Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)



Mr Cousins

  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 insurers—this 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—

  44. Unchanged?
  (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 advice?
  (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 consultants—indeed, they use consultants quite a lot—so 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 anxieties yourself?
  (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 reasons.

  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 it—I 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 it—although 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 occasions—almost every year in fact—the 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 of it.

  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 Life—which I am not and never have been—and 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 marketing regulators.

  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 Life.

  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, would you?
  (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 annuity question?

  59. No. In terms of the reserving policy that should be adopted in with-profits funds.
  (Mr Daykin) There have been so many such reports—dozens and dozens of them, so I am not sure.

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