Groupe Consultatif Actuariel Europen

Role of the Actuarial Function

(working document)

7 December 2005 Brussels, Belgium

Copyright Groupe Consultatif

Prepared by: Aisling Kennedy (Ireland) Jiri Fialka (Czech Republic) Karel Goossens (Belgium) Ad Kok (the Netherlands)

Insurers should be required to have actuarial expertise

2
Copyright Groupe Consultatif

Role of the Actuarial Function

The Actuarial Function

The Solvency Actuary The Competencies of the Solvency Actuary The Position of the Solvency Actuary The Report of the Solvency Actuary

3
Copyright Groupe Consultatif

Role of the Actuarial Function

The Actuarial Function

The Solvency Actuary The Competencies of the Solvency Actuary The Position of the Solvency Actuary The Report of the Solvency Actuary

4
Copyright Groupe Consultatif

Skills and Competencies

Financial and prudential analysis and advice on the management of risks, liabilities and assets Mathematical and financial skills and training in statistics and risk analysis, used to analyse past events, assess present risks, and model what could happen in the future
Platform of defined skill set and competencies

5
Copyright Groupe Consultatif

Range of actuarial roles

Market factors Internal & External risk

Reinsurance

Forecasting Stress testing Stochastic Modeling ALM

Pricing Premium

Methodology

Risk measurement Solvency

Reserving Claims

Assumptions

Past adequacy

Profit testing P&L Sources

6
Copyright Groupe Consultatif

Task and responsibilities include

Pricing
Tariffs for insurance companies Design of policies and systems

Reserving
Technical provisions and liabilities of insurance companies Equalisation provision for social security system

Profit testing
Profitability and profit sharing policies Indexation of pension

Risk measurement
Capital adequacy Asset Liability Modelling
7

Copyright Groupe Consultatif

Introducing the Solvency Actuary

Solvency Actuary
Provides hands on analysis and advice May direct internal actuarial resources Advises the senior governing body on

Please note current country specific preferences

Technical provisions and solvency position at reporting date Adequacy and sufficiency level of premiums Adequacy of reinsurance arrangements

Risk management Takes a forward looking view of the companys financial position

Reviewing Actuary
Provides second view on the financial position current and forward looking
8

Copyright Groupe Consultatif

Role of the Actuarial Function

The Actuarial Function

The Solvency Actuary The Competencies of the Solvency Actuary The Position of the Solvency Actuary The Report of the Solvency Actuary

9
Copyright Groupe Consultatif

The Solvency Actuary I

To perform an investigation into the financial position of the insurance company on an annual basis. This covers the whole financial position (not only technical provisions and related items) as shown in the balance sheet
Not just an historical investigation but also a forward looking exercise examining the expected future development of the financial position

To report the results of this investigation in writing to the senior governing body of the insurer To monitor and report as required on changes to the companys financial position during the course of the year
10

Copyright Groupe Consultatif

The Solvency Actuary II

Primary client is Board or Senior Governing Body Secondary client may be Supervisor There should be a three way relationship between the Solvency Actuary, the Board and the Supervisor; the Supervisors relationship with the other two parties may be determined by legislation or there may be a three party contract between the insurer, the Supervisor and the Solvency Actuary Solvency Actuary maintains a good relationship and (in)formal contacts with external Auditor; the external Auditor may be relying on the Solvency Actuarys report Possible whistle blower responsibility to Supervisor Public Role / Disclosure requirements
11

Copyright Groupe Consultatif

Role of the Actuarial Function

The Actuarial Function

The Solvency Actuary The Competencies of the Solvency Actuary The Position of the Solvency Actuary The Report of the Solvency Actuary

12
Copyright Groupe Consultatif

Possible whistle blower responsibility

Possible whistleblowing role - if set down in regulation or contract with Supervisor In any circumstances in which the current or future solvency of the insurer is in danger
The Solvency Actuary reports to the Board
The Solvency Actuary advises the Board that in the event that the Board does not act to mitigate the relevant circumstances, he will have to notify the Supervisor If the Board does not act, the Solvency Actuary must notify the Supervisor, at the same time advising the Board that he is doing so
13

Copyright Groupe Consultatif

Public Role

Is there a further role for the Solvency Actuary in relation to the public interest?
For example, should the Solvency Actuary be required to produce a report for policyholders? Would this be provided for in legislation?

14
Copyright Groupe Consultatif

Actuarial Governance

Actuary
Code of conduct Specified education requirements Relevant experience Fully fledged CPD program Peer review arrangements Disciplinary infrastructure

Solvency Actuary, in addition

Independent position

15
Copyright Groupe Consultatif

Independence

Objective view
Free of any material conflict of interest i.e. Unhindered by other material (commercial) concerns of the insurance company To seek conformity with accounting standards Whistle blower power and protection (indemnity)
16

Copyright Groupe Consultatif

Role of the Actuarial Function

The Actuarial Function

The Solvency Actuary The Competencies of the Solvency Actuary The Position of the Solvency Actuary The Report of the Solvency Actuary

17
Copyright Groupe Consultatif

Actuarial Position I

It is envisaged that there would be both:

a Solvency Actuary, and a Reviewing Actuary

Please note current country specific preferences

Some companies may choose that the:

Solvency Actuary be an internal appointment Reviewing Actuary role be an external appointment.

Potentially both roles could be internal appointments, but this could give rise to concerns as to the independence of the Reviewing Actuary. Some companies may choose to fulfil both roles externally. However, not by the same person and the two external actuaries should not be connected
18

Copyright Groupe Consultatif

MODEL A

Actuarial Position

Senior Governing Body Management

Chief Solvency Actuary Financial External Auditor

Officer

19
Copyright Groupe Consultatif

MODEL B

Actuarial Position

Senior Governing Body Management

Chief Reviewing Actuary Solvency Actuary Financial External Auditor

Officer

20
Copyright Groupe Consultatif

MODEL C

Actuarial Position

Senior Governing Body Management

Reviewing Actuary

Chief Financial External Auditor

Solvency Actuary

Officer

21
Copyright Groupe Consultatif

MODEL D

Actuarial Position

Senior Governing Body Management

Reviewing Actuary

Chief

Financial
Solvency Actuary Officer

External Auditor

22
Copyright Groupe Consultatif

Role of the Actuarial Function

The Actuarial Function

The Solvency Actuary The Competencies of the Solvency Actuary The Position of the Solvency Actuary The Report of the Solvency Actuary

23
Copyright Groupe Consultatif

Statutory Financial Reporting I

Status quo at bookyear end under the prevailing accounting principles Development of financial position between current and previous reporting date

Technical provisions and related balance sheet items

Risk margins on the provisions Discounting

To carry out a minimal number of checks, tests w.r.t. possible adverse deviations
check on methodology, check on calculations, retrospective, backward looking statements, IFRS Liability Adequacy Test, ad hoc coverage of risk development, annually
24

Copyright Groupe Consultatif

Statutory Financial Reporting II

To discuss with external Auditor before finalisation

To separately report in writing to Senior Governing Body To separately report in writing to Supervisor (when required)

25
Copyright Groupe Consultatif

Solvency Financial Reporting I

Financial and Solvency Position of the company Compliance with local (additional) solvency requirements

Independent report by the Solvency Actuary

Based on generally accepted actuarial principles Stating Personal opinion

Groupe Consultatif to produce framework

Copyright Groupe Consultatif

26

Solvency Financial Reporting II

Status quo and expected future development (1)

Possible adverse deviations Prospective, forward looking statements

Risk Audit and Review

Integral coverage of risk development Continuous monitoring Controlling the process

Groupe Consultatif to produce framework

Copyright Groupe Consultatif

27

Solvency Financial Reporting III

Status quo and expected future development (2)

Analysis of individual risks and risk management measures
Correlations Effect of diversification Suggested improvements

Capital adequacy position

Analysis of recent development Projections Minimum Capital Requirement Solvency Capital Requirement Use of Standard formula vs. internal model

Compliance with Solvency II legal requirements

Groupe Consultatif to produce framework

Copyright Groupe Consultatif

28

Solvency Financial Reporting IV

Based on

Strategy and general policy of company Economic developments Risk developments Portfolio developments Risk hedging Interdependencies / correlations Going concern / run off status Policyholders behaviour / reasonable expectations Scenario testing & analysis What if analysis Distinguish between short term / long term Back testing experience

Groupe Consultatif to produce framework

Copyright Groupe Consultatif

29

Solvency Financial Reporting V

Report will be send to the Board (Senior Governing Body) Board remains responsible for all company reporting to Supervisor, external Auditor etc.

Board may decide to send to Supervisor (on a voluntary or on compulsory basis)

Board may decide to send to external Auditor (on a voluntary basis) National Supervisor may require direct access to Report (or parts of the Report) or may require a separate report from the Solvency Actuary
30

Copyright Groupe Consultatif

Solvency Financial Reporting VI

Supervisor

Report of the Solvency Actuary

Board of Directors

External Auditor
31
Copyright Groupe Consultatif

Position Groupe Consultatif

Groupe Consultatif is ready, willing, prepared and organised to develop proposals in close cooperation with Directorate Internal Market for a framework for

The Actuarial Function The Solvency Actuary The Competencies of an Actuary The Position of the Actuary The Report of the Actuary

32
Copyright Groupe Consultatif