Looking Back... On The Future

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Looking Back... On the Future Have we learnt from life’s mistakes?

he year is 2049 and Mervin wakes to his final day as Chief Actuary of ATM Life (formed in 2035 through the merger of three large life insurers in the Australian market). By no coincidence, today is also Merv’s 75th birthday. In response to the failure of successive Governments’ policies to address the ageing of Australia’s population, by lifting the qualifying age for the aged pension, it is now compulsory for all white collar self-funded retirees to work until the age of 75.

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Merv smiles as he turns on his computer and runs his daily valuation report. He sets his model point programs running and contemplates his 50 year career. As the program starts its extractions from the mainframe, Merv curses the fact that despite them being over 40 years old, ATM Life never managed to upgrade its systems, never mind the umpteen legacy products crying out to be upgraded. Over his time within the life insurance industry, Merv has noticed that product development comes in waves and cycles, with three separate blocks of participating business of differing styles, decades apart, causing endless headaches. Merv thinks back to the global financial crisis of 2008-2013 which created a deep global recession, the effects of which were still seen decades later. The reluctance of US banks to deleverage their toxic assets led to a more protracted recession there than in other parts of the developed world. This, coupled with escalating levels of US Government debt on the back of multiple fiscal stimulus packages; a failure to address spiralling public health expenditure; and a lack of willingness to increase taxes, led to the US being ejected from the G20 in 2023 and assured China’s ascendance to dominate the global economy. In Australia, unemployment rocketed past 15% in 2013, with GDP growth bottoming out at negative 3% in 2011. Off the back of this, the equity markets continued to tumble until the ASX200 dipped just below 1,000. It took another 10 years before the index would reach a new high.

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Regulation around the world changed significantly as a result of the credit crunch. This was complemented by the establishment of the international Body for the Oversight of Systemically Significant Institutions (BOSSI) in 2015. Unfortunately, over time the industry forgot about its mistakes of the beginning of the century. This, coupled with a preoccupation amongst policymakers on issues relating to systemic risk over issues relating to moral hazard, meant that in 2026 the world’s largest bank collapsed under the strain of trillions of dollars of toxic assets, leading to a global downturn that became known as GFC2. Having reached highs of 20,000, the ASX200 found itself heading dramatically south and by the middle of 2027 had dropped back below 6,000, wiping out the superannuation savings of millions of people. In the life insurance industry, changes over the period had also been significant. The year 2013 saw the abolition of commissions following major mis-selling scandals that hit the industry hard in 2011. A number of life companies went out of business as a result. ATM Life refused to pay commission and only worked with advisers who charged a fee for their advice. This initially caused problems, but their extensive “Get the Right Advice!” advertising campaign paid dividends for them in the end. It took just a few more years before commissions were abolished globally. ATM Life also made the brave decision in 2015 to introduce variable annuities with a number of in-built guarantees. Merv spent a large amount of time, and ATM Life’s money, in building a complex hedging program to cover these guarantees. A number of other companies followed until they became the most popular investment product in the market. Disaster struck as a result of GFC2, when the hedging programs failed and many companies made large losses due to a sudden sharp increase in the volatility of the investment markets. Soon after, sales of variable annuities were phased out, joining the long list of tried and failed legacy

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products in Australia. If only the Australian industry had taken note of the lessons learnt overseas. Reflecting the numerous operational risk debacles over the 2040s, the risk team at ATM Life is the largest in the country with 150 people, including 50 actuaries. Over the past 50 years, the actuarial profession has moved on considerably. Having spent decades promoting themselves as the experts in all areas of risk management, in 2049 actuaries found themselves with a key role in all corporations across Australia. All companies must now have an Appointed Risk Actuary to certify that all aspects of risk are being addressed and well managed by the company. Looking back, Merv is not so sure that this is a good thing, especially with regard to the numerous charges laid by the corporate regulator in 2030 against actuaries who failed to foresee the impacts of GFC2. The underinsurance problem was deemed to be solved in the late 2030s thanks largely to a major communications crusade led by the actuarial profession to educate the general public about the need to have adequate insurance cover. There were a number of sometimes shocking advertisements which played upon people’s fears about the possibility of the family breadwinner dying, leaving the family with a financial and emotional burden. Product design had to be changed, and yearly renewable term products were replaced by guaranteed regular premium products. ATM Life led the way in this area. Regular surveys now reveal that more than 95% of the Australian population have sufficient cover. Actuarial education is now truly global and has a much stronger focus on risk management and communication skills. In fact, an intensive one year university course devoted to communication skills is now mandatory for all those wishing to call themselves actuaries. Complete Risk Management (CRM) comprises most of the rest of the training. Actuaries got heavily involved in the climate change debate and for many years did a lot of work in this area. Nevertheless, around 2019 it became evident that the scientists had got it wrong and that the earth was actually cooling slightly. Soon, few actuaries would admit to having been involved at all.

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in 2026 the world’s largest bank collapsed under the strain of trillions of dollars of toxic assets, leading to a global downturn that became known as GFC2

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company would have survived. ATM Life, thanks to its prudent risk management policies, was one of the lucky ones.

Five hours later, as the results of today’s valuation are finally in, Merv turns his mind back to the present day. Looking at the output, Merv wished he was policy owner number 63111798, ATM’s one remaining participating traditional (phase 2) policyholder. Due to vastly understating the policy owner retained profits over the last 20 years, this policy owner is left with a bonus pool of $500 million, and his guaranteed benefits are only $500,000. While ATM Life fought with BOSSI to get this released to the shareholders, their request was ultimately denied. Thanks to the re-introduction of annuities in the Australian market, Merv has been able to purchase an index-linked lifetime annuity with his $20 million retirement package. He is looking forward to a long and healthy retirement – expecting to live to at least 120, thanks to the major genetic medical advances of the 2020s. ▲ Matthew Wood [email protected] Disclaimer: Opinions expressed in this article do not necessarily represent those of his employer, The Institute of Actuaries of Australia, its officers, employees and agents, or the Actuary Australia Editorial Committee.

The bovine flu pandemic of 2033-2034 wiped out a quarter of the world’s population. It came in a number of waves, each one worse than the last. 90% of life companies and all but one reinsurer survived the huge strain. Thankfully, the regulators had strengthened the solvency requirements to contain a large margin for pandemics, otherwise no

AC TU ARY ! 5 3 4 2 ! , ) ! s July 2009