Actuaries Abroad

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Actuaries Under Scrutiny
by Kendra Felisky-Watson

The long-awaited Penrose Report into the problems at the Equitable Life Assurance Society was released on Monday, March 8 to considerable media coverage. Equitable Life is Britain's oldest mutual life insurance company, founded in 1762 at a meeting in the White Lion tavern in Cornhill in the City of London.

[By now you are thinking: What does this have to do with general insurance (aka property/casualty) actuaries? Keep reading….]

Here's a very simplified background so I do not get sued for libel: many years ago, The Equitable devised a product that would guarantee a certain rate of interest for policyholders who chose to buy the product. Unfortunately, when interest rates fell and the stock market did not do what was expected, they had to fork out far more than they had anticipated to these policyholders. Not surprisingly, they eventually ran out of money, causing losses of an estimated £3.5 billion for its one million policyholders.

While the U.K. actuarial profession thought actuaries might get some blame for the problems at The Equitable, the U.K. profession was surprised by the government's response to the Penrose review. (And this is where we get to the part that pertains to ALL actuaries.)

The government has appointed a special advisor (Sir Derek Morris) to review the U.K. actuarial profession with particular regard to professional standards. Although the problems with The Equitable pertain more to life actuaries, ALL actuaries are being included. The complete terms of reference for Sir Derek are as follows:

"Consider what professional and/or other regulatory framework would best promote recognised, high-quality, and continuously developing actuarial standards, openness in the application of actuarial skills, transparency in the professional conduct of actuaries, accountability for their actions, and an open and competitive market for actuarial advice in the U.K.

In doing so:

• Take into account developments in the actuarial profession, regulation, and the financial services market in the U.K. and abroad;
• Examine the role of actuaries in the financial services sector, including providing actuarial opinions in relation to audited accounts;
• Build on the work of recent government and regulatory initiatives;
• Examine the relationship between the Government Actuary's Department and the actuarial profession and with other parts of government.
• Recommend a framework that will be independent in representing the public and consumer interest, and be accountable, flexible, transparent, and no more burdensome or restrictive than is clearly justified."

In the U.S., this would be equivalent to a congressional inquiry into the actuarial profession. We are talking serious business here.

Even before the Penrose Report, the U.K. profession had realized there was a need for change. Jeremy Goford, president of the Institute of Actuaries, and Tom Ross, president of the Faculty of Actuaries, stated that "today, there is an irresistible clamour for openness, transparency, and accountability, and we are having to change more rapidly." They then introduced four initiatives:

• Actuarial Standards Board—containing a majority of independent members to introduce the concept of independence into our standard-setting procedures
• Revalidation of Professional Competence—requiring all actuaries who give actuarial advice to have practicing certificates
• Peer Review—having all actuarial work reviewed by external/independent actuaries
• Disciplinary Scheme—making new joint arrangements between the Institute and Faculty.

It is interesting to note the frequency of the word "transparency" in all these communications. Obviously, the time has now come for actuaries to step down from their ivory towers, open their black boxes, and join the rest of the world.

On a slightly more entertaining note, a paper will be presented at the Institute of Actuaries on Operational Risk. This is an expanded version of the paper presented at last October's GIRO conference in Cardiff. It has some quite interesting thoughts of the kind of risks facing companies, including insurers, and how to model them. Some amazing-looking graphs are included that really need to be seen to be believed.

The horrible cold, grey, drippy, wet winter appears to finally be coming to an end and England beat the West Indies at cricket in the West Indies. Spring is definitely on its way.