The Role of the Appointed Actuary

Concerns about the appointed actuary role

In a recent Insight publication (pdf), APRA made a few points about the role of Appointed Actuaries, particularly where it involves Pricing, which seem to express some concern as to whether appointed actuaries have been effective:

A tender for group insurance involves input from a number of professional parties, including product managers, underwriters and reinsurers, to formulate a competitive tender. APRA’s view is that Appointed Actuaries are central gatekeepers in the process under the Life Insurance Act 1995, balancing competing interests while all the time watchful of the ongoing health of the insurers they are advising.

It is therefore paramount that, at all times, the appointed actuary maintains both their professional and statutory responsibilities. To this end, APRA continues to hold discussions with Appointed Actuaries and the profession as to how their responsibilities can be more effectively delivered.

Some in the industry (including me in a recent blog post) have expressed concern that appointed actuaries (not necessarily actuaries as a profession) are losing influence in life insurance companies, becoming less senior, moving more towards compliance and less towards advice. My post summarises some of this:

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.

And it appears to be increasingly difficult to hire appointed actuaries. This one is hard to be definitive about, but there are more consultants acting as appointed actuaries (mostly temporary as roles are filled) in big life insurance companies than there were when I first became an appointed actuary in 2006.

Statutory role of the appointed actuary

So what are the professional and statutory responsibilities of appointed actuaries? Section 93 of the Life Insurance Act requires a life company to “have an actuary appointed by the company”.

The appointed actuary of a life company must perform for the company the functions of an actuary set out in the prudential standards and in reporting standards made by APRA under the Financial sector (Collection of Data) Act 2001.

So to find out what the functions of an actuary should be, we must read the main relevant Prudential Standard (LPS320) to work out the role of the Appointed Actuary. In the preamble, APRA says that:

The Appointed Actuary is responsible for providing impartial advice in relation to the life company’s operations, financial condition, capital base, prescribed capital amount and policy liabilities. It is the ultimate responsibility of the Board of a life company to enable its Appointed Actuary to undertake his or her responsibilities.

In the way in which APRA talks about the role of the Appointed Actuary, from time to time, the key words here are impartial advice. APRA often reminds companies that they are responsible for emerging issues (for example the recent issues of life insurance profitability), rather than the appointed actuary.

In the standard and Life Act itself, there are a few things a life company can’t do without advice from its appointed actuary (which among other things, mean that a company can’t do these things if their appointed actuary is away sick or on leave, unless a substitute is formally appointed):

• issue or modify a policy (unless it is not a material under the company’s pricing policy)
• change its reinsurance arrangements
• pay a bonus to participating policyholders
• distribute money from a Statutory Fund (generally a transfer to another fund or to shareholders)

The appointed actuary must provide advice on the assumptions and methods used for the calculation of policy liabilities and capital (which the company must follow, or tell APRA why it has chosen to do something different).

And the appointed actuary must write a report about the financial condition of the company at least annually, which must include assessment of:

• valuation of policy liabilities and capital
• the systems and processes used to calculate surrender values
• any investment performance guarantees
• the company’s internal capital adequacy assessment process
• the company’s risk management framework (this last one made it very difficult for a CRO to also be an appointed actuary of a company, even before the CPS 220 explicitly disallowed the option)

What are the issues?

There are a few items (some aspects of the pricing requirements, and the surrender value requirement are examples) which appointed actuaries regard as adding compliance without that much value add and reducing the time available for the appointed actuary to be more strategic. And the personal nature of the appointment makes it hard for the appointed actuary to focus on issues (that may be very important) that aren’t specifically required by the standards.

But to me, the issues are bigger than this. The time is right to look at the bigger questions about the role of the appointed actuary, rather than suggesting small incremental changes. Here are a few that occur to me:

• If ADIs have the same risk management requirements (with the advent of CPS 220) as insurance companies, then what should be the role of the appointed actuary? Should it exist at all? If so, how much of it is a valuation role and how much of it is a risk management role?
• Should the appointed actuary’s role have so many specific requirements (as outlined above), or should it be more general in nature (as the CRO’s role is – with the broad requirement that the CRO be in charge of the risk management function and have suitable access)
• Is the requirement to review a risk management framework the only reason why a CRO can’t also be an appointed actuary? Or are there further conflicts that make this impossible
• How would the role of the appointed actuary be positively defined? Or in other words what gap is being filled by the existence of the appointed actuary?

What do you think? Are these the right questions? If not, what are the issues? I will come back to this topic in the coming weeks.