The role of the Appointed Actuary

Perspectives

Proposed changes to the role of the Appointed Actuary

Key considerations for Management and the Board

“The purpose of the Appointed Actuary role is to ensure that the board has unfettered access to expert and impartial actuarial advice and review, to assist with the sound and prudent management of an insurer and that the insurer gives adequate consideration to the protection of policyholder interests.”

Background

APRA recently released its discussion paper, “The role of the Appointed Actuary and actuarial advice within insurers”. The discussion paper explores various proposals which are aimed at increasing flexibility, streamlining requirements and clarifying the role that the Appointed Actuary (AA) plays within insurers.

APRA recognises the importance of the role of the AA within insurers. However, in consultation with the insurance industry, it has observed that over time the role has become increasingly compliance focused. The proposed changes are aimed at addressing these and other concerns and APRA expects they will as a result “allow the Appointed Actuary greater capacity to play a strategic role within insurers”.

The discussion paper covers AAs in life and general insurance. Consideration of the private health insurance AA role has been deferred.

Subject to the outcomes of consultation on this discussion paper, APRA will release draft prudential standards for consultation and, in due course, associated guidance incorporating the changes proposed in the paper.

APRA has introduced five key proposals, highlighted in the following diagram and summarised in the section below.

APRA
Figure 1: Summary of AA review proposals

Changes at a glance

An effective AA can make a significant contribution to an insurer. APRA’s proposals are aimed at improving the functioning of the AA role, and ensuring it remains fit-for-purpose. This includes improving the capacity of the AA to provide strategic level advice to Boards and senior management. The five key proposals are:

1. Introducing a purpose statement for AAs

The current task-based and compliance focus of the role have been raised by insurers and AAs as limiting the capacity of AAs to provide strategic level advice to the Board and senior management. APRA proposes amending the prudential standards by introducing a clear purpose statement for the role, which will reflect APRA's expectations:

  • That the AA is to be a strategic advisor to the Board
  • Regarding the seniority of the role and how the role is positioned with respect to other roles, e.g. CRO, CFO.

2. The actuarial advice framework

Actuarial advice framework

APRA proposes allowing insurers to establish a framework for the provision of actuarial advice within the company, and that the Board approves this framework. The actuarial advice framework encompasses when actuarial advice is required and when the advice must come from the AA. The Board should require that the AA plays an active role in the development of the framework and in any future amendments to it (refer to Figure 2: Elements of the actuarial advice framework below). 

As a result APRA expects that non-material “compliance” AA activities will reduce, enabling greater focus on the areas of strategic importance to the insurer.

actuarial advice framework
Figure 2: Elements of the actuarial advice framework

Areas requiring actuarial advice

APRA proposes that each insurer will set its own framework for its use of actuarial advice, leaving it open for each insurer to take the approach that best suits its needs.  However, APRA has stated a minimum list of areas that must be the subject of actuarial advice when material. These include:

General insurance:

  • Insurance concentration risk charge;
  • Central estimate + 75% probability of sufficiency insurance liabilities;
  • Net premium liabilities relating to catastrophic losses;
  • Capital reductions planned for run-off insurers;
  • Any other matters required by prudential standards.

Life insurance:

  • Method for determining capital base, prescribed capital amount and policy liabilities;
  • Participating business and business with discretionary participation, changes to investment strategy and asset-liability management;
  • Pricing for new and changed products;
  • Changes in reinsurance strategy or arrangements or changes to existing reinsurance; 
  • Any other matter required by prudential standards.

As part of the framework APRA expects that in the Financial Condition Report the AA would comment on how the framework has operated during the year.

3. Addressing conflicts of interest

APRA is retaining restrictions on dual-hatting but is willing to consider alternative arrangements where this is requested. Under APRA’s current views, an AA:

  • Should not dual-hat as a CRO, due to potential conflicts (as the AA, in assessing the insurer’s financial condition, will be required to impartially assess the risk management framework), but APRA may consider other arrangements for smaller organisations.
  • Is not prohibited from dual-hatting as a CFO, if appropriate care and management of any potential conflicts has been undertaken by the organisation.
4. Improving reporting requirements

The Financial Condition Report (FCR)

The FCR must contain a comprehensive, impartial view of the financial condition of an insurer and is relied upon by the Board and APRA. APRA proposes that GPS 320 and LPS 320 clearly define the minimum areas that the AA:

  • Must consider; and
  • May decide to comment on in the FCR, depending on their view of the matter’s relevance and materiality to the financial condition of the insurer.

APRA expects that these changes will lead to a higher concentration of material and strategic content in the FCR compared to the current situation.

APRA is aware of potential overlap between the FCR and (for example) ICAAP. Therefore, APRA proposes a number of minimum requirements which aim to streamline the requirements and require that the AA comment on material matters and provide brief comment on why any particular matter is not material / relevant. The AA would also provide separate advice when the risk management framework and ICAAP are first established, and reduce the AA’s review of the risk management framework and ICAAP in the FCR.

The Insurance Liability Valuation Report (ILVR)

Currently, for general insurers, the ILVR must be prepared by the AA on an annual basis, documenting key aspects of the valuation process. APRA proposes that:

  • The requirement mandating that the Board must receive the ILVR be removed;
  • The AA must still sign-off the ILVR and submit a copy to APRA;
  • The FCR capture a summary of key ILVR content at a level suitable for Board consideration; and
  • For level 2 insurance groups (that are not required to produce a FCR) the Board be supplied with a non-technical executive summary of the ILVR.

Further, APRA proposes that life insurers produce a technically-focused ILVR, enabling much existing detail of this nature to be removed from the FCR.

APRA may request that ILVRs be peer-reviewed where considered appropriate. 

It is proposed that both the FCR and the ILVR be submitted to APRA within 3 months. 

5. Simplifying prudential standards

APRA proposes to remove the following AA life compliance requirements:

  • Capital adequacy standards under subparagraph 12(d) of LPS 320;
  • Directions or conditions of registration applicable to the life company under the Life Act under subparagraph 12(d) of LPS 320;
  • Surrender values and paid-up values as relevant to Prudential Standard LPS 360 Termination Values, Minimum Surrender Values and Paid-up Values (LPS 360) under subparagraph 12(c) of LPS 320; and
  • LPS 370 under subparagraph 12(c) of LPS 320.

 Further, APRA is proposing to:

  • Create a new Prudential Standard GPS 340 Valuation of Insurance Liabilities, capturing all the liability valuation requirements that are the responsibility of the insurer; and
  • Amend GPS 320 to make it less prescriptive.

In doing so, it is aiming to increase consistency across life and general insurer prudential standards.

FEEDBACK

APRA is requesting feedback and written submissions to the proposals by 21 September 2016. The draft prudential standards will be released in late 2016.

APRA has not specifically included proposed guidelines for the health insurance industry but is, at this stage, welcoming any feedback in respect of health insurance.

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Key considerations for the Management and the Board

Introduction:

The insurance industry is undergoing significant and fundamental changes as new technologies and analytics emerge with increased focus on efficiency, customer centricity and digital channels. These changes are challenging insurers to closely look at their business and operating models. Boards are increasingly seeking expert advice in their role of overseeing insurers as their respective companies address these challenges and pursue their strategic goals. As part of this, a Board should find that an effective AA provides strategic input and advice over and above the AA’s minimum compliance responsibilities.

A fundamental focus of the APRA changes is to move from a task-based definition of specific AA “duties” to a purpose-based definition of the AA’s “role”. 

In this section we set out some views on how Management and Boards can obtain deeper value from their AA, and key questions Management and Boards should be asking of their AA.

The underlying questions at the heart of APRA’s discussion paper are:

  • Whether organisations find that they are extracting significant value from their AA beyond the bare minimum compliance-related responsibilities.
  • How the proposed “actuarial advice framework” can further support the insurer’s achievement of its strategic goals.
  • Whether APRA is overregulating the role of the AA, with too many rules that restrict the AA’s availability and freedom of judgement. 

Whilst the proposals attempt to address these concerns, a key question remains around whether the APRA paper goes far enough to solve these questions, and whether it achieves what it desired.

Four Faces of the AA:

Our view is that the role of the AA should encompass the following “Four Faces” and the AA needs over time to strike a suitable balance of engagement across each of these areas in their role to bring more value to the organisation:

Four Faces
Figure 3: Four Faces framework

Starting from the bottom:

  • Steward – this is about the AA being accountable for critical insurance functions (e.g. reserving) which can impact the insurer’s financial condition.
  • Operator – this is about operational effectiveness of the actuarial function, using the systems, processes and people efficiently to deliver an optimum service.

Moving to the top:

  • Catalyst – while the AA continues to deliver the Steward and Operator services, the Catalyst role is about influencing the organisation to change for the better and being part of catalysing that change.
  • Strategist – this is about the AA and the actuarial function bringing value to the insurer’s strategy formulation, decision making and implementation.

Based on research Deloitte conducted over the last 2 years, covering 100 actuarial functions worldwide and local market presence, we have found that actuaries are spending too much time on Steward and Operator roles but aspire to spend more time as a Catalyst or a Strategist. The diagram below summarises the findings and the gap between current and desired balance across the Four Faces.

Four Faces Gap
Figure 4: Findings and the gap between current and desired balance across the Four Faces

This research highlights that a well-functioning actuarial function is one where the Steward and Operator roles are performed really well which, in turn, provide the AA opportunity to focus more of their time as a Catalyst and Strategist. In a well-performing actuarial function the Catalyst and Strategist roles cannot be performed in the absence of the Steward and Operator roles. It is important for the Steward and Operator roles to be viewed as elements that, when performed well, will unlock new insights that can help shape the insurer’s strategy and competitive positioning.

The key element for achieving this in APRA’s proposals is the Board-approved actuarial advice framework. We believe that a well-designed actuarial advice framework will help insurers obtain greater value from their actuarial functions.

We believe that from these APRA proposals, the key issue for Management and Board is to define the target state for the actuarial function, taking account of the insurer’s requirements; and then to move to an operating model that will achieve that outcome.

Globally there are many different stages of maturity for the actuarial function in insurers. The APRA “actuarial advice framework” invites insurers to consider where they are on this maturity curve, and where they should be. 

We list below the key areas for Management and Board considerations.

1. Actuarial advice framework – get it right

We are encouraged to see, and fully support, APRA’s proposal for each insurer to establish its own actuarial advice framework. This is a positive step for insurers to assess their need for actuarial advice and how best to engage with their AA and actuarial function. In establishing the framework, insurers and their respective AA will have the opportunity to identify the areas which they collectively think will get the most value out of their actuarial function.

There is a wide range of areas where the insurer can consider obtaining actuarial advice. The APRA framework envisages each company determining what type of advice to receive and in what context. APRA has suggested the minimum necessary involvement, not a “normal” or “maximum” level. 

The actuarial advice framework gives each insurer the chance to shape its actuarial function to suit the next decade rather than the previous one; and to ensure the actuarial focus is on material strategic and operational issues while not neglecting necessary current functions.

The context for the framework should be that each company determines the circle of executives and advisors to involve in its decision-making based on its assessment of the value they will provide.

Based on the above, key questions Management and Boards can already start asking include:

  1. Where is the organisation using actuaries at present?
  2. Where should it be using actuaries? 
  3. What should be put in place to ensure that this value is effectively delivered?
  4. What does the ideal AA role look like for the insurer in this context?
  5. What role does the Board or Audit Committee want to have in shaping the actuarial advice framework?

APRA’s draft purpose statement specifically includes the Board’s need to receive “unfettered” and “impartial” advice from its AA. This raises a question of whether the AA should be an employee or external to the insurer. We believe that for the largest insurers an internal AA is optimal, and for the smaller insurers an external AA is required. For those in the middle we believe the balance may have shifted with APRA’s new proposals. The work of devising the actuarial advice framework will allow each insurer to reassess its position on this.

2. Get out of our own way

We believe that coupled with APRA’s intended reduction of regulation, AAs should also review the level of internal rules and processes they have created. Having the confidence to "get out of our own way" and make their processes, systems and controls more efficient will free up time to perform the more strategic and value adding roles that Boards and management are seeking from the AA. This will need some investment into streamlining and enhancing what the AA and actuarial function do. The result should be to modernise systems and processes ready to support the next phase of development of the insurance industry.

“Let's get out of our own way!”   

3. Professionalism to deal with inherent conflict

Conflicts of interest are inherent in the role; for example, to advise on pricing and then to also make recommendations on reserving. The professionalism inherent in any senior actuary should be sufficiently mature to ensure that potential areas for conflicts of interest are overcome.

We believe that it would be more effective for the industry if APRA were to rely on the professional judgement an AA will exercise in the ordinary course of business to manage any potential conflict of interest arising in an insurer’s preferred organisation structure. We believe this is preferable to developing a rules-based framework for potential conflicts of interest. The AA, Management and the Board should be expected to exercise their own judgement, based on the size and nature of their organisation, as to whether and how any potential conflicts need to be managed.

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Deloitte Actuaries & Consultants

We are part of a global Actuarial Rewards and Analytics network consulting across General and Life Insurance, Wealth Management, Banking, Health and Superannuation.

Please contact Deloitte’s team to discuss the role your AA and the actuarial function can play within your organisation.

Caroline Bennet
+61 3 9671 6572
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Rick Shaw
+61 2 9322 7471
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Kaise Stephan
+61 2 9322 3218
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James Hickey
+61 2 9322 5009
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Brad Oldridge
+61 2 9671 7255
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Paul Swinhoe
+61 2 9322 5017
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Alan Merten
+61 2 9322 3123
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Martin Lam
+61 2 9322 7643
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Nicole Stransky
+61 2 9322 5766
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Marc Mer
+61 2 9322 5523
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