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With-profits governance and the role of actuaries
Pete McGurk, a partner with the Insurance Consultancy team, discusses the latest FSA proposals for the with-profits sector of the insurance industry and the role of actuaries.
In June 2003 the FSA published the latest paper arising from the With-Profits Review carried out in the wake of the Equitable Life troubles. This paper summarises feedback received on the detailed proposals published earlier in Consultation Paper 167 (CP167) and describes some changes to the original proposals in the light of that feedback.
Two earlier articles, one on with-profits governance and a second on the role of actuaries, describe the CP167 proposals in detail. The main proposals, in summary, were:
- Each insurer with with-profits business will be required to publish a detailed Principles and Practices of Financial Management that describes a framework for how it will exercise the numerous areas of discretion within the management of with-profits. The main aim is to prevent the arbitrary use of such discretion to the detriment of policyholders or sub-groups of policyholders.
- Each with-profits insurer should put in place arrangements to ensure that the PPFM are abided by in practice. How they should do this is the subject of guidance rather than hard and fast rules but the FSA strongly favours the formation of a With-profits Committee (WPC) for larger insurers. The WPC would be independent and report to the board on compliance with the PPFM and the way discretion was exercised.
- The current Appointed Actuary role will be abolished as the FSA feel that this role, and in particular the responsibility for determining a life insurer's reserves, is inconsistent with the rest of the supervision regime which puts the responsibility for the running of the business on the Board of Directors or other governing body.
- All life insurers will be required to appoint an actuary to fulfil a new function, the actuarial function. This function would relate only to the valuation of the policyholder liabilities and would include the provision of advice on methods and assumptions, although the choice of these would rest with the board. For the many other functions that are currently the responsibility of the Appointed Actuary, the onus would switch to the board to obtain the necessary actuarial advice.
- With-profits insurers will need to appoint a with-profits actuary to report to the board and any WPC on areas of discretion as they relate to the fair treatment of policyholders.
- The regulatory reporting structure will be changed to reflect the directors' responsibility for the policyholder liabilities and to make these liabilities subject to audit. The auditor must obtain a report from an independent (of the insurer) actuary - the reviewing actuary - on the calculation of the liabilities.
These proposals drew some strong criticism from both the actuarial profession and the Government Actuary's Department. In particular, the lack of certification of the policyholder liabilities by an actuary was perceived to be a weakening of the current system. The tight timescales at a time when the insurance industry is facing other difficulties and changes were also an area of concern for many.
The latest Policy Statement retains all the key elements described above. However, some changes are made to the detail and the timetable.
- The reviewing actuary will now be required to provide a public certification of the policyholder liabilities in a similar form to the current Appointed Actuary's certificate.
- The with-profits actuary will now be required to make a report to policyholders on the insurer's compliance with the PPFM.
- The with-profits actuary will not be permitted to be a member of the board.
- The PPFM need only be made available on request to new policyholders as opposed to being supplied as a matter of course.
- The changes in the actuarial roles and the regulatory reporting framework will be delayed until the introduction of the Integrated Prudential Sourcebook (PSB) in 2004. For most insurers this will mean that the first year-end valuation carried out under the new regime will be at 31 December 2004.
- The deadline for firms to publish their PPFM has been moved back to the end of March 2004 from the second half of 2003.
Some rather sceptical views on the FSA's original cost-benefit analysis had been received and the cost estimates have been increased. Appeals to simplify or waive some proposed requirements for smaller insurers have fallen on deaf ears.
Pete McGurk, August 2003.