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Professionalism. Professional standards for Solvency II Chris Daykin. Article 48 (2) of Solvency II Directive.

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Professionalism

Professionalism

Professional standards for Solvency II

Chris Daykin


Article 48 2 of solvency ii directive
Article 48 (2) of Solvency II Directive

  • 2) 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.


2009 2010
2009-2010

  • Vote on level 1 text

  • 3 waves of level 2 consultation : proposed by CEIOPS, opinions from stakeholders, decision by Member States and EU Commission : several thousand pages to analyse

  • Quantitative impact studies : stress tests for 30 major European insurance groups

  • Beginning of level 3 work for CEIOPS : waiting for internal model pre-applications


Ceiops consultation 1st wave march june 2009
CEIOPS consultation1st wave : March – June 2009

CP26 to CP37 – mostly on Technical Provisions

But, of particular relevance to professionalism:

CP33 - System of Governance

Since then, two more waves of consultation

Consultation Papers up to CP79


Groupe consultatif submissions 1
Groupe Consultatif submissions – 1

  • response to CP33 in June 2009

  • detailed submission at end of September 2009

  • proposed major role for Groupe in developing standards

  • Groupe argued that these should include

    • public interest standards

    • technical standards


Groupe consultatif submissions 2
Groupe Consultatif submissions – 2

  • public interest standards would include

    • qualification standards

    • ethical standards

    • governance standards

    • communication standards

  • technical standards would include

    • interpretative standards

    • technical implementation standards


Groupe consultatif submissions 3
Groupe Consultatif submissions – 3

  • qualification standards would include

    • syllabus (based on Groupe core syllabus)

    • relevant experience (period and quality/relevance)

    • Continuing Professional Development requirements

  • ethical standards would be a subset of Groupe’s Code of Conduct

  • governance standards concern relationships between actuarial function and others


Groupe consultatif submissions 4
Groupe Consultatif submissions – 4

  • communication standards concern clarity of communication of actuarial function

  • technical standards would be developed

    • principles-based rather than prescriptive rules-based

    • covering all aspects of the actuarial function

    • and, possibly, other actuarial roles


Actuarial function level 2 text final advice from ceiops
Actuarial function level 2 text : final advice from CEIOPS

  • (…), it is incumbent upon the undertaking to make sure that persons charged with actuarial tasks have the relevant qualifications, experience and knowledge of applicable standards. CEIOPS does not envisage a specific university degree or training as a prerequisite for adequately fulfilling the actuarial function; in particular a person carrying out the relevant tasks does not need to acquire the occupational title of “actuary” in jurisdictions where such a title is available.


Actuarial function level 2 text final advice from ceiops1
Actuarial function level 2 text : final advice from CEIOPS

  • The actuarial function requires an understanding of the stochastic nature of insurance and the risks inherent in assets and liabilities, including the risk of a mismatch between assets and liabilities, as well as an understanding of the use of statistical models.

  • CEIOPS may develop Level 3 guidance on how any appointed actuary interacts with the responsibilities of the Actuarial Function


Actuarial function level 2 text final advice from ceiops2
Actuarial function level 2 text : final advice from CEIOPS

  • The process of developing the European actuarial guidelines shall involve participants with appropriate knowledge and experience of actuarial issues and should represent in balanced proportions the insurance industry, the actuarial profession and the academic community.

  • In forming and formulating its own actuarial view, the actuarial function shall be objective and free from influence of other functions and the administrative, management or supervisory body.


Draft level 2 text from commission
Draft Level 2 text from Commission

Chapter X: System of Governance

  • Article 10(1) Without prejudice to Articles X, Y (IM on the calculation of technical provisions), CEIOPS may develop European actuarial guidelines on technical, professional and ethical issues, taking into account the standards set in national and international actuarial associations.

  • the Groupe has suggested amendments to this to open the way for Groupe to ‘develop’ and CEIOPS to ‘promulgate’ standards.


Groupe consultatif follow up activity
Groupe Consultatif follow-up activity

  • meetings with European Commission

  • …and with CEIOPS

  • preparing paper on structures and due process for standard-setting led by Groupe

  • addressing relationship between ‘fit and proper’ and public interest standards

  • aim is to set up Standards Committee following annual meeting of Groupe on 1 October 2010


Fit and proper
Fit and proper

Article 42 of Directive

Insurance and reinsurance undertakings shall ensure that all persons who effectively run the undertaking or have other key functions at all times fulfil the following requirements:

(a) their professional qualifications, knowledge and experience are adequate to enable sound and prudent management (fit); and

(b) they are of good repute and integrity (proper).


Fit and proper1
Fit and proper

  • although wording includes ‘at all times’, ‘fit and proper’ is easier to apply initially than continually

  • does not embrace CPD as a concept

  • ‘proper’ falls short of following professional and ethical standards

  • finding someone not ‘fit and proper’ usually entails demonstrating their involvement in a fraud or a company that has got into difficulties

  • wording in Level 2 has strong flavour of looking back at past conduct and experience


Standard setting
Standard-setting

  • standards should be principles-based

  • …not rules-based

  • must be mandatory (even for non-members)

  • need to be enforced by someone

  • this points to EIOPA promulgating standards

  • …national regulators would monitor and enforce

  • Groupe members would adopt standards


Development of standards
Development of standards

  • development by practitioners, not regulators

  • …but needs to be an open process

  • standards impact on other stakeholders

  • Groupe could establish Standards Committee

  • …appoint actuaries to the Committee

  • …invite some non-actuaries

  • consult widely on draft standards

  • present standards to EIOPA for endorsement


Technical implementation standards
Technical implementation standards

Technical implementation standards might cover

  • general principles

  • data

  • assumptions

  • modelling

  • monitoring experience

  • evaluating underwriting policy

  • evaluating adequacy of reinsurance arrangements

  • effective implementation of risk management


Standards for other actuarial roles
Standards for other actuarial roles?

  • although standards developed under Article 48(2) would relate to actuarial function, Groupe could develop standards more broadly for actuarial roles under Solvency II

    • risk management

    • asset/liability management

    • Solvency Capital Requirement (SCR)

    • Own Risk and Solvency Assessment (ORSA)

    • financial reporting for accounts

    • market consistent embedded value


MCR / SCR / ECONOMIC CAPITALRISK

MCEV

VALUE

ASSETSASSET LIABILITY MANAGEMENT

Overall consistency

TECHNICALPROVISIONS

STRATEGYPERFORMANCE

ACCOUNTING REPORTINGMULTISTANDARD RECONCILIATION

GOVERNANCEINTERNAL CONTROL

Risk Management

A new world for insurance actuaries : actuaries everywhere ?

Vision of Groupe Consultatif

Underwriting policy

Reinsurance arrangements

20


Standards for solvency ii
Standards for Solvency II

  • major challenge for the Groupe Consultatif

  • …and the member associations of the Groupe

  • the role of the actuary looks set to expand and develop

  • widely accepted high quality standards will assist

  • …but outcome will depend on individual actuaries

  • …supported by an active role played by associations


Professionalism in life and general insurance

Professionalism in Life and General Insurance

Leading to practice-specific case studies


Aims of talk
Aims of talk

  • To identify issues of professionalism that are particularly relevant to practising life and non-life insurance actuaries

  • To review the current professional environment, and thinking behind it


Sins of the past that may haunt us life insurance
Sins of the past that may haunt usLife Insurance

  • products designed to disguise charges

  • high risk products (e.g. precipice bonds)

  • instances of mis-selling of life products

  • weak reserving for financial guarantees

  • underestimating the need for economic capital

  • insufficient consideration of uncertainty

  • high profile failures (in UK Equitable Life…)


Sins of the past that may haunt us non life
Sins of the past that may haunt usNon-life

Sins of the past that may haunt usNon-Life Insurance

  • weak reserving

  • inadequate recognition of latent claims

  • being ‘compliant’ with the management

  • mis-interpreting claim settlement dynamics

  • high profile failures (e.g. HIH in Australia)

  • and Independent in UK…


Where might we now be at risk
Where might we now be at risk?

  • over-reliance on complex models

  • are they the right models?

  • underestimating the fatness of the tail

  • failing to predict the financial crisis

  • (not) treating the customer fairly

  • poor communication of risk

  • inadequate scrutiny and peer review

  • conflicts of interest


Issues of professionalism for practising actuaries
Issues of professionalism for practising actuaries

  • Who is my client ?

    • having due regard to others whose interests might be affected

  • Relationship with other actuaries

    • respect

    • challenge non-compliance

  • Avoiding conflicts

  • Integrity (including confidentiality) and objectivity

  • Competence and care

  • Communication


Current professional environment i
Current professional environment (I)

  • Code of Conduct

  • Technical Guidance and Actuarial Standards

    • regulatory guidance

    • local standards/guidance

    • Groupe Consultatif (or CEIOPS) standards

    • need for CPD

  • Professional judgement

    • need evidence to justify this (good documentation)

    • external controls (eg regulator) on what can be done


Current professional environment ii
Current professional environment (II)

  • Statutory Actuary System

    • Appointed/Responsible Actuary

    • advice to Board

    • requirements and responsibilities

  • Conflicts of Interest

    • How independent are we as actuaries?

    • can we wear several hats?

    • responsibilities to policyholders, shareholders, management


Public responsibilities of life actuary
Public Responsibilities of Life Actuary

  • Opinion on financial condition

  • Valuation of liabilities

  • Certification of adequacy of assets to meet liabilities

  • Actuarial reports – internal and external

  • Marketing disclosures

  • New products and pricing

  • Certification of fairness or equity

  • Transfers of business

  • Surrender values


Public responsibilities of general insurance actuary
Public Responsibilities of General Insurance Actuary

  • Opinion on financial condition

  • Valuation of technical provisions

  • Certification of adequacy of assets to meet liabilities

  • Actuarial reports – internal and external

  • Risk analysis and management

  • Design of reinsurance programme and risk transfer mechanisms

  • New products and pricing

  • Capital requirements

  • Transfers of business


Responsibilities of appointed or responsible actuary
Responsibilities of appointed or responsible actuary

  • Continuous monitoring of financial soundness

  • Adequacy of premium rates

  • Soundness of product design

  • Access to management and to Board

  • Relationship with regulator

  • Suitability of investment policy

  • Dynamic financial condition analysis and reporting


Possible roles of insurance actuary
Possible roles of insurance actuary

  • Employee

  • Director

  • Policyholder

  • Shareholder

  • Holder of share options

  • Member of performance-related remuneration scheme


Possible conflicts of interest
Possible conflicts of interest

  • Shareholder v policyholder

  • Management v shareholder

  • Marketing attractiveness v prudence

  • Prudence v transparency

  • Incentives v shareholder value

  • Solvency v “fair” premiums


Dealing with uncertainty
Dealing with uncertainty

  • Reserving ranges

  • Understanding uncertainty

  • Communicating uncertainty

  • Professional responsibilities in an uncertain world

  • Role of reinsurance and risk transfer


Actuarial governance
Actuarial Governance

  • How can the actuary contribute to good corporate governance?

  • Professionalism offers a firm basis for trust

  • Openness, transparency and accountability

  • Risk assessment and management

  • Evaluation of impact on all stakeholders

  • Protection of the interests of policyholders

    • “Treating the customer fairly”


Actuarial risk management
Actuarial risk management

  • Risk analysis

  • Enterprise risk management

  • Dynamic financial analysis

  • Development of risk control strategies

  • Evaluation of risk-based capital

  • Resilience of company to potential adverse scenarios

  • Expected component of Solvency II regulatory regime


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