Systemic risk is one of three risks that have been identified as new “hotspots” by the UK’s Joint Forum on Actuarial Regulation (JFAR) because of a perceived increase in risk to the public interest where actuarial work is central.

‘Effective communication’ and ‘Impact of Undue Commercial Pressure’ are the other new hotspots.

In its new ‘Risk Perspective’ report, the group explained that it had decided to include the actuarial risks associated with pandemics as a subset of systemic risk, rather than to introduce a further hotspot specific to pandemics.

The systemic risk hotspot is explained as “the risk that actuaries may not allow appropriately for the increasing global interconnectedness of risk or may be inappropriately guided by groupthink”.

According to the report, the impacts on actuarial work from a severe pandemic are likely to include the possibility of a need to reassess how the employer covenant is considered in the support of DB pensions.

Sir Jon Thompson, CEO of the Financial Reporting Council, which is one of the members of the JFAR, said: “The current coronavirus pandemic highlights the importance of identifying and managing risk. It will understandably introduce additional risk and uncertainty into the work of actuaries.

“The Risk Perspective takes a holistic view of this and other key risks to the quality of actuarial work. Actuaries, employers and users of actuarial work are encouraged to collaborate effectively to understand and mitigate the risks to high quality actuarial work and to explore opportunities in the public interest.”

“We are alive to the areas flagged in the report and continue to work closely with the industry to ensure savers remain protected”

Sarah Tune, head of actuaries at The Pensions Regulator

The other members of the JFAR are the Pensions Regulator (TPR), the Financial Conduct Authority, the Prudential Regulation Authority, and the Institute and Faculty of Actuaries.

Sarah Tune, head of actuaries at TPR, said: “The work carried out by actuaries is vital to the financial planning and investment strategies of all pension schemes and so we welcome this report which highlights the most pressing and emerging risks which could threaten retirement savings if not properly tackled. We are alive to the areas flagged in the report and continue to work closely with the industry to ensure savers remain protected.”

Since early March a group of senior actuaries and other specialists have been working to help actuaries respond to the coronavirus crisis “quickly, meaningfully and thoughtfully”.

Climate-related risk top hotspot

This year the JFAR’s analysis identified climate-related risk as the top hotspot, possibly “the defining risk of our times”.

The risk, according to the report, is that “actuaries may not take into account appropriately, or communicate clearly, the impact of climate-related risks on decisions of users of actuarial advice”.

After systemic risk, the JFAR states that ‘Ageing Population and Affordability’ is – “probably” – the third most significant risk in the context of actuarial work.

It is “the risk of failure to allow appropriately for changing costs of mortality, morbidity and family support systems due to future experience deviating from projections”.

The last of the “big four” risks, according to the JFAR, is “Unfair outcomes for individuals”, which refers to “the risk of actuaries not acting in the best interests of customers which may result in unfair treatment of some subgroups in favour other subgroups that are financially more profitable”.

The other risks are:

  • Geopolitical, Legislative and Regulatory Risk: The risk that actuaries are unable to consider, or plan, for the potential for political, legislative or regulatory change at an international or national level
  • Technological Change and Competence In New Areas: The risk that actuaries entering new fields may not have a deep enough understanding of the statistics or that they may not adequately understand artificial intelligence models or other disruptive advances
  • Impact Of Undue Commercial Pressure: The risk that actuaries may be placed under significant pressure to adopt inappropriate assumptions or models to achieve desired commercial outcomes
  • Effective Communication: The risk of actuaries failing to adequately explain the risks and potential adverse outcomes to decision makers or to others impacted by the actuarial work

The full Risk Perspective report can be found here.

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