THE REGULATORY ROLE OF THE ACTUARY

Chris Daykin

UK Government Actuary

EARLY REGULATION

• New York and Massachusetts

• prior controls on premiums and reserves

• 1870 Life Assurance Act (UK)

• freedom with publicity

• actuarial reporting requirement

WHAT SKILLS CAN ACTUARIES BRING?

• data management and analysis

• scientific rating techniques

• scientific reserving techniques

• reinsurance pricing and evaluation

• asset/liability management

• overall financial management

WHY ACTUARIES?

• formal training

• mathematics and statistics

• mathematical modelling skills

• understanding of insurance

• assets as well as liabilities

• professional structure

THE REGULATORY SPECTRUM

• prior approval of products and premiums

• systematic notification of new products

• actuarial responsibility for liabilities

• asset adequacy opinion

• Appointed Actuary

• future financial condition reporting (DFA)

THE APPOINTED ACTUARY KEY FEATURES

• continuous appointment

• assets and liabilities

• continual financial monitoring

• professional control

• responsibility to supervisor

DUTIES OF THE APPOINTED ACTUARY

• valuation of assets and liabilities

• report to the directors on the results

• determination of surplus or deficit

• advice on surplus distribution

• continual financial monitoring

• expense disclosure

• financial condition report

THE APPOINTED ACTUARY IN THE UK

• FIA or FFA and over the age of 30• must hold practising certificate• appointment notified to FSA• consultation with previous AA• current FSA proposals to split the role

- actuarial function advising the Board

- actuary concerned with discretion

CURRENT PROFESSIONAL REQUIREMENTS

• direct access to the Board

• requirement to monitor continually

• report on surplus distribution

• reasonable expectations of policyholders

• whistle-blowing responsibility

CONTINUOUS MONITORING OF FINANCIAL POSITION

• product design and marketing

• premium rates and options

• current investments and continuing policy

• derivative exposures

• current and future level of expenses

• reinsurance arrangements

DYNAMIC FINANCIAL ANALYSIS (STRESS-TESTING)

• realistic future cash-flows

• impact of regulatory requirements

• alternative scenarios

• use of stochastic modelling

• identification of risks

• risk management strategies

WHISTLE-BLOWING

• professional responsibility

• underpinned by legislation

• interests of policyholders

• responsibility to company

• responsibility to regulator

• need for protection or indemnity?

ACTUARIAL ROLES IN GENERAL INSURANCE

• pricing and reserving

• determination of loss provisions

• determination of other provisions

• design or testing of reinsurance programme

• determining reinsurance bad debt provision

• dynamic financial analysis

REGULATORY ROLES IN GENERAL INSURANCE

• Appointed Actuary (as for life insurance)

• certification of loss reserves (provisions)

• determination of liabilities

• certification of premium adequacy

• DFA or financial condition reporting

• evaluation of capital requirements

CANADA

• appointed actuary (life and non-life)

• realistic valuation methods

• provisions for adverse deviations

• risk-based capital (MCCSR)

• dynamic capital adequacy testing (DFA)

USA - LIFE

• asset adequacy opinion

• cash-flow testing

• risk-based capital

• movement towards appointed actuary

• role of NAIC and State Commissioners

USA - P & C

• loss reserve certification

• risk-cased capital

• movement towards appointed actuary

• dynamic financial analysis

• separate actuarial professional body (CAS)

ACTUARIAL ROLES IN COMPLEMENTARY PENSIONS

• scheme design

• level of contributions

• funding and solvency management

• asset/liability management

• pricing of individual options

• bulk transfers

REGULATORY ROLE OF ACTUARY IN DB PENSIONS

• regular valuation of assets and liabilities

• determination of contribution rate

• certification of funding position

• advice on investment strategy

• whistle-blowing

REGULATORY ROLE OF ACTUARY IN DC PENSIONS

• determination of contribution rate

• certification of reserves for guarantees

• determination of annuity rate

• similar roles to life insurance

• advice on investment strategy

• whistle-blowing

ACTUARIES IN SUPERVISORY OFFICE

• understanding of actuarial issues

• effective monitoring of technical provisions

• monitoring of financial strength

• interface with actuarial profession

• support for appointed/valuation actuary

• counterbalance to concentration of power

GOVERNMENT ACTUARY’S DEPARTMENT

• independent source of actuarial advice

• carries weight with the industry

• good interface with actuarial profession

• easier to recruit and retain actuaries

• available for all areas of government

ROLE OF PROFESSION

• initial education

• qualification standards

• continuing professional development

• standards of practice

• interface with regulatory bodies

• disciplinary framework

LOOKING FORWARD

• challenges of more open markets

• international accounting standards

• DFA and financial condition reporting

• increased role for actuaries

• importance of professional associations

• increasing internationalisation