Rob Paton recounts how the Australian public has benefited from the work of actuaries
Much of the work by actuaries occurs behind the scenes. Often teams are involved, making individual recognition impossible. Often similar work is being done by actuaries generally. Often success can be judged only after long periods have elapsed, and even then successful projects are less worthy of public discussion than failures. So the collective work of actuaries often goes unnoticed, and success becomes expected and not recognised.
Key strengths of the actuarial profession are our general competency within our specialities (evidenced by our training and exams), our ethical behaviour (evidenced by our Code of Conduct, our Professional Standards and Guidance), and our enforcement. These strengths have encouraged clients, regulators and public policy makers to entrust the actuarial profession with important work which affects the financial lives of the Australian public. Please enjoy these three examples, especially if you recognise your work
1.Private Sector Employee Benefits: Conversion of Defined Benefits to Defined Contributions: 1980 to 2000
Today’s political environment provides many examples of the immense difficulty involved in making major changes which affect the finances of individuals. The financial consequences of high inflation and low investment returns of the 1970s on employee defined benefit plans (and on the required employer contributions) shocked employers and unsettled trustees. The taming of inflation and the recovery in investment returns in the subsequent decades opened up the possibility to private sector employers of settling these defined benefit arrangements on a fair financial basis. Furthermore, funded defined benefit superannuation was not consistent with the “total remuneration” approach which gained traction with private sector employers over the 1980s (the “salary plus benefits” approach had applied up to that time in Australia, and continued to apply in the Americas and Western Europe until changes to some accounting expense requirements along with the Global Financial Crisis forced changes to commence in those locations).
“…Australian actuaries saw the public benefit of these conversions and provided appropriate advice to enable equitable implementation of the employer’s decision…”
From the early 1980s, some Australian early adopter employers commenced working with actuaries with the objective of replacing “salary plus benefits” with “total remuneration” for all employees. These employers required that both existing and new employees were covered by “total remuneration”, and therefore that future service defined benefits were converted to defined contributions on an equitable basis. Inevitably this led to offers being made to employees to convert past defined benefits to a defined contribution amount. The many Australian actuaries who worked on these conversions determined an equitable value for the ongoing defined benefits to enable each current employee’s “total remuneration” to be calculated, determined an equitable value for each employee’s accrued defined benefit, oversaw the transfer of investments, insurance and administration to a defined contribution environment, and participated in the communication of the offer to employees. These were major projects.
Over these 20 years, thousands of defined benefit plans (covering hundreds of thousands of members) were converted to defined contribution, most commonly on the basis of individual employee consent. To the best of my knowledge, there were few post-event challenges by employees to the validity of these conversions.
The substantial unfunded employee benefit liabilities of many employers overseas at the time of the Global Financial Crisis are the evidence for the considerable benefits which these conversions provided to private sector employers in Australia, who benefitted from employee cost predictability and reduction in potential adverse financial outcome, along with increased overall employee engagement. Commencing from the 1990s, all Australians have benefitted from Australia’s low rates of unemployment and steady economic growth, with the “total remuneration” approach being one contributing factor. Defined benefit to defined contribution superannuation conversions were an important contributor to the growth of industry fund superannuation, which in turn led to the introduction of the Superannuation Guarantee from 1992.
While ongoing defined benefit advice was diminished for the profession, the fact that so many Australian actuaries saw the public benefit of these conversions and provided appropriate advice to enable equitable implementation of the employer’s decision is evidence of the Australian profession acting not in its own interests, but in the public interest.
2. Statutory Roles for Actuaries in General Insurance
The insolvency of HIH in early 2001 ushered in substantial changes to the prudential regulation of General Insurance in Australia, including the statutory role of Appointed Actuary to each ongoing general insurer. While the General Insurance industry’s pre-2001 opposition to increased prudential regulation and to the introduction of a statutory role for actuaries had been successful with politicians prior to the HIH insolvency, even the light touch regulation Australian politicians of the early 2000s embraced the need for strengthened prudential regulation, which commenced from 2002 amid continued industry opposition, and was extended from 2006 by the requirement for the Appointed Actuary to prepare an annual Financial Condition Report.
“The General Insurance Appointed Actuary regime proved that the actuarial profession in Australia was capable of delivering on substantial new statutory roles…”
That the Appointed Actuary regime has been a success for the General Insurance industry and its policyholders is taken as a given these days, and is evidenced in at least four ways:-
- The absence of failures of General Insurers to date since the regime commenced in 2002;
- A general reduction over time in the amplitude of General Insurance price cycles;
- No failures of Medical Indemnity Insurers to date since Medical Indemnity Insurers were brought within the General Insurance regime in 2008 (prior to 2008, medical indemnity was provided by mutual societies with a history of financial instability); and
- Despite the opposition of the General Insurance industry in 2002 to the Appointed Actuary regime, surveys of Directors (in particular), and Senior Managers (to some extent) from about 2009 have acknowledged the value of most elements of the Appointed Actuary regime in assisting them to better understand the financial drivers of their businesses.
The General Insurance Appointed Actuary regime proved that the actuarial profession in Australia was capable of delivering on substantial new statutory roles, and of winning over Boards and Managements over time as the appropriateness of the advice provided was demonstrated in financial results and in improved understanding.
3. Statutory Roles for Actuaries in Private Health Insurance
After the 1990s decade of private health insurance (PHI) entity failures and highly variable premium increases from year to year, the Commonwealth Government and the then PHI prudential regulator (PHIAC) mandated actuarial involvement in the preparation of an insurer’s projections which were required to support the insurer’s application for the necessary annual premium increases. In the early 2000s, most insurers had no connections with actuaries, and the Boards and Management of most insurers opposed the imposition of “unnecessary interference and cost” from the mandatory involvement of an actuary.
Despite PHI industry opposition, this small, behind the scenes, mandatory actuarial role commenced from 2001, leading to reductions in insurance entity failures, and reductions over time in the variability of annual premium increases as the drivers of year to year variability in insurance margins in this low margin insurance business were better understood by Boards and Management. The mandatory duties of actuaries were increased gradually over subsequent years, until a full Appointed Actuary role was introduced from 2007, including duties related to “Notifiable Circumstances”.
At the Actuaries Institute April 2011 Convention, Raewin Davies and Adam Jupp presented the results of a PHI industry wide insurer CFO survey of the Appointed Actuary role which concluded (amongst other conclusions):-
- 80+% of insurer CFOs who responded stated that the annual FCR “is valuable to their Board”, and 60% of CFOs stated that the annual FCR “is valuable to Management”;
- For a significant minority of CFOs, recommendations in the FCR were regarded as “important to the business”; and
- If regulations were changed to delete the requirement for an annual FCR, 80+% of CFOs expected that their insurer’s Board would continue to require an annual FCR to be prepared.
By 2013 and 2014, when the effects of reductions in premium rebates introduced by the then Commonwealth Government were commencing to adversely affect the policyholder (and therefore the financial) experience of most insurers, all insurers welcomed the Appointed Actuary’s analysis as the progressive adverse impact on the insurer’s assumed future financial experience from these complex changes was included in insurer projections, including regulatory capital and risk capital calculations, and required future premium increases. The current position contrasts with the 1990s decade during which most insurers faced a different adverse external environment without the assistance of an Appointed Actuary.
These examples illustrate the past benefits to the Australian public from the work of the actuarial profession in Australia, of which each of us can be quietly pleased. The examples illustrate how the profession as a whole has worked together in three distinct areas of core actuarial practice. Doubtless there are other equally good examples. These Australian examples contrast the position of actuaries overseas, some of whom have seen statutory roles removed over the last 20 years. These three examples are relevant at this time when the role of the Appointed Actuary in Life Insurance is under review, and some in the profession are agitating for the Life Insurance Appointed Actuary role to be removed or curtailed substantially.
What do you think have been the public benefits from our work?
While the opinions in this article are Rob’s alone, Rob thanks the actuaries who reviewed the historical accuracy of the success stories and provided their comments for Rob’s consideration.
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