Jobs that actuaries do
- Risk
- Modelling
- Managing assets and liabilities
- Monitoring experience
In order to assess, quantify, manage and monitor risks, actuaries need to be able to:
- Use economic analyses to form judgements about future inflation and interest rates
- Use data relating to future liabilities to estimate payments that need to be met
- Build, parameterise, test and implement models
- Handle assumptions in a critical manner
- Build appropriate margins into assumptions and appreciate the impact of such margins
- Project and discount future cashflows using assumptions
- Calculate the contributions required to build up a fund over time to meet future liabilities
- Monitor the progress of the accumulation of a fund
- Advise on reinsurance and other risk transfer mechanisms
- Analyse the variation between actual and expected experience
- Manage the variation in the progress of a fund to ensure that future liabilities are met
- Handle data in a critical manner
- Manage the build up of assets to meet future liabilities
- Contribute to decisions on investment policies aimed at meeting future liabilities
Statutory roles:
- In his or her opinion proper records have been kept for the purpose of the valuation of the liabilities
- Proper provision for the liabilities has been made
- The liabilities have been valued in accordance with any legislative rules setting out the method and assumptions for their valuation
- The liabilities have been valued in the context of the assets, which in turn have been valued in accordance with the appropriate rules
- In his or her opinion the premiums/contributions for future years will be sufficient, on reasonable actuarial assumptions, and taking into account the free assets of the provider to enable it to meet its commitments in respect of the contracts written, or pensions promised
- A statement of the difference between the value of the provider’s assets and its liabilities
- He or she has complied with professional guidance notes
Actuarial qualifications framework aims to promote actuarial quality through
- Methods
- Actuaries
- Communication
- Environment
Being a Professional:
- Make decisions and take personal responsibility for them
- Act with integrity and detachment from his or her own personal circumstances
- Develop a direct, personal and trusting relationship with a client to advise on the most suitable solution for that particular client
- Recognise that the views of others may differ from his/her own and that the other views may be valid
- Achieve and maintain competence in skills
- Be reliable and timely
- Communicate clearly
- Recognise who the client is and what their needs are
- Recognise and seek to avoid conflicts of interest
How to manage conflicts of interest
- Avoid conflicts of interest as far as possible
- Disclose the conflict of interest to both parties concerned
- Establish Chinese Walls to ring fence people and data
- Maintain detailed records of previous assignments
- Report to the regulator if the statutory actuary feels his client isn’t treating customers fairly
Carrying out an actuarial task
- Ensure that you are familiar with the context in which you are operating and the implications of the results
- Consider resources and timescales
- Define the task with the client and consider any conflicts of interest
- Consider what are the questions that need answering
- Gather and assess the available information
- Set assumptions
- Decide on a method
- Arrive at a solution
- Check the solution and get someone else to check it
- Communicate the answer in a way that is understood to the client
- Consider the professional implications of the work being done
To be fully briefed on a client consider
- Information available in the public domain
- Pre-project meeting
- Culture and risk appetite of the client
- Circumstances and objectives
- Conflicts of interest
Types of advice
- Factual advice – based on research of facts
- Indicative advice – an opinion
- Recommendation – involving research, modelling and consideration of alternatives
External environment
- Legislation and regulation
- State benefits
- Tax
- Accounting standards
- Capital adequacy and solvency
- Corporate governance
- Risk management requirements
- Corporate structure
- Commercial considerations
- Changing social trends
- Demographic changes
- Environmental issues
- Lifestyle changes
- International practices
- Technological changes
Aims of Regulation:
- To correct perceived market inefficiencies and to promote efficient and orderly markets
- To protect consumers of financial products
- To maintain confidence in the financial system
- To help reduce financial crime
Direct costs of Regulation:
- Administering the regulation
* Compliance for the regulated firms
Indirect costs of Regulation:
- An alteration in the behaviour of consumers, who may be given a false sense of security and a reduced sense of responsibility for their own actions
- An undermining of the sense of professional responsibility amongst intermediaries and advisors
- A reduction in consumer protection mechanisms developed by the market itself
- Reduced product innovation
- Reduced competition
Functions of a Regulator:
- Influencing and reviewing Government policy
- Vetting and registration of firms and individuals authorised to conduct certain types of business
- Supervising the prudential management of financial organisations and the way in which they conduct their business
- Enforcing regulations, investigating suspected breaches and imposing sanctions
- Providing information to consumers and the public
Mitigation tools to deal with information asymmetry
- Disclosure required from financial firms
- Cooling off periods
- Chinese walls
- Consumer regulation on unfair contract terms and treating customers fairly
- Whistle blowing
Mitigation tools to maintain confidence in the market
- Checks on capital adequacy and solvency of providers
- Ensuring practitioners are competent and act with integrity
- Compensation schemes
- Ensuring orderly and transparent markets
- Stock exchange requirements
Types of regulatory regimes
- Unregulated markets
- Voluntary codes of conduct
- Self regulation
- Statutory regulation
- Mixed
Forms of regulatory regimes
- Prescriptive – detailed rules as to what may or may not be done
- Freedom of action – rules only on publicity of information
- Outcome-based – with prescribed tolerated outcomes
Self-regulation:
• Organised and operated by the participants in a particular market without government intervention
• The incentive is the fact that regulation is an economic good that consumers of financial services are willing to pay for and which will benefit all participants
• Another incentive is the threat by government to impose statutory regulations if a satisfactory self-regulation system isn’t implemented
• Advantages:
o System is implemented by the people with the greatest knowledge of the market, and with greatest incentive to achieve the optimal cost benefit ratio
o Should be able to respond rapidly to changes in market needs
o May be easier to persuade firms and individuals to co-operate with a self-regulated organisation than with a government bureaucracy
• Disadvantages:
o Closeness of regulator to the industry its regulating
o Danger that the regulator accepts the industry’s point of view and is less in tune with the views of third parties
o Could lead to weaker regime than is acceptable to consumers and other members of the public
o Can suffer low public confidence in the system even if the regime is operating efficiently and effectively
o May inhibit new entrants into the market
Statutory Regulation:
• The government sets out the rules and polices them
• Advantages:
o Less open to abuse than the alternatives and may command a higher degree of public confidence
o May be able to run efficiently if, for example, economies of scale could be achieved through grouping its activities by function rather than type of business
• Disadvantages:
o Can be more costly and inflexible than self-regulation
o Market participants themselves are argued to be in the best position to devise and run the regulatory system. Outsiders may impose rules that are unnecessarily costly and may not achieve the desired aim
o Claimed that attempts by government to improve market efficiency usually fail and that financial services regulation is an economic good that is best developed by the market
Logical needs
- Protection
- Accumulation for a purpose
- Accumulation for a purpose as yet unknown
Benefit providers
- State
- Employers
- Individual
- Financial institutions
- Other corporations
The role of the State as a provider of benefits:
- Provide benefits to some or all of the population
- Educate or require education about the importance of providing for the future
- Regulate to encourage or compel benefit provision by or on behalf of some of the population
- Regulate bodies providing benefits, and bodies with custody of funds, in an attempt to ensure security for promises made or expectations created
- Provide securities for investment
The role of Employers in relation to the financing of benefits:
- Compulsion or encouragement from the State
- A desire to look after employees and their dependants financially beyond the level provided by the State
- A desire to attract and retain the services of good quality employees
- Pooling of expenses and expertise
