Risk Management and Insurance - Analysis - Assessment - Decision - English Version - Uni Ulm
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Risk Management and Insurance
Analysis – Assessment – Decision
2 Contents
Introduction Finance
Actuarial science – the basis for the main focus of research 3 Extreme values worry scientists, too 15
Prof. Karl Joachim Ebeling, President of Ulm University Multivariate models take several risks into account
Research in the Faculty of Mathematics and Economics 4 Be aware of the risks and act accordingly 16
Prof. Dieter Rautenbach, Dean of the Faculty Research on financial risk management ist important – as maxims like this are difficult
to implement in practice
Context
Integrating psychological aspects 17
Mathematics, management and economics as a unified whole 5 People tend to be overconfident
The Ulm idea: a tailored study course developed from needs assessment
Mathematical Biometry
Insurance
Calculating risks in the life sciences 18
Systemic risks in occupational pension schemes 6 Infection in hospitals is a burning question
There are risks even if the contributions to occupational pensions are treated responsibly
Interview
Modelling risk 8
Stochastics is only useful when randomness comes into play A look at theory, analysis and everyday work in the private sector 20
Dr. Thomas Wiesemann, Member of the Management Boards of
Overview Allianz Lebensversicherungs-AG and Allianz Private Krankenversicherungs-AG
Study programs – Research – Prizes – Collaboration 10
Students‘ Experiences
Mathematics, Management and Economics
Ulm was the right decision 21
Sustainability Students award an AAA for the combination of subjects
Not sawing off the branch we are sitting on 12
Perspectives of University Management
Sustainable economics is more than just public relations
Ulm University – strong overall profile 22
Analysing environmental and supply risks 13
Dieter Kaufmann, Chancellor
The electricity market has its own special risks
Publishing details 23
Introduction 3
Actuarial Sciences – the basis for the main focus of research
Foreword by Prof. Karl Joachim Ebeling, President of Ulm University
Ulm University is regarded as a pioneer in the the consolidation of this area of focus. A newly One area of focus of the Masters program is
establishment of Quantitative Economics. In established Master program which includes that of actuarial sciences. The professional
1977, it was Ulm that first introduced Mathe- these important issues for society, as well as for profile of an actuary offers many diverse career
matics and Management as a course of studies, future professional life, will be of great benefit prospects in the fields of banking and insurance,
which to this day still enjoys a great demand, for students. specialisingin the evaluation and management
and which has led to the establishment of of financial risks. One important advantage
similar study programs in other locations. This The research focus on risk management and for Masters students in Ulm in this context is
study course forms the basis for the successful insurances is embedded in an extensive network that parts of the basic examinations to become
research area of risk management and insur- of partners from business and industry both an actuary are integrated into the study
ances established at the Ulm University. within the Science City Ulm and beyond. In par- program and can be assessed during their
ticular the Institute for Financial and Actuarial studies.
The quantitative focus of economic sciences in Science (ifa) works closely with stakeholders
Ulm deals with the measurable foundations for in Ulm University, and makes an important In the case of capital investments in particular,
economic decisions; this enables Ulm University contribution to the strength of this main focus of risk management represents an area of great
to distinguish itself significantly from the tradi- research recognised throughout Germany. sensitivity, which has suffered considerably
tional study programs in the field of economic from the financial market crisis, and which has
sciences. Graduates from Ulm are highly sought Risk Modelling suffered a resulting loss of reputation through Prof. Karl Joachim Ebeling, President of Ulm University
after on the job market and are extremely attrac- The key issue lies in the modelling, quantifica- the application of unfair investment strategies.
tive for industry, and services sectors. tion and control of risks. The areas of financial It is therefore of particular concern to us that
mathematics and stochastics, as well as those of aspects of business ethics be taken into proper
The internal objectives of the Faculty of Mathe- finance and the insurance industry, are particu- account, that people are put first, and that the
matics and Economics also reflect its quantita- larly involved in addressing these issues. The application orientation of the business content
tive focus, which includes financial services and exclusive characteristics of Ulm are supported by is coordinated in the services of citizens for the
their mathematical methods, whose scientific the unique subject combination of mathematics safety and organisation of life. We want to do
analysis supports the university’s priority and economic sciences within a single faculty. our part in strengthening this attractive and
research programs. Sustainability research, well Both these subjects, relevant to the focus of important subject area in the interests of the
established within Ulm University with profes- research, are closely interlinked and generate public. With its diversity and its presence in
sorships for sustainable knowledge, sustainable important synergistic effects, as well as a range key social sectors, this focal point offers many
education and sustainable markets and insti- of possibilities for interdisciplinary research and opportunities to develop scientifically reliable
tutions, is becoming increasingly important for teaching projects. and tailor-made solutions.
4 Introduction
Research in the Faculty of Mathematics and Economics
Prof. Dieter Rautenbach, Dean of the Faculty
The Faculty‘s central research topic lies exactly
on the interface between mathematics and
economic sciences. We study important issues “The high quality of the research is reflected by the research
in areas of economics, with the help of math- ranking of the German Economic Review, which puts the
ematical modelling, analysis and simulation.
Faculty in second place among all the universities in the
The central themes are insurances, financial
German speaking area.”
risks, environmental and supply risks, as well as Prof. Dieter Rautenbach, Dean of the Faculty for Mathematics
risks in health, services and industry. For a long and Economics
time, the core of this research topic has been
the Graduate College of the German Research
Foundation: “Modelling, Analysis and Simula-
tion in Economathematics.”
Most of the economic problems stem from finance
and insurance management, where both our
scientists and students benefit from the close Prof. Dieter Rautenbach
links between economics and mathematics. The
high quality of the research is reflected in the
research ranking of the German Economic Review, research. In cooperation with Medicine and Dealing with risks
which puts the Faculty in second place for finance Psychology, we also examine behavioural issues The behaviour of individuals and institutions However, it is not only natural catastrophes
among all the universities in the German speaking related to economics and management. must now be analysed. This is because dealing that are of enormous relevance to society as a
area. Moreover, in the last five years, the Faculty with risks is influenced by how individuals per- whole. The same is true for another area of our
has won 16 prizes for research on insurance. Risk research is one of our faculty‘s central ceive risks and by the communication within the research—“Management Rules”—and their con-
areas of expertise. Our scientific work mostly company. We employ the methods of psychol- sequences for company risk. At the latest, this
Our research on quantitative economic scienc- begins with statistical analyses. How probable is ogy, information economics and organisational becomes clear when the methods developed
es focuses on the quantitative foundation for the occurrence of an event and how high will the economics. Finally, the costs of the risk must are applied to company pension funds. In large
economic decisions in profit and non-profit damage be? A price that is appropriate to the be distributed by source and adequate control companies, this might represent billions on the
organisations, particularly research on risk man- risk can then be determined. The reliability of structures and possible safeguards must be balance sheet.
agement and the related theme of sustainability the results is checked. developed.
Context 5
Mathematics, management and economics as a unified whole
The Ulm idea: a tailored study course developed from needs assessment
It has been possible to study mathematics at more insurance companies were facing relaxa- different ways and furthermore, they have broad
Ulm University since 1972. “In those years, we tion of the regulation system in Germany, which knowledge of applied mathematics. Whether
had the chance of planning a study program, demanded new skills from their staff. Now, we are talking about insurance risk or company
like on a drawing board—a study program the plan was to develop an interdisciplinary pension schemes, or about a derivative bought
that is unique in the German speaking area”, program based on strong mathematical founda- by a company to protect themselves against any
explains Prof. Ulrich Stadtmüller, the mathe- tions but with emphasis on applied topics and changes in the capital markets, risk manage-
matician who has helped to develop the faculty oriented towards the needs of business and in- ment always demands the same abilities.
over decades. dustry. Partners from industry and the ministries
were involved in the discussions. The result was Ulm tackles new challenges
“Some of our staff had observed in the USA how the program which is now called Mathematics The insurance industry has been subjected to
mathematicians found jobs in industry and in and Management. “Companies such as Allianz enormous changes and new challenges. Until
financial services and how statistics and com- Insurance and the Deutsche Bank were very the 1990s, the German insurance industry was
puter science were becoming increasingly im- positive, as they were looking for academic staff almost cut off from the rest of the world. Be-
portant as work with computers started. These with sound theoretical knowledge, but who cause of the strict regulation of the market, there
experiences were included when we started knew how to read a balance sheet and who were were only a few products in life insurance. When
thinking about new concepts in educating math- familiar with the work of an auditor as well.” you built a house, there was no choice between
ematicians. You could suddenly calculate things different insurance companies, as there was
that had previously been impossible.” Further- Our success shows that we were right only one insurer for each federal state. However,
According to Stadtmüller, half of the graduates the market was opened by the EU in 1995, and models and their calculation; this is the promis-
have an employment contract in their pockets German insurers were suddenly exposed to ing approach towards treating the problem of
The following courses deal with the complex before they have their master degree. Four competition with British and American products. risk holistically. To achieve this, students have
of issues related to risk management: weeks after completing the course, 90% have There was a great need for new methods and to tackle other areas: insurance economics and
Mathematics and Management fixed employment. They are successful in the models, as well as other ideas and procedures. actuarial science, mathematical finance and
(Mathematical Finance, Mathematical insurance industry, the financial industry or Thus, people with proper training were required. finance.
Insurance) in the financial management departments of
Management and Economics large companies but also in other branches It has turned out that the combination of With this knowledge, they are like people on
(Sustainability, Behavioural Economics) like the software industry. Since the range of subjects in our program provided the ideal a theatre stage. They can train the spotlight
Finance (Financial Mathematics, Financial the program is so wide, students in Ulm do not foundation for these challenges. Using modern from different angles on the risk event, so that
Economics, Actuarial Sciences) only understand about insurances or banks, information sciences, economic questions and they can then develop a model and analyse the
but about risks—as risk may be packed in many economic results are linked with mathematical problem with it.
6 Insurance
Systemic risks in occupational pension schemes
There are risks even if the contributions to occupational pensions are treated responsibly
certain that the money will be available when it ance—must step into action. This is financed by
is to be paid out to the pensioner. This gives rise contributions from all German companies.
to the following problems, which are increas-
ingly being studied by analysts. If the value of Risky investment strategies
the pension reserves changes, this can lead to Prof. An Chen, Director of the Institute of
significant losses by the company.” Insurance Science, is studying the investment
behaviour of market participants. Her stud-
There must also be safeguards against inflation. ies show that the more funds an investor has
The company is therefore obliged to adjust for available, the easier he finds it to make riskier
inflation every three years. Alternatively, an investments. But there is also another phenom-
automatic 1 % increase per year can be included enon. When the financial situation is poorer, the
in the pension payments. As Zwiesler summa- investments become riskier. Gambling behav-
rises: “There is great potential for risk here, iour becomes evident. These investors are driv-
which means a lot of work for the actuary. What en by the hope of still saving themselves with
happens when the baby boomers retire is quite high profits from a risky investment. They might
critical. This is admittedly not as explosive as an win a ticket with their last penny for the profit
inter-generational contract as in social security. of millions that they passionately desire. But
But nevertheless, in this case too, part of the investors may also be seduced by the irrespon-
money must be earned by the next generation.” sible investment behaviour of a so-called “moral
“What do car manufacturers and electricity Occupational pension schemes have been es- But what happens when there is not enough hazard”. If there are safeguards against any risk
suppliers have in common? They are both tablished in Germany since the 1970s. However, money or the company is bankrupt? If there is not (for example, with a pension guarantee fund),
insurance companies that incidentally also sell this item now makes up most of the liability side enough money for pensions, the German pension the investor can make risky investments without
cars or current.” This is how Prof. Hans-Joachim of the balance sheet. Bayer AG has pension re- guarantee fund assurance—a sort of reinsur- worry—as the risks are born by others.
Zwiesler sees the crux of the problem that will serves of 9 billion Euros. For Volkswagen AG, the
become a major headache in future—particular- figure is as high as 24 billion Euros. According to
ly to large companies. A portion of employees’ Zwiesler: “The advantage is that the money re- “What do car manufacturers and electricity suppliers
wages is not paid in cash but in pension or sur- mains within the company and can be invested have in common? They are both insurance companies
vivors’ benefits. For the moment, the payment is or used for internal funding. The companies are
tax free. The tax authorities only demand their not subject to the same investment restrictions
that incidentally also sell cars or current.”
share after payment. as insurers. However, the company must be Prof. Hans-Joachim Zwiesler, Institute for Insurance Science
Insurance 7
How do the company financial managers want to panies will suffer a lot if many pension funds
THE CONTROL CYCLE – INSTRUMENT FOR AN OPTIMAL INVESTMENT STRATEGY
safeguard the reserves for the future? Ulm sci- default simultaneously.” On the basis of these
entists are searching for an optimal investment assumptions, models are developed for the
Search for future reserves strategy. They are also working through the probability of such scenarios. It is then calculat-
possibility that several companies go bankrupt, ed how much risk capital would be necessary.
which causes a systemic risk. Chen explains Another solution is that other investors step in
Problem
analysis that one possibility might be a risk-adjusted to save the system.
premium. It would then be possible to reward
investment behaviour or higher rates of owner Other countries – other systems
Improving equity. According to Chen, these studies have not only
MODEL DEVELOPMENT
the model
excited interest in other countries with similar
Model Parameter
However the Ulm scientists are not only systems, such as the USA, but also in EU part-
studying the various risk factors, but are also ners who provide for old age in other ways. “It is
calculating the consequences of alternatives really fascinating to find out how these different
Quality assurance
Data
Is the model suit-
methods of calculating retirement pensions. systems may be reasonably compared—as they
Documentation
Documentation
able? Insurance companies offer pension funds in all have the same objective.” An Chen then ex-
May we have to
Analysis/ make changes? Parameter which the employer gives the money to the plains the strategy in China, her home country.
Interpretation estimation pension funds, from which the pensions are sub- “With the one child family, the Chinese will have
sequently paid. It is then an interesting question just as severe problems as the Germans with
as to how such a fund should be provided with the population pyramid. Only they have had
Quality risk capital. In separate steps, they describe the less experience with officially managed pension
assurance model
safety mechanisms between the participants—a schemes. Women in China often retire in their
complex matter with four participants. The mid 50s. As they are mostly already grandmoth-
scientists must then specify which mechanisms ers, they take the responsibility for bringing up
Projection Implementation
must be considered as a risk. Zwiesler gives the their grandchildren, while their children work. In
following example: “Usually when the pension return, the children make sure that their parents
Quality Assurance Results Testing (QA) fund of a certain company is underfunded, the can survive financially.” This family safeguard is
sponsoring company of the pension fund and now at risk, which is why the Chinese are very
the pension guarantee fund will step in first to carefully studying pension schemes in the rest
Documentation support the pension fund. The future premiums of the world. We are discussing possible coop-
that the sponsoring company needs to provide erative studies with a delegation from the elite
to the pension guarantee fund will be increased University of Fudan in Shanghai.
The figure shows how the Ulm scientists measure various risk factors and
calculate alternatives for provision for old age. according to the magnitude of the underfunding
level of the pension fund. Surely the other com-
8 Insurance
Modelling risk
Stochastics is only useful when randomness comes into play
“Mathematics is an art, which is often (though The level of mathematical literacy in the every- models and are amazed when these models fail
not always) helpful to other sciences”. Prof. day world is often quite low. Spodarev observes “We develop proofs that to reflect the real world.” How can Ulm mathema-
Evgeny Spodarev, Director of the Institute of that even significant industry players continue may be derived from practice. ticians help in such a case? “One of our industry
Stochastics, is certain that scientists need to to work with bad mathematical models. Notable partners had made serious errors in risk model-
Nevertheless, they possess their
carry our fundamental research (and not only offenders are banks and insurance companies, ling. In response, we developed a model of storm
applied) research, in order to develop new theo- which often have problems calculating the risks
own independent justification losses that produced three-dimensional maps of
ries. “We develop theories that may be derived of their own products. “They should have good and beauty.” annual losses. Using the insights from this mod-
from practice. Nevertheless, they possess their actuaries, who are capable of calculating an el, we were able to develop software that allowed
Prof. Evgeny Spodarev, Director
own independent justification and beauty.” This adequate model of the risk. In the real world, of the Institute of Stochastics pur partner to calculate their insurance premi-
is why they say that mathematicians are years they often employ staff with only rudimentary ums correctly.” This helped the insurer’s actuary
ahead of practice in some areas of knowledge. mathematical knowledge. They use the wrong department.” Spodarev emphasizes that it is
Insurance 9
important to make sure that customers under- BUSINESS SUPPORTS SCIENCE
stand the limits of stochastic modelling, which
is only applicable to random events. “Some of Since 2010, the Signal Iduna Group has donated half the funds for a Junior Professorship in actuarial science. The company not only provides
the things that happen in financial markets have financial support. Through his close contact with their actuaries, Junior Professor Marcus Christiansen learns about the current risks in this
nothing to do with the laws of chance. Investors type of work.
have become aware of a specific opinion or
political situation and take fright, leading them They tell him about problems which they cannot deal with during their daily work as
to dispense with a certain investment. This is thoroughly as would be necessary for an analysis with a long-term perspective. Chris-
not a random event.” Spodarev stresses that tiansen then attempts this with realistic data from the company. He develops statistical
stochastic modelling approaches only work when techniques with other procedures and risk management techniques. As he says: “I do
the market is relatively stable. Extreme events or not do their work for them and this work is not commissioned. I would like to solve
crashes—where the normal market mechanisms basicproblems that are then published in scientific journals and which would then
no longer work—lead to false assumptions and benefit both the whole field and society.”
make stochastic forecasting impossible.”
For example, Christiansen is studying how policy holders change their insurance com-
Stochastic geometry in 4-D pany. The legislator wishes to encourage competition by making it possible to change
What is the chance that a burglary or other crime insurance. But what happens when predominantly healthy people change into one
will occur at a specific location? The Bavarian tariff and sick people into another? “This anti-selection effect is linked to many risks
State Criminal Office commissioned the Ulm for the insurance company. For the tariff with disproportionately many sick people, the
stochastics experts to develop a suitable model premiums would greatly increase. It would then be almost impossible to recruit new
of crime risk. Using the results of this model, high policy holders. On the other hand, it would be difficult to leave a tariff like this, as it
crime risk areas could be identified and police pa- would mean losing part of the actuarial reserve.”
trols in those areas could be increased. Spodarev
explains that their calculations had to determine
risks that depended on the day of the week and
season, as well as on spatial location. Thus, their “I would like to solve basic problems
model had both temporal and spatial dimensions.
that are then published in scientific journals
In stochastic geometry, complex 4D structures
can be described using just a few model parame-
and which would then benefit both the
ters. Stochastics can calculate a probability—how whole field and society.”
likely it is that something happens. However, it Jun. Prof. Marcus Christiansen,
cannot predict the times and locations of specific Institute for Insurance Science
crimes. So, of course, criminals will not be caught
red-handed just by calculating a probability.
10 Overview
Study programs – Research – Prizes– Collaborations
Mathematics, Management and Economics
STUDY PROGRAMS AT THE FACULTY ACTUARIES OF THE FOURTH GENERATION
Ulm University Faculty of Math- The analysis of the financial crisis led to the emergence of matics. The mathematician must therefore be capable of
ematics and Economics is one of two problems. Products were developed with risks that had presenting his results and the limitations of their models
the few faculties in Germany that either not been properly calculated or with calculations in such a way that non-mathematicians can understand
combines courses in mathematics that had been wrongly interpreted. Moreover, communica- and interpret them as well.
and economics in the same build- tion between the market participants was inadequate. In addition, the mathematician must develop an under-
ing. About 400 students per year Ulm University therefore asked itself how the study area standing of process management, how his models can be
complete their degree here. of actuarial science could be placed on a broader basis. integrated into commercial processes and decisions are
All our graduates have excellent professional opportunities. In In order to analyse complex situations, the financial world reached.
1977, we were the first faculty in Germany to offer a course on busi- must be described in mathematical models. This will also Ulm University has responded to this challenge with the
ness mathematics and thus laid the foundation for the close link be true in future. training concept for “Actuaries of the Fourth Generation”.
between mathematics and economics. In response to the complexity of the problems, the models The teaching program includes not only all essential
The degree programs: themselves have become more complex in recent years. mathematical and economic knowledge and abilities, but
Management and Economics (B.Sc./M.Sc.) Nevertheless, the analyst should not forget that they do also lectures on process management and organisation.
Mathematics and Management (B.Sc./M.Sc.) not cover all features of the real world. There are also lectures on communication for actuaries.
Mathematics (B.Sc./M.Sc.) Commercial decisions must still be made by human These explain to the actuary how he can present his
Mathematics (teaching) beings. They decide whether they implement the mathe- models, with their results and limitations, in a compre-
Mathematical Biometry (B.Sc./M.Sc.) matical results one to one, or use their ”common sense”, hensible manner to managers, supervisors or analysts.
Computational Science and Engineering (CSE), (B.Sc./M.Sc.) which may possibly also include consequences beyond Thus Ulm University is trend-setting in the holistic training
the company. of actuaries.
Finance (M.Sc.)
It would be good if as many managers as possible under-
stood both the significance and the limits of the mathe-
1967 1970 1973 1977 1992
Foundation of Ulm University Mathematics started as subject Black-Scholes Model Mathematics and Management Actuaries11
EXCHANGE PROGRAMS AND CO-OPERATIONS PRIZES AND HONOURS NETWORK
For 30 years, the Faculty of Mathematics and Economics About 40 professors research and teach at the faculty, The Ulm network is closely linked. The Faculty main-
has been coordinating an exchange program with American including numerous winners of national and international tains very good and intensive contacts with industry and
universities. research prizes. commerce, both within the Ulm/Neu-Ulm region and far
The partners are: Syracuse University, University of Wiscon- Research on the insurance industry, managerial finance beyond. The five endowed chair professors show our close
sin at Milwaukee, Binghamton University, San Diego State and mathematical finance is regularly awarded important links to special cooperation partners particularly clearly: the
University, Illinois State University, Missouri University of prizes, including the Merckle Research Prize, the Spencer L. Ludwig Erhard Chair on Economic Policy, the Werner Kress
Science and Technology and Florida Institute of Technology. Kimball Award, the Kessler Prize, the Gillardon Advancement Chair on Strategic Management and Finance, the endowed
Award, the Best Paper Award of the German Association Chair on Sustainable Knowledge, Sustainable Education
Other international co-operations are restricted to specific
for Managerial Finance, the Best Paper Award of the Global and Sustainable Economics, the Péter Horváth Chair for
themes. These are: University of West Florida in Pensacola
Association of Risk Professionals, the Reuters Award, the Business Management and the Junior Professorship for
(Statistics), Edith Cowan University Perth, Western Australia
Swisscanto Best Paper Award and the Tor Vergata Young Insurance Mathematics of the Signal Iduna Group.
(Economic Sciences), Lomonosov Moscow State University
(Mathematics), University of Waterloo and Fudan University Economist Prize. The Scientific Computing Center Ulm is an interdisciplinary
Shanghai (Insurance Sciences). Approximately 400 students each year are awarded a research centre set up by Ulm University, as well as being
degree. These regularly include the winners of prizes for an established partner of industry. Since 2005, Landesbank
In addition, the Faculty cooperates with numerous universi-
outstanding final papers or doctoral theses. Baden Württemberg (LBBW) has supported a Trading Room,
ties in the following countries …
which gives students direct access to financial markets and
… in mathematics with: Brazil, Estonia, France, Great Brit- Here is a selection of the prizes for insurance economics,
data. The Institute of Financial and Actuarial Sciences (ifa)
ain, Ireland, Italy, the Netherlands, Austria, Poland, Sweden, managerial finance and mathematical finance: SCOR Prize
is an independent advisory company for actuarial ques-
Spain, the Czech Republic and Turkey for Actuarial Sciences, Gauss Prize for Young Scientists from
tions related to life insurance. The Ulm Forum for Economic
the German Association for Mathematical Insurance and Fi-
… in economic sciences with: Croatia, Switzerland, Cyprus, Sciences (UFW) e. V. provides support to science, university
nance, together with the German Society of Actuaries, MINT
Greece, Poland, Portugal, Rumania, Slovenia, Hungary education and practice. The Economics Advisory Council
Award, Berlin Prize for Insurance Sciences, Südwestmetall
… in general university exchange programs with: is an informal committee with managers from industry and
Advancement Award, Prize of the Centre des Professions
Egypt, Australia, Brazil, Chile, Canada, Mexico, Russia, economics, most of whom studied business mathematics at
Financières (FR); Gillardon Advancement Award, DZ Bank
Singapore, Taiwan and USA Ulm University.
Career Price, Reuters Award, Acatis Value Prize, Mileva
Einstein-Maric Prize.
1993 1999 2003 2005 2010 2011 2020
Foundation of ifa Management Finance Graduate College, Mathematical Biometry Computational Science
and Economics LBBW Trading Room and Engineering (CSE)12 Sustainability
Not sawing off the branch we are sitting on
Sustainable economics is more than just public relations
hedge the risk. This is a proven procedure, but purchased internationally. As Müller explains:
combats the symptoms, not the cause. Müller’s “Some tantalum comes from the Congo, where
job is to search for other solutions, for exam- it finances a civil war. In Peru, children work in
ple substitute materials or potential savings. mines and the term “blood diamonds” speaks
He may investigate whether old mines can be for itself. For example, VW has 48,000 direct
revived. “Think about the rare earth elements. suppliers. This needs work on the identification,
They are not really so rare, but are found in very analysis and avoidance of problems.” The first
low concentrations in the earth. For example, step is to specify standard rules to which suppli-
mines in the USA that produced rare earths as ers must comply. Do they comply with specific
secondary products were closed at a time when standards? Then information on suppliers is col-
there was no demand for these. China currently lected with a questionnaire. “Information about
enjoys an essential monopoly in rare earths, specific countries—such as corruption—can be
as it dominates the market with 97% of world obtained through Transparency International.
production. We should then ask ourselves how Substance databases provide information about
we can reduce the price risk associated with this risks linked to substances. Depending on what
situation.” It takes years before an old mine is you mark with a cross, points are awarded.
reactivated. Other deposits, such as those in Finally there is a score that is a measure of the
Greenland, would lead to almost insuperable risk associated with a supplier.”
environmental problems, because of their high
uranium content.” Questions are asked, but controls are carried
out, too. Müller describes the course of the
“My job is to identify the social and ecological University. Although he is not responsible for a When is a product “clean”? project as follows: “If there are breaches, you
risks and to sensitise us to them. I then have to focus research area, more and more, his work On the one hand solutions must be found that should try to develop improvement plans, so-
develop instruments, either to reduce the risks is becoming part of his colleagues’ research work over a long period; on the other hand, called “corrective action plans”. You must then
or to exploit them to generate opportunities.” projects. This is particularly the case in work environmental compatibility is of increasing make a fundamental decision about the impor-
Martin Müller is Endowed Chair Professor for linked to industrial risks. importance. Consumers are now interested tance of the price, quality and sustainability”.
Sustainable Knowledge, Sustainable Education, whether the production of a product is ecolog-
and Sustainable Economics at Ulm University. Industry needs raw materials, but the prices of ically and ethically “clean”. This is a Herculean Müller has also analysed sustainability and the
The chair was donated by the City and Region these may fluctuate violently. Companies there- task for some large producers, as the variety of connected risks for companies in the region.
on the occasion of the 40th anniversary of Ulm fore protect themselves against these risks or materials is increasing and more and more is One bank wanted to offer an investment fundSustainability 13
for sustainable products with regional character. Masters in sustainable company management “Many people have
“The assumption was as follows. The inhab- From the winter semester 2015/2016 on changed their views after
itants of the region would like to know who is there will be a study program on Sustainable
the financial crisis.”
involved and are glad if they already know the Management, partially financed by the State
company. The risk in developing this product Program for Sustainable Science. The students Prof. Martin Müller, Foundation
is that there will be problems if a single rotten will learn how to make commercial decisions Professor for Sustainable Knowledge,
egg is included.” Sustainability has become that consider secondary ecological and social Sustainable Education and Sustainable
an important issue in the financial sector. You effects. As the themes and research projects are Economics
can see this in the foundation of new “ethical” highly complex, the program will be interdisci-
banks, which commit to ecological or social plinary. Besides from economic knowledge, the
objectives. According to Müller: “Many people program will deal with the relevant principles of
have changed their views after the financial philosophy, psychology, biology and information
crisis. This is a good thing. In the long-term, we science. As the next step, Ulm University will
don’t want to saw off the branch on which we concentrate the research and project work in a
are sitting.” Centre for Sustainability.
Analysing environmental and supply risks
The electricity market has its own special risks
The current unhindered emission of greenhouse the wind and sun, how can we be sure that the pants and then to design the general framework
gases throughout the world is linked to massive light will not go out when the wind does not of the market in such a way that the desired
risks to the world climate and therefore a dan- blow for long periods and the sky is cloudy? goals for energy policy can be achieved in a sus-
ger for future generations. An essential factor And what happens with the new participants in tainable and economically favourable manner.
in reducing these risks would be to decrease the market? “If we want to guarantee secure supplies, com-
the elimination of CO2 in electricity production. panies must have adequate incentives to invest
However, switching energy supply from fossil The economist Prof. Sebastian Kranz deals with in reliably available reserve power stations or
fuels and atomic energy to renewable energy questions on the suitable design and regulation in storage technologies—which are currently
sources is a complex challenge and a variety of of markets and institutions. The main aim of his very expensive. However, a major factor in the
risks must be considered. Here is one example: research on the energy sector is to understand decisions on investment is whether the invest-
If a large proportion of current is produced by the incentives of the different market partici- ment costs will in fact be recovered. This must14 Sustainability
be incorporated in a suitable market design.” payment of electricity suppliers, so that man- BASIC RESEARCH MEETS PRACTICAL WORK
Sebastian Kranz also studies the susceptibility agers have incentives to consider the costs for
of different market mechanisms to the risk of society as a whole. Risk can also be described as the
the exploitation of market power. presence of uncertainty. Either
Game theoretical models explain managers’ involved parameters are not pre-
The networks play a key role in the energy strategic behaviour and its consequences under cisely known, or the processes are
turnaround. If network development does not various market mechanisms. Mathematical so complex, that both our current
keep pace with the development of renewable models from statistics and risk theory help in knowledge and computer calcula-
energies, the following situation may become the analysis of the decisions of market partici- tions are not enough to consider
increasingly frequent. Windmills in the north of pants and their consequences. all parameters. Numerical analysis
Germany can actually turn fast, but sometimes is applied to these problems in a
have to be switched off, as cheap wind current Collaborations wide variety of areas, such as the
cannot reach South Germany on demand. In general, the energy market is a highly financial world or engineering. The
complex theme. As Kranz explains: “In this underlying mathematics has many
As Kranz explains: “The current regulation of case, a single large study cannot solve the similarities.
network operators and the organisation of our whole problem. Many different aspects must be
electricity markets—where in practice pow- studied over years, often in cooperation with One reason for the financial crisis
er stations receive the same electricity price other institutes, such as the Cologne Institute of was the mutual dependence of
everywhere in Germany—provides hardly any Energy Economics. In the future, we may cooper- different market participants.
incentive to network operators and electricity ate with the Centre of Solar Energy and Hydro- Mathematical modeling of this
suppliers to coordinate the development of gen Research or the Helmholtz Institute Ulm for complex financial structure is very difficult, as many dependencies cannot be measured or are
networks and regional structures of investment Electrochemical Energy Storage”. even unknown. If the numerical analyst wishes to quantify these uncertainties, he must identify
in power stations in a cost-effective manner for the dependencies and their influence on the overall behaviour of the financial system. According
consumers.” Many different factors can be con- Within the faculty, there are synergies—both to Prof. Karsten Urban of the Institute of Numerical Analysis: “If I wanted to consider everything,
sidered. For example, direct current cables can in teaching and in research—between Martin I would have differential equations in more than 300,000 dimensions. As the complexity of the
reduce energy losses over long distances, but Müller’s business management perspective and calculations rises exponentially with the number of dimensions, it would be impossible to calcu-
need expensive transformers. Perhaps there are the general theme of environmental protection late this, even in 100 years. We call this the curse of dimensionality.”
cheaper power station sites in North Germany and sustainability.
than in South Germany. However, in South Ger- Numerical analysts like Urban can use mathematical methods to analyse past financial crises and
many, there may be new costs for new network to calibrate their models correspondingly, but they cannot look into the future. “If firm A seals a
investments. With colleagues from Cologne contract with firm B, it is very rare that you can read about this in the newspaper on the following
and Munich, Sebastian Kranz is investigating a day. And even if you could, I don’t know what effect this would have on the stock market. How-
suitable combination of incentive regulation for ever, we can identify the risk factors and quantify their influences.”
network operators and intelligent market-basedFinance 15
Extreme values worry scientists, too
Multivariate models take several risks into account
Weather phenomena always attract a great deal to model the dependency structure effective-
of attention, especially when they are extreme. ly. However, as the number of important risks
Those affected suffer under the consequences increases, the situation gradually becomes more
and often cannot understand why they were difficult and most methods become increasingly
not warned in good time or why the necessary inadequate.”
precautions were not taken. Events are also re-
ferred to as extreme because they are rare. This Reality is too complex
rareness is good in itself, but causes trouble Robert Stelzer’s students investigate how finan-
when trying to estimate the associated risks. cial markets can be described mathematically
in an appropriate way. They select a model that
In many applications, simple models such as the reflects the market structure well and then they
normal distribution (as shown in the Gauss- employ mathematical methods to draw conclu-
ian bell curve) do not adequately account for sions from it.
the possible occurrence of extreme values and
therefore enormously underestimate the risks. “If I have a result, I have to ask myself a series of
questions. For example, is this plausible and is it
Multivariate models can help compatible with economic theories? If not, I have
Models need to reliably reflect the relevant to consider whether I have selected the correct
properties of the risks. This is true for the effects mathematical model or mathematical approach,
of weather events as well as for events in the or whether the mathematical results demon- But there are also extreme events. Admittedly, a financial crash. Then it does not help if I refine
financial markets. strate defects in the economic assumptions I methods have been developed in extreme value the model again and again by incorporating more
have made.” Thus Stelzer plays the ball back to theory and statistics to determine the frequency and more assumptions. This may give a result
Prof. Robert Stelzer, Director of the Institute of economics. “There is not only pure mathematics, of extents of damage that have not yet been that appears to be precise, but also increases the
Mathematical Finance, explains the possible which is inherently correct, but in the application observed. However, it is important not to make risk that my assumptions are false and that my
challenges: “In many situations, several risks there is an underlying system that you want to an exact prediction—which is impossible—, but results are therefore unreliable. The result may
play a role at the same time. These must there- describe. In the end, all models are wrong, as to make as accurate as possible an estimate of never be presented as a single apparently precise
fore be represented in appropriate multivariate reality is always more complex. Yet, as reality is the probabilities of the different extents of dam- figure; the precision of the prediction must
models. The obvious question is then what are too complex for us to understand, we need mod- age of future events. “What happens can always always be included. In other words, a measure
the mutual dependencies of the different risks. els that effectively reflect the most important be worse than anything that has ever happened must always be given of how much the actual
With two risks, various approaches can be used aspects for the specific application.” before—whether we are talking about floods or values will deviate from the point estimate.”16 Finance
Be aware of the risks and act accordingly
Research on financial risk management is important – as maxims like this are difficult to implement in practice
Higher profits are generally only achieved when Examples such as these illustrate the difficul- However, only measuring risks is not enough, the financial crisis of 2008. They had betted on a
the risk is high. This applies both to private ties that risk managers have to deal with. Many even though this is still the principle task of reduction in risk premiums.
investments and to commercial activities. Fi- events that may be of decisive importance for risk managers in banks and elsewhere. Risk
nancial risk management is helpful in balancing success or failure are of very low probability. specialists should play an essential role when According to André Güttler of the Institute of
chances and risks and in avoiding unnecessary chances and risks are being compared. This Strategic Management and Finance at Ulm
risks. Gunter Löffler, Professor of Finance at Ulm Uni- is because many players have an incentive to University: “The situation is reminiscent of the
versity exemplifies the problems of assessing give more weight to chances. The hope of being failure of the hedge fund LTCM, whose managers
Risk management starts with risk assessment. risks from historical data as follows: “The debts paid a larger bonus, of being bailed out by the also made fundamental errors and who had to
By how much may property prices decrease in of the Greek government were restructured in government or of keeping up with successful be saved in 1998 by the US Central Bank and a
the coming three years? How high is the risk 2012. The most recent comparable case in an in- competitors makes it easy to overlook risks. group of large banks.”
that a country becomes bankrupt? dustrial western country was Germany in 1953.” Some psychological behaviour patterns have
the same effect. Research and practice
Gunter Löffler reports: “We recently assessed
Research on financial risk management is the risk for a medium-sized company that long-
therefore multifaceted. Measurement prob- term contracts would not be fulfilled due to the
lems are one research area at Ulm. The finance bankruptcy of the contractual partner. We are
researchers are investigating how high the risk currently discussing with a bank how to gen-
is that banks or states infect each other and how erate scenarios for developments in property
this can be measured. This is a really important prices.” Co-operations of this sort often lead to
research question, as the risk of chain reactions interesting themes for master theses.
is often given as the main argument for official
rescues.
Another current research project investigates
whether investors in US bond funds have bene-
fitted from the funds’ use of credit derivatives.
On average, these derivatives were used by fund
managers to take more credit risk, and not to re-
duce existing risks. Many funds were then taken
by surprise when risk premia increased duringFinance 17
Integrating psychological aspects
People tend to be overconfident
In the ideal economic world, man is homo oeco- Fellner-Röhling has let her students trade in an Researchers have observed this type of myopia
nomicus. He does what promises to bring him artificial stock market. In order to create realistic in students and professionals alike. Fellner-Röh-
the greatest advantage, particularly in financial conditions, they received financial rewards ling showed that this behaviour can be attenu-
matters. Such rational behaviour can be easily depending on their success. ated by two interventions. The participants in an
integrated into the sober world of numbers investment experiment either received aggre-
when modelling risks. First, they were given public information about gated information—that combined short term
the probability distribution of the asset value. gains and losses—or their investment horizon
The only problem is that human beings cannot Subsequently, they received private information. was extended.
turn off psychological processes. We are guided The correct estimation of the asset value should
by emotions and our assessments are flawed. be based on a combination of both. “Investors were compelled to leave their port-
Thus, the individual himself can become an ele- folio unchanged for a certain period of time and
ment of uncertainty when assessing risks. This ”A typical pattern is that the precision of the not to sell it immediately when prices fluctu-
is why behavioural aspects are being increas- private information is overestimated. In the ex- ated. This constraint restricted their freedom of
ingly integrated into economic analyses. treme case, the broker considers that his private action, but increased their final returns.”
information is absolutely correct and then ac-
According to Gerlinde Fellner-Röhling, Professor cepts more risk than is justified when trading”, Thus, it becomes clear that research does not
of Behavioural Economics at Ulm University: according to Fellner-Röhling. stop at analysing irrational behaviour, but
“One important factor in financial markets is instead strives for solutions in order to protect
that people tend to be overconfident.” In experiments, Prof. Fellner-Röhling always both the individual and society from negative
attempts to disentangle cognitive and emotional consequences.
It has been found that stockbrokers think that factors. The difficulties of such an approach are
they can predict the future more accurately than illustrated by yet another phenomenon. She
the facts allow: “This can lead to increased trad- explains: “People feel much more pain due to a
ing volume and sometimes to excessively high loss than pleasure due to a gain. If assets gain
market prices.” After the dotcom bubble and the and lose in rapid alternation, people shy away “People feel much more pain
financial crash of 2008, laymen readily accept from the investment risk. We call this myopic
the image of the overconfident financial juggler. loss aversion.” The time horizons that investors
due to a loss than pleasure
consider are often too short. The high volatility due to a gain.”
However, this hypothesis can only be tested in a of the market is then obvious, but the long-term Prof. Gerlinde Fellner-Röhling,
scientific economic experiment. For this reason, chances of returns less so. Institute of Economics18 Mathematical Biometry
Calculating risks in the life sciences
Infection in hospitals is a burning question
The concept of risk is often used in medicine. unethical, if for example the mechanisms of
How high is the risk of developing cancer? How action were to be compared of treatment with
risky is this operation? What are the risks of a the patient’s blood and with donor blood (for
specific drug treatment? Clinical studies must example in a study on cancer patients with
provide the answers. Biostatisticians are respon- transplanted blood stem cells). Experience
sible for planning and evaluation. These experts clearly shows that the patient’s own blood is
must master the necessary mathematical and better if possible.
statistical methods, as well as having adequate
basic knowledge of medicine and biology. For many patients, there is always the risk that
the patient may be infected with other patho-
Prof. Jan Beyersmann, Professor of Biostatistics, gens during treatment. The risk of infection is
explains the special features of this subject: “The normally quantified as the number of infec-
biostatistician does not conduct research alone in tions per 1,000 patient days. In our example of
his room, but collaborates with users. It is often a patients with transplanted stem cells, the donor
question of survival time analyses and these have blood treatment suddenly leads to a lower risk
a similar mathematical structure to insurance of blood infection. However, if the risk is quanti-
mathematics. However, the available data are fied as the number of blood infections per 1,000
different, so other techniques are used, too.” patients, treatment with the patient’s own blood
decreases the risk (as expected).
Ethics sets the limits
Before he starts calculating, the biostatistician This contradiction may be resolved by consid-
must describe the term “risk”. As Beyersmann ering the mathematics and the medical situa-
explains, the problem is that this is not a clear tion. As Beyersmann explains: “Patients with
case of right or wrong. He gives three examples donor transplants need longer to recover, and
of the difficulty of the design of a study and this leads to more patient days. At the same
the definition of risk. In randomised studies, time, it is necessary to give them prophylactic
patients are assigned to treatment groups on a treatment. This leads to a reduction in the risk
random basis. These are the gold standard for of infection per 1,000 patient days. There are ul-
demonstrating the efficacy of drugs or treat- timately more infections than with the patient’s
ments. However, a study of this sort would be own blood, although these are delayed.”Mathematical Biometrics 19
“The new Act on Infection Protection shows what a hot
potato this is. In general, there are too many infections in
hospital and it is thought that this might be linked to the
excessive use of antibiotics.”
Prof. Jan Beyersmann, Institute for Statistics
The study described by Beyersmann provides to the conclusion that beta-blockers prolong
new insights into the antibiotic prophylaxis of life. However, this is a mistaken conclusion.
cancer patients. In general, the use of antibi- This is because only persons who have already
otics may be problematical. “The new Act on lived long enough can belong to the group who
Infection Protection shows what a hot potato regularly take beta-blockers. This is a faulty
this is. In general, there are too many infections classification.”
in hospital and it is thought that this might be
linked to the excessive use of antibiotics.” Back to the issue of infection. Residence time
data are used to analyse infection risks and
The search for relevant data prophylaxis. The latter can also be thought of as
Another area of research is health care research the positive risk of avoiding an infection: Infec- tient. You also have a specific cost rate for one Biometry provide considerable added benefit
as a component of health system research. tions should be avoided. Then for transmittable such day in hospital. Here the mistake would be for risk research at Ulm. “The subject “mathe-
This deals with the care, nursing, diagnosis, diseases you can put the patient in an isolation that an infection only affects costs when it has matical biometry” is almost unique in Germany.
treatment and follow-up of the patient. “We room. However, this is expensive, particularly for already occurred. A long term patient who was There are study programs in the area of biosta-
evaluate the observation and settlement data of intensive care patients. A cost-benefit analysis expensive may have lain for a long time because tistics, but only Ulm has the close relationship
the health insurance funds, in order to investi- is then performed to balance the costs caused his infection developed early. Or it can be a to mathematics.”
gate the risks during the course of the patient’s by an infection against the costs arising from patient with a late infection, who lay for a long
treatment. For example, we may ask whether infection prophylaxis. Thus, once again various time and had a relatively complicated clinical
administration of beta-blockers has a favour- risks are compared. But how do you quantify the course. Sometime after two weeks he still devel-
able effect on life expectancy.” Beyersmann costs of an infection? oped an infection. However, this prior stay has
chose this example to illustrate the procedure’s nothing to do with the infection.”
potential for error. “If you compare patients who “You compare the mean number of days for
have regularly taken beta-blockers with those which an infected patient was in hospital with Jan Beyersmann considers that the chair in Bio-
who have not taken them regularly, you come the number of days spent by an uninfected pa- statistics and the study program MathematicalYou can also read
