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The Actuary The magazine of the Institute & Faculty of Actuaries
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Solvency II: Brave new world

There has been much discussion about the impact of Solvency II on insurance companies and the industry as a whole. However, as a student actuary involved in general insurance, I wondered what the impact of Solvency II would be on actuaries working within the industry on a day-to-day basis.

Doing the job
Under Solvency II, the way that work is carried out will change. For example, Solvency II is likely to require different actuarial techniques from the ones currently used. Technical provisions will be estimated as a probability-weighted average of expected future cash flows, taking into account the time-value of money and including a risk margin. Many of us are estimating claims reserves using traditional deterministic actuarial techniques, primarily relying on incurred claims data. Under Solvency II, not only will we need to discount these reserve estimates, requiring projected payment patterns, we will also need to demonstrate a deep understanding of the uncertainty of those reserves. We will additionally be required to apply the same approach to evaluating unexpired risk liabilities currently allowed for in the unearned premium reserves.

Companies need to decide whether to estimate their solvency requirements using the standard formula or a regulator-approved model. For a model to be approved under Solvency II, management must use the model as a tool throughout their decision-making process. Actuaries therefore need to progress from modelling individual classes or lines of business to consistently modelling the business as a whole. While those of us modelling the individual capital assessment (ICA) may already be doing this, there will be additional requirements under Solvency II to show that the model is embedded across the whole of the business, including operational areas such as marketing. This will require an understanding of all areas, and an ability to reflect this in our analysis and modelling. Our role is not only going to change within the areas that we are already working in, it will also expand into new ones.

Talking the talk
We often hear others say that actuaries speak a different language; this will not be sustainable under Solvency II. Embedding a consistent language for describing risk and capital throughout organisations will be a key consequence of the Pillar II requirements, so actuaries will need to be conversant in all areas of the business. When communicating on the elements of Solvency II, we will need to consider the audience to ensure that they are able to understand the results, key assumptions, sensitivities, strengths and limitations of the analyses and models, and what they mean for them. Variability, for example, can be presented as a value or in terms of its financial impact under different scenarios. We may need to present messages differently to a finance team compared to an underwriting team.

Being able to ‘talk the talk’ is not the only way that communication skills will need to be honed. Both the new regulations and management will require clear documentation of the controls for, and design of, the embedded risk management framework, including any internal models, in order to gain comfort that the risk outputs (whether qualitative or quantitative) are reliable. This documentation will need to be of a standard such that all other parts of the business, including personnel with varying expertise, can look at the written work and understand its outputs and limitations.

In demand
There is explicit reference made to actuaries within Solvency II. We can expect our workload to increase as well as seeing increased demand for services in the UK and across Europe. In addition, the demands of the ‘use test’ — whether the company’s internal model is widely used and integrated into its risk management process — and the Own Risk and Solvency Assessment may open the door for actuaries to move across into new areas of the business, working alongside people from non-actuarial backgrounds.

Actuaries may work not just with the pricing, underwriting and claims teams, but also with the finance, risk, internal audit, product design and marketing teams across non-life insurance, life insurance and pensions. This will increase the diversity of work and provide more opportunity to learn about different business sectors. As a result, transferable skills will increase which, in turn, will make the profession even more interesting and attractive to enter.

The big wide world
Across Europe there are varying levels of actuarial expertise, with some countries having only a small handful of qualified actuaries. Recent feedback from QIS 4 (the fourth quantitative impact study testing the calibration and parameterisation of the proposed Solvency II standard formula) has highlighted that this has proven to be problematic when trying to carry out some of the statistical methods required under the standard formula. This provides us with many opportunities to work abroad either by taking temporary secondments or new roles.

Although the group support proposals may not make it into the final directive, there is no doubt that group supervision is going to be an integral part of Solvency II, producing further opportunities to work with European counterparts and the group supervising regulator. Additionally, with other regulators across the world, including the US, Bermuda and Japan, paying close attention to the development of Solvency II, a path could be set for actuaries to operate across many territories with relative continuity.

Getting up to speed
While Solvency II may be about to provide actuaries with a world of opportunity, we have to position ourselves to make the most of it. Solvency II is not just about modelling uncertainty or understanding capital — we need to understand and apply our knowledge within various insurance areas and also have a detailed understanding of the risks specific to a particular company. As the deadline gets closer, companies will need to train all of their staff, not just their actuaries. Those ahead of the game may be able to take on the role of training others both within a company and externally.

Solvency II is going to broaden and challenge the role of actuary both within our current jobs and in territories that have not yet been explored. To make the most of these opportunities, it is essential to have a fluency in the language of Solvency II, as well as being conversant with others working in the field. In doing this, we can make the most of what might be the biggest change to insurance industry regulation since it was first introduced.

Anne Hagen is an associate consultant at PricewaterhouseCoopers LLP