By Jack Cumming

Not long ago, Steve Moran published an article titled “In Defense of Jack Cumming.” Of course, I’m grateful and flattered, though I don’t think I should need a “defense,” since I only want to help senior living. It’s slightly embarrassing to think that constructive thinking needs a defense. Maybe it has something to do with my being an actuary.

Are Actuaries Needed?

Some time ago, a leading senior living corporation objected to a proposed Maryland requirement for actuarial studies. Their objection: “These actuarial reports are expensive to obtain, lengthy, and convoluted …. There is no reason why Maryland should be one of the few states requiring these actuarial reports.” This reflects a widespread skepticism within the industry about actuarial insights and analysis.

Are the objections to actuarial analysis valid, or are they “alternative facts”? Perhaps, calling lobbying hyperbole counterfactual is a bit strong. The enterprise in question may have been merely trying to avoid something unfamiliar to the lobbying executives.

  • Expensive? Experience shows that actuarial consultants’ reports are based primarily on hourly rates and are consistent with the cost of accounting or legal reports.
  • Lengthy? The assertion of length reveals more about the observer than the reports. If the length is what’s suited to the importance of the analysis, why would that be an objection? Most actuarial reports I have seen are 15 to 20 pages, with the gist presented succinctly at the front end.
  • Convoluted? The complaint of convolution suggests that perhaps sound senior living is too complex an undertaking for the executives of the objecting organization. One has to wonder if they are fully qualified. I hope they’re open to learning.

Why You Need Actuaries

As an actuary myself, perhaps I can help these unknowing executives gain a better picture of what actuaries do and what they don’t. Actuaries can help an enterprise to match risks and finances over a time period — say, the lifetime of the residents. They can’t make the enterprise act accordingly. Actuaries are analysts and advisors. They are seldom operators as well.

Actuaries are skilled in calculating future financial obligations and contingencies. They can help founders and executives to better quantify the lifetime commitments which many CCRCs take on by accepting entrance fees as contract consideration. The entrance fee model, as effective as it has proven to be, especially for not-for-profits, is complex, and actuaries are experts in helping executives to understand and manage that complexity.

Whether those entrance fees are refundable or not, they are a contractual consideration for future benefits over the lifetimes of the residents. That makes them actuarial by their nature and requires actuarial determination.

The alternative is “seat-of-the-pants” management. Without actuarial or equivalent assistance in such a case, executives are just using their own judgment and experience, without planning, preparation, or expert analysis.

That’s foolhardy. It’s equivalent to “by guess and by golly.” We can do better. Some not-for-profit senior living providers might say they do. They pray about it. And, while prayer can help, actuaries can assist that divine intervention.

Scientific Analysis, or Luck of the Draw?

What actuaries can’t do is to make operating decisions based on the scientific analysis that the actuaries provide. Of course, that’s not the case if actuaries are themselves the top tier executives, as is often the case in many successful insurance companies.

For instance, if executives embark on ill-considered growth — imagining that “if you build it, they will come,” as is often the case in senior living — that’s just ignoring the evidence that disciplined market studies and actuarial analysis might have provided. Too often, it’s built, and they don’t come. Seat-of-the-pants thinking, like rule-of-thumb pricing, requires much luck. Gambling may be fun but it’s seldom wise.

Actuaries are trained to combine analysis of the time value of capital with human life contingencies and risk exposures to suggest the range within which business decisions can reasonably be made. The value of actuaries for entrance fee CCRCs is a matter of simple sound business judgment. In the U.S., there are committee-prepared “actuarial standards of practice” like ASOP #3, which is specific for CCRCs, but business circumstances are primary, and the ASOPs are useful guidance.

Actuarial Analysis From First Principles

In other countries, though, actuaries have more latitude to act on principle to assist their employers or clients. The video How an Actuary Saved Elon Musk illustrates that greater latitude and broader perspective. Did you even know that Elon Musk benefited early in his career from his partnership with an actuary? You, too, can benefit if you partner with the right actuary.

If you extrapolate from the specific case study in the video to the business you are responsible for leading, you can see for yourself how the actuarial perspective and the related intensive training required of actuaries can be of value. The video is central to understanding the wisdom of this article.