A leading industry spokesperson has called for actuaries to become more involved in product construction so that all risks are evaluated.
InstituteofActuariesofAustralia senior vice president Trevor Thompson said actuaries in some banks were involved in this area, but in areas such as funds management it was rare.
“The profession is underrepresented in risk management,” he said.
Retail investors have not understood the risks in some products and even some superannuation trustees did not see the problem.
“People are entitled to believe there are checks and balances in place with the products they are investing in,” Thompson said.
“There ought to be a structure or reporting framework in every product provider.”
It is argued in some quarters that rating agencies should spot any risks and report them.
But Thompson said it depended on the type of people working at the agencies as to whether they could report on all risks.
“There needs to be a lot of accountability between what the regulator wants and the creation of the PDS [Product Disclosure Statements] for a product,” he said.
“We are not saying products are wrong, just that people haven’t looked at how they will perform in all markets.”
Thompson said the problem has been that as products outperform it becomes an expected outcome.
“Risk management is about looking at all possible outcomes for a range of products,” he said.
Watson Wyatt managing director Andrew Boal said people now see some products as being flawed just because of recent failures.
“If an investor put money into the share market in 1987 and lost a proportion of their money, does this mean the product is flawed just because the market went down?” he asked.
“The recent problems have caused a loss of faith in structured products, which is wrong.”
Boal said some investors will now move away from Australian equities, but even if the market fails to lift in the next eight months, returns will only bottom out at -5 per cent.
He argues that for long-term investors, this negative return — if it happens — is nothing compared to the compounded return over a 20 or 30-year period.
