Examination of Witnesses (Questions 20
- 39)
THURSDAY 8 FEBRUARY 2001
MR CHRIS
DAYKIN CB, MR
ANDREW YOUNG
AND MR
ANDREW BEER
Mr Beard
20. I would like to go back, in the light of
that, to my first question which was a very blunt question, namely,
what was your role in relation to the problems of Equitable Life?
Did you have a role in relation to the problems of Equitable Life?
(Mr Daykin) Yes. We had exactly the role I indicated,
that we reviewed the financial statements of the company, as with
other companies that we were required to review, and made a confidential
report to the regulator for the time being.
21. Was your advice accepted when you gave it?
(Mr Daykin) It is not possible to say that precisely
because our advice represents a review of the financial situation
of the company. It is not our task necessarily to say what regulatory
action should be taken in any particular situation but to present
the financial information and facts about the company—as
with any other company—which would enable the regulator
to be well informed of the situation.
22. Did you assess the nature of the insurance
policy that would need to be taken out by Equitable Life to cover
its potential liabilities after the court case on guaranteed annuity
rates?
(Mr Daykin) The focus of regulation in the UK is on
reserving, not on the nature of the contracts themselves. In fact,
under EU legislation now there is a requirement not to have any
prior approval of products or premium rates but that has always
been the case in the UK—that companies have been free in
the life insurance area to issue whatever contracts they wish
at whatever premium rates they choose, and the focus of regulation
has always been on the adequacy of the financial resources and
on the adequacy of the solvency margin, the excess of the assets
over liabilities, in particular in relation to the requirement
set by the EU in that regard.
23. Did you advise on those matters?
(Mr Daykin) Yes.
24. Were you satisfied that the advice was responsibly
taken?
(Mr Daykin) As far as I am able to judge.
25. And your advice was to safeguard against
possible liabilities in the future, and you felt that that advice
was adequate to do that?
(Mr Daykin) The primary responsibility for establishing
appropriate technical provisions and taking care of the reasonable
expectations of the policyholders rests with the appointed actuary
of the company. Our responsibility in advising the regulator has
been to monitor the role played by the appointed actuary and to
satisfy ourselves that he, or she should that be the case, is
following the appropriate professional norms and standards, and
setting up reserves in a way that we would regard as adequately
prudent.
26. Are you saying that your advice is about
the procedure that the actuary should follow rather than about
the adequacy of the insurance company for a particular set of
circumstances?
(Mr Daykin) No. I think I am saying that the primary
responsibility rests with the appointed actuary in the sense that
we do not have the responsibility to go in and calculate the reserves
of the company ourselves. We monitor what the appointed actuary
is doing through what is reported to us and through our interaction
with him in order to satisfy ourselves that what he is doing is
reasonable, and we may then, in some cases, suggest that there
should be a different approach or that the regulator needs to
be talking to the company about certain issues, and in some cases
we issue generic guidance to the industry—as, indeed, in
this case of guaranteed annuities. I put out a letter in January
1999 and another one in December 1999 setting out some of the
broad considerations which I thought it important for appointed
actuaries to take into consideration in setting up reserves.
27. With respect to the particular case of Equitable
Life and your advice to the actuary there, was it your belief
that the actuarial advice that was given to Equitable Life was
adequate?
(Mr Daykin) I am not able to answer that specific
point because it is a matter of specific professional advice on
a particular company to our client.
Chairman: Perhaps I should just say to my colleague
that we do have the FSA in front of us next week, and that may
be the best place to pursue this particular matter.
Mr Beard
28. Mr Chris Headdon moved in December 2000
from being Equitable Life's appointed actuary to its managing
director. Do you have any misgivings about that kind of switch?
(Mr Daykin) I do not have any role in relation to
the approval of directors and managers of companies. Directors
and managers are subject to the fit and proper procedures under
the legislation, and the FSA would take an interest in this. The
only general rule which I have been involved with in relation
to this is that we discourage somebody from being appointed actuary
and managing director at the same time.
29. But not as a sequence?
(Mr Daykin) There is no objection fundamentally to
somebody doing one after other.
30. Have you been asked to advise on how Equitable
Life can best carry out business in the future?
(Mr Daykin) There are continuing professional bits
of advice being given to the FSA who are now responsible for this
under the Treasury on all aspects relating to the on-going situation
of the company.
31. What is your role in the inquiries that
have been announced by the FSA?
(Mr Daykin) As yet we do not have any formal role.
As I understand it, the inquiry which is being carried out by
the FSA is being carried out by their internal audit department.
It may well be that they will want to meet with people from the
Government Actuary's Department in due course.
32. But at the moment you have no formal role
in relation to the FSA?
(Mr Daykin) No.
33. From your perspective, what lessons would
you draw from the Equitable Life case in relation to what is publicly
known about the way in which the life insurance industry generally
is run and regulated?
(Mr Daykin) I think it may be too early to draw conclusions
yet until some of the investigations have proceeded further. In
this case, the company had a specific strategy and publicly announced
way of running its affairs which I believe must have been attractive
to policyholders otherwise people would not have been so inclined
to take out policies with the company. There was a good deal of
discussion about the way in which the Equitable carried out its
affairs amongst the actuarial profession: there was a meeting
when actuaries from the Equitable presented a paper a bit more
than ten years ago now, and there was quite an active discussion
because other members of the actuarial profession felt they were
carrying on in a way which was different from what most other
companies were doing. They had a very specific policy as a mutual
insurer, where all the ownership of the company is with the policyholders
and, therefore, there are no shareholders with a separate interest,
so if you like they are one of the last major mutuals and some
of the issues which arise around this particular problem arise
because they were a mutual, and will not necessarily be reflected
in the future to the extent that many mutuals have now ceased
to exist. There are also questions, I imagine, to be considered
about the extent to which additional liabilities were effectively
imposed on the company by a legal judgment; there was probably
no way in which they could have completely foreseen what was going
on there, and that raises concerns from a regulatory point of
view. There are also issues concerning the whole way in which
the regulatory system works and the appointed actuary. For my
part, I do not feel anything which has been shown so far would
indicate particular problems in that direction but that will be
further explored in the subsequent reviews.
34. What was the nature of the disquiet that
you mention that was around in the profession about the way in
which Equitable Life conducted its business compared with other
people?
(Mr Daykin) The principle on which they carried on
their business was that they felt that each generation of policyholders
should receive a full return from the investments that had been
made during the course of their membership of the society. It
was therefore inappropriate for them as a mutual society to hold
a large estate, as we call it in the profession, a large additional
source of money, over and above passing it back to each generation
of policyholders. That meant that they ran their affairs with
as small as possible an estate, sufficient to satisfy the regulatory
requirements, but they thought it was inappropriate to build up
excessive assets because that would be unfair to the current generation
of policyholders. Other actuaries would argue that that was all
very well but you have to keep money aside for a rainy day, and
it is not really unfair on policyholders to keep that back in
order to be able to address some future issues. The Equitable
said, "It is unfair; we think the next generation of policyholders
should meet their own problems, and it is not our job to hold
back money from one generation for the next".
35. Why do you associate that weakness specifically
with mutuals?
(Mr Daykin) In the case of a proprietary company the
considerations are very different because the rationale for continued
existence of the company rests with the interests of the shareholders.
In the case of a mutual it is certainly part of some mutuals'
philosophy that they are purely there for the benefit of their
members, and different mutuals have different approaches on how
they treat equity between different generations. Essentially they
are there for the members and not to serve any exterior purpose.
36. But surely the regulator to which you are
adviser could say to a mutual, "You need to have a fund which
gives you an adequate buffer against unforeseen events in the
future", and that would see the problem off?
(Mr Daykin) They were not precluded from the normal
processes of regulation in any way at all. They were required
to set up provisions in the normal way and they were required
to meet the solvency requirements which are laid down in the legislation.
I think maybe the direction of your questioning is that maybe
we should have required particular companies to hold more of a
solvency margin than the legislation requires. In my view, that
would go beyond what the European directives permit the regulator
to do. The extent to which companies hold assets over and above
the regulatory requirements is really a matter for the individual
companies.
Mr Cousins
37. You have said you are a client of the regulators.
Do they pay you?
(Mr Daykin) Yes, they do. Since 1989 all of the people
we give advice to, be they government departments or regulators,
pay us for our services. We charge fees on the same sort of basis
as a private firm would do, except that we are a non profit-making
organisation so on the whole our fees tend to be significantly
lower than most private sector firms, but we charge on an hourly
rate for all our services and we bill them and they pay us money,
and that is why the amount which appears as our net requirement
from Parliament is extremely low. We have a net vote of about
£600,000 to support our total expenditure of £8 million
because most of the money is recovered from the fees which our
clients pay to us.
Mr Cousins: I have just been passed a note by
the Chairman to say that, if I have a policy with Equitable Life,
I ought to declare an interest. I would like to make it clear
to the Committee that I do not have a policy with Equitable Life.
Mr Beard: Could I make the same point?
Chairman: Could I make the point that my wife
does.
Judy Mallaber: I do not have a policy with Equitable
Life.
Chairman
38. When you said you had a better fee structure
or lower fee structure than some of your competitors, does that
mean there is unfair competition involved here with your not accounting
properly for your overheads, or something to that effect?
(Mr Daykin) I do not think it means it is unfair.
It means we have a somewhat different structure from other consultancy
services. We are somewhat constrained by being a government department:
we have to comply with all the requirements of being a government
department, so that imposes constraints on us relative to what
we can do in regard to propriety, where we have our offices, how
we organise ourselves and manage our accounts, and it also directly
affects what we can pay our actuaries. In practice certainly,
therefore, the salaries of the more senior members of the department
would be significantly lower than the salaries which would be
received by people working for private sector firms, especially
those who are self-employed and partners in their own firms. That
is clearly a defining factor in terms of enabling us to maintain
a lower level of fees. On the other hand, a lot of consulting
firms will support the actuarial consultancy function with a whole
range of other activities in communications, IT, consultancy,
management consultancy, investment consultancy, and the Government
Actuary's Department is, if you like, a single-service provider.
We are providing actuarial services and it is not our task and
would not be seen as appropriate for us to get into all these
other areas and, therefore, we have to charge fully for the actuarial
service, including overheads, and cannot spread the costs across
other activities.
39. And the costs associated with your fees
are totally transparent?
(Mr Daykin) Any client who wishes to know what our
fee structure is will be told what our fees are and they can also
seek tenders.
40. He can be told what your fees are but will
he also have some way of assuring himself and will your competitors
have some way of assuring themselves that the cost structures
associated with those fees are transparent?
(Mr Daykin) I think we have always been open in the
publication of our accounts; with resource accounting we now have
very full disclosure of all aspects of the Department's activities.
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