CH1 - Actuarial advice Flashcards
Possible clients that actuaries advice in the private sector (16)
- Policyholders
- Prospective policyholders
- Members of benefit schemes and their dependants
- Employers
- Insurance company - board of directors
- Insurance company - shareholders
- Insurance company creditors
- Trustees of benefit schemes
- Sponsors of benefits schemes
- Employees
- Auditors of insurance companies
- Auditors of the sponsors of benefit schemes
- Investment fund managers
- Members of investment schemes
- Sponsors of capital projects
- Banks
Possible clients that actuaries advice in the public sector
In the public sector actuaries advise central and local government departments and related organisations, such as central banks and regulatory bodies. As in the private sector, advising actuaries might be employees of the relevant organisation, or independent consultants.
Describe how stakeholders other than the client might be affected by any actuarial advice given
It is important to identify all the stakeholders involved when any actuarial advice is given.
In most circumstances different categories of stakeholder have different interests. In most situations one or more stakeholders will remunerate the actuary, but there will be several other stakeholders with significant interests who do not contribute directly to the actuary’s remuneration.
In many cases the advice given to a client by an actuary will impact on other stakeholders. The actuary needs to consider the interests of all stakeholders, and not only those who seek (and pay for) advice.
It is important to consider all stakeholders because omitting a stakeholder will distort the context, eg one stakeholder’s risk can be a source of another stakeholder’s gain.
It is also necessary to retain a sense of proportion in considering who else may be affected by advice given.
Interest and functions of clients
Policyholders and prospective policyholders:
- Personal protection against death and illness
- Protection of property
- Investment
- Retirement planning
- Protection against requiring long-term home or nursing care
- Protection against personal liability claims (eg. for causing a motor accident)
Members of benefit schemes and their dependants:
- Provision of benefits on future events such as death, retirement, illness and withdrawal.
Employers:
- Protection against financial loss arising from the death or ill-health of employees
- Protection of assets
- Provision of work-related benefits that will attract and retain good quality staff
- Meeting legislative requirements
- Managing the costs of running the business
- Quantification of the amount of surplus capital in the business
- Investment of surplus capital
Insurance company board of directors:
- Meeting legislative requirements for the management of the business
- Investing and managing the assets of the company
- Managing the liabilities of the company
- Determining the levels of provisions to hold to meet the future liabilities
- Setting premium rates
- Meeting policyholders’ reasonable expectations
- Good corporate governance
- Obtaining appropriate and adequate reinsurance to protect the business
Insurance company shareholders:
- Obtaining a good return on their investment that appropriately reflects the level of risk that had been taken
Insurance company creditors:
- Certainty that the monies owed to them will be paid
Trustees of benefit schemes:
- Managing the assets of the scheme
- Paying the benefits promised under the scheme as they fall due
- Maintaining solvency
Sponsors of benefit schemes:
- Providing protection benefits that meet the needs of the members and their dependants
- Providing retirement benefits that meet the needs of the members
- Managing the cost of providing the benefits
- Meeting legislative requirements
Employees:
- Provision of protection benefits on death or sickness
- Provision of pension benefits on retirement
- Investment of surplus personal funds
Auditors of insurance companies:
- Assessment of provisions
Auditors of the sponsors of benefit schemes:
- Assessment of the future liability to pay benefits
Investment fund managers:
- Investment strategy, particularly taking into consideration the need to meet liabilities
Members of investment schemes:
- Understanding how to invest in order to meet specific liabilities or objectives, such as saving for retirement
Sponsors of capital projects:
- Assessment of the risks underlying the project
- Consideration of potential risk mitigation techniques
- Evaluation of the future cashflows
Banks:
- Provision of investment and savings products
- Use or investment of surplus funds
Central bank:
- Monetary strategy
Government:
- Setting legislation that impacts on the provision of financial products, schemes, contracts and transactions that provide benefits on future financial events
- Monitoring the adherence to this legislation
- Funding benefit provision by the State
- Monitoring the funding of benefit provision by the State
Regulators:
- Ensuring the regulatory requirements are met
Why certain factual information about the client should be sought in order to be able to give advice
Often in their work actuaries are giving advice to a client with a particular problem. Such advice will often set out alternative solutions and the implications of each solution. These solutions must always be relevant to the specific circumstances of the client.
At all times the actuary should be aware of any conflict of interest.
An example of when a conflict of interest could arise is when an actuary is advising both the trustees and the sponsor of a benefit scheme. The primary concern of the trustees will be the security of members’ benefits, whereas the employer will also be concerned about the costs.
How certain factual information about the client should be sought in order to be able to give advice
In many cases the client will give a brief to, or agree terms of reference with, an actuary without specifying the client’s position. This is normally not because the client is trying to hide information, but because the client is so knowledgeable about his/her own position that he/she inadvertently thinks everyone else is equally well-informed.
It is important that before starting analysis of the problem, the actuary is fully briefed about the client. There will be a significant amount of information in the public domain, for example information in any company accounts or similar publications. Many clients also have websites that contain important information. Before starting on the specific task, the actuary should research and assimilate such information. This exercise might then require a follow-up pre-project meeting with the client to ensure that their position has been fully understood.
Explain why subjective attitudes of clients and other stakeholders are relevant to giving advice
If the actuary is not aware of the information regarding the client’s background, ethical position and culture, there is a risk that the advice given will be inappropriate. For example, most charities have objectives that cannot be quantified in financial terms and that they would expect advice to consider.
Corporate bodies have a risk appetite, which is essentially driven by the risk appetite of their stakeholders, particularly their owners. Corporate bodies frequently describe their risk appetite openly in the annual accounts or other published statements.
It is also important for the actuary to be aware of the general style and culture of the client. This is often best achieved by an initial meeting at the client’s premises, or the opportunity for a more general discussion with the client in a less formal session than a business meeting.
Types of advice
- Indicative advice: Giving an opinion without fully investigating the issues - such as in response to a direct oral question
- Factual advice: Based on research of facts, e.g. legislation
- Recommendations: Researched and modeled forecasts, alternatives weighted, recommendations made consistent with requirements, work normally peer-reviewed
There will also be occasions when other professionals will need to be involved in providing the advice, such as accountants and lawyers.
Distinguish between the responsibility for giving advice and the responsibility for taking decisions
Part of the process of advising the client will be to explain to the client the reasons for making those specific assumptions. The actuary should explain the implications of making alternative assumptions and of any alternative solutions that may have been considered but eventually not recommended on both the client and other stakeholders who may be affected.
However, at the end of any discussions it will be the client who decides which solution to adopt.
Sometimes the actuary may be responsible for making a business decision.
Sometimes, an actuary may have an executive role within an organisation and may be making decisions on matters such as provisioning, reinsurance programs and asset allocation. In such situations there is a danger that the actuary will take decisions based on his or her own conclusions and the actuary should seek further advice or peer review of the decision made.
It is vital that the rationale behind any decisions taken is properly documented, including documentation of alternatives that have been considered.
Professional and technical standards that might apply to actuarial advice
- The Institute and Faculty of Actuaries’ requirements in relation to professional conduct are set out in the Actuaries’ Code.
Professionalism is essential in setting the scene for the context in which the actuary will operate. The basic principles of professionalism will determine the suitability of solutions to the problems raised. - Ethical and professional best practice and standards are the responsibility of the Institute and Faculty of Actuaries, and apply to all members of the profession, regardless of the territory of area of work in which they operate.
- In the UK, Technical Actuarial Standards (TASs) are the responsibility of the Financial Reporting Council.
The aim of the TASs is to ensure that users for whom actuarial information is created should be able to place a high degree of reliance on the information’s relevance, transparency of assumptions, completeness and comprehensibility, including the communication of any uncertainty inherent in the information.
TAS 100 - Principles of Technical Actuarial Work
TAS 200 - Insurance
TAS 300 - Pensions
TAS 400 - Funeral plan trust - The Financial Reporting Council has developed an Actuarial Quality Framework which is designed to support effective communication between actuaries and other stakeholders in actuarial work.
