The Working Party has developed some practical hints and tips for those developing integrated risk management (IRM) plans for UK defined benefit pension schemes in the context of the requirements of the Pensions Regulator. Four case studies are presented to illustrate its conclusions, which are encapsulated in the ten commandments for effective IRM. IRM is the consideration of investment, funding and covenant issues, and how these interact. Its purpose should be to aid decision making and so should have a clear outcome in mind. It should be a continuous process and should form part of everyday trustee governance – it is not simply a one-off exercise. Whilst most Trustees and advisors consider funding issues when setting their investment strategy and vice versa, fewer fully integrate covenant into their decision-making process. However, covenant underpins all risk taken in a pension scheme and so needs to form a regular part of trustee discussions and analysis by advisors.

This paper presents latest thinking from the Institute and Faculty of Actuaries’ Model Risk Working Party and follows on from their Phase I work, Model Risk: Daring to Open the Black Box. This is a more practical paper and presents the contributors’ experiences of model risk gained from a wide range of financial and non-financial organisations with suggestions for good practice and proven methods to reduce model risk. After a recap of the Phase I work, examples of model risk communication are given covering communication: to the Board; to the regulator; and to external stakeholders. We present a practical framework for model risk management and quantification with examples of the key actors, processes and cultural challenge. Lessons learned are then presented from other industries that make extensive use of models and include the weather forecasting, software and aerospace industries. Finally, a series of case studies in practical model risk management and mitigation are presented from the contributors’ own experiences covering primarily financial services.

Solvency II is currently one of the most sophisticated insurance regulatory regimes in the world. It is built around the principles of market consistency and embedding strong risk management and governance within insurance companies. For business with long-term guarantees, the original basis produced outcomes that were unacceptable to the member states. The original design was amended through Omnibus II. The working party has looked back at the outcome of the final regulation and comments on how well Solvency II has fared, principally from a UK perspective, relative to its initial goals of improved consumer protection, harmonisation, effective risk management and financial stability. We review Pillar 1’s market consistent valuation (including the risk margin and transitional measures) as well as the capital requirements (including internal models). We look at the impact this has on asset and liability management, pro-cyclicality and product design. We look at Pillars 2 and 3 in respect of the Own Risk and Solvency Assessment, liquidity and disclosure. Finally, we stand back and look at harmonisation and the implications of Brexit. In summary we conclude that Solvency II represents a huge improvement over Solvency I although it has not fully achieved the goals it aspired to. There are acknowledged shortfalls and imperfections where adjustments to Solvency II are likely. There remain other concerns around pro-cyclicality, and the appropriateness of market consistency is still open to criticism. It is hoped that the paper and the discussion that goes with it provide an insight into where Solvency II has taken European Insurance regulation and the directions in which it could evolve.

Conventional diagnoses of the 2007/8 Global Financial Crisis see it as “abnormal”, and then resort to explanations in terms of “irrational exuberance”, “animal spirits”, “herding behaviour” and so on. The prescription – “better regulation” – then follows automatically, as it has done after every such crisis, all the way back to tulipmania 400 years ago. But if there are different “seasons of risk”, and if financial sector actors are able to latch onto different risk-handling strategies, each appropriate to one of those seasons and inappropriate to the others, then we have a very different explanation: one in which, in contrast to both neoclassical and behavioural economics, rationality is no longer singular. This “anthropological” hypothesis has its roots in Mary Douglas’s book “How Institutions Think”, and the paper shows how it is well supported by historical evidence, agent-based modelling, and fieldwork among both financial sector firms and their regulators, as well as by parallels from ecology, organisation theory and evolutionary (i.e. Schumpeterian) economics.

The intellectual climate around financial solvency regulation has changed markedly since the global financial crisis, especially with regard to the usefulness of market prices, the desirability of principle-based solvency assessment, the feasibility of a probabilistic approach to produce accurate capital estimates, and indeed whether solvency assessment should be risk-sensitive at all. This short paper provides some reflective notes on approaches to solvency capital assessment for insurance firms in this context.

In the last three decades the life insurance industry was rocked by a series of mis-selling scandals such as endowment mortgage, personal pension and payment protection insurance mis-selling. Regulators have stepped in to try to address the underlying causes and improve customer protection by introducing more stringent regulation targeted at sales practices and remuneration, product design, disclosure and ongoing monitoring together with significantly larger financial penalties for non-compliance. Against this background, the paper considers whether customers understanding of risks and outcomes associated with life insurance products can be further improved and how poor customer outcomes can be avoided in the future. We acknowledge the complexity of these issues, which involve many stakeholders, covering all stages of the product lifecycle and customer journey and being impacted by a constantly changing regulatory landscape. We first review the current regulatory landscape across both the United Kingdom and other jurisdictions, concluding that whilst regulators have acted to improve customer protection, gaps still remain, particularly around the areas of disclosure and consideration of changing customers’ needs throughout product lifetimes. The paper then considers how the current situation could be improved for customers in a cost effective manner. We focus on improvements in disclosure, needs-based selling, ongoing assessment and communication as a means of ensuring that products continue to meet the customers’ needs and risk profile, and on introducing a duty of care which would force financial services firms to act in the best interests of their customers. In this paper we present our preliminary thoughts and recommendations. Some of the recommendations will cost something to implement, and should therefore be supported by cost-benefit analyses that would weigh these costs against the potentially larger benefits to both customers and the insurance industry.

Much actuarial work is underpinned by the use of economic models derived from mainstream academic theories of finance and economics which treat money as being a neutral medium of exchange. The sustainability of a financial system whose understanding is based on a limited view of the role of money has increasingly been subject to criticism. In order to identify needed research programmes to address such criticisms and improve these disciplines, we sought to understand the current state of knowledge in economics and finance concerning the link between monetary and financial factors and sustainability. We have approached this through a search for relevant literature published in the highest-rated academic journals in economics, finance and the social sciences for titles and abstracts containing both references to the financial system on the one hand, and sustainability and environmental factors on the other. The systematic search of a universe of 125 journals and 355,000 articles yielded the finding that surprisingly few research papers jointly address these concepts. Nevertheless, we find that current research shares a broad consensus that the implications of the growth-oriented economic model results in an increasingly interconnected and fragile financial system whose participants are not incentivised to fully recognise the natural environment and resource constraints. We further observe that the prescriptions offered are relatively limited and small-scale in their outlook and that there is a vital need for further research, particularly for actuaries who are required to take a longer-term outlook. The Resource and Environment Board has supported this work with two key objectives: first, to identify research that may have direct application to actuarial work and, second, to identify gaps in academic research that would help drive the Institute and Faculty of Actuaries’ own research agenda. With this in mind there are three further areas of potential actuarial research. These are the policy aim of pursuing growth without limit within a finite ecosystem; discount factors as the primary means of capital allocation and investment decisions; and the use of gross domestic product as the key metric of economic activity and success. We also conclude that further academic research is urgently needed to understand the sustainability of the banking and monetary system.

This abstract relates to the following paper: Aspinall, N.G., Jones, S.R., McNeill, E.H., Werner, R.A. and Zalk, T., Sustainability and the financial system: Review of literature 2015. British Actuarial Journal. doi: 10.1017/S1357321718000028

This abstract relates to the following paper: RaeR.A., BarrettA., BrooksD., ChotaiM.A., PelkiewiczA.J. and WangCA review of Solvency II: has it met its objectives? ‐ Abstract of the Edinburgh DiscussionBritish Actuarial Journal. doi: 10.1017/S1357321717000241

This abstract relates to the following paper: KelliherP.O.J., AcharyyaM., CouperA., GrantK., MaguireE., NicholasP., SmeraldC., StevensonD., ThirlwellJ. and CantleN.J.Good practice guide to setting inputs for operational risk models ‐ Abstract of the Edinburgh Discussion. British Actuarial Journal. doi: https://doi.org/10.1017/S1357321716000179

In this paper, four variants of calculating the Solvency Capital Requirement for long-tail liabilities satisfying Solvency II regulations are discussed. The merits of each metric are related to the stated objectives of Solvency II. Assumptions made in the calculations are assessed for suitability for the determination of an appropriate level of Solvency Capital. We show that two methods for calculating Solvency Capital provide insufficient capital to restore the Economic Balance Sheet in the event of distress. The standard formula referencing the Claims Development Result is shown to be too conservative when models are correctly specified.

This abstract relates to the following paper: CookeJ., ScottA., SmithD., RoganA., CooperR.MorganS., PlotnekA., KenyonN. and BhallaS.Recalculation of the Solvency II Transitional Measures on Technical Provisions ‐ Abstract of the Edinburgh Discussion. Institute and Faculty of Actuaries. https://www.actuaries.org.uk/documents/recalculation-solvency-ii-transitional-measures-technical-provisions

This abstract relates to the following paper: BlackR., TsanakasA., SmithA. D., BeckM. B., MaclugashI. D., GrewalJ., WittsL., MorjariaN., GreenR. J. and LimZ. (2018) “Model Risk: Illuminating the Black Box ‐ Abstract of the Edinburgh Discussion,” British Actuarial Journal. Cambridge University Press, 23, p. e2. doi: 10.1017/S1357321717000150.

This abstract relates to the following paper: HitchcoxA. N., PatelC., RamseyC. J., StuddE. L., MaL. T., ElliottM. B. and KeoghT. W. (2018) “IRM: Putting theory into practice for UK defined benefit pension schemesy ‐ Abstract of the London Discussion,” British Actuarial Journal. Cambridge University Press, 23, e1. doi: 10.1017/S1357321717000095.

This abstract relates to the following paper: BarnardC. R., FrancisK., HussainT., JumancaC. and ZhangA. (2018) “Do customers understand our life insurance products? ‐ Abstract of the London Discussion,” British Actuarial Journal. Cambridge University Press, 23, e9. doi: 10.1017/S135732171800003X.