Julie Dickson delivers warning to actuaries and insurers: time to “raise the bar”

By Hubert Roy | August 19 2011 07:11PM

The actuarial profession needs to do more. If it does not, others will take its place. This is the message Julie Dickson had for the Canadian Institute of Actuaries when she spoke at their annual meeting in Ottawa on June 30.In a speech titled “Raising the Bar”, the head of the Office of the Superintendent of Financial Institutions (OSFI) identified several concerns that need to be addressed. Ms. Dickson also threw a few darts at insurance companies.

Her first point dealt with the role of the actuarial profession. According to Ms. Dickson, she has often noticed that actuaries only deal with their technical responsibilities without examining more general needs. She also hopes that actuaries will take the lessons learned from the Japanese earthquake last February and work them into their models.

“Traditionally the development, maintenance, and running of insurance models have been the domain of actuaries. As other professionals (financial engineers, quants with MBAs, etc.) acquire the same skill sets, there will be pressure brought to bear on the role of the actuary as the ‘go to’ person when it comes to developing and interpreting the results of these models. Actuaries should ask themselves how they can counter the perception that other financial professionals may be better suited to run these complex financial models,” commented Ms. Dickson.

The Superintendent says that she is troubled by the ways actuaries deal with compliance, and is also disappointed with insurance companies in this matter.

“Frequently, the response to our requirements appears to be driven only by the need to comply, rather than by using the exercise as a means of identifying and reporting on important aspects of the way in which organizations manage risks,” she comments. “This response is troubling because it implies a mechanical response, which may be conducted as cost effectively as possible, but that is not connected to any real business or risk management practices employed by the organization.”

She cites enterprise risk management (ERM) as an example. While the need for sound practices has never been more pressing, she is not satisfied by the way the industry deals with risk management, whether it be for capital adequacy, crisis simulations, or governance practices. She says that insurers frequently complete these tests “as if they were just regulatory compliance exercises rather than important demonstrations of real life ERM.”

Ms. Dickson says that the challenge to maintain objectivity has caused the actuarial profession to change the way it interacts with OSFI. Insurers are increasingly relying on volunteers to represent them. This has affected OSFI’s relationship with the actuarial profession and the industry.

Adversarial discussions

“In the context of today’s global environment, it is more important than ever that your profession present a strong, vigorous and objective voice on key issues, based on sound research and actuarial principles. In the absence of such objectivity, OSFI finds itself having increasingly adversarial discussions with industry on many important issues. We need your help to make these discussions more positive and productive,” she says.

The superintendent recognized the work that Canadian actuaries have done at the global level. She pointed out that some measures, such as the establishment of an appointed actuary within each insurance company, have helped Canadian actuaries to earn the respect of their colleagues around the world. (Editor's note: the appointed actuary must assess the actuarial liabilities of an insurer and file an annual report with OSFI.)

However, Ms. Dickson believes that Canadian actuaries could be even more active internationally. “I suggest that the Canadian profession should not be shy in leading the local development of papers and guidance on important topics, especially for those in which Canada already has significant experience,” commented Ms. Dickson. “As the public is increasingly affected by the decisions being made internationally, sharing Canadian experience and expertise with an international audience would seem to offer your profession a means of further meeting your first guiding principle.”

Ms. Dickson also congratulated Canadian actuaries on the arguments they made concerning the implementation of the International Financial Reporting Standards (IFRS). But that said, Ms. Dickson notes that her organization’s relationship with the Actuarial Standards Board is not as good as the one it has with the Accounting Standards Board.

She points out that OSFI has worked with both actuaries and accountants when dealing with the IFRS issue, but has the feeling that the Actuarial Standards Board is reluctant to develop the accompanying Canadian standards without OSFI’s support.

“We believe that such an approach would position OSFI as the sponsor or owner of such standards. To us, it would be much more appropriate and, we would think, preferable to the actuarial profession, for it to take the lead in this regard. If OSFI, by default, becomes the owner of the standards, the role and importance of the actuarial profession would be diminished,” comments Ms. Dickson.