Consultation Paper on Reserving and Pricing for Non-Life Insurers and Reinsurers (CP73)

On 17 September the Central Bank of Ireland (“CBI”) released a consultation paper (CP73) covering a number of changes to the current requirements for reserving and pricing for non-life insurers and reinsurers. The changes are intended to strengthen the current supervisory framework, by:
  1. Implementing requirements on a statutory basis for non-life insurers and reinsurers to provide assurance that appropriate reserves are being maintained; and 
  2. Prescribing the signing actuary role as a Pre-Approval Control Function (“PCF”)

Full compliance is required with the requirements for the financial years ending 31 December 2014 and thereafter. Comments are sought by 10th December 2013.

The Signing Actuary Role

  • Individuals will require the prior approval of the CBI before they can be appointed to the function of Signing Actuary (Paragraph 3 of CP73). 
  • For High Impact companies the Signing Actuary should be an employee of the company (Appendix 1, Paragraph 9). Where the role is outsourced:

- The Signing Actuary should not be from the same firm as the External Auditor or the Reviewing Actuary (Appendix 1, Paragraph 10).; and
- The Signing Actuary position should be formally reviewed every nine years (Appendix 1, Paragraph 11)

Statement of Actuarial Opinion ('SAO')

  • A SAO should be submitted to the CBI on an annual basis, no later than four months after the end of the financial year (Appendix 1, Paragraphs 13 and 14). The accompanying report should be made available to the CBI no later than two months after the SAO is signed (Appendix 1, Paragraph 16). 
  • The SAO shall provide an independent view of the adequacy of the Company’s reserves (Appendix 1, Paragraph 12). 
  • The report should include a discussion of the main risks and uncertainties which should aid the Board in setting the risk margin (Appendix 1, Paragraph 19e).

Governance Requirements

  • The Board should ensure that the company has appropriate governance arrangements in place in respect of the setting of claims estimates (Appendix 1, Paragraph 21). 
  • There should be internal controls on the data submitted to the Signing Actuary (Appendix 1, Paragraph 23). 
  • The Board should set a transparent pricing policy which includes robust internal policies for setting the technical prices and any deviation from the technical price (Appendix 1, Paragraph 25). 
  • The Board should set a clear reserving policy (Appendix 1, Paragraph 26). 
  • High Impact companies should establish a Reserving Committee which should oversee the company’s compliance with the reserving policy (Appendix 1, Paragraph 47). It should meet at least quarterly and should include:

- At least one independent non-executive director
- The member of the executive management with responsibility for claims
- The Signing Actuary (and Chief Actuary where different)
- The Head of Underwriting
- The Head of Finance

Internal Audit Assessment

  • The internal audit function should conduct an assessment of the company’s reserving process. A report on this assessment should be provided to the CBI (Appendix 1, Paragraph 30). 
  • High Impact companies shall perform this assessment at least once every two years. For Medium High Impact companies is should be performed at least once every three years and for Medium Low Impact companies at least once every five years (Appendix 1, Paragraphs 31 to 33). 
  • Peer Review Report
  • A Peer Review Report is to be produced by the Reviewing Actuary and should provide the Board with an independent view of the Company’s reserving and advise the Board on any limitations of the approach used by the Signing Actuary (Appendix 1, Paragraph 34). 
  • The report should include commentary on the methodologies, assumptions and main uncertainties in the Signing Actuary’s report and also an assessment of the reasonableness of the Signing Actuary’s conclusions (Appendix 1, Paragraph 35). 
  • The Reviewing Actuary should be external to the company, the Signing Actuary’s company (if outsourced) and the External Auditor (Appendix 1, Paragraph 42). 
  • The role of Reviewing Actuary should be rotated after three consecutive peer reviews (Appendix 1, Paragraph 44). 
  • High Impact companies shall have a peer review performed every other year. For Medium High Impact companies is should be performed every three years and for Medium Low Impact companies every five years (Appendix 1, Paragraphs 38 to 40).

Risk Margin Report

  • The risk margin is defined as the amount by which the booked reserves exceed the best estimate (Appendix 3). 
  • For High Impact companies a Risk Margin Report is to be produced by the CRO, Chief Actuary or Signing Actuary as appropriate (Appendix 1, Definitions). 
  • Among other things this should include an analysis of the material risks to the reserve adequacy and an explicit enumeration and justification of the risk margin booked by the Board (Appendix 1, Definitions). 
  • When calculating the risk margin, the following should be considered (Appendix 3, Paragraph 3.1):

- The level of uncertainty in the reserves
- Changes in the claims environment
- Exposure to latent claims or new types of claims; and
- Exposure to binary events
- Stress and scenario testing should be employed to help determine the risk margin (Appendix 3, Paragraph 3.8).

Guidance on Best Estimate (Appendix 3)

  • The best estimate is defined as “a probability weighted average of future expected payments arising out of current incurred claims liabilities and claims handling expenses, both reported and unreported. This is to be based on an analysis of appropriate and valid historical claims experience obtained from specific company or market based data using reasonable and applicable statistical projection methodologies.” 
  • In particular, it should not take account of the time value of money nor include precautionary risk margins either explicit or implicitly.