What questions should you ask your actuary?

Photo credit: iStock.com/FangXiaNuo

Over the last 20 years, I’ve presented the results of various actuarial analyses to client Boards hundreds of times. Sometimes I get asked great questions, but mostly, I don’t.

I understand why, though. The actuarial presentation is rarely the sole focus of a Board meeting, and the Board is usually moving quickly through a busy agenda with financial results, governance issues, new initiatives, marketing, etc.

I also understand that some Board members are less comfortable than others with the numbers and financial-centric presentations. The actuarial concepts and terminology can be overwhelming, and some Board members are bound to feel uncomfortable asking questions for fear of showing a lack of understanding. It is certainly not their fault – Board education on actuarial topics is not easy to find, and often Board members will be limited to one or two opportunities annually to have any actuarial discussion.

To encourage actuarial discussion at the Board level and highlight the value that the actuary can provide, I came up with a list of questions for Boards to ask their actuary.

Here are my top five:

1) Is there anything as part of your work or our operations that is of concern to you?

This question opens the floor for the actuary to discuss potential concerns or simply to provide assurance to the Board that none have been identified.

The best part about this question is how general and open-ended it is. While the typical actuarial presentation might have been only focussed on one specific area, such as pricing, reserving, or stress-testing, this question allows the actuary to bring up other concerns, too.

Interestingly, it’s quite common for audit committees to meet in-camera with the auditor, but not with the actuary. Why not? Going in-camera allows the actuary to speak more freely, especially if they are bringing up concerns which aren’t part of the presentation that was requested by management.

2) We aim to be the best – is there anything being requested by regulators or your other clients that we should also consider doing?

Some organisations view the actuarial work as a pure regulatory compliance exercise and simply want the actuary to update their analysis from the prior year. Even as an actuary, I understand that it’s easier to review a report year over year when the only thing that changes is the figures.

Other organisations view the actuary as a strategic partner. They include the actuary in strategic planning and thrive on continual improvement of the actuarial reporting. The actuary (especially an actuary who has experience with other organisations or who is actively involved within the actuarial community) can often provide valuable input on what’s coming down the regulatory pipeline, what the burning issues are for other organisations, and what other analyses could be provided to deliver insights with respect to strategic goals.

3) What do you do to fulfill your financial monitoring requirements as our appointed actuary?

The appointed actuary of any company in Canada is required to perform some financial monitoring throughout the year. Asking about and understanding what your appointed actuary does to fulfill this requirement provides the Board with a better understanding of and a higher confidence in the controls in place to monitor the financial health of the entity.

4) What do you think of our strategic direction?

Your actuary understands your operations, the regulatory environment, and the current market conditions. They may be able to provide you with valuable advice.

Again, I like this question because it is very general in nature and provides an opportunity for your actuary to give a high-level response which isn’t constrained by a specific reporting item on the agenda. Depending on how dialed-in the actuary is with your strategic direction, you may get an answer immediately, or they may have to circle back to you with their input.

5) What other stress-testing of assumptions, catastrophes or scenarios should we consider as part of our risk assessment strategy? Are we focussing enough on the key risks to our business?

In my experience, this question usually allows the Board to hear the same information that management would have conveyed from another source, but in some cases, it can reveal new areas which the Board should be concerned with. Depending on the level of regulation the entity is subject to, these discussions may already be at the forefront of a Board’s agenda. For smaller organizations and organizations with less complex risks, such as captives or reciprocal insurance exchanges, the Board is often not as well-versed, for example, in operational risks.

Your actuary is an expert that analyzes your operations, understands the financial impact of rating decisions, and monitors the financial health of your organization. In my ideal world, there would always be a few minutes set aside for me at each Board meeting to discuss some of these questions. I know the Board’s agenda is full, but the discussion that ensues should be of value to the organization.

While some actuarial presentations might be gruesome, routine, or even confusing, these more general questions should be answered in plain English and allow for an exchange that builds a high level of trust and makes the most of one of the Board’s most valuable assets – the actuary.

 

Julie-Linda Laforce, FCIA, FCAS, MAAA
CFO, Principal of Property & Casualty Actuarial Services