Select Committee on Treasury Minutes of Evidence

Supplementary memorandum from the Government Actuary

  1.  Supervision of the life assurance industry became a function of the Financial Services Authority (FSA) on 1 January 1999, having been the responsibility of HM Treasury from 1 January 1998, and previously the responsibility of the Department of Trade and Industry.

  2.  The Government Actuary's Department (GAD) acted as actuarial adviser on insurance supervisory issues to each of these successively from the early 1960's. GAD has acted as actuarial adviser to the FSA since 1 January 1999. This was formalised by an exchange of letters. It was first envisaged that a formal contract would be discussed but the need for this has been superseded with the intended transfer of GAD staff to FSA later in 2001, as outlined in the earlier memorandum.


  3.  By way of background, each life insurer is required by statute to appoint an actuary with responsibility for carrying out an annual valuation of the insurer in order to determine its level of free reserves, and the amount of any surplus available for distribution to policyholders and shareholders.

  4.  The appointed actuary is bound by a combination of statutory regulations and professional guidance in the methodology and assumptions to be adopted in this annual valuation. These are designed to ensure with a reasonably high degree of probability that life insurers can meet their contractual liabilities, having regard also to policy holders' reasonable expectations. A report on this valuation of liabilities is presented in prescribed format each year as part of the insurer's annual financial returns to the FSA.

  5.  In addition, the appointed actuary is expected by the actuarial profession to monitor the financial condition of the insurer continuously, and to advise the company and its directors on all issues relating to its ongoing financial condition. This includes advice on suitable premium rates determined on appropriate actuarial assumptions, distribution of available surplus, investment policy, reinsurance arrangements and the margins available to cover both initial and ongoing expenses. Compliance with the associated mandatory professional standards of practice is certified by the appointed actuary to FSA each year.


  6.  The role of GAD in relation to regulation of the life insurance industry mainly consists of actuarial advice to the FSA on the ongoing prudential supervision of around 270 individual life insurers, applications for authorisation by new insurers, and some general advice on insurance regulation and on supervisory policy issues.

  7.  In order to fulfil this role, the Department has progressively built up a team of actuaries with a wide range of experience and currently has an intended complement of nine actuaries (although there are currently three vacancies following secondments to the FSA) and two chief actuaries dedicated to this role. A directing actuary acts as Deputy Government Actuary in this area of GAD's work and has responsibility for advice on both life and general insurance supervision.

  8.  As indicated in our main memorandum, the whole of this team is expected to transfer to FSA from 26 April this year, and become part of their Insurance Firms Division.

  9.  The role of GAD in relation to the regular ongoing supervision of individual insurers primarily involves analysis of the financial returns (as provided to GAD each year by FSA), including the valuation report by the appointed actuary. These are examined to assess the current financial position of the insurer including the strength of the valuation basis. In addition, GAD considers the effect of any adverse features or trends as disclosed in the returns. A confidential report is then sent to FSA on each insurer, setting out the result of this analysis, along with a copy of any correspondence with the actuary resulting from the scrutiny of the returns.

  10.  In addition, GAD is often called on to advise on a range of other financial issues affecting individual insurers. These include company restructurings, transfers of insurance business and transactions affecting the relative interests of policyholders and shareholders.

  11.  All applications to FSA for authorisation for a new life insurer have to include appropriate financial projections for the first three to five years of the insurer's life. These would normally be referred to GAD for a confidential assessment of their reasonableness, and of the underlying risks that the proposed level of capital could be insufficient.

  12.  Advice is also provided to FSA on a number of broader policy issues, including development of their new rulebook, the effect of new stakeholder pensions, the low inflation theme project, international discussions on solvency capital, and the resilience testing of insurers for the effect of changing market conditions.

  13.  The advice on resilience testing includes the issue of advice to all insurers by the Government Actuary on the parameters to be adopted for this purpose. This generic advice does not have any manadatory status but is provided to show the general standard of testing that GAD would expect to see included in the FSA returns. This standard is intended both to protect consumers and to promote market confidence.

  14.  There is regular consultation with the actuarial profession on technical issues, including issues relating to the role and status of appointed actuaries. Members of GAD regularly participate in a number of working parties and committees of the profession which consider life insurance issues.

  15.  Individual appointed actuaries are invited to meet the Government Actuary when newly appointed, for a discussion of their role. The appointed actuary is seen as fundamental to the ongoing financial management of life insurers, as confirmed by the retention of the concept within the Financial Services and Markets Bill 2000.

  16.  Although GAD has direct contact with appointed actuaries on technical issues, matters of supervisory policy are a matter for the relevant regulatory to decide and implement.

26 January 2001

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