Groupe Consultatif Actuariel Européen Role of the Actuarial Function (working document) December 2005 Brussels, Belgium Prepared by: Aisling Kennedy (Ireland) Jiri Fialka (Czech Republic) Karel Goossens (Belgium) Ad Kok (the Netherlands) “Insurers should be required to have actuarial expertise” 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 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 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 Range of actuarial roles Market factors Internal & External risk Forecasting Stress testing Stochastic Modeling ALM Reinsurance Pricing Premium Risk measurement Solvency Methodology Reserving Claims Assumptions Past adequacy Profit testing P&L Sources 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 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 company’s financial position  Reviewing Actuary – Provides second view on the financial position – current and forward looking 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 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 company’s financial position during the course of the year 10 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 Actuarial Position MODEL A Senior Governing Body Management Chief Solvency Actuary Financial External Auditor Officer 19 Actuarial Position MODEL B Senior Governing Body Management Chief Reviewing Actuary Solvency Actuary Financial External Auditor Officer 20 Actuarial Position MODEL C Senior Governing Body Management Reviewing Actuary Chief External Auditor Financial Solvency Actuary Officer 21 Actuarial Position MODEL D Senior Governing Body Management Reviewing Actuary Chief External Auditor Financial Solvency Actuary Officer 22 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 ‘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 ‘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 ‘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 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 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 – Compliance with Solvency II legal requirements • • • Minimum Capital Requirement Solvency Capital Requirement Use of Standard formula vs internal model Groupe Consultatif to produce framework 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 Policyholder’s behaviour / reasonable expectations Scenario testing & analysis ‘What if’ analysis Distinguish between short term / long term Back testing experience Groupe Consultatif to produce framework 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 ‘Solvency’ Financial Reporting VI Supervisor Report of the Solvency Actuary Board of Directors External Auditor 31 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 ... diversification • Suggested improvements – Capital adequacy position • Analysis of recent development • Projections – Compliance with Solvency II legal requirements • • • Minimum Capital Requirement... to the company’s financial position during the course of the year 10 The Solvency Actuary II  Primary client is Board or ‘Senior Governing Body’  Secondary client may be Supervisor  There should... 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 Public Role  Is there a further role for the Solvency