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The Actuary The magazine of the Institute & Faculty of Actuaries

Morris review: Managing Morris

It’s Monday 8 March 2004, just coming up to 4pm. The government is moments away from releasing the Penrose report into Equitable Life.

In the House of Commons, a little-known Treasury minister, Ruth Kelly, is about to rise to her feet. It is her job to make the announcement. Around the country, a million-plus policyholders are about to find out that they will not receive any compensation. Kelly is not going to be popular. In the days and weeks ahead, her ability to defend the government’s position will be tested many times over. By the end of the year, she will have changed jobs twice and been catapulted into the cabinet. By the end of the day, actuaries will be facing a threat to jobs once thought secure, and the Faculty and Institute will have been forced into a fight for their continuing relevance.

At Staple Inn, the profession’s communications team is watching Kelly closely. Actuaries are at the heart of this story. Some elements of the press have been sharpening their knives in recent weeks: they seem to smell actuarial blood. Iain Taylor, the profession’s head of communications, has prepared answers to 101 questions, any or all of which might be thrown at him or his colleagues.

Tom Ross and Jeremy Goford, presidents of the Faculty and the Institute, are nowhere in sight. They haven’t been answering their mobiles all day. They are at the Treasury reading an advance copy of the Penrose report, having agreed in advance to remain inside the Treasury until the report has been published. They also have a copy of Ruth Kelly’s announcement that she is commissioning a wide-ranging review of the actuarial profession. Their eyes fix on the words ‘wide-ranging’.

Then they turn to the name: Sir Derek Morris. It is not familiar to them. For now, the announcement they are holding tells them what they need to know. Sir Derek is a former Oxford economist and the outgoing chairman of the Competition Commission. Clearly, he is very experienced at market investigations. He is also no stranger to complex finance. This could be a disaster or could it be just what the profession needs?

When their Treasury host returns, he is accompanied by Niki Cleal, a high-flyer in the Government Economic Service. She will be the project team leader on the Morris Review, reporting directly to Sir Derek. Today, she is being introduced to the heads of the profession. By now, Tom and Jeremy have already made their first critical decision of the Morris Review: they must ensure that it is the best thing that has happened to the profession since the invention of compound interest.

Back at Staple Inn, colleagues have now heard Kelly’s announcement. Iain Taylor looks at his list of 101 answers. The press will be on the phone any minute now. But there’s only going to be one question: ‘What’s your reaction to the Morris Review?’

Work in progress
Two months previously, Michael Pomery had been elected as the Institute’s next president and Harvie Brown was hotly tipped for the Faculty position. With six months to prepare for their accession, they were acutely conscious that, for several years, the profession had been identifying an extensive programme of change. They wouldn’t need Lord Penrose to tell them that all was not well. There wasn’t a single area of actuarial regulation, from the day a new student joined to the day he or she retired, that was left untouched by the reforms already under way.

A new education syllabus for students was scheduled to kick in just as Michael took office. A programme of ‘competence revalidation’ was also being devised. Regulating actuaries’ day-to-day practice would be in new hands following the announcement that a new actuarial standards board was to be created. Plans were also afoot to introduce peer review into many areas of actuarial work. A new disciplinary scheme had come into effect that month.

Michael and Harvie could see it would be their job to make all this happen. The two of them had more than enough work for the next two years and were unlikely to be called upon for more change

First contact
The Morris Review would not start until 1 May, almost two months after Kelly’s announcement. This gave the profession time to prepare.

That week, the presidents wrote to Sir Derek. Determined to make a good first impression, they decided the central message must be that we had confidence in our own plans for change, but were keeping an open mind to new proposals: short and simple, but with important subtexts. First, it was important to get across that the content of the Penrose report hadn’t come as a shock to the profession. We had already recognised the need for change and were doing something about it a lot of somethings, ranging rather more widely than the criticisms identified by Lord Penrose.

Second, we needed to convey that we weren’t going to dig our heels in on our existing plans. We already knew that our desire for an independent actuarial standards board was limited by the powers and the resources at our disposal. A board with external backing and external funding would be far more effective than one that owed its existence to our say-so. The Morris Review could help us with that and more besides.

Were there risks in expressing confidence in our plans? It was almost inconceivable that the review would reject out of hand the notion of a standards board, and Lord Penrose had praised the new disciplinary scheme. That was two out of five, straight away. If Sir Derek surprised everyone by rejecting those ideas, we could address that problem when it arose in nine months’ time. There was little point, now, in having less than full confidence in proposals that the Financial Times had already written about. The cat wasn’t going back in the bag.

The letter to Sir Derek also suggested that the profession’s chief executive, Caroline Instance, should meet Niki Cleal as soon as possible. The presidents had met her at the Treasury. Now it was important to maintain close relations with her.

In the shadow of Morris
Sir Derek had his team: we needed ours.

Over the course of the ensuing 12 months, an uncountable number of individuals would make a substantial contribution to the profession’s input to the review. In the early days, senior members of the staff provided extensive briefings to the Morris team. Later, members of the profession’s Councils, boards, and more staff colleagues would provide input to the formal submissions. Spearheading the effort was a team of seven, comprising the presidents, the incoming presidents, the chief executive, and two Council members: Seamus Creedon and me. In government-speak, we were ‘the shadow Morris team’.

One of the first decisions of the shadow team was to commission an introductory paper for the review, describing the actuarial profession and putting it in a proper context. The Penrose report had given a lot of attention understandably to the work of the appointed actuary at Equitable Life. But it needed to be understood by the review that there were fewer than 120 appointed actuaries out of 4,500 UK practising fellows. The review would need to know what the other 4,400 did.

It was important at this stage to stick to the facts. As a profession of highly trained problem-solvers, it was tempting to pre-empt the work of the review ourselves. But there was little point in trying to tell Sir Derek the answer(s) before he had even decided upon the questions that would be irritating, and counterproductive. As confident as we were in our ideas, we had also committed ourselves to maintaining an open mind.

Building our case
The shadow team asked the Faculty and Institute Councils to give us a broader perspective. Looking at the review from Sir Derek’s perspective, what did they expect he might make of the profession? From their own perspectives, what would they most like the review to achieve and what would they least like? Finally, what would the public expect the review to recommend?

When the review published its consultation document during the summer, Councils gave more crucial input. Drawing heavily on our introductory paper, the document set out 88 questions. Over 100 people or organisations responded.

The most difficult questions were those that called for an appraisal of the profession’s strengths and weaknesses. Plainly, it would be a mistake to be overly modest and self-effacing. As a profession, we have substantial responsibilities. If we showed little confidence in our own abilities, why should anyone else? But it would be foolish not to acknowledge any weaknesses. So, while submissions by some actuaries listed the ability to communicate among the strengths, the profession took the view that this lacked self-awareness. We said ‘the need to communicate actuarial concepts to non-actuarial audiences calls for a skill which is not a natural fit with being mathematically orientated problem-solvers’. By linking a strength to its attendant weakness, we felt we could steer a course which avoided arrogance, self-effacement, and complacency.

Sir Derek was not persuaded by those who claimed that actuaries, in general, were capable communicators. His view was that users find actuarial information too technical and too complex. More disturbingly, their proxies (non-executive directors and pension fund trustees) do not comprehend the advice sufficiently either. In his interim assessment, Sir Derek went so far as to suggest that regulatory intervention by way of an overarching public interest obligation might be needed to remedy ‘the understanding gap’.

His final report repeated the criticism of communication skills. But, having consulted further, and analysed the proposition in more detail, Sir Derek concluded that there was no effective mechanism that would deliver an overarching public interest obligation without damaging other rights that users of actuarial services were entitled to. This conclusion drew heavily on submissions made by the profession. We can only speculate whether the profession’s arguments in the closing stages would have carried as much weight if earlier submissions had included overly optimistic assessments of the profession.
In planning our approach to the review, the shadow team decided from a very early stage that, as important as it was to know where we wanted to end up, there were very few issues on which we needed to commit ourselves to a position before we were called upon to do so. Instead, we revealed our hand progressively. Starting with purely factual information in our introductory submission, we added objective opinion in our response to the summer consultation and, only after seeing the interim assessment, did we volunteer our preferred way forward.

In this way, we honoured our commitment to keep an open mind; we gave ourselves the opportunity to change our preferences in the light of new information without having to backtrack on any positions previously adopted. We also gave ourselves the credibility to press the review hard on those issues we felt strongest about.

The verdict
In his interim assessment, last December, Sir Derek proposed an independent actuarial standards board, most likely within the framework of the Financial Reporting Council (FRC), coupled with oversight of the profession’s other activities by a body similar to the FRC’s oversight board for accountancy. The profession considered this central proposal to be one we could and should support.

The review also identified options on a range of other topics, including education, compliance monitoring, conflicts, and market-testing. It was now time for us to reveal the options we preferred. It was important to focus on the outcomes we were for or against and not get drawn into a battle over the underlying analysis just for the sake of it.

But first we had to endure an uncomfortable few days while the press selectively reported passages from the interim assessment which identified actuarial weaknesses, and steadfastly refused to report any of the strengths highlighted in the report. The Financial Times, predictably, wrote up Sir Derek’s assessment as a ‘demolition job’ and his proposals as a ‘rebuke to actuaries’. Sir Derek’s proposals to build on the profession’s reforms and to maintain (and possibly extend) the roles reserved to actuaries did not support the press’s story, so they ignored that part.

But with widespread support for the thrust of the review’s proposals, Sir Derek was able to proceed to a final report ahead of schedule. At the time of going to press, the review has been accepted by government and, it seems, by most other observers.

Having gone into the review with confidence in the changes we had initiated, but receptive to new proposals, it was gratifying to see Sir Derek acknowledge that ‘the review has built on changes already contemplated or initiated by the profession’. He was also complimentary about the profession’s attitude to the review:

‘[The profession” does not accept all [my” analysis; but has nonetheless adopted a forward-looking stance, recognising that significant change is desirable, seeking to work with the grain of the options for reform and providing constructive input...’