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The Actuary The magazine of the Institute & Faculty of Actuaries

A country in transformation

The European Union (EU) has ten new members. One of these is Slovakia, and in this article we look at the changes taking place there in areas of interest to actuaries. It should be noted, however, that many of these changes would be taking place even without EU accession as part of the transformation of the Slovakian economy.

Pension reform
As in most continental European countries the state pay-as-you-go system is in a poor way. The current right-wing government has finally had the courage to reform it. The first and perhaps most painful step for most people has been to increase the retirement age, albeit phased in, to 62 for both sexes. Also being phased in is the right of women to retire earlier according to the number of children they have.
The second stage of the reform involves the setting up, from 1 January 2005, of a new three-pillar pension system. The first pillar is the current pay-as-you-go scheme, itself amended as from 1 January 2004. The second pillar takes the form of personal savings accounts. New entrants to the workforce will have their pension contributions, including those made by their employer, split evenly between these first two pillars. Current members of the workforce will have until 30 June 2006 to decide whether to stay entirely within the current pay-as-you-go scheme (the first pillar) or to switch to the new system.
The government envisages that five or six management companies will be set up by the end of this year to administer and invest the money in the personal accounts under the second pillar. At retirement, each person will use the money accumulated in his or her account to buy an annuity from an insurance company, to add to the pension from the first pillar.
It is likely that the management companies will offer a choice of three investment funds: conservative, middle-of-the-road, and adventurous. The Financial Market Authority, the Slovakian equivalent of the UK’s Financial Services Authority, will have the task of supervising these companies.
The third pillar, which already exists, consists of supplementary pension arrangements. At the time of writing their exact future under the new system was still under discussion.
The nature of the reform leads to some interesting actuarial questions. Perhaps the most important question is how those who have the option to switch to the new system will make their choice. The management companies will want to persuade as many people as possible to switch, but for many they would be better off staying entirely in the current pay-as-you-go-system. The government is also keen to encourage people to switch. There would seem to be an opportunity here for the actuarial profession, if it is prepared to grasp it, to help explain the issues.
A second question is the choice of investment strategy. Contributors will be able, at the start of each year, to change the type of fund in which they invest their contributions. Should they start in an adventurous fund and switch later to conservative, or the other way round? The issues here are difficult enough to explain to relatively financially sophisticated individuals.
A further question relates to the annuities that insurance companies will offer. Under the pay-as-you-go system, pensions increase according to the higher of inflation and the increase in average earnings. Will insurance companies be required to offer annuities with such increases? If so, how will they price them and reserve for them? How will the companies allow for mortality changes? There is room for significant improvement in mortality rates in Slovakia over the next few decades. Again, there is scope for the actuarial profession to be active, to think through all the issues that may arise, and to put forward possible solutions.

Joining the EU will not of itself bring forth any big changes as the basic insurance legislation already complies with EU directives. For the first time though, it will be possible, through Freedom of Services, for Slovaks to take out insurance contracts with companies situated in other EU member states. As far as individuals are concerned, this is of limited use, as the main insurance contract held by most Slovaks is that relating to compulsory motor insurance, and only companies supervised in Slovakia can offer this.
One recent innovation worth mentioning is the introduction of a system of ‘responsible actuaries’. As the name suggests, the model is the German Verantwortlicher Aktuar rather than the British appointed actuary. Every insurance company, life and non-life, must have a responsible actuary whose main role is to prepare a report each year for the Financial Market Authority. The content of the report is set out in legislation and must include the responsible actuary’s opinion on the financial condition of the company.
The Financial Market Authority maintains a list of people who can be a responsible actuary. To get on this list, an applicant must be university educated, have no criminal record, have practical experience, and pass a special examination. The latter is meant to test actuarial knowledge as well as knowledge of insurance law and insurance accounting. It consists of a three-hour written examination and a half-hour oral examination.
There is no requirement to be a member of the Slovakian Society of Actuaries. This is a pity as the education requirements of the Society are more onerous and, in particular, meet the Groupe Consultatif requirements. In practice, however, almost all the people on the list of responsible actuaries are also members of the society. We believe that the others are members of actuarial societies in other countries.
One significant gap in the responsible actuary system is the lack of a requirement for these actuaries to undertake CPD. Given the speed of change in the insurance area this seriously undermines the credibility of the system.

Medical expenses
At the moment, medical expenses insurance exists only in a limited form in Slovakia, but the Minister of Health is keen to see it offered more widely as part of his reform of the state health system.
So far the changes have been to introduce a modest charge for visits to a doctor and for each prescription, a daily charge for hospital admission, and a mileage charge for transport by ambulance. The next layer of changes will see the introduction of charges for different illnesses. The whole cost of serious illnesses will be met by the health system, whereas the patient will meet the entire cost of avoidable illnesses, like influenza, for example.
The Minister of Health wants to see companies offering complementary medical expenses insurance that will cover all these charges and also allow patients to have better hospital accommodation and food, and to queue-jump.

The actuarial profession
This is one area where we can say that joining the EU will bring changes. The Slovakian Society of Actuaries is keen to become a full member of the Groupe Consultatif and to this end is in the process of amending its constitution.
In between our writing this article and your reading it, it is hoped that the membership will have approved the new constitution. The main change is to introduce two levels of membership: full members, likely to be known as Actuary SSA, and ordinary members. We expect that initially those on the list of responsible actuaries will make up the full members, although the society cannot require this.
The society is also proposing to introduce a scheme of compulsory CPD, but has yet to decide on the details. Such a scheme will help to meet the gap referred to earlier regarding the requirements to be a responsible actuary.
Starting this year, the society has introduced a series of regular seminars and these will form the base for future CPD. The first such seminar covered developments within the Solvency II project. It was clear from the discussion afterwards that this, together with the fair value accounting proposals, has the potential of providing plenty of work for actuaries if they can assert themselves as the natural people to carry it out.
You will see from the above that the future for the actuarial profession in Slovakia should be bright. It is, however, a young profession, with a relatively young membership split roughly equally between the sexes, and it has still to fight against a lot of incomprehension with regard to who actuaries are and what they can offer. The battle has largely been won in the area of insurance the general manager of the Financial Market Authority is herself an actuary but in other areas the profession still has a struggle ahead.