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Threats to Actuarial Quality and Regulatory Reform

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management


In its latest Risk Perspective report the Joint Forum on Actuarial Regulation (JFAR) has highlighted risks to high quality actuarial work in a number of areas.  JFAR comprises the Financial Reporting Council (FRC), the Institute and Faculty of Actuaries (IFoA), the Financial Conduct Authority (FCA), The Pensions Regulator (TPR) and the Prudential Regulation Authority (PRA).

The JFAR identifies eight “hotspots” where there is a perceived increase in risk to the public interest where actuarial work is central. Not surprisingly, Covid-19 and climate change are highlighted as top risks.

Systemic Risk - “the risk that actuaries may not allow appropriately for the increasing global interconnectedness of risk or may be inappropriately guided by groupthink”

The report identifies “Systemic Risk” as a key “hotspot”, which has now been updated to include a consideration of the potential impact of the Covid-19 pandemic on actuarial work. The JFAR considers that the pandemic threatens actuarial quality due to the introduction of uncertainties into the assumptions used for mortality, health and future economic experience. More generally systemic risk threatens actuarial quality because it can lead to events outside the bounds of scenarios normally used in actuarial models.

Climate Related Risk – “the risk that actuaries may not take into account appropriately, or communicate clearly, the impact of climate-related risks on decisions of users of actuarial advice”

We have seen many recent publications on the risks associated with climate change including from a number of regulators. It is not surprising that climate change is identified as a key hotspot where actuaries have an “important role” in assisting others to mitigate the worst effects of what is described as potentially “the defining risk of our times”. The report helpfully sets out actions and publications of government and JFAR regulators.

The report identifies the pressure on long term investors to respond to client change as meaning that users of actuarial work will want assurance from actuaries that the impact of exposure from physical, transition and liability risks related to climate change are fully assessed and incorporated into actuarial work. The actuary needs to ensure that users of their work understand the degree to which these risks are factored into their assessment, uncertainties around that and the residual risk that remains.

Other hotspots

Other hotspots identified in the report include: 

Ageing Population and Affordability - “the risk of failure to allow appropriately for changing costs of mortality, morbidity and family support systems due to future experience deviating from projections”. This is identified as potentially “the third most significant risk”.
Unfair outcomes for individuals – “the risk of actuaries not acting in the best interests of customers… which may result in unfair
treatment of some subgroups in favour other subgroups that are financially more profitable”.
Geopolitical, Legislative and Regulatory Risk – “the risk that actuaries are unable to consider or plan for the potential for political, legislative or regulatory change at an international or national level”.
Technological Change and Competence In New Areas – “the risk that actuaries entering new fields may not have a deep enough understanding of the statistics or that they may not adequately understand Artificial Intelligence (AI) models or other disruptive advances”.
Impact Of Undue Commercial Pressure -”the risk that actuaries may be placed under significant pressure to adopt inappropriate assumptions or models to achieve desired commercial outcomes”.
Effective Communication – “the risk of actuaries failing to adequately explain the risks and potential adverse outcomes to decision makers or to others impacted by the actuarial work”. 

Future changes to the regulation of actuarial work?

The report comes at a time when the broader regulatory framework for actuarial work is under scrutiny.

The Kingman Report, an independent review of the FRC published in December 2018 and led by Sir John Kingman, called for the abolition of the FRC and its replacement with a new Audit, Reporting and Governance Authority (ARGA). Legislation to bring ARGA into effect is still awaited. In the review, Sir John also made the following recommendations for the future oversight of the actuarial profession; highlighting its importance to the pensions and insurance industries in particular:

  • The Government, working with the PRA and TPR, should review what powers are required effectively to oversee regulation of the actuarial profession (Recommendation 74);
  • Neither the FRC, nor ARGA is best-placed to be the oversight body; the PRA (which employs around 80 actuaries) is a much larger repository of regulatory actuarial expertise than the FRC and would be best-placed to take on all the actuarial responsibilities currently vested in the FRC (Recommendation 75).

The basis for these recommendations is:

1.    Although the FRC carries out oversight of the IFoA by reviewing relevant IFoA activities and monitoring visits, it performs no monitoring or supervisory role over the quality of actuarial work.

2.    The FRC’s enforcement remit is limited to investigating, in the public interest, potential misconduct by individual actuaries (not firms).

Sir John noted that actuarial work performed within a statutory audit context should continue to be subject to audit oversight monitoring and enforcement and will therefore remain the responsibility of the FRC.

Although the government welcomed Sir John's recommendations (and the IFoA launched a new actuarial monitoring scheme in September 2019, overseen by the FRC), they will require primary legislation to implement them.


Actuaries should consider the areas of risk identified in the JFAR’s report and take appropriate steps to address them in their work. Although the risks stemming from Covid-19 may be the most immediate, risks such as climate change are also a key area of current focus.

JFAR stresses in the report that it is not claiming that there is current evidence of the risks materialising or of poor quality / insufficient actuarial work occurring in these areas. It also says that it does not intend to propose additional regulation to mitigate all the risks identified in the report.

While the FRC has brought very few enforcement cases against actuaries, that position may change with a new regulatory regime. Having regard to guidance such as that issued by the JFAR will be key to avoiding adverse regulatory findings.