1. Copyright ⓒ Groupe Consultatif 1 Role of the Actuarial Function Groupe Consultatif Actuariel Européen 7 December 2005 Brussels, Belgium (working document) Prepared by: Aisling Kennedy (Ireland) Jiri Fialka (Czech Republic) Karel Goossens (Belgium) Ad Kok (the Netherlands)

2. Copyright ⓒ Groupe Consultatif 2 “Insurers should be required to have actuarial expertise”

3. Copyright ⓒ Groupe Consultatif 3 Role of the Actuarial Function The Actuarial Function The Actuarial Function The Solvency Actuary The Solvency Actuary The Competencies of the Solvency Actuary The Competencies of the Solvency Actuary The Position of the Solvency Actuary The Position of the Solvency Actuary The Report of the Solvency Actuary The Report of the Solvency Actuary

4. Copyright ⓒ Groupe Consultatif 4 Role of the Actuarial Function The Actuarial Function The Actuarial Function The Solvency Actuary The Solvency Actuary The Competencies of the Solvency Actuary The Competencies of the Solvency Actuary The Position of the Solvency Actuary The Position of the Solvency Actuary The Report of the Solvency Actuary The Report of the Solvency Actuary

5. Copyright ⓒ Groupe Consultatif 5 Skills and Competencies Financial and prudential analysis and advice on the management of risks, liabilities and assets Financial and prudential analysis and advice on the management of risks, liabilities and assets Mathematical and financial skills and training in statistics and risk analysis, used to analyse past events, assess present risks, and model what could happen in the future Mathematical and financial skills and training in statistics and risk analysis, used to analyse past events, assess present risks, and model what could happen in the future Platform of defined skill set and competencies Platform of defined skill set and competencies

6. Copyright ⓒ Groupe Consultatif 6 Range of actuarial roles PricingPremium ReservingClaims RiskmeasurementSolvency Profit testing P&L Sources Reinsurance Market factors Internal & External risk Methodology Assumptions Past adequacy Forecasting Stress testing Stochastic Modeling ALM

7. Copyright ⓒ Groupe Consultatif 7 Task and responsibilities include Pricing Pricing –Tariffs for insurance companies –Design of policies and systems Reserving Reserving –Technical provisions and liabilities of insurance companies –Equalisation provision for social security system Profit testing Profit testing –Profitability and profit sharing policies –Indexation of pension Risk measurement Risk measurement –Capital adequacy –Asset Liability Modelling

8. Copyright ⓒ Groupe Consultatif 8 Introducing the Solvency Actuary Solvency Actuary Solvency Actuary –Provides “hands on” analysis and advice –May direct internal actuarial resources –Advises the ‘senior governing body’ on Technical provisions and solvency position at reporting dateTechnical provisions and solvency position at reporting date Adequacy and sufficiency level of premiumsAdequacy and sufficiency level of premiums Adequacy of reinsurance arrangementsAdequacy of reinsurance arrangements –Risk management –Takes a forward looking view of the company’s financial position Reviewing Actuary Reviewing Actuary –Provides second view on the financial position – current and forward looking Please note current country specific preferences

9. Copyright ⓒ Groupe Consultatif 9 Role of the Actuarial Function The Actuarial Function The Actuarial Function The Solvency Actuary The Solvency Actuary The Competencies of the Solvency Actuary The Competencies of the Solvency Actuary The Position of the Solvency Actuary The Position of the Solvency Actuary The Report of the Solvency Actuary The Report of the Solvency Actuary

10. Copyright ⓒ Groupe Consultatif 10 The Solvency Actuary I To perform an investigation into the financial position of the insurance company on an annual basis. This covers the whole financial position (not only technical provisions and related items) as shown in the balance sheet To perform an investigation into the financial position of the insurance company on an annual basis. This covers the whole financial position (not only technical provisions and related items) as shown in the balance sheet –Not just an historical investigation but also a forward looking exercise examining the expected future development of the financial position To report the results of this investigation in writing to the ‘senior governing body’ of the insurer To report the results of this investigation in writing to the ‘senior governing body’ of the insurer To monitor and report as required on changes to the company’s financial position during the course of the year To monitor and report as required on changes to the company’s financial position during the course of the year

11. Copyright ⓒ Groupe Consultatif 11 The Solvency Actuary II Primary client is Board or ‘Senior Governing Body’ Primary client is Board or ‘Senior Governing Body’ Secondary client may be Supervisor Secondary client may be Supervisor There should be a three way relationship between the Solvency Actuary, the Board and the Supervisor; the Supervisor’s relationship with the other two parties may be determined by legislation or there may be a three party contract between the insurer, the Supervisor and the Solvency Actuary There should be a three way relationship between the Solvency Actuary, the Board and the Supervisor; the Supervisor’s relationship with the other two parties may be determined by legislation or there may be a three party contract between the insurer, the Supervisor and the Solvency Actuary Solvency Actuary maintains a good relationship and (in)formal contacts with external Auditor; the external Auditor may be relying on the Solvency Actuary’s report Solvency Actuary maintains a good relationship and (in)formal contacts with external Auditor; the external Auditor may be relying on the Solvency Actuary’s report Possible ‘whistle blower’ responsibility to Supervisor Possible ‘whistle blower’ responsibility to Supervisor Public Role / Disclosure requirements Public Role / Disclosure requirements

12. Copyright ⓒ Groupe Consultatif 12 Role of the Actuarial Function The Actuarial Function The Actuarial Function The Solvency Actuary The Solvency Actuary The Competencies of the Solvency Actuary The Competencies of the Solvency Actuary The Position of the Solvency Actuary The Position of the Solvency Actuary The Report of the Solvency Actuary The Report of the Solvency Actuary

13. Copyright ⓒ Groupe Consultatif 13 Possible ‘whistle blower’ responsibility Possible whistleblowing role - if set down in regulation or contract with Supervisor Possible whistleblowing role - if set down in regulation or contract with Supervisor In any circumstances in which the current or future solvency of the insurer is in danger In any circumstances in which the current or future solvency of the insurer is in danger –The Solvency Actuary reports to the Board –The Solvency Actuary advises the Board that in the event that the Board does not act to mitigate the relevant circumstances, he will have to notify the Supervisor –If the Board does not act, the Solvency Actuary must notify the Supervisor, at the same time advising the Board that he is doing so

14. Copyright ⓒ Groupe Consultatif 14 Public Role Is there a further role for the Solvency Actuary in relation to the public interest? Is there a further role for the Solvency Actuary in relation to the public interest? For example, should the Solvency Actuary be required to produce a report for policyholders? For example, should the Solvency Actuary be required to produce a report for policyholders? Would this be provided for in legislation? Would this be provided for in legislation?

15. Copyright ⓒ Groupe Consultatif 15 Actuarial Governance Actuary Actuary –Code of conduct –Specified education requirements –Relevant experience –Fully fledged CPD program –Peer review arrangements –Disciplinary infrastructure Solvency Actuary, in addition Solvency Actuary, in addition –Independent position

16. Copyright ⓒ Groupe Consultatif 16 Independence Objective view Objective view Free of any material conflict of interest i.e. Free of any material conflict of interest i.e. Unhindered by other material (commercial) concerns of the insurance company Unhindered by other material (commercial) concerns of the insurance company To seek conformity with accounting standards To seek conformity with accounting standards ‘Whistle blower’ power and protection (indemnity) ‘Whistle blower’ power and protection (indemnity)

17. Copyright ⓒ Groupe Consultatif 17 Role of the Actuarial Function The Actuarial Function The Actuarial Function The Solvency Actuary The Solvency Actuary The Competencies of the Solvency Actuary The Competencies of the Solvency Actuary The Position of the Solvency Actuary The Position of the Solvency Actuary The Report of the Solvency Actuary The Report of the Solvency Actuary

18. Copyright ⓒ Groupe Consultatif 18 Actuarial Position I It is envisaged that there would be both: It is envisaged that there would be both: –a Solvency Actuary, and –a Reviewing Actuary Some companies may choose that the: Some companies may choose that the: –Solvency Actuary be an internal appointment –Reviewing Actuary role be an external appointment. Potentially both roles could be internal appointments, but this could give rise to concerns as to the independence of the Reviewing Actuary. Potentially both roles could be internal appointments, but this could give rise to concerns as to the independence of the Reviewing Actuary. Some companies may choose to fulfil both roles externally. However, not by the same person and the two external actuaries should not be connected Some companies may choose to fulfil both roles externally. However, not by the same person and the two external actuaries should not be connected Please note current country specific preferences

19. Copyright ⓒ Groupe Consultatif 19 Senior Governing Body Management Solvency Actuary Actuarial Position External Auditor Chief Financial Officer MODEL A

20. Copyright ⓒ Groupe Consultatif 20 Senior Governing Body Management Solvency Actuary Actuarial Position External Auditor Reviewing Actuary Chief Financial Officer MODEL B

21. Copyright ⓒ Groupe Consultatif 21 Senior Governing Body Management Actuarial Position External Auditor Reviewing Actuary Chief Financial Officer Solvency Actuary MODEL C

22. Copyright ⓒ Groupe Consultatif 22 Management Solvency Actuary Actuarial Position External Auditor Reviewing Actuary Chief Financial Officer Senior Governing Body MODEL D

23. Copyright ⓒ Groupe Consultatif 23 Role of the Actuarial Function The Actuarial Function The Actuarial Function The Solvency Actuary The Solvency Actuary The Competencies of the Solvency Actuary The Competencies of the Solvency Actuary The Position of the Solvency Actuary The Position of the Solvency Actuary The Report of the Solvency Actuary The Report of the Solvency Actuary

24. Copyright ⓒ Groupe Consultatif 24 ‘Statutory’ Financial Reporting I Status quo at bookyear end under the prevailing accounting principles Status quo at bookyear end under the prevailing accounting principles Development of financial position between current and previous reporting date Development of financial position between current and previous reporting date Technical provisions and related balance sheet items Technical provisions and related balance sheet items – –Risk margins on the provisions – –Discounting To carry out a minimal number of checks, tests w.r.t. possible adverse deviations To carry out a minimal number of checks, tests w.r.t. possible adverse deviations –check on methodology, check on calculations, retrospective, backward looking statements, IFRS Liability Adequacy Test, ad hoc coverage of risk development, annually

25. Copyright ⓒ Groupe Consultatif 25 ‘Statutory’ Financial Reporting II To discuss with external Auditor before finalisation To discuss with external Auditor before finalisation To separately report in writing to Senior Governing Body To separately report in writing to Senior Governing Body To separately report in writing to Supervisor (when required) To separately report in writing to Supervisor (when required)

26. Copyright ⓒ Groupe Consultatif 26 ‘Solvency’ Financial Reporting I Financial and Solvency Position of the company Financial and Solvency Position of the company Compliance with local (additional) solvency requirements Compliance with local (additional) solvency requirements Independent report by the Solvency Actuary Independent report by the Solvency Actuary Based on generally accepted actuarial principles Based on generally accepted actuarial principles Stating Personal opinion Stating Personal opinion Groupe Consultatif to produce framework

27. Copyright ⓒ Groupe Consultatif 27 ‘Solvency’ Financial Reporting II Status quo and expected future development (1) Status quo and expected future development (1) –Possible adverse deviations –Prospective, forward looking statements –Risk Audit and Review –Integral coverage of risk development –Continuous monitoring –Controlling the process Groupe Consultatif to produce framework

28. Copyright ⓒ Groupe Consultatif 28 ‘Solvency’ Financial Reporting III Status quo and expected future development (2) Status quo and expected future development (2) –Analysis of individual risks and risk management measures CorrelationsCorrelations Effect of diversificationEffect of diversification Suggested improvementsSuggested improvements –Capital adequacy position Analysis of recent developmentAnalysis of recent development ProjectionsProjections –Compliance with Solvency II legal requirements Minimum Capital RequirementMinimum Capital Requirement Solvency Capital RequirementSolvency Capital Requirement Use of Standard formula vs. internal modelUse of Standard formula vs. internal model Groupe Consultatif to produce framework

29. Copyright ⓒ Groupe Consultatif 29 ‘Solvency’ Financial Reporting IV Based on Based on –Strategy and general policy of company –Economic developments –Risk developments –Portfolio developments –Risk hedging –Interdependencies / correlations –Going concern / run off status –Policyholder’s behaviour / reasonable expectations –Scenario testing & analysis –‘What if’ analysis –Distinguish between short term / long term –Back testing experience Groupe Consultatif to produce framework

30. Copyright ⓒ Groupe Consultatif 30 ‘Solvency’ Financial Reporting V Report will be send to the Board (‘Senior Governing Body’) Report will be send to the Board (‘Senior Governing Body’) Board remains responsible for all company reporting to Supervisor, external Auditor etc. Board remains responsible for all company reporting to Supervisor, external Auditor etc. Board may decide to send to Supervisor (on a voluntary or on compulsory basis) Board may decide to send to Supervisor (on a voluntary or on compulsory basis) Board may decide to send to external Auditor (on a voluntary basis) Board may decide to send to external Auditor (on a voluntary basis) National Supervisor may require direct access to Report (or parts of the Report) or may require a separate report from the Solvency Actuary National Supervisor may require direct access to Report (or parts of the Report) or may require a separate report from the Solvency Actuary

31. Copyright ⓒ Groupe Consultatif 31 Board of Directors ‘Solvency’ Financial Reporting VI External Auditor Supervisor Report of the Solvency Actuary

32. Copyright ⓒ Groupe Consultatif 32 Position Groupe Consultatif Groupe Consultatif is ready, willing, prepared and organised to develop proposals in close cooperation with Directorate Internal Market for a framework for The Actuarial Function The Actuarial Function The Solvency Actuary The Solvency Actuary The Competencies of an Actuary The Competencies of an Actuary The Position of the Actuary The Position of the Actuary The Report of the Actuary The Report of the Actuary