The lure of fool's gold, the madness of crowds and poor regulation helped lead to recession

In their discussion, Ronnie Bowie, President of the Faculty of Actuaries, Nigel Masters, President of the Institute of Actuaries and Paul Sweeting, Professor of Actuarial Science at the University of Kent examined the factors which led to the current global financial crisis and also considered the future business landscape when we come out of recession.

Ronnie Bowie posed the question "why did so many intelligent people/ organisations commit such a basic error?" and gave the damning response: "The madness of crowds, which infected otherwise sensible and experienced boards; the lure of fool's gold; the encouragement of government - quite the opposite of what should have happened; weak and, in some cases no, regulation; highly incentivised sales teams remuneration based on short term sales volume rather than longer term profitability of contract; and inadequate internal risk functions and insufficient independence of those functions."

Nigel Masters emphasised that economies will always face such crises and that the challenge is to be properly prepared: "There will always be cycles. The question is how to survive them. Greater concentration on risk management and scenario testing will help as it will allow managers to make better decisions faster when the next financial problem hits."

Paul Sweeting looked ahead to the financial landscape post recession and argued that regulation must strike the right balance between curbing damaging behaviour while still allowing businesses the freedom to operate in a competitive global market: "(Businesses) will require the weight of regulation to ensure that lessons are learned. It is also important that the increase in regulation is not so great that the competitive position of the UK suffers, or that the resulting costs do not significantly reduce value for money for policyholders and customers."

                                                                                     -- ENDS --

A full transcript of the round table discussion is available here and is available for publication in full or in part.

Enquiries: Tel. Michael Scanlan on 020 7632 1453 or email michael.scanlan@actuaries.org.uk

Notes to Editors

1. A full transcript of the round table discussion is available for publication in full or in part
2. Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.
3. Members of the Profession have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyds.
4. The Profession is governed jointly by the Faculty of Actuaries in Edinburgh and the Institute of Actuaries in London. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of the Profession in society.
5. The Profession is available to provide expert comment to the media on a range of actuarial-related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions.