Once upon a time, actuaries lived in an ivory tower, where they pored over complicated mathematical valuations…and they invariably came up with incontrovertible, well-founded and faultless opinions. They towered above the parties, influenced by no one, not even by their bosses.
From time to time they explained to everyone who wished to know how insurance mathematicians do their work objectively and ethically and that, with such caretakers, every policyholder can rest assured.
The insured, participants of pension funds and other interested parties have become vocal. They noticed bad experiences with accountants, who have allowed consultancy and auditing - their original craft - to become carelessly intertwined. They rightly ask the question: how have actuaries kept these two apart?
The actuaries descended from their tower and had to admit that - actually ever since the emergence of their profession - they had naively combined consultancy and certification. This had been done without evil intent and fortunately without major mishaps too.
Spurred on by the supervisory authority, who had also been rudely awakened, the actuaries flung themselves at studying the question of how they, as a profession, could guarantee the independence of the certifying actuary - the man or woman who gives an opinion on the financial position of an insurer or pension fund and who verifies whether this position meets the minimum criteria stipulated in legislation and regulations.
The Dutch association of actuaries, Actuarieel Genootschap (AG), arrived, like others in the field, at the conclusion that combining the roles of adviser and certifier in a single person is not good practice, that assessing one’s own work is not a good idea either and that it is essential that the certifying actuary can carry out his duties independently.
How should this independence be guaranteed ? The answer to this question was not so easy for professional association AG, because the two largest subgroups - actuaries employed by insurers and pension funds and, alternatively, actuaries who work for consultancy firms - are not entirely in agreement with each other. They represent two professional groups under one roof.
United in their quest for worthwhile, interesting and well-paid work, and in their conviction that the interests of the final beneficiary (the insured/participant) are decisive, they nevertheless contest part of the territory: certification, in particular that of insurers. Here it is crucial to find the fine balance between sound knowledge of a single institution, on the one hand, and broad experience with a range of companies, on the other.
The professional contribution of both types of actuaries is extremely valuable and a sensible combination of these is the obvious course to take.
However, what about the independence of the internal actuary in relation to that single employer - his boss - compared to the relationship between his external fellow actuary and the customer(s) of the latter?
This is not an absolute contradiction: an external actuary may feel that he is economically dependent on a - very large - customer and an internal actuary may have good reason to be fearful of his boss.
Independence in an absolute sense is largely an ideal and approaching this ideal depends very much on the personal integrity and the characters of those involved. Ultimately it relies on the individual person, although the law and a code of conduct may encourage ‘upright’ behaviour! The choice is not one between extremist, namely the sombre adherent to the maxim ‘people are inclined to commit all manner of evil’ and the naive optimist who believes that people ‘are predestined to be good’. A realist accepts the wisdom of the adage ‘opportunity makes the thief’ and ensures that his bicycle is locked with a strong chain. Traffic lights and road markings are placed at a dangerous intersection. And a few traffic police, who ensure that everybody sticks to the rules, are very useful… but they can’t count on popularity. Likewise, actuarial regulators and certifiers will not be popular either.
In short, it is wise to alert certifying actuaries to questionable situations and to define their position in such a way that their independence and impartiality are strengthened so that they can serve their only real customers – the insured and pension scheme members. They expect an expert and independent assessment of the financial position of the fund or the insurer to whom they entrusted their premiums and contributions and, in doing so, expect an opinion about the ‘certainty’ of the benefit(s) they have been promised.
Modern supervision and regulation focus on providing ‘reasonable’ certainty that commitments made in the past (the period in which premiums were paid or pension was accrued) will be met and the expectations created will come true. The sustainability of a pension plan in the long term, however, also receives increasing attention from the regulator.
The certifying actuary focuses on the same ‘reasonable’certainty and on the risk-bearing circumstances which may undermine this certainty. Monitoring of compliance with the criteria set by the supervisor, De Nederlandsche Bank (DNB) -recently tightened considerably and laid down in the brand new Financial Assessment Framework - is one important part of the task of the certifying actuary. The other part of the actuary’s task is forming an independent and impartial opinion of his own on the financial position of the insurance institution, given its explicit and implicit objectives and on the basis of a sound analysis of the aforementioned security.
What consequences does all this have for the professional practice of actuaries? More than in the past, actuaries will be aware of the various roles which they fulfil, of the risks associated with combining these roles for a single group of insured, as well as the factors which threaten their independent assessment.
The following opinions already appear to be commonly held:
o Advising and certifying an insurance institution are two tasks which must not be assigned to a single person: a certifying actuary should not assess the effects of his own advice and his own preparatory activities;
o Situations where one and the same actuary advises parties with conflicting interests should either be avoided or should be subject to strict guarantees (transparency);
o If a customer is advised and certified by one single firm, sound Chinese walls must exist…good governance may require more substantial building materials or even a radical partitioning of the house!
o Internal certification - by an actuary employed by the institution to be certified - is undesirable, but the combination of sound preparation by internal actuaries with an alert external ‘watching eye’ results in the best of all possible worlds.
The professional association AG will undoubtedly tighten up its rules in the short term, in order to satisfy the new matured insights of its members…as well as those of legislator and regulator. The latter will (continue to) demand an end to both internal certification and combination of consultant and certifying actuary in one single person. At present, the combination of these two roles on behalf of a client within one single actuarial firm is, for some, cause for concern.
In the meantime, actuarial firms seem to have started dismantling these personal combinations. They are considering a possible further step, namely setting up a completely separate board of certifying actuaries manned by actuaries who are not involved in consultancy and who are at least at arm’s length from the departments responsible for consultancy.
Some may be waiting for the cat to jump: what ideas are developing within the field? Will the regulator and the organisations representing pension funds strive to achieve a far-reaching separation: no actuarial firm carrying out both consultancy and certification for one and the same client? Even if this separation is not obligatory or generally accepted for the time being, it will occur more frequently that the one firm acts as the external adviser to an insurance institution or pension fund and that another firm takes responsibility for certification.
In the interests of customers, sound agreements between the firms are inevitable, namely a flexible interface between the firm which carries out the preparatory activities and the firm of the certifying actuaries. In short, the actuarial firms still have a number of practical matters to sort out.
Our firm is currently involved in negotiating the route taken last year, namely a board of certifying actuaries which operates separately from the consultancy departments and which can fulfil its role as the independent certifying ‘outpost’ of DNB.
The fact that actuary Rein van Dam - who was head of the Pension Fund Supervision Department of DNB until the beginning of this year - joined our unit on 1 July speaks volumes.
Willem Meijer is an actuary with the Certifying Unit of Mercer Human Resource Consulting in Amstelveen