2006 PARIS

The Business of the Consultant Actuary

Chairman: Adrian Waddingham UK

Presenters: Segundo Tascon Mexico

Ed Morgan Switzerland

Stuart Leckie China

1st June 2006 09:00 – 10:30

The UK “Morris Review” 2005• Adequate choice of (actuarial) provider• High concentration in advice to biggest

pension schemes ( four firms have 70%)

• Choice might be limited in future if smaller firms have insurance problems and are exposed to uncapped liabilities

• Market testing of providers, and switching of actuaries, is low

• Preference for multi-service provisioncould limit competition by single service providers

Growth of UK consultants

0

200

400

600

800

1000

1200

1400

1600

1990 1996 2000 2004

(membership of the UK Association of Consulting Actuaries)

Choice of (actuarial) provider• Significant entry by small/medium firms

(and the “big four” accountants)• So good choice – except for investment

advice to large pension plans• Recommended “un-bundling” of

investment advice• And to help small firms on PI insurance:

– Use liability caps– Set up “collective” insurance schemes– Improve risk controls– Use proportionate liability clauses

Market Testing (of actuaries)

• Pension trustees should– Evaluate (informally) their actuaries

annually– Formal evaluation every three years– Market test no less than every 6 years

• Trustees should report their compliance with this approach (or if not, why not?)

Scrutiny of Actuarial Advice

• Address the “understanding gap” between actuaries and their clients

• UK Pensions Regulator now giving “code of practice” on pension trustee knowledge and understanding

• Greater use of professional trustees

• Should the client’s existing actuary provide the trustee training?

The Business of the

Consultant Actuary

Segundo Tascón NewtonDirector General Watson Wyatt Mexico

In Mexico

The Retirement Consultancy has been more dynamic over the last six years than in the last three decades to the point that it requires high specialization of various retirement disciplines, being the result of…

Factors of Influence in the Consulting Work

A. - Social Security LawB. - Legal FrameworkC. - DemographyD. - GlobalizationE. - Accounting Standards

Factors of Influence in the Consulting Work A. - Social Security Law

20012005

20092013

20172021

20252029

2033

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

Law 1973

Law 1997

Factors of Influence in the Consulting Work

B. - Legal Framework Mexican Labor Code

All companies have a statutory obligation to make a severance payment if employment is terminated without just cause.Attainment of retirement ages is not deemed to be just cause.Therefore, Legal Termination Indemnity is payable upon retirement.Legal Termination Indemnity = 3 months pay+ 20 days pay x

Years of service

Factors of Influence in the Consulting Work

B. - Legal Framework Income Tax Law

Pension Plan Advantages:Tax deductible contributionsInvestment income not taxedTax free pension up to 9 times the monthly wage salary

Years

0%

10%

20%

30%

40%

50%

60%

1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2055

Po

pu

lati

on

Per

cen

tag

e

0-19

20-59

>60

Age Groups:

Factors of Influence in the Consulting Work C. - Demography

Factors of Influence in the Consulting Work

D. - Globalization

Sox Law – PP Governance – Investment StrategyTrend toward DC PlansGlobal ActuaryReporting CoordinationHigh level of Competitive MarketCommunication

Factors of Influence in the Consulting Work

E. - Accounting Standards FAS 87 Boletín D-3 IAS 19

Evolution of Retirement Consultancy

From - Annual Actuarial Valuation for Funding and Accounting

plus

To - Pension Plan redesignPension Administration (benefit statements, etc)Workforce planningInvestment consultingALMSpecialized communicationSocial Security and tax

planning advice

Evolution of Pension Plans

A. - DB plans equivalent to legal Termination Indemnity

B. - Trend towards departure from traditional DB Plans

Alternative Pension Plan Design Pension Equity Plan Seniority Award Strategic Bonus Health Retirement Account

Current Issues

The constant ghost of a new pension legislation

Rules and regulations of investment

SOX law

The Business of the Consultant Actuary – A European View

Ed Morgan, PrincipalMILLIMAN

SOMMAIRE/ SUMMARY

Introduction to Ed Morgan and my experience as a consulting

Contrast consulting and Insurance businesses

A background to actuarial consulting in Continental Europe

Opportunities and Challenges

An introduction to Ed MorganAn introduction to Ed Morgan I am a UK actuary (FIA 1989)

I am mainly a life actuary although I have also done some non-life work

I have been based in a number of European countries (UK, Italy, France and now Switzerland)

My experience in consultingMy experience in consulting I worked for 15 years in large insurance

companies

In 1999 I started as an independent consultant

In 2001 I started to build a group of international consultants spread across several European countries

In 2004 our group of consultants became part of Milliman

Consulting is very different from InsuranceConsulting is very different from Insurance There are many fundamental differences between the

insurance and consulting businesses in terms of the issues involved in managing a business. For example:

Insurance workflows tend to be fairly predictable – consulting workflows can be very uneven (e.g. year end work) or unpredictable (e.g. M&A work)

(Life) Insurance is a “hard” selling business. Consulting is (usually) a soft sale.

Insurance is a very regulated business. Consulting is quite unregulated.

Insurance company structures are hierarchical pyramids. Consulting structures are much flatter.

Actuarial Consulting is relatively Actuarial Consulting is relatively underdeveloped in Continental Europeunderdeveloped in Continental Europe

There are a variety of reasons for a lower level of development than in the anglo-saxon world:

Insurance markets were significantly more regulated (at least until 10 years ago with the introduction of changes such as the 3rd EU Life Directive).

More dominant role of state in pension systems The role of the actuary was traditional seen as a

narrower “liability-side only” role.

European Actuarial Consulting MarketEuropean Actuarial Consulting Market

Many small firms and independent consultants

More generalists than specialists

Relatively limited presence of large international firms (a situation gradually changing over the last 10 years)

OpportunitiesOpportunities Continuing rapid pace of change (e.g. Solvency II,

advent of stochastic modelling etc)

M&A activity (although emergence of bigger players can eventually lead to more self-sufficiency)

Greater awareness of the value of actuarial advice

“Industrialisation” of some actuarial processes

Various audiences want an external opinion (e.g. validation of internal models for Solvency II)

Business Challenges Facing Actuarial Business Challenges Facing Actuarial Consultants in Europe TodayConsultants in Europe Today

Insurance companies are becoming better at purchasing consulting (not necessarily a disadvantage)

Increasing risk of litigation and consequent impact on cost of Professional Liability Insurance

Need for specialisation (insurance world is too complex for one person to cope with everything)

Need for high-power tools (we need software engineers as well as actuaries)

29

The Business of the Consulting Actuary

“The Challenges of Consulting – China”

STUART H. LECKIE O.B.E., J.P., F.F.A., F.I.A., F.S.A.TEL: (852) 2147 9998FAX: (852) 2147 2822E-mail: stuart.leckie@stirlingfinance.com

1 June 2006

Map of China

China DemographicsChina DemographicsTotal:

Rural Population:

+

Urban Population

Consider:

One Child Policy

Greatly improved life expectancy

Dependency Ratio deteriorating rapidly

About 1.3 billion

800 million

+

500 million

Ages:

0-14 90 million

15-59 370 million

60+ 40 million

China Demographic DevelopmentsChina Demographic Developments

59.6

6.1 7.8 6.8

71.5

1.76.2

10.9

77.1

1.9 2.0

28.2

Life expectancy Fertility rate Old-age DependencyRatio

60+ as % of totalpopulation

1970 2005 2040Source: UN Population Division

History of Life CompaniesHistory of Life Companies First insurance company in Shanghai, 1912

AIA 1919

People’s Insurance Company of China (PICC) restarted insurance business in 1980

Today 34 life insurance companies operating in China

6 national domestic life companies

20 international companies with J.V.’s

Growth rate extremely high

Interest rates low/mismatching problem

Life companies very restricted on investments

PICC, China Life, Ping An + others to go public

WTO restrictions to ease

History of Chinese Actuarial ProfessionHistory of Chinese Actuarial Profession Introduction of overseas actuarial

education systems, examples

Graduate actuarial program at Nankai University jointly developed with SOA, 1987

Exam centre of Institute of Actuaries at Central University of Finance and Economics, 1993

Exam centre of Institute of Actuaries of Japan at Southwest University of Finance and Economics and China Finance College in 1998

Exam centre of Casualty Actuarial Society at Shanghai University of Finance and Economics in 2002

History of Chinese Actuarial ProfessionHistory of Chinese Actuarial Profession

Construction of Insurance Regulation, 1995

Chinese Life Insurance Mortality Table, 1996, 2005

Actuarial Practice Standards and Actuarial Reporting System, 1998

Organizational establishment, 2001

Majority of actuaries are company actuaries

Western consultancies active

No real emergence (as yet) of local consultants

Society of Actuaries of China (SAC)Society of Actuaries of China (SAC)

First Chinese actuarial exams in October 1999

43 Chinese qualified actuaries

SAC set up as subsidiary of China Insurance Association and under auspices of CIRC in July 2001

14 exam centres, including Hong Kong

2005, applied to become an independent organization

SAC Annual Conferences and IAA International Forums

Life LegislationLife Legislation

Shanghai rules 1995

Standardization of policy provisions

Appointed Actuary system

Embedded Value reporting requirement, 2005

“Enterprise Annuities” – MOLSS

Policy directive – State-owned enterprises to concentrate on primary business and withdraw from domestic partnership of JV insurance companies

Actuarial ActivitiesActuarial Activities8 Functions:

• Life• Non-life• Healthcare• Social security• Pensions• Investments• Education• Regulation

ChallengesChallenges

Relationship based

Data

Fees

Unsophisticated users

Bonuses and “reasonable expectations”

Accounting standards

Governance

Professional liability

RegulatorsRegulators Banking China Banking Regulatory Commission

Insurance China Insurance Regulatory Commission

Investments China Securities Regulatory Commission

Pensions Ministry of Labour & Social SecurityCIRCCSRCCBRC Ministry of Finance

Comparison with Hong KongComparison with Hong Kong

“1 country, 2 systems”

No. of actuaries, associates & students

Fellows: China 50 Hong Kong 280

Associates: China 160 (ASACs) Hong Kong 250

& Students

Joint ActivitiesIAA International Actuarial ForumShanghai-Hong Kong-Taipei Actuarial SymposiumAnnual Joint Regional Seminars

Thank you!