Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 20 - 39)



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.


  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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