1 Les rôles de l’actuaire sous Solvabilité 2 Solvency II new requirements and new roles for actuaries Institut Luxembourgeois des Actuaires 28 janvier 2016

2 Agenda  Part 1 : New Requirements in the context of Solvency II  Part 2 : Roles of actuaries  Part 3 : Position of the Actuarial Profession Requirements and points of attention for actuaries and the profession

3 Part 1 : New requirements in the context of Solvency II

4 Modelling requirements  Market Value Assets and Market Value Liabilities –Market Consistent Valuation  Loss Function Modelling Prospective Stochastic Projections Distribution functions Modelling Validation

5 Risk Management Requirements  Risk Management System –Own Risk and Solvency Assessment RM Process Communication

6 Risk Management Framework Risk Management Requirements Risk Appetite Identify & Assess Risks Risk Measurement Monitoring & Reporting Link to Business Strategy Stress & Scenario Testing Risk Culture CERA Enterprise Risk Management

7 Professional Requirements  System of governance –Risk Management Function –Actuarial Function  Fit and proper criteria –Professionalism –Judgement Actuary as part of system of governance Ethical standards Technical standards

8 Reporting Requirements  Actuarial Function Report –AMSB –Data quality, methods and assumptions, back testing, underwriting, reinsurance, Report to the Supervisor (‘RTS’): not public Solvency and Financial Condition Report (‘SFCR’): annual public report ESAP2 Independent Review

9 Solvency II : clear separation of responsibilities The “Three Lines of Defence” I Business Operations Managing risk in line with risk appetite and limits ALM Capital management Underwriting and reserving Operational risk Reinsurance II Risk Management Function Independent of operations Design and effectiveness of risk management Internal model Monitoring and reporting risk profile III Internal Audit Independent of operations Evaluate internal controls and governance Compliance with internal strategies, policy and processes

10 Part 2 : Roles of actuaries

11 The 4 Key Functions in the Solvency II System of Governance Compliance Risk Management Actuarial Function Internal Audit Operationally independent Fully independent Independent position of actuary

12 Solvency II : clear separation of responsibilities for actuaries The “Three Lines of Defence” becomes n lines of defence I Business Operations Managing risk in line with risk appetite and limits ALM Capital management Underwriting and reserving Operational risk Reinsurance II Risk Management Function Independent of operations Design and effectiveness of risk management Internal model Monitoring and reporting III Internal Audit Independent of operations Evaluate internal controls and governance Compliance with internal strategies, policy and processes Actuarial Function Coordination and review of technical provisions Opinion on underwriting policy Opinion on reinsurance policy Contribute to risk management system risk profile IV External Audit Independent of operations ISA 500 : external expertise In context of audit Supervisory system : expertise and capacity External Actuarial Expert Actuary is present in all lines of defence Supervisory System

13 Actuarial Function : article 48  Technical provisions Coordinate the calculation of technical provisions Methods, assumptions and data Appropriateness of the methodologies, assumptions and models Sufficiency and quality of the data used in the calculation of technical provisions Compare best estimates against experience Reporting requirements Inform on the reliability and adequacy of the technical provisions Express an opinion on the underwriting and reinsurance policies Risk Management Contribute to the risk management system, with respect to the risk modelling and to the ORSA TP Complex

14 The Actuarial Function’s playing field The technical standards are defining the actuarial function’s playing field These are being developed by EIOPA and cover: Review and validation of data Segmentation and unbundling Assumptions Methodologies The Fit & Proper standards Technical standards are developed by EIOPA The actuarial profession has a code of conduct EIOPA makes reference to the standards of the Actuarial Profession as an “additional benchmark” Standards setting process

15 The Report of the Actuarial Function  The primary audience is the management body –The supervisor may also request the actuarial report EIOPA does not intend to define the structure and content of the Actuarial Function’s report European Actuarial Standard ESAP2 DescriptionsJustificationsOpinions / Conclusions methodologies for assessing sufficiency of technical provisions assumptions the review of data the contribution to the risk modelling differences between technical provisions in different years conclusions from comparing actual versus expected an opinion on the overall underwriting policy an opinion on the overall reinsurance policy recommendations how shortcomings could be remedied Approval

16 Comparing the Actuarial and Risk Management Function Technical Provisions Internal ModelRisk PoliciesORSA Actuarial Function Design Implement? Validate Co-ordinate Contribute to risk modelling Provide assistance Express opinions Underwriting Reinsurance Contribute Risk Management Function Design Implement Validate Document Inform Written policies Underwriting Reserving Investment Liquidity & concentration Operational Reinsurance Determine solvency needs Assess compliance Reconcile ORSA & SCR Additional skills required

17 Solvency II results in a rebalancing of responsibilities… Head of actuarial function CFO Chief Risk Officer Defining business strategy 1 st line management of risks Business planning Expert advice on assumptions, methodology and models Support risk management system Challenge business strategy Oversight of risk management Monitor risk profile against risk appetite SII is about Risk Manage- ment

18 Implemention in Europe  Survey amongst the Member Associations of AAE  Update Position Paper 2011 : information stakeholders  Position Roles of Actuaries under SII  Assess Resources and Qualification  Assess relationship with stakeholders Actuarial Function Appointed Actuary External Expert External Audit Risk Man. Actuaries are also present in all aspects of operations : CEO, CFO, Modelling, Product Management, Pricing, Reserving, Reinsurance, Asset management, …

19 Market information Life Act/CieNon Life Act/Cie UK13510 Rest 8 2 There are enough insurance actuaries – non life stays a bottle neck

20 Status SII  2/3 countries have introduced SII in local legislation on 24 September  80% are ready for reporting (not necessarily the same)  85% will apply volatility adjustment  20% will apply matching adjustment  40% will allow transitional measures  Companies not under SII scope will apply SI (50%), SII, SII light, other rules or N/A Europe is not ready yet ! MA is an exception Uniformity on TM does not exist

21 Actuarial Function  Almost all AFH are QA : average 95%  The support needed –Information and promotion for insurance companies with focus on fit & proper –Seek support with supervisor –Compulsory Practicing Certificate in UK –Voluntary Practicing Certificate in IRL  Only a fraction is outsourced –0% - 25% with an average of ± 10% –In one country it is not allowed –There is no sharing of outsourcing capacity today but it is not excluded AFH is QA Practicing Certificat 10% is outsourced – to early for sharing

22 Actuarial Function  The AF reports to –Board of directors in 60% –Management Board85% –CEO45% –CRO35% –CFO45% –Other15% AF reports to Board

23 Appointed Actuary  An appointed actuary role is maintained in 50% –60% for Life activities –45% for Non Life activities  The appointed actuary is always an actuary (qualified) AA continues in 50% of markets

24 External Expert  30% is considering an external expert role  If there is a role, it is applied for Life and Non Life EAE in 30% : Awareness ? Implementation ?

25 External Audit  Actuaries are in support of external audit in 90% –If there are actuaries supporting they always can be employees of the audit firm –In 45% it can also be external actuaries  There is exceptionnally a concertation on the roles with the audit profession Opportunity for contact with audit profession

26 Risk Management  66% of CRO’s are actuaries (weighted average)  Others have expertise in economics, finance, law, business, bank CRO  A rough estimate shows that about 25% of insurance actuaries are involved in risk management mainly in underwriting and financial RM  It is allowed to combine the AF and RM –As a person 95% ; As a unit 90% –Based on proportionality  A qualified actuary complies in 90%  There is a local RM association in 40% Majority of CRO is actuary (role of the profession ! )

27 Position of the Actuarial Profession

28 Positioning of the Role of the Actuary  1° The fully qualified actuaries of the actuarial associations are best fit for the Actuarial Function  2° The actuary is actively involved in the risk management system  3° The actuary is available for an independent review of the Solvency II Financial Condition Report

29 Positioning of the Role of the Actuary  4° The actuary can act in an external and an internal role  5° The actuary works together with other experts  6° The interaction with the external auditor has to be organised

30 On the Independent Review of Solvency II Reports (Nov 2014)  Independent review of SFCR is important part of the overall governance framework for Solvency II.  Solvency reporting gives to a larger extent forward looking or prospective information. As a result Solvency reporting will serve a different and additional purpose than regular financial reporting. As a consequence, there will be an enhanced role of professional judgment by experts such as qualified actuaries.  The Solvency II reports supplement existing mandatory financial reporting and supplement the embedded value (EEV or MCEV) reports which are currently drawn up by many life insurers on a voluntary basis. The importance of external reviews of such additional reports has already been acknowledged by the industry.

31 On the Independent Review of Solvency II Reports (Nov 2014)  The AAE is concerned about the potential lack of convergence between the national practices related to external scrutiny and review process for the purposes of the Solvency II  The AAE believes that all quantitative information, including underlying methodologies, assumptions and in any case the implications of this quantitative information for the potential future development of the solvency and capital position of the undertaking under review should be assessed and attested. This review will be specific to each undertaking and will rely on a combination of analysis of past experience and judgment of future trends, including various potential economic and entity specific scenarios that could influence the solvency and capital position of the undertaking.

32 On the Independent Review of Solvency II Reports (Nov 2014)  As a consequence the review should “be carried out by persons who have knowledge of actuarial and financial mathematics, commensurate with the nature, scale and complexity of the risks inherent in the business of the insurance or reinsurance undertaking, and who are able to demonstrate their relevant experience with applicable professional and other standards.” (SII directive, Art 48 (2))  Since the professional judgments provided by the Actuarial Function need actuarial expertise, an independent actuary’s opinion should be required to perform any independent review in order to assure the public and the supervisor that the professional judgments applied in the process are appropriate.  As a means of giving independent confidence to the public, the opinion of the independent actuary should be disclosed. This disclosure should include the basis of the independent actuarial review, by which actuary it was performed and the opinion of that actuary.