9 UK Regulatory Environment (1)

Question 1

Describe the two regulators for the UK insurance business. (4)

Answer 1

1. The Prudential Regulatory Authority (PRA)
   
   • Part of the Bank of England
   • Responsible for prudential regulation
2. The Financial Conduct Authority (FCA)
   
   • Responsible for conduct regulation
   • Also responsible for the regulation of smaller financial service companies that do not fall under the PRA (e.g. brokers, small investment firms).

Question 2

Describe global systemically important insurers (G-SIIs). (3)

Answer 2

1. G-SIIs are of such size, importance and global interconnectedness that their failure would cause sever adverse consequences across the global financial system.
2. In 2013 the IAIS (International Association of Insurance Supervisors) announced its intended approach to the identification of G-SIIs. Shortly afterwards the FSB (Financial Stability Board) published a list of 9 G-SIIs. This list is updated annually.
3. G-SIIs are subject to enhanced supervision, including the need to have in place systemic risk management plans, enhanced liquidity plans and effective separation of non-traditional or non-insurance business, where feasible.

Question 3

State the PRA’s two primary objectives in respect of insurance company supervision. (2)

Answer 3

1. Promoting the soundness and safety of the companies it supervises.
2. Contributing to securing an appropriate degree of protection for actual and potential future policyholders.

A key feature of the PRA’s approach is risk-based supervision.

Question 4

State the PRA’s 3 Fundamental Rules that are not also FCA Principles for Business. (3)

Answer 4

1. Prudence - Firms must act in a prudent manner.
2. Risk - Firms must have effective risk strategies and risk management systems.
3. Resolution - Firms must prepare for resolution so, if the need arises they can be resolved in an orderly manner with minimum disruption of critical services.

Question 5

State the FCA’s key objective and the three aspects that underpin it. (4)

Answer 5

The FCA’s key objective is that the relevant markets function well, under-pinned by:

1. Securing an appropriate degree of protection for consumers.
2. Promoting effective competition in the interests of consumers.
3. Protecting and enhancing the integrity of the UK financial system.

Question 6

List the FCA’s six Principles for Business that are not also PRA’s fundamental rules. (6)

Answer 6

1. Conduct - A firm must observe proper standards of market conduct.
2. TCF - A firm must pay due regard to the interests of its customers and treat them fairly.
3. Comms - A firm must pay due regard to the information needs of its customers and must communicate this clearly, fairly and without misleading them.
4. COI - A firm must manage conflicts of interest fairly.
5. Advice/Discretion - A firm must ensure the suitability of its advice and discretionary decisions.
6. Assets - A firm must arrange adequate protection for its customers assets when it responsible for them.

Question 7

State four areas where the PRA requires additional reporting over and above the standard Solvency II requirements. (4)

Answer 7

1. With-profits business.
2. Revenue account - based on UK GAAP.
3. Business model analysis - forward looking data for the current year and a projection for three years.
4. Best estimate assumptions for life insurance risks.

Question 8

List the 9 main classes into which the FSMA2000 divides long term business. (9)

Answer 8

1. Life and annuity
2. Marriage and birth
3. Linked long-term
4. Permanent health
5. Tontines
6. Capital redemption
7. Pension fund management
8. Collective insurance
9. Social insurance

Question 9

Outline the two main statutory actuary roles. (5)

Answer 9

1. Chief Actuary (or AFH) for all firms transacting long term business and subject to Solvency II regulation.
2. With Profits Actuary (WPA) for all firms transacting with profits business.
3. These guys are not allowed to fill other roles in a firm that would cause a conflict of interest.
4. The WPA cannot be a board member.
5. But, subject to certain requirements, both roles can be filled by one person.

Question 10

State the main responsibilities of the Chief Actuary. (8)

Answer 10

1. Calculation of technical provisions, including:
   - Accurate and complete data.
   - Appropriate methodologies, models and assumptions.
2. Review - of the best estimate assumptions, comparing against experience.
3. Risk management - contribute to the effective implementation of the risk management system, in particular the risk modelling.
4. Opinions communicated to the regulator on:
   - reliability and adequacy of the technical provision calcs
   - the adequacy of the reinsurance arrangements
   - the overall underwriting policy

Question 11

State the four main responsibilities of the With Profits Actuary. (4)

Answer 11

1. Advise management on the key aspects of discretion affecting with profits business.
2. Produce a report to the governing body at least once a year covering this advice, including how the PPFM relates to the advice.
3. Advise management whether the assumptions used to calculate the future discretionary benefits within the technical provisions are consistent with the PPFM.
4. Produce a publicly available annual report for policyholders. The report must contain the WPA’s opinion on whether policyholders’ interests have been taken into account and they have been treated fairly.

Question 12

State requirements on firms in respect of the Chief Actuary and With Profits Actuary. (4)

Answer 12

1. Keep the actuaries informed of the business plans
2. Ask the actuaries advice on the implications of business plans for policyholders.
3. To pay due regard to the advice of the actuary.
4. To provide the actuary with adequate resources and provide such data and systems as may reasonably be required.
5. The requirements of SIMR also apply (i.e. initial and ongoing “fit and proper” assessment).

Question 13

List nine key principles included in APS L1 (Duties and Responsibilities of Life Assurance Actuaries). (9)

Answer 13

1 triple and 3 pairs:

PRE/TCF:

• The need to ensure that management are aware of the Chief Actuary’s interpretation of PRE and obligations in respect of TCF.
• The need for the AFH to satisfy him/herself that systems of control are in place to prevent misleading as to PRE.
• The need for the AFH to inform management of the implications for fairness and PRE of material changes in business plans or practices.

Resources, Information and Reports:

• The need to ensure that resources and information are available.
• The need to ensure timely access to relevant reports and papers.

Discretion:

• The relationship between the Chief Actuary (AFH) and the WPA in regard to areas of discretion.
• Circumstances under which the WPA must give advice to management on the future exercise of discretion affecting its with profits business.

Appointment:

• The conditions for appointment in each role.
• Procedures relating to possible conflicts of interest, particularly if the AFH and WPA roles are shared.

Question 14

State the advised course of action regarding whistleblowing stated by APS L2. (5)

Answer 14

1. Verify the matter is in scope of the relevant regulations.
2. Take appropriate initial steps, establishing the facts of the situation by talking to the appropriate people.
3. Communicate matters with urgency when the actuary reasonably believes that
   
   • a contravention may have occurred,
   • a matter is of material significance to regulators or
   • a significant risk may be present.
4. The whistle-blowing obligation over-rides any legal duty of confidentiality to the company.

Question 15

Describe the regulatory constraints on a UK Life Insurance Company’s ability to transfer assets out of a long-term fund. (3)

Answer 15

1. Any amount disclosed a surplus in the supervisory valuation can legally be transferred out of the long-term insurance fund.
2. The are restrictions that apply to transfers out of with profits funds.
3. The FCA can intervene to stop such a transfer if it believes is goes against TCF principles.

Question 16

Outline the requirements for transferring long term insurance business between companies. (6)

Answer 16

1. Under part VII of FSMA it is necessary to obtain the sanction of the High Court (Court of Session in Scotland) before long term business can be transferred.
2. The rules restrict the transfer to be within EEA states.
3. The petition to the court must include a report from an independent expert nominated or approved by the PRA (in consultation with the FCA).
4. The Court must be satisfied that the companies involved have adequately publicised the scheme and sent a short formal notice to all policyholders.
5. The Court must satisfy itself that the receiving company is authorised and that it will be able to cover its regulatory capital requirements after the transfer.
6. Any person, including employees of the companies involved, can be heard by The Court if they feel like the transfer may adversely affect them.

Question 17

List the three groups of policyholders mentioned in the Independent Experts Report and the areas in which the impact of transfer is assessed. (6)

Answer 17

Groups:

1. The transferring policyholders.
2. The remaining policyholders.
3. The existing policyholders of the company into which the business is being transferred.

Areas of Consideration:

1. Policyholder benefits and benefit expectations.
2. Security of policyholder benefits.
3. Wider TCF issues.

Question 18

State the five requirements that are both FCA principles for business and PRA’s fundamental rules. (5)

Answer 18

1. A firm must conduct its business with integrity.
2. A firm must conduct its business with due skill, care and diligence.
3. A firm must at all times maintain adequate financial resources.
4. A firm must organise and control its affairs responsibly and effectively.
5. A firm must deal with its regulators in an open and cooperative way and disclose anything that would reasonably be expected to be disclosed.