The future of actuaries – the view at Lloyd’s

InsuranceERM interviews Henry Johnson, actuary at Lloyd’s of London. The interview focuses on how the operation is adopting Solvency II, but I’d like to focus on other parts:

First, what capital regulation means to the actuarial profession. In short, actuaries are becoming more important contributors:

Currently, there is no explicit role for actuaries at all, on the non-life side, outside of Lloyd’s, whereas under Solvency II there are lots of formal roles for actuaries.

I think a good actuary would be interested in most of the things that Solvency II imposes. There are lots of good actuaries in the Lloyd’s market and where they’ve gone into a managing agent as the only actuary, or the chief actuary, they’ve managed to persuade the directors of the managing agent that they actually know what they’re talking about reserving, capital, the business planning process, pricing and even investments and buying reinsurance.

I’m not suggesting the actuaries should be the decision-makers, but just that they’re good for adding value and helping people to think in an organized way about the issues. And the list of these issues is similar to, or even goes beyond, what Solvency II requires of actuaries.

Second, on the increasing demand for actuaries. Solvency II increases the need for modeling, and that will create a shortage of actuaries:

If everybody is going to have what would currently be a fairly thorough actuarial team, I do have concerns about the numbers of actuaries that will be required, both in the lead up to Solvency II and also in the future.After 2012, every insurer will have to be run like best practice today. That’s great – best practice is good – but suddenly moving to best practice for everybody is a big jump in resources and I don’t know exactly where all those people will come from.

Third, on whether actuaries make good risk managers. Basically, he says, actuaries can be good risk managers but their mathematical predilections don’t make them the automatic choice:

Not everybody trains in mathematics and if you said risk managers and actuaries would become one profession, then you’d either be saying everyone has to be trained in mathematics or that people who are not can’t contribute to risk management. And I don’t think that’s true. Also, actuaries have to do a lot more than just risk management.

And finally, if actuaries are needed to help set capital, what isn’t getting done?

Partly because of the demands that ICAS and Solvency II have placed on the actuarial profession to provide actuaries for capital calculations, there are fewer young dynamic, people who are basing their career on doing pricing.

It used to be the case a few years ago that if you took a bright young spark at the beginning of their career in the London market, they would often want to do pricing. And that’s because it’s very interesting and they could see the effect of their work quite quickly with underwriters. I’m concerned that that trend has now been reversed and that now the people who are trying to make their way are drawn towards the capital arena because that’s where the action is.

But really, pricing the business correctly is what determines whether we’ll make a profit or not, or even whether we’ll remain solvent or not. So I’d like to see more actuaries able to focus on that.

The final point is key. You can hold all the capital you want, but if you underprice your business, all you will do is drain that capital away.

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