Q: At Milliman, is it typical for a person to start out working on a relatively small project and develop it into something much more ambitious?
Yes, because Milliman is a very entrepreneurial culture, so it’s very supportive of people and their ideas to grow new businesses and to develop innovative new services. I benefited from that culture.
Q: Was that something that you already knew about Milliman before you joined?
It was blind luck. I knew absolutely nothing about Milliman. It’s kind of funny because, looking back on it now that I know the industry inside and out, there’s no better place for me than Milliman. Yet it was just totally, totally random.
Q: How did you come to work at Milliman?
I was working at a large life insurance company, and at that time I was specializing in risk management for that company. But in Milliman’s Life practice there was a need for someone with expertise on risk management and derivatives and they reached out to me to see if I wanted to be that expert in the Chicago practice.
Originally, I was hired to provide expertise on mergers and acquisitions-related projects, but almost as soon as I arrived at Milliman I made a research proposal to develop a business plan to provide consulting services specifically in financial risk management. I realized that risk management was a business in and of itself, so I started the practice and worked hard to try and grow it. It took several years before it had any kind of meaningful success, but soon it began to grow like crazy, and now we have a very large business in financial risk management.
Q: What kind of advice would you give to a new Milliman employee in order to help them succeed here?
I think the first piece of advice would be to collaborate. Milliman has a highly collaborative culture. The worst thing that they could do would be to sit at their desk and look for answers in a textbook. If you’re working at Milliman, you’re working with the leading experts in the industry. You should reach out to those people and talk to them and ask them questions—you need to actively learn from them.
It’s just amazing how free everyone here is with their time and their expertise. As new people benefit from that culture, they accumulate their own expertise and then share it as well.
It’s a unique place. I’ve been exposed to lots of different organizations, and Milliman just has so much to offer. We recently installed a TelePresence system. That cost a huge amount of money, and we spent it because we put our wallet where our mouth is when it comes to collaboration. Having TelePresence allows these groups in different offices to actively collaborate every single day.
But then there are also little things that make a difference. We have lunch together every Friday, and we have it catered so that we can all just stay here and talk with each other. Another example is that we noticed that in one of the conference rooms, the conference room table was almost the exact dimensions of a ping-pong table. So we clear it off and play ping-pong on Friday afternoons, and just hang out and talk to each other. It’s a casual environment where people really respect one another and collaborate together and it just makes it a joy to work here.
Q: It sounds like Milliman’s not overly hierarchical in terms of interactions between junior and senior employees.
It’s a very flat organization. Really, your position at Milliman is determined by your expertise and your ability to translate that expertise into credibility and legitimacy in the industry. At Milliman, traditional types of hierarchies don’t exist. They’re totally irrelevant. The only thing that really matters is if our clients value that person’s expertise. And the only way that clients are going to value that person’s expertise is if that person is a genuine expert. You can never fake that.
Q: I wonder why more companies don’t do things this way. What do you think?
I don’t really know! I think it’s probably risk aversion. I think for companies that aren’t doing this, switching to this approach is really scary. I think the good thing about Milliman is that it gets the balance right, and recognizes that some things work and some things don’t. And then if we get smart, engaged people, they’re going to find something that works.
Q: In some ways, even though Milliman’s culture is quite unique for this country, it still sounds very close to an American ideal of the “free market of ideas.” How does that come across in Japan, or Australia or England, for the locals in those places who come to work for Milliman?
I’ll admit that after working in this model for a few years, I assumed that this would just work exactly “as is” in other countries around the world. I had no international experience when I started at Milliman. My international experience was limited to eating at International House of Pancakes. Working here gave me the opportunity to broaden my understanding and perception of different countries and different cultures around the world. As I got to know people and became friends with folks in Japan and Australia, the U.K., Germany, and so on, I realized that there are real differences that you can’t just roll right over. So what we try to do is to combine this basic approach that we have with local culture and local people in order to get it to work. And that’s how we’ve had success as we’ve gone to other countries around the world.
For example, when we started the European Financial Risk Management practice, I took five Americans and planted them in Amsterdam and said, “Go to work, guys.” And then I realized that the right way to do it was to recruit Europeans to get them to participate in the process of building the European Financial Risk Management practice to have them work collaboratively with Americans, and then to adapt the culture to the local region, so that there was a consensus that we’ve gotten it right. That second approach has worked in different countries around the world. We had an Australian working in the Financial Risk Management group in London, and his dream was to ultimately move back to Australia and expand our work to Australia, so he did that. In that way he was able to bring our expertise and processes to that country, recruit local people, and then to establish our presence in that market.
Q: How does your practice at Milliman address the issue of balancing work responsibilities and a personal life?
I think we address it incredibly well. Our proposition to the marketplace is that our people are the leading experts in financial risk management. This means people hire us because of our expertise. They don’t hire us because we work long hours and we’ll just grind away at something. You want Milliman because these are the brightest people who are going to be able to come up with the innovations that are needed for success. In order to have quality work like that, people need balance. You’re not going to do cutting-edge work or thought-provoking work if you’re totally worn out and grinding away, just spending all your time working. That’s the approach that I take in my life. I think I’ve got a great work/life balance, and it’s a culture that I set for the organization. I always tell my employees, “You know, if you’re going to try to get a client to do something new, it’s not going to work if you didn’t get a good night’s sleep the night before, and if you’re just burned out.”
People work reasonable schedules, and people are always talking about the other interests that they have. One of our Chicago employees is a really accomplished jazz pianist. The kinds of people work here are people who excel, and those people have interests outside of work. Just from talking to them, it’s clear that they’re able to pursue those interests. This is a place where people work and raise families. Everyone wants to devote time to their kids and their community and they do that and I think we’re better for it.
Q: Could you explain MG-Hedge?
Sure. It’s a very sophisticated computer system, but it’s all built around a very simple idea. Life insurance companies provide guarantees to their customers. Millions of people save for retirement with life insurance companies, and they have their money invested in stocks and bonds. If the market does well, your investments grow, and you make money. But if the market does poorly for a sustained period of time, the insurance company will give you a guarantee to protect you against a severe sustained decline in the market.
In the 1990s, insurance companies were giving those guarantees without doing enough to protect their own risk. I pointed out to these companies that if the stock market went down, insurance companies could go bankrupt. What they really needed was a system to quantify their market risk, and then to specify the transactions that they needed to make in the capital markets to mitigate that market risk. That’s the basic idea behind MG-Hedge: Know your market risk, and then mitigate that risk so that you don’t go bankrupt if the stock market goes down.
We first developed MG-Hedge in 1998-1999. And then the stock market cooperated with us and dropped catastrophically in 2000, and showed everyone that this stuff really works.
Q: When you describe it, it sounds very straightforward—almost simple. Had anyone tried to do something like it before?
Different people had talked about it. Nobody had really done it. We were really the first group to gain the confidence of the industry. I think the Milliman brand had a lot to do with that. If it’s just a random group of people showing up to talk about this idea, an insurance company is not going to take them seriously. But when Milliman showed up with the quality of people and the processes and the technology the firm represents, that really made everyone sit up and pay attention. Insurance companies recognize that Milliman’s quality control is wrapped around everything we do.
It was so wonderful for me to be doing the innovative work that I was doing here at Milliman, because if I had being doing it at a firm without the Milliman brand, I might have just been dismissed and not taken seriously.
Q: Do you think that Milliman’s foundation as an actuarial firm makes a difference in terms of Milliman’s reputation and ideas about what Milliman consultants are capable of?
Yes, I think it does. We’ve seen similar efforts by major investment banks, but you know, Milliman’s efforts were just perceived in a totally different light.
When investment banks show up to discuss this topic, insurance companies realize, “Well, these are salespeople, they’re here to sell me a security, and they’re looking out for their interest, and not for mine.” But when Milliman shows up we have a reputation for being independent, so our analysis has a lot more credibility. Our actuarial roots have established in everyone’s mind that we take an actuarial approach: a very detailed, very quantitative approach where we look at all the potential risks involved and study them to a great level of detail. So yes, I think that actuarial background really helped.
I think one of the other good things about Milliman is that we really recognize our limitations and we’re good at reaching out to new professionals as the firm grows. I’m an investments actuary by training, but as I was building this business I realized that, although my actuarial training was a great starting point for understanding this problem and developing a solution to it, it wasn’t sufficient. I needed technology professionals and capital markets professionals and quantitative development professionals to actually complete this work. So as the Financial Risk Management practice has grown, it has come to include not only actuaries, but also those three other professional specialties as well. And these four groups all work together in a collaborative fashion to solve this one big problem.
Q: How big is the Financial Risk Management team?
Globally, the team is 75 people. That includes about 50 people in Chicago, and then 10 in London, 10 in Sydney, and then a couple each in Tokyo and Seoul. It’s one integrated global practice with people in different locations, because when we manage risk in the market, that process affects clients all over the world. Market risk is market risk all over the world, so it made sense to develop an integrated global team. We can work for clients no matter what country they’re in. We have people managing risks 24 hours a day by having a presence in different points around the globe.
We work for all different types of companies. We work for the large multi-nationals, and then we work for small- and medium-sized companies. We work for companies that only operate in one country. And what we’ve found is that the global multi-nationals, who were among our first clients, will come to us and say, “We want to expand our business in a new country—will you help us?” Conversely, we’ll have domestic-only companies ask for our help in expanding their business globally. We’ve seen that process repeat itself in various European and Asian countries. That’s been really satisfying, because you get to know people from different cultures, and see how this basic idea can be brought to market in different circumstances.
The Financial Risk Management practice is a global practice. We really make an effort to form a sense of our global team, so for example, people from the U.S. will go to Australia, or they’ll go to London for a few months and work there, and people from those other countries will come here into Chicago. That way everybody knows everyone, everyone works together. Another example of this effort is the installation of a TelePresence system in Sydney, Chicago, and London, so that everyone can have the latest generation of technology to see each other and talk to each other. If you’ve never seen it, it’s hard to appreciate what it is: It makes it feel as if everyone is sitting in the same room talking to each other.
Q: Recently, the whole concept of “hedging” has taken on an almost sinister connotation. Could you talk about the difference between a product such as MG-Hedge and exotic hedge fund products?
Sure, that’s a really good point. What we do is the opposite of some kind of exotic, proprietary hedge fund. It really comes back to our mission and what we’re trying to accomplish. Our goal is to use technology and financial engineering for transformational improvement of our retirement security system, by following the principles of simplicity, transparency, and reliability. If you think about those three principles: simplicity, transparency, and reliability, that captures it right there. When we started, there were a number of philosophical choices that we had to make. Most of the people who get into the business of hedging and derivatives go down one path, whereas we’ve gone down the opposite. When you think of a hedge fund, you think of a secret group. They’re not going to share their strategy with anyone. Hedge funds are completely proprietary, completely closed. That secrecy leads to all kinds of byproducts; because of that proprietary nature nobody’s really sure what they’re doing, and nobody’s really sure if it’s going to work. And, by definition, there’s no free flow of ideas among groups of that nature.
Our approach was to do the opposite. Rather than emphasize complexity, we decided to focus on simplicity and transparency. We said, “Let’s use the simplest, most liquid instruments available, and let’s use them in simple combinations.” There are a lot smart people who work here. Yet we also have a strong sense of humility, because we know that the financial market is a very harsh environment, and that no one necessarily knows everything that could happen or how everything might play out. So we decided to stick with the things that work well, the things that have stood the test of time and have worked even in the most stressful market conditions.
Before the global financial crisis, I think most people didn’t really appreciate how important that was. But now that our clients have seen our hedge strategies work even in the midst of this terrible global financial crisis, they realize, “Wow, that was incredibly well done. There were any number of things that they could have done that wouldn’t have worked, but what they did do, did work because they stuck with things that are simple.”
The other principle is one of transparency. And that just makes it wonderful to work here, because we insist on doing all of our work in a fully transparent way, where we share all of our ideas in a very open way with our clients. We require our clients to audit what we’re doing, and to test what we’re doing. That means that our lives are difficult, because the network has to stand up to scrutiny and we have to be able to defend what we do. But ultimately, it makes us better, makes us stronger. We’ve been doing that now for 10 years, and every once in a while they’re right, and we’re wrong, and we need to improve. Making those improvements and then continuing that cycle has led to the accumulation of expertise of this group that’s just stunning.
When people come to work here at Milliman they’re very quickly exposed to the cutting edge of the industry because they’re in an environment with a very free flow of ideas.
The last piece is reliability. Many of the tools used by hedge funds proved to be unreliable. But our work was reliable, because in everything we do, we assume that the crisis is going to happen. That’s our baseline, so we say, “Well, in a crisis you want to have triple levels of redundancy on things, because it’s got to work.” You don’t just want it to work when things are good. You want it to work when everything is falling apart, and that’s the approach that we took.
Q: Would you say that this current economic crisis is the ultimate test of MG-Hedge?
It’s definitely the most severe test. I mean, these are the worst economic conditions since the Great Depression. It really has been a massive stress test, and it’s held up! So that’s been really good. It’s been incredibly gratifying, and incredibly stressful. Our workload has been pretty high during the crisis. But we can step back and look at what we’ve done and say: “Wow! It’s worked just like we hoped it would.” That’s been really wonderful.
Q: What are the possibilities for expanding MG-Hedge?
I think there’s tremendous potential. It’s really just gotten started. Right now, most of our work has been associated with retail retirement savings products, in which an individual realizes that they need to do a better job of saving for retirement. That person contacts a financial planner, and then that financial planner works with them to set up a retirement savings account in a life insurance company. That’s great for those individuals, maybe 10 million people or so in the United States. They’re now delighted that they took the time and took the initiative to do that. But that’s not enough. Everyone is going to get older. Everyone has to plan for retirement. This is not a luxury—even though the majority of people never get proactive about retirement planning. I feel like we’re letting people down right now in terms of meeting everyone’s needs.
So rather than being an optional choice for a small number of people who take the initiative, we need to become the default option for everyone. In my vision, guarantees will be embedded in 401(k) accounts and IRA accounts. Guarantees will be the standard, not only in the United States, but in other countries as well.
Q: And how will that change things? Will it lower the price of admission for people?
There will be a tremendous benefit to people in terms of cost savings. We expect that the cost of the guarantees to drop, possibly as much as 50%. There are a lot of costs that the individual policyholder faces, but if there’s a massive institutionalization of guarantees, the cost will drop tremendously.
Q: So what can you or Milliman do to promote the proliferation of MG-Hedge guarantees?
My colleagues and I do a lot of speaking at industry conferences, we write articles, we also visit large corporations to talk about adding guarantees into their 401(k) plans, and we visit the mutual fund organizations to talk about the benefits of having guarantees associated with their funds and their IRA accounts. And of course we talk to all the life insurance companies.
We’ve also done some work in the public policy area. Now, given the global financial crisis, everybody’s attention has returned to these issues, so there’s a lot of interest now among public policy professionals to figure out where the holes are in the system, and how it can be improved. Milliman will definitely play a role in that process.
Working at Milliman means that you’re going to have a higher profile in the industry than you would have working at many other firms. The exposure that you get here, the opportunity to build a reputation, and all of the knowledge that comes from participating in the process is really a unique opportunity—one you’ll only get at Milliman.
Q: Have you had any memorable cultural misunderstandings in any of the Milliman offices you’ve worked in overseas?
Well, the first time I went to Japan I traveled on Japan Airlines. I got up to the front of the line and all of a sudden the staff began bowing deeply. They said, “Oh, Mr. Mungan! We’ve been waiting for you! We were hoping you’d show up!” And I said, “You were?” They upgraded me to first class, and they treated me incredibly well. Finally I asked them, “What is going on?” And they said, “Well, we’ve all been talking about you, and we wanted to meet you, and see what you were actually like.” And I said, “Well, what is this? I’m just going to Japan for a business, I’m an actuary.” And they said, “Well, your name!” I had no idea what they were talking about. But evidently Mungan in Japanese means—it’s actually the Japanese word for the top hand that you can get in mahjong. It would be the equivalent to my name being—if this were poker—Ken Royal Straight Flush. In Japan now, whenever I travel there, I get it all the time. I guess my name literally translates as “Your Dreams Come True.” So I’ll be introduced to somebody, and they’ll just start cracking up laughing.
Q: What is the origin of your name? It’s not Japanese, I assume.
Q: Nobody gives you that treatment on Aer Lingus?
No. They just say, “Get in the back, buddy!”
Q: Do you know any good actuary jokes?
I only know one. There are some people in a hot air balloon and they got lost. They see a guy down in a field, and they call down and ask, “Can you tell me where we are?” And the guy says, “Yes!” “Well, where are we?” they ask. And the guy says, “You’re in a basket suspended 300 feet above the ground.” And then they shout back, “Are you an actuary?” And he says, “Yes! How did you know?” And they respond, “Because your answer was incredibly accurate and completely useless!”