Lessons from the new uk regulatory framework for life assurance
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Lessons from the new UK regulatory framework for life assurance. presented by Colm Fagan at the Life Strategies conference, Dublin, 2 March 2005. 3 months into the job …. Significant prudential supervision changes in the UK: Responsibility for solvency liabilities transferred to Board

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Lessons from the new UK regulatory framework for life assurance

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Lessons from the new UK regulatory framework for life assurance

presented by Colm Fagan at the Life Strategies conference, Dublin, 2 March 2005


3 months into the job …

Significant prudential supervision changes in the UK:

  • Responsibility for solvency liabilities transferred to Board

  • Appointed Actuary role no longer exists (since 31/12/04)

  • Three new statutory actuarial roles instead:

    • Actuarial Function Holder

    • With-profits Actuary

    • Reviewing Actuary

  • Realistic reporting required where with-profits funds >£500m

  • Treating Customers Fairly (TCF)

    • Replaces PRE

    • Principles & Practice of Financial Management (PPFM)

  • Individual Capital Assessments (ICA)

  • Individual Capital Guidance (ICG)


Background Company Information

  • Closed to new business(one of 66 companies closed to new business in the UK, representing total AUM of £191bn)

  • 2 with-profits funds – both 100%:0%

  • Annuity liabilities of £1.5bn

  • Guaranteed Annuity Options


External Environment

  • FSA root & branch review of regulatory reporting regime

  • Dichotomy between messages to customers and reserving approach

  • Lots of contractual guarantees introduced when economic climate and outlook for life expectancy were very different but ….… falling interest rates, stock-market falls and improvements in life expectancy have seen chickens coming home to roost


Actuarial role in liability calculation

  • Appointed Actuary’s assessment of solvency liabilities historically outside the scope of the external audit

  • Since 31/12/04:

    • Appointed Actuary role no longer exists

    • Actuarial Function Holder (AFH) responsible for calculating liabilities based on methodology and assumptions set by Board

    • Reviewing Actuary appointed by auditor to review AFH’s work

  • Process has worked well so far

  • Communication is key – longevity assumption good example


Realistic Basis for With-profits

  • PPFM required- transparency on operation of with-profits fund- Principles v Practices- Customer Friendly version on the way

  • Realistic Liabilities- should make adequate provision for benefits promised- should reflect principles of PPFM- consider range of eventualities- can be quite complex in practice


Expert View?

“The best realistic peak hedge of a long-dated policy will often be a short-term option - (it) provides gamma and vega coverage for long-term delta hedging implicit within dynamic asset allocation”


Realistic Liabilities

  • Cost of guarantees- where simulations show projected assets < guaranteed benefits

  • Cost of smoothing- where simulations show future annual falls in assets > maximum benefit reductions allowed by PPFM

  • Judgement required when modelling - what is “normal”?- what us “extraordinary”


With-profits Actuary

  • Required for with-profits companies

  • Main role is to advise the Board & mgt on exercising discretion

  • Particular challenges for closed funds

    • distribution of “inherited estate”

    • calculation of surrender values

  • Also advises Board on

    • consistency of liability assumptions with PPFM

    • investment policy

    • allocation of expenses

  • Required to report annually to policyholders on extent to which their interests are taken into account in the exercising of discretion by the Board


Pillar 1 and Pillar 2

  • Pillar 1- twin peaks, WPICC etc.

  • Pillar 2- ICA prepared by firm and submitted to FSA- ICG then determined by FSACapital required = Max (Pillar1, Pillar 2)


Pillar 2

  • All material risks should be considered

    • Market & Credit Risk

    • Insurance Risk

    • Operational Risk

    • Group Risk

    • Liquidity Risk

  • Minimum acceptable capital = amount required based on 99.5% probability that assets will exceed liabilities after one year on a realistic basis(or lower probability over a longer period if appropriate)

  • 99.5% one year probability test equates to BBB credit rating


Modelling Risks

  • Stochastic or deterministic?

  • Independence of risks - e.g. risk of stock-market crash v risk of living longer- some risks have offsetting characteristics- Anecdotally diversification benefits of up to 40%


Cost Benefit Analysis of ICA

  • Costs include:

    • project management

    • consulting support

    • heavy senior management time

    • processing costs

    • etc.

  • Benefits include valuable insights into risks inherent in the business and formal consideration of how to mitigate and manage those risks

  • On balance, very difficult to justify for smaller companies


Lessons from the new regulatory frameworkfor life assurance

presented by Colm Fagan at the Life Strategies conference, Dublin, 2 March 2005


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