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The Actuary The magazine of the Institute & Faculty of Actuaries

Life: The death of the with-profits actuary?

Recent research by GAAPS Actuarial has revealed a growing trend among companies to outsource the function of traditional in-house with-profits actuaries (WPAs) — a total of 42% are now in fi rms of consulting actuaries.

On New Year’s Eve 2004, one of the most senior job functions within the actuarial profession was abolished — that of the appointed actuary. Three years on, the time seems right to fi nd out exactly what has happened to the successors of this role and what broader implications this change has had on the wider world of actuaries and life funds.

The statutory role of the appointed actuary included the valuation of liabilities to policyholders, monitoring the ongoing solvency position, advising on premium rates, advising on risk, and providing advice on the exercise of discretion towards policyholders.

Where with-profi ts policies were involved, it was felt that the burden of due diligence and the duty owed by the appointed actuary to policyholders inevitably created a confl ict of interest, as he or she was quite often a director of the life company. It was argued that the risk that they would compromise the protection of the life fund’s policyholders at the expense of their shareholders and fellow directors was just too great — a decision reached largely as a result of what happened at Equitable Life.

With their responsibilities focusing on the fair treatment of policyholders, it is the WPA who can fairly claim to be the true successor to the appointed actuary.

A process of transition
Many of the previously independent life companies have either amalgamated into larger insurance company groupings or else have been absorbed into broader-based fi nancial services groups. Many with-profi t funds are now run as ‘closed funds’. Only 35 of the 108 fellows acting as appointed actuaries at the end of 2004 appear on the Financial Services Authority’s (FSA) list of WPAs at the end of 2006. The rest of these fellows no longer do so, although they presumably account for a significant number of the actuarial function holders (AFHs) in the new set-up.

For the new regime, this does have some significance, as it means that just 35 of the fellows currently acting as WPAs previously held the position of appointed actuary, bringing with them the accumulated experience gained from their previous role, while nearly 40% were newly appointed.

Many appointed actuaries who were directors — and some who weren’t — decided to become the AFH, and appoint a subordinate as WPA. In this way they could retain their board appointment, and their knowledge and skill would still be available to the company. There were even a few appointed actuaries under the old regime who took on neither controlled function, and just remained as finance director.

At an Association of British Insurers seminar in 2004, it became obvious that some companies chose to divide up the roles depending on whether the appointed actuary was a director, and how senior they were. The size and type of company was almost irrelevant.

Senior role
The majority of appointed actuaries were directly employed by the company (or parent company) for which they acted, and most were either directors of their companies or enjoyed a senior management position. The remuneration packages stated in the FSA returns generally indicated that the salaries were paid in respect of the appointee’s broader management role, of which the appointed actuary function was just one element. It was rarely possible, if ever, to isolate the function of appointed actuary and determine the proportion of the overall remuneration attached solely to that function.

In earlier years, a relatively small proportion of companies — but a very large proportion of friendly societies — contracted out the appointed actuary function to fi rms of consulting actuaries. For those that did, the figure in the FSA returns shows the total fees earned by the consultancy from that company. This reason alone inhibited many consultancies from shouldering the burden of the appointed actuary that often only formed a small proportion of the fees shown.

Although the copies of the returns supplied to the FSA must contain the fi gure for ‘overall remuneration’ of the WPA (and earlier the appointed actuary), those provided to the public and to other companies do not need to include this information. This loophole was not widely known or, if known, was not being used. With the increased outsourcing of the WPA, the loophole has been used by almost half of the companies surveyed. In one case, where the consultant refused to provide the information that was not publicly available, he declined to participate on the grounds that ‘it would give a biased slant’. Our research found that 42% of WPAs are now consulting actuaries, many of whom have acted in that capacity for more than one company.

Outsourcing on the rise
The implication is clearly that an increasing number of life insurance companies, including some of the very largest, fi nd it expedient to contract out this regulatory role rather than employ someone in-house.

One reason for this drive to outsourcing might well be the terms of reference governing the responsibilities and conduct of a WPA, which are increasingly complex and burdensome. Another reason might be that the governing body, whose duty it is to oversee the work of the WPA, either directly or through a with-profits committee, takes comfort from the regulatory support and internal peer reviewing that forms part of a contract with a consulting firm. A third reason might be that, with many with-profi ts funds or sub-funds closed to new business, with-profits management is not seen as a core function and, therefore, is one suitable for outsourcing. Little surprise, then, that an increasing number of companies contract out this function to consulting actuaries.

The view is increasingly that corporate regulatory actuarial compliance has become too complex an issue to be dealt with in-house. It has become a highly specialised business in its own right, and is best left to the experts. Companies risk losing vital skills by outsourcing the function of the with-profi ts actuary but, as funds close, many companies feel they cannot afford to maintain the requisite expertise in-house.

It is our belief, however, that it is not just the cost of having an appropriate backup in case your WPA falls ill or needs a holiday that is driving this trend. Since they are not allowed to be directors, there might be some reluctance among in-house actuaries to undertake the function of WPA. That said, the role is necessarily still recognised as being of the utmost importance. In 2006, the average number of years’ post-qualification experience as a fellow among WPAs was 20. Interestingly, the corresponding figures among appointed actuaries during the final years of that regime were almost exactly the same.

In some companies, it is not always evident that the functionary gave up all directorships they may previously have held with the company. There appears to be some confusion as to whether the WPA of a company may continue to be a director of another company within the group, although it is clear they cannot be a director of any parent company.

Ample remuneration?
Perhaps one of the most interesting questions is whether the loss of directors’ rights, and hence status, has been refl ected in WPAs’ remuneration packages? It would certainly seem so. Only 35% of WPAs surveyed had declared a salary over £150k. With the level of responsibility involved, this is surprising.

It may be that the statutory role is being taken by a more junior employee reporting to, and overseen by, an AFH who is on the board. It is difficult to see how such an individual can find the conflicts of interest easy to resolve. In these situations, one wonders whether the new regime has fulfilled its purpose.

A lot of the larger companies have rigid salary bands, which makes it easy for consultancies to headhunt skills and sell them back at a premium. Could companies save money in the long term by increasing pay for WPAs and any necessary backup, thereby retaining these skills in-house? It might well be that the newly qualified fellow will in future see two possible distinct career paths more clearly than before:

>> For those more interested in the actuarial function itself, there will be the opportunity of working for one of the consulting fi rms that are increasingly being appointed to undertake the role of WPA and sometimes an even broader range of actuarial functions (even for some of the larger life companies)
>>On the other hand, for those more interested in pursuing a managerial role, perhaps with an ambition ultimately to become a director, the traditional life offices might offer a more clearly defined career path.

The implications for those entering the Profession could be profound. It would certainly be in no-one’s interest for the actuarial function to be marginalised and increasingly perceived as little more than a highly technical ‘backroom’ skill.

The change of regime from appointed actuary to WPA may have been necessary in terms of the Profession being seen to ‘put its own house in order’ but it may also ultimately have been a complex response to a problem that was more a matter of perception than reality. Eventually, it might even lead to some fundamental underlying changes in the employment patterns of actuaries, with a clearer distinction between actuaries and managers.