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The Actuary The magazine of the Institute & Faculty of Actuaries

Solvency II: Defining role

With most people’s attention to Solvency II so far focusing on Pillar 1 and the Quantitative Impact Studies, there are some provisions in the adopted directive proposal that have not yet had the attention they deserve from actuaries. These include the requirement for companies to have an effective ‘actuarial function’ with specific responsibilities. Many of these responsibilities relate to areas non-life actuaries are already involved in, such as technical provision calculations. There are, however, other responsibilities that extend into non-traditional areas of involvement for non-life actuaries such as the requirement to provide opinions to the company’s management on ‘the overall underwriting policy’ and ‘the adequacy of reinsurance arrangements’.

In March, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published the first batch of consultation papers on their advice for Level 2 implementing measures. One of these papers, CP33-09, concerns ‘systems of governance’, which includes the actuarial function. In what follows, we briefly comment on the two opinions and also on CEIOPS’ proposal for how suitable technical standards could be developed.

Overall underwriting policy
Of all the responsibilities of the actuarial function, this requirement stands out as the most significant extension to the typical role currently assumed by an actuarial team. This is particularly the case in the London market where, despite the increasing role of actuaries, many Lloyd’s agencies are still underwriter-led organisations. CP33 did give some useful clarification that such an opinion might contain an analysis of the sufficiency of premiums, which is an area where an actuarial opinion would be valid.

Further clarification is needed as to what business this refers to. ‘Already earned business’ and ‘written but unexpired exposure’ are more naturally covered under technical provisions. We therefore feel that this assessment should be for one year’s future new business (which fits well with the Pillar 1 timescale for capital assessment) and that this opinion could be provided as part of the annual business planning cycle.

Adequacy of reinsurance arrangements
The last decade has seen a marked change in the degree of input that actuarial and analytical work makes to reinsurance purchasing decisions, both in major reinsurance brokers that now all have sizable analytical teams and insurers that increasingly use their internal capital models in reinsurance buying decisions. However, actuaries’ involvement is often subsidiary to the reinsurance manager and limited to assessing the limits and retentions of cover.

If this trend in actuarial involvement continues up to the implementation of Solvency II, an actuarial role in opining on the structural aspects of the reinsurance purchase may be quite credible. Unfortunately, the details of what the opinion should encompass are still vague. The CEIOPS draft Level 2 advice contains only a single paragraph on this topic which actually adds ambiguity over whether the opinion is about the overall reinsurance strategy or the arrangements themselves, and about the areas it should include (for example, if it should include design of a reinsurance panel and wording issues).

Technical standards
For consistency, the role would need to be carried out according to the same principles and standards across Europe. This presents a challenge, as European actuaries are likely to have varied education, follow different local practices and be regulated by their national supervisory authority. Some countries, such as the UK with the Board for Actuarial Standards (BAS), already have their own professional oversight board. However, actuarial standards have yet to be defined at a European level.

In CP33, CEIOPS opened the debate on the regulation of European actuarial standards in CP33. Alternative suggestions are:
>> To use the technical standards to be defined by CEIOPS in their Level 3 guidance
>> To rely on ‘widely accepted’ standards
>> To develop European standards endorsed by a European body independent of CEIOPS.

CEIOPS favours the latter option, which has led some in the actuarial profession to refer to the potential creation of a Euro-BAS. One European body that could fill the gap is the Groupe Consultatif Actuariel Européen. Its current aim is to ‘bring together the actuarial associations in the European Union to represent the actuarial profession’; this could be a significant extension of its role.

Other considerations are:
>> At what level will the common standards be set? It would seem appropriate that, as far as possible, they are set as high-level generic principles rather than prescriptive guidance.
>> How will this affect UK actuaries? From 2012, most technical provision and capital assessment work will fall under Solvency II, and yet these are exactly the areas which BAS sees as within its core scope.
>> Will the requirements apply only to actuaries who are members of professional bodies or additionally to those who (as is permitted under the Solvency II Directive) carry out the actuarial function without a specific actuarial qualification?

Ian Cook is chief actuary at Willis Re, Catherine Cernesson is an executive adviser at KPMG Actuarial, and Graham Fulcher is the leader of the Watson Wyatt UK non-life team. They are all members of a GIRO Working Party on the Solvency II Actuarial Function Responsibilities.