The hollowing out of the investment and insurance systems

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During four sessions from 16-23 March, a group of leading economists and actuaries gathered—virtually—to discuss the public interest purposes and shortcomings of finance.

ATC member Ashok Gupta pointed out a number of ways in which investment savings needed to be directed more effectively to better meet the needs of customers, society and the environment. Our regulatory framework carries incentives that encourage financial sector participants to chase some risks and to avoid other risks, with undesirable outcomes.

These undesirable outcomes frequently include a focus on trading of existing assets, a zero-sum game, with insufficient of the long term risk taking that creates new assets for society. Because of the perceived penalties for short term price volatility, we get insufficient long term investment, with damaging bad long term consequences.
When we look at the financial system through a system lens, its complex and adaptive character explains why regulation can lead to unintended consequences. This is why the IFoA has supported the setting up of FinSTIC – The Financial Systems Thinking Innovation Centre.

It is essential that regulation is better thought through to achieve the outcomes we need, and actuaries need to play their part in this deep rethinking.