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Presented to the Institute of Actuaries Students' Society on 6th November 1970 THE ACTUARY IN AUSTRALIA by A. Spedding THE ACTUARY IN AUSTRALIA 1. INTRODUCTION (1.1) It is now almost fifteen years since D. Drybrough presented his paper on Life Assurance in Australia to this Society. The Australian Life Assurance industry has made rapid progress since then, and a number of significant changes have taken place. To take only one factor, sums assured in force quoted by Mr. Drybrough as having increased from about $A 1.4 x 10 in 1945 to $A 3.8 x 109 in 1954, stood at $A 24.1 x 109 in 1969 (£stg $A 2.15). (1.2) The Australian market has for many years been dominated by a few local, long established and powerful Mutual (or effectively mutual) Offices, but many local and overseas organisations have taken an interest in this market over recent years. At the end of 1969, of 47 Life Offices registered (excluding the 2 State Offices), 33 were companies incorporated outside Australia or were subsidiaries of such companies. (1.3) It is against this background of rapid growth and significant market changes that the current situation is examined, with particular reference to the role of the actuary; it is hoped that this will be of interest to the would-be emigrant actuary or student, and to those U.K. actuaries who become involved in their companies' Australian operations. Occasional reference will also be made to the New Zealand situation, where the large Australian Offices are a major market force. 2. GENERAL ECONOMIC AND POLITICAL ASPECTS (2.1) Australia, comprising Territories and a Federation of States, supports a population of about 12½ million, of which approximately 2½ million are in each of Sydney and Melbourne. Canberra, the Federal Capital, is still small, but is emerging as an attractive and well planned city. The other States' capital cities are also relatively small, but major developments in Western Australia are influencing Perth's growth. (2.2) After many years during which grain and wool formed the basis of the economy, industry is expanding rapidly and although Australia is still regarded as being only a semi-industrialised country, it has a greater percentage of its work force in secondary industry than the U.K. In more recent years, the results of oil and mineral explorations have begun to make their mark on the trade figures. The average real growth in the Gross National Product over the last decade was about 6% per annum. The 19681/69 rate was 8½% in real terms, but the 1969/70 rate appears to have fallen to about 5½%. The average annual rate of inflation over the last decade was only 2.4% . Despite strong pressures on wages, this relatively low rate of inflation has been achieved possibly due to the steady increase in industrial productivity and the very active immigration programme being followed. At the present time there are signs of inflationary strains, the current annualised rate being about 5½%, compared with the "tolerated" rate of 3%. (2.3) The ruling Federal Government is a Liberal-Country Party Coalition (c.f. U.K. Conservative) which was re-elected in November 1969 with a reduced majority. The Labour opposition is showing signs of cohesion, after a prolonged period of internecine strife. The various State Governments administer most of the affairs of their own State, receiving a share of the total Income Tax raised by the Federal Government, as well as raising their own State taxes and duties from (inter alia) life policies and estates. The States will require a larger share of taxation revenues if services (schools, hospitals, transport, roads etc.) are to be maintained, let alone improved. (2.4) The New Zealand economy is still very dependent on the sheep, the country's greatest natural resource (in the words of a recent actuarial paper) being grass. Industrial developments are, however, taking place, including the establishment of a local steel industry. -2- 3. LIFE ASSURANCE LEGISLATION AND TAXATION (3.1) The Australian Life Insurance Act 1945-1965 is administered by the Insurance Commissioner, who has fairly wide discretionary powers. The present Insurance Commissioner, an actuary, is a former President of the institute of Actuaries of Australia and New Zealand. A detailed account of the extent of Government Control is given by T.P. Scott in his paper to the 1969 Pacific Insurance Conference (this paper also provides a comprehensive survey of the history and recent development of the industry). The Insurance Commissioner can have great influence on a Company's policy, particularly in respect of its investments and style of management. Adverse trends in expense rates, lapse rates and so on are "enquired into". (3.2) In broad terms, a Company has to be registered under the Act before it can undertake life assurance business in Australia, and it must establish and maintain at least one statutory fund, transfers out of which are controlled. The amount allocable to shareholders is also limited. Separate accounts are maintained for each major class of business (i.e. Ordinary, Industrial, Superannuation), and the auditors have to be satisfied that any apportionment between accounts has been done on an equitable basis. Detailed monthly and annual statistical returns on movements (e.f. Board of trade annual 3rd Schedule, Part IV) are required, together with quarterly statements on ledger balances and annual Revenue Accounts and Financial Balance Sheets. Some statistical returns are subdivided by State. (3.3) As far as the actuary is concerned, all premium rates have to he approved by an actuary, and Valuation Reports and Analyses of Business in force (e.f. Board of Trade 4th and 5th Schedules) are required. Minimum reserve, surrender value and paid-up value bases are laid down. (3.4) In order to register a new Life Office, a detailed submission is made to the Insurance Commissioner, incorporating estimates of income, expenditure, valuation and other strains over a 1O year period on "optimistit" and a "pessimistic" New Business assumptions. Normally, ear-marked funds of at least $A ½ million are necessary in addition to adequate capital. Other requirements are given in a set of "guide-lines" available from the Insurance Commissioner, who has to be completely satisfied as to the ability of the proposed management (including the Actuary) to successfully conduct Life business. (3.5) Taxation of Life Offices is based primarily on interest income in excess 61 3% of a proportion of the "calculated liabilities" @ 4%, with some allowance for expenses. This often approximates to tax on interest income in excess of about 2½% of the assets producing this income, with some expense allowance. Net realised capital gains are included in the income assessable for tax. The 3O/20 rule, relating to the composition of investments, becomes an important factor in investment policy. Superannuation business is effectively tax free, provided that at cost at least 30% of the assets of each statutory fund are invested in Government and "semi-Government" Securities, with at least 20% in Government Securities. Resident companies (i.e. incorporated in Australia) are allowed a rebate of tax on Ordinary and Preference share dividends. (3.6) Personal taxation relief on Life premiums paid is generous by most countries' standards. The rate of Income Tax is on an increasing scale, and relief is obtained at the highest tax rate paid by the individual on a maximum premium outgo and superannuation contributions of $A 1,200. The taxation authorities are thought to be checking this aspect of personal taxation returns more carefully following some imbalance between "claimed" premiums and premiums received by the total Life Assurance industry. (3.7) In New Zealand, the regulation of Life Offices is more by persuasion than by legislation, and this seems to work reasonably well in this relatively snail market. The extent of this persuasion reaches into the investment policy of each Office, as far as determining the minimum percentage of funds placed in Government Securities. Taxation is basically related to the cost (on a prescribed basis) of bonuses declared, plus dividends to shareholders, with the consequence that most Offices offer low premium, low bonus policies. -3- 4. OFFICE AND SALES ORGANISATION (4.1) Organisation structures are not dissimilar to many obtaining in the U.K. although there are proportionally fewer actuaries as either General or Investment Manager in fact, there appears to be only one actuary whose title is Investment Manager. However, where the General Manager is not an actuary, the Deputy General Manager almost invariably is, and he also often acts as the effective Investment Manager, although not given that title. Actuaries are in evidence in the top management structures of Offices, and often actuaries are in charge of underwriting, E.D.P., sales etc. (4.2) Australian Life Offices were early in the field of mechanisation, and followed developments in the U.S.A. rather more quickly than many British Offices. Mechanisation has been pursued along differing courses, ending up with either highly centralised configurations, or, in one case, extensively decentralised local computer operations. The overall degree of mechanisation is high. (4.3) Most Offices operate with full time Agents who sell direct to the public and are remunerated by commission on the business sold. Groups of such Agents (say 10 to 2O per group) are directed by a Supervisor or Field Manager, who is responsible for recruitment, training and supervision. Some Offices have experi- mented with salaried salesmen and part salary part commission. There are also large numbers of Industrial Branch agents, who are allowed to write Ordinary Branch business. The member companies of the Life Offices' Association operate on the basis of sole agency agreements, with the result that Broker influence is minimal. 5. TYPES OF BUSINESS (5.1) In the Ordinary Branch, With Profits business continues to dominate the scene, and Terminal Bonuses have now become a feature of most Offices' bonus systems. There is however a persistent trend to Non Profit business, resulting in a reducing average premium rate. Team (5.2) In the Industrial Branch, the business (generally known as Collector Insurance) has grown steadily rather than spectacularly, and is mainly in the form of Endowment Assurances. (5.3) The development of Superannuation business has been notable for the use of non-allocable funding techniques, and the facility whereby the policyholder can vary from time to time the percentage of the funds' investments in equities, fixed interest and Government securities. The main emphasis is still on lump sum benefits, a situation which the present personal taxation rules do little to discourage. One State (Victoria) is considering the concept of compulsory portability of pension rights, and the Commonwealth Government too is investigating this. (5.4) The prospects for Equity-linked contracts are not bright at present, due mainly to the restrictive guide-lines laid down by the Insurance Commissioner. There is much interest being shown in this field, but little can be done in the present circumstances. (5.5) Following changes in the taxation basis of Non Cancellable Disability Insurance business, a number of Offices have entered this field and there has been much interest shown in developing this form of cover. Previously, this business was taxed as Non Life (i.e. on profits, after allowance for unearned premiums, expenses and claims), with the result that profits were taxed before they were earned. Now, subject to certain conditions, the Office is allowed to deduct the increase in the actuarial reserve from the excess income before arriving at a taxable profit. There are unfortunately some problems still remaining in the treatment of claims reserves in the taxation return. - 4 - 6. REINSURANCE (6.1) There is now an active professional reinsurance market which has in the main replaced the reciprocal exchange system previously operated by the local Offices. The world's largest professional reinsurer (Swiss) and two major British reinsurance companies are registered, and provide comprehensive underwriting facilities in Melbourne and Sydney. Large individual cases are quickly underwritten and placed on the international reinsurance market. (6.2) The reinsurance companies have been mainly responsible for the introduction of the numerical rating system, and for the marked change in the ability of the direct Offices to offer cover on even heavily substandard lives. (6.3) Both Coinsurance and Risk Premium methods of reinsurance are used, and special methods have been developed for handling the reinsurance of group Term business with "free cover". Catastrophe reinsurance is normally available, but Stop Loss coverage is not offered by the locally registered reinsurance companies. (6.4) A local Office may reinsure with a non-registered reinsurer, but gross reserves have to be set up and reinsurance premiums cannot be paid out of the statutory fund. Consequently, virtually all reinsurance is placed with the locally registered reinsurance companies. 7. INSTITUTE OF ACTUARIES OF AUSTRALIA AND NEW ZEALAND (7.1) The I.A.A. & N.Z. was incorporated in May 1963, following the dissolution of the previous "Society". It is a very active body and the steady flow of papers usually generates lively discussions. There seems to be a lack of awareness in the U.K. of the range of topics discussed in papers in the Transactions and in contributions to the Institute Bulletin. The following list illustrates the wide scope of subjects written on over the past two years:- Transactions Bulletin 1968: Australian Mortality (1958-63) Analysis of Surplus Non Life Insurance Growth Rate of an Economic Time Appraisal of Fixed Interest Series Securities Effective return on Fixed Interest Interpolation contracts Vesting and Preservation of Graduation Operators in Time Employee Superannuation benefits Series Analysis 1969: Urtit Linked Life Assurance Assessment of Ordinary Shares Distribution of Capital Growth Life Insurance Act and Policies Inflation Training of Actuaries (Macquarie University) In addition, the Presidential Address (which is discussed as a paper) appears in each Transactions, and details of legal matters affecting the insurance industry are given in the Bulletin. Notes are also published in the Bulletin on items of general interest to the profession, such as population mortality statistics. -5- (7.2) There are two Branches (New South Wales & Victoria) and each Branch operates a Branch Committee, from which are drawn the members of the Institute Council. Many sub-committees deal with such matters as professional guidance, tuition, university liaison, recruitment, journal, publicity, new entrants and so on. Close links are maintained with other actuarial bodies, particularly the Institute and Faculty. (7.3) Tuition and marking of tests (apart from the marking of Fellowship tests) are provided for students in both Melbourne and Sydney. The system of twice yearly Institute examinations has been especially welcomed in a country where a long hot summer can cover much of the normal study year. 8. SCHOOL OF ACTUARIAL STUDIES (8.1) For many years the I.A.A. & N.Z. has been liaising with the Australian universities in recruiting graduates into the profession. There have also been investigations into the feasibility of some university courses being modified so as to follow more closely the actuarial syllabus. Eventually, following close co-operation between the I.A.A. & N.Z., the Life Offices' Association of Australia, other employers of actuaries, and the governing board of Macquarie University (Sydney), a School of Actuarial Studies was founded in November 1967. The Life Offices and other employers agreed to donate a sum of $A 100,000 spread over 5 years in order to establish the School, after which period it will be supported through the normal university financial system. (8.2) A leading Australian actuary, with high academic qualifications, was appointed as Head of the School; he and a number of actuaries on the staff of Maquarie University are actively associated with the development of this important link between the profession and the academic world. The actuarial subjects are covered as part of Macquarie B.A. degree. Full details of the operation of the School are given in Professor A.H. Pollard's paper. (8.3) There are now some 13 students in the 3rd year, 20 students in the 2nd year and 34 students in the first year (1970), including 2 from New Zealand and 4 from Malaysia. Of these students, 32 are on generous full-time scholarships provided by 11 different organisations. It seems likely that the School will eventually settle down at a final year size of about 20. Further details are given by Mr. C.J. Stevens in his 1970 Presidential Address to the I.A.A. & N.Z. 9. ROLE OF THE ACTUARY (9.1) The role the actuary plays will depend very much on the type of Life Office. With the larger Offices, it is generally similar to that in a large U.K. Office, although heavier responsibility can come at an earlier age because of the shortage of actuaries. In a smaller newer office, the actuary (often the only actuary in the Office) is likely to become involved to a significant degree in sales problems. Incidentally, one of the largest Offices has an actuary as its Sales Manager. (9.2) Apart from this broad generalisation, much obviously depends on the capability and inclination of the actuary. Actuaries are employed in many positions ranging from General Manager to more technical and less managerial situations. (9.3) An increasing number of actuaries are in consulting practice, some are in Commonwealth and State Government service, and a few are in Banking. With the development of the School of Actuarial Studies, there are now 3 Fellows and 3 Associates at Macquarie University. As at the end of September 1969, there were 196 Fellows of the I.A.A. & N.Z. of which 156 were resident in Australia and 17 in New Zealand, There are relatively few retired actuaries in Australia and New Zealand, and there is a significant number of former U.K. actuaries. -6- 10. SALARY STRUCTURE (10.1) A survey of salaries of actuaries with up to 10 years experience since qualification was undertaken in 1968 by I.A.A. & N.Z. The main purpose of this was to provide a more concrete presentation of likely future salary patterns to possible recruits to the profession. At that stage (early 1968) entrants direct from school generally commenced in the range of $A 1,700 - $A2,100 (official exchange rate is £stg.l $A2.15), whilst graduates started at $A 3,100 - $A 3,650. Most Life Offices were paying newly qualified actuaries $A 6,500 - $A 7,500, and actuaries in responsible positions with about 10 years post-qualification experience were receiving of the order of $A 10,000. Those actuaries in very senior positions command considerably greater salaries. In New Zealand, salaries were in general about 80% of the above levels, expressed in $NZ (parity with $ A ) . (10.2) Most Life Offices offer in addition a valuable range of "fringe benefits", including superannuation and favourable mortgage facilities. Salaries in Government service are higher in many parts of the "scale", whilst actuaries in consulting practice normally earn more, with possibly fewer "fringe benefits"than comparable actuaries in Life Offices. (10.3) Since 1968, there has been a general increase in salary levels. For example a recent survey by Monash University of starting salaries for graduates in mathematics showed an average starting salary of $A 3,900. Also recent advertisements for actuaries have quoted salaries in excess of $A 10,000. (10.4) There is a minimum salary scale for all employees in the insurance industry, and the current scale reaches $A 4,264 (males) after 14 years adult service, and $A 2,616 (females) after 7 years adult service. In many cases, employees are well above this scale, and special structures apply to typists, key punchers etc. (10.5) Salaries in other professions are high. A few examples of median salaries in the 26 - 30 and 36 - 40 age groups as at mid 1969, were :- 26 - 30 36 - 40 Accountancy £2,944 £3,589 Dentistry £4,112 £5,981 Medicine £2,794 £6,495 a Lw £2,570 £5,953 (these figures have been converted to £stg at the current rate of exchange.) Salary rises averaging 7% have taken effect since mid 1969. (These figures, produced by the University of Melbourne, were published in the 21st June 1970 edition of the Sunday Times). -7- 11. PERSCHAL TAXATION AND LIVING COSTS (11.1) The official rate of exchange between two currencies is not always the most suitable for comparison purposes, and each U.K. Appointments Board circular makes reference to this. Many factors entering into a cost of living comparison depend on personal circumstances, and individual judgement must be exercised. There are however a number of factors which have general application, and these are, now considered. (11.2)* Taxation in the middle income group is as high, if not higher, than in the U.K. Taxation allowances for wife and children are smaller than in the U.K., mortgage interest is not deductible, but education and medical expenses are deductible. There is no earned income relief, but family allowances are not taxable. The rate of tax increases for each band of taxable income, and is about 50% for the band $A 8,000 - $A 8,799, and almost 60% for the $A 12,000 - $A 15,999 band. As an example, a married man with two young children, earning a salary of $A 10,750 (£stg 5,000 @ 2.15) could expect to pay, after the usual allowances, about 26% of income in fax. (11.3) It is difficult to generalise on house prices, partly because the cavity- wall type of construction, which is usual in the U.K., is becoming the exception rather than the rule in Australia; there, most new houses are timber frame with a single brick skin. However, in the capital cities, housing costs are dominated by the high price of land. This seems to be principally due to two factors, namely, the difficulty of providing services (water, power, sewerage, transport, education) to outlying areas, and the necessity to live within a reasonable distance of work in one of the most urban communities in the world. In suburban Sydney, Melbourne and Canberra, house prices seem to be somewhat higher than in comparable London suburbs. 12. THE FUTURE (12.1)The future of the Australian Life Insurance Industry is bright, linked as it is both by its investments and business prospects to the developing economy of the country. Some Offices, even the large ones, are experiencing growth rates in excess of 25% per annum. The demand for actuaries will grow, and a survey made in 1966 indicated that the then employers of actuaries would require 225 qualified actuaries by 1975. This compares with the end of September 1969 figure of 151 actuaries who were employed in Australia. (12.2) It seems likely that Australia will play a leading role in assisting countries in South East Asia in developing Life Assurance on sound lines. The Pacific insurance Conference, held biennially, was created to further the exchange of concepts and experiences between Life and Health Insurance Companies of the Pacific Rim", and the fourth such conference was held in Sydney in 1969 and was strongly supported by Australian Offices. (12.3) New Zealand, more English and more green than Australia, does not at present seem to have the bright economic future facing Australia, but further industrialisation, and if successful, mineral and oil explorations, could have a marked effect on the country's future. • The August 1970 budget proposed some reductions in the taxation burden on salaries up to $A 32,000, which would improve the figures quoted in (11.2). (12.4) And the emigrant actuary's future? Following a thorough assessment of such factors as likely living costs, taxation, housing (with due allowance for house agents' descriptive powers). overall future prospects, the new arrival faces a new way of life in a new country. The language, though not new, is unusual in parts - "the wife's'crook, and spent the weekend in bed with a wog" should not be misinterpreted, and there is only a modicum of truth in the rumour that an adjective with sanguinary connotations is used in everyday speech with a frequency exceeding that achieved by current British T.V. plays. References,  D. Drybrough: Life Assurance in Australia - J.S.S. 14(1) T.P, Spott: Life Assurance in Australia - Pacific Insurance Conference, April 1969.  A.H. Pollard: The Academic Training of Actuaries with Particular Reference to the Programme at Mscquarie University - T.I.A.A. & N.Z., 1969.  C.J. Stevens Presidential Address - T.I.A.A. & N.Z., 1970. Additional references:- 24th Annual Report of the Insurance Commissioner for the year end 31st December, 1969. September 1st and 2nd 1970 editions of The Financial Times, Economic Trends (Australia) - Development Finance Corporation Limited. Acknowledgement Acknowledgement is made to the Management of the Australian Reinsurance Company, who provided much information on the current Australian scene, and to Professor A.H. Pollard and Development Finance Corporation Limited for assistance with economic data.
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