Chapter 25 of our report deals with the touchy issue of actuarial standards. The good news is that the IFoA’s standards are very good.
Here are some quotes from their website (but the italics are ours):
https://www.actuaries.org.uk/about-us
“Under our Royal Charter we have a duty to put the public interest first”
https://www.actuaries.org.uk/upholding-standards
“We regulate actuaries in the public interest.”
Can’t argue with any of that.
https://www.actuaries.org.uk/about-us/stepping-out-shadows
“One third of the UK public say they understand our traditional role in navigating financial risk, but we believe that it’s our ethics and professionalism that set us apart.”
We agree.
https://www.actuaries.org.uk/about-us/our-brand
“Our vision is for the Institute and Faculty of Actuaries (IFoA) to serve the public by ensuring that where there is uncertainty of future outcomes, actuaries are trusted and sought after for their valued analysis and authority”
“Integrity
- We are: Doing the right thing for the organisation, our members, the profession and the public interest
- By being:
- Honest
- Accountable, and
- Professional.”
https://www.actuaries.org.uk/upholding-standards/standards-and-guidance/actuaries-code
The principles of the Actuaries’ Code include, and we quote:
- Integrity: members will act honestly and with the highest standards of integrity
- Competence and care: members will perform their professional duties competently and with care
- Impartiality: members will not allow bias, conflicts of interest, or the undue influence of others to override their professional judgement
- Compliance: members will comply with all relevant legal, regulatory and professional requirements, take reasonable steps to ensure they are not placed in a position where they are unable to comply, and will challenge non-compliance by others
The conflicts of interests page states:
“As one of the five key principles of the Actuaries’ Code, impartiality is placed in sharp focus in the context of professional conflicts of interest, actual or perceived”
To quote the industry manual on NNEG valuation, Hosty et alia (2007): “For providers attempting to price the NNEG on a market consistent basis there is insufficient product margin in order to provide a competitive product …” (p. 30.). Section 7.3.3 of that article explains that under a market consistent approach the product would not be profitable, whilst the discounted projection (aka real world) model “has produced a significantly lower cost” and is therefore to be preferred.
Actuarial standards are then summarised in the following four documents, from which we reproduce key passages.
The first is APS X1:
APS X1: Applying Standards to Actuarial Work
“8.2. Members must be able to justify the standards applied (and/or not applied) to their Actuarial Work, if reasonably called upon to do so.
9.1. A failure to comply with this APS may result in a finding of misconduct in terms of the IFoA’s Disciplinary Scheme.”
APS X2: Review of Actuarial Work
The second is APS X2, which applies to the review of actuarial work, and which is relevant to the IFoA/ABI working party’s work on NNEG valuation:
“1.3. In considering for the purposes of paragraphs 1.1 and 1.2 whether and to what extent Work Review should be applied to a piece of work (including whether and to what extent Work Review should be in the form of Independent Peer Review), Members should have regard to all of the relevant circumstances, including the following:
1.3.1. the degree of difficulty of the piece of work and its complexity
1.3.2. the significance of the piece of work, including any financial, reputational or other consequences for the person(s) for whom the work is produced
1.3.3. whether the circumstances of the piece of work make it more likely that errors could be made
1.3.4. the reasonable expectations of the person(s) for whom the work is produced;
1.3.5. the extent to which judgement and/or analysis is required
1.3.6. the application of other quality assurance controls to the piece of work;”
We have tried and tried to elicit information – hard information, as opposed to boilerplate waffle – about the quality assurance processes used by the IFoA/ABI working party’s on NNEG valuation, but we cannot find anyone in any position of responsibility will take responsibility, even in private, let alone in public. What was the independent scrutiny process, who were the senior figures in the IFoA or Actuarial Research Council who signed off, etc? It’s all a bit of a mystery. So as regards the quality assurance in this case, we can’t work out what it was and no-one will tell us.
“1.3.7. the desirability of assuring public confidence in the quality of the work in question.”
So the question is how failing to answer concrete questions about the quality assurance process helps to assure public confidence in the quality of the work in question.
“Technical Actuarial Standard 100: Principles for Technical Actuarial Work (TAS 100) promotes high quality technical actuarial work. It supports the Reliability Objective that “users for whom actuarial information is created should be able to place a high degree of reliance on that information’s relevance, transparency of assumptions, completeness and comprehensibility, including the communication of any uncertainty inherent in the information.
How users can place “a high degree of reliance” on valuations produced by an approach which produces valuations that are impossible and close to an order of magnitude too low?
1. Judgement shall be exercised in a reasoned and justifiable manner; material judgements shall be communicated to users so that they are able to make informed decisions understanding the matters relevant to the actuarial information.”
Maybe someone can explain to us what exactly is “reasoned and justifiable” about the Discounted Projection approach that the industry uses? And in what sense are decisions based on the impossible valuations it can produce to be considered informed?
- Data used in technical actuarial work shall be appropriate for the purpose of that work so that users can rely on the resulting actuarial information.
“appropriate”, “rely” …
2.1 Data shall be relevant for the purpose of the technical actuarial work.”
Actuaries are using assumptions about hpi to price the forward in their NNEG valuation models, but hpi is irrelevant. See, e.g., PRA SS 3/17 (p13, para 3.17) which states: “It is important to note that views on future property growth play no role in preferring one contract over the other. Investors in both contracts will receive the benefit of future property growth (or suffer any property depreciation) because they will own the property at the end of the deferment period. Hence expectations of future property growth are irrelevant …”
So Riddle us this: in what sense is an irrelevant variable relevant?
“3. Assumptions used, or proposed for use, in technical actuarial work shall be appropriate for the purpose of that work so that users can rely on the resulting actuarial information.”
How can it be appropriate to use an incorrect approach (the DP approach) that depends on an irrelevant variable, an assumed house price inflation rate? And how are results based on an inappropriate assumption about an irrelevant variable reliable for users?
“Technical Actuarial Standard 200: Insurance,” Financial Reporting Council December 2016
The fourth is TAS 2000, which applies to insurance.
“8. Measures, assumptions and judgements used to derive any estimates described as “best estimate”, “central estimate” or other similar terms shall be neither optimistic nor pessimistic and shall not contain adjustments to reflect a desired outcome.”
See the conflict of interest discussion above on the importance of profitability concerns.
Finally, some advice on what the IFoA might do:
If we make mistakes we want to put things right. By monitoring any concerns raised, including any formal complaints, and by taking prompt corrective action where necessary, we seek to learn from where things have gone wrong and improve the standard of our service for future users.
That quote comes from the IFoA’s document “Putting things right.” Yes indeed.