The Institute and Faculty of Actuaries (IFoA) has issued a Risk Alert to all its members on the impact of high inflation, with a particular focus on actuaries working in general and life insurance and pensions.
The Risk Alert aims to help bring attention to how current significantly high levels of inflation may affect actuarial practice, and will provide a useful reminder of some of the key issues.
It states that all members, regardless of practice area, should consider and adjust their work by taking appropriate consideration of:
- Expectations of future inflation and rationale for selections
- Different types of inflation, where relevant
- The impact of the current high inflation environment on underlying methodologies
- The quantification of uncertainty to ensure the user of the work understands the potential range of plausible and possible outcomes.
Neil Buckley, IFoA Regulatory Board chair, said: “The actuarial profession is a key part of the global financial sector which has not operated in a high inflation environment, such as the current one, for many years.
“We know that members will be aware of the uncertain economic environment and rapidly changing market conditions. By issuing this Risk Alert, we are aiming to bring this issue to the attention of the profession and support members by alerting them to some areas of work which need careful consideration.”
Inflation has been impacted by a variety of factors, including the ongoing war in Ukraine, the COVID-19 pandemic and the global reopening, with the Bank of England recently raising interest rates to 1.75% in response.
The IFoA's latest Risk Alert asks members to ensure they comply with their obligations under the Actuaries’ Code, Actuarial Profession Standards, and, for actuaries carrying out UK technical actuarial work, the Technical Actuarial Standards produced by the Financial Reporting Council.
It states: “They should clearly explain the impact of current high inflation or investments and returns of products to clients, and proactively communicate appropriately to users.
“Where actuaries believe that data or products they are using are overestimating or overpromising returns, they should clearly flag these issues to the appropriate individuals or groups.”
Image credit: iStock
Author: Chris Seekings