Update on Appointed Actuary Regulations

Transcription

1 Update on Appointed Actuary Regulations Presented by Yek Cheng June 26, 2006

2 Introduction Purpose is to describe current status of the development in appointed actuary regulations Brief discussions of emerging issues A quick look at the future.

3 Disclaimer All comments represent my personal opinions Do not reflect the opinions of my employers or other entities that I am associated with

4 Outline Phase I & Phase II Initial focus: disclosures and oversight Importance of appointed actuaries Independence of appointed actuaries Reserve strengthening Phase III

5 Phase I Good Start Phase 1 Getting Started: Yearend Basic GPR s with interest scenarios Published initial practice notes Hold annual AA meetings Focus on adequate disclosures in the actuarial memoranda Provide time to build cash flow testing models Much attention and support from the regulators

6 Disclosures and Oversight Easy to focus on technical aspects of AA Significant amount of reference exists for model building and cash flow testing Also easy to neglect the softer aspects of AA Judgment and decision making Professionalism Quality and integrity of actuarial work Significant effort was spent on some of these softer aspects.

7 Disclosures and Oversight Focused on disclosures issues even when testing techniques still not sophisticated Review of submitted actuarial memoranda Comply with published rules? Use self-check list. Actuarial memo includes adequate disclosures? Publish illustrative examples Annual AA meetings emphasize high quality actuarial memoranda. Also start rudimentary discussions of how to determine adequacy

8 Phase II Has Arrived Phase 2 Multi-Scenario CFT Year end CFT testing with required scenarios Full disclosure of assumptions used AA to formulate opinions of asset/reserves adequacy Annual AA meetings still important Focus on building AA expertise in the industry Encourage internal company discussions on reserve adequacy and company actions

9 Importance of Appointed Actuary Products and consumers more sophisticated More complex cash flows Less predictable policyholders behaviors Need to test interest scenarios Assets are key to reserve adequacy Scenario testing enhances understanding Shift more responsibilities to companies Not feasible to staff regulators adequately Regulations cannot cover all possible situations Companies have better understanding of their situations

10 Actuarial Standards and Practice Notes Formal actuarial standard setting requires lots of time and expertise. Not feasible during the early stages How-to instructions are needed and welcomed by AA. Continue the practice notes concept Started with initial practice notes from AIROC Continue to build up a body of reference through updates of the written practice notes as well as minutes of the annual AA meetings. Practice Notes = a living document

11 Credibility of Appointed Actuaries Main regulatory hurdle encountered in Phase I: How can they trust the company actuaries? AA & company Increase experience and expertise Internal peer review and discussions Better disclosures and documentation Regulators Audit Independent external reviews Threats of regulatory actions

12 Reserve Strengthening The possibility of inadequate reserves is real Any inadequacy will be apparent in Phase II AIROC started this discussion via an illustrative example. Industry and regulators need to agree on a methodology for phasing any reserve strengthening Lack of a feasible method will discourage companies from setting up extra reserves even if deem necessary by AA

13 Phase III Not that far away Phase 3 AA Fully in Place Start with year end 2011 Stochastic testing prescribed (ambitious?) Need to start building tools and expertise Need to build up and document AA experience Should start a formal actuarial standards process in the near future. Annual AA meetings still important

14 Critical Success Factors Intelligent supervision by regulators Over-regulation may be counterproductive Companies taking more responsibilities Not compliance but good strategic tool for ensuring company long-term well being Training and protection of actuaries Key player in the process Strong support from industry and regulators needed