Dr Shane Whelan, FFA

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Asset-Liability Management for Actuaries

• Dr Shane Whelan, FFA

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Preface

• This course is given jointly with Mr Gareth
  Colgan, MA, FIA.
• It is based on the Core Applications - Concepts
  (CA1) course of the Faculty Institute of
  Actuaries
• It is not an exemption subject.
• Integrates all areas of actuarial practice with
  the concept of the actuarial control cycle.
• Gives an introduction to traditional areas of
  actuarial expertise.
• My lectures are on Tues at 1100 in Q011 and
  1200 in Q004.
• Three hour exam in Summer (repeat in Autumn). No
  choice on exam required to do all questions.

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Chapter 1

• The Actuarial Profession
• "Every person who has mastered a profession is a
  skeptic concerning it."
  George Bernard Shaw

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What do actuaries do?

• A reasonable definition might be
• Actuaries assess, quantify, monitor and advise
  on the management of risks inherent in contracts
  or structures that provide benefits on future
  contingencies.
• The contingencies are often related to death or
  survival or state of health.
• Actuaries also contribute to decisions on
  investment policies aimed at meeting future
  liabilities

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Technical Skills Possessed by Actuaries

• To perform their function, actuaries must be able
  to
• Handle data in a critical manner
• Use data relating to future liabilities to
  estimate the amount and timing of future payments
• Use economic analyses to form judgements on such
  matters as future inflation and interest rates.
• Handle assumptions in a critical manner
• Build appropriate margins into assumptions and
  appreciate the impact of such margins
• Project and discount future cashflows
• Build, calibrate, test, and implement models
• Calculate the contributions required to build up
  a fund over time to meet future liabilities
• Monitor the progress of the accumulation of a
  fund and the build up of assets to meet future
  liabilities
• Analyse the variation between the actual and
  expected experience
• Advise on how to manage the variation in the
  progress of a fund to ensure that future
  liabilities are met
• Communicate the results of their work.

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Professional Skills Serving the Public Interest

• To achieve their vocation, the actuary will
• Understand where and when the expertise of other
  professionals is needed
• Work with other professionals to solve problems
• Operate within an environment that requires
  professionalism, scrutiny and transparency
• Apply the highest standards of independence and
  due diligence to protect the public interest
• Help the Government in shaping legislation and
  regulations that affect the contracts and
  structures that they are expert in.

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Types of Advice given by Actuaries

• Advice can come in at least three different
  forms
• indicative advice giving an opinion without
  fully investigating the issues for example in
  response to a direct oral question
• factual advice based on research of facts e.g.
  legislation
• recommendations researched and modelled
  forecasts, alternatives weighted, recommendations
  made with facts
• Actuarial advice will often set out alternative
  solutions and the implications of each solution
  and come to recommendations. 
• Note that the actuary will have made assumptions
  in reaching the advice and recommendations that
  are given. Part of the process of advising the
  clients will be to explain the reasons for making
  those assumptions.
• The actuary should also explain the implications
  of alternative solutions on both the client and
  other stakeholders, who may be affected by them.

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Difficult Question

• What makes an occupation a profession?

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Professions Two Common Viewpoints

• The naïve view accepts the professions own
  view of itself as high levels of skill coupled
  with high ethical standards.
• The cynical view sees professions as
  self-interest groups, opportunistically
  monopolising a domain of knowledge for high
  wages
• "People of the same trade seldom meet together,
  even for merriment and diversion, but the
  conversation ends in a conspiracy against the
  public, or in some contrivance to raise prices.
  It is impossible indeed to prevent such meetings
  by any law which either could be executed, or
  would be consistent with liberty and justice."
• Adam Smith (1776) An Inquiry into the Nature and
  Causes of the Wealth of Nations, vol. I, bk. I,
  ch. 10.

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Meaning Origin of Professions

• Three prongs to a profession
• Cognitive expert, specialised knowledge from
  long training course. Monopoly on judging and
  applying this expertise.
• Normative ethical standards, serve the public
  good.
• Organisational organised in recognised grouping
  wirh disciplinary powers over members.
• Perhaps, in UK and Ireland, historically grew
  from 3 learned professions of divinity, law, and
  medicine as new professions in 19th century
  attempt to achieve the same social cachet.
• Requires trust concern welfare of individual
  services mostly to wealthy and members of
  profession must be similar.
• Incidental characteristic is being well-paid!
• Actuary is not regarded as a profession
  everywhere.

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Characteristics of a Professional

• The following might appear on any list
• Competence
• Integrity
• Relevance
• objectivity
• Diplomacy
• Sensitivity
• Awareness
• Reliability
• good communication both listening and delivery
• sensitivity to changes in the working environment
• ability to maintain confidences where appropriate
• Some see the ideal characteristics of a
  professional as remarkably similar to the old
  fashioned English gentleman, noblese oblige being
  replaced with in the public interest.

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Professional Guidance

• In UK and Ireland, professional guidance is given
  in the Professional Conduct Standards (PCS) and a
  set of Guidance Notes.
• These outline the standards imposed by the
  profession on its membership.
• Failure to comply can lead to sanctions or,
  ultimately, expulsion from profession.
• Key themes in professional standards are
• Act in proper manner
• Be discrete (keep a secret)
• Only act when competent to do so
• Only act when no conflict of interest
• Be fair to other actuaries

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Know Your Client

• The actuary needs to have sufficient background
  about the client to put the task into context.
• This requires broad business knowledge knowing
  the scene. Hence experience important.
• Obviously, the need to know exactly who is the
  client.
• Surprisingly, this is sometimes not obvious.
• The need to know if there are (or could be seen
  to be) any conflicts within the client firm
• Acting on both sides of a litigation or takeover.
• Acting when you have a financial interest in the
  outcome
• Pension funds advising both sponsor and
  Trustees?

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Abstacts from Professional Conduct Standards
(Faculty Institute of Actuaries)

• A member has a duty to the profession and must
  not act in a manner which denigrates its
  reputation or impugns its integrity.
  Responsibility to any client must be consistent
  with that duty.
• As a matter of law, information acquired by a
  member in the course of professional work is
  frequently confidential to the members client or
  the members firm.
• Many assignments offered to members require
  considerable knowledge and experience for proper
  completion. Requisite knowledge includes
  methodology, relevant legislation and local
  conditions. Members must not give advice, unless
• satisfied of personal competence in the relevant
  matters, or
• acting in co-operation with, or with the guidance
  of, someone (not necessarily a member) with the
  requisite competence.

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Abstacts from Professional Conduct Standards
(Faculty Institute of Actuaries)

• Clients are entitled to assume that advice given
  by a member is unaffected by interests other than
  those of the client, taking account of any
  identifiable professional or legal duty of care
  of the client in respect of a third party.
• A member must make full and timely disclosure to
  the client of any financial interest which the
  member or the members firm may have in any
  assignment that the member undertakes for that
  client or in its outcome.
• Members must avoid any action that would unfairly
  injure the professional reputation of any other
  member. Criticism of one members work by another
  member is acceptable, provided that the criticism
  is properly reasoned and believed to be
  justified.

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Abstacts from Professional Conduct Standards
(Faculty Institute of Actuaries)

• While publicity for the actuarial profession is
  encouraged, any form of publicity that might give
  a member an unjustified or unfair professional
  advantage, as opposed to a legitimate commercial
  advantage, is prohibited.

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Statutory Roles of Actuaries

• In some territories (Ireland, UK, US, etc) there
  are statutory roles that can only be taken by
  actuaries, mainly relating to the certification
  of the adequacy of assets to cover liabilities
  for a life insurer, general insurer or pension
  scheme.
• The actuary, in such a statutory role, is usually
  required to certify some or all of the following
• In his or her opinion proper records have been
  kept for the purpose of the valuation of the
  liabilities.
• The liabilities have been valued in accordance
  with any legislative rules setting out the method
  and assumptions for their valuation.
• The liabilities have been valued in the context
  of the assets, which in turn have been valued in
  accordance with the appropriate rules.

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Statutory Roles of Actuaries (Cont.)

• In his or her opinion the premiums/contributions
  for future years will be sufficient, on
  reasonable assumptions, and taking into account
  the surplus assets of the provider to enable it
  to meet its commitments.
• Proper provision for the liabilities has been
  made.
• A statement of the difference between the value
  of the providers assets and its liabilities.
• He or she has complied with professional guidance
  notes.

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What makes an occupation a profession?

• List might include
• Work done important to individuals and society as
  a whole
• The professional has control over how task is
  done
• Not obvious when work is of high quality or not.
• Members inherit reputation from previous
  generation, pass it on to next.
• Has the structure of a profession
• education and certification of competence,
• ethical standards,
• organisation with disciplinary powers over
  members
• Professions part of structure of the society
• Such self-regulatory structures must be a feature
  of the society

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Further Reading

• Bellis, C.S. (2000) Professions in Society.
  British Actuarial Journal 6, 317-364.
• Whelan, S. (2005) Global Science divided by Local
  Professions. The Actuary (UK), November 2005.
• Creedon, S. (2005) Morris Identifies Clear
  Choice, The Actuary (UK), Jan./Feb.
• Morris (2005) The Morris Review of the Actuarial
  Profession Final Report. HMSO
• Bellis, C. Shepherd, J. (Eds) (2003)
  Understanding Actuarial Management the Actuarial
  Control Cycle, Chapter 2. Institute of Actuaries
  of Australia
• For Professional Conduct Standards see websites
  of profession
• Ireland www.actuaries.ie
• UK www.actuaries.org.uk
• US www.soa.org
• For best source on most issues try the UK
  actuarial magazine at www.the-actuary.org.uk

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Asset-Liability Management for Actuaries

• Shane Whelan, L527