Complexity Science Actuarial Research Conference (ARC)

ARC
2012
Complexity Science
What it is and Why it is important to You
Actuarial Research Conference (ARC)
3-August-2012
Dave Snell ASA MAAA FLMI MCP ChFC CLU ARA ACS
Technology Evangelist
RGA Reinsurance Company
Vice Chairman’s Office
The security of experience. The power of innovation.
www.rgare.com
ARC
2012
What is Complexity Science?
Deterministic
Chaos?
Behavioral Economics?
Predictive
Modeling?
Fractal
Geometry?
Experimental Mathematics?
Complexity
Economics?
Cellular Automata?
Network Science?
Artificial Intelligence?
Complex Adaptive Systems?
Microworlds?
Agent-Based Modeling?
Genetic Algorithms?
"I can't define pornography,“ … "but I know it when I see it.“
- Justice Stewart in Jacobellis v. Ohio 378 US 184 (1964).
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Characteristics of Complex Systems
§  Complex collective behavior
§  Signaling and information processing
§  Adaptation
Examples: insect colonies, the brain, the immune
system, economies, the World Wide Web, the stock
market, housing prices, populations
ants picture from http://thinkorthwim.com/2007/05/28/ants-using-themselves-as-living-bridges/
termite mound from Wikipedia
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Why Learn About Complexity Science?
“Please, Ms. Sweeney, may I ask where you’re going with all this?”
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Why Learn About Complexity Science?
“We need scarcely add that the
contemplation in natural science of
a wider domain than the actual
leads to a far better understanding
of the actual.” - A.S. Eddington (the
astronomer who first demonstrated that
Einstein’s Theory of Relativity worked in
the real world)
“The people who master the new
sciences of complexity will become
the economic, cultural, and political
superpowers of the next century.”Heinz Pagels, President of the
International League for Human Rights.
“Complexity is the science of the
21st century” – Stephen Hawking
"The goal of futuring is not to
predict the future but to improve it.
We want to anticipate possible or
likely future conditions so that we
can prepare for them. We
especially want to know about
opportunities and risks that we
should be ready for." - Edward
Cornish (founder of the World Future
Society)
Society of Actuaries report on Health
Section website: Complexity Science – an
introduction for actuaries, by Alan Mills
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
How Did Economists Get It So Wrong?
(Paul Krugman, NY Times article 2-SEP-2009
2008 Nobel Memorial Prize in Economic Science)
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
How Did Economists Get It So Wrong?
(Paul Krugman, NY Times article 2-SEP-2009
2008 Nobel Memorial Prize in Economic Science)
They overlooked the complex interrelationships in the economy and the
sensitivity to small changes.
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
How Did Economists Get It So Wrong?
(Paul Krugman, NY Times article 2-SEP-2009
2008 Nobel Memorial Prize in Economic Science)
They overlooked the complex interrelationships in the economy and the
sensitivity to small changes.
They did not know about the Second Law of
Thermodynamics
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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2012
sustained inattentional blindness for dynamic events
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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2012
SFI
sustained inattentional blindness for dynamic events
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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2012
SFI
1987
Main Attraction
Economists
vs. Physicists
sustained inattentional blindness for dynamic events
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Behavioral Economics
(example from Dan Ariely’s Book, Predictably Irrational)
Beauty is relative!
The Economist Magazine
• 
online $59
• 
print $125
§  online + print $125
Update: The Economist now offers only the two outer options and they automatically
include the web subscription ($95.00) in the price of the paper copy ($223.38).
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Behavioral Economics
(example from Dan Ariely’s Book, Predictably Irrational)
Beauty is relative!
The Economist Magazine
•  online $59
• 
print $125
§  online + print $125
Update: The Economist now offers only the two outer options and they automatically
include the web subscription ($95.00) in the price of the paper copy ($223.38).
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Behavioral Economics
(mostly from Dan Ariely’s Book, Predictably Irrational)
§  More on Beauty (Dan Ariely, John Holland, et al)
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Behavioral Economics
(mostly from Dan Ariely’s Book, Predictably Irrational)
§  More on Beauty (Dan Ariely, John Holland, et al)
§  Anchoring (from Priceless, by William Poundstone)
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Behavioral Economics
(mostly from Dan Ariely’s Book, Predictably Irrational)
§  More on Beauty (Dan Ariely, John Holland, et al)
§  Anchoring (from Priceless, by William Poundstone)
§  3, 6, 9, 12 Think of a number (from Numb3rs – Season 1)
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Behavioral Economics
(mostly from Dan Ariely’s Book, Predictably Irrational)
§  More on Beauty (Dan Ariely, John Holland, et al)
§  Anchoring (from Priceless, by William Poundstone)
§  3, 6, 9, 12 Think of a number (from Numb3rs – Season 1)
§  Honesty on exams (Dan Ariely)
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Behavioral Economics
(mostly from Dan Ariely’s Book, Predictably Irrational)
§  More on Beauty (Dan Ariely, John Holland, et al)
§  Anchoring (from Priceless, by William Poundstone)
§  3, 6, 9, 12 Think of a number (from Numb3rs – Season 1)
§  Honesty on exams (Dan Ariely)
§  Honesty on insurance applications
Complexity Science – 3-AUG-2012 Dave Snell
(Dan Ariely)
SOCIETY OF ACTUARIES
ARC
2012
Behavioral Economics
(mostly from Dan Ariely’s Book, Predictably Irrational)
§  More on Beauty (Dan Ariely, John Holland, et al)
§  Anchoring (from Priceless, by William Poundstone)
§  3, 6, 9, 12 Think of a number (from Numb3rs – Season 1)
§  Honesty on exams (Dan Ariely)
§  Honesty on insurance applications
§  You selfish pig!(from Origin of Wealth, by Eric Beinhocker)
(Dan Ariely)
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Behavioral Economics
(mostly from Dan Ariely’s Book, Predictably Irrational)
§ More on Beauty (Dan Ariely, John Holland, et al)
§ Anchoring (from Priceless, by William Poundstone)
§  3, 6, 9, 12 Think of a number (from Numb3rs – Season 1)
§ Honesty on exams (Dan Ariely)
§ Honesty on insurance applications
§ You selfish pig!(from Origin of Wealth, by Eric Beinhocker)
(Dan Ariely)
heavy
numbers
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Deterministic Chaos
Note: 0≤X(t) ≤ 1
The Logistic Map: X(t+1)=R * X (t)* [1 – X(t)]
For R=2, the starting point is
unimportant and there is a
single attractor of .5
For R=3.1, the starting point is
unimportant and there are two
attractors of .558 and .765
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
Deterministic Chaos
ARC
2012
The Logistic Map: X(t+1)=R * X (t)* [1 – X(t)]
SOCIETY
When R=4, starting point is critical and there appear to be no attractors
OF ACTUARIES
ARC
2012
Deterministic Chaos has implications
for our actuarial models
精
算
師
Is the actuary really the “master of accurate calculations”?
_=p +p –p p
pxy
x
y
x y
… or does it?
“Our 99.5% Conditional Tail
Expectation (CTE) for this
block of business is
$5,000,000
… or is it $500,000,000?”
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Deterministic Chaos has implications
for our actuarial models
Is the actuary really the “master of accurate calculations”?
精
算
師
_=p +p –p p
pxy
x
y
x y
… or does it?
“Our 99.5% Conditional Tail
Expectation (CTE) for this
block of business is
$5,000,000
… or is it $500,000,000?”
SOCIETY OF ACTUARIES
ARC
2012
Predictive Modeling
§  The data is the model
§  Infer characteristics from real
data rather than from theory
§  Often as accurate as an APS
(Attending Physician
Statement), but many times
cheaper and faster
Examples:
§  Progressive Car Insurance
§  Backpacker serial killer in
Australia
Complexity Science – 3-AUG-2012 Dave Snell
picture from http://en.wikipedia.org/wiki/
File:KnnClassification.svg
SOCIETY OF ACTUARIES
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Predictive Modeling (continued)
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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2012
Predictive Modeling
(a caution before we move on …)
Very cool (and hot!) topic, but not really new except for
the inexpensive sources of vast amounts of new data.
Actuarial
qualification
“As currently promoted it might more aptly be
called “lifestyle-based analytics in an insurance
underwriting setting” –Tim Rozar, FSA
“We must balance art and science” – Craig Spencer, FSA
“… it appears to simply repackage long-standing
modeling techniques from statistics, which are
literally 20+ years old: Bayesian analysis, non(and semi-) parametric statistics, neural network
models, etc. Theoretical and applied empirical
academic literature is vast and rich on these
subjects.” - Anatoliy Belaygorod, PhD
“Just because you can doesn’t mean you should!”
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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2012
Network Science
§  United States power transmission grid
§  UPS and FedEx hubs
§  Airport terminals
§  Our brains
§  World Wide Web
§  Financial economy
Site and Bond (physics)
Node and Link (computer science)
Actor and Tie (sociology)
Vertex and Edge (geometry)
Hub and Spoke (network topology)
Website and Hyperlink (WWW)
Neuron and Synapse (brain)
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Fractals
§  Lots of pretty pictures …
How long is the coastline of the UK?
http://fractalfoundation.org/resources/fractalRichardson effect: the measured
software/
length of coastlines and other natural
•  … and more than just pretty pictures features appears to increase without
limit as the unit of measurement is
•  Lungs, brain, DNA strands
made smaller[
What is a fractal?
An irregular geometric object with an infinite nesting of structure at all scales.
Why do we care about fractals?
Natural objects are fractals.
Chaotic trajectories (strange attractors) are fractals.
Assessing the fractal properties of an observed time series is informative
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Fractals have fractional dimensions
Examples of geometric objects with non-integer dimensions
Koch Curve
Dimension of Koch curve is 1.26
The length of the curve
increases with each iteration. It
tends towards infinite length.
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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2012
Fractals
What practical, real life use do they have?
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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Fractals
What practical, real life use do they have?
How about life itself?
Except during division, a human cell’s two
meters of DNA is jammed into an area
about a hundredth of a millimeter wide.
Fractal folding keeps DNA organized in a
cell's nucleus, despite the tight pack.
Regions of DNA (shown in different colors)
are clustered together.
Credit: Leon A. Mirny, Maxim Imakaev on http://
fractalfoundation.org/2009/11/fractal-globules-in-dna/
Science News, November 7, 2009
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Fractals
What practical, real life use do they have?
How about life itself?
Except during division, a human cell’s two
meters of DNA is jammed into an area
about a hundredth of a millimeter wide.
Fractal folding keeps DNA organized in a
cell's nucleus, despite the tight pack.
Regions of DNA (shown in different colors)
are clustered together.
Credit: Leon A. Mirny, Maxim Imakaev on http://
fractalfoundation.org/2009/11/fractal-globules-in-dna/
Science News, November 7, 2009
Also lightning, snow-flakes,
crystals, broccoli, blood vessels,
pulmonary vessels, …
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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2012
2012
More fractals:
• your lungs
• your blood vessels
•  your brain
Source: http://fractalfoundation.org/fractivities/FractalPacks-EducatorsGue.pdf
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
SOCIETY OF ACTUARIES
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Fractals … a parting look
Do Fractals have use
as a tool for actuaries?
I make no claim that Fractals can be useful in stock analysis; but some
prominent mathematicians do.
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Genetic Algorithms
Meet Robby
Robby is only able to do 7 actions:
0-Move North 1 square
1-Move South 1 square
2-Move West1 square
3-Move East 1 square
4-Stay put
5-Pick up a can
6-Make random move (from 0-5)
But my Robby’s brain is so limited, Robby cannot see even one square away …
cannot even see a can in the current square. Can Robby learn to be like Robby’s
hero WALL·E?
Story of Robby simplified from Complexity: A Guided Tour by Melanie Mitchell, Ph.D.
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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2012
Genetic Algorithms (cont.)
§  Robby actions can be represented by a strategy
string, like ‘35265’
(move East, pickup, move South, random, pickup)
§  In 100 steps, what strategy would you use to pick
up as many randomly placed cans as possible?
You get 10 points for each can.
Complexity Science – 3-AUG-2012 Dave Snell
0- north 1
1- south 1
2- west 1
3- east 1
4-Stay put
5-Pick up
6-random
SOCIETY OF ACTUARIES
ARC
2012
Genetic Algorithms (cont.)
§  Robby actions can be represented by a strategy
string, like ‘35265’
(move East, pickup, move South, random, pickup)
§  In 100 steps, what strategy would you use to pick
up as many randomly placed cans as possible?
You get 10 points for each can.
0- north 1
1- south 1
2- west 1
3- east 1
4-Stay put
5-Pick up
6-random
• Oh yeah! … you lose 5 points every time
you hit a wall.
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Genetic Algorithms (cont.)
v Randomly assign the gene
string for 100 robots.
v Run them through 100 test fields where cans have been randomly
scattered for each test.
v Score each robot and eliminate losers (survival of the fittest).
v Assign mating rights to survivors per test scores.
v Pick parents, and pair them off to produce the next generation
(splitting gene string at arbitrary point)
Parent F (52.80 points): 54335351253404 315142153601520652551511513145155663
Parent M (45.60 points) :54335351525534 633242153604216362551511503145155625
Red
gen
e fro
es ar
m pa
M
rent
Child A: 54335351253404 633242153604216362551511503145155625
Child B: 54335351525534 315142153601520652551511513145155663
v Randomly mutate a few genes (actions)
v Repeat for 100 (or 1,000 or 10,000) generations
Watch evolution in action
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Genetic Algorithms (cont.)
v Randomly assign the gene
string for 100 robots.
v Run them through 100 test fields where cans have been randomly
scattered for each test.
v Score each robot and eliminate losers (survival of the fittest).
v Assign mating rights to survivors per test scores.
v Pick parents, and pair them off to produce the next generation
(splitting gene string at arbitrary point)
Parent F (52.80 points): 54335351253404 315142153601520652551511513145155663
Parent M (45.60 points) :54335351525534 633242153604216362551511503145155625
Red
gen
e fro
es ar
m pa
M
rent
Child A: 54335351253404 633242153604216362551511503145155625
Child B: 54335351525534 315142153601520652551511513145155663
v Randomly mutate a few genes (actions)
v Repeat for 100 (or 1,000 or 10,000) generations
v Watch Robby pass SOA Life Contingencies exam (MLC)?
Watch evolution in action
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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Genetic Algorithms
(How twins are made)
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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2012
Genetic Algorithms (simplistic recipe wrap-up.)
1.  Randomly assign the initial gene strings or
situational responses.
2.  Run tests in your model environment.
3.  Score each robot and eliminate losers.
4.  Assign mating privileges to highest scorers.
5.  Pick parents (perhaps many per child), and build
next generation via splits or gene-by-gene
6.  Randomly mutate a few genes (actions).
7.  Repeat for 100 (or 1,000 or 10,000) generations or
until no more improvements.
Genetic Algorithms – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Cellular Automata
“I expect that the children of 50 years from now will learn cellular
automata before they learn algebra.” - Stephen Wolfram in 2006
A New Kind of Science
(1200+ pages - by Stephen Wolfram)
Free online access at http://
www.wolframscience.com/
Rule 90
CA(2,2,1,1,T) -90 is a shortcut notation for: 2 neighbors within
radius of one, 2 states such as ON and OFF, action
dependence upon 1 previous state, a vision horizon of 1, and
True synchronous behavior where each automaton updates at
the same time). Then, using the same type of binary logic for
the end state, we can succinctly describe the state changes
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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2012
Cellular Automata
Example: Flocking
Craig Reynolds (animator for TRON,
Batman Returns and lots of other
movies)
Same techniques used by animators
now to create the horses in The Lord
of the Rings - Return of the King
watched starlings in flight
3 simple rules:
• Separation
• Alignment
• Move to center of mass
Description Formation flight.jpg Flock of birds in flight
Date 1 May 2005(2005-05-01), 18:51:37, Source originally posted to
Flickr as formation flight, Author Kumon, Shibuya-Ku, Tokyo, Japan
This file is licensed under the Creative Commons Attribution 2.0
Generic license.
Complexity Science – 3-AUG-2012 Dave Snell
also:
market simulators,
health care sims, forest
fire sims,
pandemic sims
SOCIETY OF ACTUARIES
ARC
2012
New Tools Require New Skills
Click picture for 95 second video that summarizes this presentation.
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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2012
New Tools Require New Skills
3+4=4+3
3-4≠4-3
Click picture for 95 second video that summarizes this presentation.
Complexity
Sciences
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
What’s the Point?
§  If we can get better at anticipating, and recognizing early warning signs,
we can develop mitigation strategies.
§  We can do a better job of seeing the gorilla in the room?
§  Pandemic – prepare ‘A Team’ to help mitigate (P&C companies action in
LA fires)
§  Mortality - help people live longer (obesity awareness training)
§  Target jumbo cases – Oprah Winfrey, the Laurens, etc. (how do we help
them live longer?)
§  Reinsure, retrocede or sell off blocks of business before they deteriorate
§  Target better client deals
§  Choose the appropriate tools for your landscapes: Simple, Rugged,
Dancing (Scott Page, Ph.D. – University of Michigan)
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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2012
Don’t be too busy for new tools
I don’t have time to
use new tools. I have
a battle to fight!
Gee! Isn’t this
new Gatling gun
great?
Grant
1861
Winner
in U.S.
Civil War
Napoleon
1815
Loser at
Waterloo
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
How get started
§  List of reference books and videos
(see handout)
§  Free Modeling and discovery tools
§ 
§ 
§ 
§ 
§ 
StarLogo
NetLogo
Repast Simphony
XAOS
Roberta (a.k.a., Robby)
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
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2012
Parting thought …
“To meet the demands of the fastchanging competitive scene, we
must simply learn to love change
as much as we have hated it in
the past.”
- Tom Peters,
author of In Search of Excellence
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Recap:
□ 
□ 
□ 
□ 
□ 
□ 
□ 
□ 
□ 
□ 
□ 
Society of Actuaries
A- Complexity science (CS) defined
The Actuary of the Future
B-Economists blew it by ignoring CS
section,
Forecasting & Futurism
C-Behavioral Economics
section, and
Health section
D-Deterministic Chaos
E-Predictive Modeling
Get Involved!
F-Network Science
Dave Snell
G-Fractals
Technology Evangelist
[email protected]
H-Genetic Algorithms
I- Cellular Automata
J- Getting started, and new tools
K-Common vision, parting thoughts, wrap-up and questions
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Wrap-up, and Feedback
Most actuarial presentations are like mathematics, 1/2 the people can’t
understand them …
and the other 2/3 don’t care about them
Good tools
and Fun? …
Bonus video 1 - Robby
… or did we waste your time?
Let’s Talk!
Bonus video 2- EC gain
Bonus video 3 – EC strategy
Complexity Science – 3-AUG-2012 Dave Snell
SOCIETY OF ACTUARIES
ARC
2012
Complexity Science
What it is and Why it is important to You
Actuarial Research Conference (ARC)
3-August-2012
Dave Snell ASA MAAA FLMI MCP ChFC CLU ARA ACS
Technology Evangelist
RGA Reinsurance Company
Vice Chairman’s Office
The security of experience. The power of innovation.
www.rgare.com