ATRC 2012Raising confidence in actuarial

work: the role of educators

Graham FinlayJon Thorne

11 September 2012

Financial Reporting Council

Ipsos MORI confidence survey • Performed since 2007• Telephone interviews• Questions developed in 2010• Sample size increased to over 200• Participation from directors, investors and

practitioners• Around 7 out of 10 say technical standards are

important – however non-actuaries know nothing or ‘just a little’ about them

Financial Reporting Council

Some comments

Financial Reporting Council

“Because of all the new products that have come out and the things that have been happening in the market: they have had to up their game” (Insurance NED)

“I now understand more of it” (Insurance executive)

“They are producing more back up information to support some of their assumptions” (Auditor)

“I am aware that the standards are being developed bringing added clarity” (FTSE director)

“The actuaries are trying to please too many people, rather than just giving advice” (Pension scheme manager)

Confidence in relevance of actuarial information

Financial Reporting Council

Actuaries

2008

2010

2012

Pensions trustees

2008

2010

2012

Insurance directors

2008

2010

2012

92%

88%

76%

98%

78%

88%

86%

92%

71%

Confidence in reliability of actuarial information

Financial Reporting Council

Actuaries

2008

2010

2012

Pensions trustees

2008

2010

2012

Insurance directors

2008

2010

2012

98%

96%

72%

96%

80%

93%

92%

89%

71%

Confidence in clarity of actuarial information

Financial Reporting Council

Actuaries

2008

2010

2012

Pensions trustees

2008

2010

2012

Insurance directors

2008

2010

2012

90%

82%

56%

88%

70%

86%

69%

69%

57%

Confidence in the integrity of actuarial profession

Financial Reporting Council

Actuaries

2008

2010

2012

Pensions trustees

2008

2010

2012

Insurance directors

2008

2010

2012

98%

94%

92%

98%

96%

100%

97%

97%

100%

Confidence in competence of actuarial profession

Financial Reporting Council

Actuaries

2008

2010

2012

Pensions trustees

2008

2010

2012

Insurance directors

2008

2010

2012

98%

96%

84%

94%

91%

95%

95%

86%

100%

In summary

Confidence in the competence and integrity of the actuarial profession remains high, further strengthened by an increasing proportion of those asked who say that they are very confident.A high proportion of those surveyed said that technical standards were either extremely or very important. However, a significant proportion still considers that actuarial information is presented in a more complex way than is strictly necessary.

Financial Reporting Council

Actuarial communications should:

• Be clear• Be unambiguous• Use plain language where possible• Address your needs • Reflect your knowledge and expertise• Explain uncertainty and limitations• Identify and assess relevant key risks

Financial Reporting Council

Getting behind the headlines• We want to:

– understand why perceptions have changed– identify barriers to higher ratings

• Can these be addressed by education?• Detailed comments follow

– (excluding comments relating to legislation and standards or reflecting user action)

What’s leading to improvement?

• Clearer communications / presentation:“… the profession has made it (presentation of information) more accessible to non-actuaries” (Insurance NED)

“They have realised that they need to communicate to non-actuaries” (Auditor)

“Greater articulation or transparency in terms of limitations of the advice and the assumptions that underpin that advice” (Insurance NED)

“Our ability to engage with and challenge the actuary has increased our understanding” (Pension trustee)

This seems to be an example of genuine progress and recognition of a step change

What’s leading to improvement?

• Better focus on data

“We are seeing how the actuarial data is being used and how it benefits our business” (Insurance executive)

“They have started to use, in terms of mortality data, a lot better information and they seem to be more conscientious with economic inter-relationships.” (Quoted company director)

What’s leading to improvement?

• Improved processes / modelling

“The quality of the process that has been put in place” (Insurance executive)

“[Actuaries] have developed finer models and… there is a much more detailed data base.” (Pension scheme manager)

“They are producing more back up information to support some of their assumptions” (Auditor)

Cause for concern?• Keeping up with a complex world

– “The extreme difficulty of projecting into the future these days. Market volatility would seem to make the formulas of the past redundant” (Pension trustee)

– “It is more to do with the complexity of the underlying pension schemes… The other factor is the changing economic environment” (Pension scheme manager)

– “It is not an exact science and fluctuations in the market can throw up anomalies” (Auditor)

Cause for concern?• Keeping up with a complex world• Actuaries agree that it’s a challenge!

– “There is greater uncertainty in terms of the world economy and future demographic trends”

– “The job’s more complicated and some of the older people have not kept up to speed”

– “We are asked to employ new techniques that are not as familiar as existing techniques”

Cause for concern?• Keeping a grip on reality – inputs

– “I think there’s a fundamental discrepancy between the risk discount rate that is used and market reality” (Insurance NED)

– It feels like it (actuarial information) is disconnected from where the long-term economic trend is going” (Auditor)

– “ I think they are getting further and further away from real life situations” (Company director)

Cause for concern?• Keeping a grip on reality – inputs

– “The profession has not got a great record in keeping up with demographic changes” (Intermediary)

– “They have not really changed their assumptions enough” (Company director)

– “Because of not being forward and keen enough about changes in longevity” (Company director)

Cause for concern?• Reinforcing credibility - outputs

– “There is so much uncertainty around the numbers. Often the changes we see in reporting – especially from insurance companies – show a lack of transparency.” (Investment manager)

– “The information included… about pension schemes has been excessively volatile” (Company director)

– “Losses since 2008 have deteriorated. Arguably actuaries should have spotted that” (Insurance NED)

Cause for concern?• Reinforcing credibility - outputs

– “In comparing actuarial outputs, they feel too varied between actuaries” (Auditor)

– “Their outputs appear to be too variable” (Auditor)BUT

– “I think it is more herd-like and less independent, less individual bodies within the community” (Investment manager)

Issues for educators?

• Dealing with complexity– A subject in its own right?– Looking to others?

• Explaining models– Broad based lack of awareness of limitations?

• Setting assumptions– Short-term(?) trends and long-term analysis

Issues for educators?

• Demonstrating credibility and consistency– From year to year– Across the profession– Consistency: principles or prescription– Avoiding “following the herd”

Questions and comments