The first two chapters of this actuarial thriller can be found in the July-August 2017 issue of AR. Keaton, who works in the Reserving department, uncovers a secret Pricing operation to make the loss ratios appear profitable! His informant has revealed that they have enlisted the help of Predictive Modeling. Harris, a hardened Reserving actuary, arms Keaton with a fake “Senior Predictive Modeler” ID and instructs him to find out more information and to put a stop to the plan.
Predictive Modeling sat five floors up from Reserving. Keaton took a long detour around the floor to make sure he wasn’t being followed. As a further precaution, he ducked into a restroom stall and proceeded to change his appearance by flipping over his study materials so that the outside binder now showed “Exam 5” instead of “Exam 7” and by exchanging his BA-II Plus with the TI-87 hidden in his pocket. He then exited the restroom and climbed the steps, glancing back to make sure that no actuarial agents were on his tail.
Keaton approached the door at the top of the stairs. He listened to the drippings coming from the coffee dispensers on the other side of the door as he took out the newly printed ID and waved it in front of the sensor. He pushed the door open and noted the dull, dark carpet as a cold wind hit him in his face — the air conditioning was set too high on this floor — causing him to pull up his collar.
Before him was a long, narrow hallway. As he neared the hallway, two Predictive Modeling agents approached and asked to see his documentation. Trying to act calm, Keaton took out his new ID and handed it to them. One of them looked it over carefully while the other eyed him suspiciously. “How about the news last night?” the former asked him.
“What news?” Keaton responded, too smart to fall for their trap. The asker nodded and handed back his ID.
Keaton reached the corner of the floor, which he knew to be a bad area. Here, actuaries would develop over-fitted models and choose Tweedie powers carelessly without bothering to check residuals. He clutched his study notes tightly to his chest as he passed by the thin, beige cubicles. “Psst,” he heard a sickly looking, blonde-haired modeler call out to him with a raised mug of coffee. “How would you like to learn about advanced genetic algorithms?” Keaton turned his head and quickly headed to the end of the hallway.
Seeing a conference room in front of him, Keaton swiftly looked both ways before ducking in. This room was the frequent meeting place for Predictive Modeling. It was from here that they would plot and devise new and clever schemes to bewilder and confuse. Keaton approached the front of the room and looked carefully at the whiteboard. He could see that a series of complicated equations scribbled on the board had been erased. What had they been trying to hide, he asked himself. It’s not like someone would just erase the board as a courtesy. His answer came after the equations. He could make out a word, “Trend,” which was followed by a downward arrow! So that was it, he thought. They must be planning on lowering the trends to make the book look profitable!
As he thought about it, it all made sense. All the pieces came together! Just then, he heard some noise from outside of the conference room!
“Do you have this room reserved? Because we booked it from three o’clock,” said one of three modelers who appeared at the door.
Keaton watched as three modelers burst in, arguing passionately over which type of Pareto was superior.
“That’s okay,” Keaton said as he exited the room. He snuck along the hallway past the ERM quadrant to the office that belonged to Alec, the head of the Profitability operation. He knocked on the door, calling out, “You can come out now, Harris!”
He could hear soft murmuring from behind the door. After a long pause, the door opened. Alec sat behind a large desk, a look of hatred on his face directed at Keaton. In front of him was Harris!
Harris turned to face Keaton. “How did you know it was me who gave them the idea?” he asked, a note of embarrassment in his voice.
“I admit that I didn’t realize until later,” Keaton said stepping into Alec’s large office. “When you were studying, I saw you highlight the word, ‘conservatism.’ Any true Reserving actuary wouldn’t need to highlight that word!” Keaton paused for dramatic effect. “Clearly, you must have been talking to someone outside of Reserving!”
Alec rose abruptly from his chair. “There’s nothing you can do about it now!” he thundered. “The trend code is running as we speak. It’s due to complete in exactly one hour. One server is in a secret location in South America that only I know. The building containing it is heavily fortified, guarded by 40 Modeling agents — all with Ph.D.s in statistics! Its backup is on a volcanic island in the Pacific, heavily guarded as well! It’ll just be a matter of time now!” Alec turned and pointed to a large red display on the wall that was counting down the time as Keaton couldn’t help but wonder why these people always made everything much more complicated than necessary.
Harris turned to face Keaton. “The best part is that you’ll be blamed for the defection. That Predictive Modeling ID in your pocket will be used as evidence that you were collaborating with them.”
“But can’t I just discard the ID?” asked Keaton.
“And lose access to the brand new coffee machine installed on this floor?” Harris responded. “I don’t think you’ll be doing that. I’m going down to speak with the head of Reserving now.”
Harris exited the office, rushing to the elevators. Keaton followed close behind. Harris made off in an elevator car going down to the Reserving floor. Keaton took pursuit and quickly jumped into the next car.
The two cars zoomed downwards, Harris’ car slightly ahead. Keaton slammed repeatedly on the door close button as two employees slowly entered on the floor below. Harris’ car stopped on the next floor and a beverage cart was wheeled in, allowing Keaton to close the gap! It was a high-speed elevator chase down to Reserving! Keaton swore on the next floor when a polite man held the door open for others to enter! Harris’ car edged back in front and was the first to arrive on Reserving.
Harris ran to the head of Reserving’s office and began explaining how Keaton was the one behind the profitability issue.
Keaton slunk into the head of Reserving’s office. When she saw Keaton, she stepped over to face him.
“Thanks for a job well done!” she said, taking Keaton’s hand and vigorously shaking it. “The department owes you a debt of gratitude!”
“But … I don’t understand,” Harris said. “How can you thank him for making the loss ratios profitable?”
“Profitable?” said the head of Reserving. “They’ve never been more unprofitable! Thanks to the revised risk-adjusted profit loads from ERM, the business has already been discontinued!”
Uri Korn, FCAS, works for AIG in New York City.