Category: Operational Risk

More and Better Uses Ahead for Governments’ Financial Data

Mary Pat Campbell

Link: https://www.governing.com/finance/more-and-better-uses-ahead-for-governments-financial-data

Excerpt:

In its lame duck session last month, Congress tucked a sleeper section into its 4,000-page omnibus spending bill. The controversial Financial Data Transparency Act (FDTA) swiftly came out of nowhere to become federal law over the vocal but powerless objections of the state and local government finance community. Its impact on thousands of cities, counties and school districts will be a buzzy topic at conferences all this year and beyond. Meanwhile, software companies will be staking claims in a digital land rush.

The central idea behind the FDTA is that public-sector organizations’ financial data should be readily available for online search and standardized downloading, using common file formats. Think of it as “an http protocol for financial data” that enables an investor, analyst, taxpayer watchdog, constituent or journalist to quickly retrieve key financial information and compare it with other numbers using common data fields. Presently, online users of state and local government financial data must rely primarily on text documents, often in PDF format, that don’t lend themselves to convenient data analysis and comparisons. Financial statements are typically published long after the fiscal year’s end, and the widespread online availability of current and timely data is still a faraway concept.

…..

So far, so good. But the devil is in the details. The first question is just what kind of information will be required in this new system, and when. Most would agree that a complete download of every byte of data now formatted in voluminous governmental financial reports and their notes is overwhelming, unnecessary and burdensome. Thus, a far more incremental and focused approach is a wiser path. For starters, it may be helpful to keep the initial data requirements skeletal and focus initially on a dozen or more vital fiscal data points that are most important to financial statement users. Then, after that foundation is laid, the public finance industry can build out. Of course, this will require that regulators buy into a sensible implementation plan.

The debate over information content requirements should focus first on “decision-useful information.” Having served briefly two decades ago as a voting member of the Governmental Accounting Standards Board (GASB), contributing my professional background as a chartered financial analyst, I can attest that almost every one of their meetings included a board member reminding others that required financial statement information should be decision-useful. A key question, of course, is “useful to whom?”

Author(s): Girard Miller

Publication Date: 17 Jan 2023

Publication Site: Governing

A Fraud-Filled 2022: Scammers and Lawsuits Fill the News

Mary Pat Campbell

Link:c https://www.thewealthadvisor.com/article/fraud-filled-2022-scammers-and-lawsuits-fill-news?mkt_tok=NDQ2LVVIUy0wMTMAAAGJIsrFu-ubnD_VamPIV5gs8dCoXVSfoUS6DR0oZTPmBTOiB6nIRrBML9aoxKGy2CiDh81BoEvZ4_6Zt5a-_GheqnYSTKutsKMFiWq7IQ8F55-O

Graphic:

Excerpt:

LIMRA discussed its FraudShare program in this June 2022 story, and the statistics were striking.

More than a third (34%) of companies reported increases in account takeover attempts in 2021 as compared to the previous year, according to LIMRA. Account takeovers occur when someone takes ownership of an online account without the owner’s knowledge, often with stolen credentials. In addition to account takeovers attempts, 34% of companies saw increases in company impersonation and 31% had increases in claims fraud.

A LIMRA report showed that fraud incidents increased in 2021 in all but two categories of fraud. (Please note that fraud “incidents” shown in the chart below are attempts and do not indicate that the account takeover attempts were successful.)

Author(s): John Hilton, InsuranceNewsNet

Publication Date: 30 Dec 2022

Publication Site: The Wealth Advisor

Investing Novices Are Calling the Shots for $4 Trillion at US Pensions

Mary Pat Campbell

Link: https://www.bloomberg.com/news/features/2023-01-04/us-public-pension-plans-run-by-investing-novices-are-on-the-edge-of-a-crisis?cmpid%3D=socialflow-twitter-economics&utm_campaign=socialflow-organic&utm_medium=social&utm_source=twitter&utm_content=economics

Graphic:

Excerpt:

In the US, a lineup of unpaid union-backed reps, retirees and political appointees are the vanguards of a $4 trillion slice of the economy that looks after the nation’s retired public servants. They’re proving to be no match for a system that’s exploded in size and complexity.

The disparity is dragging on state and local finances and — together with headwinds that include a growing ratio of retirees to workers and lenient accounting standards — gobbling up an increasing share of government budgets. Precisely how much it’s costing Americans is hard to say. But a Bloomberg News analysis of data from CEM Benchmarking, which tracks industry performance, indicates that the price tag over the past decade could run into the hundreds of billions of dollars.

….

The disconnect was on display at a 2021 investment committee meeting of the California Public Employees’ Retirement System, which provides benefits to more than 750,000 individuals. An external adviser warned board members that the boom in blank-check companies was a sign of froth in financial markets.

“I had never heard of those,” chairwoman Theresa Taylor told her fellow directors of the then-sizzling products known as SPACs, according to a transcript of the meeting.

….

Systems are underfunded partly because public officials face greater pressure to fulfill today’s demands than to fund obligations 20 or 30 years away. And because hikes in taxes and contributions are unpopular, there’s an incentive to downplay the problem.

Instead, plans are investing in higher risk assets, which make up about one-third of holdings, according to data from Preqin. That allocation has more than doubled since just before the 2008 financial crisis as plans have poured $1 trillion into alternatives.

….

Many pension advisers make smart recommendations: the guidance that CalPERS should stay away from SPACs, for one, was proven sound once regulators ramped up scrutiny of that market, which has all but ground to a halt. Yet it remains unclear how closely individual directors evaluate investments that get put in front of them.

“I served with one director for about 15 years and never saw him ask a question” about his system’s investments, said Herb Meiberger, a finance professor who sat on the board of the $36 billion San Francisco Employees’ Retirement System until 2017. A spokesman for the system said it takes governance and fiduciary duty very seriously, and that board members receive training to help them execute their duties.

Harvard finance professor Emil Siriwardane has researched why some US plans have put more money into alternatives. It wasn’t the worst-funded or those with the most aggressive performance targets. “By a factor of eight-to-ten,” the closest correlation is the investment consultants that pension plans hire, Siriwardane found.

….

Canada’s detour from the American-style model began in the late 1980s, when Ontario’s government and teacher federation decided to reboot a plan that was invested in non-marketable provincial bonds. They set up the Ontario Teachers’ Pension Plan in 1990, concluding the province could save $1.2 billion over a decade by operating more like a business.

Ontario Teachers’ first board chairman was a former Bank of Canada governor and its first finance chief was a corporate finance veteran. It soon began investing directly in private markets and infrastructure, opened offices in Europe and Asia and acquired a large real estate firm. The system pays its board members close to what corporate directors make, and manages 80% of its investments internally. Those practices have put it on a solid financial base: Ontario Teachers’ says it’s been fully funded for the past nine years, with a current funding ratio of 107%.

Until the 2008 financial crisis, boards in the Netherlands — where traditional public sector pensions are common — looked a lot like those in the US. Then the country’s central bank was given authority to assess candidates. It looked at directors’ combined risk management, actuarial and other expertise.

Many smaller Dutch funds didn’t make the cut. The regulatory hurdles helped set off a wave of mergers that, over the past decade, has reduced the number of plans by over two-thirds. The system has sprouted professional directors who serve more than one at a time. 

Few US boards are following suit. Only 19 of 113 funds studied made changes to their board composition from 1990 to 2012, a paper published in The Review of Financial Studies in 2017 found.

 “A lot of funds in the US like the idea of transforming, want to transform, but don’t have the political fortitude to do it,” said Brad Kelly of Global Governance Advisors, a Toronto-based firm that works with US and Canadian pension funds.

Author(s): Neil Weinberg

Publication Date: 3 Jan 2023

Publication Site: Bloomberg

Under Government Pressure, Twitter Suppressed Truthful Speech About COVID-19

Mary Pat Campbell

Link: https://reason.com/2023/01/02/under-government-pressure-twitter-suppressed-truthful-speech-about-covid-19/?utm_medium=email

Excerpt:

Twitter’s ban on “COVID-19 misinformation,” which Elon Musk rescinded after taking over the platform in late October, mirrored the Biden administration’s broad definition of that category in two important respects: It disfavored perspectives that dissented from official advice, and it encompassed not just demonstrably false statements but also speech that was deemed “misleading” even when it was arguably or verifiably true. In a recent Free Press article, science writer David Zweig shows what that meant in practice, citing several striking examples of government-encouraged speech suppression gleaned from the internal communications that Musk has been disclosing to handpicked journalists.

Twitter’s moderation of pandemic-related content was intertwined with government policy from the beginning. Even before Joe Biden was elected president and his administration began publicly and privately demanding that social media companies suppress speech it viewed as a threat to public health, the company’s guidelines deferred to the positions taken by government agencies such as the Centers for Disease Control and Prevention (CDC). And those rules explicitly covered “misleading information” as well as “demonstrably false” statements.

….

That July, Twitter sought to clarify “our rules against potentially misleading information about COVID-19″ (emphasis added). “For a Tweet to qualify as a misleading claim,” the company said, “it must be an assertion of fact (not an opinion), expressed definitively, and intended to influence others’ behavior.” Possible topics included “the origin, nature, and characteristics of the virus”; “preventative measures, treatments/cures, and other precautions”; “the prevalence of viral spread, or the current state of the crisis”; and “official health advisories, restrictions, regulations, and public-service announcements.”

That was a very wide net, potentially encompassing anyone who questioned the CDC’s ever-shifting guidance or criticized government policies, such as lockdowns and mask mandates, aimed at reducing virus transmission. While the intent requirement ostensibly allowed dissent as long as it was not aimed at influencing behavior, that limitation did not mean much in practice, since moderators were apt to infer the requisite intent when they encountered tweets that implicitly or explicitly deviated from the recommendations of “public health authorities and governments.”

….

Another example that Zweig cites: Last August, @KelleyKga, a self-described “public health fact checker,” responded to another Twitter user’s claim that “COVID has been the leading cause of death from disease in children” since December 2021. “What an excellent example of cherry picking!” @KelleyKga wrote. “If you narrow it down to only the specific months you specify, which include the largest Covid wave (seen across the world), AND you ignore all non-disease deaths, AND you ignore cancer, heart disease, SIDS, then COVID is ‘leading.'”

Author(s): Jacob Sullum

Publication Date: 2 Jan 2023

Publication Site: Reason

FTX’s collapse mirrors an infamous 18th century British financial scandal

Mary Pat Campbell

Link: https://theconversation.com/ftxs-collapse-mirrors-an-infamous-18th-century-british-financial-scandal-196729

Excerpt:

The Charitable Corporation was established in London in 1707 with the noble mission of providing “relief of the industrious poor by assisting them with small sums at legal interest.”

Essentially, it sought to provide low-interest loans to poor tradesmen, shielding them from predatory pawnbrokers who charged as much as 30% interest. The corporation made loans available at the rate of 5% in return for a pledge of property for security.

The Charitable Corporation was modeled on Monti di Pietà, a charitable institution of credit established in Catholic countries during the Renaissance era to combat usury, or high rates of interest.

Unlike the Monti di Pietà, however, the British version – despite its name – wasn’t a nonprofit. Instead, it was a business venture. The enterprise was funded by offering shares to investors who, in return, would make money while doing good. Under its original mission, it was like an 18th century version of today’s socially responsible investing, or “sustainable investment funds.”

….

There are several key characteristics that stand out in the collapses of both the Charitable Corporation and FTX. Both companies were offering something new or venturing into a new sector. In the former’s case, it was microloans. In FTX’s case, it was cryptocurrency.

Meanwhile, the management of both ventures was centralized in the hands of just a few people. The Charitable Corporation got into trouble when it reduced its directors from 12 to five and when it consolidated most of its loan business in the hands of one employee – namely, Thomson. FTX’s example is even more extreme, with founder Sam Bankman-Fried calling all the shots.

Author(s): Amy Froide

Publication Date: 21 Dec 2022

Publication Site: The Conversation

Government Financial Reporting – Data Standards and the Financial Data Transparency Act

Mary Pat Campbell

Link: https://xbrl.us/events/230124/

Date and Time of upcoming event: 3:00 PM ET Tuesday, January 24, 2023 (60 Minutes)

Description:

The U.S. Congress passed legislation on December 15, 2022 that includes requirements for the Securities and Exchange Commission to adopt data standards related to municipal securities. The Financial Data Transparency Act (FDTA) aims to improve transparency in government reporting, while minimizing disruptive changes and requiring no new disclosures. The University of Michigan’s Center for Local State and Urban Policy (CLOSUP) has partnered with XBRL US to develop open, nonproprietary financial data standards that represent government financial reporting which could be freely leveraged to support the FDTA. The Annual Comprehensive Financial Reporting (ACFR) Taxonomy today represents general purpose governments, as well as some special districts, and can be expanded upon to address all types of governments that issue debt securities. CLOSUP has also conducted pilots with local entities including the City of Flint.

Attend this 60-minute session to explore government data standards, find out how governments can create their own machine-readable financial statements, and discover what impact this legislation could have on government entities. Most importantly, discover how machine-readable data standards can benefit state and local government entities by reducing costs and increasing access to time-sensitive information for policy making.

Presenters:

  • Marc Joffe, Public Policy Analyst, Public Sector Credit
  • Stephanie Leiser, Fiscal Health Project Lead, Center for Local, State and Urban Policy (CLOSUP), University of Michigan’s Ford School of Public Policy
  • Campbell Pryde, President and CEO, XBRL US
  • Robert Widigan, Chief Financial Officer, City of Flint

Publication Site: XBRL.us

Covid’s Drag on the Workforce Proves Persistent. ‘It Sets Us Back.’

Mary Pat Campbell

Link: https://www.wsj.com/articles/covid-workforce-absenteeism-productivity-economy-labor-11667831493

Graphic:

Excerpt:

Two-and-a-half years after Covid-19 emerged, reported infections are way down, pandemic restrictions are practically gone and life in many respects is approaching normal. The labor force, however, is not.

Researchers say the virus is having a persistent effect, keeping millions out of work and reducing the productivity and hours of millions more, disrupting business operations and raising costs.

In the average month this year, nearly 630,000 more workers missed at least a week of work because of illness than in the years before the pandemic, according to Labor Department data. That is a reduction in workers equal to about 0.4 percent of the labor force, a significant amount in a tight labor market. That share is up about 0.1 percentage point from the same period last year, the data show.

….

Another half a million workers have dropped out of the labor force due to lingering effects from previous Covid infections, according to research by economists Gopi Shah Goda of Stanford University and Evan J. Soltas at the Massachusetts Institute of Technology. In a Census Bureau survey in October, 1.1 million people said they hadn’t worked the week before because they were concerned about contracting or spreading the virus.

The resulting labor shortages are contributing to upward pressure on wages and inflation, one reason the Fed delivered its fourth consecutive 0.75 percentage point interest rate increase last Wednesday. On Friday, the Labor Department reported brisk job growth in October, but health-related absences remained elevated and the labor force contracted slightly.

Author(s): Gwynn Guilford and Lauren Weber

Publication Date: 7 Nov 2022

Publication Site: WSJ

Thinking Spreadsheet

Mary Pat Campbell

Link: https://joelgrus.github.io/thinking-spreadsheet/

Graphic:

Excerpt:

There are many books about spreadsheets out there. Most of these books will tell you things like “How to save a file” and “How to make a graph” and “How to compute the present value of a stream of cashflows” and “How to use conjoint analysis to figure out which features you should add to the next version of your company’s widgets in order to impress senior management and get a promotion and receive a pay raise so you can purchase a bigger boat than your neighbor has.”

This book isn’t about any of those. Instead, it’s about how to Think Spreadsheet. What does that mean? Well, spreadsheets lend themselves well to solving specific types of problems in specific types of ways. They lend themselves poorly to solving other specific types of problems in other specific types of ways.

Thinking Spreadsheet entails the following:

  • Understanding how spreadsheets work, what they do well, and what they don’t do well.
  • Using the spreadsheet’s structure to intelligently organize your data.
  • Solving problems using techniques that take advantage of the spreadsheet’s strengths.
  • Building spreadsheets that are easy to understand and difficult to break.

To help you learn how to Think Spreadsheet, I’ve collected a variety of curious and often whimsical examples. Some represent problems you are likely to encounter out in the wild, others problems you’ll never encounter outside of this book. Many of them we’ll solve multiple times. That’s because in each case, the means are more interesting than the ends. You’ll never (I hope) use a spreadsheet to compute all the prime numbers less than 100. But you’ll often (I hope) find useful the techniques we’ll use to compute those prime numbers, and if you’re clever you’ll go away and apply them to all sorts of real-world problems. As with most books of this sort, you’ll really learn the most if you recreate the examples yourself and play around with them, and I strongly encourage you to do so.

Author(s): Joel Grus

Publication Date: originally in dead-tree form 2010, accessed 29 Oct 2022

Publication Site: Joel Grus github

The Impact of COVID-19 on Life & Disability Claims Departments – Results of a Gen Re Survey in the UK Market

Mary Pat Campbell

Link: https://www.genre.com/knowledge/publications/2022/october/rm22-3-en

Graphic:

Excerpt:

The main concern of managers was that their assessors were, like the rest of the population, limited in terms of what they could do to unwind or use to escape due to lockdown restrictions and limited freedom. This contrasted with usual routines.

We asked about the impact of these concerns on the health of claims professionals. Absenteeism within claims teams varied across the companies and while sick leave increased slightly there did not appear to be any significant or concerning trends (Figure 6).

Author(s): Grace Cairns

Publication Date: 9 Oct 2022

Publication Site: Gen Re

Actuarial Modernization Errors

Mary Pat Campbell

Link: https://www.theactuarymagazine.org/actuarial-modernization-errors/

Excerpt:

Professionalization leads us to an interesting dilemma. Actuarial culture and, for that matter, organizational culture got insurance companies to where they are today. If the culture were not moderately successful, then the company would not still exist. But this is where Prospect theory emerges from the shadows. It is human nature not to want to lose the culture that enabled your success. Many people nonetheless thirst for the gains earned by moving in a new direction. Risk aversion further reinforces the stickiness of culture, especially for risk-averse professions and industries. Drawing from author Tony Robbins, you cannot become who you want to be by staying who you currently are. Our professionalization, coupled with our risk aversion, creates a double whammy. Practices appropriate to prior eras have a propensity to be locked in place. Oh, but it gets worse!

By the nature of transformation and modernization, knowledge and know-how are embedded in the current people, processes and systems. The knowledge and know-how must be migrated from the prior technology to modern technology. Just like your computer’s hard drive gets fragmented, so too do firms’ expertise as people change focus, move jobs or leave companies. The long-dated nature of our promises can severely exacerbate the issue. Human knowledge and know-how are not very compressible, unlike biological seeds and eggs. In a time-consuming defragmenting exercise, information, knowledge and know-how must be painstakingly moved, relearned and adapted for the new system. This transformation requires new practices, further exacerbating the shock to the culture. Oh, but it gets even worse!

The transformation process requires existing teams to change, recombine or communicate in new ways. This means their cultures will potentially clash. Lack of trust and bureaucracy are the most significant frictions to collaboration among networks. The direct evidence of this is when project managers vent that teams x, y and z cannot seem to work together. It is because they do not have a reference system to know how to work together.

Author(s): Bryon Robidoux

Publication Date: September 2022

Publication Site: The Actuary

Avoiding Unfair Bias in Insurance Applications of AI Models

Mary Pat Campbell

Link: https://www.soa.org/resources/research-reports/2022/avoid-unfair-bias-ai/

Report: https://www.soa.org/4a36e6/globalassets/assets/files/resources/research-report/2022/avoid-unfair-bias-ai.pdf

Graphic:

Excerpt:

Artificial intelligence (“AI”) adoption in the insurance industry is increasing. One known risk as adoption of AI increases is the potential for unfair bias. Central to understanding where and how unfair bias may occur in AI systems is defining what unfair bias means and what constitutes fairness.

This research identifies methods to avoid or mitigate unfair bias unintentionally caused or exacerbated by the use of AI models and proposes a potential framework for insurance carriers to consider when looking to identify and reduce unfair bias in their AI models. The proposed approach includes five foundational principles as well as a four-part model development framework with five stage gates.

Smith, L.T., E. Pirchalski, and I. Golbin. Avoiding Unfair Bias in Insurance Applications of AI Models. Society of Actuaries, August 2022.

Author(s):

Logan T. Smith, ASA
Emma Pirchalski
Ilana Golbin

Publication Date: August 2022

Publication Site: SOA Research Institute

5 insurance use cases for machine learning

Mary Pat Campbell

Link: https://www.dig-in.com/opinion/5-use-cases-for-machine-learning-in-the-insurance-industry

Excerpt:

4. Fraud detection

Unfortunately, fraud is rampant in the insurance industry. Property and casualty insurance alone loses about $30 billion to fraud every year, and fraud occurs in nearly 10% of all P&C losses. ML can mitigate this issue by identifying potential claim situations early in the process. Flagging early allows insurers to investigate and correctly identify a fraudulent claim. 

5. Claims processing

Claims processing is notoriously arduous and time-consuming. ML technology is a tool to reduce processing costs and time, from the initial claim submission to reviewing coverages. Moreover, ML supports a great customer experience because it allows the insured to check the status of their claim without having to reach out to their broker/adjuster.

Author(s): Lisa Rosenblate

Publication Date: 9 Sept 2022

Publication Site: Digital Insurance