APRA proposes changes to the role of Appointed Actuary

Appointed Actuary - Strategist?

Appointed Actuary – Strategist?

Regular readers of this blog might recall some previous posts of mine on the role of the Appointed Actuary. APRA had asked the Industry and the Actuarial profession for views on how the role of the Appointed Actuary should change, given difficulties in recruiting (particularly in life insurance) and a perceived reduction in influence for the Appointed Actuary. APRA has now taken on the feedback, and proposed revisions to the role (pdf here).

It’s a really thoughtful and helpful response. APRA has taken on board the major issues and, in some cases, gone further than the feedback recommended, in proposing changes that will help to pull the role away from compliance to assist it in becoming more strategic.

First of all, APRA proposes a purpose statement for the Appointed Actuary. This was a key recommendation from the Actuaries Institute recommended. APRA’s proposed statement is:

“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. The Appointed Actuary must have the necessary authority, seniority and adequate support to ensure their views are considered seriously by the board and they are able to make a significant contribution to the debate of strategic issues at the executive level. The Appointed Actuary plays a key role in, and provides effective challenge to, the activities and decisions that may materially affect the insurer’s financial condition as well as its treatment of policyholders.”

This captures the key role of the Appointed Actuary as an adviser to the Board. Almost as significant, though, is the recommendation for an Actuarial Advice Framework. This would allow a company to create a framework for all actuarial advice, which would not require all of it to come from the Appointed Actuary. Some really important aspects proposed include a delegations framework as well as the provision of the possibility of temporary delegations. APRA’s comment is:

APRA considers that implementing a clear actuarial advice framework will help reduce the non-material compliance activity currently undertaken as part of the Appointed Actuary’s responsibilities. This will increase the opportunity for the Appointed Actuary to provide more strategic advice to the insurer and fulfil the intended role proposed under section 2.1.

This would be a great step forward for the role of the Appointed Actuary. In a large and complex company, it is difficult for any Appointed Actuary to be across all the current requirements in enough depth to personally provide advice on them. Even when someone else has done the majority of the work, formally signing off a piece of advice requires serious involvement from the Appointed Actuary him or herself. That doesn’t allow that much time for strategic advice. Allowing the company to define the most material pieces of advice also allows the Appointed Actuary to provide advice for the most strategic questions.

Other key proposals include:

  • Removing the requirement for a review of the ICAAP and the risk management framework from the Financial Condition Report (FCR), instead requiring actuarial advice when there are material changes, to allow the Appointed Actuary to provide input into a framework, without compromising his or her role as a reviewer.
  • Proposing a requirement for an Insurance Liability Valuation Report (ILVR) for life insurance, consistent with general insurance (but removing the requirement for it to be submitted to the Board for either life or general insurance).
  • Removing some of prescriptive requirements for what must be in the FCR from the Prudential Standards (for example calculation of surrender values and the cost of guarantees). For this to work in life insurance, the Professional Standard (PS200) will also need to be rewritten, as many of the prescriptive requirements come from the professional standards.
  • A new materiality policy, to work with the Actuarial Advice policy – this would work with the Actuarial Advice policy and identify what decisions are material, what requires advice from the Appointed Actuary, and when that advice should be provided to the Board. The Appointed Actuary would comment on the operation of the materiality policy in the FCR. This would remove the current requirement (in life insurance) for the Appointed Actuary to provide advice on whether an issue is material before a decision can be made.
  • Allowing pricing advice (in life insurance) to be part of the actuarial advice framework outlined above. This would separate the decision to require actuarial advice on pricing from a requirement for that advice to come from the Appointed Actuary. APRA notes that the most material advice should come from the Appointed Actuary, but allows the framework to be used to determine what is material.
  • Retaining the ban on the Appointed Actuary being the CRO, but continuing to allow dual hatting with the CFO providing conflicts are clearly managed

From my perspective, as a former Appointed Actuary, these proposals will go a long way towards making a difference in the role – allowing the AA space to be strategic without compromising some of the key policyholder and long term risk advice aspects of the role. There are a couple of small things I will still quibble about when providing specific responses. On the whole, the proposals, if adopted, will be a great step forward in appropriately identifying the role of actuarial advice in an insurance company.

APRA has asked some very specific questions for comment in their discussion paper, I would encourage all those with an interest in the role to think thoughtfully about the proposals and provide a specific response. This is a great chance for the actuarial profession to maintain and enhance our strategic advice role to insurance companies.

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For this post, I am reemphasising my disclaimer – This post consists of my own personal views, and does not necessarily reflect the views of my employers – past, present or future. I should also stress that while I was on the Institute’s task force responding to APRA’s original request, this post does not necessarily reflect the Actuaries Institute’s views on this topic either.