Crazy "independent" idea
You know how listed companies are required to have their accounts audited independently by external auditors? This is to prevent their accounts from being audited by parties with vested interest in the financial statements of the companies (i.e. conflict of interest). For example, it is in the interest of the CEO of a company to present good results from its financial statement and therefore an audit by him or anyone close to him is likely to be biased or at least perceived to be so.
Now, given that for an insurance company, the largest liability is the policy liability i.e. reserve set aside to meet expected future insurance claims, why the position of Actuary is not independent? Currently, either the Actuary is a permanent staff of the insurance company or a consultant hired to act as the company's Actuary. Either way, he is the company's Actuary and is not required by regulation to be independent.
Of course there are constraints on the Actuary to ensure he act "independently". He is bound professionally by the code of conduct of the institute he belongs to. For example, the Institute of Actuaries of Australia stipulates that their actuaries always act in the interest of the public, among other things. Another check is the independent auditor's review of the company's Actuary's input in the financial statement. The auditor typically will engage their own actuary to conduct a peer review.
This all sounds good and well but there will always be constant pressure from the company's senior management and/or board of directors to present a good set of financial statements. Often, there will be pressure on the Actuary to either push up or down his calculated liability figures within "reasonable range". His initial figure is likely to be the middle of this range but the final figure is often changed from that. Still reasonable, just not middle.
A lesser argument can be made for the independent auditor, whose fee is paid by the company. Often, auditor has to provide "unofficial" help to the company lest they be replaced by another.
Here's a kooky idea: both company's actuary and auditor are randomly assigned to the company by a government body and compensation for their work is either fixed by the government (payable by company) or borne by the government (in which case, some sort of levy should be imposed on the industry to recoup the cost). In such scenario, both actuary and auditor can perform their work without fear or favour (or being "kicked out").
The immediate problem I can think of is that this increases the potential corruption level of the government. Just imagine the mischief some government official can get into. Also, for this to work, every country in the world has to adopt this to avoid companies fleeing to countries that do not.
I'm sure there are more issues with this idea but I cannot think up more (still recovering from illness!). What do you think?
Now, given that for an insurance company, the largest liability is the policy liability i.e. reserve set aside to meet expected future insurance claims, why the position of Actuary is not independent? Currently, either the Actuary is a permanent staff of the insurance company or a consultant hired to act as the company's Actuary. Either way, he is the company's Actuary and is not required by regulation to be independent.
Of course there are constraints on the Actuary to ensure he act "independently". He is bound professionally by the code of conduct of the institute he belongs to. For example, the Institute of Actuaries of Australia stipulates that their actuaries always act in the interest of the public, among other things. Another check is the independent auditor's review of the company's Actuary's input in the financial statement. The auditor typically will engage their own actuary to conduct a peer review.
This all sounds good and well but there will always be constant pressure from the company's senior management and/or board of directors to present a good set of financial statements. Often, there will be pressure on the Actuary to either push up or down his calculated liability figures within "reasonable range". His initial figure is likely to be the middle of this range but the final figure is often changed from that. Still reasonable, just not middle.
A lesser argument can be made for the independent auditor, whose fee is paid by the company. Often, auditor has to provide "unofficial" help to the company lest they be replaced by another.
Here's a kooky idea: both company's actuary and auditor are randomly assigned to the company by a government body and compensation for their work is either fixed by the government (payable by company) or borne by the government (in which case, some sort of levy should be imposed on the industry to recoup the cost). In such scenario, both actuary and auditor can perform their work without fear or favour (or being "kicked out").
The immediate problem I can think of is that this increases the potential corruption level of the government. Just imagine the mischief some government official can get into. Also, for this to work, every country in the world has to adopt this to avoid companies fleeing to countries that do not.
I'm sure there are more issues with this idea but I cannot think up more (still recovering from illness!). What do you think?
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