Ladies and Gentlemen.
1. First, let me say thank you to the Institute for the opportunity to address you today. This is the first time that I have spoken to this audience and it is very much a pleasure.
2. In many ways I feel an affinity with actuaries. The making of public policy is not unlike many of the activities undertaken in the actuarial field. It requires an assessment of the available facts, mixed in with some assumptions about the future and a good deal of opinion about what actions would best represent the views of our community.
3. Governments frequently have to make decisions with less than perfect information. Risk management is a daily part of any politicians' life.
4. The word `risk' itself is derived from the early Italian `risicare' or `to dare'. Over the past 18 months we have perhaps seen what can happen when the management of a company dares too much.
5. Corporate failures, both here and in the United States, have led to widespread questioning of the quality of financial reporting and whether supporting regulatory frameworks are sufficiently robust.
6. The board and management of corporations must take primary responsibility for ensuring that the interests of both their shareholders and creditors are protected.
7. However, boards and management do not always act in this way. Adam Smith would perhaps have put this down to `the overweening conceit which the greater part of men have of their own abilities [and] their absurd presumption in their own good fortune'.
8. History is littered with entrepreneurs whose grand visions have ended in disaster taking investors, and in some cases, whole economies, along for the ride.
9. It is for this reason that Governments around the world have instituted corporate regulation. Corporate regulation is designed to encourage the management of companies to act in the best interest of shareholders and creditors.
10. However, governments need to justify the imposition of new regulation, which may potentially stifle innovation and wealth-creation.
11. As part of the Corporate Law Economic Program, the Government facilitated decision-making by directors through the introduction of a business judgement rule into the Corporations Law.
12. The business judgment rule provides directors with a safe-harbour from personal liability in relation to honest, informed and rational business judgements, where the directors have taken steps to inform themselves about the subject matter involved, including through seeking professional advice.
13. Coupled with a statutory form of derivative action for shareholders, these measures addressed concerns about director liability and accountability at the same time. They do not impose further prescription on the behaviour of boards and management; rather, they seek to provide incentives toward proper behaviour.
14. Corporate regulation is augmented by requirements for audit. In financial regulation there is an additional overlay. Financial institutions need to manage risks to minimise losses to depositors, policyholders or their members. Increasingly, there is a role for actuaries in the corporate governance structure of these firms.
15. Statutory requirements to use an auditor or an actuary clearly carry with them significant benefits for those professions. However, Governments do not confer monopoly rights on professionals without expecting some quid pro quo.
16. Governments and the wider community expect auditors and actuaries to take their duties at law seriously and exhibit due care and diligence in the discharge of their duties.
17. These are high expectations and serious reputational risks exist when these expectations are not met.
18. A very clear example of the pressure that can befall a profession which fails to live up to expectations can be seen by the widespread questioning of the role of accountants and auditors following recent corporate failures.
19. Actuaries have so far avoided detailed scrutiny, however in light of the increasing reliance on actuaries in the regulation of the financial sector, it is certainly worth considering what lessons can be drawn for your profession from the current debate.
20. There are three broad areas currently confronting auditors which might deserve consideration by the actuarial profession.
21. Firstly, as actuaries you should consider how you can safeguard your tradition of ethical conduct.
22. Reputation is of critical importance. The reputation of a profession is enhanced by maintaining high standards of admission and professional development, adherence to ethical rules of conduct and professional standards and by taking disciplinary measures against rogue elements.
23. Second, actuarial advice must be unbiased. This is critical. Related to this is the question of independence. All of the issues surrounding independence and perceived independence need to be properly thought through.
24. The two main professional bodies for accountants last month announced the approval of a new professional standard for audit independence.
25. The new standard recommends among other things:
- a seven year mandatory rotation of audit partners for listed companies;
- a mandatory two year period before a retired auditor can become a director of a former client; and
- a ban on providing non-audit services where, in the course of conducting an audit, a firm would be required to check its own work.
26. It may be that the direction taken in this standard deserve consideration by the actuarial profession.
27. A further challenge for your profession is the potential pressure which may be exerted on actuaries. The Institute needs to have systems in place which ensure that its members are not only required to, but in fact are able to, provide truly unbiased advice.
28. The problems facing general insurance actuaries may be especially challenging.
29. Under the provisions of the General Insurance Act and related prudential standards, actuaries will be required to provide advice to the Board on the setting of insurance liabilities. The actuary will also have duties to whistle blow on companies which fail to comply with the statutory requirements applying to it.
30. Unlike the situation in life insurance, where the actuary has for many years been regarded as of major importance in the management of risk, the role of actuaries in the management of a general insurance company is still a relatively novel idea.
31. To some extent, general insurance companies may find it difficult to make this transition and may be reluctant to make the move to a greater reliance on actuarial advice. In this context, actuaries may potentially be subject to greater pressure to provide advice consistent with the desires of the management of the company.
32. Resisting these pressures and providing truly unbiased advice will be an important challenge both for individual actuaries and the Institute, insofar as its systemic responsibilities are concerned.
33. Actuaries should also be prepared to manage what might be described as a gap in expectations between what is expected of them and what can actually be delivered.
34. With an increased reliance on actuarial reports in financial institutions, the question needs to be asked, how well do market participants understand the role of actuaries and do they understand the limitations of actuarial reports? What sort of pressure might arise for the profession if actuarial reports come under scrutiny in the context of a corporate failure?
35. Turning to the role of Government, Government's need to ensure that the regulatory framework provides for the sound conduct of business by setting appropriate duties and accountabilities for managers and boards of companies and appropriate roles for auditors and actuaries.
36. In terms of the accounting and auditing professions, the Government is committed to ensuring that Australia has a world's best practice regulatory and disclosure framework.
37. Australia has already achieved significant regulatory reform in the accounting standards setting process through the CLERP process.
38. These reforms have included new arrangements for the Australian Accounting Standards Board and its oversight body, the Financial Reporting Council.
39. The focus of debate on further reform in this area has been the Ramsay report on auditor independence.
40. The Government will shortly be announcing a process for advancing the Ramsay report. The extension to the final reporting date for the HIH Royal Commission has caused us to reconsider the schedule to ensure that any relevant recommendations are taken into account.
41. However, the Government is thinking beyond just auditor independence. Audit quality depends on a range of factors including the depth of the market for audit services, the framework for setting auditing standards and whether the standards should have the force of law.
42. Consideration also needs to be taken of the rules and practices governing audit engagement and the role of the management and board of companies.
43. The Government is also committed to the promotion of international accounting standards. Australia is at the forefront of building consensus for a single set of standards to be adopted globally.
44. My colleague, Senator Ian Campbell, last week announced that the Government would be contributing an additional $2 million over two years to boost Australia's contribution to the setting of international accounting standards.
45. I was very pleased to hear that the Institute has been taking a keen interest in and providing input into the development of an international accounting standard for insurance. This is worthwhile and I commend the Institute for its ongoing involvement.
46. As I have already alluded to, the new general insurance regime introduces a range of improved corporate governance requirements for this sector.
47. Although it would be inappropriate for me to comment directly on issues which may be under investigation, the recommendations of the HIH Royal Commission will no doubt provide further focus for corporate governance arrangements and the role of auditors and actuaries in the general insurance industry.
48. Of course, there may also be lessons for other parts of the financial system as well.
49. The community's expectations of the safety of financial institutions are higher than those for other corporations.
50. In the case of superannuation for example, there is a very clear expectation that super funds should be safer than other non-superannuation investments.
51. The compulsory nature and current lack of portability of super, its concessional tax treatment and the vital role it plays in the retirement income of Australians, make it imperative that there be an effective regulatory framework for the industry.
52. The Government considers it essential that the community has full confidence that the regulatory framework safeguards superannuation savings from imprudently investment and management.
53. Superannuation fund members must also be given adequate information on which to base investment decisions and be kept informed of the nature and performance of those investments.
54. In recognition of the importance of ensuring safety in superannuation savings, last year the Government established the Superannuation Working Group, chaired by Don Mercer, to develop legislative options to improve the safety of superannuation funds.
55. The SWG reported to the Government on 28 March of this year. I am carefully considering the proposals contained in that report and I expect that the report, together with the Government response, will be released in the second half of this year.
56. The unfortunate reality is that whatever requirements are put in place, sometimes corporations fail.
57. In the case of financial institution failure, the high level of community expectation of safety coupled with the devastating consequences for individuals has meant that in the last year, the Government has intervened three times to provide assistance to those affected.
58. In the case of HIH, the Government stepped in to provide assistance to policyholders with insurance claims caught up in the liquidation. To date the Government has paid out over $75 million in assistance.
59. The Government has also responded to the difficulties being experienced in the medical indemnity insurance market to avert a disruption in medical services when UMP/AMIL was placed into provisional liquidation.
60. Initially the Government announced a short term guarantee. On 31 May 2002 Prime Minister's announced a package of measures to address the issues surrounding medical indemnity insurance.
61. This package includes an enhanced guarantee, proposals for dealing with unfunded incurred but not reported liabilities (IBNRs) and also key strategies for ensuring that medical indemnity insurance is available and affordable moving forward. The Government intends that a new comprehensive framework of measures will be in place before 31 December 2002.
62. Last week, I announced the first ever use of the provisions of Part 23 of the Superannuation Industry (Supervision) Act 1993 to compensate 181 superannuation funds formerly under the trusteeship of Commercial Nominees of Australia.
63. These funds suffered loss due to fraudulent conduct or theft. This loss was compounded by fees charged by the replacement trustee to reconstruct accounts and return these funds to compliance.
64. It is the role of the Government to ensure that the framework for regulation and the resolution of corporate failures is attuned to the needs of the community. Auditors and actuaries similarly need to ensure that the services that they provide are in accordance with expectations.
65. Community attitudes continue to evolve and change. As you would know better than I, the future does not always reflect the past.
66. The professions and Government need always to be on the look out for risk and stand ready to respond flexibly to new challenges.
67. I appreciate the strong contribution that the Institute makes into the making of public policy. In recent times, this has included work on public liability and medical indemnity.
68. I look forward to our continuing relationship and will watch with interest as the actuarial profession evolves to meet its new roles and responsibilities.
Thank you.