ASHK Current life actuarial issues in the UK and the challenges of GN16 in Hong Kong. John Jenkins Fiona Chau 2 nd December 2015
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1 ASHK Current life actuarial issues in the UK and the challenges of GN16 in Hong Kong John Jenkins Fiona Chau 2 nd December 2015
2 Agenda Introduction of SII from 1 st January 2016 New PPP and SIMR from 1 st January 2016, and its effect on life actuaries New pensions regime, and the ramifications of the removal of annuitisation requirement Year End 2015 workload and going forwards GN16 from a HK perspective GN16/AGN9 observations and comparison with the UK 1
3 Agenda Introduction of SII from 1 st January 2016 New PPP and SIMR from 1 st January 2016, and its effect on life actuaries New pensions regime, and the ramifications of the removal of annuitisation requirement Year End 2015 workload and going forwards GN16 from a HK perspective GN16/AGN9 observations and comparison with the UK 2
4 Recap: Solvency II New EU Regulation effective 01/01/2016, designed to: Provide greater protection to policyholders through an enhanced prudential regime. Better align capital requirements to the firms asset and liability profiles and enhances the quality of capital. Improve firms own risk management with the aim of reducing the probability of firm failure. Reform the public disclosure about a firm s financial condition, to encourage effective exercise of market discipline. PILLAR 1 PILLAR 2 PILLAR 3 Quantitative requirements Market-consistent valuation of assets and liabilities Best estimate liabilities plus risk margin Capital requirements Minimum (MCR) Solvency (SCR) Tiering of own funds Group capital requirement Quantifies all risks on a balance sheet System of Governance Internal controls and risk management system Required functions Own risk and solvency assessment (ORSA) Supervisory review Capital add-ons Prudent Person regime Supplements P1 and promotes good corporate risk management Market discipline Transparency Disclosure (QRT/RSR) Solvency and financial condition report (SFCR) Solo Group Fosters market discipline and a risk dialogue among stakeholders 3
5 Recap: Solvency II Balance Sheet This looks neat and precise Assets Liabilities Surplus BUT many companies are adjusting for the non economic aspects of SII: What do you change when moving from Pillar 1 to Pillar 2 in the base balance sheet? Contract boundaries Market Consistent Value of assets Solvency Capital Requirement (SCR) Minimum Capital requirement (MCR) Own funds Risk calibrations Other Remove the risk margin Treatment of pension scheme risk Remove transitionals that were used in Risk Margin (RM) Credit risk adjustment Risk margin cost of capital charge Matching adjustment 6 23 Best Estimate Liabilities (BEL) Technical Provisions Risk free rate 6 23 Volatility adjustment % 20% 40% 60% 80% 100% Change Do not change Source: 2015 KPMG Technical Practices Survey 4
6 New HK RBC Framework Pillar 1 Overview Existing basis Proposed RBC basis Standardised approach with flexibility to allow internal model Capital Excess capital HK solvency capital requirement 200% 150% 100% Free surplus Required capital PCR ( 99.5% VaR over a one-year period ) MCR ( to be defined after QIS ) Trigger points for supervisory interventions Liability Technical provisions and insurance liabilities Margin over the current estimate (MOCE) Current estimate (CE) MOCE Treatment and approach to be further considered in phase II Other liabilities Other liabilities Total balance sheet approach This diagram is for illustrative purposes and does not demonstrate the relative size of each component or level of capital requirement between the existing framework and the proposed RBC framework. 5
7 Life Technical Provisions: Matching adjustment Description Regulatory allowance for insurers to take advantage of a liquidity premium provided they can demonstrate they are able to hold their assets to maturity. Benefit is portfolio dependent. Requires regulatory pre-approval. Business impacted Immediate annuities in payment (UK/Netherland/Spain). Deferred annuities and Bulk Purchase Annuities? Some savings business invested in corporate bonds with Market value adjustors (Spain). Matching adjustment Regulatory aspects Restrictive application no future premiums; fixed asset cash flows; no surrender risk; make whole provisions on assets. Lack of diversification between matching portfolio business and other business (in SF). Emerging themes from companies Application process is perhaps more onerous than companies had envisaged. Companies which back annuities with equity release assets need to restructure assets and apply for PIM. Other assets also less valuable. ACHIEVING APPROVAL FROM THE PRA FOR, AND ONGOING MANAGEMENT OF, MATCHING ADJUSTMENT PORTFOLIOS ARE ONEROUS TASKS 6
8 Life Technical Provisions: Matching adjustment Gross redemption yield of assets Source: Matching adjustment Fundamental spread Single risk free rate weighted by liability cash flows E.g. the GBP AA 10 year financial sector fundamental spread is 46bps as at end October 2015 Allowance for downgrade Allowance for default OR (IF HIGHER) These will be derived by EIOPA quarterly, by credit rating, duration band and selected asset classes. 35% long term average spread Product and asset admissibility Annuity type products and only certain types of assets key is to be bond-like and have fixed cashflows. Where issuer has options/can amend cashflows, generally not admissible for MA unless there are sufficient penalties/compensation. Equity release in current form almost certainly excluded. Make whole clauses may allow assets such as callable bonds and commercial mortgages to be admissible. Sub investment grade assets can be used but benefit is capped so assets and liabilities will not move in same way. Other requirements Sufficient matching need to risk adjust the asset cashflows. Tolerance and mismatch methods are not prescribed (PRA feedback suggests quite strict). Need to monitor if requirements not met for two months, cannot use MA for two years. Capital requirements Standard formula: captured in spread risk, e.g. for a BBB asset, a 100bps spread increase will result in a 25bps MA increase. This is likely to be more penal than the ICA. For IM, need to consider the recalculation of the MA under stress needs knowledge of EIOPA calibration, but not just formulaic application. Other issues Diversification: possibly OK for IM companies, but not for SF companies. Public disclosure of impact. Requires regulatory approval and regulators can apply a capital add-on if use is unreasonable. Contentious areas Ring Fencing Collateralising Certain assets that aren t included 7
9 Life Technical Provisions: Matching adjustment In the base scenario, what percentage of the spread is assumed in the matching adjustment? Source: 2015 KPMG Technical Practices Survey 8
10 Life Technical Provisions: Volatility adjustment Description Adjustment to the risk free curve to reduce balance sheet volatility and avoid pro cyclical behavior. Based on notional portfolio by country and currency (hence not company specific). Requires regulatory pre-approval. Business impacted Cannot be used on blocks of business where Matching Adjustment is already being applied. For UK companies, need to demonstrate that the liabilities it is used on have liquid cashflows. Volatility adjustment Regulatory aspects For Sep 2015 VA was 24bps for GBP and 27bps for most euro currency countries (can vary by country e.g. Greece is 76 bps). Swiss CHF is 5bps. Dec 14 22bps, Mar 15 18bps, Jun 15 22bps for GBP EIOPA now publishing on a monthly basis. Emerging themes from companies Many UK companies are planning to utilise this for their with profit business. Notional portfolio so not directly investible for companies. Requirements for UK application only consulted on shortly before applications were due. Again the volatility adjustment has points of contention, most importantly: You can t assume the volatility adjustment increases in a stress scenario 9
11 Life Technical Provisions: Transitionals Transitional measures on technical provisions Transition over 16 years Based on difference between Solvency I Pillar 2 (ICA) (likely) and Solvency II technical provisions Transitional benefit Solvency I Pillar 2 liability (ICA) Solvency II risk margin Solvency II best estimate liability (including MA + VA) Solvency I Pillar 1 mathematical reserves Will be capped such that a company cannot be in a better position compared to Solvency I PRA could require a recalibration of the difference every two years or when risk profile changes The benefit can be applied at the homogeneous risk group level Must be approved by the regulator and the impact of using it must be publicly disclosed If not using it would result in a breach of SCR, an annual report must be sent to the regulator outlining what action has been taken and future action to ensure compliance at the end of the transition period Industry thoughts Concern that the PRA will limit the benefit of these Does the floor against Solvency I and/or the risk of recalibrating gap every two years mean Solvency I can t be switched off for another 16 years? How will analysts react to this? If can get by without, then worth doing so? Having to capture data for pre 2016 business and post 2016 business potentially troublesome Having to produce an ICA to much tougher timescales particularly for YE
12 Matching Adjustment and PRA applications Approval timeline Q PRA runs trial application process Q October further clarity expected from PRA 31 October EIOPA report on EIOPA-CP- 14/007 (approval process) 1 Dec 14 6 Jan 15 Preapplication process Q April PRA approval powers granted Q Q PRA review and approval (up to 6 months) Letters issued 10/11/2015 PRA have said they are considering 300 applications under SII, of which 20 are internal models. The rest are matching adjustment, volatility adjustment and group applications. 11
13 SCR Solvency Capital Requirement Calculated either by a standard formula or an internal model Standard Formula The SCR is calculated for different sub-risk components Use either a formula or a shock approach For those sub-risks for which the SCR is calculated with a shock approach the SCR is equal to the difference: SCR = Own funds (base) Own funds (shock) The risk margin is assumed to be constant in base and shock Aggregated using a prescribed correlation matrix Internal Model Use your own view of the risk calibrations much like ICA, but with more documentation and validation A very onerous process Results of IM applications will not be known until 5 th /6 th December 2015 a few days time 12
14 SCR standard formula risks SCR Not risk based Adj BSCR Operational Not included: Volatility (particularly equity) Pension Scheme Risk Market Health Default Life Non-life Intangible Interest rate SLT Health CAT Non-SLT Health Mortality Premium Reserve Equity Mortality Premium Reserve Longevity Lapse Property Longevity Lapse Disability Morbidity CAT Spread Currency Disability Morbidity Lapse Equity Stress of 22% for equities purchased before 1/1/16. Lapse Expenses Key Most important stresses for life companies Concentration Illiquidity Expenses Revision Type 1 (listed on regulated exchanges in EEA or OECD) stress is 39% + Symmetric Adjustment Revision CAT Type 2 (everything else) stress is 49% + Symmetric Adjustment 13
15 SCR Solvency Capital Requirement (cont.) Why chose an internal model? Ability to fully tailor the model to the company s risk profile More appropriately match risk profile (attractive for large diverse companies and specialist providers) Can be updated over time as the risk profile changes...and regulatory capital is calculated on a more consistent basis with that used for decision making A lot of companies (in the UK) started off IM but a number have reined back to SF Why chose the standard formula? The costs of developing an internal model may outweigh the benefits. (This is true for all but very large companies) The risk profile for the standard formula may be a fair reflection of the company 14
16 The Internal Model Approval Process Any application for approval, must submit, as a minimum, documentary evidence that the internal model fulfils the following requirements: Use test Statistical quality Calibration standards Validation Profit and loss attribution Documentation Supervisory authorities shall give approval to the application only if they are satisfied that the systems for identifying, measuring, monitoring, managing and reporting risk are adequate. As part of the initial approval process of an internal model, the supervisory authorities shall approve the policy for changing the model. Very detailed and onerous process. Not for the faint hearted! 15
17 Solvency II Requirements on the ORSA its components Evaluating the past and present Technical provisions Regulatory capital Overall solvency needs/valuation SCR deviations Looking to the future Risk profile Solvency projections Strategy link Stress tests Own Assessment Process Design Standard formula/internal model Integration multi-disciplinary requirement Frequency metrics Application Proportionality Valuation Independent challenge/management review ORSA Report/ORSA Policy Decision-making ORSA policy ORSA process ORSA report submission 16
18 The ORSA as part of the wider framework ORSA can be seen as a wrapper that brings together all of the elements and processes that make up a firm s risk management framework. The ORSA should allow a firm to articulate their risk and capital position and help drive the thinking behind the adequacy of the framework that underpins it. A best practice ORSA should allow inferences to be made about each of the elements pictured in the wheel, adding value to the firm and clearly demonstrating to their supervisor how they manage risk and capital. The results of the ORSA will be important to stakeholders, both internally and externally, as markets supervisors and the public call for more robust and transparent risk management practices. Risk data, MI and reporting Risk training and comms Risk methodology Risk strategy and vision Risk operating model Capital management Risk appetite Risk governance 17
19 Pillar 3 Reporting requirements The reporting and disclosure requirements under Solvency II are substantially more far-reaching and extensive than current reporting to the PRA... REPORTING REQUIREMENTS ARE VERY ONEROUS! Private reporting to the supervisor Regular RSR every three years to the Supervisor (with an annual report for material changes) + a full set of QRTs every year A core set of quarterly QRTs for solo and groups Templates have internal checks which must be satisfied Annual solvency and financial condition report (SFCR) Annual quantitative reporting templates (QRTs) National specific reporting templates Quarterly quantitative reporting templates (QRTs) Regular supervisory report (RSR) every three years (with an annual report for material changes) Actuarial Function Report (more later) Public reporting Annual SFCR + subset of QRTs for solo and groups... with a subset of QRTs and narrative reporting required during the preparatory period Larger firms (over 12 billion of assets) have to complete additional reporting for Financial Stability purposes 18
20 Solvency II balance sheet, technical provisions and own funds assurance Step 1 and Step 2 Step 1 A review and recommend report on the preparedness to implement the Solvency II balance sheet Assesses the firm s methodology and assumptions against Solvency II Carried out by the firm s external auditor, or an external professional firm The report produced is similar to a gap analysis Step 2 A reasonable assurance opinion on the Solvency II balance sheet. Assesses the firm s calculations against the methodology and assumptions considered in Step 1 Firms use the preparatory reporting templates issued by EIOPA to present the results of their calculations Carried out by any external firm PRA has recently confirmed that the Solvency II Balance Sheet and SCR (Standard Formula firms only) will be subject to audit 19
21 Solvency II Pillar 1 summary and lessons for Hong Kong Solvency II good in principle: Realistic/economic balance sheet + sensible stress test capital requirements BUT: Many implementation aspects OTT: Some technical aspects, and disclosure too extensive both EU and UK aspects SCOPE FOR HK TO TAKE GOOD PARTS AND LEAVE OUT OTT PARTS 20
22 Agenda Introduction of SII from 1 st January 2016 New PPP and SIMR from 1 st January 2016, and its effect on life actuaries New pensions regime, and the ramifications of the removal of annuitisation requirement Year End 2015 workload and going forwards GN16 from a HK perspective GN16/AGN9 observations and comparison with the UK 21
23 Prudent Person Principle Recap on requirements No sole reliance external information Non-routine investment activities Assess security, quality, liquidity and profit Establish investment targets Manage conflicts of interest Unit Linked and Index Linked Non-traded assets Derivatives only to reduce risk or for efficient portfolio management Securitisations: align interests of insurer and originator How this is achieved Internal credit ratings (MA users review of this), do not rely solely on capital Upfront assessment of new investment types Investment policy must set out how this is achieved. Benchmarks written into mandates Should be set out in investment policy or elsewhere in policy suite. Investment policy how assets are selected in best interest of policyholder Implement control procedures Procedures to monitor performance and demonstrate that reducing risk or improving portfolio efficiency Document aligning of interests 22
24 Prudent Person Principle Issues encountered There have been big changes in the investment markets and we have seen increased oversight of investment activities, even if this is not linked to the Prudent Person Principle Improving capability of investment teams Investment policies rewritten Formal risk involvement in investment decisions Increased rigour on new investment types Focus on internal credit ratings and outsourced investment consulting Improvements in investment oversight How do you make the Prudent Person Principle work beyond the technical people in your Solvency II team? 23
25 Duties of the Actuarial Function under SII and SIMR Article 48 Actuarial function The actuarial function should: Oversee the calculation of the technical provisions. Ensure appropriate methodologies, models and assumptions are used. Compare best estimate against experience. Assess sufficiency and quality the data used for technical provisions. Inform the Board via a reasoned analysis on the reliability and adequacy of technical provisions (including sensitivity analysis). Opine on the overall underwriting policy and adequacy of reinsurance arrangements. Contribute to the effective implementation of the risk management system. Produce a written report at least annually on the tasks undertaken and their results. The chief actuaries (in the UK) are required to: Hold a practicing certificate. Demonstrate breadth and depth of relevant experience reflecting the Solvency II requirements as detailed in Article 48 of the Directive The chief actuaries in the UK will be subjected to greater regulatory scrutiny before appointment. It is not clear if there is a distinction between the Chief Actuary and the head of the Actuarial Function. The duties assigned to the actuarial function are a combination of Line 1 and Line 2 roles, leading to questions around the optimal structure for the actuarial function 24
26 Actuarial Function structure Illustrative Structures Chief Actuary Head of Actuarial Function Chief Actuary (= Head of Actuarial Function) CFO Chief Actuary (=Head of Actuarial Function) Actuarial Reporting Actuarial Function Actuarial Reporting Actuarial Function Actuarial Reporting Actuarial Function Smaller vs Larger firms Solvency II vs SIMR Line 1 vs Line 2 Chief Actuary vs Head of Actuarial Function WPA role largely unchanged Key: First Line Across first and second line Second Line 25
27 Reporting from the Actuarial Function Proposed content of the Actuarial Function Report Actuarial Function, advice and opinion areas (ESAP2) Technical Provisions Adequacy and reliability of Technical Provisions Factors and judgements within Technical Provisions Opening and closing Technical Provisions Co-ordination of process Sufficiency and quality of data Methods and models Assumptions Comparing best estimates against experience Sensitivity analysis Current position So far so good. 26
28 Reporting from the Actuarial Function But Additional proposed content of the Actuarial Function Report Actuarial Function, advice and opinion areas (ESAP2) Opinion on Underwriting Opinion on Reinsurance Contribution to implementation of the Risk Management System Current position Can the Actuarial Function holder give a view on these issues? Also. Group actuarial function provides advice and an actuarial opinion on: underwriting risks of the group, asset-liability aspects, the group s solvency position, the group's prospective solvency position, such as stress tests and scenario tests in the area of technical provisions and ALM, distribution of dividends in relation to discretionary benefits, underwriting policies, reinsurance arrangements and other forms of risk transfer or risk mitigation techniques for insurance risks. Also advice is given on the adequacy, fairness of premiums and discretionary benefits, or the methodology to determine the same, by the group actuarial function. (Explanatory text accompanying Guideline 46 of Systems of Governance Requirements) 27
29 Agenda Introduction of SII from 1 st January 2016 New PPP and SIMR from 1 st January 2016, and its effect on life actuaries New pensions regime, and the ramifications of the removal of annuitisation requirement Year End 2015 workload and going forwards GN16 from a HK perspective GN16/AGN9 observations and comparison with the UK 28
30 Pension Reforms Changes to pensions announced in the 2014 Budget and Autumn Statement have fundamentally altered the pensions landscape in the UK. Can withdraw funds from pensions post 55 subject to marginal income tax rate (and 25% tax free) Removed requirement for DC plan members to annuitise their pension pots Pension plans can now be used like bank accounts Many small pots are being withdrawn in one go Policyholder Impacts Greater choice and flexibility More options available when choosing how to use their pension savings Some companies are only offering all or nothing withdrawals Face costs switching to new more flexible products Tax implications of withdrawals may not be fully understood by policyholders Potential to lose valuable guarantees on withdrawal Company Impacts Relieved of some guarantee costs Annuity sales have nosedived. Specialist annuity providers have been forced to merge Companies with annuity interests have re-focused on the bulk annuity market, increasing competition Many companies administration systems are not flexible enough to cope with customer demands 29
31 Pension Reforms Impact on Products Sale of Pension Annuities Number of customers aged 55 or over who accessed their pension savings since 6th April 2015 Thousands Q113 Q213 Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 UFPLS (partial encashment) Annuity Withdrawal of tax-free lump sum only Drawdown (full encashment) Small pots payment Drawdown (partial encashment) UFPLS (full encashment) (Source: FCA pension freedoms data collection exercise: analysis and findings - September 2015) Thousands Annuity sales have dropped dramatically A large number of policyholders are fully cashing in their pots Generalist life insurers are divesting existing books to annuity specialists 30
32 Agenda Introduction of SII from 1 st January 2016 New PPP and SIMR from 1 st January 2016, and its effect on life actuaries New pensions regime, and the ramifications of the removal of annuitisation requirement Year End 2015 workload and going forwards GN16 from a HK perspective GN16/AGN9 observations and comparison with the UK 31
33 Reporting Requirements Year end 2015 OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP BAU IFRS/EV etc weeks IFRS disclosure 6-10 weeks EV disclosure 13 weeks Closing PRA Returns: 31/03 17 weeks Weeks TBC Closing IGD: 30/04 YE 15 ICA 2015/2016 SII/EC market reporting? 6-10 weeks SII/EC disclosures? SII regulatory reporting 20 weeks 26 weeks Day 1 SII Reporting (Solo) 20/05 Day 1 SII Reporting (Group) 30/06 8 weeks Interim Q3 Solo QRT:25/11 14 weeks Interim Q3 Group QRT: 06/01 8 weeks Q1 Solo QRT: 26/05 14 weeks Q1 Group QRT: 07/07 32
34 Solvency II Summary What does this mean for Hong Kong? What might Hong Kong take away from this? SII is good in principle It has been reasonably well implemented in the EU but in the UK it has been over engineered The process has been very onerous. Many companies have relied on contractors or consultants in order to meet the tough regulatory timescales The PRA has increased difficulty for companies Companies will only know their SII final position with one month to go until SII is live Solvency II is a big step forward for the EU excluding the UK It has debateable value for the UK given the previous ICA regime (personal view) 33
35 Agenda Introduction of SII from 1 st January 2016 New PPP and SIMR from 1 st January 2016, and its effect on life actuaries New pensions regime, and the ramifications of the removal of annuitisation requirement Year End 2015 workload and going forwards GN16 from a HK perspective GN16/AGN9 observations and comparison with the UK 34
36 Overview of GN16 requirements Guidance Note on Underwriting Long Term Insurance Business (GN16) 35
37 Overview of GN16 requirements Guidance Note on Underwriting Long Term Insurance Business (GN16) 36
38 Overview of GN16 requirements Guidance Note on Underwriting Long Term Insurance Business (GN16) 37
39 Non-guaranteed policyholder benefits 1 Considerations in setting dividends 3 Segmentation of policies into dividend classes Few insurers: Separate dividend management for products that are sold on tranche basis / limited offer 4 Most insurers: Consider historical experience Consider future outlook Smoothing of experience (Mainly investment experience) Most insurers: Review dividend at least annually Investment and claims experience, some may consider persistency and expense experience 2 How are non-guaranteed benefits managed? Review of dividends & bonus Sharing of surplus 5 Asset allocation Few insurers: Consider product features and characteristics Show how guaranteed benefits are fulfilled Very few insurers: Explicitly state the ratio of surplus to be shared with policyholders Sources: KPMG analysis 38
40 Potential challenges in GN16 Implementation 1 Collaboration and timeline 2 Corporate policy and governance of par / universal life business 3 Benefit illustration Holistic approach to implement GN16 in different functional areas Collaboration between sales, IT, management and actuarial Resource shortage may affect implementation progress Getting in-force illustration ready on time Establishment of committee to advise independently on par business Guidance on contents of the corporate policy Significant system enhancement to generate inforce illustrations The gap between current state and HKFI Guidance note on illustration Getting 25 th & 75 th percentile of investment return for pessimistic and optimistic scenarios Relevant training for distributors 39
41 Potential challenges in GN16 Implementation 4 Product design 5 Remuneration structure 6 Training Demonstrate fairness and appropriateness for nonguaranteed benefits and charges Assurance that product is sustainable Proper use of distribution channels in selling products Setting of best estimate assumptions (AGN9) Justification that insurer is paying commission on earned basis Assurance that remuneration structure will not incentivise mis-selling FNA implementation in selling process How to conduct suitability assessment Risk management to avoid circumventing post-sales control Post-sales process infrastructure 40
42 Agenda Introduction of SII from 1 st January 2016 New PPP and SIMR from 1 st January 2016, and its effect on life actuaries New pensions regime, and the ramifications of the removal of annuitisation requirement Year End 2015 workload and going forwards GN16 from a HK perspective GN16/AGN9 observations and comparison with the UK 41
43 GN16 GN16 SECTION 1, 2, 3 4 SUMMARY COMMENTS UK POSITION INTRODUCTION, REGULATORY REFERENCES, PURPOSE DUTIES OF BOARD, CONTROLLER, APPOINTED ACTUARY References to interests of customers, fair treatment of customers, PRE Board has responsibility 4.2 seems very onerous PRE on non-guaranteed benefits AA advises on his/her interpretation of PRE Similar to UK FCA requirements on Treating Customers Fairly (TCF) UK not so strong/specific AA replaced by AFH/WPA at end 2004 advisory roles HK AA more onerous 5, 6, 7, 8, 9 PRODUCT DESIGN, ADEQUATE AND CLEAR INFORMATION, SUITABILITY, CUSTOMER ADVICE, REMUNERATION Suitability of product, customer needs, charges fair, clear information, pricing assumptions, key feature and risks disclosure, know your customer, customer advice, no commission bias All quite similar to UK Conduct of Business Rules (COBS) but set out more succinctly Some more onerous aspects eg on fees and charges being fair and commensurate with risks/services No commission now in UK fees, but can deduct from premiums 10,11 ONGOING MONITORING, POST SALE CONTROL Conflicts of interest, appropriate service, on-going customer disclosure, product monitoring, postsale follow-up Broadly similar to the UK Reason why letters as opposed to post sale calls to vulnerable customers 42
44 GN16 Appendix 1 AREA REQUIREMENTS COVERED 1 INTRODUCTION Definition of participating / withprofits COMMENTS AND UK POSITION Similar to UK only GN16 is more succinct! 2.1, 2.2 CORPORATE POLICY Allocation of surplus/profits between PHs and SHs Philosophy and approach Charges for guarantees/capital Fairness between generations Investment strategy Smoothing Segregation of assets Illustrations see below Conflicts PH leaflets Reference to WPC Declaration by Chairman/NED/AA All sensible areas. Some apparent omissions eg surrender treatment. UK covers this in the PPFM Detailed PPFM rules Principles and Practices separate, rules on how these can be changed PPFM is public and on website Generally well accepted in the UK. Also CFPPFM shortened customer friendly version WPC requirement in UK. ToR on website Report of company to PHs Report of WPA to PHs 43
45 GN16 Appendix 1 cont. 2.3, 2.4, 2.5, 2.6 AREA COVERED APPOINTED ACTUARY AND BOARD REQUIREMENTS 2.3: AA duty to ensure fair chance of achieving nonguaranteed returns AA report to Board IA may require independent party to review Board ultimately responsible COMMENTS AND UK POSITION 2.3 very onerous on the AA? May stem from AGN5 Other aspects not dissimilar to the UK UK always requires independent input (eg WPC) 3.1 to 3.7 PROVISION OF BENEFIT ILLUSTRATIONS Projected performance split between guaranteed and nonguaranteed Customer must sign the illustration AGN5 not misleading, conditions clearly set out Low, high scenarios, wider for higher volatility Many similarities with UK but some differences. No split between gteed and non-gteed future bonuses although gteed minimums are stated in UK UK is NOT each policyholder year years 1-5, then maturity/retirement No UK requirement for customer to sign interesting idea Low/high scenarios similar to UK 44
46 Interlude UK approach to illustrations both unit-linked and withprofits Illustrate on Lower Central Upper three rates Current Rate 2% pa 5% pa 8% pa Taxable Current Rate Non-taxable 1.7% pa 4.7% pa 7.7% pa Requirement to use a lower central rate if the standard rate would overstate the investment potential of the fund Applies for example to deposit funds and (possibly) bond funds Requirement for differential of +/-3% pa for deriving upper and lower rate from central rate but may get waiver if this is unreasonable FCA consulting on more detailed approach drilling down to EBR of fund Projected surrender values, years 1-5, on central rate Projected maturity/retirement values on all 3 rates Done on own charges/expenses, including mortality charges Rules laid down for longevity improvements Statements on eroding power of inflation inflation rates laid down: 0.5%pa, 2.5%pa, 4.5%pa Full descriptions and caveats that actual outcome could be higher or lower No formal concept of a best estimate projection, and emphasis on variability of outcome 45
47 GN16 Appendix 1 AREA COVERED DISCLOSURE OF NON- GUARANTEED BENEFITS DISCLOSURE OF NON- GUARANTEED BENEFITS DISCLOSURE OF NON- GUARANTEED BENEFITS REQUIREMENTS Customer apprised of risk factors Variability and volatility of returns Target asset mix, underlying investments Bonus philosophy Fulfilment ratios on nonguaranteed benefits Ongoing communications and annual updates. Checking sustainability Premium offset options, vanishing premiums, reduced premium paying terms COMMENTS AND UK POSITION UK approach is through Key Features document and Reason Why letter UK uses fund fact sheets for asset mix need to link better to illustrations No UK equivalent of fulfilment ratio requirement highly onerous? Is this statistically do-able at all? Applies also in the UK, but still on standard growth rates Not a particular issue in the UK 46
48 GN16 Summary GN16 covers very much the same ground as the equivalent requirements in the UK o Both for the general aspects and the illustration aspects Some aspects of GN16 look very onerous in principle and do not apply in UK e.g. expectation of fair chance of achieving non-gteed returns, fulfilment ratios GN16 is more concise than the UK equivalent pros and cons of this: o Shorter, less detail, more scope for company to apply sensibly to its products clearly good o But less standardised, more scope for different interpretations, thus harder for companies to know exactly what to do? Each company has to work it out for itself? o Less standardisation makes comparing companies/products more difficult Governance structure and reporting is less onerous/formalised 47
49 ASHK Draft Guidance Note AGN9 Very useful and well drafted. Some thoughts and areas which have been contentious in the UK Future economies of scale and efficiency gains on expenses Best Estimate versus Prudent Best Estimate Different best estimates for different purposes Credit default best estimates Future economies of scale and efficiency gains on expenses Pension schemes accounting costs or funding costs? Subsidies from other business lines 48
50 Thank you! Q&A
51 Contacts at KPMG Hong Kong Estella Chiu Partner, Head of Actuarial Services ASPAC Tel: Steven Gin Director, Actuarial Services KPMG Hong Kong Tel: Fiona Chau Associate Director, Actuarial Services KPMG Hong Kong Tel: Syed Haider Associate Director, Actuarial Services KPMG Hong Kong Tel: Thomas Tang Associate Director, Actuarial Services KPMG Hong Kong Tel:
52 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
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