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FRC response to EIOPA Consultation Paper on the Proposal for Guidelines on System of Governance
Comments Template on Consultation Paper on on the Proposal for Guidelines on the System of Governance
Deadline: 19 June 2013 12:00 CET
Name of Company: Financial Reporting Council
Disclosure of comments: Please indicate if your comments should be treated as confidential: Public
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The numbering of the paragraphs refers to this Consultation Paper, the numbering of cells refers to the Technical Annexes II and III.
| Reference | Comment | Resolution |
|---|---|---|
| General Comment | The FRC is the UK's independent regulator responsible for promoting high quality corporate governance and reporting to foster investment. We are well qualified to respond to this consultation given our role in overseeing the actuarial profession. We set technical standards for actuarial work for insurers and IORPs. We set accounting and reporting standards for financial statements and for the work of auditors. We are also responsible for the UK's Corporate Governance Code which sets out standards of good practice in relation to Board leadership and effectiveness, remuneration, accountability and relations with shareholders. | |
| Introduction General Comment | We agree that it is sensible for EIOPA to propose these guidelines as a consistent approach to implementation of Solvency II will be beneficial to insurers and supervisors, as well as to practitioners and policyholders. However, we are concerned that the "glidepath" to implementation of Solvency II may influence investment decisions as insurers balance the potentially conflicting requirements of the current Solvency I based requirements against the currently uncertain Solvency II pillar 1 requirements with knock-on effects on the long term investment needs of the European economy more generally. Therefore, we suggest that before making a decision to publish the guidelines, EIOPA consider what the potential impact might be on investment and growth in the EU. |
We welcome the proposal to establish an actuarial function in preparing for Solvency II as we consider that actuarial information is helpful to the administrative, management or supervisory body (AMSB) of an insurer in making decisions concerning technical provisions, underwriting policy and reinsurance arrangements. In the UK, the FRC in its independent oversight role of the Institute and Faculty of Actuaries (IFoA) regulatory activity oversees the IfoA's practising certificate regime established for actuaries carrying out the actuarial function role in UK life insurers and for syndicate actuaries in Lloyd's. EIOPA might find this regime a useful precedent capable of extension to all actuarial function work. We will raise with the PRA and the IFoA its extension in the UK.
| | | 1.1 | | | | 1.2 | | | | 1.3 | | | | 1.4 | | | | 1.5 | | | | 1.6 | | | | 1.7 | | | | 1.8 | | | | 1.9 |
We suggest that either Guideline 41 is extended directly or additional supporting explanatory text is provided to reflect a requirement to monitor and report on the plans to implement the requirements set out in Articles 76 to 85 of Solvency II.
While article 48 does not require the work of the actuarial function to be carried out by a member of the professional actuarial body, it does require that the role is carried out by persons who have appropriate knowledge of actuarial and financial mathematics and who are able to demonstrate relevant experience with applicable professional and other standards. An individual taking on the actuarial function, either in whole or in part, will be required to demonstrate to the Board that they are fit to perform the role. One indicator of fitness might be to be a member of a professional actuarial body and possessing a relevant practising certificate issued by that body endorsing the required experience. In the UK, the FRC in its independent oversight role of the Institute and Faculty of Actuaries (IFoA) regulatory activity oversees the IfoA's practising certificate regime established for actuaries carrying out the actuarial function role in UK life insurers and for syndicate actuaries in Lloyd's. EIOPA might find this regime a useful precedent capable of extension to actuarial function work in both life and general insurers.
An indicator that conflicts of interest are managed appropriately might be adherence to a code of professional conduct and to technical actuarial standards that require transparency of the reporting of results including disclosures concerning risk and uncertainty. Through its code of professional conduct, the Actuaries' Code, the IFoA, overseen by the FRC, requires its members to exercise their professional judgement free from bias and conflicts of interest. The FRC has published technical actuarial standards that require explanation of the methods and assumptions used to calculate technical provisions and to provide information concerning risk and uncertainty.
We agree that valuation models should be fit for purpose appropriately reflecting the key drivers of the insurer's risks. The FRC has issued a technical actuarial standard on modelling which requires documentation of an explanation of how a model is satisfactory for the purpose for which it is used. It provides principles on how and when to evidence the explanation of how a model is considered to be a satisfactory representation. It requires checks to be performed and documented to determine fitness for purpose. It also provides guidance on how fitness for purpose might be evidenced. We suggest that NCAs might consider monitoring the work of the actuarial function concerning valuation models against similar requirements.
For this reason the FRC includes a requirement in its Technical Actuarial Standard M: Modelling that the actuarial function should explain in this case to the AMSB - the limitations of the models used and their implications. We also require that that actuarial function is able to explain why the model used is a satisfactory representation in the context of the purpose for which it is being used.
In our Technical Actuarial Standard R: Reporting Actuarial Information the FRC includes a principle that the results should always include an indication of uncertainty supported by explanatory as follows:
> Uncertainty may concern the results of calculations, assumptions on which information is based or other aspects. It may arise from random variations, lack of information or other sources. The extent of any material uncertainty may itself be subject to uncertainty.
There are many ways of indicating the extent of uncertainty, such as: - giving a range, measure of the value at risk or other statistical calculation; - showing the numerical consequences of changes in assumptions; - presenting the outcomes of scenarios, possibly including extreme scenarios; and - describing the uncertainty and explaining why it has not been quantified.
We agree that the actuarial function has a role in ensuring data quality and in making recommendations on how data might be materially improved. We note that the actuarial function has a role in recommending improvements to procedures that would improve data quality. While it is implicit that the proportionality principle applies, our experience suggests that accompanying explanatory text reinforcing the point that any recommendation to improve data quality should be proportionate to the anticipated improvement in the reliability of the technical provisions might be useful.
We suggest that the actuarial function might also report to the AMSB on the implementation of those recommendations.
We agree that the actuarial function should compare technical provisions from one valuation date to the next and be able to reconcile any difference. We have included such a requirement in our technical actuarial standards on reporting.
However, we suggest that this requirement is better included under guideline 44 which considers testing against experience. We consider that the reasons for differences are more likely to arise because assumptions are not borne out in practice or the valustion models are inadequate rather than purely data quality although we accept that poor data quality may lead to poor assumptions or inadequate models.
We also consider that it may be disproportionate to identify all the causes of any deviations and so the work of the actuarial function should be limited to identifying the material causes of the deviations identified.
However, given our comment on paragraph 1.83, the guideline might be replaced by a a requirement to explain material deviations from one valuation to the next.
However, we are concerned that the supporting explanatory text and what is likely to be required by level 2 regulations are too prescriptive.
- the design of the model using knowledge of the underwriting risk;
- assessment of data quality given the actuarial function's responsibility for data concerning the calculation of technical provisions;
- assessing the level of complexity required of the model;
- modelling of underwriting risks and ensuring consistency of assumptions between those used to determine technical provisions and the SCR;
- validation, for example comparing actual and expected results given the requirement to do this for technical provisions; and
- as a user of the internal model able to provide feedback on the model to improve it.