ASIC Chair Joe Longo recently delivered a speech at the AICD Australian Governance Summit outlining the practical meaning of enforcing director duties – one of which was the directors’ ability to challenge senior officers based on their knowledge and experience.
In the traditional setting of insurance companies, the Appointed Actuary (AA) is one of the senior officers that are involved in those conversations.
While the AA is one of the common connection points between directors and the business, AA’s advice requires contributions from a range of different actuaries across the business, many of whom specialise in risk areas that are core to the business. This highlights the importance of engaging actuaries as they collectively manage a wide range of risks that are key to effective corporate governance.
Actuaries and Key Business Risks
For insurers and reinsurers, “insurance” is not only the core of the business but also the most material source of risk. However, the variety and aggregation of risks from writing insurance policies are particularly complex, as it involves an array of operational, behavioural and statistical factors.
Actuaries are the experts in this field as they are trained to understand the context and complexities of the business, identify risks, and quantify them into meaningful insights. It requires a long list of considerations, such as product design, policyholder behaviour, reinsurance, capital, expense management, etc.
To gain comfort in judging the materiality of risks presented, directors rely on advice from actuaries and other professional stakeholders. Experience plays an important role in helping to maintain the integrity and sustainability of the business.
Opportunities vs. Risks
Actuarial advice is often required for various commercial insurance propositions, such as open market tenders for Group insurance schemes. Directors consider both insurance risks and commercial opportunities raised by both management as well as the AA in this process to support the decision-making process.
This relates to Mr Longo’s point that directors must “… plan for and consider the consequences and risks of all options on the table …”.
In that regard, actuaries play an essential role in corporate governance – by being the subject matter experts that promote and facilitate the consideration of risk associated with commercial insurance propositions.
Actuarial advice also brings additional corporate governance perspectives around balancing shareholder versus policy owner interests, which is core to both the Life Insurance Act and professional standards. Whilst mostly thought of as being associated with traditional participating business, this is also an important consideration around risk business particularly with respect to the sustainability of product designs and pricing.
Actuaries are often required to provide support on wider risk issues, using techniques similar to the management of insurance risks. They include asset-liability matching, market and credit risk, strategic and emerging risks such as Environmental, Social, and Governance. Actuaries are increasingly adding value through enterprise risk management. Typically, they work collaboratively with the Chief Risk Officer and their team to ensure that the framework that defines the governance, risk appetite, policies, and standards are fit-for-purpose for the business and evolve appropriately.
While the Board and Directors carry the ultimate responsibility of corporate governance, actuaries and other professionals in the business work collectively to provide the advice necessary for the management and the Board to make the best decisions for the business. From an accountability and capacity management perspective, the AA’s team typically focuses primarily on insurance-related risks and supports other actuaries and risk functions (including the Chief Risk Officer) to help manage other material financial risks.
The actuarial skillset is a core contributor to the identification, quantification, and translation of complex information into meaningful management insights and thus is fundamental to effective corporate governance.
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