuaries.
Property and Casualty (P&C) could no longer insure shipping freight that left the Western hemisphere due to all the fighting in Europe and Asia. The 2022 Ukraine war was only the beginning. P&C also had to contend with climate change too. Population collapse didn't help with climate change because the collapsed economies could no longer get fossil fuels due to political tensions, which forced them to burn dirtier fuel sources such as trees. The farming techniques were similar to 1900 and massively inefficient land use."
M&A
Michelle says, "Wow, dad! Before this class and your explanation, I had no context as to how a decision in 1979, made 7000 miles away, could unintentionally intensify a population collapse 50 years later and bring down the global economy! Dad, how did you find a job again in all this turmoil?"
Dad replied, "Good question! Due to the deglobalization that was going on, there was a lot of activity in mergers and acquisitions. As the US no longer wanted to or could police the world, old pre-WWII alliances and disagreements were popping up worldwide. Insurance and reinsurance companies that had expanded worldwide were now doing business in hostile countries. Due to the conservative nature of the insurance industry, they started buying and selling blocks of business to consolidate within allied countries.
Reinsurance companies in Geographies of Success and others like Germany and France survived. But everywhere else, they either closed shops because the country had too much turmoil, or the insurance companies, to appear that they were still growing, kept consolidating until they were monopolies. Reinsurance couldn't back these monopolies due to political tensions. Buying and selling blocks of insurance kept a lot of actuaries busy. Luckily, I could jump on this bandwagon and get reemployed."
Michelle says, "Wow! So many things happened over the 40 years. How did the models change?"
The Models
Dad responds, "The models have changed a ton. Luckily, the SOA doubled down on diversity, equity, and inclusion. They declared in 2027 that education was just as important as race, religion, etc.
They invited different professions to present and participate significantly at the SOA conferences, such as climatologists, system scientists, physicists, computer scientists, designers, geopoliticians, and various other technical professions. We had speakers like Mervyn King, David Orrell, Stephanie Kelton, Steve Keen, Peter Zeihan, Steven Wolfram, Adam Grant, and many other interesting, cool people. This change in perspective brought many new ideas and ways of looking at problems. After the presentations, we sat around and shared and debated how we could incorporate the ideas into our work. It was like the coffee houses of the 1700s. It was so much fun!
As much turmoil was going on in the world, this made it exciting to be involved in the profession. The old guard, who hadn't taken exams in years, got reinvigorated! There was a sense of kinship that we could come together and tackle our issues. In the end, what resulted was that our models got a lot less linear and a lot fuzzier. It was great that it happened just before the crash because we needed all the creativity and innovation we could muster."
Michelle looks at him with a weird facial expression and says, "Fuzzier?"
Dad says, "After the Impact conference with Mervyn King, we got on the bandwagon to differentiate risk from uncertainty. We have thought these were synonyms for a time, but they are not. Risk has to do with resolvable uncertainties or, in layperson's terms, games of chance, such as the Yahtzee you played with your grandmother. The risk applies in situations with well-defined events in well-defined event spaces with stationary processes. Well-defined events and static methods were very short in supply after Black Hole Monday!
Mervyn King talked to us about radical uncertainty, which is uncertainty beyond risk. Outcomes are vague or happen with so little frequency that calculating reliable probabilities is nearly impossible. Probability wasn't applicable in this situation, so we had to move to possibility. The possibility is where fuzzy mathematics comes in. Don't worry; the loss models and risk management exams contain sections on fuzzy mathematics.
Furthermore, with all the chaos and uncertainty in the world, it became mission-critical to move beyond equilibrium models, which exclusively focus on random external shocks. Equilibrium models assume processes will naturally come to rest, and feedbacks dampen oscillations over time. Equilibrium and dampened oscillations were a thing of the past in the deglobalizing hellscape we lived through!
The shocks weren't external and random. They were due to the tightly interconnected structure of the global markets. People weren't independent agents acting in their own best interests. They behaved like scared Wildebeest herds looking for social confirmation of their decisions. All these dynamics forced us to update our modeling techniques, which included topics such as social and economic networks, complex systems, and systems science. Systems science was necessary to understand the emergence, self-organized criticality, and other nonlinear dynamics. Self-organized criticality helped us know when and how markets might collapse once they hit a critical point.
Adding dynamic systems modeling meant that actuaries started significantly increasing agent-based modeling in conjunction with economic scenario generation (ESG). We performed spectral analysis to tease out different signals from the market. We would then calibrate the emergent behavior of our models to reproduce the market signals so that we could understand the sources of various market behaviors.
Once we had a big-picture understanding of the behavior of the market, we would dissect the market into its major structural pieces called regimes. Only after having a good handle on the structural model of the economy would we fire up the old ESG. We wouldn't calibrate the ESG to the market. We had a one-to-one relationship between the regime and ESG. We would calibrate each ESG to the behavior of its regime. Modeling was tons of fun, always interesting, and highly challenging."
Michelle states, "Man! No wonder there are so many exams. There is so much to learn, but it sounds exciting."
The End
Michelle sees that the celebration has moved to a different part of the house and says, "Hey, dad, maybe we should go interact with everyone else."
Dad replies, "Man, I am proud and excited for you to follow in my footsteps. Seeing that you have the same love for my profession was so much fun. I am going to miss you going off to college."
Michelle replies, "Thanks, dad. I love you too. Let's be friendly with everyone else. We should probably wake up Aunt Betty now."
Bryon Robidoux, FSA, CERA, MAAA, is an assistant vice president of Product Development at Constellation Insurance. Bryon can be contacted at bryon_robidoux@constellationinsurance.com.
References
- Fieguth, Paul. An Introduction to Complex Systems: Society, Ecology, and Nonlinear Dynamics. Springer, 2021.
- Hidalgo César. Why Information Grows: The Evolution of Order, from Atoms to Economies. Basic Books, 2016.
- Howell, Michael J. Capital Wars: The Rise of Global Liquidity. Palgrave Macmillan, 2021.
- Kay, John, and Mervyn A. King. Radical Uncertainty: Decision-Making beyond the Numbers: With a New Preface. W. W. Norton, 2021.
- Keen, Steve. The New Economics: A Manifesto. Polity Press, 2022.
- Kelton, Stephanie. The Deficit Myth Modern Monetary Theory and the Birth of the People's Economy. PublicAffairs, 2020.
- Mian, Atif, and Amir Sufi. House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again. Chicago University Press, 2015.
- Stoop, Ruedi, et al. Nonlinearities in Economics: An Interdisciplinary Approach to Economic Dynamics, Growth and Cycles. Springer, 2021.
- Zeihan, Peter. The End of the World Is Just the Beginning: Mapping the Collapse of Globalization. Harper Business, 2022.