Financial Condition Working Party 2000 General Insurance Convention

Financial Condition Working Party Members Philip Archer-Lock Andrzej Czernuszewicz Nigel Gillott Peter Hinton Shailesh Malde David Paul John Ryan Nylesh Shah We would like more company representation (not people with company experience).

Actuarial Involvement Assessment of individual risks reserving, reinsurance, expenses, pricing, assets, etc Overall risk coordination role ALM, DFA, statistical techniques (including correlations), financial understanding etc How much involvement should the actuarial profession have?

Background GIB aim for statutory financial reporting role. FSA introducing “Financial Condition” report. No requirement for formal actuarial involvement but must demonstrate appropriate skills. Identified 2 roles for actuaries Conventional claims reserving and premium adequacy Pulling it together.

Financial Condition Working Party 2000 General Insurance Convention

Insurance Company Risks

Risks X ?  ACTUARIAL ASSESSMENT RISK

Financial Risks

Asset Risks Value, Bad debt Modelling volatility Market value  Reinsurance Market ? Valuation Concentration ACTUARIAL ASSESSMENT RISK

Liability Risks  Discounting Unexpired Risks Unearned Premiums Outstanding claims / IBNR ACTUARIAL ASSESSMENT RISK

Liability Risks  Mismatch ACTUARIAL ASSESSMENT RISK

Financial Risks

Underwriting Risks Impact on pricing assumptions But varies by class  Concentration ? Acceptance  ? Growth / new classes Pricing ACTUARIAL ASSESSMENT RISK

Exposure Risks ?  ACTUARIAL ASSESSMENT RISK PMLs Reinsurance Policyholders’ Reasonable Expectations  Claims frequency / severity Reinsurance PMLs ACTUARIAL ASSESSMENT RISK

Business Risks  Investment Strategy ? Mergers & Acquisitions Expenses ACTUARIAL ASSESSMENT RISK

Financing Risks  Gearing Debt interest / repayment Dividend commitments ACTUARIAL ASSESSMENT RISK

Insurance Company Risks

Operational Risks But might come across evidence But might help with system requirements Could help assess some procedures X Management Technology ? Administrative Fraud ACTUARIAL ASSESSMENT RISK

Operational Risks DFA / Market Analysis X Reputation ? Data quality / availability  Planning ACTUARIAL ASSESSMENT RISK

External Risks Possible future. Some known changes X ? Social ?  Confiscation / Nationalisation Political Taxation ? Social ?  Legal / Legislative ACTUARIAL ASSESSMENT RISK

External Risks X Regulatory  Group structure ? Dependency ACTUARIAL ASSESSMENT RISK

Financial Condition Working Party 2000 General Insurance Convention

Actuarial Involvement Assessment of individual risks reserving, reinsurance, expenses, pricing, assets, etc Overall risk coordination role ALM, DFA, statistical techniques (including correlations), financial understanding etc How much involvement should the actuarial profession have?

Why companies fail

Why companies fail Contribution of different professionals to risk assessment

Why companies fail Profession Actuary Auditor Other No-one Contribution of different professionals to risk assessment Profession Actuary Auditor Other No-one % Contribution 39% 21% 18% 22%

Why companies fail Other data sources available Data relevant to US Reasons may change over time

Why companies fail Profession Actuary Auditor Other No-one Contribution of different professionals to risk assessment Profession Actuary Auditor Other No-one % Contribution 39% 21% 18% 22%

Actuarial involvement What contribution can actuaries make to the assessment of the individual risk? the overall risk coordination role? Does our training equip us for such work? Would we need additional training and research to play a useful role? Are we the best placed profession to help?

Financial Condition Working Party 2000 General Insurance Convention

Functions of the Working Party Identify what needs to be done and guidance for conventional actuarial areas. Identify what needs to be done in the “pulling together” role. Make sales pitch for the profession to be involved in the latter. Some actuaries may only be qualified for the former role and some only for the latter. There are other candidates for the pulling it together role but the Working Party believe in many cases actuaries would be the best candidates.

Outline of Report Areas of Risk directly susceptible to actuarial analysis Description of risks faced by companies. Discussion of those susceptible to actuarial techniques. Contribution of other professionals. Assessment of such Risks Details of actuarial techniques available to assess individual risks. Reporting. Skills required to carry out role.

Outline of Report Risk Co-ordination Role Extension of investigations required. Methods for aggregating the different risks. Risk measures. Dealing with correlations. Reporting. Ways of reducing of risk. Skills required to carry out role.

Outline of the Report Appendices Example of process for Bibliography. UK motor company with high solvency margin. Worldwide multi-line company. Specialist London Market company. Bibliography.

Timetable March Sessional Meeting FSA consultative document. Is there a requirement for Guidance Note(s). Ascertain whether there is any resource pressure on the profession.

Questions on which we would welcome input Do you think the concepts are achievable by the profession? Do you think the approach is sensible? What are we missing? Do we need to set up other working parties to deal with specific techniques? Do we need Guidance Notes? Are there any specific training needs in this area other than those that would normally be carried out?