Times They Are a-Changin'

I have been thinking of change (not the small coins in one’s pocket) and the feeling that there is too much of it at the moment. I could look at this in terms of the global economy or the UK but instead want to consider the mini-world of actuarial science. This may be a narrow perspective but the themes have significant repercussions for us all. I was discussing some of these ‘mega-trends’ affecting actuaries with a group of our alumni in Cyprus last week; the key issues that emerged were:

1. There is increasing regulation with Solvency II, which will affect insurance companies globally and is effectively requiring companies to adopt a systematic approach to risk measurement and management – added to this we have the response of regulators in many countries to the current financial crisis.

2. The development of actuarial standards to provide a set of guiding principles to govern actuarial work – this started in the UK (as one of the recommendations of the Morris Review following the demise of Equitable Life in 2000: www.frc.org.uk) but is being taken up in the US, Canada and more widely.

3. An increasing recognition of the importance of longevity risk and the failure of current actuarial models to estimate the future trend in mortality rates and the inherent uncertainty – this is leading to research on new and improved models and also the Life & Longevity Markets Association (www.llma.org) which has been set up by insurance companies and banks to help with the development of a market in hedging instruments.

4. The is a global switch in the design of pension plans, with a move from defined benefit (DB) to defined contribution (DC), partly because of the longevity problem – the outcome of this will be a transfer of risk from sponsoring companies to pension plan members.

There is an element here of swings and roundabouts. Why swings? Because it was not so long ago (early 1960s) that DC pension plans were being closed in the UK and converted into DB plans because the DC ones delivered poor returns for the customers at times of high inflation. Why roundabouts? Because diversion of actuarial attention on to longevity and mortality takes actuaries back to the historical roots of their subject – to the work of Halley and others in the 17th century.

Is change just a feature of the world of 2010? Is change good? On further reflection, there has always been change – when my actuarial career began there were stock market crashes, the switch from with profits to unit linked insurance…..So change is inevitable and the question is how to cope with it. As James Lowell, the American poet said: “The only argument available with an east wind is to put on an overcoat”. Good advice as winter arrives and the change goes on.