Professional Standards - Intro Whilst the Code of Conduct deals with broad ethical and behavioural issues… …Standards of Practice are concerned with specific behaviours required of the Actuary in relation to particular practice area applications, often in connection with statutory duties imposed on the Actuary. Wide range of “style” between general/generic/principles-based and detailed/specific/technical/rules-based.

Standards of professional performance and behavior Developed to meet the expectations of users of the professional services Provide guidance for –dealing with commonly encountered problems –Handling new problems & non-routine situations Ensure the high quality of professional services

IAA, Associations in North America and in the UK, and others have issued many Standards of Practice. Actuaries should take care to understand which Standards of Practice (if any) apply to any Actuarial Services they are providing. in some countries (eg China) actuarial standards of practice are laid down by the regulator. In Israel: –Distant past: uniform methods, assumptions etc. –Work became diverse, non-uniform & complex: attempts to issue standards (e.g. draft DAC recoverability standard 1998). –Definition of “appointed actuary” and recognition of “actuarial association” in law & supervisors regulations: encourages issuance of standards. Interaction with anti-trust authority.

Importance of professional standards The beneficiaries: - The general public (insured people) - The regulator - The government and legislation bodies (Ministries of Finance, Labour, Health etc.) - The companies we work for (Boards of Directors) - Others we work with (accounting, risk management, …) - Actuaries

UK The Faculty and Institute of Actuaries used to issue Guidance Notes and has retained responsibility for a number of them. BAS (Board of Actuarial Standards) of the FRC (Financial Reporting Council) - aim of supporting investor, market and public confidence in the financial and governance leadership of entities by setting high quality actuarial standards. The Actuarial Profession will continue to set ethical standards - The Actuaries’ Code, which came into force on 1 October 2009, sets out 5 core principles which actuaries are expected to observe in their professional lives. It replaces the former Professional Conduct Standards (PCS) and represents the corner-stone of a new system of professional regulation for all UK actuaries.

Current UK Guidance Notes 1Prudential supervision in the UK of life insurance 2Financial Condition Reports (RP) 7Relationship with auditors i.r.o. long-term business (RP) 8Additional guidance on valuation of long-term business 40Role of Actuarial Function Holder 44Mathematical reserves & Resilience Capital Requirement 46Individual Capital Assessment (RP) 47Stochastic modelling (RP) RP = Recommended Practice (otherwise Practice Standard) 22Disclosure — FSA Rules –Disapplied from November 2008 when abridged content was incorporated into FSA rules

BAS book of standards Set of Technical Actuarial Standards (TAS) by December 2010 Adopted Guidance Notes will (eventually) cease to apply Proposed TAS structure: –Generic: Data, Modelling and Reporting –Specific: Insurance, Defined benefit pension scheme funding, … Reporting actuarial information TAS(R) – 24 September 2009 Data – exposure draft 28 May 2009 Modelling – exposure draft 28 May 2009 Insurance – exposure draft 4 September 2009

Background of Standards in US 1965: AAA formed; issued its own “Code”: Professional Duty, Member’s responsibility & relationship to his principal, Impartiality & independence, Advertising, publicity, & relations with other members, Remuneration, Use of titles 1970’s: “Standards” start to be developed in response to guides/laws issued by AICPA, NAIC, Federal Gov’t, et al. 1988: ASB formed; given sole discretion to promulgate actuarial standards of practice

Focus of Standards (US) Indicate how fundamental concepts & methodological principles should be applied in a variety of circumstances 5 “Areas of Practice” within ASB, each with its own operating sub-committee, charged with developing & reviewing appropriate ASOP’s: –Casualty –Health –Life –Pension –General

Format of Standards (US) Preamble –Purpose, scope, effective date of Standard –Definitions of special terms –Background & historical issues –Review of current & alternate practices Analysis of Issues & Recommended Practices Communications & Disclosures

Relevant Standards for Casualty Practice ASOP #17 Expert Testimony by Actuaries ASOP #19 Appraisals of Casualty, Health, and Life Insurance Businesses ASOP#20 Discounting of Property and Casualty Loss and Loss Adjustment Expense Reserves ASOP #23 Data Quality

Relevant Standards for Casualty Practice ASOP #29 Expense Provisions in Property/Casualty Insurance Ratemaking ASOP #30 Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking ASOP #36 Statements of Actuarial Opinion Regarding Property/Casualty Loss and Loss Adjustment Expense Reserves ASOP #39 Treatment of Catastrophe Losses in Property/Casualty Insurance Ratemaking ASOP #41 Actuarial Communications ASOP #43 Property/Casualty Unpaid Claim Estimates

Applicability Guidelines The Code of Professional Conduct requires that actuarial services satisfy applicable standards of practice. Non-authoritative guidance as to which actuarial standards might apply to various assignments. The guidelines provide a list of the tasks normally performed by actuaries in the different practice areas, and a list of ASOPs that are usually applicable to each task List of tasks: –Appraisals –Expert advice, Witness, and/or Testimony –Financial Analysis, Projections, and Reporting –Miscellaneous –Product Development/Ratemaking/Pricing –Regulatory Issues/Filings –Reinsurance –Reserving

IAA Practice Guidelines are educational and non-binding in nature. They represent a statement of appropriate practices, although not necessarily defining uniquely practices that would be adopted by all actuaries. They are intended to familiarise the actuary with approaches that might appropriately be taken in the area in question. They also serve to demonstrate to clients and other stakeholders and to non-actuaries who carry out similar work how the actuarial profession expects to approach the subject matter. So far evolved to supplement existing country standards and to address new global/European subjects (IFRS, Solvency II).

IAA IASP 1 - Guidelines of Actuarial Practice for Social Security Programs IASP 2 - Actuarial Practice IASP 3 - Classification of Contracts IASP 4 - Measurement IASP 5 - Current Estimates IASP 6 - Liability Adequacy Testing IASP 7 - Discretionary Participation Features IASP 8 - Changes in Accounting Policies IASP 9 - Accounting for Reinsurance Contracts IASP 10 - Embedded Derivatives and Derivatives IASP 11 - Business Combinations IASP 12 - Disclosure of Information about Insurance Contracts

Solvency II Article 48 (2) of Solvency II Directive : The actuarial function shall be carried out by persons who have knowledge of actuarial and financial mathematics, …, and who are able to demonstrate their relevant experience with applicable professional and other standards. Actuarial function level 2 text (CEIOPS advice): …, 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.

Groupe Consultatif submissions Propose major role in developing standards (vs CEIOPS) : –public interest standards qualification standards (incl. CPD) ethical standards governance standards (incl. relationships) communication standards –technical standards interpretative standards technical implementation standards –principles-based rather than prescriptive rules-based –covering all aspects of actuarial function (possibly more)

Technical implementation standards Might cover (more general than IAA): –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? 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

Experience in Israel (1) Existing mess (historical) of principles, methods and assumptions applied in practice, especially in Life & Health reserving but also pensions (“past” and “future” accrual) and P&C (discounting or not). Much of this does not have any formal regulations or other guidance on which it is based. What is actuary’s responsibility for applying and/or disclosing (inappropriate) methods, principles (inconsistent) etc. Expectations of other parties (regulator, accounting profession, reporting authorities, clients) – –“What does the ILAA say you should do about…?” –“What is the ‘normal’ actuarial ‘method’ for calculating reserves?” –“Are there no actuarial standards that say how you should…?”

Experience in Israel (2) De-facto, what is actuary’s role, responsibility, and freedom regarding methods, data and assumptions that he uses? –Does he have default responsibility to check data, and what scope of checking is considered “normal” or sufficient? –To what extent, if any, can he absolve himself of this responsibility? –What freedom exists regarding who takes responsibility for methods and assumptions? –If actuary uses assumptions set by client/regulator etc., does he have responsibility to reject them if “unreasonable”, or to limit his opinion? –If so, what process is expected from actuary in order to determine of assumption is reasonable? What responsibility does actuary have to regulator or public beyond the “dry” written regulations? What responsibility does actuary have to client (e.g. inform client of issues and alternatives, or just do what client asks)?

Going forward in Israel Individual Actuary: Guidance Notes, TAS and Actuarial Profession Standards From IAA, UK, US, Israel (?), CEIOPS (?) –yardstick of professional conduct –what is binding, formally and non-formally (e.g. FIA in Israel)? –how to comply? — especially if not formally binding Actuarial community: Role of actuarial association, and challenge of limited resources Role of “actuary” or actuarial profession as opposed to regulator, accounting profession/board, Securities Authority, industry body… International / local (adoption/adaption/supplementation) Complying with instructions from Anti-Trust Authority