Actuarial Accountability
in a Changing World
The UK Morris Review
and its
Implications for the US
Panel Participants

Lauren Bloom

Mary Frances Miller

Karen Terry
Background

From Equitable
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To Penrose
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To Morris
Equitable
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Near Collapse of Equitable Life
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the UK’s oldest Life Insurer
Questionable actuarial and accounting
practices related to individual pensions
• Illustrations and current payments “promised” a
better return than guaranteed
• Reserves were only for guaranteed benefits
• Actuarial methods were questioned by others within
the profession

Dominant chief actuary was also the CEO
Penrose

Lord Penrose led the UK government’s
inquiry into Equitable

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Many parties had responsibility
Actuaries particularly singled out
•
•
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•
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Vague, self-serving standards
Poor self-regulation
Anti-competitive behavior?
Recommended a further review
Hence the Morris Review of the Actuarial
Profession
Sir Derek Morris

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PhD Economist
Head of House at Oriel College (Oxford)
Extensive academic & government
credentials
Chair of the UK Competition Commission
The review took a little over a year and
involved extensive input from inside &
outside the profession, inside & outside
the UK
The Morris Review: 3
Charges

Competition and Choice for Actuarial
Services in the UK

Regulatory Framework of the Actuarial
Profession in the UK

Review of the UK Government Actuary’s
Department

Peculiar to the UK and not covered today
Competition & Choice

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Focused on pension consulting &
insurance
Found recent significant entry by smaller
firms: reasonable provider choice
But – significant concentration for the
large pension plans
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Combined bidding for actuarial and other
services is common (such as the fund
manager)
Recommended separate tenders for
actuarial consulting & other services
Competition & Choice

Recommended separate tenders for
actuarial consulting & other services

Is this similar to Sarb-Ox
requirements?
Competition & Choice

Not much switching of actuarial provider
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Difficult to review the quality of advice
Client-specific knowledge is important
Full service contracts including actuarial
Marketing is costly
Best practices for pension plans
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Evaluate annually
More formal evaluation triennially
Remarket at least every 6 years
Competition & Choice
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Best practices for pension plans
Evaluate annually
 More formal evaluation triennially
 Remarket at least every 6 years

Is the US situation analogous?
 Are the suggestions good (best)
practice here?

Competition & Choice
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Significant “understanding gap” for users
of actuarial advice
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Many just trust their actuary
Pension trustees & non-executive directors
of insurers need better education, training
& guidance
A Standard on Communication is needed
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Information & advice users typically need
How to convey in a manageable form so users
can understand, scrutinize & probe
Competition & Choice
Better education, training & guidance
for users
 A Standard on Communication is
needed
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Do we have a similar understanding
gap?
Morris criticized actuaries’
communications skills:
“too much has been expected of
actuaries and, explicitly or
otherwise, too much has been
promised by them.”
 “clients have looked to actuaries to
provide certainty, and actuaries
have often appeared to provide it.”

Morris continues:
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“many have regarded actuarial
advice as having the characteristics
of a ‘black box’ analysis with
methodology … calculations…and
even the input assumptions being
quite opaque.”
In pensions, Morris observes that
actuaries have been criticized for:
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Failing to allow for the downward path of
inflation and interest rates in the 1990s
Failing to allow for the subsequent stock
market drop
Not questioning the “prevailing
orthodoxy” that equities could be
expected to provide healthy long-term
returns
Morris called for a standard of
practice on communications:
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Disclosure of assumptions and extent to which
professional judgment was exercised
What methodologies were chosen and why
Sensitivity analysis of outcomes to changed
assumptions and methodologies
Probabilistic analyses of key variables or
indicators under particular scenarios
Concerns the client should have, bearing in mind
the client’s capacity to cope with various types
and levels of risk.
In the U.S.:
Do the ASB’s standards address all
of the areas Morris identified?
 Should they?
 Do the profession’s Code and
standards provide sufficient
guidance on communications?
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Regulation of the Profession
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UK specific findings
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Professional standards are weak, ambiguous
or too limited in range – and perceived as
influenced by commercial interests
Absence of proactive monitoring of members’
compliance with standards
Profession is too introspective, not forwardlooking enough, slow to modernize
Regulation of the Profession
• Professional standards are weak,
ambiguous or too limited in range – and
perceived as influenced by commercial
interests
• Absence of proactive monitoring of
members’ compliance with standards
• Profession is too introspective, not forwardlooking enough, slow to modernize
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To what extent are these
weaknesses of the US profession?
Regulation of the Profession
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Conclusion: the current self-regulatory
framework is inadequate to protect the
public interest
Three possibilities:
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Continue self-regulation
Independent oversight of self-regulation
Full statutory regulation
Middle route is chosen
Oversight of Self-Regulation
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Recommended that the Financial
Reporting Council (FRC) take on oversight
of the actuarial profession
• Note that FRC already oversees accounting
profession in the UK
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Five areas of oversight
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Education and Continuing Ed requirements
Reserved (statutory) roles for actuaries
Professional & ethical standards
Monitoring compliance
Discipline
Education
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Concerns with the current system
Encourages narrow application of
actuarial skills rather than broader
appreciation of actuarial principles
 Not open to new ideas from outside the
actuarial profession (financial
economics particularly cited)

Education (cont’d)
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Inadequate oversight of quality
assurance
• And lack of confidence among candidates
Existing apprenticeship program
discourages employment of actuaries
outside traditional roles
 Long travel time discourages the best
candidates
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• They can be investment bankers much
faster
Education (cont’d)
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Concerns with the current system
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Skills vs principles
Not open to new ideas
Inadequate oversight of quality
Discourages employment outside traditional
roles
Long travel time discourages the best
candidates
Are these valid criticisms of the CAS
system?
Education
Recommendations
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Greater academic & non-actuarial
syllabus input
Improve quality control on exams
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Involve external experts
Expand university education of actuaries
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More exam exemptions
Accredit departments rather than individual
courses
• Allow for innovation
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Fast track graduate programs to cover the
technical parts
Education
Recommendations
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Greater Academic & non-actuarial
syllabus input
Improve quality control on exams
Expand university education of actuaries
Do these recommendations have
relevance in the North American
environment?
Continuing Ed
Existing UK scheme is too
complicated
 No assurance of adequate
monitoring or professional
“revalidation”
 Not comparable to other professions’
requirements
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Current UK Cont Ed
Initiative
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Minimum CPD syllabus for statutory roles
Practicing certificates for other actuaries
(voluntary at first – future mandatory?)
Basic CPD required for all actuaries
Compliance monitoring
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Annually for statutory roles
Triennially for certificate holders
Spot checks for other (10%)
Current US Requirements
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“Statutory” = NAIC opinion signers
 12 hours / 6 in “organized” activities
 Must be relevant to the opinion
Other “prescribed” statements
 12 hours / 6 “organized”
No provision for monitoring except at
ABCD level
Under Consideration
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Require 30 hours for virtually all actuaries
 Actuary determines relevance
Maintain 12 / 6 in reserving for NAIC
opinion signers
Continue with no monitoring except at
ABCD level
US Continuing Ed
Is the current system sufficient?
 Will the proposal improve US
practice?
 What about assurance to the public
that the profession is up to date?
 Should there be compliance
monitoring?
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Roles Reserved for
Actuaries
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Current life and pensions roles in the UK
should be retained
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But if others prove able to do it, the
government should consider letting them!
There is no current p/c reserved role
except for Llyods syndicates
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FSA (like NAIC) should consider requirement
that management consult with an approved
person with relevant skills
• Who may or may not be an actuary
Standard Setting
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Current UK system has standards set by
equivalent of AAA practice councils
Current standards
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have at times been weak and ambiguous;
have failed to resolve contentious issues;
have lacked consistency across practice areas;
have in some cases been dominated by
commercial interests; and
there has been insufficient independent and
lay input into the standard setting process.
Standard Setting Options
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Profession proposed a semi-independent
Actuarial Standards Board
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Review notes that this works outside the UK!
UK version would have representation from
outside the profession
Intermediate – put the ASB under the
oversight of the regulator
Draconian – have the regulator set the
standards
Standards:
Recommendations
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Intermediate choice – Standards of
practice set by the outside oversight
board
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Majority UK practicing actuaries
Overseas actuaries or academics
Users of actuarial advice
Consumers & regulators
Profession maintains ethical standards
(Code of Conduct)
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But the ASB could also create standards
Standards in the US

Is the US Actuarial Standards Board
sufficiently independent?
In reality?
 In perception?
 Membership?
 Process?
 Susceptible to large employer
influence?
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Compliance with Standards
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Lack of scrutiny was a major factor in the
Equitable’s problems. Penrose cited:
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the complexity of the work of actuaries;
the specialist nature of the actuarial
profession;
the existence of reserved roles; and
the emergence of professional norms which
discouraged critical assessment of one actuary
by another.
No current method for monitoring &
ensuring compliance with standards
P/C Recommendations
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Consider introducing a requirement for
actuarial advice as part of the audit for
general insurers;
the Financial Reporting Council, working
closely with the FSA and the Profession,
should – within 2-3 years – satisfy itself
that appropriate monitoring of actuaries’
compliance with professional standards
and independent scrutiny of actuarial
advice is occurring through either direct
supervision by the regulator, audit or
external peer review.
P/C Compliance Monitoring
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actuarial advice as part of the audit
appropriate monitoring of actuaries’
compliance with professional standards
and independent scrutiny of actuarial
advice is occurring through either direct
supervision by the regulator, audit or
external peer review.
Should there be compliance review in the
US?
If so, how and by whom?
Discipline
Lack of public confidence in the
profession’s ability to police itself
 Recognized by the Institute/Faculty
prior to Morris Review
 New discipline process adopted 2005
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UK Discipline
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Independent disciplinary Board
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Separate from the Institute/Faculty
Councils
Lay participation at all stages of the
process
 Morris also recommended closer
links with regulators
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Discipline in the US
Is the ABCD sufficiently
independent?
 Is there confidence in the process
within the profession?
 Is there public confidence in the
actuarial discipline process?
 Where does the counseling function
fit in?
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The U.S. is not the U.K.
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There are significant differences in:
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Law and structure of government
Regulation of industries actuaries serve
Cultural expectations
The U.S. profession is very active in
addressing public interest through public
policy involvement.
The U.S. standard-setting and discipline
processes directly address public interest.
Academy activities:
Survey of membership on
professionalism topics
 Council on Professionalism Task
Force on Independence
 Continued work to address public
interest in dealings with policy
makers

Morris’ Review is limited to
the U.K.:
Many of his observations may be
irrelevant here.
 His review provides a basis for selfevaluation here and elsewhere.
 Ultimately, any changes the U.S.
profession makes should be
appropriate to the U.S.
environment.
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Questions and
Comments?