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This document is incomplete without the accompanying discussion; it is confidential and intended solely for the information and benefit of the immediate recipient hereof.

Canadian Institute of Actuaries

The Morris Review- and why it is so Relevant for Canadian Actuaries

November 17, 2004

Mike LombardiMontreal

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Approach

Personal perspectives based on My year as CIA president, including

Council of Presidents

Presidents’ Forum

IAA meetings

Special guest at SOA Board meetings

Meetings with Canadian regulators, employers, students, universities, and insurance industry representatives

Lessons learned about the actuarial profession Observations documented in CIA bulletin (“President’s Corner”)

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Lessons learned

Global profession Increasingly international Can achieve a lot through joint efforts on similar issues

Global standards Insurance and pension accounting standards are converging worldwide If we don’t get involved and help make history we may become history

Mutual recognition Removes barriers to professional mobility No need to start over and rewrite local actuarial exams

Public policy We should not be shy about speaking out on social issues

Health care

Automobile insurance

Pensions especially Especially where our expertise is particularly relevant

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Lessons learned (cont’d)

Role model CIA is one of the largest, most respected actuarial organizations in the world. Our professional unity is envied Our creative developments are admired

Consolidated standards

Peer review

Insurance financial reporting (CALM)

Capital management (CTE)

Responsiveness Need to reassure our publics that their trust in us is well founded Issues related to public confidence in our profession

Corporate governance

Independence

Professional standards

Continuing education and discipline

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Lessons learned (cont’d)

The image of actuaries We need to improve

Our communication skills

Our business acumen

Our eagerness to do new things

Our willingness to take personal career risks. Employers promote actuaries who are more like Captain Kirk and less like Mr.

Spock.

Thinking outside the box Our effectiveness will be enhanced by creative thinking and bold initiatives Need to

Step outside our comfort zone

Broaden our thinking

Challenge the status quo “Change is not only inevitable but it is necessary to achieve ongoing success”.

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December 2003 Bulletin “Towards a Global Actuarial Profession”

“International issues matter greatly and will increasingly affect our future. Over the next few years, a tidal wave of international business, regulatory, and professional developments will sweep away the familiar insurance and pension world as we know it today.”

“To retain our position of influence and relevance – not to mention our jobs – it is imperative that we adapt and prepare for these coming changes.”

Key international developments IAA leadership and professionalism International actuarial standards Solvency II: “Total balance sheet approach” Education 2005: towards a single curriculum worldwide Mutual Recognition Agreements (MRAs) NAFTA: actuary officially recognized as a profession

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January - February 2004 Bulletin “Thinking outside the box”

Charles H. Duell, director of the US patent office, said in 1899, “Everything that can be invented has been invented.”

IBM chief Watson declared in 1953 “There is no real market for computers because only five computers will

be needed by the whole world.”

Thinking outside the box requires different attributes A willingness to apply new perspectives to day-to-day work Openness to do different things Openness to do things differently Valuing new ideas and Acting on them

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January - February 2004 Bulletin “Thinking outside the box”

Selected topics Non-actuarial representation General acceptance Actuarial independence - insurance Actuarial independence - pension

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January - February 2004 Bulletin “Thinking outside the box”

Non-actuarial representation

The public interest is our guiding principle

The ability of professions to regulate themselves is being questioned

Trust must be demonstrated—it can be destroyed in the blink of an eye.

Questions: How well do we deal with conflicts of interest? Do our practice committees view issues too narrowly? Are members or chairpersons on our practice committees unduly

influenced by their corporate roles? Can we properly identify and control real or perceived conflicts of

interest? Should we welcome or resist representation from the broader public?

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January - February 2004 Bulletin “Thinking outside the box”

Non-actuarial representation

Public representation may sound foreign or threatening…. BUT…

It is becoming a reality in other jurisdictions -- driven in large part by a need to preserve trust in the profession In the US, the Actuarial Standards Board In Australia, actuarial standards board members are actuaries appointed

by government rather than the profession In the UK, non-actuarial representatives account for almost 40% of

voting members in key standards-setting councils In South Africa, Actuarial Governance Board consisting mainly of non-

actuaries to represent external stakeholders

The real question is not “What percentage is comfortable?”

The real question is “How best to balance a desire to control our own standards vs. the need to more visibly respond to the public interest.”

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January - February 2004 Bulletin “Thinking outside the box”

General acceptance

One of the existing criteria to be satisfied before establishing a new standard

If not generally accepted, adoption will not take place

Leads to prolonged and healthy actuarial debate

Examples: Peer review CSOP

Many feel the final product was much better than the original proposals

Others, however, feel this criterion Ties our hands unnecessarily May prevent emergence of a timely standard when it is needed May ultimately conflict with our duty to the public interest

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January - February 2004 Bulletin “Thinking outside the box”

General acceptance

The CIA is almost unique

The majority of actuarial and accounting bodies worldwide do react to feedback

BUT, if a new standard is necessary the time for discussion has ended

Questions ”Is continuation of the status quo acceptable?” “What are our responsibilities to the public?” “How is general acceptance perceived?”

the standards-setting group will establish a standard, with orwithout general acceptance

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January - February 2004 Bulletin “Thinking outside the box”

Actuarial independence - insurance

What is the actuary’s role with respect to the soundness of insurance companies?

Independence concerns Should actuarial services be provided to an insurer that is an audit client Can the objectivity of the appointed actuary be met if he/she is an

employee of the insurer

Most of the attention so far has been auditor independence but beginning to shift to the independence of the appointed actuary.

In UK, Financial Services Authority regulator questioned, subsequently removed, auditor’s reliance on appointed actuary

In Holland, insurance regulator is seeking changes aimed at demonstrating independence of the actuary

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January - February 2004 Bulletin “Thinking outside the box”

Actuarial Independence - insurance

In Canada Peer review But “are we are doing enough to address the independence issue?.

For example Three years to do peer review not same as annual accounting audit AA calculations not verified by anyone

Suppose a company fails and this is aggravated by a reserve calculation error. Questions: Can CIA avoid criticism by indicating that verification was outside the

scope of the peer review? Can auditors avoid criticism by indicating they relied on the actuary and

the peer review process? Is it possible that no one is accountable? Will these “no-fault” excuses be tolerated by the public and by

regulators?

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January - February 2004 Bulletin “Thinking outside the box”

Actuarial independence - pension

Whose interests does the pension actuary represent? Plan sponsor or Plan members

Can actuary truly represent both?

For example, assume the plan sponsor asks for Less conservative assumptions And takes a contribution holiday

Questions: How to avoid a real or perceived conflict of interest? How to preserve pension plan members’ confidence? Independent actuary for plan members? Peer review? Greater disclosure of instructions, assumptions, and reasons?

“While these measures seem intrusive, now is the time for the CIA to be looking into the issue rather than when a crisis is upon us”.

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March 2004 Bulletin “Responding to external perceptions”

Discussed Penrose report and implications for the profession

“A profession dedicated to serving the public interest needs to pay attention to how it is perceived.”

“Increasingly, this means not only how we are perceived locally but also how the profession is faring internationally”

Early response by UK profession An actuarial standards board containing a majority of independent members Practice certificates to cover ALL actuaries who give actuarial advice Peer review for appointed actuaries and pension actuaries A disciplinary board with a third of its membership being from outside the

actuarial profession.

Pending Morris review, UK profession has appointed a Scrutiny Committee to review existing standards.

6 members 2 of whom are non-actuaries , 4 are actuaries from various practices

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March 2004 Bulletin “Responding to external perceptions”

Actuarial Standards Board

Typical Canadian actuarial reaction Ridiculous! Are not actuaries, by definition, the most qualified individuals to

establish actuarial standards? Why voluntarily cede the ability to run our own show?

The answer: guiding principle #1

In a post-Enron environment, there is growing pressure to ensure that standard setting bodies adequately represent all aspects of the public interest

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March 2004 Bulletin “Responding to external perceptions”

Actuarial Standards Board

Why any concern? The people who set standards are largely the same people subject to

those standards Awkward questions which might adversely affect employment or

consulting relationships are avoided We have been slow at highlighting and debating areas of potential

difficulty We have been reluctant to pursue controversial proposals

Past examples Peer review Transfer values

“While the standards-setting process can get quite messy, we need more, not less, openness and transparency”.

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March 2004 Bulletin “Responding to external perceptions”

Practice certificates

In the UK, practicing certificates needed for Appointed actuaries of life companies Pension actuaries Lloyd’s syndicate actuaries

Consideration is being given to extending the concept to cover all actuaries who give advice on actuarial matters.

Within the CIA We have not been keen on hyphenated actuaries We expect that actuaries will only take on such work for which they are

suitably qualified Voluntary continuing professional development requirements

Imagine if same CIA approach were applied to doctors: Self-assessment of competence Honour system for keeping up to date

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March 2004 Bulletin “Responding to external perceptions”

Practice certificates

Results of actuarial malpractice may not be as severe as medical malpractice, But the work we do affects the financial health and future security of

millions.

CIA should not automatically follow the UK initiatives But ignoring international developments leaves us less prepared for

similar challenges at home Dismissive comments that the situation is different in Canada will not be

satisfactory

Need to Describe how we are dealing with similar concerns Explain how our circumstances are different Provide insight about the relevance of any differences Describe how these different circumstances lead to a different solution

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March 2004 Bulletin “Responding to external perceptions”

“The public policy issues of openness, transparency, and accountability transcend national borders. It would be naïve or arrogant to assume that these issues are not important to the Canadian public.”