Actuarial Standards ORSA Standard Seminar of the Actuarial Society of Finland Helsinki (Hotel Haikko Manor) 1 October 2014 Gábor Hanák Chairperson of the Risk Management Task Force of the Standards Project Team of the AAE
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What is a profession? The Oxford Dictionary – A paid occupation, especially one that involves prolonged training and a formal qualification
IAA/AAE additions – Code of conduct (general behavioral standards) – Due process if standards of practice promulgated
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What is a profession? Karel Van Hulle on the Why Use an Actuary? Brochure (2012): “I welcome the initiatives of the Groupe Consultatif aiming at a further professionalization of the actuarial profession.” Other professions (health, law, accounting, audit) Gaining trust needs professional standards External review under Solvency II 3
Article 48 (2) of the Solvency II Directive 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
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Why standards? Cons – Compliance is a disadvantage for the individual actuary as compared to an expert with no compliance burden – Developing a standard is costly
Pros – Trust and confidence of users of actuarial services • in those delivering such services • in actuarial associations, standard setters
– Acknowledgment of serving the public 5
Standards and Notes Standards (ISAPs/ESAPs) are expected to be compulsory – Non-compliance is a violation of the code of conduct
Notes (IANs/EANs) are non compulsory, are of educational nature In a number of cases ISAPs/ESAPs will be accompanied by related IANs/EANs
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Standards and Notes Model standards (ISAPs and ESAPs)
Educational notes (IANs and EANs)
Model wording suitable for adoption by Educational material which is available for member associations as standards which use by individual actuaries without member apply to individual actuaries. associations having to adopt it formally. Intended to be mandatory (using words like Helpful guidance and educational material ‘should’ or ‘must’). for actuaries. Actuaries must comply if association adopts a standard.
member No obligation to follow the guidance.
Reflects a common understanding of how Offers alternative valid approaches, where something should be done or what different approaches are acceptable, or constitutes satisfactory practice. practice is still developing. Primarily intended to benefit, and give To help individual actuaries in doing their confidence to, the intended user(s), through work and only indirectly benefit intended enhanced quality and consistency of users of actuarial work. approach. Requires significant agreement and buy-in May present alternatives and does not from the profession. require any agreement on which of them is ‘best practice’ or even good practice. Principles-based and succinct instructions.
Didactic in style along lines of a text-book, with examples and case studies.
Expected to change relatively infrequently as Should be flexible enough to evolve as it contains durable principles. practice and techniques develop and with the addition of new case studies and examples.
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The ASC General Terms of Reference Support Strategic Objective 3 The purpose of the ASC is to develop and maintain ISAPs in accordance with the Vision Statement, the Due Process and the Statement of Objectives for ISAPs
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The ASC - Tasks Maintain framework for scope and architecture of standards Prepare SOIs, EDs, and final ISAPs Report to Professionalism Committee (PC) on how Due Process has been followed and keep PC informed at each stage Provide periodic review of ISAPs Liaise with other committees Maintain a workplan on development of ISAPs 9
The ASC Composition Current members: Australia, Canada, Finland, Germany, Hungary, Mexico, Netherlands, Taiwan, UK, US (2) Chair: Dave Pelletier, Canada Vice Chairs: Alfred Gohdes, Germany Godfrey Perrott, US
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The ASC Composition from 1/1/2015 Current members: Australia, Austria, Canada, Finland, Germany, Hungary, South Africa, Taiwan, UK, US (2) Chair: Alfred Gohdes, Germany Vice Chairs: Tom Karp, Australia Godfrey Perrott, US
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ISAPs already adopted ISAP 1 General Actuarial Practice – 18 November 2012 – Reformatted and Glossary removed on 13 October 2013
ISAP 2 Financial Analysis of Social Security Programs – 13 October 2013
Glossary of Defined Terms Used in ISAPs – 13 October 2013 12
ISAP in ED phase ISAP 3 Actuarial Practice under IAS 19 Employee Benefits – Comment deadline was 14 March 2014 – The ASC has just voted and approved ISAP 3 and the revised Glossary – ISAP 3 and the revised Glossary have been exposed by the IAA: fatal flaw review – Approval by Council next spring
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ISAPs in SOI phase ISAP [4] Actuarial Practice in relation to IFRS X Insurance Contracts – Draft SOI commented – Final SOI ratified by Council in September 2014 – The relevant task force is working on the ED
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ISAPs in SOI phase ISAP [5] Insurer Enterprise Risk Models ISAP [6] ERM Programs and IAIS Insurance Core Principles – Draft SOIs commented – Final SOIs ratified by Council in September 2014
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ISAPs in SOI phase ISAP [7] “Current estimates” and other matters in relation to the IAIS capital standards – Draft SOI commented until 5 September 2014 – Next steps: final SOI to be approved by ASC, EC then Council
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The AAE’s Standards Project Team (equivalent to the ASC) Current members: Finland, France, Germany, Greece (2), Hungary, Ireland, Italy, Spain, UK + Chief Executive and Secretary-General Chair: Chris Daykin, UK Task Forces – Actuarial Report TF (chaired by Dieter Köhlein, Germany) – Risk Management TF (chaired by Gábor Hanák, Hungary) 17
ESAPs under development ESAP 1 General Actuarial Practice – Practically the same as ISAP 1 (Glossary is not separated) – Expected to be adopted on 3 October 2014 by the General Assembly of the AAE
Why ‘duplicate’ ISAP 1? – ...to ensure that ESAPs make a coherent set without relying on external model standards
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ESAPs under development ESAP 2 Actuarial Function Report under Directive 2009/138/EC – ED comment period ended on 1 March 2013 – Revision by the task force, discussion in committees – A Working Draft has been sent to Member Associations and relevant stakeholders – Could not be finalized as Level 2 and Level 3 regulation of Solvency II have not been finalized – Potential revision in light of the above – A second Exposure Draft will be sent out 19
ESAPs under consideration ESAP on the ORSA process under Solvency II ESAP on the role of the Actuarial Function in contributing to the risk management system under Solvency II ESAP on Actuarial practice in relation to internal models under Solvency II ESAP on independent review by actuaries under Solvency II 20
Proliferation of standards? At the 2014 Spring meetings of the AAE the issue was discussed in committees – 7 ISAPs and 6 ESAPs could appear in a short period of time – Phased progress is needed
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IFoA: Applying Standards ED 33 May 2014
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ESAP [3]: a standard on ORSA ESAP [3] Actuarial practice in relation to the ORSA process under Solvency II – A discussion paper was commented in AAE committees – A Proposal to Develop Standard will be further discussed on 2 and 3 October at the AAE meetings – Depending on those discussions and decisions taken afterward, development of the exposure draft of ESAP [3] will start 23
ESAP [3]: a standard on ORSA Background In March 2012: an IAA SOI on ERM was exposed – evaluation and reporting of risk positions – treatment of risk within a control cycle
Mixed responses – Too broad, field in development
Less than half of the respondents agreed to develop an ISAP (IAN or other) Process aborted 24
ESAP [3]: a standard on ORSA Background Since then the Actuarial Standards Board of the US has issued two ERM standards – Risk Evaluation in ERM – Risk Treatment in ERM
The IAA realized that pro-activity is needed – The MCEV example – Competition, Bernardino, Who will set risk management standards?
Insurer ER Models and ERM Programs and IAIS ICPs are fairly narrow in scope 25
The Solvency II home
ORSA Pillar 2 Qualitative requirements
Pillar 1 Quantitative requirements Market consistent valuation: S2 Balance Sheet • Own funds • SCR, MCR • Prudent Person Principle •
Governance: • Risk M’ment • Actuarial • Int’l control • Int’l audit • ORSA • Supervisory Review Process •
Pillar 3 Market discipline Supervisory reports • Disclosure • Transparency •
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The ORSA Process
NEED A STANDARD? 27
ESAP [3]: a standard on ORSA ORSA: as defined by Solvency II ORSA is a complex process to be carried out by (practically) all insurers in Europe Actuarial and many other experts’ contribution is vital Actuaries should be fit A standard can help to gain confidence of firms and authorities
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ESAP [3]: a standard on ORSA The model standard on ORSA should – enhance the quality of ORSA-related services; – demonstrate that output produced by actuaries meets the needs of users; – enable actuaries to play an enhanced role in risk management in the protection of policyholders; – contribute to harmonized application of Solvency II and to development of consistency of practice; – provide guidance to actuaries on good practice in ORSA-related services 29
ESAP [3]: a standard on ORSA The model standard on ORSA – will have widespread practical relevance; – will be primarily actuarial in nature; – should enable the actuary to draw upon actuarial standards as well as best practices; – should not conflict with legislation or other applicable standards; – should not limit innovations; and – should not restrict practice inappropriately relative to what a non-actuary providing services in relation to ORSA could do 30
ESAP [3]: a standard on ORSA Proposed scope Considerations on the ORSA processes – – – – – – – –
structured and documented approach to uncertainty; consistency with or deviation from S2 requirements; business planning period; interactions among risk, capital, and value; involvement of the business in the ORSA processes; risk management and ORSA; events triggering an ORSA run; effectiveness of the model(s) supporting the ORSA methodology as a risk management tool
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ESAP [3]: a standard on ORSA Proposed scope Considerations in relation to the model(s) supporting the ORSA methodology – ORSA methodology and structure — connections with SCR methodology; – risk coverage considerations for the model(s) supporting the ORSA methodology; – combining quantitative and qualitative risks coherently; – stress and scenario testing; – time horizons; – group ORSA; – limitations of the model(s); – real world vs modelled world 32
ESAP [3]: a standard on ORSA Proposed scope Considerations in relation to “Business as Usual” (using ORSA) – Entity interactions with business processes and business units; – The ORSA run: set-up, reproducibility, documentation; – The ORSA output: the ORSA Report; documentation, use and limitations
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ESAP [3]: a standard on ORSA Proposed scope Considerations in relation to Governance – – – –
processes for design, use and monitoring; communication and consultation with stakeholders; review and update of appropriateness; review and update of users, uses and suitability
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ESAP [3]: a standard on ORSA Proposed scope To be accompanied by an EAN – Clarification of ORSA related terminology – Risk appetite, risk tolerance, and risk profile – Identification, assessment, calibration, measurement, management, monitoring, mitigating, controlling and reporting on various risks – Combining quantitative and qualitative risks coherently – Appropriate “richness” of risk inputs and ORSA outputs – Appropriate probability distributions of the underlying risks – Assessment of dependency of risks – Bases of valuation – Asset-liability management – Data quality
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ESAP [3]: a standard on ORSA
Not enough to have standards in risk management: Need to demonstrate that such standards work
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The ORSA Process?
Gödel
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…or Mission Impossible I?
Escher
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…or Mission Impossible II?
Bach
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Gödel, Escher, Bach: An Eternal Golden Braid
Douglas Hofstadter
…or?
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…and!
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Thank your for your attention Any questions, comments?
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