Examination of Witnesses (Questions 40
THURSDAY 8 FEBRUARY 2001
DAYKIN CB, MR
41. In your annual report on page 8, section
3, you set out the services you provide to the insurance regulators
with regard to life insurance companies, and the term there throughout
is "advice". You conduct regular visits to life insurance
companies: you did an overall report on the financial state of
life companies: you offered specific advice on the implications
of guaranteed annuity options for insurersthis is set out
in your report. Are you telling the Committee that all that advice
is entirely the property of those who you advise and that you
have no independent role on behalf of the public interest?
(Mr Daykin) That is true except where there is a specific
responsibility of the Government Actuary to report publicly. If
we look, for example, at the social security area, the Government
Actuary is required under the various social security acts
42. I understand that but I am talking here
about this particular area of your work.
(Mr Daykin) In this area, there is no general role
given to the Government Actuary to be involved from a public interest
perspective. We are solely involved as the professional advisers
of the regulator.
43. Concerning the relationship involved which
you described as a client relationship, though it is here described
as "advice", presumably there are some written rules
about the terms of this relationship, and the rights and responsibilities
of each party?
(Mr Daykin) Yes. I would not draw any distinction
between "client" and "advice". The client
relationship in a professional context is a fiduciary one between
the client and the provider of advice, and the actuary who is
dealing with a client is providing actuarial advice to the client
under that relationship. Normally it would be set out in some
terms of engagement. In the case of our relationship with the
Department of Trade & Industry we had what one might describe
as a service level agreement which set out the terms of what we
were supposed to do, what they were supposed to do, how the priority
setting process worked, how we were to communicate with each other
and what information we were to provide to each other. That was
carried forward to the relationship with the Treasury
(Mr Daykin) Essentially, yes, but then the Treasury
contracted out the service of regulating the industry to the Financial
Services Authority pending the coming into force of the Financial
Services and Markets Bill and at that stage, as I think I set
out in our supplementary memorandum, it was discussed whether
there should be a formal tendering process or contractual arrangement
between the FSA and the Government Actuary's Department. That
was then put on hold because it was decided in about November
1999 that the FSA would prefer to move towards the position of
employing the actuarial resource directly, and that decision was
finally taken in October 2000 by the management board of the FSA.
We are moving towards that transfer taking place now on 26 April
of this year.
45. So far as the past is concerned, you have
described it as a service level agreement between the government
insurance regulators and yourselves. Presumably the Committee
could have access to that? Could we see the agreement? It would
be fairly preposterous if we could not.
(Mr Daykin) From my point of view, there is no problem
at all, since it is joint property owned by us and the regulator.
46. Perhaps you could arrange for that to happen.
In terms of your relationship with the FSA, you are saying that
they have got their own independent means of getting actuarial
(Mr Daykin) The FSA consider that they are responsible
for deciding from what source they should get actuarial advice.
They are not precluded from taking actuarial advice from consultantsindeed,
they use consultants quite a lotso they would not be precluded
from continuing to take actuarial advice from the Government Actuary's
Department as a consultant. They also, however, employ their own
actuaries and their intention in the future is they will employ
the majority of actuaries working in this area and that the "C"
Directorate of the Government Actuary's Department which is focused
on providing services to them will be transferred as in effect
a TUPE-type transfer. The whole of the function will transfer
to FSA and the individuals concerned will transfer to become employees
of the FSA from April this year.
47. The Institute of Actuaries has expressed
some reservations about the clarity of this relationship, and
who will have the duty of providing to someone the independent
advice that is necessary within this system. Do you have those
(Mr Daykin) It was not a question which I was asked
for my opinion on. This was a decision by the FSA and I believe
they have put their own memorandum in to you which explains the
48. Mr Daykin, what do you think of their decision?
(Mr Daykin) It would be a different relationship from
what it has been in the past. I am in continuing discussion with
the FSA about how we can maintain something of the special relationship
which existed before between the Government Actuary and the appointed
actuaries of insurance companies.
49. This is the point, is it not? On a statutory
basis we have appointed actuaries within insurance companies and
indeed, as a result of the AXA case, we now have a new innovation,
an independent actuary within a specific with-profits fund, and
they make these reports to previously the government and now the
FSA. I have a copy of one of these reports because I was interested
to see itI deliberately did not get Equitable Life; it
happens to be Scottish Widows and there is no significance about
that. My wife, by the way, has a with-profits bond with Scottish
Widows but I do not propose to pursue the Scottish Widows point;
it is simply a "for instance". This is all extremely
detailed, very interesting information which is of course on public
record. I have access to it, as a member of Parliament; any member
of the public has access to italthough God knows what sense
they would make it of it. Who has the duty within this system
of acting on behalf of the public interest with regard to prudential
regulation of reserving under this system?
(Mr Daykin) The Financial Services Authority are being
given that responsibility under the Financial Services and Markets
Bill, or Act as it now is.
50. The government, when it was the regulator,
had the ability to issue specific advice to companies that their
minimum solvency requirement was not adequate, and on a number
of occasionsalmost every year in factthe government
did so advise insurance companies that their minimum solvency
requirement was not adequate. Have you ever known an occasion
when the government issued that advice without you having previously
advised the government that that was the correct course of action?
(Mr Daykin) That would certainly have been the case
in relation to some general insurance companies because our involvement
was less comprehensive in relation to the general insurance industry.
It could be in some cases that there would be a clear breach of
the solvency requirements if a company became insolvent where
it would be de facto the case that the regulator would need to
intervene almost without taking any advice at all, but I think
in practice, in the life insurance area, there has always been,
over the last thirty or more years, a constant coming and going
between the regulator and the Government Actuary's Department
to ask how we should approach this problem and what is the significance
51. Focusing on this life insurance area, which
for the purposes of the present situation is the crucial one,
have you ever known a situation in which you have advised that
the minimum solvency requirement was not adequate and where that
advice has not been taken by the insurance regulator?
(Mr Daykin) I cannot recall a specific instance but
then I have not been responsible over the whole of this period.
52. Perhaps you could check that and let us
know. Have you ever known the insurance regulator to offer advice
that the solvency requirement was not adequate and you had failed
to offer that advice yourself?
(Mr Daykin) No.
53. In other words, Mr Daykin, on the basis
of those two answers, you are the effective source of the advice
about solvency requirements and reserving policy issues within
life insurance companies?
(Mr Daykin) Certainly, yes.
54. Just as an example, had I been a policyholder
in Equitable Lifewhich I am not and never have beenand
I had asked for a projection of the returns on my policy, they
always used to show two lines of projection: one on the guaranteed
basis and one on the current basis, and those projections always
showed the guaranteed basis as less advantageous than the current
basis. In 1993 they did a switch and from 1993 onwards those projections
always showed the guaranteed basis as being more favourable than
the current basis. Would you have been aware of that?
(Mr Daykin) Probably not. We are not involved in any
way with the disclosures which are given to policyholders by the
company or, indeed, the regulation of that process by the successive
55. You say "probably not", but my
question was very specific. Were you or your department aware
of that, or were you not?
(Mr Daykin) I personally was not but we can not talk
about this anyway because it relates to the specifics of the Equitable
56. I am asking you a factual question. Were
you aware of the switch of the projections? It is a perfectly
sensible question: either you were or your were not?
(Mr Daykin) As far as I am aware, we would not expect
to receive such information.
57. I am asking you a specific question and
perhaps you could let the Committee know whether or not you were
aware of that. A study was done about two years ago on the reserving
policy for with-profits insurance, and you would be aware of that,
(Mr Daykin) I am not sure.
58. It was done by the Institute of Actuaries?
(Mr Daykin) I would be aware of anything done by the
Institute but you mean specifically in relation to the guaranteed
59. No. In terms of the reserving policy that
should be adopted in with-profits funds.
(Mr Daykin) There have been so many such reportsdozens
and dozens of them, so I am not sure.