Select Committee on Treasury Appendices to the Minutes of Evidence


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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