Supplementary memorandum from the Government
1. Supervision of the life assurance industry
became a function of the Financial Services Authority (FSA) on
1 January 1999, having been the responsibility of HM Treasury
from 1 January 1998, and previously the responsibility of the
Department of Trade and Industry.
2. The Government Actuary's Department (GAD)
acted as actuarial adviser on insurance supervisory issues to
each of these successively from the early 1960's. GAD has acted
as actuarial adviser to the FSA since 1 January 1999. This was
formalised by an exchange of letters. It was first envisaged that
a formal contract would be discussed but the need for this has
been superseded with the intended transfer of GAD staff to FSA
later in 2001, as outlined in the earlier memorandum.
3. By way of background, each life insurer
is required by statute to appoint an actuary with responsibility
for carrying out an annual valuation of the insurer in order to
determine its level of free reserves, and the amount of any surplus
available for distribution to policyholders and shareholders.
4. The appointed actuary is bound by a combination
of statutory regulations and professional guidance in the methodology
and assumptions to be adopted in this annual valuation. These
are designed to ensure with a reasonably high degree of probability
that life insurers can meet their contractual liabilities, having
regard also to policy holders' reasonable expectations. A report
on this valuation of liabilities is presented in prescribed format
each year as part of the insurer's annual financial returns to
5. In addition, the appointed actuary is
expected by the actuarial profession to monitor the financial
condition of the insurer continuously, and to advise the company
and its directors on all issues relating to its ongoing financial
condition. This includes advice on suitable premium rates determined
on appropriate actuarial assumptions, distribution of available
surplus, investment policy, reinsurance arrangements and the margins
available to cover both initial and ongoing expenses. Compliance
with the associated mandatory professional standards of practice
is certified by the appointed actuary to FSA each year.
6. The role of GAD in relation to regulation
of the life insurance industry mainly consists of actuarial advice
to the FSA on the ongoing prudential supervision of around 270
individual life insurers, applications for authorisation by new
insurers, and some general advice on insurance regulation and
on supervisory policy issues.
7. In order to fulfil this role, the Department
has progressively built up a team of actuaries with a wide range
of experience and currently has an intended complement of nine
actuaries (although there are currently three vacancies following
secondments to the FSA) and two chief actuaries dedicated to this
role. A directing actuary acts as Deputy Government Actuary in
this area of GAD's work and has responsibility for advice on both
life and general insurance supervision.
8. As indicated in our main memorandum,
the whole of this team is expected to transfer to FSA from 26
April this year, and become part of their Insurance Firms Division.
9. The role of GAD in relation to the regular
ongoing supervision of individual insurers primarily involves
analysis of the financial returns (as provided to GAD each year
by FSA), including the valuation report by the appointed actuary.
These are examined to assess the current financial position of
the insurer including the strength of the valuation basis. In
addition, GAD considers the effect of any adverse features or
trends as disclosed in the returns. A confidential report is then
sent to FSA on each insurer, setting out the result of this analysis,
along with a copy of any correspondence with the actuary resulting
from the scrutiny of the returns.
10. In addition, GAD is often called on
to advise on a range of other financial issues affecting individual
insurers. These include company restructurings, transfers of insurance
business and transactions affecting the relative interests of
policyholders and shareholders.
11. All applications to FSA for authorisation
for a new life insurer have to include appropriate financial projections
for the first three to five years of the insurer's life. These
would normally be referred to GAD for a confidential assessment
of their reasonableness, and of the underlying risks that the
proposed level of capital could be insufficient.
12. Advice is also provided to FSA on a
number of broader policy issues, including development of their
new rulebook, the effect of new stakeholder pensions, the low
inflation theme project, international discussions on solvency
capital, and the resilience testing of insurers for the effect
of changing market conditions.
13. The advice on resilience testing includes
the issue of advice to all insurers by the Government Actuary
on the parameters to be adopted for this purpose. This generic
advice does not have any manadatory status but is provided to
show the general standard of testing that GAD would expect to
see included in the FSA returns. This standard is intended both
to protect consumers and to promote market confidence.
14. There is regular consultation with the
actuarial profession on technical issues, including issues relating
to the role and status of appointed actuaries. Members of GAD
regularly participate in a number of working parties and committees
of the profession which consider life insurance issues.
15. Individual appointed actuaries are invited
to meet the Government Actuary when newly appointed, for a discussion
of their role. The appointed actuary is seen as fundamental to
the ongoing financial management of life insurers, as confirmed
by the retention of the concept within the Financial Services
and Markets Bill 2000.
16. Although GAD has direct contact with
appointed actuaries on technical issues, matters of supervisory
policy are a matter for the relevant regulatory to decide and
26 January 2001