Transcript Slide 1

Dan Barron FSA MAAA FIlAA CERA
November 2010
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Objectives
 To explore the impact of SII on actuaries
 To raise questions about the direction of
the actuarial profession
 To highlight some challenges actuaries
will face in the coming years
 To suggest some areas where actuaries
should start focusing
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The Profession’s Dependence on
the Insurance Industry
 Approximately 90% of actuaries in Israel work in the
insurance industry as employees, consultants or
regulators
 To a lesser extent this is true of most actuaries
around the world
 The profession has for the most part not succeeded
in its objective of breaking out of its traditional roles
○ In some areas the role of the actuary has been reduced
○ On the other hand:
 Sophistication of actuarial work continues to increase
 Significant activity within the larger actuarial associations
 Future of the profession is very much tied to future of
insurance industry and the regulatory environment
○ To understand where the direction of the profession we
need to understand where the industry is going
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Other Developments Affecting
Actuaries
 IFRS 4 Phase II (and IFRS 9)
 Changes to MCEV
 Evolving national (UK, USA) and
international actuarial standards
 Technologies Circular in Israel
 Continued development of the risk
management profession
○ But, continuing financial crisis and the questions
raised around risk management
○ Promotion of actuaries as risk managers (CERA)
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Impact of Solvency II
 SII represents a major change for insurance
companies in respect of financial, risk and
capital management
 Actuaries have a key role to play in SII
○ Within the specific activities defined for them
○ Opportunity to take a more significant role in risk
management of insurance companies
 There are huge technical and process
challenges just to fulfill the specific actuarial
roles within SII
○ The “black box” is dead
○ Move into the “grey zone”
 Making a serious impact on strategy, capital
and risk management will require a big effort
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Four core functions under SII
 Risk management
○ By far the broadest role within SII
 Compliance
○ Part of Internal Control
 Internal Audit
○ Does not represent a significant change from
current Israeli model
 Actuarial
○ Change in role from existing AA concept
opining on reserves
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Qualifications Required to Carry
out the Actuarial Function
 Directive:
○ “Sufficient knowledge of actuarial and financial
mathematics”
○ “Able to demonstrate relevant experience and expertise
with applicable professional and other standards”
 Level II Guidance (CEIOPS)
○ Actuarial function safeguard measure to ensure “expert
technical actuarial advice” provided to decision makers
(Doesn’t represent an opinion to the public)
○ Not based on appointed/responsible actuary model

No requirement to be an actuary to carry out
actuarial function
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Actuarial Function
 Calculate technical provisions
 Opine on the overall underwriting policy
 Opine on the adequacy of reinsurance
arrangements
 Contribute to the effective
implementation of the risk management
system
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Technical Provisions

Actuarial function responsible for appropriateness,
accuracy, completeness and credibility of data
 Data auditing responsibility of internal audit

Best Estimate + Risk Margin
 Will current MCEV basis continue to be sufficient for best
estimate?
 Risk margin approach defined
○ In contrast to IFRS 4 II

Split of reserves into best estimate and risk margins
 Will need to be able to reconcile to current basis, IFRS 4 II and
MCEV

Ultimate responsibility for reserves lies with management
 Actuarial report must provide sufficient information so that they
can form their own opinion
○ Need to inform management as to the reliability and adequacy of
reserves and level of uncertainty
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Underwriting Policy

Primarily relates to providing an opinion with
respect to adequacy of premiums


Does not appear to be a major change from
current practice
Also needs to address other factors
which can affect company’s risk
exposure
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Reinsurance Arrangements

Opinion with respect to adequacy of the
reinsurance and other risk mitigation
techniques in respect of the underwriting
policy
 Represents a significant broadening of the
traditional role of the actuary particularly in the
general insurance arena
 Key component of insurance company risk
management

Adequacy of calculation of reinsurance
reserves
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CEIOPS: Open Issues

Should a common set of technical standards be
developed?
 If so, who should develop them?
 Current leaning is that CEIOPS should issue European
actuarial standards

Should CEIOPS provide Level 2 guidance on the
scope of the tasks within the Actuarial Function?
 High level guidance provided

Does CEIOPS need to provide Level 2 guidance
on structure and content of annual actuarial
reporting?
 Appears that they will leave it to local regulators or
companies
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Contribution to Risk Management
SCR standard model
 Internal model

 Responsibility of Risk Management
○ “to ensure that the model is seen as a widelyunderstood risk management tool within the
business and not purely a mathematical
model”
ORSA
 ALM
 Risk mitigation

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Internal Models

Internal models are not required by SII but
they are going to come
 The only question is when

5 key criteria for acceptance of models

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
Data quality
Calibration
Validation
Documentation
“Embeddedness” (usage)
These criteria should form the foundation
for development of internal models
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Regulatory Submissions of
Policies and Rates
 Article 21 States that:
○ “Member States shall not require the prior
approval or systematic notification of general
and special policy conditions, of scales of
premiums, of the technical bases, used in
particular for calculating scales of premiums
and technical provisions...”
 Will
the Israeli regulator abide by this?
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Pricing and Profit Testing

Allowance for risk and capital
 Regulatory or economic capital?
 Challenge in Israeli product environment
with long term guarantees

Capital Allocation
 Needs to be down to level of pricing

Cost of Capital
 Is standard formula basis appropriate?
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Beyond QIS5
Start thinking in risk management terms
 Change measurement paradigm from
single number to range/distribution
 Assess data requirements
 Assess system capabilities

 Technologies Circular, SII, IFRS 4 II
 Internal model?
Upgrade documentation & communication
processes
 Get out of the “black box”

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