One of the things that I have always loved about mathematics, particularly in my quickly receding undergraduate days, is that there is almost always a right answer.  At least for the problems posed in math classes.  Usually the answer could be determined exactly.  Sometimes, you could only approximate it, and if you couldn’t do that, you could often at least prove that it exists.  And every now and then, you’d just have to take solace in the fact that you could prove that there is no solution.  At least that’s something.  That type of certainty is comforting to the young and idealistic, and to those who limit themselves to tidy categories of problems.

The passage of time and accumulation of experience has broadened my perspective.  While I still enjoy finding an exact and correct answer when the opportunity for that luxury presents itself (balancing the checkbook, reviewing my kids’ homework, etc.), I have come to recognize that these situations are not the norm in the real world.  All of us, including, and perhaps especially, actuaries – highly trained professionals in the fields of mathematics and finance, engineers of the insurance industry, and Jedi knights of the risk management profession – are surrounded by intractable problems.  By intractable, I don’t mean that these problems cannot be solved, at least partially.  I mean that they are not amenable to an exact and correct solution that can be determined in advance.

All too often, when the mainstream media mentions the actuarial profession, a trite description like “the folks who set your insurance rates” or “the folks who predict your life expectancy” is often used.  The inference, often quite direct, is that actuaries are capable of predicting the future.  Actuaries naturally scoff at this characterization, as we know that it is absurd, but I think that a fair number of us secretly enjoy the mystical powers that are ascribed to us.  All of which contributes to a general notion that actuaries and other mathematical and financial wizzes are capable of predicting the future and eliminating risks.

The good news is that we cannot.  No one can.

Why is this good news?  It is good news because risk is the flip side of opportunity.  A business without risks is impossible, whether we care to admit it or not.  And even if it was possible, it would be a business without opportunity for gains.  The gains that businesses earn from opportunities are in compensation for the risk of losses.  Moreover, a business can be characterized as a decision, explicit or implicit, to participate in certain types of risks.

Which risks, and to what extent?  Those are the real questions.  Any entrepreneur or business leader understands this intuitively.  The actuary’s role is to plumb the depths of these questions, determine and implement answers that are appropriate for the business given its risk appetite, and review, learn, and modify over time.  Historically, much of the work of actuaries has centered around management of specific risks in the insurance industry, but there is no reason for this limitation prospectively.  Business risks are all around us – materials supply, delivery logistics, financial liquidity, competitive analysis, customer behavior, and the list goes on.  Actuaries can help evaluate and manage these risks, even if they can never be fully eliminated.  Actuaries can identify the cost-benefit trade-offs that are central to the risk management process for any business.  And perhaps most importantly, actuaries can help identify and manage the other risks – the ones that are very subtle, perhaps possibilities that we have never wanted to see or consider before.

The job of the actuary is to see the world as it is, and help manage business opportunities and risks realistically.  The job is not to do exhaustive calculations for their own sake, or impart a false sense of precision to complex financial projections, or just “run the model”.  The job is to think and do, sometimes with the aid of rigorous mathematical and financial techniques, but avoid being fooled about what is and what can never be.  Can your business use this?