Home > News > 2003 > February 2003 > The future role of the life office actuary
The future role of the life office actuary
Pete McGurk, a partner with the Life team discusses the FSA's proposals for the abolition of the Appointed Actuary
Some of the FSA's key proposals arising from its With-Profits review were published in January 2003 in a Consultation Paper, CP 167. As well as some new arrangements for the governance of with-profits business, discussed in a separate article (With-profits governance), the FSA confirmed the initial policy conclusions published in 2002 concerning the abolition of the current Appointed Actuary role and proposed some changes to the regulatory reporting system which arise partly from the actuarial proposals.
All life insurance companies and some, generally larger, friendly societies are currently required to have an Appointed Actuary whose main responsibilities include valuing the liabilities to policyholders (known as reserving), monitoring the ongoing solvency position, advising on premium rates, advising on risk and providing advice on the exercise of discretion towards policyholders. For with-profits policies, the latter role would include advice on bonus rates payable. It is the personal responsibility of the Appointed Actuary to provide the advice and to ensure that the insurer is aware of the information required to perform the role.
The FSA view this personal responsibility as inconsistent with the rest of the regulatory regime whereby responsibility rests with the governing body. They feel that this can lead to governing bodies having little involvement in reserving, a key aspect of running their business. However they recognise the importance of actuarial input to the running of life insurers.
With these factors in mind the FSA propose to abolish the role of Appointed Actuary and replace it with two advisory functions, the actuarial function that would apply to all life insurers, and the with-profits actuary that would only apply to with-profits firms. The introduction of these roles will require significant changes to the current professional guidance of the actuarial profession and both of the new functions will require practicing certificates issued by the actuarial profession.
The actuarial function would relate only to the valuation of policyholder liabilities, including advice to the governing body on methods and assumptions, the calculation of the liabilities using the methods and assumptions determined by the governing body and reporting the results. The report would be available to the FSA on request. The actuarial function-holder may be internal or external to a firm with no restrictions on what other roles could be performed for the insurer.
For other areas of advice that are currently the responsibility of the Appointed Actuary to provide, the onus would switch to the governing body to obtain this advice. In practice , this advice would probably also come from the actuarial function but this is not a requirement and it could come from one or more additional sources.
The with-profits actuary would report primarily to the governing body and also to any WPC. The role would be to report on the use of discretion as it relates to the fair treatment of policyholders including bonus rates, investment policy, surrender values, new business plans and premium rates, expense allocation, communication with customers and any proposed changes to the PPFM. The role has similarities to the Appointed Actuary role in that responsibility rests with the individual to ensure that he advises the insurer on the relevant issues and requests the relevant information and resources to perform his duties (which the insurer must provide). The with-profits actuary would be required to report annually or more frequently to the governing body on use of discretion during the period concerned. The depth of the report would be expected to vary with the size and complexity of the business.
The FSA see the with-profits actuary's role, being concerned with fair treatment and the use of discretion, as far more sensitive than the actuarial function. Consequently they propose restrictions on the other roles within a firm that may also be held. The with-profits actuary could not hold the position of Chairman or Chief Executive, nor could he hold a role that could give rise to a significant conflict of interest (proposed guidance suggests that such roles might include marketing or sales director or, for a proprietary company, finance director). Subject to the above restrictions, the with-profits actuary could be either internal or external.
The FSA envisage the new actuarial arrangements coming into force in the second half of 2003. The proposals apply to all UK life insurers apart from registered "non-directive" friendly societies, who would continue under the existing appropriate actuary regime, and Lloyd's syndicates who would remain on the syndicate actuary regime.
Changes to regulatory reporting
The proposed changes affect both the structure of the returns and the scope of the auditing of the returns.
The current regulatory reporting structure for life insurance companies reflects the role of the Appointed Actuary in being solely responsible for determining the policyholder liabilities and therefore signing them off in the annual regulatory returns in a separate actuarial report. The FSA proposals shift this responsibility to the governing body who therefore become responsible for the whole of the regulatory returns. The policyholder liabilities also, as a result, become subject to audit for the first time and therefore subject to external challenge.
The current directors' certificate and actuarial report are to be replaced by two elements:
A management report will contain both narrative and numerical data.
A directors' certificate that will be more streamlined than the current certificate.
The current returns contain a number of detailed forms, some of which form part of the actuarial report and some of which form part of the "financial statement" section of the returns. The FSA propose to transfer some key forms directly relevant to the balance sheet and solvency determination from the actuarial report into the "financial statement" forms and hence be subject to full audit. The remaining forms are deemed to be essentially "supporting calculations" and will be moved into the management report and not be subject to audit. The new location of the "actuarial" forms will be:
| Financial statements (audited) |
Forms 48, 49, 55, 56, 58, 60 and 61 |
| Management report (unaudited) |
Forms 46, 46A, 47, 51 to 54 and 57 |
Most of the narrative from the current actuarial report is shifted to the proposed management report.
The FSA plans to consult in Spring 2003 on the wider reform of insurance regulatory reporting and this will cover, in particular, the new-style management report. The conclusions on the forms above are therefore very much provisional.
As part of the auditing process, the auditor would be required to obtain a report from an actuary on the valuation of policyholder liabilities. This advice could be provided by an employee of the audit firm or by an outsider but the provider must be independent of the insurer. The auditor's report is also to be brought more into line with the Companies Act equivalent.
The actuarial profession have been recommending a full external peer review of the work currently done by the Appointed Actuary but the proposed system puts only the reserving under independent actuarial scrutiny. The FSA is hoping that the increased responsibility given to directors for other areas of this work will force them to take a deeper interest in the actuarial advice. Whether the directors can acquire the skills and inclination to do this remains to be seen.
Appointed Actuaries are currently required to draft an annual financial condition report covering the risks run by the insurer and present it to the governing body. The FSA will usually request to see a copy of this report as part of its regular monitoring process. It is proposed that firms will be required to produce a risk assessment report and make it available to the FSA, though it will not be a public document. The FSA will expect significant actuarial input to such a report but responsibility for its production will pass to the firm.
The changes to regulatory reporting are scheduled to take effect for financial years ending on or after 31 December 2003. They apply to all life insurance companies. They also apply to friendly societies apart from registered "non-directive" societies, although the proposed changes to the regulatory returns for friendly societies are much more limited and essentially reflect the removal of the Appointed Actuary as a signatory.
Pete McGurk, February 2003.