Pizza and a foolproof actuarial control

20150701_StaffPortraits_16You celebrated Friday at the office by ordering pizza for lunch but couldn’t quite eat the entire pizza yourself. It would be a great weekend snack so you plan to take it home. If you are like me, there is risk. The risk is that you will forget. Forgetting the pizza would be regretted during the weekend and it won’t be the same by Monday. So, how can you make sure you remember? There are several options. Write a note and put it in your pocket. Send yourself a reminder on your phone to alert you before you leave. These are good, but not necessarily fool proof. The note in the pocket, or anywhere, for that matter, could get lost, or at least not read until it is too late. Phone is technology, which is risk.

So, how can you guarantee you won’t forget the pizza? Assuming you drove to work, you could put your car keys on the pizza in the refrigerator. The idea is that you need your keys to drive home. So, you are forcing yourself to remember by putting in a control that can’t fail.

OK – this isn’t specifically an actuarial control. But, I’m an actuary and I use it. More importantly, what are controls actuaries can use to ensure their numbers are reasonably accurate? I wrote a blog that explained my 4 key controls. When developing controls, it is important to categorize as Preventive or Detective. 

As their name implies, Preventive controls prevent errors from occurring. For software engineers, that would include validating user input to ensure users enter valid data. Detective identifies errors after they occurred. This could be an analysis of actuarial results after processing. Examples would include trending and policy sampling. Obviously, all else equal, preventive controls are better. The popular phrase applies: an ounce of prevention is worth a pound of cure.

So, putting your keys in the refrigerator is a preventive control. You ensure that you won’t leave work without the pizza. Regardless of your business, it’s critical to ask what could go wrong. This could be broadly labeled as Enterprise Risk Management. What are the risks to the company? Then, try to develop controls that can reduce or eliminate the risks. The best controls are those that are preventive. This could include limiting access to data, reviewing data accuracy and completeness before processing etc. Ideally, actuarial software will have controls built in (such as edits for user input). Checklists aren’t controls but they can increase the likelihood that all the steps are performed and in the correct order.

Before clicking “run”, think through your input and how can you be sure it is complete and accurate. Can you perform a quick record count and compare to another source to ensure completeness? Do you completely understand the data you received? Never assume data that you have been given is accurate. 

It requires time and effort to develop effective controls. But, the investment can pay large dividends by identifying errors sooner rather than later, or worse, not at all.

About Dave

I started my actuarial career in 1986 because I couldn’t find a math teaching job. No kidding. I became an FSA in 1995 which is the year I started SALT Solutions. Recently SALT merged into Coaching Actuaries. We train risk specialists to solve difficult problems and communicate clear solutions.

I publish a “risk tip” of the day. These tips are short and sweet summaries of what I have learned in my 29 years of actuarial experience (and “real” life). The risk tips are distributed as free e-mails Monday – Friday. Consider it as your 30 second “risk vitamin” to start your day. Sign up is simple and “no risk“! We could all use less risk.