Home > News > 2002 > October 2002 > Actuaries - Appointed or Dis-Appointed
Actuaries - Appointed or Dis-Appointed
John Jeffery, from our Life team in London, describes the changing role of an actuary in the Life industry as proposed by the FSA.
Introduction
The role of the actuary within life assurance is changing!
Earlier this year the Financial Services Authority (FSA) signalled their intent by publishing a consultation paper on the role of the actuary in life insurance business entitled 'Governance of With-Profits Funds and the Role of the Appointed Actuary. The second part of this paper considered, and wished to consult on, whether the role of the Appointed Actuary (AA) should be retained in full or in part and, if it was to change, how and what should be done to take its place.
Responses came from various sources including insurers, consumer groups, government departments and the actuarial profession, with the majority but by no means all, in favour of retaining the AA role, and subsequently the FSA has published its proposals for the future.
This article summarises these proposals and explains the FSA's rationale behind them, the possible benefits and problems arising from the changes and how things may develop.
Background
The role of the AA was introduced some 30 years ago in the UK to fulfil certain roles in the management of a life office, including determination of the reserves required to meet future policyholder benefits and provision of advice to the board of directors on the financial management of the business and the fair treatment of policyholders. This latter aspect is perhaps of most importance in the declaration of bonuses on With-Profit policies.
Historically there has been little statutory control of how the role is carried out, the regulators leaving this to detailed professional guidance issued by the UK actuarial profession. The risk management role of the AA has also recently been formalised by requiring the AA to provide an annual Financial Condition Report on the risks to the solvency of an insurer.
The FSA's Proposals
A cornerstone of the new regulatory regime is that directors and senior management are responsible for securing compliance with its regulatory requirements. The FSA are concerned that under current regulations the responsibilities placed on the AA may lead the board to place too much reliance on his views, without themselves attempting to understand the issues and reach their own conclusions. It is within this respect that the FSA wishes to consider the AA role within the regulations.
The FSA wish to alter the regime to focus and underline the directors' responsibilities more. For this reason much of the AA's responsibilities are expected to pass to the board.
For With-Profits business, there is a greater need for the exercise of discretion, however, and the FSA believe this role should remain in the hands of the AA.
It is proposed that other aspects of the AA's role should revert to the firm, in particular, the determination of the surplus from which distributions may be made.
For non-profit business there is much less need for discretion and the FSA propose that the AA position is scrapped completely.
There will still be a need for actuarial advice to help the board with their decisions, and the current required function of AA will be replaced by the 'actuarial function', which will be applied to the individual whose purpose is to provide actuarial advice to the board. In particular this function would provide advice on the calculation of policy liabilities.
It is envisaged that the position of AA for With-Profits funds in the use of discretion and the person responsible for the actuarial function could be performed by the same individual or separate individuals.
The FSA also proposes some other changes: the scope for conflict of interests to arise should be reduced by not permitting the AA or holder of the actuarial function position to be the chairman or CEO of an insurer or to hold another role which could give rise to a significant conflict of interests; the Financial Condition Report will become the responsibility of the firm rather than the AA and that the board become responsible for the determination of the policyholder liabilities in regulatory returns. There is also the possibility of external audit of the FSA returns and review of actuarial work performed.
For and Against the Proposal
In many ways there will be little change in the day-to-day running of an insurance company and the actuarial work performed. There will still be a need for actuarial advice on policy reserving, premium rating and solvency issues for example, but with responsibility laid firmly at the board's door for understanding this advice, rather than allowing the board to abdicate some responsibilities to the AA.
The FSA's move towards the board controlling all aspects of the business along with other changes to the regulatory regime to a 'risk based' regime is a clear signal that the FSA wish to make the board take responsibility for all aspects of running the company, in particular, managing its risks. The FSA's concern is that if the AA is making decisions in an autonomous role or at least with only a cursory glance from board members, problems may arise as to who is responsible for these decisions and that indeed certain responsibilities will fall between the AA and the board.
A further concern of the FSA is the potential conflict of interests for the AA between the policyholders, for whom he has a duty to make sure they are treated fairly, and the shareholders of the company, by whom he is employed, and is expected to help maximise shareholder profits.
This argument although valid is not necessarily a strong one. The position the board will find themselves in will be very similar, in that it will have to be fair to all parties and maximise profit. It would seem the AA's conflict would not be greater than the board's. Indeed with the AA having a professional responsibility to policyholders through his membership of the Institute of Actuaries, and guidance provided from the Institute, his position may be less likely to cause a conflict and less likely for that conflict to compromise policyholders. It could easily be argued that the board have less responsibility to policyholders (only those placed on them in regulations, rather than professionally) and may be more likely to be swayed by their position as heads of a company whose primary role is to maximise profits.
By making the board more responsible for actuarial decisions, this may improve their knowledge and understanding of the business from an actuarial point of view, which would be no bad thing, but the greater detail and understanding of actuarial work will escape all but those trained in the field and still cause the board to rely strongly on others' actuarial recommendations.
There are a number of other comments that have been put forward to retain the AA system: One is that 'it ain't broke so don't fix it', but the FSA's job is also to make sure it doesn't break in the future; it may not be broken now but with the changing market economy, with more pressure on producing results and increasing profits, it is possible something may give in future; It is also thought that if the role of the actuary is diminished, then actuaries may be less listened to within the company, which with their unique skills would be damaging and that there may be a less able group wishing to take on this less significant role. These arguments possibly have some validity but there is no hard evidence that the removal of an official title will cause the importance of these highly qualified and trained professionals to diminish within the life insurance industry.
Conclusion
Over the past few years there have been a number of scandals arising in the insurance industry and the FSA are committed to making the regulatory regime safer for policyholders but without stifling innovation and the free market.
The proposal to make the board responsible for all aspects of an insurer's business may be another step towards this aim, but many commentators are concerned that the removal of the AA will lower the protection afforded to policyholders and will in fact be taking a backward step.
By the end of this year the FSA will produce a more detailed set of proposals, for further consultation. They appear committed to doing away with or severely diminishing the role of the AA, but with quite strong support for the AA role across the spectrum, the final situation is far from certain. We will have to wait and see if actuaries are to remain Appointed or to be dis-Appointed.
John Jeffery, October 2002.