Actuaries’ crystal ball found wanting

Actuary's crystal ball

Actuary’s crystal ball

Today there was a comment about actuaries in the Financial Review – in a much more prominent place than most actuaries achieve. The context was a downgrade to AMP profit expectations, but it has wider interest in that Chanticleer finds actuaries in the life insurance industry wanting:

Actuaries have a wonderful reputation in financial markets because of their ability to make sense out of complex accounting and regulatory issues. However, a large part of their job is to deliver hard financial assumptions based on nothing more than well-educated guesses about human behaviour.

The assumptions about how Australians with income protection would respond to illness have proven wrong. That is true right across an industry that has new annual premiums of about $2.58 billion according to Plan for Life.

One reason the actuarial assumptions have been wrong in relation to income-protection insurance is that the actuaries have struggled to understand the change in the nature of work in Australia. More people are working part-time, there are fewer jobs for well-educated people, and there is much higher incidence of stress-related leave.

This isn’t the first time an actuarial change to assumption has created a bit of interest in the financial press, and it won’t be the last. Nevertheless, it is a great reminder to those of us who set assumptions on a regular basis that we need to think about the wider environment around those assumptions. We will never get the right answer (that is the only certainty). We can, however, think widely about the influences affecting our businesses.