Are Appointed Actuaries moving to a compliance role?

Most financial services companies these days have a risk management framework with three lines of defence. The diagram below shows the three lines of defence, as illustrated by a bank. 

So where does the Appointed Actuary fit into this picture?

The original Appointed Actuary in the UK was effectively solely responsible for the calculation of the liabilities of the life insurer. The Appointed Actuary approved bonuses to policyholders, and transfers of profits to shareholders.

In Australia, this reliance on the Appointed Actuary was substantially reduced in the 1995 Life Insurance Act, with the Company (in some cases the Board of Directors) being required to approve a number of specific items (bonuses to policyholders, allocation of expenses, transfers of profits out of shareholders funds and the issuance of policies) on the advice of Appointed Actuary.  The Appointed Actuary still effectively has responsibility for calculation of the policy liabilities and the regulatory capital requirements, but both of these calculations are now audited.

At the same time, the Appointed Actuary has been asked to provide more insight in the Financial Condition Report, most notably with the requirement to assess the suitability and adequacy of the risk management framework (which was introduced as part of the new APRA risk management requirements for Life insurers in 2008)

The introduction of the new capital management framework requirements by APRA (ICAAP) in 2013 will once again reduce the reliance on the Appointed Actuary, with APRA now envisaging the possibility (as for general insurers) that the company could choose to hold a different level of regulatory capital than advised by the Appointed Actuary, provided the company meets the regulatory requirements. The Appointed Actuary, under the new draft standards, will provide advice to the company about the appropriate level of capital, but the company will not have to follow that advice.

So gradually Appointed Actuaries have been moving along the spectrum of the lines of defence. They are now providing advice and review, rather than managing, such areas as risk management, capital, asset liability risk and so on. It isn’t clear if APRA is deliberately moving actuaries in that direction, or if each individual policy decision is taken in isolation without considering the role of the Appointed Actuary as a whole. But the combined effect of the changes in the last 20 years or so has been to move Appointed Actuaries in life insurers towards a review role.

Is this the right direction for actuaries to move? Should Appointed Actuaries effectively be the third line of defence? An external review along with the internal and external auditors? If that happens, should companies have other actuaries inside the business doing the risk management, pricing, capital management and so on that the Appointed Actuary is only now reviewing?

In my view, actuaries as a profession add more to a company being part of the business, than external reviewers. So if the Appointed Actuary is to move more and more into the second and even third line of defence, then there needs to be a place for actuaries in the business. Perhaps the right way to manage this is to have a “Chief Actuary” role within the business and an Appointed Actuary role outside the business. But I fear that unless this transition is managed well, actuaries will become a compliance profession.

Actuaries’ training has equipped us well to add huge value to business, both strategically, and in managing the day to day financial and risk levers of insurance business. We need to help business continue to leverage that value, even as regulatory changes push us down the compliance path.