Professional standards for Solvency II

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
CEIOPS consultation
1st wave : March – June 2009
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
Groupe Consultatif submissions – 1
 response to CP33 in June 2009
 detailed submission at end of September 2009
 proposed major role for Groupe in developing
 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
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
(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
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
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
A new world for insurance actuaries : actuaries everywhere ?
Vision of Groupe Consultatif
Risk Management
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
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…)
past that
that may
may haunt
haunt us
Non-Life Insurance
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…
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
 Who is my client ?
 having due regard to others whose interests might be
 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,
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
 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
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
 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