1. Dan Barron FSA MAAA FIlAA CERA November 2010 1

2. Objectives To explore the impact of SII on actuaries To raise questions about the direction of the actuarial profession To highlight some challenges actuaries will face in the coming years To suggest some areas where actuaries should start focusing 2

3. The Profession’s Dependence on the Insurance Industry Approximately 90% of actuaries in Israel work in the insurance industry as employees, consultants or regulators To a lesser extent this is true of most actuaries around the world The profession has for the most part not succeeded in its objective of breaking out of its traditional roles ○ In some areas the role of the actuary has been reduced ○ On the other hand: Sophistication of actuarial work continues to increase Significant activity within the larger actuarial associations Future of the profession is very much tied to future of insurance industry and the regulatory environment ○ To understand where the direction of the profession we need to understand where the industry is going 3

4. Other Developments Affecting Actuaries IFRS 4 Phase II (and IFRS 9) Changes to MCEV Evolving national (UK, USA) and international actuarial standards Technologies Circular in Israel Continued development of the risk management profession ○ But, continuing financial crisis and the questions raised around risk management ○ Promotion of actuaries as risk managers (CERA) 4

5. Impact of Solvency II SII represents a major change for insurance companies in respect of financial, risk and capital management Actuaries have a key role to play in SII ○ Within the specific activities defined for them ○ Opportunity to take a more significant role in risk management of insurance companies There are huge technical and process challenges just to fulfill the specific actuarial roles within SII ○ The “black box” is dead ○ Move into the “grey zone” Making a serious impact on strategy, capital and risk management will require a big effort 5

6. Four core functions under SII Risk management ○ By far the broadest role within SII Compliance ○ Part of Internal Control Internal Audit ○ Does not represent a significant change from current Israeli model Actuarial ○ Change in role from existing AA concept opining on reserves 6

7. Qualifications Required to Carry out the Actuarial Function Directive: ○ “Sufficient knowledge of actuarial and financial mathematics” ○ “Able to demonstrate relevant experience and expertise with applicable professional and other standards” Level II Guidance (CEIOPS) ○ Actuarial function safeguard measure to ensure “expert technical actuarial advice” provided to decision makers (Doesn’t represent an opinion to the public) ○ Not based on appointed/responsible actuary model  No requirement to be an actuary to carry out actuarial function 7

8. Actuarial Function Calculate technical provisions Opine on the overall underwriting policy Opine on the adequacy of reinsurance arrangements Contribute to the effective implementation of the risk management system 8

9. Technical Provisions  Actuarial function responsible for appropriateness, accuracy, completeness and credibility of data Data auditing responsibility of internal audit  Best Estimate + Risk Margin Will current MCEV basis continue to be sufficient for best estimate? Risk margin approach defined ○ In contrast to IFRS 4 II  Split of reserves into best estimate and risk margins Will need to be able to reconcile to current basis, IFRS 4 II and MCEV  Ultimate responsibility for reserves lies with management Actuarial report must provide sufficient information so that they can form their own opinion ○ Need to inform management as to the reliability and adequacy of reserves and level of uncertainty 9

10. Underwriting Policy  Primarily relates to providing an opinion with respect to adequacy of premiums  Does not appear to be a major change from current practice  Also needs to address other factors which can affect company’s risk exposure 10

11. Reinsurance Arrangements  Opinion with respect to adequacy of the reinsurance and other risk mitigation techniques in respect of the underwriting policy Represents a significant broadening of the traditional role of the actuary particularly in the general insurance arena Key component of insurance company risk management  Adequacy of calculation of reinsurance reserves 11

12. CEIOPS: Open Issues  Should a common set of technical standards be developed? If so, who should develop them? Current leaning is that CEIOPS should issue European actuarial standards  Should CEIOPS provide Level 2 guidance on the scope of the tasks within the Actuarial Function? High level guidance provided  Does CEIOPS need to provide Level 2 guidance on structure and content of annual actuarial reporting? Appears that they will leave it to local regulators or companies 12

13. Contribution to Risk Management  SCR standard model  Internal model Responsibility of Risk Management ○ “to ensure that the model is seen as a widely- understood risk management tool within the business and not purely a mathematical model”  ORSA  ALM  Risk mitigation 13

14. Internal Models  Internal models are not required by SII but they are going to come The only question is when  5 key criteria for acceptance of models Data quality Calibration Validation Documentation “Embeddedness” (usage)  These criteria should form the foundation for development of internal models 14

15. Regulatory Submissions of Policies and Rates Article 21 States that: ○ “Member States shall not require the prior approval or systematic notification of general and special policy conditions, of scales of premiums, of the technical bases, used in particular for calculating scales of premiums and technical provisions...”  Will the Israeli regulator abide by this? 15

16. Pricing and Profit Testing  Allowance for risk and capital Regulatory or economic capital? Challenge in Israeli product environment with long term guarantees  Capital Allocation Needs to be down to level of pricing  Cost of Capital Is standard formula basis appropriate? 16

17. Beyond QIS5  Start thinking in risk management terms  Change measurement paradigm from single number to range/distribution  Assess data requirements  Assess system capabilities Technologies Circular, SII, IFRS 4 II Internal model?  Upgrade documentation & communication processes  Get out of the “black box” 17