Sciences of complexity and complex adaptive systems are key to understanding risk

The research, carried out for the Actuarial Profession by Neil Cantle of Milliman and Neil Allan of the University of Bath, focussed on two key problems in risk management; the setting of risk appetite with a consistent set of risk limits, and the timely identification and understanding of emerging risk.

The research presented to the conference seeks to demonstrate how using complexity and complex adaptive systems can provide practical solutions to the problems studied by Cantle and Allan.

Neil Cantle said: “Complex adaptive systems are systems which are diverse and made up of multiple, interconnected elements yet are adaptive in that they have the capacity to respond and evolve as they interact with their surroundings. They can exist in the natural world; ant colonies, cells or ecosystems, for example, and in the man-made world, especially in terms of what we might term joint human endeavour; such as a business.

“If we treat companies as complex adaptive systems and their risks as their unintended emergent properties, it is possible to apply a range of tools developed for studying emergent phenomena which arise through the complex interactions of multiple factors. These can help us to spot the early signatures of trouble before they become apparent in headline observations. Risk is an evolutionary process and applying insights from other sciences, such as biology, enables us to study more clearly how risks are emerging and how they may develop in future.

"For risk appetite we use a systems approach to gain an understanding of how the risk dynamics behave and build a structural model of the risk in terms of its main drivers and indicators, using a Bayesian Network. This not only permits the setting of limits, but same tool can be used to monitor compliance with overall risk appetite once set. It has the capability of learning from new data which means that the monitoring adapts naturally as the risk dynamics change. The solutions proposed can be applied to any industry and size of company and play to actuaries' strengths in making sense of uncertain future developments.”

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Enquiries: Tel. Michael Scanlan on +44 (0)20 7632 1453 / +44 (0)7798 804 871 or email michael.scanlan@actuaries.org.uk

Notes to Editors:

1. Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.
2. The Profession is governed by the Institute and Faculty of Actuaries. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of the Profession in society.
3. Members of the Institute and Faculty of Actuaries have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd’s.
4. The Profession is available to provide expert comment to the media on a range of actuarial- related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions.