APPENDIX 2
Memorandum from the Financial Services
Authority
INTRODUCTION
1. The FSA welcome this opportunity to outline
our plans to bring in-house the actuarial advisory services currently
provided by the Government Actuary's Department (GAD). This memorandum
briefly deals with:
— the role of the actuary in insurance
and insurance regulation;
— existing arrangements for actuarial
advice;
— the FSA's new approach to regulation;
— proposed new arrangements for actuarial
advice;
— the relationship with the actuarial
profession.
THE ROLE
OF THE
ACTUARY IN
INSURANCE AND
INSURANCE REGULATION
2. The actuary plays a key role in long
term insurance business. Under the Insurance Companies Act 1982,
every company writing long term business is required to appoint
an "appointed actuary", who must be a fellow of either
the Institute or Faculty of Actuaries. The appointed actuary has
specific duties, including in particular to report annually on
the valuation of the long term funds, and on the calculations
underlying any bonus declaration. In carrying out these duties
he is required to follow extensive professional guidance laid
down by the Institute and Faculty. The requirement for an appointed
actuary is to be carried forward in the new regime under the Financial
Services and Markets Act.
3. The matters on which the appointed actuary
reports are central to the financial health and security of a
long term business. They are therefore of great interest to the
prudential regulator. The regulator needs access to his own actuarial
expertise in order to interpret and validate the information which
regulated companies are required to provide. This is important
both to form a view on individual companies, and to monitor trends
and to identify new sources of risk across the market.
4. Actuarial techniques are increasingly
being applied in general insurance, for example in setting reserves
and pricing business. While there is no specific regulatory requirement
on general business companies to appoint an actuary, the FSA increasingly
expect to see actuarial reviews, for example in relation to proposed
transfers of business, or to support reserving estimates. In the
Lloyd's market, syndicates are now required to provide an annual
actuarial opinion on the adequacy of their reserves.
5. As for long term business, the regulator
needs access to appropriate actuarial expertise in order to evaluate
information from companies and to perform some independent analysis
at both individual company and sectoral level.
EXISTING ARRANGEMENTS
FOR ACTUARIAL
ADVICE
6. Until 1998, prudential regulation of
the insurance industry was the responsibility of the Department
of Trade and Industry and its predecessor departments. In 1998,
ministerial responsibility was transferred from the DTI to the
Treasury. From 1 January 1999, the Treasury contracted out its
administrative functions under insurance legislation to the FSA.
When the Financial Services and Markets Act comes fully into force
later this year, the FSA will become fully responsible in its
own right for all aspects of insurance regulation.
7. The DTI did not employ its own actuaries
for the purposes of insurance regulation. Rather it looked to
GAD, as the focus of actuarial expertise within government, to
undertake actuarial analysis and to advise generally on technical
insurance matters, particularly (but not exclusively) for life
insurance. These services were provided by a dedicated team in
GAD. This team was located at GAD's premises and remained under
GAD management, albeit working to priorities agreed with DTI's
insurance division.
8. These arrangements continued on the transfer
of Ministerial responsibility to the Treasury. They were carried
forward when the supervision work was contracted out to the FSA,
with the FSA becoming the customer for the services. It was recognised
that the FSA would want to review the position in due course.
9. The forecast cost to the FSA of the current
arrangements, for the financial year 2000-01, is approximately
£3.5 million. Around 20 GAD staff are engaged in providing
the services. These figures include provision for advice on the
supervision of Friendly Societies, where GAD provide a service
analogous to that they provide in relation to insurance companies.
Three GAD actuaries are currently seconded to the FSA, two in
line supervisory positions and one in a policy role. The costs
of two of these are met separately and are not included in the
figure quoted above.
10. The cost of the services is charged
to the Treasury and the Friendly Societies Commission as part
of the FSA's costs in carrying out functions under the contracting
out arrangements with the Treasury and providing services to the
FSC. Ultimately they are met by the regulated firms through fees
levied by the Treasury and FSC.
11. The services provided include, in particular,
a detailed scrutiny of the financial returns provided by each
life insurance company; advice on company-driven events (eg new
authorisations, transfers of business, requests for concessions),
and technical advice and assistance with supervisory programmes
generally.
THE FSA'S
NEW APPROACH
TO REGULATION
12. The FSA set out its proposed approach
to regulation under the Financial Services and Market Act in the
document "A New Regulator for a New Millennium", published
in January last year. We intend to take a risk-based approach,
with increasing emphasis on consumer oriented or industry-wide
activities wherever possible, rather than focusing mainly on firm-specific
activities. "Building the New Regulator—Progress Report
1", published on 11 December 2000, sets out the progress
we have made in developing these ideas and our plans for implementation.
13. Firm specific work will nevertheless
remain important and the requirement for actuarial input to firm
specific regulation will remain. We have no plans to reduce the
amount of actuarial input to insurance supervision. Indeed, overall
we are likely to be devoting additional resources to regulating
the insurance industry. But in our new regime regulatory activity
will involve much more cross-sectoral work, undertaken in multi-disciplinary
teams formed for the purpose using a flexible approach to the
deployment of resources.
PROPOSED NEW
ARRANGEMENTS FOR
ACTUARIAL ADVICE
14. While the transition of insurance supervision
to the FSA has been eased by continuing with the previous arrangements
in the short term, FSA do not believe that these arrangements
are best suited to the effective implementation of our new approach
to regulation. The physical and managerial separation inherent
in the arrangements does not help promote the integration we seek,
and hinders flexibility. Nor is the continuation of the existing
arrangements likely to represent the most efficient and economical
use of resources by the FSA for the future. We believe that our
objectives will best be supported by bringing the actuarial function
in house, using our own employees. Accordingly arrangements are
being made for the current actuarial advisory function to transfer
from GAD to the FSA, with the staff concerned transferring to
FSA employment. We expect this to happen in April this year.
15. In looking at options we considered
the possibility of using actuarial firms to provide the service.
But it seemed to us that there would be difficulties of potential
conflict for most firms, and informal discussion in the market
suggested that there would be unlikely to be much interest in
a solution of this kind. We were also very conscious of the extensive
experience and expertise of the current generation of GAD staff
who advise on insurance matters.
16. The actuarial function will form a distinct
department within the new Insurance Firms Division of the FSA.
While individual staff will be allocated to tasks on a matrix
managed basis, their professional status and training and development
will remain the responsibility of the senior transferring actuary.
We believe this structure will assist in maintaining the appropriate
level of professional independence for the actuarial function
and professional oversight of the individual actuaries.
RELATIONSHIP WITH
THE ACTUARIAL
PROFESSION
17. There has long been a close relationship
between the profession and the regulator, not least in connection
with the professional guidance relevant to the role of the appointed
actuary and other matters of interest to regulators. Such guidance
is developed in working parties which frequently include representatives
from GAD. Other consultative fora also exist, including the Joint
Actuarial Working Party, convened by GAD and on which FSA is represented.
FSA regularly meets representatives of the Institute and Faculty
on a range of matters of common interest.
18. We would expect FSA actuarial staff
to continue to play a leading role in relevant professional working
parties. Indeed we will be looking to strengthen still further
our links with the profession at all levels, not least in the
context of our work on insurance-related themes.
12 January 2001
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