Professionalism Professional standards for Solvency II Chris Daykin

Article 48 (2) of Solvency II Directive  2) The actuarial function shall 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.

Vote on level 1 text 3 waves of level 2 consultation : proposed by CEIOPS, opinions from stakeholders, decision by Member States and EU Commission : several thousand pages to analyse Quantitative impact studies : stress tests for 30 major European insurance groups Beginning of level 3 work for CEIOPS : waiting for internal model pre-applications

CP26 to CP37 – mostly on Technical Provisions But, of particular relevance to professionalism: CP33 - System of Governance Since then, two more waves of consultation Consultation Papers up to CP79 CEIOPS consultation 1st wave : March – June 2009

Groupe Consultatif submissions – 1  response to CP33 in June 2009  detailed submission at end of September 2009  proposed major role for Groupe in developing standards  Groupe argued that these should include  public interest standards  technical standards

Groupe Consultatif submissions – 2  public interest standards would include  qualification standards  ethical standards  governance standards  communication standards  technical standards would include  interpretative standards  technical implementation standards

Groupe Consultatif submissions – 3  qualification standards would include  syllabus (based on Groupe core syllabus)  relevant experience (period and quality/relevance)  Continuing Professional Development requirements  ethical standards would be a subset of Groupe’s Code of Conduct  governance standards concern relationships between actuarial function and others

Groupe Consultatif submissions – 4  communication standards concern clarity of communication of actuarial function  technical standards would be developed  principles-based rather than prescriptive rules-based  covering all aspects of the actuarial function  and, possibly, other actuarial roles

Actuarial function level 2 text : final advice from CEIOPS (…), it is incumbent upon the undertaking to make sure that persons charged with actuarial tasks have the relevant qualifications, experience and knowledge of applicable standards. CEIOPS does not envisage a specific university degree or training as a prerequisite for adequately fulfilling the actuarial function; in particular a person carrying out the relevant tasks does not need to acquire the occupational title of “actuary” in jurisdictions where such a title is available.

Actuarial function level 2 text : final advice from CEIOPS The actuarial function requires an understanding of the stochastic nature of insurance and the risks inherent in assets and liabilities, including the risk of a mismatch between assets and liabilities, as well as an understanding of the use of statistical models. CEIOPS may develop Level 3 guidance on how any appointed actuary interacts with the responsibilities of the Actuarial Function

Actuarial function level 2 text : final advice from CEIOPS The process of developing the European actuarial guidelines shall involve participants with appropriate knowledge and experience of actuarial issues and should represent in balanced proportions the insurance industry, the actuarial profession and the academic community. In forming and formulating its own actuarial view, the actuarial function shall be objective and free from influence of other functions and the administrative, management or supervisory body.

Draft Level 2 text from Commission Chapter X: System of Governance  Article 10(1) Without prejudice to Articles X, Y (IM on the calculation of technical provisions), CEIOPS may develop European actuarial guidelines on technical, professional and ethical issues, taking into account the standards set in national and international actuarial associations.  the Groupe has suggested amendments to this to open the way for Groupe to ‘develop’ and CEIOPS to ‘promulgate’ standards.

Groupe Consultatif follow-up activity  meetings with European Commission  …and with CEIOPS  preparing paper on structures and due process for standard-setting led by Groupe  addressing relationship between ‘fit and proper’ and public interest standards  aim is to set up Standards Committee following annual meeting of Groupe on 1 October 2010

Fit and proper Article 42 of Directive Insurance and reinsurance undertakings shall ensure that all persons who effectively run the undertaking or have other key functions at all times fulfil the following requirements: (a) their professional qualifications, knowledge and experience are adequate to enable sound and prudent management (fit); and (b) they are of good repute and integrity (proper).

Fit and proper  although wording includes ‘at all times’, ‘fit and proper’ is easier to apply initially than continually  does not embrace CPD as a concept  ‘proper’ falls short of following professional and ethical standards  finding someone not ‘fit and proper’ usually entails demonstrating their involvement in a fraud or a company that has got into difficulties  wording in Level 2 has strong flavour of looking back at past conduct and experience

Standard-setting  standards should be principles-based  …not rules-based  must be mandatory (even for non-members)  need to be enforced by someone  this points to EIOPA promulgating standards  …national regulators would monitor and enforce  Groupe members would adopt standards

Development of standards  development by practitioners, not regulators  …but needs to be an open process  standards impact on other stakeholders  Groupe could establish Standards Committee  …appoint actuaries to the Committee  …invite some non-actuaries  consult widely on draft standards  present standards to EIOPA for endorsement

Technical implementation standards Technical implementation standards might cover  general principles  data  assumptions  modelling  monitoring experience  evaluating underwriting policy  evaluating adequacy of reinsurance arrangements  effective implementation of risk management

Standards for other actuarial roles?  although standards developed under Article 48(2) would relate to actuarial function, Groupe could develop standards more broadly for actuarial roles under Solvency II  risk management  asset/liability management  Solvency Capital Requirement (SCR)  Own Risk and Solvency Assessment (ORSA)  financial reporting for accounts  market consistent embedded value

20 Vision of Groupe Consultatif TECHNICAL PROVISIONS Overall consistency MCR / SCR / ECONOMIC CAPITAL RISK STRATEGY PERFORMANCE GOVERNANCE INTERNAL CONTROL Risk Management ACCOUNTING REPORTING MULTISTANDARD RECONCILIATION ASSETS ASSET LIABILITY MANAGEMENT MCEV VALUE A new world for insurance actuaries : actuaries everywhere ? Underwriting policy Reinsurance arrangements

Standards for Solvency II  major challenge for the Groupe Consultatif  …and the member associations of the Groupe  the role of the actuary looks set to expand and develop  widely accepted high quality standards will assist  …but outcome will depend on individual actuaries  …supported by an active role played by associations

Professionalism in Life and General Insurance Leading to practice-specific case studies

Aims of talk  To identify issues of professionalism that are particularly relevant to practising life and non-life insurance actuaries  To review the current professional environment, and thinking behind it

Sins of the past that may haunt us Life Insurance  products designed to disguise charges  high risk products (e.g. precipice bonds)  instances of mis-selling of life products  weak reserving for financial guarantees  underestimating the need for economic capital  insufficient consideration of uncertainty  high profile failures (in UK Equitable Life…)

Sins of the past that may haunt us Non-life  weak reserving  inadequate recognition of latent claims  being ‘compliant’ with the management  mis-interpreting claim settlement dynamics  high profile failures (e.g. HIH in Australia)  and Independent in UK… Sins of the past that may haunt us Non-Life Insurance

Where might we now be at risk?  over-reliance on complex models  are they the right models?  underestimating the fatness of the tail  failing to predict the financial crisis  (not) treating the customer fairly  poor communication of risk  inadequate scrutiny and peer review  conflicts of interest

Issues of professionalism for practising actuaries  Who is my client ?  having due regard to others whose interests might be affected  Relationship with other actuaries  respect  challenge non-compliance  Avoiding conflicts  Integrity (including confidentiality) and objectivity  Competence and care  Communication

Current professional environment (I)  Code of Conduct  Technical Guidance and Actuarial Standards  regulatory guidance  local standards/guidance  Groupe Consultatif (or CEIOPS) standards  need for CPD  Professional judgement  need evidence to justify this (good documentation)  external controls (eg regulator) on what can be done

Current professional environment (II)  Statutory Actuary System  Appointed/Responsible Actuary  advice to Board  requirements and responsibilities  Conflicts of Interest  How independent are we as actuaries?  can we wear several hats?  responsibilities to policyholders, shareholders, management

Public Responsibilities of Life Actuary  Opinion on financial condition  Valuation of liabilities  Certification of adequacy of assets to meet liabilities  Actuarial reports – internal and external  Marketing disclosures  New products and pricing  Certification of fairness or equity  Transfers of business  Surrender values

Public Responsibilities of General Insurance Actuary  Opinion on financial condition  Valuation of technical provisions  Certification of adequacy of assets to meet liabilities  Actuarial reports – internal and external  Risk analysis and management  Design of reinsurance programme and risk transfer mechanisms  New products and pricing  Capital requirements  Transfers of business

Responsibilities of appointed or responsible actuary  Continuous monitoring of financial soundness  Adequacy of premium rates  Soundness of product design  Access to management and to Board  Relationship with regulator  Suitability of investment policy  Dynamic financial condition analysis and reporting

Possible roles of insurance actuary  Employee  Director  Policyholder  Shareholder  Holder of share options  Member of performance-related remuneration scheme

Possible conflicts of interest  Shareholder v policyholder  Management v shareholder  Marketing attractiveness v prudence  Prudence v transparency  Incentives v shareholder value  Solvency v “fair” premiums

Dealing with uncertainty  Reserving ranges  Understanding uncertainty  Communicating uncertainty  Professional responsibilities in an uncertain world  Role of reinsurance and risk transfer

Actuarial Governance  How can the actuary contribute to good corporate governance?  Professionalism offers a firm basis for trust  Openness, transparency and accountability  Risk assessment and management  Evaluation of impact on all stakeholders  Protection of the interests of policyholders  “Treating the customer fairly”

Actuarial risk management  Risk analysis  Enterprise risk management  Dynamic financial analysis  Development of risk control strategies  Evaluation of risk-based capital  Resilience of company to potential adverse scenarios  Expected component of Solvency II regulatory regime