Applied Actuarial Research Projects

1. Applied Actuarial Research Projects Goldenson Center, University of Connecticut • MCFAM Distinguished Lecture Series • by Jay Vadiveloo • November 1, 2012

2. Outline • Background on the Goldenson Center • Role of the Director of the Goldenson Center • Role of Towers Watson • Applied research philosophy of the Goldenson Center • Major initiatives - Replicated Stratified Sampling (RSS) modeling algorithm - ERM for Small Businesses initiative - National Retirement Satisfaction Index (NRSI) • Conclusion towerswatson.com

3. Background on the Goldenson Center, University of Connecticut • Established at UConn in 2009 with a $1M gift from the Goldenson family • Official name is the Janet & Mark L. Goldenson Center for Actuarial Research • Mission of the Goldenson is to undertakeapplied research projects thatserve the needs of industry in the region • Annual income from the endowment serves as the budget for the Goldenson Center for supporting students on applied actuarial research projects • Advisory Board established with representatives from key insurance companies in the region towerswatson.com

4. Role of Director of the Goldenson Center • Actuarial Science faculty member at UConn with a direct reporting relationship to the Dean • Manages the Goldenson Center and decides on projects to undertake • Fulfills academic role by teaching one class each semester and supervising PhD students • Director is also a full time senior consultant at Towers Watson towerswatson.com

5. Role of Towers Watson • Funds the position of Director of the Goldenson Center and provides time off from Towers Watson duties to fulfill Director responsibilities • Enables all earnings from the endowment to fully support students • Provides real life client and research projects for students to work on • Provides supervisory and project management support for joint Goldenson Center – Towers Watson projects • Joint role as Director and Towers Watson consultant provides credibility to Goldenson Center’s mission to serve the needs of industry • Constant balancing act to ensure that there is no conflict of interest in this dual role towerswatson.com

6. Research philosophy of the Goldenson Center • Focuses only on applied actuarial research • Research projects come from industry needs • Completed research projects can be immediately applied to benefit industry • Research projects have the potential of being commercialized • Ideal research projects satisfy all of the above and also have some academic/theoretical underpinnings towerswatson.com

7. Key Research Projects: Replicated Stratified Sampling • RSS is a new “smart modeling” technique that is intended to dramatically speed up run times for complex insurance calculations • Uses randomly selected samples to calculate the risk metric of interest, replicates the process to produce independent estimates of the risk metric and reduce sampling error, and combines these estimates to come up with the final RSS estimate • It allows you to run your models with a much smaller data set to deliver accurate results quickly • - Simple, easy to understand, and based on widely-used, academically sound statistical techniques • - User has full control over the parameters, including error tolerance • - Requires no new investment in actuarial modeling software • - Very little ongoing maintenance required *Covered by U.S. Patents No. 8,126,747 and No. 8,131,571

8. RSS Technique RSS Parameters: n = # of strata k = # of samples/replications Underlying population Stratum 1 Stratum 2 Stratum n … … Sample 1 Sample k Sample 2 RSS Output Metrics: Estimated changes in underlying population Batch File Base Run Sensitivity r Sensitivity 1 … RSS Processor

9. Key Research Projects: Replicated Stratified Sampling • RSS satisfies all the criteria listed in Goldenson Center’s research philosophy • Could transform how all financial modeling will be done in the future • - Awarded two U.S. patents in March 2012 • - Feature article in Sunday, May 13, 2012 New York Times “Patents aren’t only for engineers” • - One of the 2012 Innovation Award winners from Insurance & Risk magazine • - Currently being actively marketed by Towers Watson and supports research of two PhD students towerswatson.com

10. Key Research Projects: National Retirement Satisfaction Index • Idea generated by two members of the Goldenson Center Advisory Board • Intent is to create an index which captures both financial and non-financial factors impacting retirement readiness • Non-financial factors include: • - state of health at retirement • - level of adaptability (e.g., education and skills) at retirement and impact on post-retirement income • - level of job satisfaction and impact on age at retirement • - impact of pre and post retirement financial planning on retirement readiness • A more holistic NRSI should provide a more positive, controllable and dynamic picture of retirement readiness for the U.S. population towerswatson.com

11. Key Research Projects: National Retirement Satisfaction Index • NRSI construction currently involves a team of five professors, five graduate students and support from Towers Watson’s Corporate Research & Innovation (CRI) practice area • NRSI will be updated annually • NRSI will be jointly branded by Towers Watson and the Goldenson Center and the findings of the NRSI will publicly available and actively marketed • NRSI has the potential to satisfy all the research philosophy criteria of the Goldenson Center and generate the same level of publicity as RSS towerswatson.com

12. Key Research Projects: Enterprise Risk Management for Small Businesses • Motivated by the following factors: • - Small businesses are the most important, largest and fastest growing business segment of the U.S. economy • - Small businesses experience the highest failure rates compared to large corporations • - There does not exist any formalized or institutionalized • enterprise risk management (ERM) principles for small businesses • Since small business owners are not willing to pay for ERM services, over the past three years, the Goldenson Center has offered this service free of charge to small businesses in the region towerswatson.com

13. Key Research Projects: Enterprise Risk Management for Small Businesses • Unbelievably successful initiative • - Students work in teams and have total autonomy on all aspects of project from start to finish • - Great form of experiential education for students on doing non- traditional actuarial projects • - Presentations at Society of Actuaries’ conferences by students together with business owners who attest to the benefits of this initiative • - Interview with students by National Public Radio • - Article in May-June, 2012 Edition of Contingencies Magazine • - Approached by Actex publishers to write text book on ERM for Small & Medium-Sized Enterprises • Commercial potential if ERM done for a small business sector and funded by large corporations which have a vested interest in the success of the small business sector towerswatson.com

14. Conclusion • The Goldenson Center has demonstrated that universities can play a critical role in helping industry in the region above and beyond preparing students to pass actuarial exams and provide a pool of new hires for companies • It is critical that actuarial research projects undertaken by universities stem from industry needs and are done in partnership with industry • Industry does not have the time or resources to undertake long-term key research projects but by partnering with universities and led by industry, this is possible. • Students who have real life experience working on projects together with strong actuarial skills, are far more marketable and valuable to industry towerswatson.com

15. Contact Information Jay Vadiveloo, Ph.D, FSA, MAAA, CFA Professor-in-Residence & Director Janet & Mark L. Goldenson Center for Actuarial Research, University of Connecticut & Senior Consultant, Towers Watson jay.vadiveloo@towerswatson.com towerswatson.com