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Life in a Solvency II World Goodbye signing & appointed actuary, hello Actuarial Function 3 November 2015

Agenda Agenda Introduction Overview of the Actuarial Function Technical Provisions Opinion on the overall underwriting policy Opinion on the adequacy of reinsurance arrangements Contribution to risk management The Actuarial Function report Who can perform the Actuarial Function Summary of changes 2

Introduction Introduction weight of roles 2009 2015 4

Overview of the Actuarial Function

Overview of the Actuarial Function Solvency II Actuarial Function Tasks Technical provisions Methods Assumptions Sufficiency and quality of the data Best estimates vs experience Reliability and adequacy of the TP Express an opinion on the reinsurance arrangements Express an opinion on the underwriting policy Contribute to risk management system, with respect to risk modelling, ORSA 6

Technical Provisions

Technical provisions Technical provisions Level 1 Directive Article 48(1) Undertakings shall provide for an effective actuarial function to: Coordinate calculation of technical provisions using appropriate methods, assumptions Assess data Compare best estimates against experience Reliability, adequacy of calculation of TPs Level 2 requirements Limitations of data are properly dealt with Identify homogeneous risk groups Systems used in the calculation of technical provisions Carry out sensitivity analyses CP92 Actuarial opinion on TP Actuarial report on TP PRE, discretionary powers, with-profits Reserving committee Potential non-life exemptions Peer review Assumptions, methods, uncertainties Reasonableness of conclusions Additional requirements for High/Medium High Impact 8

Technical provisions What does this mean in a practical context? SCR Calculation and adjustment for RM Projection with justification for approach Prudence Data Challenge peer reviewer, Board, CRO PRE, discretionary powers, with-profits Opinion Reliability, adequacy of calculation, data, methods, assumptions models Segmentation Material limitations and reliances Recommendations on improvements 9

Opinion on Overall Underwriting Policy

Opinion on underwriting policy What is the opinion on the overall underwriting policy? Level 1 Directive Article 48(1) Undertakings shall provide for an effective actuarial function to: Express an opinion on the overall underwriting policy Level 2 requirements The opinion shall at least include conclusions regarding the following considerations: Sufficiency of the premiums Effect of inflation, legal risk, change in the composition of the undertaking's portfolio, bonus-malus systems Anti-selection EIOPA s Guidelines More detail was then provided in the explanatory text of EIOPA s Guidelines on system of governance issued in January 2015: product pricing consistent with underwriting policy key risk factors influencing NB profitability material planned changes in terms and conditions degree of variability surrounding expected profitability the consistency of this degree of variability with the risk appetite of the undertaking this is not a view on every single policy, but rather on underwriting in general 11

Opinion on underwriting policy What does this mean in a practical context? Overall, it is not yet completely clear what is required of an underwriting opinion However, enough guidance has been provided to signal the type of considerations that the Actuarial Function should make Considerations 1. Underwriting policy and process 2. Expected profitability and volatility 3. Risk identification 4. Internal consistency between underwriting and other internal policies 5. Premium adjustments 6. Other considerations, such as comparison with experience 7. Review of technical pricing models 8. Collection of data and policy admin 9. Review of other underwriting services Further details on some of these considerations are provided in the following slides 12

Opinion on underwriting policy Considerations (1) Underwriting policy and process Review of the underwriting policy, to determine whether the process is reasonable and contains adequate risk controls Review of the execution of the underwriting policy for business written over the period and the tools for monitoring the underwriting policy Review of documentation used to support the policy underwriting Expected profitability and volatility Whether premiums received are adequately covering the future claims losses and expenses for unearned periods and new policies The variability around future profitability The likelihood of losses in excess of certain amounts Differences between experience analysis and the assumptions used in the broader business Risk identification Have key risk factors influencing future profitability been considered? Whether the assessment of premium sufficiency has considered key risk factors Whether key risks have been considered as part of the overall underwriting strategy Are sources of systemic risk being considered? 13

Opinion on underwriting policy Considerations (2) Consistency between underwriting and other internal policies Whether the underwriting policy is consistent with other policies of the undertaking Consistency with at least risk appetite, reinsurance arrangements and Technical Provisions policies Do the policies cross reference Premium adjustments Profit shares / retrospective rating how have these adjustments been allowed for and the reasons for these adjustments? Response to emerging experience have premiums been adjusted in response to emerging experience and, if so, how? If not, what was the justification? On-going impact of inflation Other considerations Management information - is it fit for purpose? Anti-selection / business mix consistency over time and comparison to plan Impact of option and guarantees or planned changes in terms and conditions have these been considered and what is the impact Other material financial drivers that should be catered for in the underwriting Policy 14

Opinion on Adequacy of Reinsurance Arrangements

Opinion on reinsurance What is the opinion on adequacy of reinsurance arrangements? Level 1 Directive Article 48(1) Undertakings shall provide for an effective actuarial function to: express an opinion on the adequacy of reinsurance arrangements Level 2 requirements The opinion shall include analysis on the adequacy of: the undertaking s risk profile and underwriting policy; reinsurance providers taking into account their credit standing; the expected cover under stressed scenarios in relation to the underwriting policy; the calculation of the amounts recoverable from reinsurance contracts and special purpose vehicles. EIOPA s Guidelines (EIOPA-BoS-14/253) The explanatory text suggests that the following issues should be considered: The consistency of the undertaking s reinsurance arrangements with its risk appetite The effect of reinsurance on the estimation of technical provisions net of reinsurance recoverables An indication of the effectiveness of the reinsurance arrangements in mitigating the volatility of own funds An assessment of how the reinsurance coverage could respond under a number of stressed scenarios Descriptions and examinations of other possible reinsurance arrangements 16

Opinion on reinsurance What does this mean in a practical context? Overall, it is not completely clear what is required for a reinsurance opinion However, enough guidance has been provided to signal the type of considerations that the Actuarial Function should make Considerations 1. Reinsurance programme structure and process 2. Reinsurance programme performance 3. Quality of reinsurance security 4. Calculation of reinsurance recoveries in balance sheet and ORSA 5. Internal consistency between reinsurance and other internal policies 6. Review of reinsurance reporting 7. The performance of alternative reinsurance programmes 8. Recommendations on improving the use of reinsurance 9. Assessment of average credit ratings relative to plan Considerations 1 and 2 are discussed in more detail in the following slides 17

Opinion on reinsurance Reinsurance programme structure and process Key considerations Process Output Any gaps in reinsurance Risk of reinsurance exhaustion Whether reinsurance programme structure is typical for a company with this specific risk mix, risk appetite and volume Any concentration of exposure to individual reinsurers Impact of any reinsurance commutations/termination clauses Special purpose vehicles Assessment of any gaps in the reinsurance programme, and compare this to the reinsurance policy Compare to other similar companies where possible Review any stress and scenario testing Review gross and net loss distributions to identify where reinsurance protection no longer responds to gross losses in the manner expected and the circumstances under which this occurs Document summarizing process including numerical assessments Explanation of where reinsurance might fail and if this is consistent with other policies and risk appetite Assessment of the distribution of reinsurance recoveries between reinsurers under different scenarios and at different percentiles 18

Opinion on reinsurance Reinsurance programme performance Key considerations Alignment of the reinsurance programme with your risk policy and risk framework Whether the reinsurance programme protects the portfolio as governed by the reinsurance policy Whether reinsurance adequately responds to a range of stressed scenarios Whether the reinsurance protects your credit rating as mandated by your risk policy Process Assess the impact of reinsurance on gross losses faced under a range of scenarios at different levels of probability Scenarios should include regular business-as-usual scenarios as well as a series of stressed scenarios Consideration of whether the net ultimate losses and net loss ratio distribution are consistent with your stated risk appetite Example output ~85 th Percentile 100 90 80 70 60 50 40 30 20 Mean LR This chart shows the net loss ratio distribution Assuming 10% expenses and, therefore, a 90% net loss ratio as the breakeven loss ratio, this diagnostic suggests that the company will make a loss 15% of the time Put differently, the diagnostic suggests that the company will incur a net underwriting loss 1-in-7 years This can be compared to the risk appetite/tolerances This diagnostic will be produced for each class of business and the company as a whole 10-0% 50% 100% 150% 200% Loss Ratio 19

Contribution to risk management

Contribution to risk management What is the contribution to risk management arrangements? Level 1 Directive Article 48(1) Undertakings shall provide for an effective actuarial function to: contribute to the effective implementation of the risk-management system, in particular with respect to the risk modelling underlying the calculation of the capital requirements, and to the assessment of the ORSA. Delegated Acts requirements N/A EIOPA s Guidelines (EIOPA-BoS-14/253) The AF must if there is an internal model: specify which risks within its domain of expertise are covered by IM contribute to how dependencies between these risks and with other risks are derived 21

Contribution to risk management What is the contribution to risk management arrangements? CP92 Requirements HoAF to provide an actuarial opinion to the board on each ORSA process: Range of risks Adequacy of stress scenarios Appropriateness of financial projections Continuous compliance regarding TP calculation Potential risks arising from calculation of TPs What does this mean in a practical context? Contribute to ORSA process from start to end Data Underwriting risks Experience analyses Involve in validation activities 22

The Actuarial Function report

The Actuarial Function report Actuarial Function report The actuarial function shall produce a written report to be submitted to the administrative, management or supervisory body, at least annually. The report shall document all tasks that have been undertaken by the actuarial functions and their results, and shall clearly identify any deficiencies and give recommendations as to how such deficiencies should be remedied. What does this mean in practice? All material tasks and their results do not have to be addressed in one written report The contents of the report(s) will need to address each of the areas covered by the actuarial function, discussing: o o o Process undertaken to consider each of the issues required of the actuarial function Conclusions of the investigations undertaken by the actuarial function, including any deficiencies identified Suggested actions to remedy any deficiencies identified 24

The Actuarial Function report What does this mean in practice? One aggregate report is possible but avoiding surprises may be easier with multiple reports Expectations of the AF will depend on company but may include Data adequacy Opinion on technical provisions Pricing policy Reinsurance arrangements Risk policies Conflicts of interest 25

Who can perform the Actuarial Function?

Head of Actuarial Function Head of Actuarial Function Level 1 have knowledge of actuarial and financial mathematics, commensurate with the nature, scale and complexity of the risks inherent in the business Other Practising certificate optional Additional tasks can be undertaken avoid conflicts of interest Actuarial Function CBI PCF role, fit and proper, suitable experience, member of recognised actuarial association. Senior actuary Outsourcing possible if not high impact firm Level 2 Implies need for senior actuary for example promptly report any major problem in their area of responsibility to the AMSB Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 27

Summary of changes

What is changing Comparison of Functions Appointed Actuary What stays? Individual Reports to the Board Duties to CBI Disclosure duties Determines technical reserves Premium rates appropriate Policyholders reasonable expectations What goes? Right of direct access to the Board Satisfied company is solvent at all times Transfers from LTBF What s new? Sufficiency and quality of data Express an opinion on adequacy of underwriting/reinsurance Contribute to effective implementation of risk management system Actuarial Opinion on Technical Provisions Opinion on ORSA process Peer review More challenge from Board? Reserving policy Member of recognised Actuarial Organisation Preparation of Financial Condition Report Member of SAI Prudence 29

What is changing Comparison of Functions Life Reinsurance and GI What stays? Individual Provision of report to Board Annual certification Provision of Statement of Actuarial Opinion Reserves comply with legislation Solvency margin Retrocession programme What goes? Member of SAI What s new? Sufficiency and quality of data Express an opinion on adequacy of underwriting/reinsurance Contribute to effective implementation of risk management system Continuous involvement Actuarial Opinion on Technical Provisions Opinion on ORSA process Peer review More challenge from Board? Reserving policy Member of recognised Actuarial Organisation 30

Eoin Murphy eoin.murphy@ T: +353 1 618 1248 David O Connor david.oconnor@ T: +353 1 775 6798 31