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SUP 4.3 Appointment of actuaries1

Appointment by firms

SUP 4.3.1R

A firm to which this section applies (see SUP 4.1) must:

  1. (1)

    appoint one or more actuaries to perform:1

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    1. (a)

      the actuarial function (see SUP 4.3.13 R) in respect of all classes of its long-term insurance business; and1

    2. (b)

      the with-profits actuary function (see SUP 4.3.16A R) in respect of all classes of its with-profits business (if any);1

  2. (2)

    notify the FSA, without delay, when it is aware that a vacancy in the office of any such actuary1 will arise or has arisen, giving the reason for the vacancy;

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  3. (3)

    appoint an actuary to fill any such1 vacancy that has arisen; and

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  4. (4)

    ensure a 1replacement actuary can take up office at the time the vacancy arises or as soon as is reasonably practicable after that.

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SUP 4.3.2G

The provisions relating to the duties of an actuary appointed to perform these functions1 are set out in SUP 4.3.13 R to SUP 4.3.18 G. The functions performed by actuaries appointed by1 a firm under SUP 4.3.1 R are specified as controlled functions (CF 12, the actuarial function, and CF 12A, the with-profits actuary function) in SUP 10 (Approved persons).1 As a result, an application must be made to the FSA under section 60 of the Act (Applications for approval) for approval of the person proposing to take up such 1an appointment. Section 61(3) of the Act (Determination of applications) gives the FSA three months to grant its approval or give a warning notice that it proposes to refuse the application. A firm should not appoint an actuary until the FSA has approved the actuary. In order to comply with SUP 4.3.1 R, a firm should ensure it applies to the FSA as soon as practicable before the date when it needs the actuary to take office. The FSA will need time to consider the application before deciding whether to grant approval. See SUP 10 (Approved persons).

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Appointment by the FSA

SUP 4.3.3R

If a firm, which is required to appoint one or more actuaries1 under SUP 4.3.1 R, fails to do so within 28 days of a vacancy arising, the FSA may appoint one or more actuaries1 to perform any function corresponding to the actuarial function or the with-profits actuary function1 on the following terms:

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  1. (1)

    the actuary to be remunerated by the firm on the basis agreed between the actuary and the firm or, in the absence of agreement, on a reasonable basis; and

  2. (2)

    the actuary to hold office until he resigns or the firm appoints another actuary.

SUP 4.3.4G

SUP 4.3.3 R allows but does not require the FSA to appoint an actuary if the firm has failed to do so within the 28 day period. When it considers whether to use this power, the FSA will take into account the likely delay until the firm can make an appointment and the urgency of any pending duties of the actuary1.

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SUP 4.3.5G

The FSA will not normally seek to appoint an actuary under SUP 4.3.3 R if a notification under SUP 10 (Approved persons) has been received from the firm in relation to a proposed appointment of an actuary under SUP 4.3.1 R, and that application is still being considered.

SUP 4.3.6R

A firm must comply with and is bound by the terms on which an actuary has been appointed by the FSA under SUP 4.3.3 R.

SUP 4.3.7G

If the FSA appoints an actuary under SUP 4.3.3 R, he will not be an approved person (not being appointed under SUP 4.3.1 R).1 However, the firm is still under an obligation to appoint an actuary under SUP 4.3.1 R and will need to seek prior approval of that person (even if the individual it proposes to appoint is the person who has been appointed by the FSA under SUP 4.3.3 R).

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1Actuaries'1 qualifications

SUP 4.3.8GRP

The FSA is concerned to ensure that every actuary appointed by a firm under this section1 has the necessary skill and experience to provide the firm with appropriate actuarial advice. SUP 4.3.9 R to SUP 4.3.10 G set out the FSA's rules and guidance aimed at achieving this.

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SUP 4.3.9RRP

Before a firm applies for approval of the person it proposes to appoint as an actuary under SUP 4.3.1 R1, it must take reasonable steps to ensure that the actuary:

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  1. (1)

    has the required skill and experience to perform his functions under the regulatory system; and

  2. (2)

    is a Fellow of the Institute of Actuaries or of the Faculty of Actuaries.

SUP 4.3.10GRP

To comply with SUP 4.3.9 R and Principle 3, before an actuary1 takes up his appointment the firm should ensure that the actuary:

1
  1. (1)

    has skills and experience appropriate to the nature, scale and complexity of the firm's business and the requirements and standards under the regulatory system to which it is subject; and

  2. (2)

    has adequate qualifications and experience, which includes holding an appropriate practising certificate1 under the rules of the Institute of Actuaries or the Faculty of Actuaries;

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and seek confirmation of these from the actuary, or the actuary's current and previous employers, as appropriate.

Disqualified actuaries

SUP 4.3.11RRP

A firm must not appoint under SUP 4.3.1 R1 or an actuary who is disqualified by the FSA under section 345 of the Act (Disqualification) from acting as an actuary either for that firm or for a relevant class of firm.

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SUP 4.3.12GRP

If it appears to the FSA that an actuary1 has failed to comply with a duty imposed on him under the Act, it may disqualify him under section 345 of the Act. For more detail about what happens when the disqualification of an actuary is being considered or put into effect, see EG 155 (Disqualification of auditors and actuaries)1. A list of actuaries who are disqualified by the FSA may be found on the FSA website (www.fsa.gov.uk).

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Conflicts of interest

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SUP 4.3.12ARRP

1A firm must take reasonable steps to ensure that an actuary who is to be, or has been, appointed under SUP 4.3.1 R:

  1. (1)

    does not perform the function of chairman or chief executive of the firm, or does not, if he is to perform the with-profits actuary function, become a member of the firm's governing body; and

  2. (2)

    does not perform any other function on behalf of the firm which could give rise to a significant conflict of interest.

SUP 4.3.12BGRP

1Both the actuarial function and the with-profits actuary function may be performed by employees of the firm or by external consultants, and performing other functions on behalf of the firm will not necessarily give rise to a significant conflict of interest. However, being a director, or a senior manager responsible, say, for sales or marketing in a firm (or for finance in a proprietary firm), is likely to give rise to a significant conflict of interest for an actuary performing the with-profits actuary function. He nevertheless retains direct access to the firm's governing body under SUP 4.3.17 R (2).

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The actuarial function 1

SUP 4.3.13RRP

An actuary appointed to perform the actuarial function must, in respect of those classes of the firm's long-term insurance business which are covered by his appointment1:

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  1. (1)

    advise the firm's management, at the level of seniority that is reasonably appropriate, on1 the risks the firm runs in1 so far as they may have a material impact on the firm's ability to meet liabilities to policyholders in respect of long-term insurance contracts as they fall due and on the capital needed to support the business, including regulatory capital requirements;1

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  2. (2)

    monitor those risks and 1inform the firm's management, at the level of seniority that is reasonably appropriate, if he has any material concerns or good reason to believe that the firm:

    1. (a)

      is not meeting liabilities to policyholders under long-term insurance contracts as they fall due, or may not be doing so, or might not have done so, or might, in reasonably foreseeable circumstances, not do so;

    2. (b)

      is, or may be, effecting new long-term insurance contracts on terms under which the resulting income earned is insufficient, under reasonable actuarial methods and assumptions, and taking into account the other financial resources that are available for the purpose, to enable the firm to meet its liabilities to policyholders as they fall due (including reasonable bonus expectations);1

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    3. (c)

      does not, or may not, have sufficient financial resources to meet liabilities to policyholders as they fall due (including reasonable bonus expectations) and the capital needed to support the business, including regulatory capital requirements1 or, if the firm currently has sufficient resources, might, in reasonably foreseeable circumstances, not continue to have them;

  3. (3)

    advise the firm's governing body on the methods and assumptions to be used for the investigations required by IPRU(INS) 9.4R or IPRU(FSOC) 5.1R and the calculation of the with-profits insurance capital component under INSPRU 1.34 as applicable;1

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  4. (4)

    perform those investigations and calculations in (3), in accordance with the methods and assumptions determined by the firm's governing body;1

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  5. (5)

    report to the firm's governing body on the results of those investigations and calculations in (3); and1

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  6. (6)

    in the case of a friendly society to which this section applies, perform the functions of the appropriate actuary under section 87 (Actuary's report as to margin of solvency) of the Friendly Societies Act 1992.1

SUP 4.3.14GRP

IPRU(INS) 9.4R and IPRU(FSOC) 5.1R require firms to which this section applies to cause an investigation to be made at least yearly by the actuary or actuaries appointed to perform the actuarial function, and to report on the result of that investigation. INSPRU 1.34 requires realistic basis life firms to calculate the with-profits insurance component as part of their capital resources requirements. The firm is responsible for the methods and assumptions used to determine the liabilities attributable to its long-term insurance business. The obligation on friendly societies to obtain a report from the 'appropriate actuary' under section 87 of the Friendly Societies Act 1992 applies to a friendly society which is to receive a transfer of engagements under section 86 (transfer of engagements to or by a friendly society). The 'appropriate actuary' in this context is the actuary appointed to perform the actuarial function, rather than the appropriate actuary under SUP 4.4 (Appropriate actuaries).1

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SUP 4.3.15GRP

SUP 4.3.13 R is not intended to be exhaustive of the professional advice that a firm should take whether from an actuary appointed under this chapter or from any other actuary acting for the firm. Firms should consider what systems and controls are needed to ensure that they obtain appropriate professional advice on financial and risk analysis; for example:1

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  1. (1)

    risk identification, quantification and monitoring;1

  2. (2)

    stress and scenario testing;1

  3. (3)

    ongoing financial conditions;1

  4. (4)

    financial projections for business planning;1

  5. (5)

    investment strategy and asset-liability matching;1

  6. (6)

    individual capital assessment;1

  7. (7)

    pricing of business, including unit pricing;1

  8. (8)

    variation of any charges for benefits or expenses;1

  9. (9)

    discretionary surrender charges; and1

  10. (10)

    adequacy of reinsurance protection.

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The with-profits actuary function1

SUP 4.3.16R

[deleted]1

SUP 4.3.16ARRP

1An actuary appointed to perform the with-profits actuary function must:

  1. (1)

    advise the firm's management, at the level of seniority that is reasonably appropriate, on key aspects of the discretion to be exercised affecting those classes of the with-profits business of the firm in respect of which he has been appointed;

  2. (2)

    where the firm is a realistic basis life firm advise the firm's governing body as to whether the assumptions used to calculate the with-profits insurance component under INSPRU 1.34 are consistent with the firm's PPFM in respect of those classes of the firm's with-profits business;

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  3. (3)

    at least once a year, report to the firm's governing body on key aspects (including those aspects of the firm's application of its Principles and Practices of Financial Management on which the advice described in (1) has been given) of the discretion exercised in respect of the period covered by his report affecting those classes of with-profits business of the firm;

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  4. (4)

    in respect of each financial year, make a written report addressed to the relevant classes of the firm's with-profits policyholders, to accompany the firm's annual report under 6,COBS 20.4.7 R6 as to whether, in his opinion and based on the information and explanations provided to him by the firm, and taking into account where relevant the rules and guidance in ,COBS 20,6

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    the annual report and the discretion exercised by the firm in respect of the period covered by the report may be regarded as taking, or having taken, the interests of the relevant classes of the firm's with-profits policyholders into account in a reasonable and proportionate manner;1

  5. (5)

    request from the firm such information and explanations as he reasonably considers necessary to enable him properly to perform the duties in (1) to (4);

  6. (6)

    advise the firm as to the data and systems that he reasonably considers necessary to be kept and maintained to provide the duties in (5); and

  7. (7)

    in the case of a friendly society to which this section applies, perform the function of appropriate actuary under section 12 (Reinsurance) of the Friendly Societies Act 1992 or section 23A (Reinsurance) of the Friendly Societies Act 1974 as applicable, in respect of those classes of its with-profits business covered by his appointment.

SUP 4.3.16BGRP

1In advising or reporting on the exercise of discretion, an actuary performing the with-profits actuary function should cover the implications for the fair treatment of the relevant classes of the firm's with-profits policyholders. His opinion on any communication or report to them should also take into account their information needs and the extent to which the communication or report may be regarded as clear, fair and not misleading. Aspects of the business that should normally be included are:1

  1. (1)

    bonus rates to be applied to policies at maturity or on the 3death of a 3policyholder, or when calculating the annual bonus;

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  2. (2)

    investment policy in the light of product descriptions disclosed to customers;

  3. (3)

    surrender value methodology (including market value adjusters);

  4. (4)

    new business plans and premium rates;

  5. (5)

    allocation of expenses to with-profits business;

  6. (6)

    investment fees to be charged to with-profits business;

  7. (7)

    changes to the Principles and Practices of Financial Management; and

  8. (8)

    communications3 with policyholders or potential policyholders on the issues in (1) to (7).

SUP 4.3.16CGRP

1The reports3 in SUP 4.3.16AR (3) and SUP 4.3.16AR (4) 3should be proportionate to the nature of the with-profits business. For smaller firms with fewer products, the extent of reporting would be proportionately less.

SUP 4.3.16DGRP

1Firms should normally obtain advice, from the actuary appointed to perform the with-profits actuary function in respect of the affected class or classes of with-profits business, whenever they are preparing to make key decisions based on the exercise of discretion affecting their with-profits business. Firms should also have risk management processes in place to ensure that all relevant matters are referred to the actuary for advice.

SUP 4.3.17RRP

A firm must require and allow any actuary appointed to perform the with-profits actuary function1 to perform his duties and must1:

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  1. (1)

    keep him informed of the firm's business and other plans (including, where relevant, those of any related firm, to the extent it is aware of these);

  2. (2)

    provide him with sufficient resources (including his own time and access to the time of others);

  3. (3)

    hold such data and establish such systems as he reasonably requires;

  4. (4)

    request his advice about the likely effect of material changes in the firm's business plans, practices or other circumstances on the fair treatment of the relevant classes of the firm's with-profits policyholders1; and

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  5. (5)

    pay due regard to his advice, whether provided in response to a request under (4) or on the actuary's1 own initiative; this will include, if he requests it, allowing him to present his advice directly to the firm's governing body (that is, the board of directors or, for a friendly society, the committee of management).

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SUP 4.3.18GRP

A firm's duty to keep an actuary appointed to perform the with-profits actuary function1 informed includes providing relevant information, even where the actuary1 does not ask for it. The firm needs to appreciate that the actuary1 may be unaware of certain business developments and so unable to request relevant information.

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SUP 4.3.19G

[deleted]

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SUP 4.3.20R

[deleted]

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SUP 4.3.21G

[deleted]

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