www.the-actuary.org.uk12 hours to save the universeIn response to Angus Sibley (Letters, Jan/Feb 2008), anyone who ever had a biology lesson should know that the human female is among the most infertile of mammals. She is fertile for only about 4% of her lifetime. Some experts argue there is only a 12-hour 8216window8217 in the monthly cycle when conception is possible and even then the probability is in the order of 40% (a wonder any of us made it here at all).Logic has it, therefore, that conception may be avoided if the fertile times can be identified and the 8216marriage act8217 is abstained from during those times. To coin a phrase from an old TV show, 8216we have the technology8217. It is known as natural fertility regulation (NFR) and is in fact the most effective family planning method of all (the term 8216rhythm method8217 is old hat). NFR has no associated health risks, abortifacients or unpleasant side effects and certainly isn8217t 8216rocket science8217 8212 the late Mother Teresa used to teach it to illiterate women in the slums of Calcutta.With regard to 8216overpopulation8217, we need to ignore the spin-meisters and concentrate instead on facts. Like many other 8216baby boomers8217, I lived through the unprecedented doubling of the global population in the second half of the 20th century. Never before in human history had our numbers increased so far, so fast: from three billion in 1960 to six billion in 2000. But our numbers didn8217t double because we suddenly started breeding like rabbits. They doubled because we were no longer dying like flies. Fertility was falling throughout this era, from an average of six children per female in 1960 to only 2.6 by 2002.On the fantasy island of overpopulation, human numbers are always exploding, but a closer look reveals a different picture. The unprecedented fall in fertility rates that began in post-war Europe has, in the decades since, spread to every corner of the globe, including Latin America. Recent UN forecasts indicate that the world8217s human population will continue to creep up until about the year 2040, peaking at around 7.6 billion people. It will then begin to shrink.Many nations, especially in Europe, are already in a death spiral, losing a significant number of people each year. Persistently low birth-rates have serious economic, social and political consequences. The only future a nation has is its children and any nation where the indigenous people are not having children will, inevitably, become populated by people and races that are.Patrick McKay1 February 2008Bankruptcy costs moreHiten Nandha8217s article was an excellent summary of the state of play with Modigliani and Miller (8216Fifty years and counting8217, Jan/Feb 2008, p39). One issue, however, that I still feel is underplayed in qualifying the equivalence of equity and debt financing, is that of bankruptcy risk.The original theory8217s assumption of zero bankruptcy cost was clearly unrealistic in the extreme but even the 5% quoted in the article seems to me to be a serious underestimate, particularly in jurisdictions which, unlike the US, do not make it easy for a company to continue trading towards workout under legal protection from creditors. My characterisation of the situation in the event of severe financial stress would be that it is embarrassing for an equity-financed company, but prone to prove disastrous for a debt-financed one. This risk should be considered a substantial offset to the case for taking advantage of the tax deductability of debt interest by ramping up gearing, especially for cyclical businesses.John Bishop31 January 2008Letter of the month - 8220I82218220I8221 stands for infrastructure. This year, we8217re strengthening ours. For both people and systems. And it means we have a whole slew of exciting opportunities on offer. Find out more by emailingactuaryopportunities@hbosplc.comEqual opportunities for all - our policy is as simple as that.Sponsored by March
200Risk must be managedThe invitation to submit thoughts on 8216the end of risk management8217 (Jan/Feb 2008, p23) could hardly be ignored following my last letter (Actuaries8217 need for investment strategy, December 2007). Not wishing to labour the point, I stressed that risk management could only be applied with due consideration of economic/market circumstances.Indeed, I fear that the term 8216risk management8217 in the hands of many actuaries leads them into mathematics, asset/liability modelling and obscure derivative theories. A full understanding of the potential risks (and rewards with equities) is needed at all times, which is often more subjective than hypothetical mathematical theory. To quote examples:1 The ignored consequences of falling interest rates and increasing longevity 8212coupled with inadequate reserving for guaranteed annuity rates 8212 caused the collapse of Equitable Life.2 The strange assumption that aggregating sub-prime mortgages in the US, and selling such mortgage packages, somehow reduced the risks followed by the subsequent contagion of the credit crunch.3 Northern Rock seemed to forget that its business was borrowing short and lending long. Rather than relying on loyal retail deposits, short wholesale funding dried up in the money market with inevitable consequences.4 Competition among banks and building societies led to collateral debt obligations, and structured financial instruments with reduced collateral backing exacerbated these situations.5 The removal of cheap finance has caused large losses in several major hedge funds. Many try to develop parallel switches from A to B, like contracts for difference, but the prospect of major gains in single transactions of selling short or buying increases risks dramatically.6 The UK has not provided the only example of rogue traders causing major calamities (comparable with some hedge funds8217 performance). Independent and continuous auditing is vital.In summary, risk must be managed but it is not primarily a mathematical problem. It is an organisational, management challenge with the need for an awareness of the possible consequences of one8217s decisions. Experience, flair and common sense are particularly important in selecting business models and investment strategy.Kent Sandom30 January 2008The writer of the Letter of the month receives a Venecia fountain pen kindly supplied by HBOSLetter of the monthLettersYour viewLetters to the editorIn which readers express their views on fashion no-nos, commission woes and fertility windows08_09_Actuary_Letters_0308.indd 819/2/08 13:10:20
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