A MUCH WIDER application of actuaries’ skills outside their mainstay in the insurance industry would have helped to avert some of the massive corporate losses we are now seeing, according to the profession’s peak body.
The Institute of Actuaries Australia said the market volatility and losses of recent months was increasing demand for professionals that could help analyse risks, as well as integrate risk management practices into companies.
The IAA’s new president, Greg Martin told Risk Management actuaries have an important role to play in assessing the risks faced by organisations outside the insurance sector, and were now being sought out by banks and regulators to help assess complex financial and operational risks.
“We are increasingly seeing our skills being called upon to address the wider risks faced by the businesses we help,” he said. For instance, he said regulators like ASIC were appointing a lot more from the accounting field instead of lawyers.
ASIC chairman, Tony D’Aloisio, acknowledged recently that the regulator needed more expertise within its ranks to be able to effectively oversee the operation of the markets in conjunction with the Australian Securities Exchange.
Martin said there were a wide range of underlying reasons for the high-profile losses and corporate collapses in companies such as RAMS, Tricom, Allco. MFS, Centro, ABC Learning, Société Générale, Northern Rock and now Bear Stearns.
The root causes, he said, included miscalculations of operational risk, strategic risks in the business model, leveraged exposure to credit or market risk and market perceptions about complex financial arrangements.
As an actuary, Martin said the risks that the various failed corporates were exposed to seemed obvious, as did the weaknesses inherent in the unlisted, unrated debentures market.
“Did they understand the value gains from the risks in the good times they were trading for the value destruction that would come in the bad times?” Martin said.
“Were some of those employed to manage these businesses properly incentivised to weigh up that trade?”
Other questions that should have been asked included: “did these businesses actually understand the risks they were involved with; the depth and cumulative affect of the risks they faced; the likelihood of circumstances in which the risks would bite?”
Some of the big failures seemed to be classic examples of a company owning long-term assets funded by short-term liabilities. “The company may well have found it could increase immediate profit margins through using certain favourable funding sources. How well did it consider the strategic business risk of focusing on the funding sources?” Martin said.
“Assessing and advising on such asset-liability mismatch risk is fundamental to the work off an actuary.”
Martin also told Risk Managementthat disclosures in company accounts were becoming so lengthy and detailed, it was difficult even for actuaries to understand the key risks they faced.
He said there needed to be more attention paid to analysing exactly what was being disclosed and then a summary provided of the key risks faced, and what this meant in practice for the company.