Regulation of Insurance and Pensions

June 2007Nairobi

Insurance - events of the last ten years

Lower interest ratesSevere correction in equity markets in 2000-1Equitable Life the catalyst in the UK

Longer life expectancyGuarantees biteMuch criticism of part played by actuaries

Enron and Worldcom the catalysts in the US, new focus on professionals (Arthur Anderson)

Response - Actuarial Profession

September 2001: Corley Report publishedRecommendations on professional guidance and Role of Appointed Actuary

Reviews (Round 2)

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Penrose Enquiry■

FSA With Profits Review

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FSA Insurance Regulation Review

Lord Penrose

Penrose Report (817 pages)

Criticisms of actuaries were:Lack of comprehensive standards (particularly in defining policyholders’reasonable expectations)Over reliance on role of Appointed ActuaryLack of scrutiny and audit of calculationsReactive discipline proceduresReluctance to challenge fellow professionals

FSA

John Tiner

Chief Executive

FSA With Profits Review

Transparency in Policyholder CommunicationsUnfair Contract TermsGovernance and Discretion over the operation of with-profit fundsDisclosure to Customers, and in Regulatory ReportingThe Interests and Fair Treatment of Customers

FSA Insurance Regulation Review

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Radical Review■

Covering life insurance and general insurance

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Comparison with banking regulation

Consultation Paper CP167 (With-profits governance, the role of actuaries in life insurers, and certification of insurance returns)

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Appointed Actuary concept thrown out

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Replaced by 3 roles■

Actuarial Function Holder (AFH)■

With Profits Actuary (can be same person as AFH)■

Reviewing Actuary (often employed by external auditor)

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PPFM introduced - transparency

Sir Derek Morris

Morris Review

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….promote recognised, high-quality and continuously developing actuarial standards,

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openness in the application of actuarial skills,

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transparency in the professional conduct of actuaries,

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accountability for their actions and ■

an open and competitive market for actuarial advice in the UK.

Morris Review

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….framework that will be independent

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in representing the public and consumer interest.

Morris – Final Recommendations

Market for actuarial servicesRegulating the ProfessionEducation & CPDActuarial rolesStandard settingPublic interest and accountabilityScrutiny and discipline

Market for Actuarial Services

Focus “Understanding gap”Not enough challengeEducating non executive directorsNew communication standard (first job for new Standards Board)

Regulating the Profession

Self regulation aloneStatutory regulationIndependent oversight

The central recommendation of the review is that the actuarial profession should be subject to independent oversight by the Financial Reporting Committee

Proposed FRC Structure

FRC

Board forActuarial

Standards

AccountingStandards

Board

AuditingPractices

BoardPOBAA Review

Panel

Investigationand

DisciplineBoard

Faculty and

Institute Councils

LESSONS

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Trust –

once damaged, is hard to repair

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External Scrutiny –

openness and transparency, willingness to accept review and criticism, even from non-actuaries

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Communication –

willingness and ability to convey complex concepts -in understandable termsto directors, policyholders and shareholders

Guidance Note 2 (extract)

“It is essential that the report is expressed in a form which is accessible to its readers and does not conceal important issues inadvertently by, for example, undue length or complexity. An executive summary or overview drawing attention to important issues would be helpful.”

Lessons for regulators and actuaries in other countries

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The UK life insurance regulatory model has been followed in many countries

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Its drastic revision in 2005-6 will trigger reviews elsewhere

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Appointed actuary model may change in many parts of the world■

Actuary as advisor to the Board■

Board must carry central responsibility■

Reviewing actuary ■

With profits actuary?

Lessons for regulators and actuaries in other countries

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More pro-active regulators■

Treating customers fairly

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New interpretations of the public interest■

New powers to enforce compliance with regulatory framework

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More transparency■

PPFM – principles and practices of financial management available as a public document

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More accountability■

Better governance

Lessons for regulators and actuaries in other countries

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More demand for actuaries■

Employed by regulators to monitor compliance

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Employed by insurers to be able to comply■

More need for actuarial education■

IAA Project to develop an International Education Programme

Pensions –

the past ten years

Swing from DB to DC

Lower interest and inflation rates

Buoyant markets leading to ‘irrational exuberance’

Severe correction in equity markets in 2000-1

Consequences for funds and sponsors

DB funds insolventEquity investment seen as overdoneSwitched into fixed interest, realised losses not recouped as markets recovered

IAS19 requires the scheme sponsor to show unfunded pension liabilities on its own Balance SheetEquity volatility acceptable for the pension fund

is not acceptable for the corporate sponsorHence lower volatility assets (fixed interest) must be heldLong hard road back to solvency, if ever

Consequences for funds and sponsors

DC funds are in better shapeBy definition, cannot be insolventMore sponsors would try to convert DB funds, but for insolvency

Consequences for members and pensioners

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DB funds may have to cut benefits

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Severe social and financial consequences for governments called upon to make good losses

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Risk transferred from corporate sponsors to governments

Consequences for members and pensioners

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DC funds have other problems

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Conversion terms seen as unfair in hindsight – restitution problems

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Risk transferred to members who may be unaware and/or incapable of taking investment decisions

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Trustees often need education more than members

Consequences for regulators and actuaries

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Transfer and withdrawal value standards■

Preservation of deferred pensions on withdrawal

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Transparency of asset management and administration fees

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Conflicts of interest disclosure by service providers

Background to Pension Funds Amendment Bill in South Africa

Key problems in the regulation of the retirement

funding environment:

High costs (administration charges and early

termination penalties)

Skimming of investment returns (secret profits,

conflicts of interest)

Investment losses (inappropriate exposure to

high risk assets)

Misappropriation of funds (misuse of pension

fund surplus, fraud, theft)

Background to Pension Funds Amendment Bill in South Africa

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Key challenges in the regulation of the retirement funding

environment:

Lowering costs through proper disclosure, competition and

safety nets

Improved governance of retirement funds (clear duties,

codes of conduct)

Trustee knowledge and training

Appropriate application of surplus legislation

Improving the supervisory abilities and powers of the FSB

Encouraging a culture of compliance