APN 106-Actuaries and Long-term Insurers

Question 1

Outline a high level overview of the responsibilities of the head of actuarial function? (5)

Answer 1

• Two components review/oversight and reporting i.e. expressing an opinion or advising the board of director and senior management

• HAF should be sufficiently independent with activities underlying associated actuarial roles

• Statutory duties
o Set on in the prudential standards of the Insurance Act 2017

• Professional responsibility

• Reporting requirements
o Provide board of directors with annual reports regarding opinions and advice

Question 2

Describe the requirements and process with respect to the appointment and termination of HAF? (4)

Answer 2

• Fit and proper requirements needs to be satisfied
o Appropriate technical expertise and practical experience
o Appropriate practicing certificates for line of work
o Compliance with professional code of conduct and continual professional development

• Consultation with current HAF

• Inform board of directors their responsibility according to the APN and the Insurance Act

• On resignation/termination notify PA on any issues that may prejudice compliance with the Insurance Act

Question 3

Describe the HAFs responisbilities regarding the evaluation of data used in calculations of technical provisions, SCR and MCR? (3)

Answer 3

 Ensure data is adequate, accuracy, representative

 Ensure material completeness and correctness (limitations e.g. relevance, consistency over time),

 satisfied with data controls (recon of movements, recon to administration systems, data to accounts, recon after cleaning process, recon inputs and outputs of model)

Question 4

Describe the HAFs responisbilities regarding the evaluation of assumptions used in calculations of technical provisions, SCR and MCR ? (8)

Describe the issues in assumptions that should be brought to the boards attention? (5)

Answer 4

o Assumptions (reasonable assumptions)
 Review source data
 Review Credit taken for reinsurance or other forms of risk transfer
 Compare to experience analysis
 Review process/policy for setting assumptions and judgement made
 Review Assumptions outside insurers control
 Sensitivity testing
 Highlight assumptions with material impact and high uncertainty in value
 Review stochastic estimates

o Assumptions (brought to attention of the board)
 Allowance for options and guarantees
 Credit for reinsurance recoverables
 Future management actions
 Interpretations of discretionary elements
 Actions of management that may have an influence on assumptions

Question 5

Describe the HAFs responisbilities regarding the evaluation of Models used in calculations of technical provisions, SCR and MCR ? (4)

Answer 5

 Reference to prudential standards to ensure compliance

 Review description of methodology and ensure proportional to risk

 Review approximations used in the event where standard methods where prevented

 Review documentation and controls (changes, usage, storage)

Question 6

Describe the HAFs responsibilities regarding the analysis of changes and use of internal models in calculations of technical provisions, SCR and MCR ? (2)

Answer 6

o Analysis of change
 Discuss instances where the actual experience materially deviates from assumptions

o SCR using partial or full internal models
 Extensive reviews needs to be complement according to the prudential standards

Question 7

List the main responsibilities of the HAF with respect to the financial position of the insurer? (5)

Answer 7

• Risks to solvency and liquidity
• Solvency capital ratio (include comments on changes)
• On-going solvency/ORSA report
• Risk monitoring as part of ORSA
o Evaluation of standardised formula (SCR) to measure risks

Question 8

List the components of a report that HAF prepares regarding on-going solvelcy/ORSA reort for the board? (10)

Answer 8

o Include summary of ORSA in reports to the board

o Capital requirement needed over business planning period

o Consequent impact on solvency

o Impact of distributions and capital injections

o Key risks which may affect projections

o Key unusual features of projections (new launch, maturity, reinvetment)

o future actions that can be taken if solvency deteriorates

o Sufficiency of financial resources to meet liabilities as they fall due

o Interaction between business plan and future solvency

o stress and scenario tests

Question 9

List the components othat HAF considers regarding the monitoring of future risk? (12)

Answer 9

 Terms and conditions of existing business and current new business including options and guarantees

 Existing investments and the asset liability management strategy

 Marketing plans i.e. sales volumes and costs of sales

 Persistency of business and discontinuance terms

 Pricing of internal unit funds for unit linked polices

 Current and future expenses

 Current and future mortality and morbidity assumptions

 Underwriting

 Reinsurance

 Allocations to shareholder and policyholders

 Current and future tax position

 Nature and availability of surplus

 Allocation of capital and relevant costs of capital

 Systems controls

Question 10

Describe evaluation of standardised formula (SCR) to measure risks taking into account risk profile and boards risk appetite? (6)

Answer 10

 Insurers risk profile relative to industry profile (calibration required)

 Material non-standard features of the insurer (product terms, reinsurance, investments)

 The significance of the risk in overall risk profile and SCR calculations

 Allowance for additional risks not in the standardised formula

 Sensitivity of SCR to various risks

 The availability of internal and external models to evaluate the calibration

Question 11

Describe the HAFs responsibility regarding shareholder distributions? (3)

Answer 11

• Insurer cannot declare or pay dividends if the insurer fails or is likely to fail to meet the financial soundness condition

• The impact of distribution on solvency and liquidity position should be communicated

• Specifically if current or project solvency fall short from minimum or target capital specified in capital management policy

Question 12

Describe the HAFs considerations regarding providing an opinion on ALM policy? (8)

Answer 12

o Types of risks

o Measurement of risk exposure (relative to risk appetite)

o Sources of asset liability management exposure
 Funds backing SCR, the economic capital and funds in excess of these requirements
 Subsidiaries
 Non-profit guaranteed policyholder liabilities
 With profit liabilities
 Options and guarantees
 Interaction with our risk types

o Principles and requirements of investment mandates

o Setting and monitoring risk limits

o Reporting of risk monitoring processes/breaches

o Operational structures and responsible committees

o Asset-liability management requirements for product approval and pricing

Question 13

Outline why the HAF should meet with the investment committee? (4)

Answer 13

• Set investment mandates

• Ensure that investment mandates reflect the nature, term, uncertainty and currency of liabilities

• Monitor compliance of investment mandates

• Monitor and manage market risk of investment strategies

Question 14

List the outcomes that the HAF will use to evaluate the underwriting policy? (9)

Answer 14

o Balance
o Justification
o Fairness
o Objectivity
o Consistency (underwriting policy with product design, pricing and claims management)
o Consistency with objectives and business strategy
o Consistency with risk appetite
o Compliance with regulation and guidelines
o Data requirement for sufficient quality

Question 15

List the considerations that the HAF will use to evaluate the reinsurance policy? (8)

Answer 15

o Adequate to support the objectives of the business defined in the business strategy
o Expected affect in current and future solvency
o Data used for reinsurance purposes are of sufficient quality
o Consider sufficiency of reinsurance
 Stress and scenario tests
 Capacity and retention of the programme
 Impact of a catastrophe
 Review models to determine sufficiency
o Identification of gaps and limitations
o Credit worthiness considerations
o Alternative risk transfer methods
o Review process for selecting reinsuarnce

Question 16

List the consideration of hat the HAF will use to evaluate product design, premiums and conditions? (18)

Answer 16

o Terms and conditions of existing business and current new business including options and guarantees
o Existing investments and the asset liability management strategy
o Marketing plans i.e. sales volumes and costs of sales
o Persistency of business and discontinuance terms
o Pricing of internal unit funds for unit linked polices
o Current and future expenses
o Current and future mortality and morbidity assumptions
o Underwriting
o Reinsurance
o Allocations to shareholder and policyholders
o Current and future tax position
o Nature and availability of surplus
o Allocation of capital and relevant costs of capital
o Appropriateness of data and assumptions used for pricing
o Premium rates for similar products
o Changes in economic conditions and general external environment
o Key risks in product design
o Results of profit testing, business plan projections, scenario and sensitivity testing, stochastic modelling

Question 17

Describe the HAFs duties regarding treating customers fairly? (4)

Answer 17

• Not a requirement of the Insurance Act but forms part of the HAFs duties

• This include monitoring the following is consistent with policyholder reasonable expectations:
o Surrender values and associated penalties
o Bonus/surplus distributions
o Fees, expense charges and risk charges

• HAF must be satisfied that all unit pricing and fund charges are consistent with reasonable expectations
o Allocation/ de-allocation prices
o Creation and cancellation prices
o Compensation of for incorrect unit pricing

• Where a distinction is made regarding the premium, benefits and terms and conditions of a policy the HAF needs to ensure that it is actuarially justified

Question 18

Describe the HAFs duties regarding profit distributions? (6)

Answer 18

• The HAF needs to evaluate and provide advice to the board regarding distribution of profit
• Review the calculation of excess assets for that business in accordance with PPFM
• The factors considered in motoring risks should be considered if relevant
• In a report of the recommendations the following should state the HAFs:
o Conclusion from appraisal of relevant experience and way in which recommendations were derived
o Understanding of financial and business objectives
o SCR vs. eligible funds after surplus distribution
o Interpretation of legal advice and how this has affected recommendations
o Interpretation of PRE including PPFM, policy and marketing literature, historic distributions
o Opinion of how recommendations meet fairness between categories of policyholders and the policyholder and insurer
• The affordability of bonuses and the adequacy of bonus stabilisation reserve should be reviewed annually
• The board should be informed of the impact of the deviations on financial positions and the impact on current and future PRE

Question 19

Describe the role of a HAF in evaluating significant transactions involving the insurer? (4)

Answer 19

• Provide an opinion on the soundness of any transfer or significant transaction
o Transfer
o Merger or amalgamation
o Acquisition or disposal
• HAF should consider the potential conflicts of interest and manage these appropriately
• Consider the post-transaction financial soundness on a prudential supervision reporting basis
• Keep in mind that report could be available to various stakeholders