2006 PARIS

1. 2006 PARIS

2. The Business of the Consultant Actuary Chairman: Adrian Waddingham UK Presenters: Segundo Tascon Mexico Ed Morgan Switzerland Stuart Leckie China 1st June 2006 09:00 – 10:30

3. Adequate choice of (actuarial) provider High concentration in advice to biggest pension schemes ( four firms have 70%) Choice might be limited in future if smaller firms have insurance problems and are exposed to uncapped liabilities Market testing of providers, and switching of actuaries, is low Preference for multi-service provisioncould limit competition by single service providers The UK “Morris Review” 2005

4. Growth of UK consultants (membership of the UK Association of Consulting Actuaries)

5. Significant entry by small/medium firms (and the “big four” accountants) So good choice – except for investment advice to large pension plans Recommended “un-bundling” of investment advice And to help small firms on PI insurance: Use liability caps Set up “collective” insurance schemes Improve risk controls Use proportionate liability clauses Choice of (actuarial) provider

6. Pension trustees should Evaluate (informally) their actuaries annually Formal evaluation every three years Market test no less than every 6 years Trustees should report their compliance with this approach (or if not, why not?) Market Testing (of actuaries)

7. Address the “understanding gap” between actuaries and their clients UK Pensions Regulator now giving “code of practice” on pension trustee knowledge and understanding Greater use of professional trustees Should the client’s existing actuary provide the trustee training? Scrutiny of Actuarial Advice

8. The Business of theConsultant Actuary Segundo Tascón Newton Director General Watson Wyatt Mexico

9. In Mexico • The Retirement Consultancy has been more dynamic over the last six years than in the last three decades to the point that it requires high specialization of various retirement disciplines, being the result of…

10. Factors of Influence in the Consulting Work • - Social Security Law • - Legal Framework • - Demography • - Globalization • - Accounting Standards

11. $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 2001 2005 2009 Law 1973 2013 2017 2021 2025 2029 Law 1997 2033 • Factors of Influence in the Consulting Work • - Social Security Law

12. Factors of Influence in the Consulting Work • - Legal Framework • Mexican Labor Code All companies have a statutory obligation to make a severance payment if employment is terminated without just cause. Attainment of retirement ages is not deemed to be just cause. Therefore, Legal Termination Indemnity is payable upon retirement. Legal Termination Indemnity = 3 months pay+ 20 days pay x Years of service

13. Factors of Influence in the Consulting Work • - Legal Framework • Income Tax Law Pension Plan Advantages: Tax deductible contributions Investment income not taxed Tax free pension up to 9 times the monthly wage salary

14. 60% 50% Age Groups: 40% Population Percentage 0-19 30% 20-59 >60 20% 10% 0% 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2055 Years • Factors of Influence in the Consulting Work • - Demography

15. Factors of Influence in the • Consulting Work • - Globalization • Sox Law – PP Governance – Investment Strategy • Trend toward DC Plans • Global Actuary • Reporting Coordination • High level of Competitive Market • Communication

16. Factors of Influence in the • Consulting Work • - Accounting Standards • FAS 87 • Boletín D-3 • IAS 19

17. Evolution of Retirement Consultancy • From - Annual Actuarial Valuation for • Funding and Accounting • plus • To - Pension Plan redesign • Pension Administration (benefit statements, etc) • Workforce planning • Investment consulting • ALM • Specialized communication • Social Security and tax planning advice

18. Evolution of Pension Plans • - DB plans equivalent to legal Termination Indemnity • - Trend towards departure from traditional DB Plans • Alternative Pension Plan Design • Pension Equity Plan • Seniority Award • Strategic Bonus • Health Retirement Account

19. Current Issues • The constant ghost of a new pension legislation • Rules and regulations of investment • SOX law

20. The Business of the Consultant Actuary – A European View Ed Morgan, Principal MILLIMAN

21. SOMMAIRE/ SUMMARY • Introduction to Ed Morgan and my experience as a consulting • Contrast consulting and Insurance businesses • A background to actuarial consulting in Continental Europe • Opportunities and Challenges

22. An introduction to Ed Morgan • I am a UK actuary (FIA 1989) • I am mainly a life actuary although I have also done some non-life work • I have been based in a number of European countries (UK, Italy, France and now Switzerland)

23. My experience in consulting • I worked for 15 years in large insurance companies • In 1999 I started as an independent consultant • In 2001 I started to build a group of international consultants spread across several European countries • In 2004 our group of consultants became part of Milliman

24. Consulting is very different from Insurance • There are many fundamental differences between the insurance and consulting businesses in terms of the issues involved in managing a business. For example: • Insurance workflows tend to be fairly predictable – consulting workflows can be very uneven (e.g. year end work) or unpredictable (e.g. M&A work) • (Life) Insurance is a “hard” selling business. Consulting is (usually) a soft sale. • Insurance is a very regulated business. Consulting is quite unregulated. • Insurance company structures are hierarchical pyramids. Consulting structures are much flatter.

25. Actuarial Consulting is relatively underdeveloped in Continental Europe There are a variety of reasons for a lower level of development than in the anglo-saxon world: • Insurance markets were significantly more regulated (at least until 10 years ago with the introduction of changes such as the 3rd EU Life Directive). • More dominant role of state in pension systems • The role of the actuary was traditional seen as a narrower “liability-side only” role.

26. European Actuarial Consulting Market • Many small firms and independent consultants • More generalists than specialists • Relatively limited presence of large international firms (a situation gradually changing over the last 10 years)

27. Opportunities • Continuing rapid pace of change (e.g. Solvency II, advent of stochastic modelling etc) • M&A activity (although emergence of bigger players can eventually lead to more self-sufficiency) • Greater awareness of the value of actuarial advice • “Industrialisation” of some actuarial processes • Various audiences want an external opinion (e.g. validation of internal models for Solvency II)

28. Business Challenges Facing Actuarial Consultants in Europe Today • Insurance companies are becoming better at purchasing consulting (not necessarily a disadvantage) • Increasing risk of litigation and consequent impact on cost of Professional Liability Insurance • Need for specialisation (insurance world is too complex for one person to cope with everything) • Need for high-power tools (we need software engineers as well as actuaries)

29. The Business of the Consulting Actuary “The Challenges of Consulting – China” STUART H. LECKIE O.B.E., J.P., F.F.A., F.I.A., F.S.A. TEL: (852) 2147 9998 FAX: (852) 2147 2822 E-mail: stuart.leckie@stirlingfinance.com 1 June 2006

30. Map of China

31. China Demographics Total: Rural Population: + Urban Population Consider: • One Child Policy • Greatly improved life expectancy • Dependency Ratio deteriorating rapidly About 1.3 billion 800 million + 500 million Ages: • 0-14 90 million • 15-59 370 million • 60+ 40 million

32. China Demographic Developments

33. History of Life Companies • First insurance company in Shanghai, 1912 • AIA 1919 • People’s Insurance Company of China (PICC) restarted insurance business in 1980 • Today 34 life insurance companies operating in China • 6 national domestic life companies • 20 international companies with J.V.’s • Growth rate extremely high • Interest rates low/mismatching problem • Life companies very restricted on investments • PICC, China Life, Ping An + others to go public • WTO restrictions to ease

34. History of Chinese Actuarial Profession • Introduction of overseas actuarial education systems, examples • Graduate actuarial program at Nankai University jointly developed with SOA, 1987 • Exam centre of Institute of Actuaries at Central University of Finance and Economics, 1993 • Exam centre of Institute of Actuaries of Japan at Southwest University of Finance and Economics and China Finance College in 1998 • Exam centre of Casualty Actuarial Society at Shanghai University of Finance and Economics in 2002

35. History of Chinese Actuarial Profession • Construction of Insurance Regulation, 1995 • Chinese Life Insurance Mortality Table, 1996, 2005 • Actuarial Practice Standards and Actuarial Reporting System, 1998 • Organizational establishment, 2001 • Majority of actuaries are company actuaries • Western consultancies active • No real emergence (as yet) of local consultants

36. Society of Actuaries of China (SAC) • First Chinese actuarial exams in October 1999 • 43 Chinese qualified actuaries • SAC set up as subsidiary of China Insurance Association and under auspices of CIRC in July 2001 • 14 exam centres, including Hong Kong • 2005, applied to become an independent organization • SAC Annual Conferences and IAA International Forums

37. Life Legislation • Shanghai rules 1995 • Standardization of policy provisions • Appointed Actuary system • Embedded Value reporting requirement, 2005 • “Enterprise Annuities” – MOLSS • Policy directive – State-owned enterprises to concentrate on primary business and withdraw from domestic partnership of JV insurance companies

38. Actuarial Activities 8 Functions: • Life • Non-life • Healthcare • Social security • Pensions • Investments • Education • Regulation

39. Challenges • Relationship based • Data • Fees • Unsophisticated users • Bonuses and “reasonable expectations” • Accounting standards • Governance • Professional liability

40. Regulators • Banking China Banking Regulatory Commission • Insurance China Insurance Regulatory Commission • Investments China Securities Regulatory Commission • Pensions Ministry of Labour & Social Security CIRC CSRC CBRC Ministry of Finance

41. Comparison with Hong Kong • “1 country, 2 systems” • No. of actuaries, associates & students Fellows: China 50 Hong Kong 280 Associates: China 160 (ASACs) Hong Kong 250 & Students • Joint Activities IAA International Actuarial Forum Shanghai-Hong Kong-Taipei Actuarial Symposium Annual Joint Regional Seminars Thank you!