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The Actuary The magazine of the Institute & Faculty of Actuaries

On the disappointed actuary?

The Morris review
Sir Derek Morris has released a consultation document setting out the principal areas of concern of his review into the actuarial profession. The document has been sent to a range of potentially interested people, including the CEOs, chairmen, and non-executive directors of UK insurers, pension fund trustees, specimen clients of the Government Actuary’s Department (GAD), consumer organisations, actuarial consultancies, and various regulatory bodies.
The review was announced by the government in response to Lord Penrose’s inquiry into Equitable Life, but the terms of reference of the review are broader than that background might suggest, and include the role of actuaries working in sectors such as pensions management, general insurance, and fund management. The consultation document, and the full terms of reference of the review, can be obtained from the web links shown below.
The closing date for responses to the consultation is Friday 10 September 2004. It is planned to publish an interim assessment in the autumn. The final report, with recommendations for change, is to be submitted to the government in spring 2005.

Contents of consultation document
The consultation document consists primarily of three chapters, examining the following areas:
– the role of actuaries, the profession, and the actuarial services market;
– the current regulatory framework and the actuarial profession;
– role and responsibilities of the Government Actuary’s Department.
These three areas between them cover a lot of ground as can be seen from looking just at the first and last questions, from ‘What do you see as the main value provided by actuaries, and, conversely, what are their weaknesses?’ to ‘How does the GAD compare with structures used in other countries for the effective provision of actuarial services to government?’.
We look below at some of the areas likely to be of interest to readers.

Appointed actuary and related roles
Sir Derek summarises the current arrangements, including the split into the three roles of actuarial function holder, with-profits actuary, and reviewing actuary. He comments: ‘The review recognises that the FSA [Financial Services Authority” had already conducted a significant consultation in developing these proposals before Lord Penrose reported. The review would therefore like to establish whether the FSA’s proposals address the criticisms that Lord Penrose raised about the over-reliance on the Appointed Actuary regime and the lack of scrutiny of actuarial opinions or whether there is a need to consider further changes.’
His questions ask, inter alia, whether the FSA’s proposals are adequate in the light of Lord Penrose’s concerns and whether non-executive directors of life insurers have sufficient expertise and information to assess the decisions of actuaries.
The direction of Sir Derek’s thinking in this regard can perhaps be inferred from his comments in a previous section of the document (‘Accountability of actuaries’), in which he quotes from a speech by Walter Merricks in his capacity as chief ombudsman of the Financial Ombudsman Service: ‘Having searched your professional conduct standards, I am still left wondering what duties a member of the Institute has when advising or assisting in the design of a product that he or she can see that may make the company a lot of money but is not going to be fit for the customers’ purpose. And how does this fit in with your proclaimed public interest role?’
The questions in the whistleblowing section ask whether there are appropriate safeguards for disclosures, if it is sufficiently clear when actuaries should report concerns, and if there is an appropriate level of disclosure at present ‘to protect the public interest’. (Interestingly, Sir Derek notes that there have been ten cases of whistleblowing by appointed actuaries under the new regulations, but no information is given of their nature.)

Openness, peer review and audit
Sir Derek opens this section with a series of quotations from the Penrose report (including Lord Penrose’s inimitable sartorial observation that asking for the auditor and actuary ‘independently to certify the liabilities is like commissioning the two legs of a pair of trousers from separate tailors’), and then describes the latest developments in particular, those relating to peer review.
His questions ask, inter alia, for opinions on Lord Penrose’s concerns about lack of openness, whether the proposed peer review arrangements seem adequate, and when actuarial opinions should be communicated to (for instance) policyholders.
Pension scheme actuaries
There is relatively little explicit attention devoted to the role of the scheme actuary. Sir Derek comments on the Pensions Bill currently going through Parliament, and notes: ‘The review is not seeking views specifically on the proposals in the Pensions Bill itself, which have already been the subject of extensive consultation and debate. However, we would like to hear about any implications for the regulatory role of actuaries in pensions.’
His questions include whether the scheme actuary’s role could be fulfilled by other professionals, whether scheme trustees ‘have the expertise and information to question and challenge the advice of Scheme Actuaries’, and if there is adequate audit or peer review of the scheme actuary’s advice.

Sir Derek’s starting point seems to be based on a post-Penrose perspective, and it is clear that the review will build on many of Lord Penrose’s concerns and conclusions. It is worrying that what should be a ‘blank slate’ review has assumed, in much of the text, a slight whiff of Penrosian fire and brimstone although one could argue that such a stance was only to be expected, given the background to the review. What are important, of course, are the questions asked and the extent to which Sir Derek will read responses through Penrose-tinted glasses.
Many readers will remember, for instance, Lord Penrose’s curious conclusion that the profession should accept responsibility for direct intervention where it was thought that the administration of life funds was likely to threaten the legitimate interests of policyholders. What would that proposal mean in practice? How would it be implemented? Interestingly, Sir Derek has not directly asked for views on the implications of that particular proposal.
The timing of the Morris review that is, the almost simultaneity with the FSA’s new regulations for insurers is intriguing. The FSA has just announced the near-final regulations which will govern the actuarial workings of the insurance sector for the years to come. How will Sir Derek address the oddities in these regulations, and will his recommendations mean another few years of re-regulation (or should we say re-re-regulation)?
For instance, we note that the FSA has confirmed the extinction of the appointed actuary, as had been expected for some time, but the new role which was to have replaced the appointed actuary from a ‘security’ perspective the ‘reviewing actuary’ is to be a damp, or at least a dark, squib. Because, apparently, of auditors’ concerns, the reviewing actuary will not be a named individual performing a publicly visible sign-off. There will not even be a requirement for the reviewing actuary to make a report; instead, the auditor is merely required to ‘obtain and pay due regard to advice from a suitably qualified actuary who is independent of the insurer’.
This seems to be a significant step backwards from one responsible signatory actuary to zero and arguably goes against the grain of the International Association of Insurance Supervisors’ current thinking. It seems extraordinary when compared with developments overseas, even more so in the context of rumours that the FSA will be introducing actuarial certification for general reserves in the next couple of years! We await with interest Sir Derek’s comments in this respect.
So, should we expect another bout of re-regulation, and another few dozen consultation papers ad infinitum, ad nauseam, and ad Valium? Well, the FSA will be obliged to act on most of his conclusions (due out in the spring of next year). There seem to be two principal ways this can go:
– the conclusions are such that substantially more consultation and re-regulation for the insurance sector will be required, with all the uncertainty and work that that would entail;
– the conclusions by and large allow the FSA to say ‘changes being implemented at the same time as this review address most of these concerns’, tweaks being made where appropriate.
One interesting variant possibly allowing some significant rewriting of the overall framework by the FSA without going through the full consultation/re-regulation cycle again is hinted at in one of Sir Derek’s questions, ‘Who should provide the [professional” guidance: the Profession, the regulators, or the government?’. Might a partial confiscation of the profession’s ‘guiding’ role be one result of the review?
We have a very interesting year ahead. The profession has adopted an ‘open door’ stance to the review, and it should be said that the review could be a positive influence for overdue change. What do you think the results of the Morris review should be? What do you fear most? Write, and let us know.
To end on a positive note, there is at least one humorous question in the consultation document which should make actuaries feel needed: ‘Will the FSA’s realistic reporting basis make actuarial calculations more accessible for non-actuaries?’

The Treasury’s press release relating to this consultation document can be found at:
The consultation document itself (43 pages) can be found at:
The profession’s response to the review can be found at:
See also the profession’s statement (p4) and an invitation to take part in a SIAS survey (p18).

FSA PS04/16: actuarial responsibilities in life insurers

The Financial Services Authority (FSA) has published Policy Statement 04/16, setting out near-final rules for inclusion in the Integrated Prudential Sourcebook for life and non-life insurers. The key points concerning actuarial responsibilities in life insurers are:
– As per CP197, the role of ‘appointed actuary’ will no longer exist; instead, there will be an actuary responsible for the ‘actuarial function’, and an actuary responsible for the ‘with-profits actuary function’.
– The new role of ‘reviewing actuary’ is created: this person will report to the auditor on the reasonableness of the firm’s liability valuation, the methods used, and the underlying economic, market, and actuarial assumptions.
– However, there will be no signed review of the reserves by the reviewing actuary. The reviewing actuary will report directly and privately to the auditor.
For details of the other parts of PS04/16 see p7 and p15.
The policy statement (362pp) can be found at www.fsa.gov.uk/pubs/policy/ps04_16.pdf.