Life Insurance Appointed Actuaries – how should the role change?

Financial Risk Management - avoid the icebergs

Appointed Actuaries – helping to avoid the icebergs?

Regular readers of this blog might remember a previous post of mine wondering about the role of the Appointed Actuary (AA) in life insurance. Since that post, the Actuaries Institute has formed a taskforce, of which I am a member. We had an insights session this week, in which we outlined our preliminary recommendations for change. Members can watch the video of the discussion here.

I’m summarising the major recommendations here, for readers to comment. The commentary is my own, and is not necessarily the view of all members of the taskforce.

A positive statement of the role of the Appointed Actuary

The role of the Appointed Actuary in life insurance is largely defined by a list of tasks, rather than a purpose. We have come up with a draft purpose statement, which may help make it clear to stakeholders why the AA exists.

The purpose of the role of the Appointed Actuary is to ensure that Board and senior management of a life insurer has ready access to, and make appropriate use of, professional  actuarial advice with respect to the key financial management aspects of the life insurer.

The Appointed Actuary must as a minimum:

  • Be responsible for advising the Board, Board Committees and senior management on the  sound financial management of the life insurer, including product pricing and design,  financial risk and capital adequacy management, liability best estimate assumptions and  measurement , and the sound financial operation of the life insurer;
  • Have the necessary authority and reporting lines to the Board, board committees and
    senior management to ensure the advice is considered; 
  • Be resourced with staff who possess appropriate experience; and
  • Have access to all relevant aspects of the life insurer.

The Appointed Actuary should be first line, not second line of defence

While the role of the Appointed Actuary is to advise, in my view, the Appointed Actuary adds most value when this advice is first line (recommending action) rather than second line (review of somebody else’s action). All other recommendations flow from this one.

Remove second and third line of defence requirements

A number of requirements of the Life AA are second or third line, which, following on from the recommendation for first line of defence, suggest they should be removed. These include such items as:

  • Review of risk management framework
  • Review of surrender value compliance

Financial Condition Report (FCR) Requirements should be less detailed

Many of the detailed requirements for an FCR are in the Professional Standard, rather than APRA’s Prudential requirements, but in some cases, requiring all of the in the document can lead to a more compliance focused document than a document that covers the biggest issues facing a life insurer.

AA should have access to decision makers and/or report to the CEO

One concern that has been expressed by a number of stakeholders is that Life AA’s have reduced in seniority and/or influence in the nearly twenty years since the role was redefined for the Life Insurance Act in 1995. This recommendation is to reiterate the need for the AA to have appropriate access, without necessarily requiring a specific reporting line (although that is certainly one way to achieve the access, as can be seen from APRA’s recent new requirement for the CRO to report to the CEO).

Include temporary delegation framework

The Appointed Actuary role, as currently defined, has a key person risk, as it cannot be delegated, without a formal resignation from one Appointed Actuary and appointment of another. The task force is recommending a more workable delegation framework, as well as removal of some of the less value adding requirements for Appointed Actuary advice (such as for all changes to reinsurance arrangements).

A review of PS200

As noted above, some of the more detailed requirements of the Appointed Actuary arise because of the Professional Standard (PS200) rather than the regulations. The taskforce recommends a full review of this standard.

Next Steps

There were some excellent comments at the Insights session earlier this week, as well as subsequently to the taskforce by email. If you have any comments on these recommendations, you can also comment here.

The taskforce is writing a report with recommendations to the Council of the Actuaries Institute for their December meeting.  Next steps will follow from that.

  4 comments for “Life Insurance Appointed Actuaries – how should the role change?

  1. Andrew Wakeling
    October 26, 2014 at 6:20 pm

    Thanks, vey interesting. I’m sure you’re right to try to emphasise the AA’s underlying purpose above the tasks that he may need to do in pursuit of such purpose.

    I grew up as a life actuary with two roles uppermost: ensuring the company keeps its promises to policyholders; and is fair and equitable to policyholders and between groups of policyholders.

    The ‘fair and equitable’ bit was mainly orientated to par business and bonus management. But it could and should apply wherever the company exercises discretion in the treatment of existing policyholders. And there is plenty of scope for unfairness in the operation of unit linked funds and unit pricing systems.

    I watched the Institute meeting from your link and was surprised not to hear any mention of policyholders. My type of life actuary typically thought he had a particular responsibility in his company to represent the reasonable interests of policyholders, particularly when set against the possibly unreasonable interests of shareholders and management. Do current Australian AA’s still think this way? Surely there is still an appreciation of a community responsibility above the filling in of statutory returns? And that responsibility is key to being a ‘profession’ and a ‘professional’?

    I have enjoyed in recent years being AA to companies in India, Sri Lanka, Malaysia and Bahrain. As AA I met regularly with the relevant insurance authorities, sometimes including a ‘government actuary’, and frequently together with my fellow AAs from the other companies in that territory. Such groups of AA’s provided a valuable conduit between the companies and the authorities and were recognised also as being ‘the actuarial profession’.

    In practice I haven’t seen any problem of ‘authority’. In my world it has never been practical for Boards or CEO’s to reject an AA’s formal advice. Of course part of the necessary operating skills is ensuring proper preparation before putting forward unwelcome advice. I have always attended regular Board meetings and had a regular reporting slot. I have always been a member of the investment committee. Ultimate power in theory has been considerable – for instance to withdraw approval for new business – but clearly such extreme steps could only very rarely be appropriate. I have never gone there.

    AW

    • Jennifer Lang
      October 28, 2014 at 8:27 am

      Thanks Andrew, I’m glad you enjoyed the session. I think we did talk about policyholders a little, but only in the context of expense allocation. I myself certainly think of part of my role is helping the company navigate the potential conflicts between shareholders and policyholders, but that might be something that should be in the formal statement, even if the individual tasks of the AA don’t reflect that all that much – which would be somewhat defining the role positively,, rather than as a list of tasks.

  2. Daniel
    October 27, 2014 at 8:31 am

    An interesting summary Jennifer! While I don’t disagree with your comments regarding the 2nd/3rd line functions of the Appointed Actuary, I am interested in whether you see another officer providing the certification on the risk management framework in place of the actuary?

  3. Jennifer Lang
    October 28, 2014 at 8:33 am

    Daniel, the view expressed by most AAs that we have talked to is that with CPS 220 requiring a full review of the design and effectiveness of the risk management framework every three years, plus an annual review by either internal or external audit, we weren’t sure why you also needed an AA review, unless you don’t think those reviews would be competently performed. It shouldn’t stop the AA from commenting on the risk management framework if there were issues that needed to be drawn out, though.

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