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Gábor Hanák is a past AAE Chairperson and current member of the AAE Professionalism Committee |
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In a recent blog of Esko Kivisaari and Leonid Zeldin, published by the Actuarial Association of Europe (AAE), it is discussed if “Is a fair value fair?”
Although I fully agree with some of the main messages of the blog, I would challenge one of the starting points.
The authors describe a notion that is called “actuarial fairness”; for example, they state that “for actuaries the price of an insurance policy is considered fair if customers bearing the same risk are charged the same price”. There are others as well who use “actuarial fairness” using the same or similar approaches (google up “actuarial fairness” for some instances).
In my understanding, this approach is, so to speak, unfair to the actuarial profession and may contribute undermining the trust and confidence in actuaries when they provide professional services.
Actuaries[1] have and do always apply fairness principles (for example for pricing). One may want to criticize that the fairness principles applied in practice by actuaries may fall short of what should be applied. However, the picture painted and the message conveyed in the blog seem to show that actuaries have and do neglect any fairness principles beyond what is called in the blog as “actuarial fairness”. This is a false picture of the profession.
The criterion used by the blog in insurance pricing (same risk – same price) could be called as a pure risk related fairness. However, actuaries have long applied other fairness criteria than this pure risk related fairness. For example, actuarial pricing in the EU does not allow to apply different prices for the same services for men and women who otherwise have the same risk characteristics (and the same applies to other protected characteristics such as ethnicity). In other words, from this viewpoint, the actuarial pricing, i.e. the pricing that actuaries normally apply, that respects the EU’s Gender Directive and other EU directives that prohibit differentiation on the basis of some protected characteristics, is fairer than the pure risk related fairness.
Having said all the above, I fully agree with the main message of the blog: that fairness should be defined and understood in much broader sense than the pure risk related fairness; that actuaries should improve their approaches to fairness to explore strange new worlds in the universe of fairness types, to boldly go where no actuary has gone before; that it is important for actuaries to discover unfair practices and convert unfairness to fairness in their services. This is true in particular in the age of AI as AI amplifies or multiplies the risk of using biased or discriminatory information already embedded in the process which then may lead to unfair decisions and consequently, the efforts actuaries need to invest in preventing unfair decisions (either intervening a priori or a posteriori the modelling) need to improve significantly both from a qualitative and a quantitative perspective.
Stating an assumed (but untrue) deficiency of the actuarial profession in the blog in terms of the approach of describing „actuarial fairness” and its analysis/application, resembles me another assumed (but untrue) deficiency of the actuarial profession. Some people insist that from now on, especially when it comes to climate related services, actuaries (like the actuary 2.0 or 4.0 or n.x or similar) should apply a forward-looking assessment as past experience will definitely be inadequate for any future related actuarial statements. However, actuaries have always applied forward looking assessments. Normally, the task of an actuary consists of making some statement on the future, like future cash flows, consequences of various scenarios, etc. Therefore, actuaries who respect the applicable code of conduct (for example a code that is substantially consistent with the model Code of Professional Conduct of the AAE[2]) should consider both past experience and all reasonable and justifiable circumstances that have a material impact on the future. Actuaries, as such, have always been and continue to be forward looking professionals.
[1] Note that when I speak of an actuary, I mean a “full member” or a “fully qualified member” of an actuarial association that is a full member of the Actuarial Association of Europe or of the International Actuarial Association.
[2] In particular paragraph A1 of the Code of Professional Conduct and Section 2.7 of the European Standard of Actuarial Practice 1 General Actuarial Practice.
12 December 2024
This blog is written on a personal title.
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