ACTUARIAL FUNCTIONS UNDER SOLVENCY 2

Solvency 2 is a risk-based capital regime being introduced across Europe. It is intended, among other things, to bring a uniform way of determining capital requirement for insurance entities.
 
In semblance to Basel II, Solvency II is organised into Pillars.

• Pillar 1 regulates the capital requirements. Insurers should be capitalised adequate to the risks of their undertakings, especially regarding their asset allocation and their liabilities, based on mark-to-market accounting. Companies could create internal models to calculate their requirements on an individual basis.
• Pillar 2 demands a higher level of risk management and governance. Besides the capital requirements, this is likely become the biggest challenge for smaller firms.
• Pillar 3 establishes higher standards of transparency.

  

Solvency II requires an Actuarial Function to be established in all insurance companies. These new requirements will lead companies to question whether the existing processes, tools and deliverables are structured in a cost effective manner.

 However, we recognise that actuaries are also suppliers of management information for decision making. There will be significant overlap between the regulatory work and the information that management will use to steer the business, and such requirements will also need to be taken into account as part of the process.

 

• The Actuarial Function forms part of the Solvency II system of governance, which EIOPA intends to introduce on a phased basis starting on 1 January 2014.
• Across Europe the challenges for implementing the Actuarial Function vary depending mainly on the level of development of the existing role of actuaries. In some countries, existing statutory roles already encompass many of the required tasks whilst in others the statutory role is less established and hence the challenge is greater.
• Different target operating models for the Actuarial Function exist and companies need to consider which are appropriate for their individual circumstances.
• Companies should not consider the regulatory requirements in isolation but should use the opportunity to understand how changes in actuarial systems and processes can produce more timely and granular information to steer the business.
• This may involve cost-benefit analyses in relation to key decisions such as the investment in technology and outsourcing of the roles. Upfront investment may lead to lower costs in the long run.
• Going forwards, the tools, processes and mix of skills required for the Actuarial Function are likely to evolve. These need to be addressed as part of an implementation plan.

Other regions and countries of the world are either planning to adopt Solvency II or enact a semblance of it as local legislation. An example is the Solvency Assessment Management (SAM) in South Africa.

Nigeria should be ready to join in adopting such regimes especially as international capital providers mount pressures in adopting an international risk based regime. Most insurance companies in Nigeria do not have actuarial functions since at present, only life companies are requested to have statutory actuarial valuation of liabilities.

Some Non-life companies in Nigeria now embrace actuarial estimation of technical liabilities. What is needed however is an actuarial function and goes beyond having an actuarial firm value the technical provisions. Most time, the actuarial firm is very distant from the company and may not be able to form a good actuarial judgement in estimating the technical provisions. Moreover, estimation of technical provisions is only a small part of the actuarial functions.

We would be doing a series on this wide topic in the next few weeks.

References:
JP Morgan- Solvency II Reporting: 3 Pillars, October, 2012
Insights: Optimising the Actuarial Function, Sept. 2013