Actuarial Accountability in a Changing World The UK Morris Review and its Implications for the US.

Actuarial Accountabilityin a Changing World

The UK Morris Reviewand its

Implications for the US

Panel Participants

Lauren Bloom

Mary Frances Miller

Karen Terry

Background

From Equitable

To Penrose

To Morris

Equitable Near Collapse of Equitable Life

the UK’s oldest Life Insurer Questionable actuarial and accounting

practices related to individual pensions• Illustrations and current payments “promised” a

better return than guaranteed• Reserves were only for guaranteed benefits• Actuarial methods were questioned by others within

the profession Dominant chief actuary was also the CEO

Penrose Lord Penrose led the UK government’s

inquiry into Equitable Many parties had responsibility Actuaries particularly singled out

• Vague, self-serving standards• Poor self-regulation• Anti-competitive behavior?• Recommended a further review

Hence the Morris Review of the Actuarial Profession

Sir Derek Morris PhD Economist Head of House at Oriel College (Oxford) Extensive academic & government

credentials Chair of the UK Competition Commission

The review took a little over a year and involved extensive input from inside & outside the profession, inside & outside the UK

The Morris Review: 3 Charges

Competition and Choice for Actuarial Services in the UK

Regulatory Framework of the Actuarial Profession in the UK

Review of the UK Government Actuary’s Department Peculiar to the UK and not covered today

Competition & Choice Focused on pension consulting & insurance Found recent significant entry by smaller

firms: reasonable provider choice But – significant concentration for the large

pension plans Combined bidding for actuarial and other

services is common (such as the fund manager) Recommended separate tenders for

actuarial consulting & other services

Competition & Choice

Recommended separate tenders for actuarial consulting & other services

Is this similar to Sarb-Ox requirements?

Competition & Choice Not much switching of actuarial provider

Difficult to review the quality of advice Client-specific knowledge is important Full service contracts including actuarial Marketing is costly

Best practices for pension plans Evaluate annually More formal evaluation triennially Remarket at least every 6 years

Competition & Choice Best practices for pension plans

Evaluate annually More formal evaluation triennially Remarket at least every 6 years

Is the US situation analogous? Are the suggestions good (best)

practice here?

Competition & Choice Significant “understanding gap” for users

of actuarial advice Many just trust their actuary

Pension trustees & non-executive directors of insurers need better education, training & guidance

A Standard on Communication is needed Information & advice users typically need How to convey in a manageable form so users

can understand, scrutinize & probe

Competition & Choice Better education, training & guidance

for users A Standard on Communication is

needed

Do we have a similar understanding gap?

Morris criticized actuaries’ communications skills:

“too much has been expected of actuaries and, explicitly or otherwise, too much has been promised by them.”

“clients have looked to actuaries to provide certainty, and actuaries have often appeared to provide it.”

Morris continues: “many have regarded actuarial

advice as having the characteristics of a ‘black box’ analysis with methodology … calculations…and even the input assumptions being quite opaque.”

In pensions, Morris observes that actuaries have been criticized for:

Failing to allow for the downward path of inflation and interest rates in the 1990s

Failing to allow for the subsequent stock market drop

Not questioning the “prevailing orthodoxy” that equities could be expected to provide healthy long-term returns

Morris called for a standard of practice on communications:

Disclosure of assumptions and extent to which professional judgment was exercised

What methodologies were chosen and why Sensitivity analysis of outcomes to changed

assumptions and methodologies Probabilistic analyses of key variables or

indicators under particular scenarios Concerns the client should have, bearing in mind

the client’s capacity to cope with various types and levels of risk.

In the U.S.:

Do the ASB’s standards address all of the areas Morris identified?

Should they? Do the profession’s Code and

standards provide sufficient guidance on communications?

Regulation of the Profession UK specific findings

Professional standards are weak, ambiguous or too limited in range – and perceived as influenced by commercial interests

Absence of proactive monitoring of members’ compliance with standards

Profession is too introspective, not forward-looking enough, slow to modernize

Regulation of the Profession• Professional standards are weak,

ambiguous or too limited in range – and perceived as influenced by commercial interests

• Absence of proactive monitoring of members’ compliance with standards

• Profession is too introspective, not forward-looking enough, slow to modernize

To what extent are these weaknesses of the US profession?

Regulation of the Profession Conclusion: the current self-regulatory

framework is inadequate to protect the public interest

Three possibilities: Continue self-regulation Independent oversight of self-regulation Full statutory regulation

Middle route is chosen

Oversight of Self-Regulation Recommended that the Financial

Reporting Council (FRC) take on oversight of the actuarial profession

• Note that FRC already oversees accounting profession in the UK

Five areas of oversight Education and Continuing Ed requirements Reserved (statutory) roles for actuaries Professional & ethical standards Monitoring compliance Discipline

Education Concerns with the current system

Encourages narrow application of actuarial skills rather than broader appreciation of actuarial principles

Not open to new ideas from outside the actuarial profession (financial economics particularly cited)

Education (cont’d) Inadequate oversight of quality

assurance• And lack of confidence among candidates

Existing apprenticeship program discourages employment of actuaries outside traditional roles

Long travel time discourages the best candidates• They can be investment bankers much

faster

Education (cont’d) Concerns with the current system

Skills vs principles Not open to new ideas Inadequate oversight of quality Discourages employment outside traditional

roles Long travel time discourages the best

candidates

Are these valid criticisms of the CAS system?

Education Recommendations

Greater academic & non-actuarial syllabus input

Improve quality control on exams Involve external experts

Expand university education of actuaries More exam exemptions Accredit departments rather than individual

courses• Allow for innovation

Fast track graduate programs to cover the technical parts

Education Recommendations

Greater Academic & non-actuarial syllabus input

Improve quality control on exams Expand university education of actuaries

Do these recommendations have relevance in the North American environment?

Continuing Ed Existing UK scheme is too

complicated No assurance of adequate

monitoring or professional “revalidation”

Not comparable to other professions’ requirements

Current UK Cont Ed Initiative

Minimum CPD syllabus for statutory roles Practicing certificates for other actuaries

(voluntary at first – future mandatory?) Basic CPD required for all actuaries Compliance monitoring

Annually for statutory roles Triennially for certificate holders Spot checks for other (10%)

Current US Requirements

“Statutory” = NAIC opinion signers 12 hours / 6 in “organized” activities Must be relevant to the opinion

Other “prescribed” statements 12 hours / 6 “organized”

No provision for monitoring except at ABCD level

Under Consideration Require 30 hours for virtually all actuaries

Actuary determines relevance Maintain 12 / 6 in reserving for NAIC

opinion signers Continue with no monitoring except at

ABCD level

US Continuing Ed Is the current system sufficient? Will the proposal improve US

practice? What about assurance to the public

that the profession is up to date? Should there be compliance

monitoring?

Roles Reserved for Actuaries

Current life and pensions roles in the UK should be retained But if others prove able to do it, the

government should consider letting them! There is no current p/c reserved role

except for Llyods syndicates FSA (like NAIC) should consider requirement

that management consult with an approved person with relevant skills

• Who may or may not be an actuary

Standard Setting Current UK system has standards set by

equivalent of AAA practice councils Current standards

have at times been weak and ambiguous; have failed to resolve contentious issues; have lacked consistency across practice

areas; have in some cases been dominated by

commercial interests; and there has been insufficient independent and

lay input into the standard setting process.

Standard Setting Options Profession proposed a semi-independent

Actuarial Standards Board Review notes that this works outside the UK! UK version would have representation from

outside the profession Intermediate – put the ASB under the

oversight of the regulator Draconian – have the regulator set the

standards

Standards: Recommendations

Intermediate choice – Standards of practice set by the outside oversight board Majority UK practicing actuaries Overseas actuaries or academics Users of actuarial advice Consumers & regulators

Profession maintains ethical standards (Code of Conduct) But the ASB could also create standards

Standards in the US Is the US Actuarial Standards Board

sufficiently independent? In reality? In perception? Membership? Process? Susceptible to large employer

influence?

Compliance with Standards Lack of scrutiny was a major factor in the

Equitable’s problems. Penrose cited: the complexity of the work of actuaries; the specialist nature of the actuarial

profession; the existence of reserved roles; and the emergence of professional norms which

discouraged critical assessment of one actuary by another.

No current method for monitoring & ensuring compliance with standards

P/C Recommendations Consider introducing a requirement for

actuarial advice as part of the audit for general insurers;

the Financial Reporting Council, working closely with the FSA and the Profession, should – within 2-3 years – satisfy itself that appropriate monitoring of actuaries’ compliance with professional standards and independent scrutiny of actuarial advice is occurring through either direct supervision by the regulator, audit or external peer review.

P/C Compliance Monitoring actuarial advice as part of the audit appropriate monitoring of actuaries’

compliance with professional standards and independent scrutiny of actuarial advice is occurring through either direct supervision by the regulator, audit or external peer review.

Should there be compliance review in the US?

If so, how and by whom?

Discipline Lack of public confidence in the

profession’s ability to police itself Recognized by the Institute/Faculty

prior to Morris Review New discipline process adopted

2005

UK Discipline Independent disciplinary Board

Separate from the Institute/Faculty Councils

Lay participation at all stages of the process

Morris also recommended closer links with regulators

Discipline in the US Is the ABCD sufficiently

independent? Is there confidence in the process

within the profession? Is there public confidence in the

actuarial discipline process? Where does the counseling function

fit in?

The U.S. is not the U.K. There are significant differences in:

Law and structure of government Regulation of industries actuaries serve Cultural expectations

The U.S. profession is very active in addressing public interest through public policy involvement.

The U.S. standard-setting and discipline processes directly address public interest.

Academy activities: Survey of membership on

professionalism topics Council on Professionalism Task

Force on Independence Continued work to address public

interest in dealings with policy makers

Morris’ Review is limited to the U.K.:

Many of his observations may be irrelevant here.

His review provides a basis for self-evaluation here and elsewhere.

Ultimately, any changes the U.S. profession makes should be appropriate to the U.S. environment.

Questions and Comments?