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The Actuary The magazine of the Institute & Faculty of Actuaries
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International: 2020 vision

The year is 2019 and I am putting together the programme for the 2020 International Congress of Actuaries. The 2020 Congress is to be held in Iraq, which has gone from strength to strength as a tourist destination since the end of the war. The religious tourists and pilgrims have now been joined by an influx of visitors from the West, attracted by the wealth of historic and archaeological sites, as well as the silks and antiques sold in the souqs and bazaars of Baghdad.

It is this dramatic location which will form the backdrop for our conference and seems an appropriate setting for a Congress that will both recognise the historical roots of the profession and the ongoing change and transformation that we are living through. Not to mention the excellent golf courses that have sprung up along the banks of the Tigris in recent years.

I want the Congress programme to reflect the shape of the profession in 2020 and believe that what a profession looks like can be assessed by examining the environment in which members operate, the trends in each of the areas in which they work and new areas into which they are moving.

The 2020 environment
Actuaries operate as part of the wider global economy and therefore this has an impact on the work that they do. In 2019 and moving into 2020, the global economy is once more enjoying a period of growth after the stresses and turmoil of the recession, which ended during the early part of the decade. Things do, however, look somewhat different to the way they looked at the 2010 Cape Town Congress.

The increase in India and China’s internal consumption, along with improvements in their labour markets, resulted in a reduction in the availability of cheap exports in the early 2010s, putting inflationary pressures on Western economies.

Inflation has, however, come back somewhat from the double-digit levels it reached in 2011 as a result of this and the unravelling of quantitative easing policies which had been put in place during the recession. This high inflationary period had a major effect on the work actuaries were doing, particularly in the areas of life and pensions.

The explosion of social media and online work has blurred geographic boundaries and there are more actuaries than ever getting involved in, and working on, projects outside of the country in which they live. The world is a smaller place than it was even five or 10 years ago — information is available instantaneously and improvements in communication and technology mean that the actuarial profession is most definitely a globalised one. There are still, however, some factors affecting actuarial work which vary enormously by geographical area — one such factor is mortality rates.

Mortality in 2020
The swine flu pandemic in the winter of 2009/2010 saw a large part of the world’s population affected by the virus. Swine flu targeted mostly the young as well as pregnant women and the scale of the pandemic therefore served to change the shape of the mortality curve with much higher-than-expected death rates among the youngest in the population.

Although the flu pandemic was a catastrophic event which has a low probability of occurring again or having any lasting effect on the remaining population, another factor is further reducing the life expectancy of the younger population of Western countries:

Known as the McDonald’s cohort, lives born between 1980 and 2010 are showing an increase in mortality rates as the effects of childhood obesity and continued poor adult nutrition take their toll. There is still only a small amount of data on mortality rates as these lives are still relatively young, but the indication is that they are subject to higher morbidity and mortality rates than those born in the preceding decades.

Whether these rates will continue to worsen at older ages compared with lives outside of the cohort, and whether this signals an end to the previous trend of steadily improving longevity in Western countries, is a matter guaranteed to generate lively debate at the conference — definitely one to add to my Congress programme. Countries in Africa and Asia were less affected by the flu pandemic, and the McDonald’s cohort does not apply to their populations to the same extent as it does in the West. The main trend in these countries is adjusting mortality models for the major differences in mortality rates by social class and geographic location.

In developing nations, the difference in life expectancy between a highly educated person earning an above-average wage and an uneducated manual worker can stretch to twenty years and beyond. Vast differences in access to medical care, adequate nutrition, clean drinking water and the likelihood of contracting HIV/AIDS and other chronic diseases mean that mortality patterns vary significantly by geographical area and social class.

It will be interesting to hear Philamon Shapiwe, a young South African actuary who has carried out a recent mortality survey in sub-Saharan Africa, conducting one of the plenary sessions on the way in which mortality models in developing countries take account of these differences. While mortality rates affect actuaries working in a number of different fields, I recognise that it is necessary to have some breakout sessions as part of the Congress, to focus specifically on each key area in which actuaries work and the current trends affecting that particular discipline.

Investment
The behaviour of, and trends in, global investment markets will affect actuaries working in all areas, as well as those who specialise in investment. I anticipate, therefore, that the breakout sessions dealing with investment will be well subscribed. In fact, investment instruments are becoming more accessible to the population as a whole. Take derivatives, for example: once the preserve of the larger pension schemes and investment banks, they are now easily and instantaneously tradable by ordinary members of the public and by the smaller institutional investor.

The markets have recognised the move away from large final-salary pension schemes towards defined contribution funds, often controlled by the individual member. There are therefore more products that focus on asset allocation solutions for these sorts of investors, where the ‘default’ fund is important and where financial sophistication is not always as high. Many more actuaries are moving towards asset and risk management, rather than focusing on liabilities, and there are more actuaries working in the area of investment than ever before.

In countries such as Uganda and the newly independent Republic of Crimea, this is illustrated by the involvement of actuaries in helping to set up local mutual savings ‘clubs’ that are rivalling traditional banking institutions. There may be lessons to be learned for these clubs in looking at the experiences of Friendly Societies which were common in the UK at one time.

Elsewhere, actuaries have been instrumental in developing and pricing new investment instruments such as international mortality swaps and asset class swaps, where younger investors can gear up their exposure to long-term growth assets and older investors can lock in returns.

Pensions
This is a practice area that was thought to be in decline 10 years ago but which still attracts newly qualifying actuaries. Indeed, the increasing globalisation of the profession has made it easier for pensions actuaries to explore new markets. Pension saving is a newly emerging industry in Asia, where the custom for generations was for children to support their parents in retirement. The one-child policy and changes in social attitudes have meant that this is no longer possible to the extent it was in the past and the current generation is realising that they will not be able to rely on their children to meet all their financial needs in retirement. There are therefore many opportunities for actuaries to get involved in the design and implementation of pension solutions in these areas.

In the more established pensions markets, final-salary schemes had seen a steady decline, particularly following the high inflationary period in 2010 and 2011 where many pension schemes were able to afford to ‘buy out’ their liabilities and wind up. We are, however, starting to see the effect of individuals saving less than they need to in money-purchase vehicles and finding that they do not have sufficient funds to meet their needs in retirement.

In some countries, such as the UK, centralised savings schemes or ‘personal accounts’ as they are sometimes known have been set up to encourage pension saving, but this is a relatively recent development and many people opted out of these schemes for fear of the effect that they would have on any means-tested benefits to which they would otherwise be entitled.

Some areas are even starting to see the re-introduction of final salary schemes as a way of tackling the problem of insufficient retirement savings. These are a new breed of scheme, however, where only a base level of pension is guaranteed and any pension increases, contingent spouses’ pensions or other uplifts are only provided where there are sufficient funds in the scheme to do so.

Actuaries have been at the forefront of these developments, helping to design pension solutions that protect the sponsor from unlimited risk, while still providing some level of risk pooling and security for pension scheme members.

General insurance
A key trend affecting general and life insurance actuaries has been the implementation of Solvency II across the EU. Solvency II aimed to ensure harmonised protection for consumers and sought to introduce a proportionate and principles-based approach to risk management and capital allocation. Roughly a decade on from its introduction, it will be interesting to look at whether these aims have been achieved and the effect that Solvency II has had on actuarial practice.

General insurance actuaries have emerged from a difficult time in the insurance cycle during the early part of the 2010s and pricing margins are continuing to improve. Consumers are still very price-sensitive, however, with online price comparison sites continuing to thrive in the developed nations, as well as moving into developing countries.

Weather patterns across the globe have become more extreme and difficult to model. Their effect on pricing policies and reserving requirements can be significant and one of the breakout sessions will look at how extreme events can be incorporated into modelling techniques. Another key trend has been the explosion in new areas of general insurance. Technological innovations have meant that there are more products being developed than ever before to insure the range of electric cars and accessories, online businesses and ‘virtual’ products which have been introduced to the market.

Life insurance
Apart from Solvency II, the key area that life actuaries are talking about at the moment is the allowance for results of genetic testing when pricing policies. The introduction of more widespread genetic testing has raised questions about how the results of these tests can be allowed for in the pricing of policies, if indeed they should be taken into account at all for ethical reasons.

Another fairly recent development for life and general insurance actuaries was the introduction in 2013 of the IFRS accounting standard, which aimed to improve transparency and required that insurance contracts were valued at the amount an insurer would expect to pay to transfer its remaining rights and obligations to a market participant at the reporting date.

There were some contentious issues which had to be dealt with before the standard was adopted and a member of the International Accounting Standards Board has been invited to talk about the final standard, the effect it has had on insurance company business and whether it has achieved its aims.

Life actuaries are looking at ways in which they can improve policyholders’ understanding of the products that they offer, as well as providing more accessible information about what products are suitable for individuals’ circumstances. Policyholder communication is therefore high on the agenda and there has been a lot of time invested in improving online communication and providing online tools for consumers to manage their policies.

Non-traditional
These specific breakout sessions ought to cater for actuaries in the more traditional practice areas but one of the key trends in the last 10 years has been the involvement of actuaries in new areas of work. The actuarial profession in 2020 enjoys a much higher profile than at any other time in its history, and actuaries are in demand in areas outside of their traditional roles.

Risk management and budgeting has been a key growth area following on from the losses of the recession at the end of the last decade. Businesses and individuals are keen to assess and understand the nature of the risks that they face, as well as how to control them, and actuaries are particularly well placed to help them do this.

The general move from final-salary pension provision to money-purchase saving has meant that the demand for individual advice has grown. Actuaries have been involved in developing this area and providing solutions in terms of retirement savings, investments and insurance which are suitable for the individual investor. Actuaries are also involved in identifying potential future problems and developing products which address these issues. One such area is long-term care and the pricing and design of products which cope with the increased demand for, and cost of, care in old age.

The increased profile of the profession and actuaries’ financial acumen and risk awareness have meant that, even in the more general business community, more and more managing directors and CEOs are actuaries. An actuary who has moved away from traditional pensions work and is now the CEO of a major multinational corporation is going to give the after-dinner talk on his experiences.

Conclusion
Putting together the programme for the International 2020 Congress has been an exciting experience. It seems there is a wide range of issues with which the profession is grappling and it is heartening to see how well we are adapting to meet these new challenges.

It is difficult to imagine how the next 10 years could bring as much change as we have seen since the 2010 Congress. Having said that, the delegates at the 2010 Congress, which was held just as the world was emerging from the global recession, probably felt the same way.

One thing is certain, actuaries around the world have a unique ability to identify, understand and manage new trends. I am confident that the nature of change, and how well we can adapt to it, will be a theme for many future Congresses.

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Marian Elliott is a director of Atkin & Co. She is head of actuarial services and is responsible for maintaining growth in the areas of pensions administration, actuarial services and trustee services. Her essay shown here was the winning entry in a competition organised by the Actuarial Profession ahead of ICA 2010