On the Role of the Actuary in a Changing World

2. The Wider Context

It may not be good politic to note it, but we live in a dysfunctional society.

If this was a sociology paper – interestingly enough, a box into which one of the initial Institute reviewers categorised it – I would explore the subject in rather more detail. However, as it isn’t, and at the risk of doing a disservice to years of more learned research, I instead offer this brief synopsis of the malaise that I believe sits at the heart of our modern society: too many of its members, beyond the bare essentials of their existence, have a connection with the World that is exercised largely through their bank account and a flat screen monitor.

It is a measure of our society’s dysfunction that so many of its members view the World primarily as a marketplace in which to acquire things. So ingrained has this notion become that possessions, and the means to acquire them, seem to have become our principal – and for many people only - benchmark of social status.

Moreover the dynamic by which society empowers the agents that govern it ensures that the scale of dysfunction isn’t just perpetuated, but accentuated. A socio-economic model whose definition of success knows only one measure will of course tend to promote those it believes are best placed to deliver against that benchmark. It is no coincidence that those who captain our industries and form our Government often tend to be even more driven to accumulate wealth than many of those they lead.

The social trends that have brought us to the present point (globalisation, the preeminence of greed, the fragmentation of communities, increased focus on self, the rising cult of celebrity and the growth of cyber-society) are all well-documented elsewhere so I won’t dwell on them here. What is of relevance going forwards is what consequence might flow from the increasing stress to which the society they’ve delivered is going to be subjected.

One consequence of these trends is that many people have become increasingly disaffected by, and disengaged from, what one might colloquially call ‘real world’ problems. Even among those who are still engaged, there is a tendency to regard the big challenges we all face as someone else’s responsibility to resolve. Such complacency is further fuelled by the faith that many still hold in the power of innovation and technology to address those problems without the need for any personal sacrifice or infringement of their own lifestyle choices, a belief that is as misplaced as it is convenient.

Adding to the dysfunctional fray is the central role that our present financial system plays in influencing socio-economic policy. Despite mounting evidence of the folly in so doing, our present generation of policymakers continues to dance to the tune of volatile financial markets, still apparently unaware that to serve the long term public interest - as is supposed to be their obligation - they need first to quit the dance floor and invest in some better music.

Thus has modern society created its own virtual reality, a reality that has thus far allowed the issues and risks considered later in this paper to be largely downplayed, and an illusion that has thus far managed to keep our society firmly on the path towards its own destruction.

It is to the discredit of our present generation of political leaders that they have failed to acknowledge or engage with people on the true reality of our present situation.

It is also to the discredit of the Actuarial Profession that it continues to acquiesce when confronted by such short-term thinking. The Profession, it seems, out of either a misguided sense of its own interest, deference to commercial interests or a conveniently blinkered view of what constitutes the public interest, feels compelled to dance to the same discordant tune. Whatever the reason, this is an abdication of leadership that I believe undermines the Profession’s risk management aspirations and amounts to a betrayal of the Profession’s own public interest mandate.

Financial markets should be a servant of the people, not their master, but any objective review of the experience of recent years would struggle to conclude as much. This matters, because if our society and its economy are to stand any chance of surviving the scale of change that is to be visited upon them, reform of financial markets is essential.

Our industry appears to have become a caricature of our economic system’s worst excesses (more on which later). Those who think its ills can be cured by better governance alone should take a closer look at the profile of the financial transactions that characterise today’s financial markets, scratch beneath the glossy surface of incremental tax revenues and take a look at what real value those transactions are adding. If they do, they will find little that is contributing to the greater good and much that is serving to undermine it.

Few voices inside the industry have thus far been bold enough to call the bluff of those who tell us that a booming City is vital to the well-being of our economy, and few voices have thus far been bold enough to say that it needs to be cut down to size. It is telling, though, that the present FSA Chairman’s voice is among them. When even the FSA is proffering the view that some parts of the City have grown too big for society’s good, financial sector profits are too high and that a number of its activities are socially useless, one begins to believe that change may be afoot.

Such views are easier to express, perhaps, when you are a gamekeeper not a poacher - as Lord Turner would know, having successfully played both – and while he only speaks the truth, at a time when so many others still seem to be choking on it he is to be commended for doing so. It is a small step in the right direction. No surprise that all the usual suspects have lined up to offer their criticism, but the point has been made, and many outside the industry would agree with him.

The Need For Change

I will make a prediction. Not a particularly bold one, in the circumstances, but nevertheless one I hold with some conviction: without a fundamental change in economic thinking, fundamental reform of financial markets and a fundamental reappraisal of social priorities, and at the hands of one or more of the influences I touch upon in section 5, at some point over the next few decades our present socio-economic system is going to collapse.

When it does, while both past precedent and human nature suggest that hopes of an orderly transition to a new socio-economic system may be optimistic, that is not to say that our degree of preparedness does not matter. Prospects for a less destructive transition could at least be enhanced if, instead of refusing to countenance that the present model is unsustainable right up until the event that proves it, Government and policymakers would engage with people of vision, on a global scale, to map out the alternatives.

The difficulty is that human nature has bestowed upon most of us an instinctive resistance to countenancing that we may have got things wrong, or to accepting unpalatable truths that run contrary to our own beliefs. Gaps in the evidence are sought and exaggerated, alternative explanations are offered. Thus, for example, can otherwise bright people see cold snaps as evidence against climate change, otherwise bright clergymen choose creationism over evolution, otherwise bright CEOs blame the failures of their companies on anyone other than themselves, and otherwise bright politicians continue to insist that we are winning wars that many others without a vested interest can see that we are losing.

Only when all other avenues have been exhausted is truth finally confronted, and even then some politicians, business executives and religious leaders seem capable of maintaining an impressively resilient state of denial.

Nowhere is this more manifest than in the attitudes of some of those who lead our own industry. Ex-CEO Dick Fuld may have collected $40 million a year for the privilege of being at the Lehmans helm, but he still couldn’t bring himself to accept any responsibility for the ship having sunk. His defence? He considered he’d acted properly on the basis of what he had been told.

The insight offered by Fuld’s observation is particularly pertinent, because some people in the higher echelons of Business and Government are not inclined to listen much even when they are told. Indeed it seems some people who lead our industry can react quite badly to being told, because they have grown rather used to doing the telling. The result, among other things, is that many of our companies have become rather dysfunctional places to work, a subject I explore in more detail in section 8.

Those who subscribe to the Fuld school of management are products of a flawed system, having evolved vestigial ears that are receptive only to certain types of message. They think not of long term sustainability but of short term profit. They talk outwardly of employees, but think inwardly of headcount. They don’t build teams, they build empires, and they reign over them like emperors. They are very accomplished at justifying their rewards, reinforcing their self-image and promoting their own interests. And as Fuld himself has shown, they are very adept at finding others to blame when things go wrong.

In a wider sense, their cause is aided by another very human trait: the greater our collective investment in a particular perceived truth, the more reluctant we tend to be to relinquish it. In which respect, there has scarcely been a greater human investment in...