Consultation Financial Reporting Council May 2016 Consultation: Revised Specifi c TASs Annex 1: TAS 200 Insurance
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CONTENTS Page 1 Scope of TAS 200 1 2 TAS 200 provisions 8 3 Impact assessment 16 4 Invitation to comment 19 Financial Reporting Council
Consultation: Revised Specific TASs Annex 1: TAS 200: Insurance (May 2016)
1 SCOPE OF TAS 200 Introduction 1.1 In this section we describe our proposals for the scope of Technical Actuarial Standard 200: Insurance (TAS 200). In deciding whether to include work in the scope of TAS 200, we have used the risk assessment process described in section 2 of the consultation document. 1.2 As a result of that assessment, the work described in paragraphs 1.4 to 1.25 is in the proposed scope of TAS 200. These areas of work comprise work that is in the scope of the current Insurance TAS and two areas of work not in the scope of the current Insurance TAS relating to Own Risk and Solvency Assessment (ORSA) and Audit. 1.3 There are a number of areas of technical actuarial work within the scope of the current Insurance TAS, which are not in the proposed scope of TAS 200. These are set out in paragraphs 1.35 to1.42. Regulatory balance sheets 1.4 Under Solvency II, the coordination of the calculation of technical provisions for regulatory reporting purposes falls within the remit of the Actuarial Function. Whilst it is not required that this role be carried out by a qualified actuary, it must be undertaken by persons with knowledge of actuarial and financial mathematics who are able to demonstrate their relevant experience with applicable professional and other standards. 1.5 Actuarial information underpins decisions by the Board on the valuation of liabilities as part of the Solvency II balance sheet. This information is supported by technical actuarial work which is heavily dependent on actuarial judgement, applies assumptions which are forward-looking and long-term and so subject to significant uncertainty, uses data which may be limited and models which are often complex. 1.6 Increasingly, technical actuarial work is used to determine a value for other elements of the balance sheet (e.g. assets that are marked to model or reinsurance assets). These elements can also be material items on the balance sheet and their valuation can involve similar complexities to those relating to the valuation of the liabilities. 1.7 In view of the reliance of the Board on the technical actuarial work underpinning different elements of the regulatory balance sheet, and their materiality, we propose that technical actuarial work to support the preparation of the balance sheet for regulatory purposes carries high risk to the public interest and should be in the scope of TAS 200. 1.8 However, we propose that, where the insurer is the sponsoring employer, the technical actuarial work to prepare information on pension schemes for the purposes of the regulatory balance sheet is adequately covered by TAS 100 and relevant accounting standards, and should not be in the scope of the Specific TASs. Financial Reporting Council 1
I.1.1 Do you agree that technical actuarial work to support the preparation of the balance sheet for regulatory purposes, (other than technical actuarial work preparing information on an insurer s pension schemes), should be in the scope of TAS 200? General Insurance Business written by Lloyd s Syndicates 1.9 A Lloyd s syndicate writing general insurance business is required to appoint a syndicate actuary who provides it with an opinion confirming that its technical provisions are no less prudent than his or her best estimate of the amounts required each year. The Lloyd s Actuary uses the work done by the syndicate actuaries to meet their obligation to ensure that syndicates technical provisions have been reviewed and appropriate opinions on them have been provided. We understand that, following Solvency II, the Lloyd s Actuary will continue to require a similar opinion on the claims provisions, rather than the technical provisions. 1.10 This work is of a similar nature to the technical actuarial work to support the preparation of the Solvency II balance sheet for regulatory purposes and therefore we propose to include this work within the scope of TAS 200, subject to the outcome of the Lloyd s review of the Statement of Actuarial Opinion. I.1.2 Do you agree that technical actuarial work to support the provision of an opinion for a Lloyd s syndicate regarding the claims provisions should be in the scope of TAS 200? Financial Statements 1.11 The insurance liabilities that appear in an insurer s statutory annual report and accounts, including financial statements, are calculated using similar complex actuarial techniques to those used to calculate the technical provisions in the regulatory balance sheet. Likewise, other elements of the insurer s financial statements may be calculated using technical actuarial work. 1.12 In view of the reliance of the Board on the technical actuarial work underpinning different elements of the financial statements and their materiality, we consider that they carry high risk to the public interest. We propose to include assessing insurance liabilities and actuarial work to determine other elements of the balance sheet for statutory financial reporting purposes within the scope of TAS 200. 1.13 However, we propose that, where the insurer is the sponsoring employer, the technical actuarial work to prepare information on pension schemes for complying with financial reporting standards is adequately covered by TAS 100 and accounting standards, and should not be in the scope of the Specific TASs. I.1.3 Do you agree that technical actuarial work to support the preparation of financial statements that are intended to give a true and fair view of their financial position and profit and loss (or income and expenditure) for insurers (other than technical actuarial work preparing information on an insurer s pension schemes) should be in the scope of TAS 200? 2 Consultation: Revised Specific TASs Annex 1: TAS 200: Insurance (May 2016)
General Insurance Tax 1.14 It is in the public interest that insurers pay their appropriate taxes. Regulation requires that general insurer s technical provisions are not set excessively in order to defer taxes. Actuarial work is required to confirm this and we consider that this actuarial work should be in the scope of TAS 200. I.1.4 Do you agree that technical actuarial work to express an opinion on the insurance liabilities appearing in tax returns for general insurance business under the General Insurers Technical Provisions Regulations 2009, should be in the scope of TAS 200? Risk Modelling underlying the calculation of the regulatory capital requirements and the Own Risk and Solvency Assessment (ORSA) 1.15 As well as co-ordinating the calculation of technical provisions and possibly other elements of the regulatory balance sheet, the Actuarial Function under Solvency II is required to contribute to the effective implementation of the risk-management system, in particular with respect to the risk modelling underlying the calculation of the regulatory capital requirements and the Own Risk and Solvency Assessment (ORSA). Technical actuarial work supports these activities. 1.16 Under Solvency II a firm can calculate its Standard Capital Requirement (SCR) using a Standard Formula (SF) or by a regulator approved (full or partial) Internal Model (IM). Such calculations can be highly complex, most notably where an IM is used, and may rely on judgments, particularly as this work involves evaluating risk in the tail of the distribution. Technical actuarial work is likely to be a core component in the development and implementation of the model. Additionally, because of the Use Test requirement, other business decisions could be adversely affected if there are errors. We believe that this work is high public interest and propose to include the technical actuarial work carried out as part of the assessment of regulatory capital requirements in the scope of TAS 200. 1.17 Management and governing bodies of insurers place a high degree of reliance on actuarial information prepared as part of the ORSA. This can include the projection of business plans, the setting of risk appetite and development and management of stress and scenario tests, all of which help management to determine strategy. The ORSA is also a key regulatory requirement under Solvency II. 1.18 We believe that technical actuarial work carried out as part of the ORSA is of high public interest and propose to include it in the scope of TAS 200. I.1.5 Do you agree that technical actuarial work to estimate regulatory capital requirements should be in the scope of TAS 200? I.1.6 Do you agree that technical actuarial work undertaken as part of the Solvency II Own Risk and Solvency Assessment (ORSA) should be in the scope of TAS 200? Financial Reporting Council 3
Insurance transformations 1.19 Insurance transformations include Part VII transfers, schemes of arrangement concerning insurance business and changes to the with-profits principles in the Principles and Practices of Financial Management (PPFM) of a long-term insurer writing with-profits business including reattributions of inherited estates and demutualisations. They all have the potential to affect policyholders benefits even if that is limited to changing the level of those benefits security. 1.20 The courts making decisions on Part VII transfers and schemes of arrangement rely on expert advice on the impact on policyholders and on other issues. This advice is likely to include actuarial information. In many cases the expert is an actuary. In developing proposals for a transformation, the insurer or insurers involved are likely to consider actuarial information. Those affected by a transformation might also consider actuarial information in developing their response. For example, the policyholder advocate in an inherited estate reattribution is highly likely to rely on actuarial information in developing their response to the insurer s proposals. Classes of policyholders affected by a proposed scheme of arrangement might rely on actuarial information in developing their response. 1.21 We consider that, given the importance of actuarial information to all the parties involved in a transformation and the potential impact on policyholders benefits, it is important that any technical actuarial work concerning them is of high quality. We therefore propose that technical actuarial work for insurance transformations is included in the scope of TAS 200. I.1.7 Do you agree that technical actuarial work to support: schemes of arrangement; Part VII transfers; and other transformations should be in the scope of TAS 200? With-profits discretion 1.22 Some insurance policies allow the insurer to exercise discretion over the benefits to be paid to the policyholder or the charges to be levied. For example, in with-profits insurance, the insurer decides on the levels of bonus to be declared from time to time. These decisions, and others like them involving the exercise of discretion, rely heavily on actuarial information. 1.23 Governing bodies of insurers writing with-profits insurance are required to take actuarial advice on key aspects of the discretion they exercise. The With-Profits Actuary gives this advice. The With-Profits Actuary s responsibilities also include commenting on the consistency of the exercise of discretion with the insurer s PPFM. 1.24 The With-Profits Actuary must also report to policyholders on whether the firm has considered their interests in a reasonable and proportionate manner. 4 Consultation: Revised Specific TASs Annex 1: TAS 200: Insurance (May 2016)
1.25 The actuarial information provided concerning the exercise of discretion with regard to with-profits insurance and its consistency with the PPFM is important to both policyholders and governing bodies of insurers. We therefore consider this work to be of high risk to the public interest and propose to include it within the scope of TAS 200. I.1.8 Do you agree that technical actuarial work to support the exercise of discretion concerning with-profits life insurance policies should be in the scope of TAS 200? Audit and assurance 1.26 Investors and regulators rely on the auditor s opinion on an insurer s financial statements and any auditor s assurance opinion on an insurer s regulatory reporting. In order to provide this opinion it is likely that the auditor will rely on technical actuarial information provided by a specialist or an expert. We consider that the technical actuarial work on which this information is based should be reliable and of high quality. The Audit Committee s understanding and effective challenge of the audit may depend on the technical actuarial work and its communication. 1.27 In some cases, the technical actuarial work performed in support of the auditor may involve a significant amount of original or independent actuarial work on which reliance is placed by the auditor. 1.28 The provision of this support to the auditor requires other skills in addition to the technical skills required to perform the underlying work. It requires the application of scepticism and challenge to the underlying technical actuarial work. 1.29 We therefore propose that technical actuarial work performed to support the auditor s opinions on an insurer s financial statements and any assurance review for regulatory reporting purposes is of high risk to the public interest and is within the scope of TAS 200. I.1.9 Do you agree that technical actuarial work to support the provision of an audit opinion on an insurer s financial statements should be in the scope of TAS 200? I.1.10 Do you agree that technical actuarial work to support the provision of an auditor s assurance opinion for regulatory reporting should be in the scope of TAS 200? Pricing frameworks 1.30 The scope of the current Insurance TAS includes the pricing of material individual risks and pricing frameworks. We consider that TAS 100 provides sufficient requirements for the pricing of individual risks, but propose to retain pricing frameworks in the scope of TAS 200. Our rationale is set out below. 1.31 Insurance risk is a fundamental concern to insurance companies and the appropriate pricing of that risk is a key factor in the ongoing profitability and sustainability of an insurance company. Financial Reporting Council 5
1.32 While we do not consider it appropriate to set technical actuarial standards for product design and commercial decisions, we do consider that the technical actuarial work underpinning those decisions should be of high quality. 1.33 We understand that it is common practice that the governing body of an insurer decides the underlying principles for product pricing with regard to measures such as achieving a target rate of return or combined ratio. Additionally, we understand that it is common practice that management decide how these underlying principles should be applied and may rely on technical actuarial information in setting methods and assumptions to determine the technical price or charges. This collection of product pricing principles, and the measures, models, and assumptions through which the underlying principles are implemented, represent the pricing framework supporting an insurer s premium rates or product charges. 1.34 We consider that the technical actuarial work supporting these frameworks, which tend to be established by business unit or product type, are therefore of high risk to the public interest and should be within the scope of TAS 200. In particular, we consider that the governing body should have sufficient information to understand any cross-subsidies within the pricing framework and the sensitivity of the outcome to these assumptions. I.1.11 Do you agree that technical actuarial work to support the development and application of pricing frameworks for products provided by an insurer should be in the scope of TAS 200? I.1.12 Do you agree that technical actuarial work to support individual pricing decisions should not be in the scope of TAS 200? Areas of technical actuarial work not in the proposed scope of TAS 200 1.35 In our risk assessment, we analysed a wider range of technical actuarial work in insurance. In many cases, we considered that the work is not of high enough risk to the public interest to be in the scope of TAS 200. There were also cases where the work was of high risk to the public interest but the existence of other mitigants means that the net risk is reduced sufficiently not to warrant inclusion in the scope of TAS 200. However, all such work is in the scope of TAS 100. The following paragraphs set out the areas of technical actuarial work that are currently within the scope of the Insurance TAS and are not in the proposed scope of TAS 200. Sale and purchase of blocks of insurance business 1.36 Technical actuarial work is frequently used to support the sale and purchase of blocks of business (for example, merger and acquisition work). The work may need to be performed under tight timescales and can have a significant impact on the terms of the transaction. 1.37 We consider that these are largely commercial decisions and the risk to the public interest from technical actuarial work to support sale and purchase of blocks of business is not great enough for the work to be included in the scope of TAS 200. TAS 100 will apply to this work. 6 Consultation: Revised Specific TASs Annex 1: TAS 200: Insurance (May 2016)
Reinsurance to close 1.38 Three years after the inception of an underwriting year (year of account), the managing agent of a Lloyd s syndicate may decide to close the year. The liabilities of the year to be closed are transferred into (usually) the succeeding open year, and a premium is paid to that year. The premium transferred is known as the reinsurance to close. 1.39 This could be considered as a commercial transaction and we do not consider that the risk to the public interest from technical actuarial work to support the calculation of reinsurance to close is great enough for the work to be included in the scope of TAS 200. TAS 100 will apply to this work. Embedded values 1.40 Long-term insurers frequently prepare an embedded value as a measure of the shareholders interests in the insurance business. The change in embedded value over successive periods might be a measure of management effectiveness and may be a used as a basis for remuneration. Technical actuarial work underpins material components of that valuation. 1.41 While the embedded value does provide information to investors in assessing the value of their investment and monitoring management effectiveness. We consider that the requirements of TAS 100 provide sufficient standards to apply to this work. In addition, the extent to which embedded values will be used in a Solvency II environment and once new accounting standards are developed is unclear and may diminish. 1.42 There are also a number of areas of technical actuarial work that were not included in the current Insurance TAS and we continue to consider that there is not sufficient risk to the public interest for that work to require specific standards in addition to TAS 100. They are now within the scope of TAS 100. These include: Underwriting and reinsurance opinions; Actuarial work to support other transformations including Skilled Persons reports and Claim determination and dispute resolution; Non-regulatory asset valuation or investment work; Repricing of reviewable rate contracts; Business planning work; and Compliance / Internal audit work. I.1.13 Do you agree that the other areas of technical actuarial work described in paragraphs 1.35 to 1.42 should not be in the scope of TAS 200? Financial Reporting Council 7
2 TAS 200 PROVISIONS Introduction 2.1 In this section we discuss the proposed provisions of TAS 200. 2.2 As with TAS 100, we have not included much of the supporting text in the existing TASs that provided background information and guidance. This is in accordance with our objective to set high-level standards and our design principles. Core provisions 2.3 We propose to have core provisions that are applicable to all technical actuarial work within the scope of TAS 200. Judgements 2.4 The exercise of actuarial judgement is a fundamental part of high public interest technical actuarial work in insurance. Judgements can make a significant difference to the results of the actuarial work and it is important that users understand the judgements that have been made and their effect. 2.5 The judgements made must reflect the nature of the insurance and reinsurance obligations (for example, if there are options or guarantees builtin to the product). They must take into account all the risks faced by the entity relevant to the actuarial work so the risks must be identified, understood and taken into account in making the judgements. Proportionality in the exercise of judgement should reflect the purpose of the work and the size and complexity of the risks. 2.6 Judgements should be made objectively and should not inappropriately override data with expert judgement. Communications should enhance user understanding of which are the key judgements and how they affect the actuarial information to facilitate effective user challenge of the actuarial work. We have therefore included the following provisions: Judgements shall reflect the nature of the insurance and reinsurance obligations, the risks faced by the entity relevant to the technical actuarial work and the purpose of the work. Communications shall describe the sensitivity of results to material judgements or a combination of judgements. 2.7 Actuarial judgements are made in the context of the risks faced by the entity and its external environment. Where there are changes in circumstances that would invalidate the judgements made these must be communicated to the user so that the user can understand when it is appropriate to keep using the actuarial information. We therefore propose to include the following provision: Communications shall explain any reasonably foreseen circumstances under which the technical actuarial work would no longer be valid. 8 Consultation: Revised Specific TASs Annex 1: TAS 200: Insurance (May 2016)
Data 2.8 Provision 2.3 in TAS 100 sets out the documentation requirements in respect of data supporting technical actuarial work. For work within TAS 200, we consider that the documentation of data provisions should be supplemented as suggested in the following paragraphs. 2.9 The documentation of data provisions extend the provisions in TAS 100 by including the documentation of data definitions. It is important in this work that the definitions of data items are precisely understood to avoid misunderstanding the data (e.g. the term premiums could be misunderstood as it could be gross or net, written or earned etc.). 2.10 TAS 100 also includes a requirement to document the source and justification of any data proxies used. Data proxies are used in insurance where entity specific data is not available (for example, the use of investment indices rather than assumptions based on the particular individual stocks and the use of data from a different territory that might be expected to exhibit similar characteristics). They can also be used to simplify calculations (e.g. in projecting the Solvency Capital Requirement for the assessment of the risk margin in Solvency II). We have included the following provisions: The documentation of the data used in the technical actuarial work shall include data definitions, data sources, data checks and controls, and the source and justification of any data proxies. Communications shall explain any data proxies used in the technical actuarial work and their rationale. 2.11 For some actuarial work data groupings are important (for example, general insurance reserving; personal lines pricing; and mortality experience analysis). Documentation shall include the groupings used and their rationale. Judgement will often need to be exercised in determining the relevance of past data and the exclusion of data points. The decisions and rationale relating to the treatment of data shall be documented. The documentation of the data used in the technical actuarial work shall include the rationale for grouping data, the criteria used to determine the groups and the resultant groupings; and the data points removed and the rationale for their removal. 2.12 For high risk public interest work, it is important that the user understands the extent to which the actuarial information can be relied on so it is essential that the data is checked to gain this understanding. We have therefore included a provision to require that a set of checks be constructed to ensure that the data is sufficiently accurate for the user to rely on the resulting information. This extends the requirement in TAS 100 that any checks performed must be documented. We therefore propose to include the following provision: A set of checks shall be constructed and performed in order to determine the extent to which, taken overall, the data is sufficiently accurate, complete and appropriate for users to rely on the resulting actuarial information. Financial Reporting Council 9
Assumptions 2.13 Provision 3.3 of TAS 100 requires communications to state the material assumptions and describe their rationale. For work within the scope of TAS 200, we consider that for material assumptions, communications should also describe how the material assumptions have been derived. 2.14 The Insurance TAS has a specific provision to include the derivation of the assumption for discount rate. We initially considered expanding the principle to a wider named list of key assumptions. However, we recognise that different assumptions are material to different entities and so we propose simply referring to material adjustments. 2.15 We propose to include the following provision which is based on the existing Insurance TAS principle, in TAS 200: Models Communications shall include the derivations of material assumptions used in the technical actuarial work. 2.16 Where using terms such as best estimate or central estimate we consider that the assumptions used as part of the modelling should not contain bias (optimism or prudence). We have therefore proposed the following provision: Best estimate measures, assumptions and judgements shall be used to derive any estimates described as best estimate, central estimate or other similar terms. 2.17 We considered whether the term best estimate should be defined. However, in practice the term is defined in different areas specific to the context of the work and so we have not included a definition. 2.18 It is important that implementations and realisations of models should be reproducible to enable effective validation of the models. This is of particular relevance for those areas of technical actuarial work within the scope of TAS 200 where the output is included in reporting to the regulator and in the financial statements. We propose the following provision: Implementations and realisations of models shall be reproducible. 2.19 We are proposing a requirement to describe the nature of any cash flows being quantified, and their timing. We have deliberately not been prescriptive about the form that the description should take, as we believe that this should depend on the context, including the relative significance of the cash flows, the purpose of the report and the levels of technical knowledge of the users. In some circumstances a simple statement that the cash flows consist of payments to policyholders, and that they are expected to occur linearly over the next twenty years (say), might well be sufficient. In other circumstances, a more detailed analysis could help the users in making strategic decisions. We propose to include the following provision: Communications shall describe the nature of any cash flows that are quantified including their timing. I.2.1 Do you have any comments on the proposed core provisions? 10 Consultation: Revised Specific TASs Annex 1: TAS 200: Insurance (May 2016)
I.2.2 Do you consider it necessary for the term best estimate to be defined? Work specific provisions 2.20 We propose to have work specific provisions that are applicable to particular areas of work. 2.21 We consider that the additional core provisions provide sufficient additional standards for pricing frameworks and have not included any specific provisions for this area of work. We considered including a specific provision relating to conduct risk but believe that this risk would be included when complying with the core provisions relating to judgements and assumptions in relation to this area of work. I.2.3 Do you have any comments on the proposals relating to pricing frameworks? 2.22 Many of the provisions for specified work are derived from the existing Insurance and Transformation TASs. Some are new to reflect feedback we have received on current risks in insurance as described below. There were also some provisions in the existing Insurance and Transformations TAS that are not in TAS 200. Regulatory balance sheets, Financial statements, General Insurance Business written by Lloyd s Syndicates and General Insurance Tax 2.23 We consider that given that these elements of technical actuarial work are specified by legislation and/or regulation that the users would want to have assurance that the elements of the relevant balance sheets and financial information have followed the requirements specifying their determination. Therefore, we propose including the following provision: Communications shall state the regulations defining the technical actuarial work being performed and confirm compliance with them. 2.24 We received feedback from the Risk Perspective outreach that increasing automation of production of results and shorter timescales makes it ever more important that results are validated and methodologies challenged. We have therefore proposed the following provision as an additional validation requirement to the provisions in TAS 100 requiring communications of changes in assumptions, methods and measures. In particular, it should be included in the communication of a comparison of the results from the previous exercise required by provision 5.4 of TAS 100: Communications shall provide an explanation for any difference between the actual experience emerging over the period since the previous exercise carried out for the same purpose (if one exists) with that assumed in that previous exercise. 2.25 We have retained the requirement in the current text to explain the difference between best estimate and a prudent estimate. As we have not defined the term best estimate we considered whether to include a requirement for communications to provide an explanation of what the term represents for the purpose of the work being undertaken. We would be interested in respondents views. Financial Reporting Council 11
2.26 In addition, for Solvency II firms, we have extended the requirements to cover the risk margin required in the calculation of the technical provisions. We have therefore included the following provision: Communications shall explain: the relationship between the estimate assumed in the valuation and a best estimate of the liabilities or provisions; the derivation of any adjustment for risk; and an explanation of any material change in the relationship between the estimate assumed in the valuation and a best estimate, and the adjustment for risk compared with the previous exercise carried out for the same purpose (if one exists). I.2.4 Do you have any comments on the proposed provisions for regulatory balance sheets? I.2.5 Do you have any comments on the proposed provisions for financial statements? I.2.6 Do you consider that TAS 200 should require communications to explain what the term best estimate is intended to represent? Risk Modelling underlying the calculation of the regulatory capital requirements and the Own Risk Solvency Assessment (ORSA) 2.27 The Insurance TAS has a provision relating to the co-dependencies of risks. We consider that the original rationale for the provision remains. Assumptions on the co-dependency of risks can have a material effect on the capital requirement. The data required to determine the relationships is likely to be scarce, particularly when considering extreme events and so this is a key area of judgement and uncertainty. We have therefore retained this provision. 2.28 We have also extended the provision to include reference to the situation where the balance sheet underpinning the risk modelling is different from the balance sheet underpinning the regulatory evaluation. This can arise if the Board has a different view of, for example, the allowance for liquidity on credit risk compared with the prescribed matching adjustment and the risk margin prescribed for use in the technical provisions. As the assumptions regarding management actions can be material to the possible effect of stress scenarios on an insurer, we have added a provision that any changes in the assumed management actions be communicated. 2.29 Finally, a core requirement of the ORSA is that a forward-looking view is considered. We have therefore included provisions relating to the calculation of that forward-looking view. 2.30 We propose to include the following provisions: Communications for technical actuarial work that include stressed scenarios and use assumptions about the co-dependencies of risks shall: 12 Consultation: Revised Specific TASs Annex 1: TAS 200: Insurance (May 2016)
describe how the balance sheet being stressed differs from that used for regulatory reporting and why; describe any changes to the management actions assumed in the stressed scenarios compared to those assumed in regulatory reporting; and describe the changes between assumptions about the codependencies used in the stressed scenarios and those used for regulatory reporting and, if there are no changes between assumptions about the co-dependencies used in the stressed scenarios and those used for regulatory reporting, explain why there are no changes. Communications for technical actuarial work that include projections over future time-periods shall: describe how the projection period has been determined and how material time dependent risks have been allowed for; and describe any material limitations of the projection methodology and how these have been addressed. I.2.7 Do you have any comments on the proposed provisions for risk modelling? Insurance Transformations 2.31 In the case of the transformations within the scope of TAS 200, one of the key considerations in addition to the valuation considerations is the consideration of fairness of treatment of all policyholders. These transformations may result in changes to the affected policyholders benefit or change in the security of future benefits. This particular aspect of these transactions is not covered elsewhere in the technical standards. Therefore, we propose to include the following provisions: Unless set by the user, a third party or by regulation, assumptions used in technical actuarial work, shall place proper emphasis on how the transformation affects the interests of all relevant parties. The extent to which account has been taken of the interests of different parties shall be documented. Communications shall include sufficient actuarial information to enable a decision-making entity to understand how different classes of policyholders might be affected by an insurance transformation. The information provided shall include: how the different classes of policyholders have been defined; the impact on different classes of policyholders benefits of adopting the insurance transformation using the assumptions supporting the proposed basis and applying alternative material assumptions; the initial and potential future changes in the value of the benefits of the different classes of policyholders; Financial Reporting Council 13
any changes in the material risks to the benefits of the different classes of policyholders; any material changes to the cash flows to policyholders resulting from the insurance transformation; and any material advantages which might be gained by any classes of policyholders. I.2.8 Do you have any comments on the proposed provisions for insurance transformations? With-profits discretion 2.32 The current Insurance TAS includes specific requirements relating to withprofits business. We consider that given the specific nature of with-profits business and the specific requirements to report on the exercise of discretion, that the provisions should be retained. The consideration of fairness to policyholders is a particular focus in insurance and is not specifically captured in TAS 100. We have not proposed any changes to the current principles: The work performed to confirm that the information needs of policyholders have been taken into account when reporting to them on the exercise of discretion shall be documented. Communications advising or reporting on the exercise of discretion shall indicate the effects of the exercise of discretion proposed or taken on policyholders benefits and on any with-profits estate affected. Communications for work that requires projecting cash flows under alternative scenarios shall describe how any changes in the assumption about the way discretion is exercised in the alternative scenarios considered are consistent with the fair treatment of the policyholders affected. I.2.9 Do you have any comments on the proposed provisions for with-profits discretion? Audit and assurance 2.33 In some cases, the technical actuarial work performed to support the auditor may involve a significant amount of original or independent actuarial work upon which the auditor places great reliance. 2.34 Given the very specific nature of the work of the actuary supporting the auditor, we consider that it is necessary to extend the TAS 100 requirement to state the scope and to additionally require the documentation of reasons of variance from scope where they occur. We propose including the following provision: The initial scope of the technical actuarial work and the reasons for any variances from the initial scope shall be documented. 2.35 The following provisions have been included based on our experiences of the wider reviews in which the FRC has engaged. The need for scepticism 14 Consultation: Revised Specific TASs Annex 1: TAS 200: Insurance (May 2016)
has been identified as part of our review of audits of insurance firms and we have added a definition of professional scepticism to the Glossary. The need for clear articulation of the conclusion of the technical actuarial work to the auditor, who then forms their own view in concluding the audit opinion, was identified as part of our review of audit cases supporting the FRC Audit Quality Reviews: Technical actuarial work undertaken shall be planned and performed with professional scepticism recognising that circumstances may exist that cause the financial statements or regulatory information to be materially misstated. Communications shall state the nature and extent of any reliance on information prepared by another party and the conclusions of the technical actuarial work including any concerns on material deficiencies or limitations. I.2.10 Do you have any comments on the proposed provisions for technical actuarial work to support the provision of an auditing opinion? I.2.11 Do you have any comments on the proposed provisions for technical actuarial work to support the provision of an assurance opinion for regulatory purposes? Financial Reporting Council 15
3 IMPACT ASSESSMENT Introduction 3.1 In this section we consider the impact of our proposals on TAS 200 including the resulting benefits and costs; our analysis focuses on the impact of our proposals on work carried out by members of the IFoA. Context 3.2 In 2015 there were 379 authorised life insurance companies and 903 authorised general insurance companies in the UK with over 20m UK households insured. UK insurers held 1.9trn assets and employed over 330,000 people. 3.3 These insurance companies are financed by shareholder capital, premium payments from policyholders and investment returns and their financial soundness depends on reserves held in respect of claims and expenses. Technical actuarial work is required to support decisions on the level of claims reserves required and premium charged while actuarial techniques will usually be used to support investment, risk management and strategic decisions. Benefits Users and the public interest 3.4 TAS 200 is intended to assist users as it sets detailed standards for technical actuarial work relating to insurance that is of high risk to the public interest. Practitioners 3.5 Practitioners will benefit from improvements to the structure, style and content of the TASs which will result in a simpler framework overall, reduced volume of regulatory material and standards which are easier for practitioners to use and understand. Over time, the changes should result in a reduction in time spent ensuring compliance with the TASs. Whilst there are a small number of new items in the proposed scope of TAS 200, overall we believe that the scope has narrowed when compared with the current Insurance and Transformations TASs. Reductions to scope 3.6 A number of items of work that were in the scope of the Insurance TAS or the Transformations TAS are not in the proposed scope of TAS 200 and are covered by TAS 100 and existing regulation, where relevant. These items of work are: a) Embedded value calculations for life insurers; b) Pricing of individual risks that are significant to the insurer; c) M&A work; d) Commutations; 16 Consultation: Revised Specific TASs Annex 1: TAS 200: Insurance (May 2016)
Costs e) Lloyd s reinsurance to close; and f) Reviewable rate contracts. 3.7 The proposed changes should not lead to material changes to work that is currently in the scope of the TASs we expect that work that is compliant with the current Insurance TAS will be compliant with TAS 200. 3.8 Evidence collected in our post-implementation review indicated that the transitional costs of implementing the current TAS framework ranged between very small amounts and 10% of the actuarial costs of the relevant organisation. The costs depended on several factors including the nature of the work and the size of the firm. The costs were proportionally higher for smaller organisations. 3.9 We consider that the transitional costs to practitioners of implementing the revised Specific TASs should be considerably lower than the costs of implementing the original TASs and no more than 1% of the annual cost of performing actuarial work. This equates to a one off cost in the range of 5m to 10m for insurance work. Additions to scope 3.10 Whilst it is proposed that a number of areas of work are removed from TAS 200, it is proposed that two areas are added to the scope of TAS 200: a) Technical actuarial work as part of the ORSA (this work is new with the implementation of Solvency II in 2016). b) Technical actuarial work supporting audit opinions (previously this work was only in scope of the TASs when the actuary was acting as an expert for the auditor). New provisions 3.11 As described in section 2 above there are some provisions that were in the Insurance TAS or the Transformations TAS that are not in the proposed scope of TAS 200. Conversely, there are a small number of new provisions. 3.12 We consider that the new provisions will not substantially add to the costs of actuarial work for these high public interest items as we consider that they are proportionate, reflect good quality technical actuarial work. Overall 3.13 The application of TAS 200 to technical actuarial work that is not currently subject to the TASs will result in transitional costs. However, we would expect that these costs would be lower than the original implementation costs for the current TASs because most practitioners have experience of implementing the current TASs. 3.14 We recognise that moving to any new regulatory framework will result in costs to amend systems and processes to reflect the revised framework. However, for areas of work within the current Insurance TAS, we consider that the longer-term benefits of adopting a more efficient structure by Financial Reporting Council 17
replacing TASs D, M and R with TAS 100 and streamlining both TAS 100 and TAS 200, will offset any transitional costs, and potentially result in longterm efficiencies. 3.15 Our post-implementation review of the TASs indicated that the long-term costs of complying with the TASs are not significant. We therefore consider that the long-term costs of complying with TAS 200 for work not covered by the current TASs will not be significant. 3.16 We consider that the changes to the Insurance TAS will not be as costly as the original implementation of the current TAS framework as this is largely a review and update exercise rather than a fundamental change in the framework. I.3.1 Do you agree that the replacement of the Insurance TAS with TAS 200 will not lead to disproportionate costs? I.3.2 Do you have any comments on our analysis of the impact of the changes set out in section 3? 18 Consultation: Revised Specific TASs Annex 1: TAS 200: Insurance (May 2016)
4 INVITATION TO COMMENT Questions 4.1 The FRC invites the views of those stakeholders and other parties who wish to comment on the content of this document. In particular, we would welcome responses to the questions below. Please provide reasons for your response and provide an alternative approach where you disagree with our proposals. Questions asked in the covering consultation Revised Specific TASs C.2.1 Do you have any comments on the risk assessment process described in paragraphs 2.2 to 2.15? C.2.2 Do you have any comments on our proposed approach to risk monitoring (paragraphs 2.16 to 2.21)? C.3.1 Do you agree that the design principles described in paragraph 3.3 will help to ensure that the Specific TASs form a coherent and risk-focussed set of requirements that apply alongside TAS 100? C.3.2 Do you agree with the proposed style and structure of the revised Specific TASs outlined in paragraphs 3.8 to 3.15? C.3.3 Do you have any comments on draft Glossary of defined terms used in FRC technical actuarial standards? C.6.1 Do you have any comments on proposed implementation of the revised Specific TASs? Annex 1: TAS 200: Insurance I.1.1 Do you agree that technical actuarial work to support the preparation of the balance sheet for regulatory purposes, (other than technical actuarial work preparing information on an insurer s pension schemes), should be in the scope of TAS 200? I.1.2 Do you agree that technical actuarial work to support the provision of an opinion for a Lloyd s syndicate regarding the claims provisions should be in the scope of TAS 200? I.1.3 Do you agree that technical actuarial work to support the preparation of financial statements that are intended to give a true and fair view of their financial position and profit and loss (or income and expenditure) for insurers (other than technical actuarial work preparing information on an insurer s pension schemes) should be in the scope of TAS 200? I.1.4 Do you agree that technical actuarial work to express an opinion on the insurance liabilities appearing in tax returns for general insurance business under the General Insurers Technical Provisions Regulations 2009, should be in the scope of TAS 200? I.1.5 Do you agree that technical actuarial work to estimate regulatory capital requirements should be in the scope of TAS 200? Financial Reporting Council 19
I.1.6 Do you agree that technical actuarial work undertaken as part of the Solvency II Own Risk and Solvency Assessment (ORSA) should be in the scope of TAS 200? I.1.7 Do you agree that technical actuarial work to support: schemes of arrangement Part VII transfers; and other transformations should be in the scope of TAS 200? I.1.8 Do you agree that technical actuarial work to support the exercise of discretion concerning with-profits life insurance policies should be in the scope of TAS 200? I.1.9 Do you agree that technical actuarial work to support the provision of an audit opinion on an insurer s financial statements should be in the scope of TAS 200? I.1.10 Do you agree that technical actuarial work to support the provision of an auditor s assurance opinion for regulatory reporting should be in the scope of TAS 200? I.1.11 Do you agree that technical actuarial work to support the development and application of pricing frameworks for products provided by an insurer should be in the scope of TAS 200? I.1.12 Do you agree that technical actuarial work to support individual pricing decisions should not be in the scope of TAS 200? I.1.13 Do you agree that the other areas of technical actuarial work described in paragraphs 1.35 to 1.42 should not be in the scope of TAS 200? I.2.1 Do you have any comments on the proposed core provisions? I 2.2 Do you consider it necessary for the term best estimate to be defined? I.2.3 Do you have any comments on the proposals relating to pricing frameworks? I.2.4 Do you have any comments on the proposed provisions for regulatory balance sheets? I.2.5 Do you have any comments on the proposed provisions for financial statements? I.2.6 Do you consider that TAS 200 should require communications to explain what the term best estimate is intended to represent? I.2.7 Do you have any comments on the proposed provisions for risk modelling? I.2.8 Do you have any comments on the proposed provisions for insurance transformations? I.2.9 Do you have any comments on the proposed provisions for with-profits discretion? 20 Consultation: Revised Specific TASs Annex 1: TAS 200: Insurance (May 2016)