Mark Azzopardi, managing director and head of insurance client strategy at BlackRock, has had a varied career in investments, pension consulting, general insurance and banking.
The Joint Forum on Actuarial Regulation (JFAR) recently published its latest Risk Perspective report - Risk Perspective: 2017 Risk Update. The forum was established in 2013 by the Financial Reporting Council (FRC), the IFoA, the Financial Conduct Authority (FCA), the Pensions Regulator (tPR) and the Prudential Regulation Authority (PRA). Through the report, JFAR reviews and reports on known and emerging risks that are relevant to the public interest where actuarial work is central.
HB: What is the value of JFAR?
SH: I believe its key strength is that it allows the members to debate topical issues that impact actuarial work and respond in a collective and efficient manner. Although each regulator has its own focus, the forum enables us to identify commonalities and share analysis of public interest risks to which actuarial work is relevant.
Over the years, we have researched and produced reports on issues ranging from the dangers of group-think to the level of pension transfer activity in a report entitled Review Of Transfers From Defined Benefit To Defined Contribution Schemes Following Pension Freedoms.
I find that the expert speaker sessions at each JFAR meeting are informative and thought provoking and help us identify and articulate Risk Perspective hotspots. Our speakers have covered big data, climate-related risk and financial security, among other issues.
Why is the Risk Perspective important for actuaries and users?
The Risk Perspective sets out the collective view of the regulators on risks to high-quality actuarial work. This year, it includes descriptions of nine hotspots where there is a perceived increase in risk to the public interest. Our aim is to raise awareness of the risks and potential mitigations and to generate debate on the hotspots. I hope that actuaries will find the Risk Perspective and our research helpful and that it will support actuaries, their employers and users of actuarial work to consider current and emerging risks in their activities.
What are the factors impacting actuarial work at the current time?
Actuarial work is wide-ranging, with a spread of influences: from large political and economic impacts such as Brexit, to the effects of new technology, and social changes, such as mortality and intergenerational fairness.
In this rapidly changing environment, actuaries need to keep up to date with developments, identify risks to established practices and assumptions, and adapt their actuarial work appropriately.
How did JFAR go about identifying the hotspots?
This year, the group developed the actuarial risk identification architecture (ARIA) to identify hotspots. This is used to identify macro-environmental drivers, risks inherent in actuarial work and market characteristics that may lead to an increase in risk. It also recognises that the ongoing activities of JFAR members influence the risk to public interest of actuarial work.
ARIA highlights interactions in the factors - for example, take big data: the availability and proliferation of big data is the result of a technological macro-environmental driver; it can affect the work of actuaries using machine learning in modelling; change the characteristics of the market (for example, through on-demand insurance); and the risk could be influenced by the regulators, through provision of education materials. The interaction of these factors may have positive or negative effects on the public interest related to the availability or price of suitable insurance products.
JFAR has identified nine hotspots in the 2017 update - could you outline the hotspots and how they affect actuarial work? How are they reflected in JFAR's work and in regulatory projects?
The effect of the nine hotspots on individual actuaries will vary. JFAR has not prioritised one hotspot over another. I can only touch on a few of them here, and I strongly encourage actuaries to read the full report and to consider the impact of the hotspots across their roles.
I would like to talk briefly about regulatory change, technological change, defined benefit pension scheme management and climate-related risk. I think these hotspots are illustrative of the breadth of the topics discussed at JFAR and the ways in which we can collaborate in the public interest.
As a group of regulators, we are aware that regulatory change could affect the quality of actuarial work. This hotspot recognises that recent changes to regulation impacting actuarial work, including those to PRA's implementation of Solvency II, may not yet be fully embedded.
PRA has published several consultation papers seeking to simplify some aspects of Solvency II and has recently issued feedback on the Actuarial Function Reports in general insurance. Actuaries and users of actuarial work can use information sources such as these to help mitigate the risk that the quality of actuarial work is adversely affected by the level of regulatory change.
JFAR has considered how technological change could impact consumers and actuarial work. Our research identified the emergence of big data and analytics as a key trend and area of investment, especially in the insurance sector. We noted that actuaries may face challenges in interpreting and communicating insights from big data and its effects on consumers, operations and business strategy.
Actuarial work can utilise big data to help expand access to products and tailor them to customer needs, but there is also a risk that data is used inappropriately, leading to some customers being excluded.
FCA presented the findings from its report Call For Inputs On Big Data In Retail General Insurance to JFAR. While, to date, no significant problems have been identified, JFAR encourages actuaries and users of actuarial work to challenge themselves regarding the ethical treatment of consumers.
FRC is responsible for setting technical actuarial standards (TASs).
It is interested in how these technological changes will change the nature of technical actuarial work to ensure that the TASs remain fit for purpose. FRC has established an internal working group to maintain a watching brief on developments in the use of technology. I have shared with my JFAR colleagues the knowledge gained from this group and the broader work of FRC, such as the increased use of technology in audit work.
The current economic conditions and the ongoing low interest rate environment continue to present challenges for defined benefit pension scheme management.
tPR shares its expertise in this area with JFAR.
tPR has emphasised for some time the vital role actuaries play in helping their clients to manage the key risks in pension schemes in an integrated way, because it is often the inter-relationships that get overlooked. It has published guidance for trustees and worked with the IFoA to deliver tools for actuaries. tPR has also worked with PRA to understand the commonalities between insurance companies and pension schemes for risk management in a prolonged low interest rate environment.
Over the past year, tPR has been working with the Department for Work & Pensions to find better ways to help trustees and sponsoring employers manage their pension risk and improve their scheme funding.
The Risk Perspective includes a hotspot on climate-related risk. Governments and businesses are starting to manage the impacts of climate-related issues, and actuaries are well placed to help them understand the risks and uncertainties related to this hotspot.
The IFoA is actively engaged in public debate on this issue and has established a Resource and Environment Board, which is dedicated to raising awareness of environmental issues that affect actuarial work. The chair of this board presented to JFAR in 2017, covering issues including the recently issued Risk Alert: Climate-Related Risks and the Practical Guide for Pensions Actuaries. It is currently working on a similar guide for investments and defined contribution pension schemes.
We recognise that our work could be limited by blind spots, assumptions that are taken for granted or group-think and bias. Therefore, JFAR welcomes feedback from actuaries and users of actuarial work on the Risk Perspective and the hotspots identified. The full report can be accessed at www.frc.org.uk/jfar
The forum is planning outreach events during 2018 to seek the input and views of actuaries and users of actuarial work. We look forward to hearing from you.
Hazel Beveridge is JFAR secretary
Stephen Haddrill is JFAR chair