Are Actuaries Independent Guardians of Financial Security or Just Telling a Convenient Tale?

Abstract

We look at the actuarial role from a behavioural point of view, borrowing from psychology and sociology. Actuaries should give independent advice, but they belong to and depend on various social groups. Large social groups are tied together by social trust, which builds up slowly, but can erode quickly. Preventing distrust requires hard work – and possibly some window dressing. What does this mean for the insurance industry? Insurance is a risky and complex business, hard to manage, and it is even harder to make the public trust in it. This throws actuaries into a big dilemma when they create transparency about risks and uncertainties: the more transparency they create, the more risks come to light. Thus, transparency improves real security (making risks visible), but may undermine perceived security, as too much bad news erodes social trust. So, how much transparency is optimal? 100%, as envisaged by financial regulation, or somewhat less?