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Actuarial Leaders Reflect On Past Year, Look To Future

The following article appeared in the December 2002 issue of The Actuary.

Copyright 2002 by the Society of Actuaries, Schaumburg, Illinois. Reprinted with permission.

The editor of The Actuary, Jay Novik, and the SOA invited four prominent leaders of actuarial organizations to participate in a telephone panel discussion addressing key issues in the past year and the year ahead for the actuarial profession. The discussants are: Dan McCarthy, immediate past-president of the American Academy of Actuaries; Harry Panjer, president of the Society of Actuaries; Gail Ross, president of the Casualty Actuarial Society; and Stan Samples, president of the Conference of Consulting Actuaries.

What important event(s) of this past year had the greatest impact on the actuarial profession and why?

Ross: Enron—because the impact it has had on the accounting profession should be a wake-up call for the potential of the same kind of event impacting our profession.

Panjer: I think the ongoing response to 9/11 is good news for the insurance industry. Very few things happen in a single year, and their effect doesn't show up in a single year. The other thing I see is the continuing decline in the stock market and its impact on pensions and insurance companies.

Samples: I'm not sure there is one particular event, but a combination of events: the stock market being down, the interest rates being down, health care costs increasing significantly, and the increased emphasis on financial disclosure integrity.

McCarthy: Accounting and auditing scandals in the United States had an impact.

Samples: The combined effects on sponsors of benefit plans, especially public companies will be significant over at least the next couple of years, and we haven't even begun to see the impact of this yet. We're going to be seeing it more and more toward the end of the year and especially into next year. Given that actuaries are the primary professionals who calculate the liabilities of these retirement and health care plans, I think we're being given opportunities to step up to the plate and truly help these plan sponsors, as well as the public, understand and manage these liabilities.

McCarthy: One other thing is the insolvency of Reliance [Insurance Co., currently in liquidation]. And I mention that because we have no idea where that whole subject is going, but that and other concerns about the solvency of insurance companies and the adequacy of their liabilities pose a potential risk for the profession in black-eye terms.

Panjer: That is exactly true, if you consider what has happened in the U.K. with the fallout of The Equitable [Life Assurance Society, which was unable to honor its annuity guarantees] and the potential changes in the range of statutory responsibilities for the actuary under the new FSA.

McCarthy: I must say that proposed change, which basically says that they should rely on trusted professionals, but it's the Board of Directors that's really in charge, is a smart change. What gave rise to it is unfortunate, but I happen to think that where they came out isn't all bad.

Panjer: My real point was that any single event could trigger a whole change in a profession, as Enron and other scandals have demonstrated for the accounting profession. We have to be very, very vigilant.

Ross: I want to go back to what Dan had talked about in terms of the overall adequacy of reserves. I'll focus on the P&C side of the industry. I've read that the U.S. property/casualty industry could be as much as $120 billion or so deficient. That's a huge amount of total surplus. I think that could be close to 30-40 percent of the total surplus. If that's the case, we have the potential for a real disaster on our hands. Asbestos is supposedly only reserved to half as much as it should be, based on some studies that I've read in A.M. Best. These are real concerns, certainly for the industry, but also for the actuary. Actuaries definitely need to step up to the plate on an individual company basis starting from the ground floor, to get their companies to do the right thing and recognize the liabilities on the balance sheet, or else we could have a meltdown at some point in the future.

Samples: Do you think we need our own definition of "core earnings," taking steps similar to the way the S&P recently developed their definition?

Ross: I hadn't thought about it from that perspective, but I do know that there are likely to be situations where internal earning pressures at companies might cause an internal company actuary (focused on job security) or an outside actuary (fearful of losing a client) to soften assumptions to get a comfort level to sign off on the opinion. I think it's so important for us as a profession to stay true to our standards and be diligent about explaining to our employers and our clients that they need to do the right thing and what the right thing is.

Panjer: Those are important issues internationally. We are in a changing world at the moment, in terms of the actuary and industries that we serve, particularly with changes in the accounting standards and potential solvency standards as well internationally.

Ross: You're right. I've spoken only of U.S. P&C because that's where most of my reading seems to be these days, but clearly this is a global issue and clearly this is not a uni-disciplined issue. This is across the entire business, and we operate very globally in our profession.

Samples: The guest speaker at the recent Academy luncheon, an attorney, spoke about us regulating ourselves and continuing to regulate ourselves. We not only have to have the rules, but we need a separate group of us that would be willing to enforce those rules and demonstrate that we do so.

Panjer: I assume that this is in response to the accounting and auditing issues in the United States. As I see it, this issue puts all professions on notice that they have to have effective standards and must be vigilant about the practices of their members. To the extent that we are vigilant, we are better able to regulate our own professionals.

McCarthy: One of the points that the speaker made was that the legal profession had always had the rules, but by virtue of lax enforcement what ultimately happened was that the enforcement power got moved from the legal profession itself, the bar associations, to the courts, because the courts basically said "Well, if you're not going to do it, we are."

Samples: Now the same thing seems to be happening with the accounting profession, where they were self-regulated until just recently.

What do you see as the biggest challenge facing the profession in the coming year?

Panjer: I see the issue of building a better set of risk management tools and skills within our profession that address a broader set of risks than we have traditionally addressed. I think that, within our profession, it's recognized that so-called financial risk management is the exciting area—it's the area of growth in terms of the intellectual content, new responsibilities and new challenges for the profession. Within both the CAS and the SOA there are groups working on this; the level of interest is very high in both organizations.

McCarthy: I was thinking in particular that with the sharp up-turn in people taking the early examinations and thus entering or considering entering the profession, we have a challenge. We have an opportunity, by virtue of the influx of candidates that is more significant than we've had for several years, because it provides the profession with an opportunity to select, train, and position from a much broader group of candidates and, I think, improve our situation in the future.

Samples: I agree. I think we have a tremendous challenge, and we've talked about this at the Council of Presidents (COP) meetings and brainstorming sessions, about changing the current perception that actuaries are just technicians. There seems to be that perception, not only with our companies and our clients, but with the publics we serve, and, very importantly, with ourselves. We need to let the public know, and convince ourselves, that we are businessmen and businesswomen who have unique skills, and we can use those skills to help our companies and clients solve business problems, not just actuarial problems.

Ross: Yes, we need to develop more broad-based business people.

Samples: I think we have a unique opportunity, because of all of these events that are happening out there are getting public attention. We should be out there with our best business-oriented actuaries to present some solutions to some of these issues.

Ross: And we need to grow our ranks with better businesspeople and not just backroom technicians.

Panjer: And that's up to us, in terms of the way we design and run our qualification processes. Both Stan and Gail mentioned better businesspeople and that's absolutely right. But in the marketplace we'll still have to differentiate ourselves in terms of the special skill set that we bring. We have to bring that strong actuarial training and perspective to the kinds of problems we address.

Samples: I agree. We cannot let up on the technical skills development. If anything, they probably need to get stronger over time. But we need to complement those skills with other, nontechnical skills.

McCarthy: If you think about the best professionals that you work with, people in other fields, people in the legal profession, for example, and to a considerable extent—even though it may sound ironic, in the medical profession, they are highly skilled, highly trained people who also have business and human skills that really lift them above the rest.

Market research sponsored by actuarial organizations indicates that the image of actuaries among employers is one-dimensional. How should the collective actuarial organizations work together to create a consistent image in the marketplace and what is your view of the image?

Panjer: Our image, like the images of lawyers and accountants, often takes a bad rap. But to some extent, the surveys that the SOA has conducted show that the perception is reality. But unlike accountants and lawyers, we don't generally sell our professional services directly to the person on the street. And that means that the kind of marketing or image building that we do, in terms of direct marketing, will have to be different and we'll have to segment our market carefully. Blanket marketing, like the accounting profession has done, will certainly make actuaries feel good, but it won't necessarily get to the potential customers of actuarial services. We really need to sell the image of the actuary on the basis of the broad skill set that the actuary brings to a problem, directly to the market segments that we want to serve.

McCarthy: In the first place, we need to face the fact that if the image is one-dimensional, we did it to ourselves, collectively over a long period of time. Getting beyond that is partly a matter of intake and selection; it's partly a matter of education; and, as Harry suggests, it's partly a matter of marketing, which I would tend to call "outreach." That's both to direct clients whom we want to serve and it also, and I say this particularly with my Academy hat on, relates to centers of influence who aren't necessarily people who hire us, but people who have a lot to say about the way our work product is viewed—governmental organizations, major non-profits, think-tanks, that sort of thing. I agree very much with the way Harry described it, but in thinking about markets, I would focus not just on people who pay us money, but people who look at what we do and have a view about it.

Samples: In terms of the actuarial organizations working together, we have basically been doing that. The COP collectively has worked on the visioning initiative over the past year. I see that as a way we would continue to work together to develop our plan of action to present to the public not only what actuaries are today, but what we believe they should become.

Panjer: Dan mentioned external relations. In the SOA we've recognized this issue and this year we've created a new external relations function, which is to make sure that our actuaries are at the table with organizations that have similar interests, such as think tanks that affect public policy. The idea is that research support and actuarial thinking need to be at the table at the front end of all these issues and not at the back end in terms of public policy development in the United States and anywhere else.

Ross: The SOA had sent their annual meeting speaker, Peter Bernstein, author of Against the Gods, a number of different pieces of information regarding some of the research that we've done in the area of risk as a profession. He was surprised to see the depth of analysis that the actuary gets into, in terms of risk. It seemed like he had never really even heard of the profession.

McCarthy: I didn't get the impression that he had never heard of the profession, but I certainly got the impression that he was surprised and impressed about the work the profession is doing and the depth of analysis.

Ross: If a man like this, an esteemed author on the topic of risk, who has received many awards and designations, wasn't really aware of our skill set, we have a lot of work to do on getting our image out there. I don't mean just to our own constituents, our employers, the regulators and all, but to other professions, and to the "common person" out on the street. I found that to be a very eye-opening assessment of how people don't really know what an actuary is.

When it comes to general risk management practices, actuaries face challenges posed by competing professions, such as MBAs, financial engineers, CFAs. Should actuaries be the first choice for risk management? If so, how can we reach the point at which actuaries are considered the first choice for these roles?

Samples: We should embrace these other professions. If we continue to compete, we are going to risk perpetuating this image that we're one-dimensional. Why not engage them, learn what they do? Let's incorporate some of their best practices into our profession. That's another way to broaden what actuaries do.

Ross: When I think about the concept of enterprise risk management, I picture a chief risk officer at a company looking at the financial, strategic, investment, operational, and hazard risks facing the company. I really believe that the actuary, trained through our examination system, gets involved with all of these areas. I think the actuary gets more involved with the full spectrum of risk than CFAs or MBAs. The hazard risk is one that jumps out at me, certainly on the non-life side. This is an area where the average MBA training is not going to help focus in on companies' hazard risk, or strict insurance risk. I like the idea of embracing the other disciplines, but I also think that we do bring a broader skill set to the table, and we should promote that and differentiate ourselves.

Panjer: Actuaries really bring together a set of skills and a broad financial framework to make them effective. The key is getting in and demonstrating. One way is to encourage our members to also complete complementary qualifications that help them get in there, like CFA, FRM, etc. One way to encourage our members is to embed some of these complementary qualifications into our own qualification process, so that we have the incentives to end up with actuaries who have a wide range of skills. The same goes for MBA programs, which is a different orientation really—the orientation there is much more professional development in the area of management.

Samples: Perhaps one way to do that would be to have on some of your exam committees, both SOA and CAS, someone with a CFA, or a CPA, or a financial engineer.

Panjer: That already exists for some of the specialty exams. My thought was a little bit more aggressive. In the area of our current professional development component within the SOA exams, people should have a lot of flexibility in terms of what professional development they choose. Recognizing complementary qualifications within that professional development component would be a good way of incenting people to seek these other designations.

Ross: We had an agenda item at Council of Presidents/Council of Presidents-Elect (COP/COPE) of trying to work with the MBA designation and the CFA designation in some fashion in conjunction with the actuarial designations.

McCarthy: Gail, you said that actuaries in many of these areas have skills and training that the other professionals don't have. I would agree with that, and that certainly gets you to the proposition that actuaries should be involved in the risk management process. It doesn't necessarily of itself get you to the proposition that an actuary should be, say, a risk officer or a leader of the team, because to get to that level you need not so much somebody who has all that specific training, though that's nice, but you need somebody who can manage the process and ask the right questions. I wouldn't say that actuaries can't do that, but I would pick up on Stan's point in saying linking our specific training with other forms of training that are broader, I think gives you the best of both worlds.

If you could see ahead five to ten years, what do you think the actuarial profession would look like?

Panjer: We'd like to see a very robust profession, serving a wide range of financial services—health management, insurance, pensions and other areas.

Samples: We'd like to see a robust and growing profession.

Ross: I envision a larger profession around the world. When I think of how the profession is exploding in China, for example, and the potential for the number of actuaries that ultimately will be in China, it's pretty mind-boggling. And I think about other emerging nations around the world. I see a really robust, growing and vibrant profession.

McCarthy: I think that's a really good point, because, to the extent that free or freer markets and more market-based systems emerge in these huge population centers in parts of the world that are coming out of other financial systems, that's just a tremendous opportunity for the profession.

What are the top three initiatives that the collective organizations can undertake to advance the profession?

Ross: Collectively, I think there's so much research that is being done and more that can be done, and we'll do well if we work together.

Panjer: I think it's very important to invest in our intellectual capital within our profession. It's research not only into numbers; it's also research into ideas and methodologies. We're in a very competitive environment, and we need to continually broaden that skill set to compete effectively. Another item is to make our qualification process attractive to potential candidates. Even though we're experiencing explosive growth at the moment, we still need to make sure that people see an actuarial career as an attractive career relative to other careers that attract the same types of candidates. In the last few years, the average age of completion of the Fellowship in the SOA has gone up significantly, and to the extent that that is a useful measure of the attractiveness for a younger person entering the profession, we should be very cognizant of it and try to drive it down to a level that we think is appropriate.

Samples: Collectively, if we continue our cooperation within the COP/COPE and develop strategies to achieve our vision, we are going to accomplish many of these things. Speaking especially on behalf of the Conference, one of my goals for next year is to help actuaries develop and hone skills that help them beyond the technical—presentation skills, communication skills, relationship skills—skills that aren't necessarily tested by exams, but are tested in meetings.

Ross: I'm in agreement with Harry and Stan because the three top initiatives I listed were research, business acumen and promoting an exciting career. In those areas, I feel that collectively we can and should continue to work together.

McCarthy: The one thing that I would add is that, if you're not careful, that list can sound very internally focused. To me, being able to take the results of our research, being able to showcase our people and being able to show people in the public—the business public, the government public, whatever—that we can really make a difference is really key, or else we run the risk of just talking to ourselves and among ourselves.

Ross: We would be remiss if we got through this conversation without somewhere mentioning that we want the public to recognize the actuary as the architect of financial security. That's the vision that has been developed by the COP/COPE.

McCarthy: The mission statement goes on to say, and this ties in with a lot of the things we've talked about, to develop and market actuaries in order that the public will have that recognition. We've been talking a lot about developing both actuaries, and, as Harry says, our intellectual capital, and I've tended to focus on the fact that we also need to be marketing that, not only in terms of individuals, although that's the way you do it sometimes, but in terms of the profession.

Samples: If you think about everything we've talked about and the responses to each of these questions, I believe we are moving toward our vision.