Simon Wasserman and Matthew Myring-McCullagh explain the importance of the Joint Forum on Actuarial Regulation’s Risk Perspective publication
The Joint Forum on Actuarial Regulation (JFAR) brings together the five UK bodies (FCA, FRC, IFoA, PRA and TPR) concerned with regulating actuaries and their work to protect the public interest. It is not another regulator and does not issue regulation of its own. However, JFAR does provide a systematic, structured forum that enables the regulators to consider the risks from actuarial work in a comprehensive and inclusive way.
As the modern world – and actuarial risks – become ever more complex and interconnected, having a joined-up approach is very important for protecting the public interest. Gaps in regulation can be identified and corrected, and we can ensure that different regulators do not seek to cover the same ground independently. In short, it is good for everyone.
Identification and management of risk to the public interest is central to the JFAR discussions, and it is therefore not surprising that the primary output from JFAR is the Risk Perspective publication. The 2019/20 update (just published and available on the FRC website) is the fifth edition, having evolved into an annual publication. The document gives readers an insight into the discussions and thought processes of the regulators of actuarial work.
The natural questions are:
- How does JFAR arrive at the risk hotspots in Risk Perspective?
- What are the big items?
- Why does it matter?
Deriving the risks
To take the first question, JFAR has a structured process. As shown in Figure 1, this process (the Actuarial Risk Identification Architecture, or ARIA for short) provides a way for JFAR to identify the various sources of risk and how they interact with each other. In the May 2018 edition of The Actuary, Hazel Beveridge (who created the framework) spoke to Stephen Haddrill, then CEO of the FRC, about this topic; you can find more details there, at bit.ly/3kTWki4
For the 2019/20 update, a dedicated group of actuaries from among the JFAR members used the framework to consider risks fundamentally. Once we had identified the specific risks that we felt were most prominent – or were increasing – we grouped them into the categories that became the hotspots. We were trying to take a three to five-year time horizon when assessing the likelihood and severity of the risks crystallising.
When doing this we also consulted many other risk assessment publications, as well as having discussions with experts. Finally, we also compared our findings with the actions being taken by each of the regulators.
The end result is that Risk Perspective presents a window into the thought processes and actions of the JFAR member regulators. The topical discussions included in the publication help to provide insight into the thinking behind the output.
It must be remembered that, in general, actuarial work is of high quality. The purpose of Risk Perspective is to help both actuaries and those who make decisions based on the work of actuaries, so that their decisions are based on sound, reliable information. The publication of Risk Perspective is in no way intended to imply that we have concerns about the quality of actuarial work.
What are the big risks?
While all the risks included in the hotspots are significant, the two that stand out in importance are climate-related risk and systemic risk.
Climate-related risk was in the list of 2018 hotspots, and while it is true that much action has been taken – and is increasingly being taken – the potential impact of climate-related risk on actuarial work has not lessened. The long-term existential risk is very real, but this alone would not have put this risk in at number one. During the next three to five years we also anticipate that the costs and risks of transition to a sustainable level of carbon emissions could have a major impact on the way world economies run, and will introduce costs and uncertainties in many areas of actuarial work. For example:
- Extreme weather conditions may create the need to re-evaluate the adequacy of catastrophe models
- Human mortality and morbidity may be impacted by a changing climate in ways that are difficult to predict in advance and represent the net effect of many factors that intersect.
Systemic risk is a new hotspot. We included this to recognise the increasing interconnectivity of the modern world and how risks may be less independent than we often assume. Originally we did not think this would be such a heightened risk, but then the COVID-19 pandemic hit. It was tempting to introduce a new hotspot devoted specifically to pandemics, but thinking about the nature of the pandemic risk, we concluded that this was essentially an example of a systemic risk crystallised.
These themes are discussed in more detail in the publication.
Why does Risk Perspective matter?
If there are so many publications that identify and analyse the risks that we face, why do we need yet another one in Risk Perspective?
The answer is very simple. Actuarial work is vital in the management of risks across financial institutions. Risk Perspective is unique in considering specifically actuarial risks from the perspective of the public interest.
It is worth repeating and emphasising what was said in the May 2018 article: “We recognise that our work could be limited by blind spots, assumptions that are taken for granted, or groupthink or bias. Therefore, JFAR welcomes feedback from actuaries and users of actuarial work on the Risk Perspective and the hotspots identified.”
Risk Perspective began as a dialogue between the regulators and the actuarial community. We would love to have your feedback and your input so that we can continue to make sure that it really helps actuaries in their work and helps users of actuarial work to better appreciate the risk factors that drive that work.
Being aware of a risk is halfway to being able to protect against it.
Simon Wasserman is project director, Actuarial Policy at the FRC
Matthew Myring-McCullagh is a project director, Actuarial Policy at the FRC