ACTUARIAL WORK is central to many financial decisions in insurance and pensions and is an important element in other areas requiring the evaluation of risk and financial returns.
High quality actuarial work promotes well informed decision-making and mitigates risks to users and the public; poor quality actuarial work can result in decisions being made which are detrimental to the public interest.
Actuarial involvement is central to some of the risks in modelling in insurance and pensions. In some areas actuarial work supports decisions that have the potential to create a risk to the public interest, for example in the design and distribution of insurance products.
Some of the risks are very broad, for example environmental concerns, and actuarial work is just one strand among many that have an impact on the public interest. By actuarial work we mean work where the use of the principles and/or techniques of actuarial science is central to risk assessment or decision making.
Actuarial work is most common in insurance and pensions, but may be carried out in a range of other sectors. Actuarial work involves analysis and judgement. It includes commercial, financial and prudential advice on the management of an entity’s assets and liabilities, especially where long term management and planning are critical to the success of the entity.
It can also cover advice to individuals, and advice on social and public interest issues. In the main, actuarial work is performed by members of the actuarial profession and by entities which are advised and controlled by them, such as financial institutions and consultancy firms.
Suitably qualified actuaries have recognised roles in providing advice for pension funds and many insurers.
The actuarial techniques used, and the judgement, skills and knowledge of those providing and those relying on actuarial information, may be inadequate for, and may not keep pace with, increasing complexity and/or commercial pressures. This may result in information which is not trustworthy and/or untrustworthy behaviour, contrary to the public interest.
To mitigate the risk of poor decision making, it is important that those performing actuarial work are able to convey to the user of the actuarial work the limitations of the model and the sensitivity of its outcomes; and exercise judgement free from undue pressures and conflicts.
Actuaries need to resist pressure to vary key assumptions and parameters in order to deliver different outcomes.
Actuaries need to recognise the impact of changes in actuarial work. A slow reaction from actuaries to change would led to inappropriate assumptions being adopted. Actuaries make long term assumptions concerning investment returns in their work in insurance and pensions.
A lack of natural resources and/or demographic changes fundamentally changes the sources of economic growth and future expectations. Actuaries need to consider the impact of these changes when making long-term assumptions to avoid these risks being mis-assessed or ignored.
Actuaries need to communicate change to reduce the risk of poor decisions. Past examples include out of date assumptions concerning longevity improvements, and the reduction in investment returns and its consequent impact on the value of mortgage endowment policies.
A current example of where the world is changing quickly is pension and actuaries will need to ensure they assess and communicate the impact of such changes as they affect actuarial work.
