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Copyright Groupe Consultatifⓒ

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Role of the Actuarial FunctionRole of the Actuarial Function

Groupe ConsultatifGroupe ConsultatifActuariel EuropéenActuariel EuropéenGroupe ConsultatifGroupe ConsultatifActuariel EuropéenActuariel Européen

7 December 20057 December 2005

Brussels, BelgiumBrussels, Belgium

(working document)(working document)

Prepared by:Prepared by:

Aisling Kennedy (Ireland)Aisling Kennedy (Ireland)

Jiri Fialka (Czech Republic)Jiri Fialka (Czech Republic)

Karel Goossens (Belgium)Karel Goossens (Belgium)

Ad Kok (the Netherlands)Ad Kok (the Netherlands)


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““Insurers should Insurers should be required to be required to have actuarial have actuarial

expertise”expertise”


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The Actuarial FunctionThe Actuarial Function

The Solvency ActuaryThe Solvency Actuary

The Competencies of the Solvency ActuaryThe Competencies of the Solvency Actuary

The Position of the Solvency ActuaryThe Position of the Solvency Actuary

The Report of the Solvency ActuaryThe Report of the Solvency Actuary


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Skills and CompetenciesSkills and Competencies

Financial and prudential analysis and advice on the Financial and prudential analysis and advice on the management of risks, liabilities and assetsmanagement of risks, liabilities and assets

Mathematical and financial skills and training in Mathematical and financial skills and training in statistics and risk analysis, used to analyse past statistics and risk analysis, used to analyse past events, assess present risks, and model what could events, assess present risks, and model what could happen in the futurehappen in the future

Platform of defined skill set and competenciesPlatform of defined skill set and competencies


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Range of actuarial rolesRange of actuarial roles

PricingPricingPremiumPremium

ReservingReservingClaimsClaims

Risk Risk measurementmeasurement

SolvencySolvency

Profit testingProfit testingP&L SourcesP&L Sources

Reinsurance

Market factors

Internal &External risk

Methodology

Assumptions

Past adequacy

ForecastingStress testing

Stochastic ModelingALM


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Task and responsibilities includeTask and responsibilities include

PricingPricing– Tariffs for insurance companiesTariffs for insurance companies– Design of policies and systemsDesign of policies and systems

ReservingReserving

– Technical provisions and liabilities of insurance companiesTechnical provisions and liabilities of insurance companies– Equalisation provision for social security systemEqualisation provision for social security system

Profit testingProfit testing– Profitability and profit sharing policies Profitability and profit sharing policies – Indexation of pensionIndexation of pension

Risk measurementRisk measurement– Capital adequacyCapital adequacy– Asset Liability ModellingAsset Liability Modelling


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Introducing the Solvency ActuaryIntroducing the Solvency Actuary

Solvency ActuarySolvency Actuary– Provides “hands on” analysis and advice Provides “hands on” analysis and advice

– May direct internal actuarial resourcesMay direct internal actuarial resources

– Advises the ‘senior governing body’ onAdvises the ‘senior governing body’ on• Technical provisions and solvency position at reporting date Technical provisions and solvency position at reporting date • Adequacy and sufficiency level of premiumsAdequacy and sufficiency level of premiums• Adequacy of reinsurance arrangementsAdequacy of reinsurance arrangements

– Risk managementRisk management– Takes a forward looking view of the company’s financial positionTakes a forward looking view of the company’s financial position

Reviewing ActuaryReviewing Actuary– Provides second view on the financial position – current and Provides second view on the financial position – current and

forward lookingforward looking

Please note current country specific

preferences


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The Solvency Actuary IThe Solvency Actuary I

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

exercise examining the expected future development of the exercise examining the expected future development of the financial positionfinancial position

To report the results of this investigation in writing to the To report the results of this investigation in writing to the ‘senior governing body’ of the insurer‘senior governing body’ of the insurer

To monitor and report as required on changes to the To monitor and report as required on changes to the company’s financial position during the course of the yearcompany’s financial position during the course of the year


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The Solvency Actuary IIThe Solvency Actuary II Primary client is Board or ‘Senior Governing Body’Primary client is Board or ‘Senior Governing Body’

Secondary client may be SupervisorSecondary client may be Supervisor

There should be a three way relationship between the Solvency There should be a three way relationship between the Solvency Actuary, the Board and the Supervisor; the Supervisor’s Actuary, the Board and the Supervisor; the Supervisor’s relationship with the other two parties may be determined by relationship with the other two parties may be determined by legislation or there may be a three party contract between the legislation or there may be a three party contract between the insurer, the Supervisor and the Solvency Actuaryinsurer, the Supervisor and the Solvency Actuary

Solvency Actuary maintains a good relationship and (in)formal Solvency Actuary maintains a good relationship and (in)formal contacts with external Auditor; the external Auditor may be contacts with external Auditor; the external Auditor may be relying on the Solvency Actuary’s reportrelying on the Solvency Actuary’s report

Possible ‘whistle blower’ responsibility to SupervisorPossible ‘whistle blower’ responsibility to Supervisor

Public Role / Disclosure requirementsPublic Role / Disclosure requirements


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Possible ‘whistle blower’ responsibilityPossible ‘whistle blower’ responsibility

Possible whistleblowing role - if set down in Possible whistleblowing role - if set down in regulation or contract with Supervisorregulation or contract with Supervisor

In any circumstances in which the current or In any circumstances in which the current or future solvency of the insurer is in dangerfuture solvency of the insurer is in danger– The Solvency Actuary reports to the BoardThe Solvency Actuary reports to the Board

– The Solvency Actuary advises the Board that in the The Solvency Actuary advises the Board that in the event that the Board does not act to mitigate the event that the Board does not act to mitigate the relevant circumstances, he will have to notify the relevant circumstances, he will have to notify the SupervisorSupervisor

– If the Board does not act, the Solvency Actuary must If the Board does not act, the Solvency Actuary must notify the Supervisor, at the same time advising the notify the Supervisor, at the same time advising the Board that he is doing soBoard that he is doing so


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Public RolePublic Role

Is there a further role for the Solvency Actuary Is there a further role for the Solvency Actuary in relation to the public interest?in relation to the public interest?

For example, should the Solvency Actuary be For example, should the Solvency Actuary be required to produce a report for policyholders?required to produce a report for policyholders?

Would this be provided for in legislation?Would this be provided for in legislation?


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Actuarial GovernanceActuarial Governance

ActuaryActuary– Code of conductCode of conduct– Specified education requirementsSpecified education requirements– Relevant experienceRelevant experience– Fully fledged CPD programFully fledged CPD program– Peer review arrangementsPeer review arrangements– Disciplinary infrastructureDisciplinary infrastructure

Solvency Actuary, Solvency Actuary, in additionin addition

– Independent positionIndependent position


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IndependenceIndependence

Objective viewObjective view

Free of any material conflict of interest i.e.Free of any material conflict of interest i.e.

Unhindered by other material (commercial) Unhindered by other material (commercial) concerns of the insurance companyconcerns of the insurance company

To seek conformity with accounting standardsTo seek conformity with accounting standards

‘‘Whistle blower’ power and protection Whistle blower’ power and protection (indemnity)(indemnity)


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Actuarial Position IActuarial Position I

It is envisaged that there would be both:It is envisaged that there would be both:– a Solvency Actuary, anda Solvency Actuary, and– a Reviewing Actuarya Reviewing Actuary

Some companies may choose that the:Some companies may choose that the:– Solvency Actuary be an internal appointmentSolvency Actuary be an internal appointment– Reviewing Actuary role be an external appointment.Reviewing Actuary role be an external appointment.

Potentially both roles could be internal appointments, but this Potentially both roles could be internal appointments, but this could give rise to concerns as to the independence of the could give rise to concerns as to the independence of the Reviewing Actuary.Reviewing Actuary.

Some companies may choose to fulfil both roles externally. Some companies may choose to fulfil both roles externally. However, not by the same person and the two external However, not by the same person and the two external actuaries should not be connected actuaries should not be connected

Please note current country specific

preferences


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Senior Governing Body

Management

Solvency Actuary

Actuarial PositionActuarial Position

External Auditor

Chief

Financial

Officer

MODEL A


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Management

Solvency Actuary


External Auditor

Reviewing Actuary

Chief

Financial

Officer

MODEL B


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Management


External Auditor

Reviewing

Actuary

Chief

Financial

OfficerSolvency Actuary

MODEL C


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Management

Solvency Actuary


External Auditor

Reviewing

ActuaryChief

Financial

Officer


MODEL D


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‘‘Statutory’ Financial Reporting IStatutory’ Financial Reporting I

Status quo at bookyear end under the prevailing Status quo at bookyear end under the prevailing accounting principlesaccounting principles

Development of financial position between current and Development of financial position between current and previous reporting dateprevious reporting date

Technical provisions and related balance sheet itemsTechnical provisions and related balance sheet items– Risk margins on the provisions– Discounting

To carry out a minimal number of checks, tests w.r.t. To carry out a minimal number of checks, tests w.r.t. possible adverse deviationspossible adverse deviations– check on methodology, check on calculations, check on methodology, check on calculations,

retrospective, backward looking statements, IFRS Liability retrospective, backward looking statements, IFRS Liability Adequacy Test, ad hoc coverage of risk development, Adequacy Test, ad hoc coverage of risk development, annuallyannually


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‘‘Statutory’ Financial Reporting IIStatutory’ Financial Reporting II

To discuss with external Auditor before To discuss with external Auditor before finalisationfinalisation

To separately report in writing to To separately report in writing to Senior Governing Body Senior Governing Body

To separately report in writing to Supervisor To separately report in writing to Supervisor (when required) (when required)


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‘‘Solvency’ Financial Reporting ISolvency’ Financial Reporting I

Financial and Solvency Position of the companyFinancial and Solvency Position of the company

Compliance with local (additional) solvency Compliance with local (additional) solvency requirementsrequirements

Independent report by the Solvency ActuaryIndependent report by the Solvency Actuary

Based on generally accepted actuarial principlesBased on generally accepted actuarial principles

Stating Personal opinionStating Personal opinion

Groupe Consultatif to produce framework


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‘‘Solvency’ Financial Reporting IISolvency’ Financial Reporting II

Status quo and expected future development (1)Status quo and expected future development (1)

– Possible adverse deviationsPossible adverse deviations

– Prospective, forward looking statementsProspective, forward looking statements

– Risk Audit and ReviewRisk Audit and Review

– Integral coverage of risk developmentIntegral coverage of risk development

– Continuous monitoringContinuous monitoring

– Controlling the processControlling the process



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‘‘Solvency’ Financial Reporting IIISolvency’ Financial Reporting III Status quo and expected future development (2)Status quo and expected future development (2)

– Analysis of individual risks and risk management Analysis of individual risks and risk management measuresmeasures

• CorrelationsCorrelations• Effect of diversificationEffect of diversification• Suggested improvementsSuggested improvements

– Capital adequacy positionCapital adequacy position• Analysis of recent developmentAnalysis of recent development• ProjectionsProjections

– Compliance with Solvency II legal requirementsCompliance with Solvency II legal requirements• Minimum Capital RequirementMinimum Capital Requirement• Solvency Capital RequirementSolvency Capital Requirement• Use of Standard formula vs. internal modelUse of Standard formula vs. internal model



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‘‘Solvency’ Financial Reporting IVSolvency’ Financial Reporting IV

Based onBased on– Strategy and general policy of companyStrategy and general policy of company– Economic developmentsEconomic developments– Risk developmentsRisk developments– Portfolio developmentsPortfolio developments– Risk hedgingRisk hedging– Interdependencies / correlationsInterdependencies / correlations– Going concern / run off statusGoing concern / run off status– Policyholder’s behaviour / reasonable expectationsPolicyholder’s behaviour / reasonable expectations– Scenario testing & analysisScenario testing & analysis– ‘‘What if’ analysisWhat if’ analysis– Distinguish between short term / long termDistinguish between short term / long term– Back testing experienceBack testing experience



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‘‘Solvency’ Financial Reporting VSolvency’ Financial Reporting V

Report will be send to the Board (‘Senior Governing Report will be send to the Board (‘Senior Governing Body’)Body’)

Board remains responsible for all company reporting to Board remains responsible for all company reporting to Supervisor, external Auditor etc.Supervisor, external Auditor etc.

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

Board may decide to send to external Auditor (on a Board may decide to send to external Auditor (on a voluntary basis)voluntary basis)

National Supervisor may require direct access to Report National Supervisor may require direct access to Report (or parts of the Report) or may require a separate report (or parts of the Report) or may require a separate report from the Solvency Actuaryfrom the Solvency Actuary


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Board of

Directors

‘‘Solvency’ Financial Reporting VISolvency’ Financial Reporting VI

External Auditor

Supervisor

Report of the Solvency Actuary


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Position Groupe ConsultatifPosition Groupe Consultatif

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

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

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