This chapter applies to long-term insurers (including friendly societies) and other friendly societies and to the Society of Lloyd's and managing agents at Lloyd's2. This chapter does not apply to actuaries advising the auditors of long-term insurers under IPRU(INS) 9.35(1A) or IPRU(FSOC) 5.11(2A), as they are not appointed to act on behalf of the firm.3

Section 340 of the Act gives the FSA power to make rules requiring an authorised person, or an authorised person falling into a specified class, to appoint an actuary3. Section 340 further empowers the FSA to make rules governing the manner, timing and notification to the FSA of such an appointment and, where an appointment is not made, for the FSA to make an appointment on the firm's behalf. The FSA's rule-making powers under section 340 of the Act also extend to an actuary's3 duties and to the cessation of an actuary's3 term of office.

This chapter defines the relationship between firms and their actuaries3 and clarifies the role which actuaries3 play in the FSA's monitoring of firms' compliance with the requirements and standards under the regulatory system. The chapter sets out rules and guidance on the appointment of actuaries3, and the termination of their3 term of office, as well as setting out their respective rights and duties. The purpose of the chapter is to ensure that:

1. (1)

   long-term insurers (other than certain friendly societies) have access to adequate actuarial advice, both in valuing their liabilities to policyholders and in exercising discretion affecting the interests of their with-profits policyholders3; and

2. (2)

   other friendly societies carrying on insurance business (and which have traditionally relied upon actuarial expertise) employ or use an actuary of appropriate seniority and experience to evaluate the liabilities of that business; and2

   2
3. (3)

   managing agents of Lloyd's syndicates employ or use an actuary of appropriate seniority and experience to evaluate the liabilities associated with insurance business carried on at Lloyd's.2

The functions3 described by SUP 4.2.2 G (1) are performed by one or more actuaries who are3 required to hold office continuously and must be approved persons3. The principal duty of an actuary appointed to perform these functions3 is to advise the firm (see SUP 4.3.13 R to SUP 4.3.18 G3 for the rights and duties of such an actuary3).

The function described by SUP 4.2.2 G (2) is performed by an 3appropriate actuary who is appointed to prepare the triennial investigation and interim certificate or statement required by IPRU(FSOC) 5.2(1) (see SUP 4.4.6 R and SUP 4.5.12 G to SUP 4.5.14 G3 for the rights and duties of an appropriate actuary).1

Actuaries 3 act as a valuable source of information to the FSA in carrying out its functions. For example, in determining whether a firm satisfies the threshold conditions, the FSA has regard to whether the firm has appointed an actuary3 with sufficient experience in the areas of business to be conducted by the firm (COND 2.5.7 G (11)).

3In making appointments under this chapter and in allocating duties to actuaries, firms are reminded of their obligation under SYSC 2.1.1 R to maintain a clear and appropriate apportionment of significant responsibilities so that it is clear who has which of those responsibilities and that the business and affairs of the firm can be adequately monitored and controlled by the directors, relevant senior managers and governing body of the firm.

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).

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.

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.

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).

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.

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)

   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;

   1

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

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 ENF 17 (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).

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).

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

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

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.

    1

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;

   3
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).

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.

1 Firms 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.

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.

An appropriate actuary should have 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. In complying with Principle 3, a firm should have regard to whether its proposed appropriate actuary has adequate qualifications and experience, and seek confirmation of this from the actuary, or the actuary's current and previous employers, as appropriate.

If it appears to the FSA that an appropriate actuary 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 ENF 17 (Disqualification of auditors and actuaries)2. A list of actuaries who have been disqualified by the FSA may be found on the FSA website (www.fsa.gov.uk).

Objectivity requires the actuary2 to perform his duties in such a manner that he can have an honest belief in his work and does not compromise the quality of his work or his judgment. An actuary2 should not allow himself to be placed in situations where he feels unable to make objective professional judgments.

The appropriate action may include asking the firm's governing body to re-assign temporarily some or all of his duties to another competent actuary. Where this is insufficient, the actuary2 should resign his office.

If the actuary2 is an employee of the firm, the ordinary incentives of employment, including profit-related pay, share options or other financial interests in the firm or any associate, give rise to a conflict of interest only where they are disproportionate, or exceptional, relative to those of other employees of equivalent seniority.

The guidance and professional conduct standards in current issue from the Institute of Actuaries and the Faculty of Actuaries are relevant to compliance with SUP 4.5.1 R and SUP 4.5.3 R.

Actuaries appointed under this chapter2 are subject to regulations made by the Treasury under section 342(5) and 343(5) of the Act (Information given by auditor or actuary to the Authority). These regulations oblige actuaries to report certain matters to the FSA. Sections 342(3) and 343(3) of the Act provide that an actuary does not contravene any duty by giving information or expressing an opinion to the FSA, if he is acting in good faith and he reasonably believes that the information or opinion is relevant to any functions of the FSA. These provisions continue to have effect after the end of the actuary's term of appointment. In relation to Lloyd's, an effect of the insurance market direction set out at SUP 3.1.13 D is that sections 342(5) and 343(5) of the Act (Information given by auditor or actuary to the FSA) apply also to actuaries who are appointed to evaluate the long-term insurance business of a syndicate.1

SUP 4.5.9 R to SUP 4.5.11 G apply to a person who is or has been an actuary appointed under this chapter2.

When an actuary appointed under SUP 4.3.1 R2 ceases to hold office, he ceases to perform a controlled function2. A firm is therefore required under SUP 10.13.6 R to tell the FSA within seven business days of its actuary2 ceasing to hold office and to complete a withdrawal form (Form C, SUP 10 Annex 6 R). Note also the requirement of SUP 10.13.7 R in relation to qualified withdrawals.

2 Section 341 of the Act (Access to books etc.) provides that an actuary appointed under or as a result of the Act:

1. (1)

   has a right of access at all times to the firm's books, accounts and vouchers; and

2. (2)

   is entitled to require from the firm's officers such information and explanation as he reasonably considers necessary to perform his duties as actuary.

2The standards and guidance issued from time to time by the Institute of Actuaries and the Faculty of Actuaries are important sources of generally accepted actuarial practice.3

The functions performed by the actuary appointed as the Lloyd's actuary under SUP 4.6.1 R are specified as controlled functions in SUP 10 (Approved persons). 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 an 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. An actuary should not be appointed until the FSA has approved the actuary. In order to comply with SUP 4.6.1 R, the Society 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.

To comply with SUP 4.6.3 R and Principle 3, before the Lloyd's actuary takes up his appointment the Society should ensure that the actuary:

1. (1)

   has skills and experience appropriate to the nature, scale and complexity of the Society'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 certificate under the rules of the Institute of Actuaries or the Faculty of Actuaries;

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

If it appears to the FSA that an actuary 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 ENF 17. A list of actuaries who are disqualified by the FSA may be found on the FSA website.

1. (1)

   The insurance market direction and guidance set out in SUP 3.1.4 G to SUP 3.1.15 G is relevant to actuaries appointed to report on the insurance business of members.

2. (2)

   References in SUP 4, as applied by SUP 4.1.3 R, to a firm include, where appropriate:

   1. (a)

      a managing agent; and

   2. (b)

      one or more member carrying on insurance business at Lloyd's policy through a syndicate;

   and references to an actuary of a firm should be read accordingly.

To comply with SUP 4.6.11 R and Principle 3, before a syndicate actuary takes up his appointment a managing agent should ensure that the syndicate actuary:

1. (1)

   has skills and experience appropriate to the nature, scale and complexity of a syndicate's business and the requirements and standards under the regulatory system applicable to the activities of managing agents in relation to each syndicate which they manage; and

2. (2)

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

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

If it appears to the FSA that an actuary 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 ENF 17. A list of actuaries who are disqualified by the FSA may be found on the FSA website.

The standards and guidance issued by the Institute of Actuaries and the Faculty of Actuaries are important sources of actuarial best practice.