AUGUST 2011 · travel broadens the mind, and in my experience this is true. In particular, I have experienced the nasty shock of realising that if you don’t see different ways of

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AU

GU

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Australia

Long Term Care Insurance in Australia

The People’s Champion – John Walsh

Solvency II and ‘LAGIC’

Private Health Insurance

Good Public Policy

Long Term Care Insurance in Australia

The People’s Champion – John Walsh

Solvency II and ‘LAGIC’

Private Health Insurance

Good Public Policy

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Enterprise Risk Management Seminar – 100 kph through the Minefield

IAA meeting

Presidential Dinner– David Goodsall

East Asian Actuarial Congress (EAAC)

13th Accident Compensation Seminar– Changing Times, Continuing Needs

Fellowship and Graduation Dinner

Young Actuaries Program – A Ramble Through the Actuarial Countryside

ACTUARY AUSTRAL IA ■ August 2011

3

contents5 Long Term Care Insurance in Australia

– A Long Time Coming? RepoRT – Bridget Browne

8 The More the Better... pResidenT’s ColUmn – Barry Rafe

9 Actuary Unearthed exposé – Ming Tan

10 The Actuarial Pulse sURveY– Dave Millar

13 Enterprise Risk Management Seminar – 100 kph through the Minefield

evenT noTiCe

14 The People’s Champion – John Walsh

inTeRvieW – Yolanda Beattie

16 Solvency II and ‘LAGIC’ RevieW – Trang Duncanson / Michael Stumbles

18 Private Health Insurance – Dealing with Uncertainty and Instability

CommenT – Peter Carroll

22 In the Margin pUzzles – Genevieve Hayes

23 Surviving Your Annual Performance Review Meeting

moRe ThAn mAThs – Martin Mulcare

24 Good Public Policy – Institute Involvement in Public Policy Debates: How it Benefits Actuaries

RevieW – Rick Shaw / Rebecca Johnstone

26 Young Acturaries Program RepoRT – Keri Lee

28 Education Update edUCATion – Philip Latham

29 Hunting for Treasures – ASOC Camp sTUdenT ColUmn – Lucy Jing

30 Members Survey RepoRT – Philip Latham

33 Letter to the Editor leTTeR – Dave Millar

34 Welfare Working Group – New Zealand RepoRT – Charles Hett

36 Accident Compensation Seminar evenT noTiCe – Registration Now Open

37 On Failure... Ceo’s ColUmn – Melinda Howes

diary dates 2011


4 editorial

How enticing can it be to get caught up in an issue? And not step back and take a look at the big picture?

Or invest a lot of time and effort going down one track – where another option might be available? Maybe not as theorectically pure, but it will get us most of the way there. In the example above the landing gear could have been manually locked down – problem solved.

As actuaries, are we guilty of the above traits in our work? Should we be stepping out more from the immediate details to fly the plane? What else can we all do on the bigger picture issues we face e.g. flood insurance, fire levies, underinsurance, obesity, systemic market risks, short-term investing, adequate retirement income levels, integrated retirement income systems, superannuation fund governance. In this edition we have a number of examples of people flying the plane: John Walsh, Melinda Howes and Bridget Browne. So I challenge you, are you flying the plane or stuck looking at that damn light? ▲

James Collier

[email protected]

Catherine Robertson-Hodder

[email protected]

N ow while actuaries are considered detail people, I saw a video recently which made me think have we got the balance right? (http://www.youtube.com/

watch?v=ICqPGkto3Yo)

It was about Eastern Air Lines Flight 401. The incident occurred in 1972, when a nose landing gear indicator light was not showing the landing gear as locked down.

Everyone got involved in trying to figure out the problem with the light. While this was all happening the autopilot disengaged. The plane slowly started to descend over a few minutes. You can guess the end.

The point is that everyone was so focussed on this issue that they did not notice the autopilot disengage. They did not hear the altitude warning sound and the engineer, whose seat the warning sound was below and therefore most likely to hear it, was away from the cockpit trying to literally see if the landing gear was down.

This incident changed the way that air crews operate. Now there must always be somone who is focused on flying the plane while problems are managed by other crew members. Sounds like a business doesn’t it?

ContributionsContributions should be sent to The Institute of Actuaries of Australia, marked to the attention of Katrina McFadyen (Communications & Member Experience Manager) at: [email protected] contributions must conform to our submission guidelines which are available from the Communications & Member Experience Manager.

magazine design Kirk Palmer Design, Sydney Email: [email protected]

next edition AA163 September 2011 AA164 October 2011 Deadline for contributions: 1 September 2011

Actuary Australia editorial CommitteeJames Collier Editor: [email protected] Robertson-Hodder Editor: [email protected] McFadyen Communications & Member Experience ManagerDaniel Cooper Assisting EditorGenevieve Hayes Assisting EditorRuth Lisha Assisting EditorDavid Millar Assisting Editor

The Institute of Actuaries of Australia ABN 69 000 423 656

Level 7, Challis House, 4 Martin Place Sydney NSW 2000 Australia Tel (02) 9233 3466 Fax (02) 9233 3446 Email [email protected] www.actuaries.asn.au

Published by The Institute of Actuaries of Australia© The Institute of Actuaries of Australia ISSN 1035-6673

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Disclaimer Opinions expressed in this publication do not necessarily represent those of either The Institute of Actuaries of Australia (the ‘Institute’), its officers, employees or agents. The Institute accepts no responsibility for, nor liability for any action taken in respect of, such opinions. Visit:http://www.actuaries.asn.au/TechnicalResources/ActuaryMagazine.aspx for full details of our disclaimer notice.

Actuary Australia

Actuaries Flying the plane


5report

i have recently returned to Australia after 12 years living in Canada, the UK, and for eight of those years, France. They say travel broadens the mind, and in my experience this is true. In particular, I have experienced the nasty shock of realising that if

you don’t see different ways of doing things, they are seriously difficult to imagine ‘out of the blue’. I would like to illustrate this using the case of Long Term Care insurance.

I first came across Long Term Care (LTC) insurance products while working in France. The product there has been a major success story – the game-changing product equivalent to the introduction of trauma insurance in Australia. So, of course, my interest was piqued.

How does it work?Here’s a summary of the main characteristics of the product sold to individuals.

● Lifetime level premium, depending on age at entry, but often not gender differentiated (seems they were ahead of their time). I have never seen it differentiated by smoker status.

● Fixed monthly benefit on meeting the definition of Dependency.● Wide variety of definitions, often combining French State

assessment (AGGIR scale) with Activities of Daily Living (ADLs). Some differences in practice regarding the requirement for permanence.

● Partial and Total levels of dependency leading to a lower and full level of benefit (eg EUR 3,000 per month if cannot perform five or six out of six Activities of Daily Living, half of that if cannot perform three or four out of six ADLs).

● No surrender value.● Reduced ‘paid-up’ benefit available after payment of at least

eight years’ premiums.● Premiums and benefits escalate with profit participation results.● Premiums are non-guaranteed, ie fully reviewable at the

discretion of the insurer.● Waiting period of usually one year for non-accidental dependency

and three years for neurologically caused dependency (e.g. Alzheimer’s).

● Entry ages usually around 40 to 70 years of age.

My initial reaction, which I think would be totally representative of the ‘average’ Australian, was “Why would someone pay a level, lifetime premium for a product with no surrender value that may or may not pay out a benefit shortly before I die in 30 or 40 years’ time? And if it doesn’t happen I get nothing back! Especially”, having put my actuarial hat on “when the premium’s not even guaranteed.” Well, in France they have – in droves. Estimates vary, but according to the French insurers’ federation (FFSA), some five million people have some form of private LTC insurance – out of a total population of over 63 million of which around 14 million are over 60. So, I spent some time looking into the possible reasons for the relative success of the product in France compared to the situation in Australia and learned plenty along the way – especially about ‘unknown unknowns’.

To give a very brief global overview: reasonably developed private LTC insurance markets exist in several countries apart from France (the US, Israel, Germany and Japan are quite developed, while Spain and Italy have just recently developed products). Two countries where a private insurance market does not exist are Australia and the UK, although there are many others.

Why does it work in France?Here are some telling examples from a recent presentation by Brom & Fischer at the Geneva Association’s 7th Health & Ageing Conference in November 2010. The image shows the outgo (in terms of fees to a retirement or nursing home), the average state support coming from retirement income and the ‘top up’ allocation

This article is based on a presentation given at the Biennial Convention in Sydney in April 2011.

long Term Careinsurance in Australia

– A long tiME CoMing?


6

(APA) provided if you have reached a certain level of dependency, and the remaining out-of-pocket expense per month. Just to clarify, retirement income in France is almost entirely funded through State-sponsored, rather than employer-sponsored, programs.

When exploring some of the reasons for the success of the product, without explicitly identifying the issue above (because it was too obvious to them to be worth stating, in my opinion), colleagues and other local experts came up with the following:

France: a financially prudent nationThe French are astonishingly financially conservative when viewed through Australian eyes. Their traditionally high household savings ratio tells part of the story, but while living there I learned:

● Credit cards are not that common and tend to be offered only as store cards.

● Home mortgage durations have recently been extended from the standard maximum of 15 years to 20 and occasionally 25 years – and they are nearly universally at a fixed rate for the duration of the mortgage.

● Home equity loans only became legal in 2006 when Jacques Chirac argued for “unlocking the sleeping equity” in residential property. A colleague at the time commented to me about what a bad idea he thought this was: “People will only go and spend the money on a car or a holiday”. I thought “and your point is?”

Protection of the legacy/inheritanceThis was cited very often as a reason for purchasing LTC insurance. It was an expression I had honestly never really heard in Australia. Of course, the bequest motive (to use its official name) exists in Australia, but it turns out there is another reason for the apparent strength of this motivation in

France. France is a Civil Law country, as opposed to Australia, which is a Common Law country. This is the source of many differences in practice between the two counties – including actuarial practice (a whole other story) – but it means that inheritance law is effectively codified. You don’t decide who gets what – this is laid down by law. Your children inherit, your spouse only gets lifetime use of your legacy. Hence, parents and (adult) children have legal rights and obligations to each other, and the drive to protect the inheritance is high.

The power of the bancassurance networkFinally, something that France and Australia have in common! It was cited to support the development of LTC insurance because salaried bank sales forces were encouraged to promote and sell the product.

The weakening of family tiesFrance is still recovering from the shame of the 2003 heatwave, when 14,000 elderly French people died. It happened during August – the traditional summer holiday period when many businesses, including medical facilities, shut down or operate on a skeleton staff. The people who died were mostly living alone without immediate family support and just didn’t know to keep themselves hydrated. Part of the backlash focussed on the loosening of traditionally fairly close ‘Latin’ family support networks. The connection with LTC comes from the desire not to be a burden and maintain independence.

Activities of the State and regional bodies Colleagues have told me that the creation of and publicity around the state benefit have generated awareness of the risk of long term care and its financial impact. This is supported by the experience in Spain, where the creation of a social security system for long term care led to the launch of a private LTC product by all major insurers.

Why doesn’t it exist in Australia?“International comparisons are often difficult to make but

anecdotally at least, Australia is regarded as having one of the best aged care systems in the world. This is, perhaps, best

interpreted in an overall sense rather than a consideration of any one aspect of aged care. … it is fair to say that

in Australia, almost every form of care and service is available, or potentially available, to the entire older

population, with a markedly high level of quality and affordability.” – Productivity Commission

2011, Caring for Older Australians, Draft Inquiry Report, Canberra Joint submission

from ECH, Eldercare and Resthaven (sub. 453, p. 4)

The diagram (left) describes the structure of the delivery of aged

care services in Australia today. There are currently

over one million people receiving some service,

at a public cost of $10 billion per

annum. Of this, 160,000 are in

report▲

LTC Insurance in France

XXII CARING FOR OLDER AUSTRALIANS

Figure 1 Current modes of care in the aged care system

Government-subsidised services are provided to over one million older people and their carers each year, with more than half receiving low intensity support through the home and community care program. The number of higher level community care packages and residential care places in each region is limited by needs-based planning ratios — 25 places per 1000 people aged 70 or over for community care packages and 88 places for residential care. Not all places are operational in each region.

At 30 June 2010, over 160 000 Australians received permanent residential care, with the majority receiving high level care. In recent years, around 70 per cent of residential care residents were female and 55 per cent were aged 85 years or older.

In 2008-09, Australian, state and territory government expenditure on aged care was $10.1 billion, with two thirds of that expenditure directed to residential aged care.

Ageing in place

Living in the community with activity restriction but without formal services

Service integrated housing for older people

(Retirement villages incl. assisted living apartments, group housing,

etc)

With carer co-residentCarer not

co-resident Living alone without carer

Services to supplement carer support

(Home & Community Care, Veterans’ Home Care, Carer Allowance, Carer Payment)

Services to substitute for carer

(domestic care, social support, Home & Community Care)

National Respitefor

Carers Program

Community Aged Care Packages

Low level residential care

Acute, post,sub-acute & transition

care High level residential care

Palliative andend of life care

Extended Aged Care at

Home programs (EACH & EACH-D)

Ageing in place

Living in the community with activity restriction but without formal services

Service integrated housing for older people

(Retirement villages incl. assisted living apartments, group housing,

etc)

With carer co-residentCarer not

co-resident Living alone without carer

Services to supplement carer support

(Home & Community Care, Veterans’ Home Care, Carer Allowance, Carer Payment)

Services to substitute for carer

(domestic care, social support, Home & Community Care)

National Respitefor

Carers Program

Community Aged Care Packages

Low level residential care

Acute, post,sub-acute & transition

care High level residential care

Palliative andend of life care

Extended Aged Care at

Home programs (EACH & EACH-D)

7


report

residential care, at a public cost of $6.7 billion p.a. and a total cost of $10 billion p.a.

If we now turn to the table below we see the proportion of the costs of each option that is funded publicly or privately.

Table 6.6 Aged care services funding by funding source

Ave public $ Ave. private Ave. per recipient contribution Gov. in 2010 % share %

Residential high care 51,550 26 74Residential low care 20,150 53 47EACH packages 39,250 4 96EACH-Dementia packages 43,450 4 96CACPs 12,700 10 90HACC 5 95Other Australian Government Variable No 100programs (for example, National compulsoryRespite for Carers) contribution

Tables sourced from Productivity Commission 2011, Caring for Older Australians, Draft Inquiry Report, Canberra (EACH, CACP and HACC are all types of care package provided to people in their own homes. In particular, Home and Community Care represents Meals on Wheels and other in-kind services that enable older people to maintain independence for as long as possible).

The private share of residential low care is 53%, comparable to the EUR 400 out of EUR 1,800 or 22% paid out-of-pocket in France for moderate dependency. For residential high care the figure is 26%, which can be compared with 55% in France.

However, I would make two further observations here:

1. Selling the family home to finance the private share of care would seem to be much more culturally acceptable in Australia than it is in France, partly related to the inheritance laws mentioned above. Hence, the financing of this contribution may cause less cash flow strain in Australia than in France.

2. The proportion paid privately for the other types of care, for those who remain in their own home and who represent the vast majority of recipients, is nominal in Australia (between 4% and 10%). This is not the case in France. There is beneficial tax treatment for home services but they are not financed by local authorities to the extent they are in Australia.

My initial reaction was that the different attitudes to this product were just ‘short term’ Australia versus ‘long term’ France; or ‘she’ll be right’ Australia versus a more prudent France. However, it was only when I understood how the French Social Security and inheritance laws worked AND how the Australian system actually works that I started to grasp how different views and approaches were on these issues, which led to these different outcomes. I was able to confront my ‘received wisdom’ with some quite different facts.

Not surprisingly, these differences are not really a question of distance: the private LTC insurance market in the UK is just as

non-existent as that in Australia. Clearly language, culture and history make for long-lasting differences.

Interestingly, when considering financing structures for the cost of long term care, the Productivity Commission report came down firmly on the side of the “this risk is uninsurable” camp. So, in the following table I take each of the reasons cited by the Productivity Commission and provide a possible riposte from the French approach.

To conclude, I think the actuarial skillset is ideal for coming to grips with some of the challenges of long term care financing, whatever the framework may be. The issue is long term by its nature and fraught with uncertainty – areas where actuarial skills should be at their best. While the Institute did not respond formally to the recent call for submissions to the Productivity Commission inquiry Caring for Older Australians (although there was an offer of further discussions regarding the Commission’s current work on Disability Care and Support), individual actuaries did provide submissions. I believe that actuaries must play a role in advising stakeholders on how best to manage this complex issue, irrespective of whether a private insurance product is part of the future framework. The final report into Caring for Older Australians has been completed and was sent to the Australian Government for its consideration on 28 June. It should be released towards the end of July and I would recommend it as a rich source of opportunity for further stimulating challenge for actuaries. ▲

Bridget [email protected]

▲

Reason given for uninsurabilityCfOA Draft report p215

Individuals have lack of knowledge about risk of needing care, competing priorities and difficulty predicting care needs.

Affordability, especially when delaying decision to later life.

Low incentives to insure due to the existence of safety nets.

How does the French product address this?

The French are inherently financially conservative, place a strong emphasis on planning ahead and know they face potentially high out-of-pocket costs.

Insurers encourage take up at younger ages and the introduction into Group schemes during working life is reducing average entry age.

Is this the key difference?Inheritance laws and means testing mean the incentives are sufficient.

Participating products with reviewable premiums and benefits are the traditional actuarial mechanisms for addressing this and are used in the French product.

Long term incidence and duration uncertain.

Adverse selection. Medical and other underwriting is performed. Rating, declines, exclusions and waiting periods are used to manage the risk.


i had an interesting discussion with a member the other day where he expressed concern about the apparent number of new actuarial graduates who could not find a job. I had not really thought about this before.

When I was a student I was convinced that Council actively managed actuarial supply and demand and that this was why the pass rate was so low, and more particularly, why I was failing! There is a certain logic to managing supply and demand. I understand that some of the medical specialties do actively manage supply in cahoots with the Government. The logic is that too many specialists risks over-servicing and hence uncontrollable increases in costs of healthcare.

The Institute does not have a policy of attempting to match supply with the demand for new actuaries. In practice, it could be argued that the Institute has little control over the number of new actuaries because the vast majority of senior students pop out of the universities. I understand that there are around 400 actuarial students starting university courses each year. Around half of these are international students, i.e. full fee paying students. The universities are keen to increase the number of students because it is very lucrative for them.

Council does approve the accreditation of universities and we recently accredited Curtin University of Technology in WA mainly because of a potential shortage of new actuaries in WA. Interestingly, a number of students are now working in the mining industry.

The view that Council takes is that we shouldn’t manage the number of new actuaries, our main interest is promoting the profession and maintaining the quality. This year we will be running three professionalism courses with over 150 new actuaries. Well

over half of these will be new Fellows. Should we be managing supply or should we have confidence that these new actuaries are all smart enough to find their own place in the sun?

Not all new graduates will find a traditional actuarial role just like not all new law graduates will work in law, the issue I think is that the actuarial qualification is a good foundation for many roles. If we, as a profession, want to build critical mass outside of the traditional actuarial areas then we need to make sure that we keep supplying good quality actuarial graduates to the market.

The point however, and this was the concern of the member who called me, is that we should not be attracting new students into the profession on a false promise. I agree that we need to make sure that we make it clear to prospective students that we cannot guarantee that there will be a choice of traditional actuarial roles for them. What we can guarantee is that they will be members of a well-respected profession and have a set of unique skills that are in demand across a growing number of organisations. In fact, the whole concept of ‘traditional actuarial work’ is one that is holding us back I think.

From now on let’s agree that there is no such thing as traditional actuarial work and that we are in the business of risk management.

One of the biggest strategic threats we face at the moment is that we require around 300 volunteers for each round of exams. This situation is unsustainable long term and Council will consider a paper at its September meeting to reduce the number of volunteers we use to run the Part III exams. We have had input from a number of educational professionals and have learned from other professional organisations. The trick is to reduce the number of volunteers whilst maintaining standards. Ideally we also would like to increase the pass rates without materially increasing costs to students and employers.

By the way, I should kill a myth that has been doing the rounds for a while, namely that we make more money out of students than Actuaries and Fellows and this bias incentivises the Institute to keep pass marks low. Notwithstanding the fact that our accounts are a bit confusing on this matter I can categorically state that the education function is aimed at being break even. The financial incentive is to actually increase pass rates. ▲

Barry [email protected]

8

The more the better...

president’s column


9actuary unearthed

Title…Pricing Actuary, Group Risk

Organisation…Munich Re

My favourite energetic pursuit… Badminton, but nowadays, it is getting harder to find that energy and time with two kids!

The sport I most like to watch... Badminton if the media stations would ever broadcast it, but I would settle for tennis

The last book I read (and when)...Must not have read one for ages as I can’t even remember that last one. I am still going through the APRA capital review proposal!

My favourite artist/album... Don’t have one. I like most instrumental, classical, new age or acoustic music

My favourite film...Don’t have one either. As long as it’s enjoyable

My interesting/quirky hobbies...I like photography and art, but my kids dominate my camera nowadays

The person I’d most like to meet...Jack Welch

What gets my goat… Incompetence

What I wanted to be when I grew up...When I was in primary and secondary school, I considered a path in medicine. When I was in high school, I somehow developed an interest in neuroscience and decided I could see myself as a neurosurgeon...

Why I decided to become an actuary...I realised how long and expensive it would be to become a doctor/neurosurgeon. At that time, I was an international student and the currency exchange rate to study/live in Australia

was fairly prohibitive so Business/Commerce was the more affordable option. I then chose Actuarial Studies, albeit having only some vague ideas what it was back in high school, and also because it’s not accounting and ‘Actuary’ sounded better than ‘Accountant’!

Where I studied to become an actuary...University of Melbourne

Qualifications obtained...BComm (Hons), FIAA

My work history... Business Development at Hannover Life Re, Valuations at Commonwealth Bank plus Pricing & Product Development at John Hancock Life (in Malaysia). An even longer history would also include cashier, cook and cleaner at a fast-food outlet, a retail fashion stockist, and a private tutor for secondary school students

What’s most interesting about my role...Working closely with people across all levels of management, dealing with clients, balancing actuarial results with commercial reality and building business relationships

My role’s greatest challenges...They are also what I found most interesting! Perhaps one other great challenge is building mutual trust with your clients in a ‘cut-throat’ industry

Who has been the biggest influence on my career (and why)... Don’t think there has been any single biggest influence so far, but there have been many positive ones... a nudge from family to consider a career in business, another nudge from friends in high-school who knew better than me about what an actuary does and challenged me to become one, the tremendous support from my wife to persevere through the exams, and the opportunities and recognition given by my employers ever since I started my actuarial experience

My proudest career achievement to date is… Getting my FIAA was great, but still couldn’t top the pride of having all eight final-year secondary school students under my tutorage significantly improved their grades in the subjects I taught and graduated into top high schools

The most valuable characteristic an actuary can possess is… Perception

If I was President of the Institute, I would… Not want to be handing out graduation certificates at the President’s Dinners. Maybe the graduates’ employers should have that honour?

My most important decision… Making the decision to pursue a career in Sydney

I’m most passionate about… Finding that balance between working hard and enjoying life (which will definitely include fine food and wine)

I’d like to be brave enough to… Go sky-diving

In my life I’m planning to change… For the better

At least once in life, every actuary should ...Work in a sales role

My best advice for my children... Listen carefully, watch closely, learn the techniques, understand the principles and apply

Four words that sum me up... Motivated, down-to-earth, perceptive, organised ▲

Ming [email protected]

Ming Tan


10 survey

The Actuarial Pulse is an anonymous, web-based survey of Institute members, run on a monthly basis, giving members an opportunity to express their opinions on a mixture of serious and not-so-serious issues.

and staff benefits and everyday perks rated very lowly (over 80% indicated these as their lowest and second lowest preferences). It also came as no surprise that positive teams and managers you respect rated highly. It is interesting, however, that the lack of these everyday perks can often be a source of discontent for employees on a day-to-day basis. The only notable difference between the genders was that women valued the “provision of constructive feedback and chances to learn” slightly higher than having a “greater variety of work”. I was surprised that flexibility in work arrangements didn’t rate more highly, especially for women, but in retrospect each of those attributes that scored more highly are important to creating a good workplace environment.

Q2: Does your workplace have formal Flexible Workplace Arrangements (FWA)?

The result of this question surprised me a little. By no means did I believe that every workplace had FWAs, however I was under the misapprehension that nearly every workplace did. Perhaps the people that answered no were able to utilise informal arrangements when appropriate.

Q3: Select any formal FWAs that you currently utilise

FWA Total Male FemalePart-time work 19% 13% 30%Compressed working weeks 3% 3% 1%Rostered days off 3% 3% 2%Alternative business hours 11% 10% 12%Flexible working hours 29% 23% 37%Working from home 37% 34% 40%Other 4% 4% 1%None 42% 44% 40%

The main differences between genders were the amount of part-time workers and females on flexible working hours, with over twice as many females taking up formal part-time work arrangements and 50% more working flexible hours. I would have thought that this difference may have been greater, however I think it is very encouraging that our profession (and our employers) allows so many of us to utilise these arrangements.

Of those people that selected ‘Other’, the most common responses were around additional annual leave ‘purchased’ and study leave allowances. One particular respondent indicated that their workplace was managing their rehabilitation after a medical incident and the hours they were working were currently very flexible.

PulseThe Actuarial

Next Survey New questions will be available in Sepember 2011.

What would you like to know? If you have a question you would like to put to the membership, email it to [email protected]

Results Report generated on 14 Junly 2011, 346 responses.

The Workplace

T his month’s Actuarial Pulse monitored the perceptions and beliefs we held about our workplace and our colleagues, especially those working part-time.

As can be seen by the charts below, there was a 2:1 split between males and females and nearly 90% of respondents were employed by an organisation (as distinct from contracting, doing casual work or owning a business). These respondent demographics were used to help shed light on the answers to the following questions.

SECTION 1

Q1: What factors do you believe contribute to a good workplace?

Respondents were asked to rank the following factors from ‘most important’ to ‘least important’ to indicate what they believe contributes to a good workplace. The following table shows the average ranking indicated by the respondents. (Lower score = higher importance)

Attribute ScoreFeeling respected and contributions valued 1.9Positive team with which to work 3.5Managers that you respect 3.6Variety of work 3.8Given constructive feedback and chances to learn 4.4Flexibility in work arrangements 4.6Access to staff benefits (phones, cars etc) 6.8Everyday perks (lunches drinks, coffee etc) 7.1

It came as no surprise that feeling respected rated very highly (over 60% of respondents indicated this as their most important attribute)

Yes: 76% No: 24%

Employed: 86.5%

Males: 76% Females: 24%

● Contracting/Casual/Own-Business: 8%, ● Retired: 2.5% ● Other: 3%


11survey

▲

Q4: Select any informal FWAs that you currently utilise

FWA Total Male FemalePart-time work 4% 2% 7%Compressed working weeks 2% 3% 1%Rostered days off 2% 3% 1%Alternative business hours 25% 24% 28%Flexible working hours 47% 50% 39%Other 6% 7% 6%None 27% 27% 27%

In a complete oversight ‘working from home’ was left off this question, which accounted for many of those people that selected ‘Other’. Personally, I am very grateful of the ability to complete my work remotely as there have been a few occasions when the notoriously unreliable tradesman/Foxtel installer/delivery man has provided a window of time (often most of the working week) in which they claim they will arrive to complete their works.

There wasn’t a great deal of difference in the use of informal FWAs by gender, except for flexible working hours. Perhaps the greater number of males was offset by the fewer number of males utilising formal flexible working hours.

Whilst flexibility in working arrangements only ranked sixth in the desirable workplace attributes, over 70% of people enjoyed informal FWAs. Perhaps people value these arrangements more highly than they initially thought.

Q5. How many hours in addition to your contractual hours do you work on an average week?

Total Male FemaleAve. weekly ‘overtime’ hours 8 8.7 6.8% working no extra hours/week 10% 9% 12%

Disappointingly, only 10% of respondents did not work any hours in addition to their contractual hours, with people working around 20% longer hours than are stipulated in their contracts. Whilst some firms have ‘reasonable overtime loadings’ supposedly built in to their remuneration packages, I would challenge anyone to satisfactorily justify an additional 20% each and every week as ‘reasonable’ and being sufficiently remunerated.

Interestingly, contract workers, casual workers and those that owned their own businesses did not, on average, work any longer than those employed on a constant basis by an organisation.

In response to this, one member posed a question, perhaps to be raised in a later edition of the Actuarial Pulse, as to whether the culture of working longer than the contractual hours breeds inefficiency in employees and workflow management passivity in managers.

SECTION 2For each of the following statements, respondents were asked whether they ‘strongly agreed’, ‘agreed’, ‘disagreed’ or ‘strongly disagreed’ with the sentiment expressed. ‘Unsure’ or an equivalent response was deliberately left out to make people decide what they best believed.

A) It is almost impossible for part-time workers to progress to an executive level in the financial services industry.

77% of respondents believed this to be the case, with 30% strongly agreeing. Perhaps this is because of the time demands on executives, or possibly as they are simply overlooked for consideration. Females were slightly more optimistic, with 73% replying in the affirmative.

One respondent summed it up nicely, saying “a major problem with part-time work in a professional environment is that it is hard to actually work only part-time hours. Individuals will work till the job is done in a professional manner. Therefore part-timers often work from home etc and therefore put in more than their allocated hours.” Which this respondent echoes with their personal experiences: “I felt extra pressure to complete the same amount of work in my few hours as my full time colleagues in their full time hours.”

B) Part-time workers are less interested in career development than their full-time colleagues.

40% of respondents believed this to be the case, with 13% strongly disagreeing with this sentiment. People will sometimes equate development with promotion, however I intended this statement to be around the holistic term of career development. Nearly 50% of males agreed or strongly agreed with this statement, showing a clear disparity to the less than 30% of females.

C) Part-time workers don’t work as hard as their full-time colleagues

10% of females agreed with this statement which was almost exactly the same as males. Whilst 10% is still higher than most people would like to acknowledge, it is refreshing to see the very vast majority of respondents believe part-time workers work just as hard as their full-time colleagues.

D) Part-time workers are never asked to work overtime hours

Only 23% of respondents believe this statement, with 30% of females and 18% of males strongly disagreeing. This appears to tie in relatively strongly with the previous statement.

E) Some part-time workers are overlooked for promotions because they are reluctant to put in long hours of work

65% of respondents believed this statement, with only minimal numbers strongly disagreeing. This question doesn’t allow for


12 survey

respondents to indicate whether or not they agree with these colleagues being overlooked. Management may believe (correctly or otherwise) that the new roles and responsibilities are not satisfactorily manageable by a part-time worker.

F) Some part-time workers are overlooked for promotions because they are perceived to be working less hard than their colleagues

I thought that this statement may have gained a stronger affirmative response than the previous. However, only 50% agreed and 11% strongly agreed. In aggregate, females believed this significantly more than men (68% compared with 56%).

G) Part-time workers are not being promoted as quickly as others, even from the beginning of their careers

There was virtually no difference between men and women responding to this statement, with 63% agreeing, 12% strongly agreeing and 23% disagreeing. Compounding this, one respondent made an important point that “part-time workers often get piecemeal, less interesting work, rather than being able to take real ownership of a role.”

H) Part-time work is not appropriate in a consulting firm in the financial services industry

This statement was included to make particular reference to the ability of part-time workers to meet the demands of their clients, whose expectations can often interfere with commitments outside of the workplace. It was pleasing to see that over 85% of respondents disagreed or strongly disagreed with the statement.

I) It is not appropriate to contact people outside their normal working hours

50% of women and only 35% of men agree that it is not appropriate to contact people outside of their normal working hours. Many people commented that “it depends” on the type of contact. For example, one respondent indicated that “it depends on the level of the employee, the reason for contact and if there has been agreement that this would/might happen due to the person being given flexible working arrangements.”

J) Children are used as a great excuse to get away from work on time or early

Surprisingly, only 45% of respondents disagreed with this sentiment, with 8% of those strongly disagreeing.

K) Going to dinner with friends” or “Going to sports training” carries the same weight as “Going home to take care of the kids

Over 70% of people disagreed or strongly disagreed and only 3% of people strongly agreed with this sentiment.

L) “Going to dinner with friends” or “Going to sports training” should carry the same weight as “Going home to take care of the kids

40% of respondents disagreed or strongly disagreed with this statement. Most interesting were some of the comments provided by the respondents around children. These included: ● Children are a great excuse for colleagues not to waste my time. My change in priorities has made me more efficient in my day and my colleagues more respectful of my time. ● Going home to take care of kids is

not optional, it is a legal requirement. ● Everyone needs to establish their priorities between work and non-work activities. Children tend to help you do this better because the priority is clearer. ● It could be harder to find an alternative to caring for kids at short notice.

Moreover respondents indicated that ● There seems to be a perception that saying you have to pick up your kids acts as a ‘get out of work on time’ card, but there have been countless times I have had to phone my parents, or my partner, or the school, because I am held up by people who don’t rate that as a valid reason to leave when you say you had to leave, or bring my kids into work after daycare ● Many part-timers I know have to go and collect the kids – but then put the kids to bed and work for another four to five hours (way beyond when the kid-less colleagues have gone home for the night) ● Work tools such as remote access and the ability to dial in to meetings help to balance priorities.

This does raise another question around whether hours worked outside of the office are recognised as much as those completed within eye-sight of the management.

M) Management / Direct Manager / Individual is responsible for making part-time work successful

Three separate statements were asked and the responses are found in the table below. Happily, it appears that almost every respondent (and every female respondent) believed that the individual played a significant role in ensuring that part-time work is successful for themselves and the business.

Strongly Agree Disagree Strongly Agree DisagreeManagement 15% 68% 16% 1%Direct Manager 18% 71% 10% 1%Individual 31% 67% 2% 0%

● Part time work is only successful if all parties compromise and work together. It is no one individual’s responsibility to make it work. ● If the employee is part-time and not flexible, it’s not convenient and I won’t try this again unless the employee has unusual skills. ● I respect the flexibility that I get from my employer and therefore am comfortable to be flexible in return but the degree of mutual trust is very dependent on your immediate manager and team. ●

Many [staff] produced as much output as full timers… unfortunately some sections of management did not recognise this. ● Is it any surprise women are under-represented in the upper echelons of the finance industry? ‘Flexibility’ often works toward the advantage of the employer where a person remunerated on a part-time basis is really doing a full-time job. ● Most, if not all, [actuaries] are employed on the basis of individual contracts. I am always of the view that working conditions and arrangements will never be on par with the rest of the Australia unless people move onto collective agreements… the things we take for granted, such as eight-hour days, five-day working weeks, are there because the union movement fought for them.

Nevertheless, I think the most encouraging comment that was received was that “getting away from work on time should not be seen as a sin.” I agree. It most certainly should not! ▲

Dave [email protected]

▲


13event

O n September 20, the Institute will host ERM 2011, the third annual seminar on Enterprise Risk Management. The seminars provide a forum for risk management

professionals to network and share their knowledge and experience. Based on feedback from participants, it’s obvious that last year’s seminar was a resounding success:

● “Excellent presentation, especially from a business perspective rather than technical.”

● “Concise and informative.”● “High level and non technical whilst being extremely practical

and expanding how actuaries need to consider risk (i.e. people/cultural issues).”

● “Fabulous … more please!”

This year, our theme is 100 kph through the Minefield. Whether we like it or not, we will all have to deal with a range of new challenges arising from a rapidly changing environment. ERM 2011 will give us a chance to take a look over the rough terrain ahead, and develop survival strategies.

Professor Ross Garnaut, the government’s advisor on climate change, will present the keynote address, on managing uncertainty.

Hurricanes, floods, earthquakes, tsunamis – how can we prepare? ERM 2011 will include a presentation from Erik Maranik, a disaster planner for the NSW government, who specialises in emergency risk management for extreme events. Each disaster has the potential to create cascading crises – for example an earthquake

in Japan might cause a nuclear power plant to spread radiation halfway around the world.

At ERM 2011, we will also be looking at technological change. Recently we have all become much more aware of threats to data confidentiality – such as the Sony Playstation hacking attack – and the potential cost of weaknesses in our IT systems (e.g. CBA’s ATM glitches). But the internet can provide opportunities as well as risks. For example, will social media change the way we do business?

As actuaries, we may need to develop better analytical skills for modelling risk. At ERM 2011, Neil Cantle from Milliman will present an introduction to a new approach to ERM, called Complexity Science. One of the major ratings agencies will also provide its own perspective on ERM.

Who Should Attend?With speakers drawn from a variety of backgrounds and industries, this seminar is shaping up to provide invaluable insight into Enterprise Risk Management, provide valuable perspectives for professionals at all levels within the ERM framework of their organisation, including:

● Chief Risk Officers ● Chief Financial Officers ● Chief Actuaries ● Risk Professionals ● Banking and Investment Professionals ● Regulators ● Consultants ● Financial Services Executives ● Equity Analysts and other Investment Professionals ● Risk Modelling Experts ● Superannuation, Asset Liability and Management Practitioners

Enterprise Risk Management Seminar

Register NOW for this important industry event at www.actuaries.asn.au/ERM2011

Tuesday, 20 September 2011 • Swissôtel Sydney – Blaxland Ballroom, Level 8, 68 Market St, Sydney

Keynote Speaker – Professor Ross Garnaut – 100kph through the Minefield

REGiStER NOW


14 interview

The people’s Champion – John Walsh

HOW ONe qUIeT

ACTUARY IS CHANGING

THe LIVeS AND FUTURe

OF AUSTRALIANS WITH

DISABILITIeS, ONe

NUMBeR AT A TIMe...

W hen I first met John Walsh, former Actuary of the Year, I wasn’t expecting our conversation to focus so much on mentors and life lessons learned – I thought numbers would be a natural focus. But

John’s experience and remarkable poignancy with words are just as inspiring as the highly and insightful numerical mind that saw John recently appointed as a member of the Order of Australia for his work in disability and health policy.

Living and working with his own disability (quadriplegia) since his early 20s, John shares some of what inspires and motivates him, and some advice he would give to young actuaries and career-builders gleaned from a remarkable career.

W hen I first met John Walsh, former Actuary of the Year, I wasn’t expecting our conversation to focus so much on mentors and life lessons learned – I thought numbers would be a natural focus. But

John’s experience and remarkable poignancy with words are just as inspiring as the highly and insightful numerical mind that saw John recently appointed as a member of the Order of Australia for his work in disability and health policy.

Living and working with his own disability (quadriplegia) since his early 20s, John shares some of what inspires and motivates him, and some advice he would give to young actuaries and career-builders gleaned from a remarkable career.


15

John generously acknowledges several mentors who he says have “influenced and inspired” him. In the public policy arena, John points to Bill Shorten and John Della Bosca, who John says have a “vision, an ability to conceptualise what the world might look like if things were done differently.”

Among other career mentors and lessons they taught him, John mentions PwC actuarial partner Chris Latham who had “great empathy for clients” and Greg Taylor, who John says “has a keen attention to detail and an excellent ability to reflect the truth in evidence.” John doesn’t only draw energy from the cream of the political and actuarial crop, but is also inspired by people at all levels of the actuarial practice at PwC, all of whom John says have something to offer and insights he doesn’t see.

Family clearly comes first with John too, and much of his inspiration comes from his three children, who range in age from 13 to 22, and John’s wife, who he says has taught him “what’s important in my life: trust and truth” – a sentiment we keep returning to as we reflect on his remarkable career. The importance of people in John’s career also resonates in his observations about the actuarial profession generally and his advice for young actuaries finding their feet. “Actuaries need to be flexible enough to sometimes look beyond the numbers. It’s a common saying that actuaries tell the way forward by looking out the back window, but says sometimes we’d benefit by looking out the front!” he jokes.

John also advises young actuaries that “it’s great to be the smartest kid, but that’s not enough – you have to be able to get behind the numbers, to understand what they really mean. In health and social policy, each number is a person with an injury or someone dying.” With his extensive experience in health and disability policy, John has also learned actuaries must become part of the industry within which they work, working alongside its participants - nurses, doctors, physios - to really understand it.

As we talk it becomes clear it’s not only the people in John’s career and life that have brought him as far as he’s come – but also his own personal ethos of perseverance and determination. “When I start something I try to finish it, and I always make sure what I do, I try to do well,” explains John. This is his answer for how, as a junior computer programmer at PTOW (later Towers Perrin), John was motivated to finish an actuarial qualification by correspondence through the Institute of Actuaries in London school over 10 gruelling years.

John’s actuarial career spans decades of consulting at PTOW and then PricewaterhouseCoopers, where he has worked for 18 years and is now a partner, as well as many years in research and policy development for government including the NSW Motor Accident Authority, NSW Home Care Service and as the statutory actuary to workers compensation authorities in NSW and South Australia. Currently, John is an Associate Commissioner working on the Productivity Commission’s inquiry into disability care and support, which provided its final report to the government on 31 July 2011.

John’s doggedness towards everything he puts his mind to is strongly reflected in his work in public policy, particularly national disability support, which he notes has been on the government radar since the 1970s. John has worked extensively in the field of

accident compensation schemes and care / support for those with a serious disability.

The vision John has held over the decades is of a national disability support scheme which will finally realise “the dream of an ordinary life” for people living with a disability. John describes the myriad barriers to participation for this group as currently ‘insurmountable’. John’s own personal experience has given him a unique insight into his work in the field of national disability support, and he acknowledges it has affected the prism through which he views the issue.

Though John says he’s been more fortunate than most people with a disability, citing supportive friends and family, and financial security, he experiences every day the frustrations of living with a disability. It’s a mark of a man to turn limitations into strengths and John’s disability certainly seems to have reinforced his natural will to persevere.

“Everyone struggles – everyone has to overcome obstacles in their lives. But when you have a major disability, it’s every five minutes.” John says this has instilled in him a “sense of not being too fazed about most things.” This ability to let go of the small issues John also attributes to perhaps his most influential mentor – his father, who John describes as “a working class man of fantastic simplicity” who always appreciated the everyday beauty in the world around him.

Returning to his work in disability policy, John says while the first step is more funding, capacity building is essential to properly manage that money. This applies to people with a disability so they can manage the support funds they’re given and make decisions on how to purchase support services, and also for service providers.

Although John says his vision for disability support may take a hundred years to achieve, he’s hopeful that soon we’ll have a system where people with a disability have the funds to purchase their own support services. “Across this scheme will lie a governance model to which actuaries can contribute to ensure it’s sustainable.”

About whether he thinks the Productivity Commission recommendations will be implemented, John remains optimistic. “I think something big will happen. Stakeholder pressure, political pressure, and the pure logic behind this issue will make it happen.” ▲

Yolanda BeattieHonner [email protected]

interview

▲

Candice Sng, Yolanda Beattie and John Walsh


16 review

In last month’s edition of Actuary Australia, Rebecca Johnstone, Policy Consultant for the Institute, provided an overview of the discussions held at the Insurance Capital Review Seminar on 9 June 2011. In this article we will discuss the impact of the

capital review changes for businesses.

Solvency II and ‘LAGIC’ – what it means locallySolvency II, the new risk-based capital regime development continues to gain momentum for European insurers, as it heads towards its planned implementation date of 1 January 2013. The annual Deloitte UK Solvency II survey shows that in the next six months, European insurers will have as their priorities:● implementation planning, ● embedding the changes into culture via personal incentivisation

and rewards, ● risk management and setting risk appetites, and ● data handling and infrastructure. Additionally we are starting to see the capital changes having real implications for businesses tactically and strategically – there has been restructuring of businesses (to maximise capital efficiency), and potential M&A activity to inorganically support changes in product mix strategy (redesigning, repricing or in particular we see a number of insurers looking to move away from long term guaranteed products, which attract heavy capital requirements).

In Australia, APRA’s Life and General Insurance Capital (LAGIC) standards also continue to gain momentum, with strong parallels to Solvency II through the 3 pillar regulatory approach, as well as local parallels to APRA’s requirements for ADIs.

The planned implementation date for LAGIC is also 1 January 2013.

APRA has been active within the industry – it released its 31 March 2011 Response to Submissions following the industry’s Quantitative Impact Study 1 (QIS1) and followed this up with a number of industry Q&A sessions; the most recent on 9 June 2011. Whilst APRA did not divulge much new information about the shape of future requirements at the 9 June 2011 session, it was a good opportunity for APRA to get a sense of the ongoing concerns from the industry ahead of the

industry submissions to APRA after QIS2 (submissions to APRA due 31 July 2011).

In short it is clear APRA has heard the industry’s concerns on a number of significant issues. Its new proposals aim to reduce aggregate industry capital requirements (relative to QIS1), complexity and pro-cyclicality in a number of areas. However, on other topics, APRA continues to hold its cards close to its chest. For example, the industry continues to press for more information on supervisory adjustments, the ICAAP process, and allowances for liquidity premiums. Each of these is covered in more detail below.

Nature and reasons for supervisory adjustments to Pillar 1 capital Whilst the possibility of supervisory capital adjustments is not new to ADIs, it is causing concern amongst insurers. Concern is due to the perceived lack of transparency as to how it will be set by APRA and for what reasons. This makes it hard for insurers to advise their Boards on how to avoid any adjustment. In APRA’s Q&A session on 9 June 2011, APRA reiterated that there would be significant dialogue with the insurer on this topic, that there will be transparency to the insurer as to the reasons for any adjustment so that appropriate action could be taken. APRA highlighted that there would be opportunity for such insurers to improve their operations and processes to avoid any proposed supervisory adjustment to Pillar 1 capital.

As any supervisory adjustments are not to be disclosed publicly, they will be reviewed on a case by case basis. The rule of thumb is that Pillar 1 assumes an entity is well managed, has sound governance, has effective risk management, and has an adequate ICAAP. In such a situation it is unlikely that a supervisory adjustment would apply. Examples where one might be applied include where the insurer’s risks are very specific and not adequately allowed for in Pillar 1, the insurer has high growth plans, a changed strategy, and/or an unusual risky business model.

solvency ii and ‘lAGiC’

Life & General Insurance Capital (LAGIC) Exploring the implications APRA’s ‘LAGIC’ is Australia’s Life and General Insurance equivalent for regulatory capital requirements. It is a three pillar approach mirroring APRA’s requirements for ADIs and international capital requirements under Solvency II.

•  Focus for organisations within Pillars:

Liquidity Risk

Insurance Risk

Market Risk

Credit Risk

Operational Risk

Pillar 1 Quantitative

Requirements

Required Capital

Eligible Capital

Quality of Capital

Pillar 2 Qualitative

Requirements & Rules on Supervision

Risk Management & Capital Management

practices (ICAAP)

Supervisory adjustment

Pillar 3 Supervisory

Reporting and Public Disclosure

Transparency

Disclosure requirements

APRA s LAGIC

•  Benchmarking modelling environment to industry best practice

•  Adapting and enhancing models to be flexible

•  ROC assessments

•  ICAAP design & implementation

•  Risk appetite

•  Stress & scenario testing

•  Business monitoring tools

•  Design risk metrics to report externally vs. internally

•  Implement/enhance existing reporting requirements

Source: Deloitte Actuaries and Consultants 2011


17

▲

review

Internal Capital Adequacy Assessment Process (ICAAP)The ICAAP is the process an insurer will now need to go through to internally assess the adequacy of their capital. APRA has stated that it is not just the process it is interested in, but also the outcomes from it.

The process needs to be owned directly by the Board with a report of the ICAAP being submitted to APRA annually. The process covers both risk management and capital management aspects and it should particularly include: ● Risk appetite setting and review process, with supporting risk

metrics/buffers and planned actions should those buffers be breached i.e. it needs to be embedded into the day to day operations of the business.

● Target surplus policy and details with regards to how the business will be managed when capital falls below target surplus levels. To understand where to set its target surplus levels, the insurer needs an assessment of the capital which it believes it should hold for the risks it bears (i.e. the ‘economic’ capital, which will usually be different to the regulatory capital). On this APRA has indicated that the level of sophistication in modelling would be expected to vary depending on size and complexity of the insurer.

● Capital projections for at least three years, which should be based on scenario testing. APRA raised the concept of ‘reverse’ stress testing; where the insurer should consider the situation(s) where it may be vulnerable to a breach of its target surplus and then stress test the process, and assess outcomes of that stress test.

Insurers who are part of a conglomerate group are sensibly looking to leverage off the ICAAP processes that already exist from its related ADI entity. In doing this, insurers need to bear in mind not only that insurance risk and interest rate risk are more important to it than the ADI, but that the ICAAP must be owned by the insurer’s Board and managed to the operations of the insurance entity. This is clearly a complex set of interactions to get right by the business as it requires stakeholder communications and collaboration across a number of different business functions within the insurance arm (actuarial, finance, risk management, IT) as well as the relevant ADI.

More will be said by APRA in October 2011 in its response to the industry after QIS2. However we believe that an insurance working group (and stakeholders from the related ADI where relevant) needs to perform a gap analysis, and start designing and planning for implementation of Pillar 2 now.

Pillar 1 quantitative proposal on liquidity premiumsAPRA is still considering whether to allow a liquidity premium margin to the capital requirement risk free rate for certain products. Without this, capital requirements for annuities in particular will become significantly more onerous than before. APRA appears to be more visibly working with the Institute in this area, and in addition has stated that it is monitoring global developments. However liquidity premiums will only be allowed if APRA can find some objective and reasonably robust way to measure this (particularly in times of stress) and if it does find a basis to use, it is

likely that such basis will be prescribed to ensure consistency.

Our view of the challenges ahead…● There’s much to do in a short period of time: Insurers have

finalised QIS2, with submissions to APRA handed in by the end of July 2011. ICAAP design and planning needs to start in earnest now. Insurers need to be ready for the October 2011 changes to Pillar 1, and implementation of models following that. Pillar 3 requirements will be coming out in late calendar 2012, leaving little time to implement reporting and disclosure requirements before 1 January 2013. All this needs to be planned and done around ‘business as usual’.

● Complex interactions to manage within the insurance functions and with the ADI where relevant: The multi-disciplinary requirements of the Pillar 1 changes (actuarial, technology and systems) and Pillar 2 changes (board ownership of risk and capital management, risk functions, actuarial functions, processes and operations, remuneration) requires strong communication and program management.

● Real business implications from these changes are firstly tactical, but the insurers who will get the most out of these regulatory changes will be the ones who prepare themselves strategically: there are strategic challenges in terms of product (relative capital requirements changing) and cultural change including ownership of ICAAP and involvement of Board in scenario setting.

The next sixteen months will hold a number of significant challenges, however there is also an opportunity for insurers to manage a tight program of change and to gain deeper insights into the risks they face moving forward. Most importantly, the most successful programs will go beyond compliance and will maximise the possible strategic and competitive benefits from the work completed. ▲

Trang [email protected]

Michael [email protected]

© 2011 Deloitte Actuaries & Consultants Limited

The window for change

Jan 2011 Jan 2012 Jan 2013

QIS1 Oct 2010

Response & Draft

Standards Oct 2011

APRA Response Mar 2011

Discuss Paper

Jun 2010

QIS2 1 May- 31 Jul

1st Reporting Period from 1 Jan -31 Mar 2013 Final

Standards Apr 2012

Final Reporting Standards Oct 2012

Submission due 31 Jan

Submission due 31 Jul

Draft Reporting Standard May 2012

today

today

APRA’s tight timeline for implementation of the standards means businesses need to ready themselves in and around “business as usual” activities .not just for Pillar 1 but now also Pillar 2.

Sources: 1. Solvency II Survey 2011 Insurers’ Responses to Evolving Rules, Deloitte

UK (4th annual survey)2. APRA’s Response to Industry Submissions on Life & General Insurance

Capital (LAGIC): Commentary and Implications, 7 April 20113. APRA Insurance Capital Seminar, 9 June 2011


18

This article is based on two Institute Biennial Convention papers, Actuarial Management of Health Funds in Australia (2007) and When too much is not enough: capital in a mutual health fund (2011), where the ideas are more fully discussed and referenced.

A dysfunctional form?

“The trouble with the world is that fools and fanatics are always so certain of themselves and wiser people so full of doubts.” – George Bernard Shaw

Actuaries often express the view there is something rather wrong with private health insurance (PHI) in Australia. Comments below, reported in the April 2011 edition of Actuary Australia in response

to survey questions about community rated flood insurance, are common:

● With community rating, the government (i.e. taxpayers) ends up picking up pieces when the pricing is deficient.

● Look where community rating has got us with health insurance – inefficient funding of health services via piecemeal, notionally private sector insurers supported by the threat of punitive taxes in order to compel purchase of their product by those whose interests would clearly be better served by not buying health insurance.

● Community rating with self-selection is a recipe for disaster.

As an economist, I do not believe that distorting prices is an ‘optimal’ way of redistributing income. Nevertheless, there are trade-offs. In Australia, in 2009-10, the average claims ratio was 101% for CTP and 86% for PHI, two products with a substantial element of community rating, and a mere 35% for individual risk products in life insurance (see Figure 1 below).

The paraphernalia of actuarial assessment and intermediated distribution is costly to consumers. Healthy young people may be slightly better off with risk rated products, even after two thirds of the premiums are taken in administration and sales costs, but sicker and older people are not. Equity itself has a cost, and simplicity is often more efficient and better serves the broader social interest, even in private insurance markets.

private health insurance

– DEALING WITH UNCERTAINTy AND INSTAbILITy

CTP PH

I

Mot

or

Hou

seho

ld

Gro

up li

fe

Trav

el

Ind

ivid

ual l

ife

Cre

dit

Mor

tgag

e

Figure 1

comment

Source: APRA & PHIAC


19

▲

comment

How PHI evolved

“The single most important thing about a free market is that no exchange takes place unless both parties benefit.” – Milton Friedman

Private health insurance has a long history in Australia. From early European settlement and gold rush days, there has been a strong private health care market in Victoria courtesy of the friendly society movement. After Federation, attempts to introduce welfare systems similar to those in Europe and America were frustrated by ideological and constitutional issues, and private health insurance continued spreading across Australia in this vacuum. Hospitals and doctors set up organisations similar to the large Blue Cross Funds of the USA to complement their private health services. The National Health Act 1953 consolidated the basic principles of the Australian system, with mandated benefits, community rating, voluntary participation and competition among insurers, and these have remained largely intact ever since.

Participation peaked at more than 80% of the population during the 1960s and 1970s. The industry had to weather the shock of Medibank in 1975 and its reincarnated clone Medicare in 1984, which destabilised the demographics, setting off the familiar spiral of rising claims and premiums. Coverage fell to 30%, its lowest point, in 2000 and one reform after another was made to stop the decline. Reforms included prudential regulation with minimum reserves to stabilise the finances; risk equalisation to spread bad risks; tax rebates to help competition against the “free and universal” Medicare; and lifetime health cover to encourage early joining. Ultimately, participation was lifted again, to around 50%, where it has largely stabilised during the past ten years.

The Australian markets in health services are generally large, complex and highly regulated. Many are characterised by monopolies and mismatches of supply and demand, and there is a bewildering patchwork of subsidies and tax shelters, with highly distorted prices. Arguably, PHI adds some competition and price signalling, and some elements of economic rationality, to this system. What about actuaries in PHI?

“The only sustainable advantage is the ability to learn faster than the competition.” – Arie de Geus

Actuaries have long been involved. Friendly Societies have been subject to actuarial regulation for many years under State laws and, although the National Health Act 1953 imposed no formal actuarial requirements, some of the major insurers also used actuaries. For example, during the 1950s, Alf Pollard was Chairman of MBF, then the largest health insurer, and Tig Melville was a consultant to its major competitor in NSW, HCF. By the 1970s, a number of actuaries, including David Watson and Brent Walker in Sydney and Allen Truslove and Carl Stevenson in Melbourne, worked in the industry. The 1989 reforms gave the profession a statutory role, as trouble-shooters for failing insurers, thereby opening up a continuous and productive relationship with the newly established financial regulator, the Private Health Insurance Administration Council (PHIAC). It also helped educate a cohort of actuaries in the

ways health insurers can fail. Subsequently, the role was broadened until, in the Private Health Insurance Act 2007, a statutory requirement was imposed on every health insurer to have an Appointed Actuary.

Actuaries have made influential contributions to the development of the industry during this period, through submissions, committee work and research. In my 2007 paper, I cited 27 publications during the period from 1959 to 2005, by 19 different actuaries, addressing matters such as pricing, reserving, experience, risk equalisation and capital management.

Three practical matters I have found important in PHI are the competitive positioning of products, managing profitability without control over claims, and building buffers for when it all goes awry, and I address these below.

Product positioning

“What we obtain too cheap, we esteem too lightly.” – Thomas Paine

How an insurer orients products to those of its competitors sets the foundation for its actuarial management, and determines the risk pool attracted and its ultimate financial outcomes. Obstetricians, surgeons, orthodontists, opticians and hospital administrators tend to recommend insurers with generous benefits. Politicians denounce gaps and deductibles. Customers view PHI as a smorgasbord where they can add and subtract covers, and move from single to couple to family status as it suits their circumstances. There is fluidity over products, and across insurers too, encouraged by the portability rules of community rating.

Ultimately, insurers themselves must provide financial value. Offering the best covers at the cheapest prices, in a competitive market, soon results in a weak balance sheet and continual crises. It is good, therefore, as a basic actuarial strategy, to set benefits a little below the highest levels on offer, and to avoid floodgate or tipping points where the risk pool becomes unbalanced and claims escalate rapidly. The actuary needs to employ a range of devices at the benefit design level to limit cherry picking and to array around each price point a broad and stable pool of risks. It is important also to avoid disturbing established risk pools in pursuit of new business.

Actuaries have made influential contributions to the development of the industry addressing matters such as pricing, reserving, experience, risk equalisation and capital management.


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Profits

“Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” – Charles Dickens

Historically, profitability was rarely an explicit goal in the mutual and benefit-focussed culture of the PHI. In my observation, aiming for and maintaining profits are the most effective measures for stabilising an insurer. Prices as a whole must be adequate to cover costs, but it is a sound principle also that relative prices reflect costs across the various components of the business.

Failure to tune prices to underlying cost patterns leaves an insurer vulnerable to rapid growth of its unprofitable business and a loss of stability. Many in the PHI market have failed from loss leading, whether deliberate or not.

Cross-subsidies are entrenched in the rules of the business, but can be eliminated across community rated price points even if those within each price point must remain.

Adequate pricing is ultimately about understanding costs, and in a risky or uncertain business, actuarial management is rather like travelling backwards into Redington’s famous expanding funnel of doubt. In PHI, the political processes for adjusting prices require forecasting for at least sixteen months ahead, and with large and volatile cash flows and narrow margins, misjudgements can be serious. I have found it helpful to disaggregate costs and track them in groups reflecting the nature of the cost driver involved, as follows.

● Hospital costs borne directly by insurers, driven by demographics over which insurers have influence only in the long term, and by clinical decisions outside the insurers’ control.

● Hospital costs borne by the risk equalisation system, a share of the total claims from all insurers in the various State pools, over which individual insurers have little control.

● General treatment costs, comprising reimbursements for non-hospital care, such as dental, optical and physiotherapy services and similar, and controllable through the design and benefit limits of the insurers’ own products.

● Administration costs, typically not large but which often receive disproportionate attention because they are most obviously within the control of individual insurers.

Across the PHI as a whole, these costs typically split about 30:30:30:10 respectively, but the mix varies considerably from product to product. Allocating and projecting them accurately for each price point are the keys to managing relative prices and profitability.

Capital in an unfunded industry

“Sometimes one pays most for the things one gets for nothing.” – Albert Einstein

For many years, PHI was regulated without prudential requirements and insurers were actively discouraged from accumulating capital. It was only in 1989, in the wake of the Medicare trauma to the industry, that minimum reserves were mandated. This evolved into the present ‘green-amber-red’ system of capital adequacy and solvency requirements.

In the early 1990s, two of the largest insurers, HBA in Victoria and Mutual Community in SA, were rescued from insolvency with an injection of external capital. Under the new ownership, first of National Mutual/AXA and then BUPA, the demutualised entities experienced dramatic increases in profitability and value. This had a demonstration effect across the PHI industry and there was a change in the attitude to capital, coinciding with similar developments in banking and insurance elsewhere. In the period from 1997 to 2009, nine further insurers were demutualised or established on a for-profit basis, including Medibank Private itself, which is owned by the Commonwealth Government.

There is now a mix of capital structures in the PHI market, with some insurers using a for profit (FP) and others a not-for profit (NFP) model, and there are also hybrids where the insurer operates as a FP while the group to which it belongs is a NFP. Market shares and solvency capital ratios of the three groups, as at June 2010, are shown in Figures 2 and 3 below.

Figure 2

Figure 3

Source: PHIAC

Source: PHIAC


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The role of capital within the PHI has been discussed by actuaries from time to time over many years, and it has become particularly topical since 2010 when PHIAC required all insurers to develop and file capital management plans. Notwithstanding their pay-as-you-go nature, health insurers require capital for a number of reasons, including the following:

Economic

– Like any business, a health insurer requires working capital for its business operations and obligations for employees, premises, equipment, ultilities, marketing, sales and compliance. A health insurer is also exposed to other risks, such as fraud, theft, sabotage, loss or damage to key resources, sovereign risks such as changes to tax or regulation, and changes in the conduct of complementary businesses such as doctors and hospitals. Further, insurers are exposed to the risks associated with dealing in financial instruments and obligations, including overestimating assets, undervaluing liabilities and misjudging prices.

Prudential

– There are prescribed accounting rules, such as those relating to premiums paid in advance and unpaid claims, and there are also prescribed solvency and capital adequacy rules. Most insurers hold additional capital to avoid the consequences of any temporary or accidental breach of the prudential benchmarks.

Market

– Insurers may also be exposed to capital markets to access finance, and consequently, to market assessments of their governance, management, labour relations, profitability and risk mitigation. They may be subjected routinely to ratings, requests for explanations and to public comment, scrutiny and speculation.

All insurers must satisfy both the economic and prudential requirements, and those with external financing must heed the judgements of the capital markets, too.

Where profit is a motive, increases in capital above the minimum are usually driven by marginal profit, expressed, for example, in hurdle rates. Capital tends to move to its most remunerative use.

Mutuals often serve community needs which are not met by profit-motivated firms, and they may have social and philanthropic aims, too. Their financing is not so constrained by profitability. Capital is accumulated gradually by conservative financial management and is relatively immoble. It is not readily supplemented and reserves are often held to meet unforeseen situations and to mitigate uncertainties inherent in the business.

Long term strategic management of a mutual has been likened to a parental role in a family dynasty, where wealth is nurtured and sustained, and passed on to each generation of stakeholders in a process sometimes called steering the estate. In my recent papers, I have described three broad approaches to running a mutual, using the somewhat colourful analogy of flying a plane over rough terrain in changeable weather:

Ground hugging

– The insurer operates with little capital and returns all profits to policyholders. Flying low means tracking each valley and hill, reading situations with little room for error, and manoevring fast. The journey is bumpy, and of course, accidents are disastrous.

Safe and sound

– There is a cushion to cope with the unexpected, but not enough for major capital outlays. The flight avoids sudden changes of height and direction with the terrain, but bad weather and other traffic may interfere. Flying higher is more relaxed, and there is opportunity to read the landscape and avoid obstacles early.

High flying

– The insurer has more than adequate capital and can be an active player in strategic changes. The flight not only avoids changes in terrain, but is above most of the weather and other traffic, too. Flying can be done on cruise control, exploiting opportunistic tail winds, and avoiding competitors and turbulence at the lower altitudes.

An accumulated estate provides investment revenues that can give a financial advantage to a NFP insurer. Not being required to match specific liabilities, the estate can be invested for high long term returns, and so long as enough is retained for the estate to grow in line with premium revenues, subsidies can improve consumer value without weakening the balance sheet. Insurance markets, in my opinion, are well served by competition between FP and NPF insurers.

Where to?

“The difficulty lies not so much in developing new ideas but in escaping from old ones.” – John Maynard Keynes

In practice, actuaries exposed on a practical basis to this industry have to unlearn some old and conventional attitudes. For most forms of insurance, the environment is stochastic and the focus is on assessing liabilities and assets. For PHI, the environment is uncertain and highly politicised, and the focus is on managing huge, finely balanced cash flows. I have found it a fascinating challenge. ▲

Peter [email protected]

For PHI, the environment is uncertain and highly politicised, and the focus is on managing huge, finely balanced cash flows.

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Crossing the River (AA160 Solution) AA160 featured a cryptic crossword. The solution to the crossword is given below:

19 correct answers were submitted. The winner of this month’s In the Margin prize, selected randomly from among the correct entries, was Adrian Wong, who will receive a $50 book voucher.

BoulderdashHaving made their way through the Maze of Doom, Allan Quatermain and Katherine Gainsborough found themselves standing at the base of a cliff. The path ahead of them seemed clear, but the eerie silence made them draw closer together.

“Up there!” said Katherine, pointing at something above their heads. Allan looked upwards, and saw a horizontal wooden beam jutting out from the cliff-face. 17 vertical columns of rocks were standing on the beam, which seemed likely to collapse at any moment.“Is it some sort of a trap?” asked Katherine.“I don’t think so,” said Allan.“Then what is it?”“I think it’s some sort of a puzzle.”“What are we meant to do with it?”“Solve it, I guess.”

This month’s puzzle is a letter drop puzzle. The solution to the puzzle is a phrase that will fit in the white squares of the grid provided, reading horizontally from left to right, with the black squares indicating spaces between words. The letters that make up the phrase have been scrambled in the space above the grid and must be unscrambled and placed in the grid. Each letter appears above the column in which it belongs. All you need to do is determine the correct row to place each letter in.

Additional examples of this type of puzzle, and a video on solving them, can be found at www.dropquotes.com. ▲

puzzles

In the Margin with Genevieve Hayes “I have discovered a truly marvelous proof of this, which this margin is too narrow to contain” – Fermat.

with Genevieve Hayes

“I have discovered a truly marvellous proof of this, which this margin is too narrow to contain” – Fermat

in themargin@actuar ies.asn.au

For your chance to win a $50 book voucher, email your solution to: [email protected] .


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i was excited to read Gae’s helpful hints about preparation for the annual performance review meeting in the May Actuary Australia (‘Ask Gae’). I thought it may be interesting to expand upon Gae’s advice and consider some additional

communication tips that may be valuable for such meetings…

When preparing for the meeting there is an obvious focus on you: your role, KPIs, achievements, talents and disappointments – not necessarily in that order. However, it is critical to remember to spend some time thinking about the other person in the meeting. We all know that communication is a two-way activity. So, what do you know about your reviewer and how might that help you in the meeting?

● Think about your reviewer’s communication style. If they like written evidence of your achievements then prepare a handout. Make it detailed if they like detail or use graphs if they like pictures. Don’t bother if they just want to talk. And if you are not sure about any of their preferences, it won’t hurt to ask what they would like you to bring along.

● Consider their thinking patterns when ordering your part of the conversation. They may like a chronological account of your year. Alternatively they may prefer it sorted into segments. They may appreciate a top down account (ie overall summary against your main objectives, then working down to specifics). Others like it built from the bottom up.

● You might like to think about their conversation style. Do they employ formal or informal language in these meetings? How colloquial should you be? Do they welcome first person descriptions or put more weight on third person references?

● Finally, you might dare to speculate on what mood your reviewer will be in. Is this a pleasant task for them? Do they seem to be more relaxed and positive in the morning or afternoon? When is your meeting scheduled? Who are they meeting before you and what impact will that have on their mood? If the mood is likely to be unfavourable, see if you can reschedule. If that’s not practical, think about how to start the conversation with the aim of improving it.

Another critical principle that applies to any communication is being clear on your message and your outcomes. By the end of the meeting, what is the most important thing that you want your reviewer to be thinking about you? How will you ensure that message is received? You might like to think of specific outcomes

that you would like to achieve. This might be the right time to express your interest in a promotion or at least a change in your role and responsibilities. It may also be an appropriate time to seek approval for a particular development program.

In all of this planning about your outcomes, what you are going to say and how you are going to present it, you could easily forget that the other fundamental skill you will need is listening. When your reviewer is providing their perspective it is really important that your active listening skills are fully operational:

● When they are commenting favourably about your performance, be open to the praise and perhaps explore what they really liked. E.g. If you hear “your reports are very clear” you might pursue it further. E.g. “What is it about my reports that make them clear to you?”

● When they are commenting unfavourably about your performance, be curious and not defensive. There is an obvious human temptation to be defensive, however a more effective response is to enquire further, seek specific examples and ask what they can suggest would help.

● In listening to your reviewer’s assessment, remember that they are merely communicating their perception. Hence, your mindset should be conditioned to exploring their impressions, rather than responding via your version of reality. People often take time to shift their impressions so don’t be too disappointed if your reviewer is not enthusiastic about the improvements you think you have made since last year.

Finally, to ensure that the communication is successful, a summary of the outcomes would be beneficial for both parties. If your reviewer doesn’t wrap up the meeting , then you should attempt a short review of the main points. And please, don’t forget to thank your reviewer for their open and honest assessment!

It takes more than maths to plan and execute a successful performance review meeting – by employing great communication skills. ▲

Martin [email protected]

more than maths

surviving Your Annual performance Review meeting


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T he Institute seeks to participate in public policy development and debate where there may be strategic opportunities for actuaries, or where actuarial involvement may have public benefits. But does public policy really benefit members?

The Institute participates because it believes appropriate participation in the public policy sphere can benefit members in three ways:

1. It enhances the reputation and profile of the actuarial profession as a whole. It consolidates the role of actuaries in existing areas of practice and targeted policy participation can assist the profession to expand into new practice areas, such as enterprise risk management and health financing, with flow-on benefits to individual members, including wider employment opportunities.

2. It presents opportunities to individual members. For example, the Institute is at times approached to recommend an actuary with particular expertise to sit on a committee or provide input in other ways. The Institute also encourages individual actuaries to develop direct relationships with policymakers.

3. It improves the overall standard of policy decision-making in Australia, thereby benefits actuaries together with other members of the public.

How the Institute approaches participating in policyThe Institute aims to play the part of non-partisan thought leaders and trusted advisors. Sometimes there is pressure from policymakers and other groups for the Institute to take a particular (or any) stance. However, the Institute’s position is that its members benefit most when it provides an actuarial perspective to critique options rather than take sides in what may be ideological debates.

One of the few areas where the Institute does have specific policy is our support for raising the Superannuation Guarantee (SG) from 9% to 12%. There has been member feedback that this policy may not be in everyone’s best interests, particularly those on lower incomes. Such feedback is valuable, and informs the way the Institute explains this policy in its discussions with policymakers.

There has been significant work done in the last year constructing four key policy positions, policy principles and a policy development and approval process. The four key policy areas are Energy and the Environment; Health; Retirement and Enterprise Risk Management. They can all be viewed on the members’ section of the website, under ‘Public Policy and Media’.

The Institute develops policy in close consultation with members, the Public Policy Council Committee, Practice Committees, taskforces and working groups, contributing to public policy by providing actuarial perspective to policy-makers and making submissions to reviews and inquiries.

As the Institute has no full-time policy staff, it’s particularly grateful to members who volunteer their time to contribute to enhancing the reputation and profile of the actuarial profession through participation in public policy. Consultants provide support at the direction of the CEO Melinda Howes, work with committees and prepare submissions.

Good publicpolicy

Institute involvement in public policy debates: How it benefits actuaries

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Case study: the Flood Debate

The flood debate is a good example of how the Institute can appropriately and effectively contribute to public policy development. The Institute set up a Flood Working Group a few years ago. The recent Queensland floods prompted government to seriously consider the availability and affordability of flood insurance. The Institute has been able to provide past papers to policy makers for background on the issues, plus relevant overseas research. There was concern that the public debate on flood policy was lacking, so the Institute organised a seminar which brought together engineers, hydrologists, government and others, which was very well received. We also draft submissions to government inquiries.

Case study: Actuaries in the Energy sector

The Institute is soon to commence discussions with the Australian Energy Regulator and the Australian Competition and Consumer Commission (ACCC) about actuarial certification of the notional costs of self-insurance for energy companies and others. There is much uncertainty around potential cash flows and environmental consequences related to various energy options, and the actuarial skill set appears suited to the consideration of conflicting financial and social interests. The challenge is to develop a role for the profession in an industry where actuaries are not recognised as having relevant expertise.

Case study: Retirement incomes

The Institute has been very active over the past two years in the retirement incomes policy arena, making several submissions to the Henry Tax Review and the Cooper Superannuation Review, together with pre-budget submissions. Although there is much more work to be done to address the issue of longevity risk, the Institute was pleased the Federal Government followed its recommendation and allowed older Australians to boost their standard of living in retirement by working part-time without jeopardising their pension income in the May 2010 budget. The Institute will continue to participate in retirement incomes policy, and plans to be involved in the October 2011 Tax Summit.

Policy-makers and the InstituteThe Institute has three target audiences when participating in policy: policy-makers, members and the public.

The actuarial profession does not have a high profile with some policymakers, so getting our skills recognised and expanding our spheres of influence will hopefully result in better policy with long-term benefits for the profession.

Most of the Institute’s policy interactions are with the federal government and with financial regulators. The Institute works closely with APRA facilitating discussion and feedback on policy developments, for example, on capital standards. Actuarial reporting is mandatory for companies regulated by APRA, and the Institute must ensure financial condition and other actuarial reports are seen by companies as providing insights, and are not just compliance documents.

The Institute is currently in discussions with Treasury and the Australian Tax Office to secure an exemption for actuaries from having to register as tax agents.

How to get involvedOne of the initiatives the Institute is looking to develop is to work with individual actuaries to get relevant and interesting actuarial research out to a broader audience. Actuaries’ numerical analyses often reflect important underlying societal trends which can be communicated to a lay audience through presentations at appropriate events and opinion-pieces in mainstream media.

Being around the Institute offices can also be rewarding, as you run into acquaintances and forge the fellowship aspect of being an actuary. We would like to see more young actuaries involved with the Institute. It is a great learning opportunity to work with leaders of the profession on issues of importance to our work but also to our wider society.

If you are interested in getting involved in any of the Institute’s activities, please contact Julia Purves at [email protected]. ▲

Rick [email protected]

Rebecca [email protected]

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The actuarial profession does not have a high profile with some policymakers – so we aim to have our skills recognised and increase our sphere of influence.


26 report

It is 5:45pm on a cold Thursday evening in June. A young actuary arrives at the PwC concierge in Darling Park and is shown to Level 10, then another and another. The arrivals turn into a steady trickle, the trickle becomes a flood, and before

long the concierge is buzzing with actuaries queuing to sign into the building. Surprised passer-bys wonder aloud what all the fuss is about, while some mutter that all this commotion is getting in the way of dedicated PwC employees returning to the office after a day at the client’s. I cheerfully reply, “So sorry, we will have this space cleared in just a moment. PwC is hosting the Young Actuaries Program tonight and the response has been overwhelming.”

It has taken a paragraph to set the scene for the second Young Actuaries Program event for the year. This event, after all, was about all things career. From the state of the current local actuarial job market to salary benchmarks, Acumen Resources generously shared their expertise from years of experience in the field of actuarial recruitment. The seminar commenced with John Killick covering the range of employer options available to actuaries. These include large and niche corporates, actuarial and management consultancies, reinsurers and brokers. He moved onto general trends in the job market for different fields such as Life, General, Super, before narrowing in on trends seen pre-GFC, across 2009, 2010, and into 2011.

While I did not know of the statistics or intricacies going on in the market previously, I had certainly gained a ‘feel’ for what was going on in the last couple of years and relished the opportunity to finally gain a clear picture of what had happened. In the pre-GFC years, the number of actuarial jobs was greater than the number of candidates, and due to recruitment and retention requirements there was upward pressure on salaries. Over 2009 the number of actuarial jobs fell to the lowest in nearly 10 years along with pressure to keep

salaries down. Job activity improved steadily each quarter in 2010, however there was still a cautious approach to replacing and adding staff, while the market size shrunk due to further consolidation of large employers.

And into 2011? There have been continual increases each quarter in job activity however, this has not been across all sectors. John pointed out the further consolidation of AMP and AXA putting two of the largest life employers on the recruitment sideline, and commented on features of the local market. For example, out of the 100+ actuarial employers in Australia and New Zealand,

Young ActuariesPROGRAM

– ACTUARIAL OPPORTUNITIES

John Killick Fred Rowley

Session in progress


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around 70 per cent have less than twenty staff. Many smaller niche sector employers are looking to take in their first in-house actuarial staff. The lack of graduate numbers in the 2008 and 2009 intakes are also starting to impact on recruitment as it is now extremely difficult to find staff with one to two years experience. Employers are having to broaden their experience requirements, or choose not to hire altogether. A wealth of information was dispatched. And with that, John was off to catch a plane.

Martin Moss then took over to discuss markets in the UK, Ireland/ Europe, Asia and the US in detail. He covered the areas of demand in each region, how easy (or not) it is to obtain certain visas, and of course remuneration. While overseas packages may have been attractive in the past, the strong AUD in recent times is now making them less lucrative. And another spanner to throw in the works - actuaries overseas generally qualify with more experience than Australian actuaries due to the structure of education pathways - so this also has an effect on remuneration.

Sitting in the audience, I began to feel a stir around me. I believe people were starting to wonder whether the topic of remuneration in the local market was going to be discussed as promised. Then lo and behold, Jenny Lyon took to the lectern and clicked to the next slide: ‘Salaries’. I kid you not, everyone sat up straight.

Jenny first discussed the components of packages, such as base salary, super, bonus (typically discretionary in Australia) and ‘other’, including discounted insurance, disability cover, reduced mortgage rates etc. We were warned that it is a common mistake to forget about less obvious components of your overall salary package when negotiating with prospective employers. Then charts and tables

appeared on the screen. There were charts with numbers showing salary ranges for graduates, for those newly qualified, and for those five and 10 years post qualification. The room began to buzz as people turned to whisper to their neighbours or borrow pens to take notes. It would take up too much space to display the results here, but should you be interested in obtaining a copy of the evening’s presentation, feel free to drop me an email.

There was one more speaker for the evening – former President of the Institute, Fred Rowley made a surprise appearance. He had come to whet our appetite about the possibility of holding the International Congress of Actuaries 2022 in Sydney, and that we, the young actuaries today would benefit the most from the conference. Personally I believe winning the bid and hosting the conference would be a very worthwhile endeavour, and that we can certainly put together a bid video that rivals Germany’s 2018 bid submission. I’m sure those of you who stayed to watch Germany’s submission would agree.

If you happened to miss out on attending the June YAP seminar, please join us for the next event, to be held sometime in September. Did I mention the lovely venue, fabulous food and drinks (courtesy of PwC) and like-minded crowd which made for a very relaxed networking environment? So come along, even if it is simply to meet new people and catch up with friends in the industry. ▲

Keri [email protected]

The YAP committee would like to extend their appreciation to Acumen Resources, PwC and the Institute of Actuaries of Australia for their support in making this event a success.

Jenny lyon, Martin Moss and John Killick


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Part III Results Semester 1 2011

I n Semester 1 2011 the Part III pass rate, including non-Fellows in the Course 7A ERM course was 36%. This represents a drop of 4% on the previous semester’s pass rate of 40%. The

Part III pass rate excluding the C7A ERM course was 39% for Semester 1 2011. This compares with 41% in Semester 2 2010 and 42% in Semester 1 2010. The pass rates since 2006 (including C7A for non-Fellows in 2011) are as follows:

2011 2010 2010 2009 2009 2008 2008 2007 2007 2006 2006

(1) (2) (1) (2) (1) (2) (1) (2) (1) (2) (1)

36%* 40%* 40%* 40% 44% 49% 44% 41% 38% 38% 37%

* The pass rates above for Semester 1 2011, Semester 2 2010 and Semester 1 2010 includes non-Fellows only in the Course 7A Enterprise Risk Management Course. This course is both a Part III course and leads to the Chartered Enterprise Risk Actuary (CERA) designation, so it is also attempted by Fellows.

Below are the pass rates for each course in Semester 2 2010 compared with the previous two semesters:

Course and Semester 2011 2010 2010

(1) (2) (1)

Course 1 Investments 33% 31% 35%

Course 2A Life Insurance 30% 31% 28%

Course 2B Life Insurance 39% 41% 44%

Course 3A General Insurance 33% 36% 37%

Course 3B General Insurance 34% 40% 35%

Course 5A Investment Management and Finance n/a 53% n/a

Course 5B Investment Management and Finance 38% n/a 56%

Course 6A Global Retirement Income Systems 50% n/a 25%

Course 6B Global Retirement Income Systems n/a 54% n/a

Course 7A Enterprise Risk Management ** 21% 34% 19%

Course 10 Commercial Actuarial Practice 59% 55% 59%

** pass rates for C7A ERM above are for non-Fellows only.

In Semester 1 2011, 3 Fellows sat and none passed. 82 non-Fellows sat and 17 passed (overall pass rate 20%). The low pass rate for Fellows is very unusual compared to previous semesters, where the pass rate for Fellows was significantly higher than non-Fellows. In Semester 2 2010 10 Fellows sat and 8 passed (overall pass rate 40%). In Semester 1 2010 10 Fellows sat and 6 passed (overall pass rate 25%).

Pass rates and exam centresThe pass rates by exam centre categories for Semester 1 2011 (including only non-Fellows in C7A ERM) were Sydney (35%), Melbourne (40%), Other Australian (52%) and Overseas (33%).

This compares with pass rates by exam centre for these categories for Semester 2 2010 of Sydney (42%), Melbourne (45%), Other Australian (26%) and Overseas (31%). ▲

Philip Latham Head of [email protected]

education UpdAtE

education

Sydney Presidential & Fellowship DinnerBarry Rafe, President

is delighted to invite Members and Guests to the

PReSIDeNTIAL & FeLLOWSHIP DINNeR

on Tuesday 13 September 2011 7.00pm till 11.30pm.

VenueDarling Rooms I & II / Dockside, The Balcony Level

Cockle Bay Wharf, Darling Park, Sydney NSW 2000

Cost$130.00 per person / $1300.00 for a table of 10 (GST inc.)

Dress CodeBusiness Attire

For further information visit: http://www.actuaries.asn.au/eventsandNetworking/Upcomingevents.aspx

invitation


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On a balmy Friday‘s midday, one week into the university mid-year break, a coach full of budding actuaries made the three-hour drive down to Warrumbui near Canberra for a weekend promising of adventure –

Tomb Raider themed.

UNSW Actuarial Society Camp is aimed at furthering the bond between students across all years. It is an event that allows everybody to get away, unwind and let loose far away from university, parents and city life.

At 4pm, we arrived at the Warrumbui camp site, our cosy retreat for the weekend. Inside, the dining area opened out into a circular amphitheatre, with the doors to our cabins hugging its edges. It was suitably named ‘The Dome’ and its warmth and ambience were both comforting and inviting, and in no time, the air was filled with a cheery hum of chattering voices settling into the new environment. Of upmost importance for the time being was raiding the place for the best cabin and the best bed.

When that had been settled, we all gathered in the amphitheatre and were split into teams that we would do activities with for the rest of the camp. For an added twist, there was a Mole team, with a concept similar to that of ‘The Mole’ TV show. A few icebreakers then followed, and before long, the first whiff of dinner drifted across from the kitchen.

If you know university students, they are extremely big on food, and it was no surprise that we could not keep them in the amphitheatre for much longer. For dinner, some chose to bond with their new team-mates, whilst others caught up with their friends.

After dinner, the first round of team activities began in the form of a Trivia Gameshow. Students were challenged with questions requiring knowledge of the movie Tomb Raider, patterns and other IQ questions.

Later into the night, when all activities had finished, students were encouraged to rest early in preparation for the Tomb Raider Amazing Race, but most, if not all, stayed up to bond over conversation, or play a gripping adapted version of Bridge, or immerse themselves into the intensely vocal Mafia game.

Breakfast was at 8am, the air was cool and fresh, and we were delightfully surprised by the sight of a kangaroo! The friendly animal allowed a number of the students to pet it before hopping away. It left us all in high spirits just before we were meant to start the mentally and physically challenging Amazing Race that would keep

us busy until lunch.

The race tied in seamlessly with the Tomb Raider theme of the camp, and the ultimate goal was to find the treasure first. Checkpoint activities involved cracking codes, raiding cabins for objects to pack for the journey, adding numbers, physical challenges, problem solving, lots of running, and food challenges. One notable checkpoint was called ‘the last supper before the journey’, and teams were given the choice of a protein snack – cicada shells, or a health snack, milk

and lime juice. A surprising number of teams chose to take a risk and try the cicada shells!

Saturday proved to be a very physical day, with some competitive games after lunch that included volleyball and Bin Ball. The students were quite exhausted by dinner time, but the feast of roast pork – a high class meal by camp standards – renewed their energies for the short trek to the campfire. The night flew by as we told stories, sang songs, danced, and toasted marshmallows by the fire.

On Sunday morning, we tidied up the place and packed our belongings, ready for the journey home. As we entered Sydney, I reflected on the weekend gone by, and realised that ASOC is not only a group of actuarial students, it is a community that is close-knit, fun-loving, and supportive. That in itself is the treasure that we weren’t looking for, but found. ▲

Lucy Jing Vice President [email protected]

hunting for Treasures

student column

– ASOC CAMP


30 report

An online survey was made available to members on 19 April 2011 on proposed changes to the Part III education pathways from 2012. The proposed changes were recommended by the Education Council

Committee (ECC) for consideration by Council.

ECC had recommended consultation with members and Practice Committees as a way of indentifying any possible issues that had not been considered, as well as gauging member support.

The survey was completed by 369 members, though not all members answered all questions. Results are detailed below.

The purpose of these first five questions was to understand the different backgrounds of the respondents to determine whether or not there were any differences in the level of support for each of the options based on member type, gender, age, most recent study in the education program, and practice area.

Q1. Membership Class Count. %Fellow 219 59.0%Actuary 43 11.7%Associate 49 13.4%Student 52 14.2%Other 6 1.7%

Q2. Gender Count %Male 266 72.9%Female 99 27.1%

Q3. Age Count %<25 41 11.2%25-29 93 25.4%30-39 126 34.4%40-49 65 17.8%50-59 30 8.2%60+ 11 3%

Q4. Year of most recent study in the Institute Education Program Count %2011-2007 203 55.9%2006-2002 40 11.0%2001-1997 25 6.9%1996-1992 28 7.7%1991-1987 18 5.0%1986-1982 8 2.2%Before 1982 5 1.4%N/A 36 9.9%

Q5. Primary Practice Area Count %Banking & Finance 23 6.3%General Insurance 120 32.8%Health Insurance 10 2.7%Life Insurance 97 26.5%Superannuation 28 7.7%Investment and Fund Management 20 5.5%Other 68 18.6

Here are the results for each of the proposed options for Part III in 2012 with a breakdown on some of the significant factors from the first five questions above. As the results based on gender showed little variation, these have been removed. In addition, the classification of ‘60+’ has been removed from the responses by age due to the small numbers of responses.

Q6. Do you support Council’s (in principle) decision to recognise PhDs by thesis from recognised universities in relevant areas (e.g actuarial studies, statistics, economics, finance or finance-related disciplines) for Part III Module 1? Response by Overall Fellows Associates Actuary Studentsmember TypeYes 79% 76% 93% 76% 83%No 21% 24% 7% 24% 17% Response by Age <25 25-29 30-39 40-49 50-59Yes 91% 72% 79% 81% 83%No 9% 28% 21% 19% 17%

members SURvEy


31report

Response by Before 1982- 1987- 1992- 1997- 2002- 2007-Last Yr studied 1982 1986 1991 1996 2001 2006 2011Yes 80% 100% 83% 69% 87.5% 74% 78%No 20% 0% 17% 31% 12.5% 26% 22%

Response by GI Life Super Invest & Bank & Health Other Practice Area Fund Mgt FinYes 79% 77% 93% 85% 52% 100% 84%No 21% 23% 7% 15% 48% 0% 16%

Overall a strong level of support was received for this option. Associates and members under 25 years of age and superannuation and health actuaries had a significantly stronger level of support for this proposal. Those who last studied from 1992 to 1996 and banking and finance actuaries had a significantly lower level of support for this option.

Comments from those who voted ‘yes’ included that a PhD is much harder to achieve than the current Module 1 options, that this will encourage research, and that the relevance of the PhD is key. Comments from those who voted ‘no’ included that people with PhDs have a narrow focus, are theoretical and not practical, that it will be too hard to determine relevance, and that this will lead to future Fellows not having investments knowledge. This last point perhaps indicates a misunderstanding that investments will be removed from the education system. Two thirds of Part III Module 1 C1 Investments has now been moved to Part II and students who don’t take the new Part II and don’t do an investments related course in Part III, will be required to complete the Investments Bridging Course.

Q7. Do you support Council’s (in principle) decision to recognise accountancy qualifications (CPA/ICA or other overseas qualifications that are deemed to be equivalents by these local bodies) for Part III Module 1?

Response by Overall Fellows Associates Actuary StudentsMember Type Yes 55% 55% 65% 40% 55%No 45% 45% 35% 60% 45%

Response by Age <25 25-29 30-39 40-49 50-59Yes 59% 50% 51% 61% 70%No 41% 50% 49% 39% 30% Response by Before 1982- 1987- 1992- 1997- 2002- 2007-Last Yr studied 1982 1986 1991 1996 2001 2006 2011Yes 100% 57% 67% 57% 54.2% 42% 53%No 0% 43% 33% 43% 45.8% 58% 47%


This option had the smallest majority of any proposed. Those with Member Type ‘actuary’ bucked the trend with a majority against the proposal, as did those who last studied between 2002 and 2006 and those who practice in Banking and Finance. Significantly stronger support was received from those in the 50-59 age bracket and those who practice in health insurance.

Comments from those who voted ‘yes’ included that the two professions have similarities, that this is only one module, and that the Institute should seek reciprocal recognition.

Comments from those who voted ‘no’ included that accountancy qualifications are not relevant, not as rigorous, or do not give people the same level of investments knowledge. The comments on the level of investments knowledge reflect some members’ views that Part III Module 1 should be on investments only, but may also indicate that there is some misunderstanding that investments knowledge has been dropped from the education program.

Q8. Do you support Council’s (in principle) decision to recognise the Chartered Financial Analyst (CFA) Charter Holder qualification for Part III Module 1?

Response by Overall Fellows Associates Actuary Studentsmember TypeYes 79% 80% 86% 76% 74%No 21% 20% 14% 24% 26%

A strong majority was received for this option, and majorities were received in all categories of respondents.

Comments from those who voted ‘yes’ included that this would be a good way of encouraging actuarial graduates planning to work in the investments fields to go on to Fellowship, that it was worth more than just one module, and that reciprocal arrangements should be sought.

Comments from those who voted ‘no’ included that the CFA was not at the same level of difficulty as a Part III module, and that there was not full coverage of the Part III Investments courses in the CFA.

Q9. Do you support Council’s (in principle) decision to recognise the UK ST1 Health exam for Part III Module 1?

Response by Overall Fellows Associates Actuary Studentsmember TypeYes 77% 77% 79% 79% 80%No 23% 23% 21% 21% 20%

Response by Age <25 25-29 30-39 40-49 50-59Yes 84% 72% 75% 87% 71%No 16% 28% 25% 13% 29% Response by Before 1982- 1987- 1992- 1997- 2002- 2007-Last Yr studied 1982 1986 1991 1996 2001 2006 2011Yes 80% 75% 83% 92% 75.0% 71% 76%No 20% 25% 17% 8% 25.0% 29% 24%


A strong majority was received for this option. Those who last studied between 1992 and 1996 and those who practice in superannuation, investments and fund management and health had significantly

▲


32 report

stronger support. There was a slightly lower level of support for this option from those who practice in banking and finance.

Comments from those who voted ‘yes’ included that the arrangements are consistent with using the UK ST9 exam for ERM, and that this option should also include Australian content.

Comments from those who voted ‘no’ included that the Australian and UK systems were too different, and that Health Insurance was not a good substitute for Investments. This could again be the result a misunderstanding that investments knowledge has been removed from the education program.

Q10. Do you agree that the Institute should only recognise the UK ST1 Health exam if candidates also complete the Institute of Actuaries of Australia’s online Private Health Insurance Course?

Response by Overall Fellows Associates Actuary StudentsMember TypeYes 69% 70% 71% 64% 70%No 31% 30% 29% 36% 30%

Response by Age <25 25-29 30-39 40-49 50-59Yes 78% 65% 74% 71% 56%No 22% 35% 26% 29% 44%

Response by Before 1982- 1987- 1992- 1997- 2002- 2007-Last Yr studied 1982 1986 1991 1996 2001 2006 2011Yes 25% 75% 56% 78% 78.3% 80% 68%No 75% 25% 44% 22% 21.7% 20% 32%


A significant majority support this option. Majorities were received in all categories, however, support was lowest amongst those above 50 years of age. The responses to this question from those who last studied before 1982, bucks the trend with a large majority against the proposal. However, there were only 5 responses in this category to this question.

Comments from those who voted ‘yes’ almost all focused on the importance of providing an Australian context.

Comments from those who voted ‘no’ included that this was making things harder than they needed to be, that work experience in health would be more useful than an online course, and again, views were expressed that Part III Module 1 should only be about investments.

Q11. Do you support Council’s (in principle) decision that the Institute should continue to offer Course 5A and 5B Investment Management and Finance beyond 2012?


Response by Age <25 25-29 30-39 40-49 50-59Yes 94% 95% 89% 93% 100%No 6% 5% 11% 7% 0% Response by Before 1982- 1987- 1992- 1997- 2002- 2007-Last Yr studied 1982 1986 1991 1996 2001 2006 2011Yes 100% 100% 94% 96% 92% 83% 93%No 0% 0% 6% 4% 8% 17% 7% Response by GI Life Super Invest & Bank & Health Other Practice Area Fund Mgt FinYes 90% 91% 96% 95% 95% 100% 95%No 10% 9% 4% 5% 5% 0% 5%

An overwhelming majority supported this option overall and amongst all categories. Some respondents questioned why discontinuing these subjects was even being considered.

Comments from those who voted ‘yes’ included that the investments area is a key area for actuaries, that the investments area is closely linked with ERM, but also noted that demand was low and that the Institute should consider the resource implications.

Comments from those who voted ‘no’ included that the CFA should be recognised to replace 5A and 5B, that employers in investments fields do not see any value in these courses or membership of the Institute, and that these courses are not actuarial science.

Q12. Do you support Council’s (in principle) decision that students who have not completed Part II 2011 (comprised of Part IIA The Actuarial Control Cycle and Part IIB Investment and Asset Modelling) are also required to take the Investments Bridging Course if they do not take any investment related option in Part III (i.e. C1, 5A or CFA).


Response by Age <25 25-29 30-39 40-49 50-59Yes 85% 82% 90% 86% 100%No 15% 18% 10% 14% 0%

Response by Before 1982- 1987- 1992- 1997- 2002- 2007-Last Yr studied 1982 1986 1991 1996 2001 2006 2011Yes 100% 100% 89% 88% 91.7% 94% 85%No 0% 0% 11% 13% 8.3% 6% 15% Response by GI Life Super Invest & Bank & Health Other Practice Area Fund Mgt FinYes 88% 83% 97% 89% 91% 100% 84%No 12% 17% 3% 11% 9% 0% 16%

A strong majority was received for this option.

Associates and Students had the lowest level of support amongst the Member Type category. There was unanimous support from those who last studied before 1986, the 50-59 age bracket and those who practice in health insurance.

▲


33

Comments from those who voted ‘yes’ included that knowledge of investments was critical for actuaries that perhaps we could do better than just requiring the Investments Bridging Course, and those who felt that we should not move away from having compulsory investments at Part III level.

Comments from those who voted ‘no’ included that there were already enough hoops to jump through and things were already confusing enough, and that the Investment Bridging Course was not ideal as its assessment uses only multiple choice questions.

Several commented that students should be required to complete Part II before becoming Fellows. There seems to have been a misunderstanding that “students who have not completed Part II 2011” means “students who have not completed Part II”. Students who complete Part II 2011 (Part IIA The Actuarial Control Cycle and Part IIB Investment and Asset Modelling) will not be required to take further investments related options. It is only students who completed Part II before 2011 who will be required to take any one

of the above mentioned investments related options. In due course, everyone will come through university doing Part II 2011 and will have the minimum investments knowledge to meet the International Actuarial Association’s Fully Qualified Actuary (FQA) standard. The Investments Bridging Course may need to continue for several years until this situation arises.

ConclusionOverall a majority of respondents supported each of the proposed options. It was also good to see that in almost all cases, the responses to each option by member type, gender, age, most recent year of study, and practice area were similar to the overall responses. ECC therefore recommended to Council that there were no reasons to modify the original proposal. ▲

Philip LathamHead of [email protected]

▲

report / letter

Dear Editor

I n the June edition of Actuary Australia, the President of the Institute, Barry Rafe, responded to my previous letter expressing concerns about the cross-subsidisation of membership fees by

the education charges levied on the students.

As I acknowledged, the disparity between the education revenue (nearly $4million) and the expenditure would need to be reduced by the allocation of the education-related staff and the allocation of overheads. Once these, and the education grants both Barry and I mentioned, are taken into account, there was still a profit of around $500,000 made from providing education services to the students in the 2010 financial year.

I was disappointed to see that President didn’t explicitly acknowledge the level of profit generated from the education program in 2010. Moreover, in my previous letter I asked a series of questions which were not addressed within the President’s response. If there is a $500,000 profit made by the education program, shouldn’t some of this money be invested back into the education program? I also asked whether or not the Institute held any concern that by failing to invest this money into the future Fellows of our profession, we were laying the foundations for future problems to arise in the quality of advice we are giving our respective businesses.

My original letter was not suggesting that the Institute maintains lower pass rates to maintain a revenue stream, but rather that the lack of clarity in the Financial Statements could lead people to draw that conclusion.

In his response the President referred to flaws in what he called the ‘revenue grab’ argument due to the disparity of membership fees between Fellows and Associates and I’m not quite sure why this is true.

My simple calculations say that if a student fails each Part III exam once before passing it on the second attempt, then the Institute will gain four more exam’s worth of revenue and forego two years of a Fellow’s membership. Whilst there are assumptions about the revenue and expenses related to each of these, it would appear that this would result in a net gain to the Institute.

As for the disparity in membership fees between Fellows and Associates, it would seem to me that from a business perspective, it is better to collect some membership revenue from these members – whatever the amount – than none at all. If the fees were set too high for the Associates, for which Institute membership may not be a necessity for these members, I would imagine fewer of them would remain members and overall revenue levels would fall. So, whilst their fees are lower for access to similar services, it appears to me that they are assisting in spreading the fixed costs of the Institute by at least contributing something.

Let me make it clear that I am not critical of the way the education program of the Institute is administered. My letter was attempting to address the lack of clarity between the revenue and expenditure of various Institute activities. If there is an operating profit from the education program, as it appears from the President’s response, then perhaps the Institute could consider some of the suggestions I outlined in my original letter, including: separately funding members to allow them to do a comprehensive review of the Institute’s education material, providing increased tutorials and /or greater access to mentors, paying volunteers a greater sum of money to mark each exam paper. ▲

Dave [email protected]

Letter to the editor


34 report

The Welfare Working Group (WWG) is the last of three working groups setup over the last two years by the New Zealand Government to consider specific social and economic matters; Tax, Savings and Welfare. Completing

their final report in February 2011, the NZ Government has now responded to the report with their views.

Welfare is naturally an important subject in any society, raising social, economic and political issues; and the report was hard-hitting with 43 recommendations. This article summarises the findings and opens up some interesting actuarial aspects that emerged from their work.

The WWG was established by the Ministry of Social Development (MSD) in April 2010 and chaired by Paula Rebstock, a former chair of the Commerce Commission. Its brief was to undertake a fundamental review of the New Zealand welfare system and consider ways to reduce welfare dependency for people of working age, with a few out-of scope topics, for example NZ Superannuation and the ACC Stocktake.

The working group followed an established pattern of three phases: by first identifying the issues, then raising options and finally reporting on conclusions. These working groups have provided a useful background of facts, thinking and ideas relevant to their subject.

The WWG findings were centred on eight key themes to improve life-time outcomes for people at risk of long-term welfare dependency:

● A stronger work focus for more people;● Reciprocal obligations;● A long-term view;● Committing to targets;● Improving outcomes for Māori;● Improving outcomes for children;● A cross-Government approach; and● More effective delivery.

On balance, the group believed that New Zealand should continue with a social assistance approach to welfare provision rather than

coverage being based on any prior contributions. The primary factor for this was to ensure universal access to assistance irrespective of the past. Nevertheless, the group concluded that the NZ social assistance system needs substantial reform if it is to be socially and economically sustainable and proposed two fundamental changes:

● establishment of a new single work-focused welfare payment to replace all existing categories of benefit, to be called Jobseeker Support; and

● establishment of a delivery agency, Employment and Support New Zealand, which will implement the new approach.

The group proposed that all people seeking welfare support would apply for Jobseeker Support. This common support would start with an assumption that people can potentially all work in some way (even if not immediately) and would send strong signals to society about the value of paid work.

Everyone would transition through up to three streams; the first is the Jobseeker stream expecting most people to take steps immediately to move into paid work, including applying for job vacancies. The second, a Transition to work stream for people with significant barriers to securing and maintaining paid work, would still have a default expectation that they would be able to secure paid work, but there would be a more flexible, tailored approach to take account of their particular circumstances.

In the final stream, the Long-term support stream for people with permanent and severe impairment, the initial presumption would be that they may have some ability, if appropriately supported and not the assumption of no ability to work. If employment is found to be inappropriate, they would be provided with long-term support with an aim still to achieve social participation.

The WWG proposed consideration of a Crown entity model for the agency (as for NZ ACC), which unlike a Department, sits at arm’s length from central Government and has external expertise through its Board. Performance management would be based on delivering contractual outcomes.

Welfare Working Group– NEW ZEALAND


35

▲

report

The various Welfare Working Group reports and some of the issues and options documents can be found at: http://ips.ac.nz/WelfareWorkingGroup/Index.html.

Some interesting actuarial aspectsThe WGG received a number of interesting papers and presentations that compared social welfare provision with the insurance sector in terms of approach, learning and opportunity. Whilst there are some similarities between social welfare, private insurance arrangements and statutory insurance schemes, it is more the differences that provide insight: the insurance approach provides a greater focus on risk, costs and the management of claims linked directly to the funding approach and with greater transparency between funding, pricing and performance (Martin Jenkins).

Another feature raised by ACC in their Overview for the Welfare Working Group paper relates to the concept and role that an ‘actuarial release’ can play linking the impact of management improvements to economic results.

Actuarial release is defined by ACC as the difference between a current and previous estimate of the outstanding claims liability, plus cost savings realised during the period, compared to original expectations. The measure attempts to isolate the impact of internal operational management on financial outcomes with adjustments to the calculation that remove the impact of external factors such as changes in economic conditions, legislation, and other factors beyond the control of management.

The diagram below presents the concept of actuarial release.

The Welfare working Group proposed a long term view be taken with the welfare system recognising the value of investing early to reduce the long-term social, economic and fiscal costs of welfare dependency. One of the key themes from the WWG report of direct relevance to the actuarial profession alongside this long-term view is the concept of a ‘forward liability’.

The group recommended adopting an actuarial approach to measuring this forward liability which would be an important feature and measurement of any reform. The proposed new ‘Employment and Support New Zealand’ entity would become directly responsible for reducing this calculated forward liability.

Some preliminary investigation work by MSD staff assessed the

future liability as at June 2009 of benefit expenditure for people on working age benefit (ie people currently on benefits) to be between NZ$44 billion and NZ$57 billion (taken as NZ$47 billion in the report). This is represented by 355,000 people on benefit at an average of between $125,000 and $160,000 forward liability per person. Invalid and Domestic Purposes benefits represented the largest component of this liability. A target is proposed to reduce this liability by 28% from $47 billion to $34 billion by 2021.

The basis for this assessment is that experience over 1999 to 2009 forms a reasonable base for the future with no significant change in social welfare policy and no increase to benefits payable. The estimate range is the result of a high and low view of future unemployment. The liability figures provided above were not discounted but using a discount rate of 6% would reduce the liability range to between $29 billion and $34 billion.

In addition to the calculation and use of ‘forward liability’, the WWG recommended that the new work-focused welfare system should:

a) explore the setting up of a distinct welfare fund to cover the costs of the welfare system, with the ultimate possibility of partially funding the system;

b) manage the Crown’s contribution to such a fund on a contractual basis that specifies the outcomes expected from any investment; and

c) use the forward liability approach to share the risks between Government, employers and local organisations.

Some of the recommendations may be politically unpalatable and the Government has responded by forming a group of eight Ministers to consider the report’s recommendations. In the meantime, MSD and Treasury are currently assessing the feasibility of the forward liability approach in more detail.

The roots of the actuarial profession were strengthened in the 18th and 19th centuries with the development of actuarial mathematics to help measure and find sustainable solutions to social welfare issues. Perhaps in the 21st

century there is a chance to extend these roots into yet further and wider fields. ▲

Charles HettHead of Actuarial [email protected]

The papers considered for the above article were:•WWGExecutiveSummary – FinalRecommendations,WWG,February

2011.•OverviewfortheWelfareWorkingGroup;ACC,September2010.•Lessons from Insurance for Welfare; Martin Jenkins & Associates,

September 2010.•Futureliability:estimatingtimeonbenefitandtheassociatedcost;CSRE

– MSD, October 2010.

2011

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37

I blame it on Martin Mulcare On 1 July last year, Martin (who has been training the Institute staff on customer service amongst other things) sent me an e-book as a happy new financial year present.

The book is called ‘180 Life-Changing Motivational Quotes, Compiled by James Adonis’*. A fair slab of the book contains quotes on failure. One quote particularly caught my attention:

“Failure is an event, never a person; an attitude, not an outcome.” – Zig Ziglar

I knew immediately why this quote resonated with me. It’s because for many years I considered myself to be a failure.

After sailing through university without failing any exams, I ran up against the brick wall of the Professional (now called Part III) exams. Back in those days (1990’s) we had to sit four exams – Life Insurance, Superannuation, General Insurance and Investment. We had to sit two at ‘ordinary’ level (a three hour exam) and the other two at ‘specialist’ level (two three hour exams in one day). No matter where you were working, you had to pass three difficult exams in another field. It was a nightmare.

I sat those exams (with a year off in the middle) from 1989 until 1997. I sat one of those exams four times – under two completely different syllabi. I passed one exam in my first four years working at a life company with large amounts of study leave. For the last five years I was studying, I was working extremely long hours in wealth management without any study leave. That’s actually when I had my best successes passing the other three of the four exams.

It has taken many years for me to get over my repeated failure. When I read that quote, it initially brought all these thoughts and feelings back – thanks Martin! Then I really read the quote. It was saying that a person is not a failure, just because they have failed in something. Or put more eloquently:

“I have not failed. I’ve just found 10,000 ways that won’t work.” – Thomas Edison

Am I a real actuary?Although a Fellow of the Institute of Actuaries I was working in a non-actuarial field and so for many years felt like an imposter... someone who did not really deserve to be an actuary.

It was only over the last year or so whilst working at the Institute and speaking to lots of other actuaries, that I realised that I’m not alone

in feeling that way. I have lost count of the number of people who’ve said to me “but of course I’m not a real actuary”.

I have also had many actuaries confess to me that they took a long time to pass their exams. I was in a meeting just last week with a senior, respected actuary in an influential position who made this confession to me. He said it with shame, and I could almost hear the echo of “I’m not a real actuary”.

I’m still waiting to find out who these mythical real actuaries are! An actuary is no longer simply someone who works in insurance or defined benefit superannuation.

When I look at my career, at this other person’s career who also took a long time to pass, at the careers of many of our Associate level actuaries (who perhaps decided life was too short to spend nine years with no social life), you can hardly say we have not been successful (modesty was never my strong point). And you can hardly say we do not deserve to be actuaries.

Why we need to failLooking at some of the other quotes in the book it painted more of the picture:

“You may not realise it when it happens, but a kick in the teeth may be the best thing in the world for you” – Walt Disney

That was certainly the case for me. When I started those exams I was an arrogant 20 year old who thought that I was way too good to be doing the menial work I was given in my life company job. In my opinion I was pretty much ready to take on a senior management position. Over the next nine years of pretty much constant failure, I developed patience, fortitude, resilience and perseverance as well as some skill and knowledge. Most of all, I developed humility (well, more than I’d had previously anyway!)

My father has a term for times of adversity – he calls it ‘character-building’. (He usually pulled that term out when we were still 10km from the car on some horrendous three-day bushwalk when I was a kid).

Failure helped build my character. It made me a better human being, and it certainly made me a better employee and business-person by my late 20’s. It’s around that time that my career really took off. Looking back, I can see the connection.

What I have come to realise is that failure is necessary for success. Failure is the crucible. A crucible is used to “keep the ore in

On Failure...

CEO’s Column


38 CEO’s Column

▲

the area where the heat was concentrated to separate it from impurities before shaping”**. Perhaps failures, like mine in the actuarial exams, are the experiences by which we are melted down and all our impurities are removed. We come out stronger, purer, and shaped into something better.

If you’re not falling over...When I was being trained to ski race when I was a teenager, I had good technique but liked to ski in control so I was quite slow. Our coach was trying to get us outside our comfort zone – to get us to ski faster. He told us that if we weren’t falling over, we weren’t skiing hard enough.

Perhaps the people who don’t experience failure are those who are not trying hard enough. They are not pushing the limits of their abilities, being audacious, going outside their comfort zones. In short, they are not taking risks. (You may say “perhaps they are just really good”…but then those people should be pushing themselves further than everyone else so they are also outside their comfort zone.)

As actuaries we are trained to minimise risk. It’s easy to see the risk in trying something new… perhaps a change of career to an area where we have little experience.

But what if the biggest risk – the tiger in the room that will slowly tighten his jaws around our necks (as Simon Longstaff said at Convention) – is the risk that we get complacent and perform below our abilities? These ‘tiger-esque’ risks are hard to see. They creep up on you.

Does our training in risk minimisation give actuaries the habit of avoiding risk in our personal life and careers? Do we prefer to ski safely and in control, looking great but ultimately losing the race?

The challenge!I challenge you to find something to undertake that will push you out of your comfort zone. Perhaps it’s volunteering for a project or taking on a new role that will stretch you. Maybe it’s a sporting venture such as a half marathon or an ocean swim. You could learn a language; volunteer for a charity that will see you mixing with different people, or perhaps join toastmasters and overcome your fear of public speaking.

Whatever it is, if you feel uncomfortable when you think about doing it, you’re on the right track.

A final word for those studying the actuarial exams:

“If you’re going through hell, keep going.” – Winston Churchill

▲ Melinda [email protected]

* www.jamesadonis.com

** Rehren Th., 2003, Crucibles as Reaction Vessels in Ancient Metallurgy, Ed in

P. Craddock & J. Lang, Mining and Metal Production Through the Ages, British

Museum Press, London p208.

Business luncheon on 22 June with denis Wilkinson – ApRA’s View on the diversified institutions Market; l to R: Christine Cameron, Sponsor – Russell investments, denis Wilkinson ApRA, institute Senior Vice president david goodsall and CEo Melinda Howes

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Singapore – Appointed Actuary, Life Insurance


Working for this leading Reinsurer in Asia, you will manage the actuarial processes, tools, analysis and strategies for facultative business. Reporting to the Head of Pricing, the role will involve; developing pricing tools, researching and continuing to improve pricing models, actuarial assumptions and pricing parameters, providing training to Underwriters.• More than 5 years of actuarial related

experience within GI• Experience in facultative reinsurance pricing is

preferred but not essential• Strong communication skills with Asian language

skills preferred• Advanced Excel skills including VBA• Qualified Fellow preferred, although Associates

with strong relevant experience also considered

Singapore – R/I Pricing Manager, General Insurance


EUROPE | ASIA | AUSTRALIA & NEW ZEALAND | MIDDLE EAST | NORTH AMERICA | SOUTH AMERICA

Lesley Traverso James Lecoutre Claire StreetT: +61 (0)2 9226 7459 T: +61 (0)2 9226 7412 T: +61 (0)2 9226 7418 M: +61 (0)433 129 390 M: +61 (0)404 397 503 M: +61 (0)401 606 [email protected] [email protected] [email protected]

1300 22 88 279 (1300 Actuary) www.dwsimpson.com

Contact Claire Street for more information.

Our client is one of the world’s leading actuarial consultancy firms with a name that wins business. They are currently looking for an actuarial operations manager who will lead internal business development to identify areas where the actuarial skill set can be applied to improve offerings to clients. Your primary role will be to further develop these areas with a view to building a data analytics/modelling team.• A minimum of 5 years actuarial experience with

1-2 as a manager• Experience of model building, Economic models,

Monte Carlo models etc • Ability to learn new software with existing SAS

and Access skills• Creative thinker with excellent communication

and presentation skills

Sydney – Actuarial Operations Manager

Expansion of the business has led to the need for an Actuary or analyst with Capital Modelling experience. This Dynamic actuarial consultancy firm with an impressive track record of success is looking for a General Insurance Actuary with between 3 and 8 years of experience, either in a company or consultancy environment. You will be results orientated, analytically minded and commercially astute.• Capital Modelling experience and strong overall

technical skills• Valuation background and SAS skills• Advanced understanding of insurance

company operations• Actuarial or Statistical/Mathematical degree• Excellent communication skills

Sydney – Capital Modeller, General Insurance


Working for a niche player in the Medical Indemnity Insurance field, this is a rare opportunity for an experienced and Qualified GI Actuary to assume responsibility for setting strategic direction as well as leading a team of actuaries and statisticians. Reporting to the GM and with a key focus on working closely with the business and developing new value add tools and processes, the key requirements of this role are as follows: • A minimum of 10 years experience including

medical indemnity or long tail product exposure• Strong technical knowledge of both pricing

and valuations• Liaising with the Appointed Actuary• Ability to run with ideas and get business buy-in


Sydney – Head of Actuarial Services

Hong Kong – Regional Chief Actuary, Life Insurance

DWS_Actuary Ad_AUG_2011.indd 1 29/07/11 12:52 PM

[email protected]

Tel +44 20 3189 2900

Dublin [email protected]

Tel +353 1 6099 400

Sydney [email protected]

Tel +61 2 9262 1612

Hong Kong asiapacifi [email protected]

Tel +852 3051 9920

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AUGUST 2011 · travel broadens the mind, and in my experience this is true. In particular, I have experienced the nasty shock of realising that if you don’t see different ways of