Actuarial function in Solvency II World IX Baltic Actuarial Summer Days 2009, Kintai, Lithuania Rokas Gylys, Lietuvos Aktuarijų Draugija

Agenda The most recent documents Definition of the actuarial function Fit and proper requirements EU actuarial standards Changes in actuarial methods Communication Other issues

The most recent documents Framework directive Consultation paper No. 33: Draft CEIOPS’s advice for Level 2 Implementing Measures on Solvency II: System of Governance

Actuarial function under Solvency 2 Specific responsibilities of the actuarial function are stated in article 24 of the Framework Directive: (a)to coordinate the calculation of technical provisions; (b)to ensure the appropriateness of the methodologies and underlying models used as well as the assumptions made in the calculation of technical provisions; (c)to assess the sufficiency and quality of the data used in the calculation of technical provisions; (d)to compare best estimates against experience; (e)to inform the administrative or management body of the reliability and adequacy of the calculation of technical provisions; (f)to oversee the calculation of technical provisions in the cases set out in Article 81; (g)to express an opinion on the overall underwriting policy; (h)to express an opinion on the adequacy of reinsurance arrangements; (i)to contribute to the effective implementation of the risk management system referred to in Article 43, in particular with respect to the risk modelling underlying the calculation of the capital requirements set out in Chapter VI, Sections 4 and 5 and the assessment referred to in Article 44.

What is new from the current actuarial practices? New responsibilities: –Assessment of data quality (partially done) –Comparison of best estimated against experience (partially done) –Opinion on underwriting policy (what about life actuaries?) –Opinion on reinsurance arrangements –Contribution to risk management function Detailed interpretation of the responsibilities will be provided in Level 2 legislation or left to individual companies to decide.

Fit an proper requirements Framework directive: “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.” Can a principle of proportionality be applied in respect to the actuarial function? In addition, general “fit and proper” requirements, e.g. reputation and integrity.

Common actuarial standards in EU Challenges: –Different background and education of actuaries –Different local practices Who will issue the standards?: –CEIOPS –Use current standards –Special independent body will be established (preferred option) Prescriptive standards or high-level guidance?

Major changes in actuarial methods Different actuarial techniques will be required: –Generally based on projections of future cash flows –Probability weighted –Explicit allowance for risk Affects both life and non life insurance Additional technical complications if internal model is chosen

Communication, communication, communication… Organizational structure should ensure close cooperation between actuarial, product development, finance and risk management functions Documentation requirements (controls, models, etc.) Will require different type of skills from actuaries –Understanding wider business processes –Communication skills We will need to make sure other people in the organization understand our calculations!

Other issues More frequent and quicker reporting? – need to change IT systems and internal processes Role of the holder of actuarial function (Appointed Actuary) not defined yet Lack of actuaries (especially during the transition stage)

Any questions or comments?

Thank you!