The actuarial profession –present and future
A Canadian perspective
Charles McLeod
13 June 2006
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Topics
1. Issues facing the actuarial profession
2. What does the public expect from aprofession?
How is the Canadian Institute ofActuaries responding?

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About the CIA• Formed in 1965
• 2800 Fellows, 900 Associates, 30Correspondents• Annual Fees for a Fellow are about
90,000 Yen• Office in Ottawa (18 staff, none areactuaries – yet)
• Only actuarial body in Canada
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About the CIA (continued)• Elected Board of Directors (16members)• 3 Councils• About 30 Committees• About 10 Task Forces• Most actuarial work for the CIA is doneon a volunteer basis
41. Issues facing theActuarial Profession5

1. Issues facing the actuarial
professiona) Criticism from respected bodies (e.g.
Morris Review, the Economist)b) Poor understanding of some risks,leading to bad pricingc) Increasing role of other professional
bodiesd) Limited growth in some traditional
actuarial roles61(a) Morris Review• Direct cause was Equitable Life and thesubsequent Penrose enquiry• Looked at all aspects of U.K. actuarial
profession• Final report published in March 20057

1(a) Morris Review’s Criticisms• “Professional standards that have been weak,
ambiguous or too limited in range, andperceived as influenced by commercialinterests;• An absence of pro-active monitoring ofmembers’ compliance with professionalstandards; and• A profession that has been too introspective,
not forward-looking enough and slow tomodernize.”81(a) Morris Review (continued)• “Continued self-regulation by the (U.K.)
profession is unlikely to restore publicconfidence in the (U.K.) actuarial
profession.”• “Independent oversight of theProfession’s self-regulation is the mostappropriate regulatory framework.”91(a) The result of the Morris Review• Financial Reporting Council (FRC) to provide
oversight of regulation of actuarial profession (FRC
already does this for accountancy)• New Board for Actuarial Standards (reporting toFRC) to set technical standards. Half of themembers are not actuaries• POBA (Prof. Oversight Body for Accountancy) tooversee actuarial education and CPD• Actuarial profession to “continue to set ethicalstandards of conduct provided that the FRC feels
this to be appropriate.”101(a) Criticism by The Economist“False precision and recklessapproximation have defined theactuarial profession’s role in the crisis
that has enveloped corporate pensions
on both sides of the Atlantic.”
January 200611

1(a) Criticism by theCanadian regulator“The days of basing assumptions solely on“actuarial judgment” are just about over. The“actuarial black box” will have to be opened
up and made clear, in fact transparent.”
Nic LePan, Superintendent, Office of theSuperintendent of Financial Institutions,
Canada (OSFI) - November 200412

1(b) Poor understanding of somerisks – some Canadian examples• Term to 100 – a low cost term product,with very low cash values, that assumed(and relied upon) higher lapses thanactually resulted.
• Minimum death benefit and maturity
guarantees on variable annuity products

131(c) Increasing role of otherprofessional bodies• Accounting profession• Risk Management (GARP, PRMIA)• Chartered Financial Analysts (CFA)
They are affecting the role played byactuaries – and they are also attractingsome bright university graduates awayfrom an actuarial career.
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1(d) Limited growth in sometraditional actuarial roles• Consolidation of the insurance industry• Defined benefit pension plans being
replaced by defined contribution plans

152. What does the public expect froma profession?
- and how is the CIA responding?

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2. What does the public expect froma profession?
a) Education of members – both before
and after qualificationb) Standards of ethicsc) Standards of practice/technicalguidanced) Research and experience studies

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2. What does the public expect froma profession? (continued)e) A monitoring/review of the work ofmembersf) A discipline processg) Public interest ahead of members’interest and profession’s interesth) Transparency18

2(a) Education – before and afterqualification
Do members have the required• Technical knowledge• Business and management skills• Communication skills
Are members keeping up to date withcurrent developments?

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2(a) Education – CIA response• Pre-qualification- Emphasis on technical knowledge- No credit given for University courses- Lengthy and unpredictable travel time20

2(a) Education – CIA response• Post-qualification- Mandatory Continuing Professional
Development (CPD)- Mandatory filing of proof of CPD compliancewith CIA office- Specific “Skills and Knowledge Inventories”
being developed- CIA is offering courses in communication21

2(b) Standards of ethics

The public expects professionals tobehave in an ethical manner, and to beable to trust them.

222(b) Standards of ethics – CIAresponse
Rules of Professional Conduct cover subjects
such as:• Integrity• Qualification Standards• Disclosure• Conflicts of Interest• What a member must do if he/she becomesaware of “apparent material non-complianceby another member”
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2(c) Standards of Practice/TechnicalGuidanceDoes the profession have standards that:• Define how work should be done?
• Limit the range of results produced bydifferent members?

242(c) Standards of Practice/TechnicalGuidance – CIA response• Consolidated set of Standards of Practice,supplemented by Educational Notes• Some Standards apply to all actuarial work;
other standards are specific to certain typesof work (e.g. pensions)• Some inconsistency between practice specificstandards• Long time to develop new standards or reviseexisting standards

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2(d) Research and experiencestudies“The (UK) profession has been too
insular, with insufficient contact withother professions and too narrow a
professional training, and has been slow
to adopt new approaches andtechniques …”(Interim report, Morris Review, Dec
2004)
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2(d) Research (continued)• Is original and relevant research taking
place – and being applied?
• Is the profession adapting relevant
concepts developed by others? (Forexample, financial economics)• Are timely and relevant experiencestudies being performed?

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2(d) Research – CIA response• Reliance (too much?) on Society ofActuaries and Casualty Actuarial
Society• Task Force on Financial Economics• New, stronger Research Committee28

2(e) Monitoring and review of thework of members

Does the professional body proactivelyreview (a sample of) the work done byits members?

292(e) Monitoring and review –CIA response• Starting in 2005, a sample of pension
plan actuarial reports is reviewed eachyear by a panel of actuaries• The work of an Appointed Actuary (AA)of an insurance company is subject toexternal review at least once every
three years

302(e) External review of an AA’s work
Scope
• Valuation of actuarial liabilities• Calculation of required capital• Future financial condition report• Allocations between participating andnon-participating business(Need not duplicate work of externalauditor)31

2(e) External review of an AA’s work
Who can be a reviewer?
• Must be an FCIA with relevant
experience (and exposure to at least
two unrelated insurance companies)• Cannot be an employee or shareholderof the insurance company (or haveworked there in previous 3 years)• Must be changed every six years
322(e) External review of an AA’s workReports• Provided to audit committee, external auditorand OSFI (regulator)• Must describe:- conclusions with respect to work reviewed- any changes that resulted from the review- any remaining difference of opinion with
Appointed Actuary33

2(f) A discipline process
Is there a process for• Investigating complaints?
• Disciplining a member when merited?
How transparent is the process?

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2(f) Discipline process– CIA response• Committee on Professional Conduct
investigates all complaints againstmembers• Contains two non-actuaries• Disciplinary tribunal for serious charges,
chaired by a retired judge• If complaint is justified, penalties varyfrom private reprimand to expulsion.
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2(g) Public interest• Does the member put the public interest
ahead of his own interest?
• Does the member put the public interest
ahead of the client’s interests whenappropriate?

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2(g) Public interest versus client’s
interests – some examples• In an insurance company: management
pressure for better financial results
versus security of policyholders• In a pension fund: management
pressure for lower contributions versus
security of plan members

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2(g) Public interest – CIA response

CIA’s Guiding Principles state: “Incarrying on its activities and programs,
the Institute holds the duty of theprofession to the public above theneeds of the profession and its
members.”38

2(h) Transparency
Can an intelligent non-actuary besatisfied that the profession’s rules andstandards:• Reflect the public interest?
• Will result in quality work, if followed?
• Are monitored for compliance?
• Will result in disciplinary action, if not
followed?
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2(h) Transparency – CIA response• Guiding principles re public interest• Ongoing external review of members’
work• Non-members involved in discipline
process• Moving towards an independent
standard setting process40Independent standard setting process
Step 1 – set up an• Actuarial Standards Board, responsible onlyfor standard setting, and• Practice Council, responsible for all otherfunctions of current Practice Standards
Council (e.g. Educational Notes)
Target is implementation at beginning of July 200641

Independent standard setting process
Step 2 - create an independent Actuarial
Standards Oversight Council• Will consist mainly of non actuaries• Will oversee Actuarial Standards Board• Will not set Standards of Practice• Modeled on Canadian Accounting
Oversight Council

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Independent standard setting process
Step 3• Actuarial Standards Board to report toActuarial Standards Oversight Council, not to
the CIA Board• Oversight Council to appoint members ofActuarial Standards Board
Target date is end of 200643

Independent standard setting process
Why do this?
1. All professions are being expected orrequired to be more transparent
2. If the CIA is proactive, we can havemuch more influence over the endresult
3. Favorable experience of Canadianaccounting profession
44Issues facing the actuarial profession- how is the CIA respondinga) Criticism from respected bodies (U.K.
Morris Review, the Economist)b) Poor understanding of some risks,leading to bad pricingc) Increasing role of other professional
bodiesd) Limited growth in some traditional
actuarial roles
45(a) Criticism from respected bodies- CIA response• Limited criticism of actuarial profession
in Canada – but this does not justifycomplacency• Various initiatives taken recently orabout to be implemented• Good relations with regulators; regularformal and informal meetings46

(b) Poor understanding of some risks,leading to bad pricing – CIA response• More emphasis on education andresearch• Pressure from regulators has helped to
produce appropriate valuation
requirements

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(c) Increasing role of otherprofessional bodies – CIA response• Increased emphasis on improving nontechnical skills of actuaries• Can the qualification process be
shortened without sacrificing quality?

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(d) Limited growth in some traditional
actuarial areas – CIA response

Working with Society of Actuaries andCasualty Actuarial Society to expand
the role of actuaries in Risk
Management49

Concluding remarks

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Questions and comments?

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