Session 3 – Risk Management and Internal Controls: Actuary Function ICP 8: Risk Management and Internal Controls 2017 ASSAL Regional Seminar on Training for Insurance Supervisors of Latin America Jack Broccoli Associate Director, Rhode Island Department of Business Regulation, Division of Insurance

INTERNAL CONTROLS OVERVIEW Control function ERM function Compliance function Actuarial function Internal audit function Outsourcing All Elements Contribute to an Effective System of Internal Controls

ACTUARIAL FUNCTION IN THE US US State insurance law does not require the establishment of a formal “actuarial function”, but has specific requirements for actuarial involvement in various insurance activities In addition, the new Corporate Governance Annual Disclosure process requires annual reporting on Board and Senior Management oversight of the actuarial function Federal standards require insurers designated as Systemically Important Financial Institutions to employ a Chief Risk Officer and a Chief Actuary to ensure that firm-wide risks are properly managed

ACTUARIAL FUNCTION IN THE US Insurance activities requiring the involvement of actuaries include the following: Loss Reserving Rating/Pricing of Business Enterprise Risk Management Capital Adequacy

LOSS RESERVING Insurers required to select an “Appointed Actuary” that is credentialed and meets suitability standards Appointed actuary required to annually present results of actuarial analysis to BOD Appointed actuary required to provide an annual opinion on the adequacy of loss reserves New Principle-Based Reserving (PBR) methodology became operative on January 1, 2017 for life insurance products. It replaces the old formulaic approach with a more dynamic approach to determine the “right-size” reserves, as determined by the actuary in accordance with the new Valuation Manual

LOSS RESERVING Annual Audit Regulatory Review All insurers are subject to an annual external audit, which requires an actuary to perform an independent review of reserves in support of the audit opinion Regulatory Review State insurance departments are also required to have credentialed actuaries review loss reserves during financial examinations

RATING/PRICING OF BUSINESS Many insurance products/lines of business are subject to rate approval processes in place at the state insurance department Rate approval processes generally require actuarial support for rate filings Rate filings are subject to review and approval by state insurance department actuaries

RISK MANAGEMENT Model Act #505 (ORSA) requires insurers that exceed a premium threshold to file an ORSA Summary Report describing their ERM framework and assessing current and prospective group solvency US ORSA is principle-based and not prescriptive No explicit role for the actuary but implied by complexity of quantitative requirements in the ORSA (i.e. exposure assessment, stress testing, measurement of group risk capital) ORSA filings reviewed by state regulators during analysis/exam activities and assess the involvement of actuaries in the process

CAPITAL ADEQUACY Models Acts #312 and 315 require that the regulatory capital RBC (Risk Based Capital) submissions for life companies be accompanied by a statement from the appointed actuary certifying the assumptions used for certain factors

OTHER STANDARDS The Actuarial Profession is large in the US: The Society of Actuaries (SOA - for Pension, Life & Health) has 24,000 members worldwide The Casualty Actuarial Society (CAS - for P&C) has 6,700 members The American Academy of Actuaries (AAA) has 18,500 members. It sets qualification, practice, and professionalism standards for all US actuaries that are members of the SOA and CAS

OTHER STANDARDS The Actuarial Standards Board (ASB) of the AAA establishes Actuarial Standards of Practice (ASOPs) for P&C, Life, Health and Pension actuaries to promote best actuarial practices Its ERM Committee has recently developed a number of standards for actuaries 2012: ASOP 46 (Risk Evaluation in ERM) 2012: ASOP 47 (Risk Treatment in ERM) 2017: ASOP on Setting assumptions 2018: ASOP on Capital Adequacy Assessment

BEST ERM PRACTICES No mandatory requirement for US insurers to have a CRO under state insurance law, but US insurers heavily utilize actuaries in ERM US regulators allow freedom to insurers in the choice of assumptions and methodologies used for risk and capital assessment. The actuaries in the company have to show the “fitness-for-purpose” of the choices US regulators allow insurers to use internal capital models to quantify their own risk capital, but US regulators do not approve models. It is the actuary in the company that has to show “validation and documentation” of the model.

QUESTIONS