Optimising the Actuarial Function

September 2013 Insights Optimising the Actuarial Function Solvency II requires an Actuarial Function to be established in all insurance companies. Th...
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September 2013

Insights Optimising the Actuarial Function Solvency II requires an Actuarial Function to be established in all insurance companies. These new requirements will lead companies to question whether the existing processes, tools and deliverables are structured in a cost effective manner. In March 2013, EIOPA issued a public consultation on guidelines addressed to National Competent Authorities (NCAs) on how to proceed in the phase leading up to the application of the Solvency II Directive. NCAs are expected to engage with undertakings in a close dialogue and to put in place these guidelines from 1 January 2014, at both individual and group levels. Four sets of guidelines were released for consultation, one of which concerns the Solvency II System of Governance, including new guidelines on the implementation of the Actuarial Function. These latest consultation papers will likely motivate insurers to prioritise the review of their existing governance structures. This might include reporting lines between CFO, CRO, chief actuary and others as well as the implementation of the four key functions of Solvency II: Actuarial, Risk Management, Compliance and Internal Audit. The focus of this article is on the Actuarial Function. Across Europe we see firms considering their future operating model. A key challenge is to manage the interactions between the aforementioned functions, and with other parts of the business, whilst demonstrating Solvency II compliance in a cost effective manner. Other stakeholders such as members of the actuarial profession are studying the consequences of the Actuarial Function’s new regulatory responsibilities, with a view to maintain and promote actuarial influence in the Solvency II world. Existing statutory actuaries are also considering the implications for their roles, notably regarding their contribution to risk management and the positions available to them in the new governance system. In this paper, we focus on the work of actuaries from a regulatory perspective. We consider the tasks that the Actuarial Function will need to undertake, as well as how it might organise itself into various operating models, and its interaction with the existing statutory roles across Europe.

However, we recognise that actuaries are also suppliers of management information for decision making. There will be significant overlap between the regulatory work and the information that management will use to steer the business, and such requirements will also need to be taken into account as part of the process.

Key messages: •• The Actuarial Function forms part of the Solvency II system of governance, which EIOPA intends to introduce on a phased basis starting on 1 January 2014. •• Across Europe the challenges for implementing the Actuarial Function vary depending mainly on the level of development of the existing role of actuaries. In some countries, existing statutory roles already encompass many of the required tasks whilst in others the statutory role is less established and hence the challenge is greater. •• Different target operating models for the Actuarial Function exist and companies need to consider which are appropriate for their individual circumstances. •• Companies should not consider the regulatory requirements in isolation but should use the opportunity to understand how changes in actuarial systems and processes can produce more timely and granular information to steer the business. •• This may involve cost-benefit analyses in relation to key decisions such as the investment in technology and outsourcing of the roles. Upfront investment may lead to lower costs in the long run. •• Going forwards, the tools, processes and mix of skills required for the Actuarial Function are likely to evolve. These need to be addressed as part of an implementation plan.

In this issue 2 The developing regulatory landscape 4 Key requirements of the Actuarial Function under Solvency II (Article 48) 7 Implications for working actuaries 7 Target operating models for the Actuarial Function 10 Implementing the Actuarial Function 12 How Towers Watson can help

Insights | September 2013

The developing regulatory landscape Across Europe, the existing regulatory environments in which the Actuarial Function of Solvency II is being implemented differ widely. As a result different issues are being faced in the various European jurisdictions.

For example, we illustrate some of the questions being raised by stakeholders in the UK, France and Germany in the following Table 01.

Table 01. Current issues concerning the implementation of the Actuarial Function for selected countries

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UK

France

Germany

Existing statutory role

•• Actuarial Function Holder •• With-Profits Actuary •• Lloyd’s Signing Actuary

•• None (apart from mortality and disability table certification)

•• Responsible Actuary

Issues for insurance industry

•• Interaction with the ‘3 Lines of Defence’ model •• Appropriate separation of policyholder and shareholder interests •• Neither actuaries nor firms want to confine actuaries to the Actuarial Function •• Undersupply of skilled actuarial resources

•• What personal legal risk will the actuary face in the new role? •• How can non-actuaries in the role demonstrate ‘relevant professional standards’? •• Who should write the new technical standards?

•• Interaction with existing governance requirements of MaRisk •• Appropriate regulatory oversight of the Actuarial Profession •• Who defines the standards and who reviews compliance with these standards?

Issues for local actuarial profession

•• Interaction of existing roles with Actuarial Function •• Increased competition from non-actuaries in Risk Management Function •• Development of approach to underwriting and reinsurance opinions

•• The Profession has no jurisdiction over non-actuaries currently occupying similar roles 1 •• Less tradition of actuarial independence from the Board •• Technical standards to be developed from scratch

•• Interaction of Responsible Actuary with Actuarial Function •• Existing role has heavier focus on policyholder protection •• Various overlapping responsibilities

Existing technical and ethical standard setters

•• Technical standards set by the Financial Reporting Council •• Ethical standards set by the Profession

•• Technical standards under development •• Ethical standards set by the Profession 2

•• Technical and ethical standards both set by the Profession

Insights | September 2013

The above issues need to be considered in relation to the ongoing challenges for actuaries, as data analysis and risk modelling become more sophisticated. These trends are partly regulatory but also reflect the need to provide timely and granular management information as part of normal business practice.

What is the Actuarial Function? Recitals 31 and 32 of the Solvency II Directive make the distinction between an insurer’s organisational units and its regulatory ‘functions’, which are defined as ‘an administrative capacity to undertake particular governance tasks’. The Actuarial Function is not necessarily an organisational unit, nor a specific person or group of people, but rather a regulatory ‘function’ which conducts the list of tasks specified in Article 48. We examine this list of tasks overleaf. Jurisdiction by jurisdiction, local regulators are already considering whether the existing statutory role should be continued once Solvency II is in place. If the existing role is retained, then regulators will have to decide whether statutory role holders will need to comply with two sets of fit and proper standards (Solvency II and local requirements), whether technical standards will require different approaches for local statutory and for Solvency II calculations, and whether potential conflicts will permit individuals to hold both roles at the same time. For example, the German Actuarial Profession has taken the position that the local role of Responsible Actuary should continue alongside the Actuarial Function role 3. It has argued that the roles differ in three key respects. Firstly, they differ in legal form, as the Responsible Actuary has a sovereign mandate to conduct self-regulation at company level. The second difference lies in their practical implementation, as firms will be free to decide the Actuarial Function’s relationship to other key functions. Thirdly, their remits are different, as the Responsible Actuary focuses more than the Actuarial Function on equitable profit sharing and policyholder protection.

In the UK, we expect the existing Actuarial Function Holder role will need to evolve to reflect Solvency II requirements. In addition, the Regulator has indicated that the role of With-Profits Actuary (defending policyholder interests) is also likely to be continued. Lloyd’s is consulting on the future of the Signing Actuary regime and at present seems likely to retain an actuarial opinion on solvency reserves, notwithstanding the Solvency II Actuarial Function responsibilities around technical provisions. A similar story is likely in Ireland and the Netherlands where Life Appointed Actuary roles and the Signing Actuary role in P&C will need to change if they are to accommodate the new Solvency II requirements. Stakeholders in Sweden and Finland have indicated that the existing Responsible Actuary roles are likely to remain, in addition to the specified Solvency II Actuarial Function role.

“Actuaries “ will need to broaden their skill-set in order to undertake certain tasks in their new statutory capacity.”

Even though the majority of European jurisdictions already have a statutory actuarial role in place, there are nevertheless significant variations in the range of statutory tasks undertaken. A recent survey by the Groupe Consultatif found that 92% of EU jurisdictions have a statutory life role involving technical provisions, whereas only 19% charge the statutory role with risk management tasks 4. This means actuaries will need to broaden their skill-set in order to undertake certain tasks in their new statutory capacity, such as the underwriting opinion, the reinsurance opinion and the contribution to the Own Risk Solvency Assessment (ORSA). All these areas are new issues for the Actuarial Function. Formal actuarial guidance is being developed by the relevant actuarial bodies but it is also likely that approaches to these issues will develop over time as market practitioners gain more experience and understanding. There is no specific requirement to have a specified head of an Actuarial Function under Solvency II. However, we believe that in practice companies will appoint one in order to have a specific point of contact for the Executive, Board and Regulator. This person may need to rely on other professionals such as underwriters and reinsurance experts to fulfil some of the required tasks. towerswatson.com 3

Insights | September 2013

“Firms “ will need to consider whether it is necessarily the Actuarial Function which calculates the technical provisions, and how to ensure separation of the operating and controlling business units.”

Key requirements of the Actuarial Function under Solvency II (Article 48) The role of the Actuarial Function is defined by a list of tasks in Article 48 of the Solvency II Directive. In this section, we summarise these tasks and in italics discuss the various implications.

Co-ordination of the calculation of technical provisions As set out in the Level 2 implementing measures, this consists of assessing the sufficiency of the provisions, assessing the uncertainty in the estimates, and comparing and justifying the differences between successive years (amongst other tasks) 5. The Solvency II technical provisions are at the heart of the Actuarial Function’s role, representing perhaps the most traditionally actuarial part of the skill-set required under Article 48. However, in some jurisdictions current statutory reserving is based on techniques less advanced than those of Solvency II (for example, using closed-form annuity factors or commutation functions) and cash flow projections have until now only been used for supplementary reporting. Actuaries in such countries may need to formalise their approaches to setting best-estimate assumptions, and may need to increase the sophistication and robustness of the modelling systems used. The regulatory texts define the Actuarial Function’s role regarding technical provisions as that of ‘co-ordination’, and list various ‘validation’ type tasks which this involves. However, the texts also state that co-ordination does not explicitly include the actual calculation. Firms will therefore need to consider whether it is necessarily the Actuarial Function which performs the calculation of technical provisions, and how to ensure appropriate ‘segregation of responsibilities to ensure independent scrutiny and validation of the calculation’ 6.

Methods, assumptions and data The texts require the Actuarial Function to review the appropriateness of the models and assumptions, consider the sufficiency and quality of data, and to interpret deviations of best estimates against experience. While the tasks involving models and assumptions are familiar territory for most actuaries, those involving data may require more focus going forward. For some, the sufficiency and quality of the data is already a prime consideration. However,

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Solvency II formalises data consideration and obliges the actuary to state the data use, including comments on the consistency of the data with the financial reporting where relevant, and the nature of any limitations imposed by any gaps or deficiencies in the data. In particular, the Actuarial Function must validate internal data, review external data and assess whether IT systems sufficiently support actuarial procedures. We anticipate that these tasks will require more interaction with IT experts across the specification, testing and quality standards to maintain the underlying data. There is also a requirement to consider the verifiability of assumed management actions. Typically such assumptions are not straightforward to justify based on historical data, and hence may require greater interaction with the Board. This could be achieved via some form of facilitated scenario analysis where the actuaries present the Board with various scenarios, and gauge the extent of management actions which the Board considers reasonable under each scenario.

Reporting requirements This covers a variety of areas, requiring the Actuarial Function to inform the Administrative, Management and Supervisory Body of the reliability and adequacy of the calculation of technical provisions, and to express an opinion on the overall underwriting policy and on the reinsurance arrangements. Firms will have to give thought as to how they will demonstrate the reliability and adequacy of technical provisions to the Regulator, with benchmarking of valuation assumptions against market averages being a potential reference point. Additionally, particularly for property casualty (P&C) business, the valuation results can be benchmarked using ratios of reserves to premiums or to claims payments with outlying values requiring a clear justification. The traditional analysis of surplus is also a useful tool and we would expect this to continue in the future, perhaps with a stronger emphasis on the wider communication of the results than is currently the case. The precise nature of the reporting lines is not specified by the regulatory texts. Firms will need to consider the relationships between the head of the Actuarial Function and the Board, the general management and the Chief Risk Officer. Reporting lines and remuneration should be structured in such a way that the Actuarial Function’s independence is ensured and that no conflicts of interest exist between assessing the adequacy of provisions and other commercial interests. Regulators in some jurisdictions may choose to put in place a formal whistle-blowing requirement.

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Expressing opinions on the underwriting policies and reinsurance arrangements may require a broadening of the actuarial skill-set in jurisdictions where actuaries do not commonly undertake these tasks. The task will include assessment of the consistency of underwriting and reinsurance policies with risk appetite in both normal and stressed situations, such as reasonably foreseeable disaster scenarios. The opinions on underwriting and reinsurance will probably not extend to consideration of technical underwriting aspects such as the effects of changes in policy wording, although this may be something the actuaries would do anyway. In cases of specialist underwriters such as Lloyd’s, the actuary may need to rely on other professionals such as specialist underwriters and reinsurance experts.

Regulatory Deliverables of the Actuarial Function The Actuarial Function must produce an annual report to the management body covering the points listed below in Table 02. The report should cover all of the information necessary for the management body to form its own opinion on the adequacy of technical provisions and on the underwriting and reinsurance arrangements. The report may also be requested by the supervisor.

“Firms “ will have to give thought to how they will demonstrate the reliability and adequacy of technical provisions to the Regulator.”

EIOPA does not intend to define the structure and content of the actuarial report. The Groupe Consultatif is however developing an actuarial report standard template covering the various opinions that the Actuarial Function may give (unqualified/qualified/adverse), how the fit and proper requirements have been met, which standards have been complied with, and the use of outsourcing.

Table 02. Items listed in the Level 1, 2 and 3 texts for inclusion in the Actuarial Report Descriptions

Justifications

Opinions/conclusions

•• Methodologies for assessing sufficiency of technical provisions •• Assumptions •• Review of data •• Contribution to 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 reinsurance adequacy •• Recommendations how shortcomings could be remedied

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While the Actuarial Function must give a number of opinions, for example on the overall underwriting policy and reinsurance adequacy, we note that the Administrative, Management and Supervisory Body remains ultimately responsible for the undertaking’s compliance with the Solvency II regulations.

Contribution to risk management The Actuarial Function is required to contribute to the risk management system with respect to risk modelling and the ORSA. There are some areas of overlap between the tasks of the Actuarial and Risk Management Functions. While the Level 2 texts permit ‘a full or partial integration of these functions’, EIOPA’s guidelines on the system of governance state that ‘in large undertakings and in undertakings with more complex risk profiles, it is expected that the key functions are performed by separate units’. The same guidelines

also require that the Actuarial Function shall perform its duties without ‘undue influence exercised by other key functions’, so in such cases these firms would have to justify to the Regulator how conflicts of interest can be avoided. In Table 03, we compare the tasks of the Actuarial Function against those of the Risk Management Function as detailed in the Solvency II Directive. The actuarial role will focus to a large extent, though not exclusively, on the quantitative aspects. Depending on the tasks they currently undertake, actuaries in some jurisdictions may regard their role as defined by Article 48 as fairly narrow – it makes no specific contribution to Asset Liability Modelling (ALM) or profit-sharing for example. In other jurisdictions Solvency II will formalise the actuarial role for the first time, which the local profession is likely to welcome.

Table 03. Tasks of the Actuarial and Risk Management Functions as defined by the SII Directive

Actuarial Function

Risk Management Function

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Technical provisions

Internal model

Risk policies

ORSA

•• Design •• Calculate •• Validate •• Co-ordinate

•• Contribute to risk modelling •• Provide assistance

Express opinions

•• Contribute

•• Design •• Implement •• Validate •• Document •• Inform

Written policies

•• Underwriting •• Reinsurance

•• Underwriting •• Reserving •• Investment •• Liquidity and concentration •• Operational •• Reinsurance

•• Determine solvency needs •• Assess compliance •• Reconcile ORSA and SCR

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Implications for working actuaries The Solvency II Directive does not stipulate that those working in the Actuarial Function need to be qualified actuaries, requiring only that they ‘have knowledge of actuarial and financial mathematics’ and ‘demonstrate their relevant experience with applicable professional and other standards’. To guide the work of those exercising the Actuarial Function (irrespective of whether they are qualified actuaries), EIOPA is developing detailed technical standards covering subjects such as review and validation of data, segmentation and unbundling, assumptions and methodologies. Other than the ‘knowledge of actuarial and financial mathematics’ referred to above, no fit and proper standards for the Actuarial Function currently exist at the European level. In parallel, the Groupe Consultatif has launched its own standards project in order to promote the actuarial profession as the preferred provider of professionals to the Actuarial and Risk Management Functions. The Groupe’s deliverables are likely to include guidance on the quality of actuarial work, reporting by the Actuarial Function, the Actuarial Function’s contribution to Risk Management, and the ORSA. This project is in turn mirrored at the national level by the local actuarial professions. The Profession has furthermore promoted the role of actuaries in the Risk Management Function, in particular through the recent introduction of the Chartered Enterprise Risk Actuary (CERA) qualification. In jurisdictions where a well-established statutory role exists, holders of these roles may be concerned that the future role may tend towards regulatory compliance. This is different from their current role, which often allows significant input to management decision-making. In such jurisdictions, local actuarial professions are likely to promote the skills of actuaries as being suitable for roles in the Risk Management Function, thus retaining their broader range of tasks and continuing to exercise their management-advisory roles. These issues are reflected in the debate over where the Actuarial Function sits in the ‘Three Lines of Defence’ model. In the UK, where actuaries are familiar with the ‘operational’ aspects of the existing statutory role, there is a tendency to emphasise the ‘Line 1’ tasks of the Solvency II Actuarial Function. In contrast, the debate in Germany tends to emphasise the ‘Line 2’ tasks. We note however that Solvency II does not refer explicitly to the Three Lines of Defence model, choosing instead to focus on the requirement to ‘avoid conflicts of interest and ensure appropriate independence’.

In jurisdictions where no statutory role exists or is limited in its scope, actuaries will face the challenge of undertaking new tasks. Under the governance requirements, Chief Actuaries will likely have to provide a stronger independent challenge to the decisions taken by the management body. In such cases, the Actuarial Profession could play a role in providing its members with the necessary support and guidance in this new, more assertive position. Personal legal risk is a concern in some cases as actuaries have never before been required to give a formal opinion on the technical provisions, and legal responsibility is often borne solely by the Chief Executive.

“A “ key question to address is how to avoid potential conflicts of interest between the Actuarial Function’s operating and controlling tasks.”

Target operating models for the Actuarial Function Article 48 is sufficiently flexible to allow multiple target operating models, thus recognising that companies in different jurisdictions will need to adapt the model to local circumstances, depending on the size and skills base of their actuarial teams. In this section we propose possible target operating models for the Actuarial Function, based on our experiences with various insurers. These are not exhaustive and other combinations are possible. In doing so, a key question to address is how to avoid potential conflicts of interest between the Actuarial Function’s ‘operating’ and ‘controlling’ tasks. For example, the role regarding technical provisions includes elements of both ‘calculation’ and ‘validation’. In addition, the Level 2 texts do not exclude the Actuarial Function being ‘involved in the original decisions’ on underwriting and reinsurance, despite being required to give a formal opinion on these issues. However, we do not anticipate a need for a formal independent review of the Actuarial Function’s findings, given that a large part of its role is already by nature a review. A second key question involves how the operating model can be adapted for firms with scarce actuarial resources in order to produce the required regulatory and management information. The following organisational charts should be interpreted as reflecting flows of information, rather than hierarchical reporting lines. In all cases, care is required to ensure that the Actuarial Function does not have a subordinate relationship with limited ability to raise a genuine challenge to management decisions. Also, as the size of the firm increases, the issues relating to the consistent communication of information across the firm also tend to increase.

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Operating model 1: Internal separation of operations and control Administrative, management and supervisory body Opinions and conclusions

Claims department

•• Sufficiency of technical provisions •• Overall underwriting policy •• Adequacy of reinsurance arrangements

Experience analysis

Capital requirements

Technical provisions Actuarial business unit

Valuation assumptions Reinsurance team Underwriting department

Reinsurance arrangements

Contribution

Actuarial Function

Policy data

within this model, for example the decentralised departments indicated could be absorbed into the Actuarial Function and a ‘circular’ system of peer review implemented.

This operating model represents a likely structure for large firms whose resources are sufficient to separate operations and control internally. The Actuarial Function has a controlling role with regards to claims, underwriting and various other tasks, and potentially an operating role with regards to risk management.

In this operating model example we have not addressed the relationship between the legal entity and the group, although such structures are also possible.

The structure could be characterised as decentralised operations (claims, underwriting and others) with a centralised review. Multiple variations are possible

Operating model 2: External Actuarial Function Opinions and conclusions External Actuarial Function

•• Sufficiency of technical provisions •• Overall underwriting policy Administrative, •• Reinsurance arrangements management and supervisory body

Valuation assumptions Technical provisions

Technical provisions Actuarial business unit

Capital requirements

Models

Risk Management Function

Contribution

This model is based on a structure frequently adopted by those life firms in the UK, Ireland, Belgium and the Netherlands wishing to outsource their Actuarial Function Holder/Appointed Actuary. In effect, the controlling tasks are outsourced but ‘operations’ remain internal. Under such a system, ‘co-ordination’ could be interpreted as setting the methodology and performing the analysis of change, for example. Assuming that the head of the outsourced Actuarial Function holds such a role for multiple firms, 8 towerswatson.com

such a model would particularly help smaller firms for whom experienced actuarial resources are often scarce. Relatively new companies could be expected to adopt such a model as a means to gain outside expertise as the company grows rapidly. Those firms which currently operate with this model often cite the overview and independent challenge that it brings as key advantages.

Risk Management Function

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Operating model 3: Combined Actuarial and Risk Management Functions Administrative, management and supervisory body Opinions and conclusions

Capital requirements

•• Sufficiency of technical provisions •• Overall underwriting policy •• Adequacy of reinsurance arrangements

Actuarial/Risk Management Function

Policy data

Valuation assumptions

Specialist underwriter

Reinsurance department

Technical provisions

Experience analysis

Outsourced reserving

In smaller entities, the proportionality principle allows partial or full integration of the Actuarial and Risk Management functions. In such cases, it may be reasonable to expect that the combined role of Chief Actuary and CRO is represented on the Board. In order to maintain the required separation of operations and control, here we have shown certain operational tasks being outsourced to specialist underwriting and reserving firms. This reflects existing P&C practice in certain countries. The internal Actuarial Function

Claims department

would retain a ‘controlling’ role, providing opinions on reserving adequacy, underwriting and reinsurance. In such a model, care is required to ensure that fresh thinking and independent challenge are embedded in the operations. It also raises the question of how small a firm must be before Actuarial and Risk can be combined. We note that no specific regulatory guidance has been provided on the latter.

Operating model 4: Group actuarial conducts the ‘controlling’ tasks Group management Group risk function Group Actuarial Function

Management (Legal entity 1)

Risk function

Actuarial Function

This model would be suited to firms where the operating entities have insufficient resources to separate operations and control at legal entity level, but for whom external outsourcing of the Actuarial Function may not be appropriate. In such a model, Group Actuarial would conduct the ‘controlling’ tasks, such as assessing the adequacy and reliability of reserves and giving the underwriting and reinsurance opinions. The entity-level Actuarial Function would conduct the ‘operating’ tasks (calculation of

Management (Legal entity 2)

Actuarial Function

Risk function

provisions, experience analysis and so forth). Such a model reflects the current industry trend towards greater control at group level. This model leverages off existing review procedures present in the group structure, and facilitates a more consistent approach across the group. It has the advantage of a clear separation between operations and control and may be well-suited to companies which have well-developed group functions. towerswatson.com 9

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Implementing the Actuarial Function

important to recognise that the regulatory aspects of the Actuarial Function will only be one of the areas where actuaries contribute to the business.

Many companies will look to build on their existing actuarial infrastructure as they adjust to the new requirements under Solvency II. It is, however,

Broadly we expect companies to consider the following steps as shown in Figure 01, part of a change programme to implement the new requirements.

Figure 01. Implementing the Actuarial Function

Stage 1: Understanding requirements •• Solvency II •• Groupe Consultatif •• Local actuarial bodies •• Management requirements

Stage 2: Gap analysis •• Structured process covering –– People –– Processes –– Tools

Any analysis of actuarial requirements should be broader than the Solvency II requirements and also take into account guidance from other stakeholders such as the Groupe Consultatif and local actuarial bodies. For example, in the UK the Financial Reporting Council has issued technical actuarial standards on Data, Modelling and Reporting Actuarial Information. Management information requirements should not be underestimated. Increasingly management is demanding more granular and timely reporting of reserve and capital information, automatic reconciliations to other reporting bases such as IFRS and the ability to run sensitivity tests efficiently with standardised reporting. Any gap analysis and implementation plans should be wide enough to consider broader issues such as emerging technologies and the options for outsourcing aspects of the work. There will also be knock-on effects on people, processes and tools which need to be considered. For example,

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Stage 4: Execution

Stage 3: Implementation planning •• Prioritisation •• Resource mapping •• Impact of technology •• Wider options such as outsourcing

•• Quick wins •• Building awareness •• Monitoring developments

an investment in technology can impact the resource profile required, with greater need for junior resources to run the numbers in a controlled environment and senior resources to sense check and communicate to management. Execution of an implementation plan is a challenge and a sensible approach would be to incrementally improve existing processes as part of business-as usual activities. Quick wins might include developing/adjusting current actuarial reports to reflect the greater focus on best-estimate methods, documentation and wider communication of expert judgement, and tools to project the capital positions for the ORSA/business planning.

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Actuarial Function gap analysis for a representative company The following Table 04 shows some of the items we would expect to emerge as part of a high level gap analysis of the Actuarial Function requirements.

Table 04. Actuarial Function gap analysis for a representative company Area

Organisation/ people

Task

Status (green/yellow/red)

Segregation of responsibilities: •• Agree target operating model for control functions •• Identify individuals responsible for calculation and validation of technical provisions

•• Informal structure exists but responsibilities are not documented •• No formal internal segregation has existed until now

Underwriting and reinsurance: •• Identify and build relationships (where necessary) with those providing the opinions •• Develop Actuarial Function’s expertise on underwriting and reinsurance

•• Key individuals are yet to be identified as Actuarial has not previously given opinions on these issues •• Actuarial does not currently have access to specialist underwriting expertise on ‘non-standard’ risks

Fit and proper: •• Identify individuals with credentials necessary to lead the Actuarial Function

Formalise interaction with risk management

•• Formal separation of Actuarial and Risk Functions already exists •• Key points of contact and reporting are operational •• Risk does not currently have access to Actuarial resources

Technical provisions: •• Develop annual timetable with sequencing of input activities for calculating technical provisions •• Develop methods for assessing sufficiency of reserves •• Formalise movement analysis

Life: •• Methodology for reserve sufficiency is yet to be developed •• Build on existing inputs for embedded value calculations Non-life: •• Build on existing reserve review process

Underwriting and reinsurance opinions: •• Develop framework and metrics for establishing the Actuarial Function’s opinion •• Produce template for opinion

Processes

Tools

•• Multiple individuals have the necessary qualifications and significant professional experience •• Credentials need to be documented for regulatory approval

Report to Board: •• Determine frequency of reporting, contents and sources of information •• Identify contributors and develop draft document

•• No such frameworks currently exist

•• Board is aware of responsibilities of Actuarial/other functions •• Leverage existing actuarial/embedded value reporting to Board •• Dry-run exercise is scheduled for 31 December 2013

Best-estimate assumptions: •• Formalise assumption-setting process (frequency of updates, data sources, use of expert judgement) •• Establish process for challenge/validation of assumptions

•• Life: Formal best-estimate assumption-setting process is subject to detailed external review as part of embedded value reporting •• Non-life: Best-estimate reserving was only recently implemented •• Assumptions committee is in place to provide challenge on assumptions to be used •• Frequency of assumptions review and of documentation is currently insufficient

Data infrastructure: •• Automate data feeds/remove manual intervention •• Automate checks and reconciliations

•• Data preparation takes time as significant manual intervention is required •• Checks are defined and documented but not automated

Modelling systems: •• Reduce SCR production time from 6 weeks to 3 weeks •• Upgrade to new grid computing platform

•• Model run-time has been reduced following recent optimisation project •• Production time is still not optimal owing to manual interventions during preparation of assumptions and consolidation of results

Reporting tools: •• Automate information for Solvency II reporting templates for technical provisions

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How Towers Watson can help Defining the target operating model Throughout this paper we describe the challenges of the Actuarial Function under Solvency II and how companies can prepare now. We have worked with European clients to help define and recommend an appropriate target operating model for the Actuarial Function, taking into account: •• The overall objectives of the management body •• The desired interactions between group and local entities •• The skills base and resources of local teams •• Compliance with the Solvency II Directive on independence and conflicts of interest Upfront planning on the target operating model can help save costs in the long run whilst delivering better quality management information. We have carried out gap analyses between clients’ existing and target operating models for the Actuarial Function, and provided consulting advice around the Actuarial Function requirements, particularly where the existing role will continue in parallel with that of Solvency II. Even if companies conduct much of the work relating to the reorganisation internally, there are specific areas where an external view is

valuable. This might include perspectives on new technology and potential efficiency gains, views on future state deliverables and processes, whether the implementation plan objectives and milestones are realistic, and benchmarks against other organisations.

Spectrum of Actuarial Function support Towers Watson provides a range of actuarial services to our clients. We currently hold statutory actuarial roles for over 50 life firms across Europe, and provide reserving opinions for a similar number of P&C companies. We expect this to increase in the future as more countries introduce formal Actuarial Function roles and more companies consider how best to implement the new regulatory requirements. In jurisdictions where the existing statutory role is less developed, we expect there will be an increase in outsourcing driven by the scarcity of skilled actuarial resources, access to best practice and technology in a cost effective manner and, in some cases, the high proportion of small and medium-sized firms unable to appropriately segregate the ‘calculation’ and ‘validation’ tasks. The following diagram shows the spectrum of services which we provide to companies in relation to the Actuarial Function. It ranges from general consulting to a full outsourcing of the Actuarial Function.

Figure 02. Spectrum of Actuarial Function support

Head of Actuarial Function General consulting

General consulting support, including peer review, type work and bespoke advice

Use of Towers Watson resource

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Provision of ‘Head of’ Actuarial Function role, working with internal team, plus additional ad-hoc work

Partial outsourcing

Ad-hoc projects and outsourcing of certain activities. Expert judgement provided by Towers Watson’s underwriting specialists and reinsurance brokers to formulate opinions

Actuarial model development Development of models of use within the internal team or at Towers Watson

Full outsourcing

Outsource of actuarial ‘unit’, including Actuarial Function

Insights | September 2013

Opting for an external Actuarial Function ensures that the function is independent and seen to be independent, both in terms of its intellectual position and in terms of remuneration. An appropriate choice will ensure that the Actuarial Function has the necessary stature to establish the opinions required by Solvency II without ‘undue influence, control or constraint exercised by senior management’7. Towers Watson’s integrated offering of actuarial support, combined with underwriting specialists and reinsurance brokers, can deliver the expert judgement needed to formulate the Actuarial Function’s opinions on underwriting and reserving. Our access to industry benchmarks provides valuable insights into the emerging best practice regarding these opinions, and can identify the key steps needed to undertake the extensive quantitative and qualitative work involved in giving these opinions.



1

Solvabilité 2 : une responsabilité à protéger – L’Argus de l’assurance, June 2011

2

Cahier des Règles Professionnelles de l’Institut des actuaires

5 6 7 3

Aktuar Aktuell Nr. 17, April 2011

4

The Actuarial Function Under Solvency II: Survey on the Role of the Actuary in Insurance Level 2 Implementing Measures on Solvency II: System of Governance CP-13/008 – Consultation Paper on the Proposal for Guidelines on System of Governance CP-13/008 – Consultation Paper on the Proposal for Guidelines on System of Governance

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Insights | September 2013

Further information For more information on how Towers Watson can help then please contact those listed below or your usual Towers Watson consultant. Belgium Karel Goossens

+32 2 678 15 50

[email protected]m

Jan De Roeck

+32 2 663 87 05

[email protected]

Francis Vaguener

+32 2 678 87 03

[email protected]

Julien Brami

+33 1 53 93 15 12

[email protected]

Jonathan Farrant

+33 1 53 93 14 21

[email protected]

Sabine Leboulanger

+33 1 53 93 14 44

[email protected]

Christian Hildenbrand

+49 221 8000 3464

[email protected]

Wolfgang Hoffmann

+49 221 8000 3421

[email protected]

Gero Nießen

+49 221 8000 3269

[email protected]

Frank Schepers

+49 221 8000 3418

[email protected]

Marcel Schmitz

+49 221 8000 3420

[email protected]

Frank Sommerfeld

+49 221 8000 3241

[email protected]

Rosemary Commons

+353 1 661 6448

[email protected]

Colin Murray

+353 1 614 6844

[email protected]

David O’Connor

+353 1 775 6798

[email protected]

Vittorio Chimenti

+39 02 63 78 02 13

[email protected]

Alessandra Gambini

+39 02 63 78 02 54

[email protected]

Francesco Sgobio

+39 02 63 78 03 21

[email protected]

Harm Blaak ​

+31 88 543 3084

[email protected]

Paul den Hartog

+31 88 543 3064

[email protected]

Peter Hoogveld

+31 20 543 3071

[email protected]

Liesbeth Kint

+31 20 543 3189

[email protected]

Gerard Pater

+31 20 543 3045

[email protected]

Christian Clemmensen

+46 85 06 417 79

[email protected]

Simon Stronkhorst

+46 85 06 417 85

[email protected]

France

Germany

Ireland

Italy

Netherlands

Nordics

14 towerswatson.com

Insights | September 2013

Russia George Belyankin

+7 495 221 49 68

[email protected]

+27 11 912 9151

[email protected]

Felipe Gomez

+34 91 590 51 27

[email protected]

Julio Koch

+34 91 590 51 30

[email protected]

Manuel de la Rosa

+34 91 590 30 09

[email protected]

+41 43 488 44 83

[email protected]

Evrim Koksal Arkut

+90 212 337 2122

[email protected]

Chris Halliday

+90 212 337 2104

[email protected]

David Addison

+44 1737 274107

[email protected]

Richard Bulmer

+44 1737 274135

[email protected]

Sanjiv Chandaria

+44 20 7170 2057

[email protected]

Neil Chapman

+44 20 7170 2460

[email protected]

Graham Fulcher

+44 1737 284869

[email protected]

John Hoskin

+44 20 7170 2282

j[email protected]

Jeremy Nurse

+44 1737 284880

[email protected]

Naren Persad

+44 20 7170 2632

[email protected]

Scott Robinson

+44 161 833 7226

[email protected]

Simon Skinner

+44 1737 284751

[email protected]

Mike Wilkinson

+44 20 7170 3018

[email protected]

South Africa Coenraad De Jager Spain

Switzerland Bernhard Gose Turkey

UK

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Insights | September 2013

About Towers Watson Towers Watson is a leading global professional services company that helps organisations improve performance through effective people, risk and financial management. With 14,000 associates around the world, we offer solutions in the areas of benefits, talent management, rewards, and risk and capital management.

Towers Watson is represented in the UK by Towers Watson Limited and Towers Watson Capital Markets Limited. The information in this publication is of general interest and guidance. Action should not be taken on the basis of any article without seeking specific advice. To unsubscribe, email [email protected] with the publication name as the subject and include your name, title and company address. Copyright © 2013 Towers Watson. All rights reserved. TW-EU-2013-32677. August 2013.

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