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SUP 4.1 Application

SUP 4.1.1 R

This chapter applies to:

  1. (1)

    every firm within a category listed in column (1) of the table in SUP 4.1.3 R; and

  2. (2)

    every actuary appointed under this chapter3;

    3

in accordance with column (2) of that table.

SUP 4.1.2 G

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 insurers5 as they are not appointed to act on behalf of the firm.3

2
SUP 4.1.2A G

4This chapter applies in part to a Solvency II firm where it appoints an actuary. This will be in particular with regard to the with-profits actuary function but also where an external actuary is appointed to perform tasks of the actuarial function of a Solvency II firm, under PRA Rulebook: Solvency II Firms: Actuaries. More generally, this chapter applies to a Solvency II firm which chooses to appoint an actuary to fulfil the requirements under rule 6.1 of PRA Rulebook: Solvency II firms: Conditions Governing Business to provide for an actuarial function.

SUP 4.1.3 R

Applicable sections

(1)

Category of firm

(2) Applicable sections or rules 4

(1)

A long-term insurer, other than:

SUP 4.1 , SUP 4.2, SUP 4.3 and SUP 4.5

(a)

a registered friendly society which is a non-directive friendly society;

(b)

an incorporated friendly society that is a flat rate benefits business friendly society;

4

(c)

an incoming EEA firm; and4

4(d)

a Solvency II firm (for which see (5) below).

(2)

A friendly society, other than a friendly society within (1) or (5).

SUP 4.1 , SUP 4.2, SUP 4.4 and SUP 4.51

(3) 2

[deleted]4

4

(4) 2

[deleted]4

4

4(5)

A Solvency II firm which does any of the following:

SUP 4.1 , SUP 4.2, SUP 4.3, SUP 4.4 and SUP 4.5 except that:

SUP 4.3.8 G to SUP 4.3.10 G do not apply to (a) and (b) in column 2; and

SUP 4.3.13 R to SUP 4.3.15 G, and SUP 4.4.6 R do not apply

(a)

appoints an actuary to fulfil the actuarial function for the purposes of rule 6 of the PRA Rulebook: Solvency II firms: Conditions Governing Business;

(b)

appoints an external actuary in accordance with PRA Rulebook: Solvency II Firms: Actuaries;

(c)

appoints a with-profits actuary.

SUP 4.2 Purpose

SUP 4.2.1 G

Section 340 of the Act gives the PRA6 power to make rules requiring an authorised person, or an authorised person falling into a specified class, to appoint an actuary3. The PRA has exercised its power to make such rules in PRA Rulebook: Solvency II firms: Actuaries; and PRA Rulebook: Non-Solvency II firms: Actuarial Requirements.5 The rule-making powers of the PRA and FCA6 under section 340 of the Act also extend to an actuary's3 duties.

6 3 6 6 6 6 6 6 3 3 3 6
SUP 4.2.2 G

This chapter defines the relationship between firms and their actuaries3 and clarifies the role which actuaries3 play in the appropriate regulator'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:

3 3 3 3
  1. (1)

    long-term insurers (other than certain friendly societies and Solvency II firms4) 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 (other than Solvency II firms)4 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)

    where Solvency II firms appoint, employ or use an actuary, certain appropriate safeguards are in place.4

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SUP 4.2.3 G

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. Solvency II firms are required to have an actuarial function. Solvency II firms are not required to appoint an external actuary to fulfil the actuarial function for the purposes of rule 6 of the PRA Rulebook: Solvency II firms: Conditions Governing Business, but they must do so if they do not have the internal capability (see PRA Rulebook: Solvency II Firms: Actuaries). Whoever has responsibility for the actuarial function (whether internal or external) will need to be approved by the PRA as a Chief Actuary. Solvency II firms carrying on with-profits business are required to appoint a qualified with-profits actuary (whether internal or external). Whoever has responsibility for advising the governing body of the firm on the exercise of discretion affecting the firm'swith-profits business will need to be approved by the PRA as a With-Profits Actuary.4 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).

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SUP 4.2.4 G

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

3 3
SUP 4.2.5 G

Actuaries 3 act as a valuable source of information to the appropriate regulator4 in carrying out its functions. For example, in determining whether a firm satisfies the threshold conditions, the appropriate regulator4 has regard to whether the firm has appointed an actuary3 (or some other person with responsibility for the actuarial function required by rule 6 of the PRA Rulebook: Solvency II firms: Conditions Governing Business)4 with sufficient experience in the areas of business to be conducted by the firm.

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SUP 4.2.6 G

3In making appointments under this chapter and in allocating duties to actuaries, firms are reminded of their obligation under SYSC 2.1.1 R or rule 2.2(2) of the PRA Rulebook: Solvency II firms: Conditions Governing Business4 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.

SUP 4.3 Appointment of actuaries1

Appointment by firms

SUP 4.3.2 G

[deleted]9

1 1 1 8 1 1 10 1 8 10 10 10 1 1 10 10 10 10 10 10 10 10 10

1Actuaries'1 qualifications

SUP 4.3.8 G

The FCA9 is concerned to ensure that every actuary appointed by a firm under PRA rules made under section 340 of the Act or for the purposes of PRA Rulebook: Solvency II firms: Conditions Governing Business, 6,9 has the necessary skill and experience to provide the firm with appropriate actuarial advice from a conduct perspective9. SUP 4.3.9 R to SUP 4.3.10 G set out the FCA’s9 rules and guidance aimed at achieving this.

1 1
SUP 4.3.9 R

Before a firm applies for approval of the person it proposes to appoint as an actuary under PRA rules made under section 340 of the Act, or for the purposes of PRA Rulebook: Solvency II firms: Conditions Governing Business, 69, it must take reasonable steps to ensure that the actuary:

1 1
  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 4.3.10 G

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;

    1

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

Disqualified actuaries

SUP 4.3.11 R

A firm must not appoint under PRA rules made under section 340 of the Act or for the purposes of9 rule 6.1 of the PRA9 Rulebook: Solvency II firms: Conditions Governing Business,9 an actuary who is disqualified by the FCA10 under section 345 of the Act (Disciplinary measures: FCA) or the PRA under section 345A of the Act (Disciplinary measures: PRA10) from acting as an actuary either for that firm or for a relevant class of firm.

1 1 8 10 10
SUP 4.3.12 G

If it appears to the FCA9 that an actuary1 has failed to comply with a duty imposed on him under the Act, it has9 the power to and10 may disqualify him under section 3459 of the Act. A list of actuaries who are disqualified may be found on the FCA10 website (http://www.fca.org.uk10).

10 10 1 10 5 5 1 10 10 10 10

Conflicts of interest

1
SUP 4.3.12A R

1A firm must take reasonable steps to ensure that an actuary who is to be, or has been, appointed under PRA rules made under section 340 of the Act, or for the purposes of PRA Rulebook: Solvency II firms: Conditions Governing Business, 69:

8
  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 4.3.12B G

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).

1

The actuarial function 1

SUP 4.3.13 R

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:

1
  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

    1
  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

      1
    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 actuarial investigations and reports of the appropriate actuary9 required by the PRA Rulebook9;

    1441
  4. (4)

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

    1
  5. (5)

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

    1
  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 4.3.14 G

The PRA Rulebook requires9firms 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. 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

1 4 8
SUP 4.3.15 G

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. (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

The with-profits actuary function1

SUP 4.3.16A R

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)

    [deleted]8

    8
  3. (2A)

    where the firm is a Solvency II firm, advise the firm'sgoverning body as to whether the assumptions used to calculate the future discretionary benefits within the technical provisions are consistent with the firm'sPPFM in respect of those classes of the firm'swith-profits business;8

  4. (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;

    3
  5. (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 6COBS 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

    310102

    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'swith-profits policyholders into account in a reasonable and proportionate manner;1

  6. (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);

  7. (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

  8. (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.

  9. (8)

    advise on any actuarial investigation required to determine the with-profits-fund surplus.8

SUP 4.3.16B G

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).

SUP 4.3.16C G

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 4.3.16D G

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.

SUP 4.3.17 R

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

1 1
  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'swith-profits policyholders1;

    17
  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); and7

    1
  6. (6)

    ensure that where a conflict of interest may arise in relation to the role of the with-profits actuary and the advice he gives, for example due to the firm's reporting lines or remuneration process, that potential conflict is identified and managed in order to minimise the possible effect of the potential conflict on the advice given.7

SUP 4.3.18 G

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.

1 1 1
SUP 4.3.19 G

[deleted]

1
SUP 4.3.20 R

[deleted]

1
SUP 4.3.21 G

[deleted]

1

SUP 4.4 Appropriate actuaries

Appropriate actuaries' qualifications

SUP 4.4.4 R

A firm must not appoint as appropriate actuary an actuary who has been disqualified by the FCA5 under section 345 of the Act (Disciplinary measures: FCA) or the PRA under section 345A of the Act (Disciplinary measures: PRA5) from acting as an actuary either for that firm or for a relevant class of firm.

5 5
SUP 4.4.5 G

If it appears to the FCA4 that an appropriate actuary has failed to comply with a duty imposed on him under the Act, it may have the power to and5 may disqualify him under section 3454 of the Act. A list of actuaries who have been disqualified may be found on the FCA5 website (http://www.fca.org.uk5).

5 5 5 3 3 2 5 5 5 5

2

Specific duties of the appropriate actuary 2

SUP 4.4.6 R

An appropriate actuary must carry out the triennial investigation and prepare an abstract of the report as required by the PRA Rulebook4.

SUP 4.4.7 G

[deleted]

2
SUP 4.4.8 R

[deleted]

2
SUP 4.4.9 G

[deleted]

2

SUP 4.5 Provisions applicable to 2all 2actuaries

Objectivity

SUP 4.5.1 R

An actuary2 appointed under PRA rules made under section 340 of the Act, or for the purposes of PRA Rulebook: Solvency II firms: Conditions Governing Business, 6,6 must be objective in performing his duties.

2 2 5
SUP 4.5.2 G

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.

2 2
SUP 4.5.3 R

An actuary appointed under firms PRA rules made under section 340 of the Act, or for the purposes of PRA Rulebook: Solvency II firms: Conditions Governing Business, 6,6 must take reasonable steps to satisfy himself that he is free from bias, or from any conflict of interest from which bias may reasonably be inferred. He must take appropriate action where this is not the case.

2 2 5
SUP 4.5.4 G

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.

2
SUP 4.5.5 G

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.

2
SUP 4.5.6 G

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.

2Actuaries' statutory duty to report2

SUP 4.5.7 G
  1. (1)

    Actuaries appointed under PRA rules made under section 340 of the Act, or for the purposes of PRA Rulebook: Solvency II firms: Conditions Governing Business, 6,6 are subject to regulations5 made by the Treasury under sections 342(5) and 343(5) of the Act (Information given by auditor or actuary to a regulator7). Section 343 and the regulations also apply to an actuary of an authorised person in his capacity as an actuary of a person with close links with the authorised person.4

    7
  2. (2)

    These regulations oblige actuaries to report certain matters to the appropriate regulator.7Sections 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 appropriate regulator,7 if he is acting in good faith and he reasonably believes that the information or opinion is relevant to any functions of the appropriate regulator.7 These provisions continue to have effect after the end of the actuary's term of appointment.

    77747
2 4

Termination of term of office

SUP 4.5.8 G

SUP 4.5.9 R to SUP 4.5.11 G apply to a person who is or has been an actuary appointed under PRA rules made under section 340 of the Act, or for the purposes of PRA Rulebook: Solvency II firms: Conditions Governing Business, 66.

2 2 5
SUP 4.5.9 R

An actuary appointed under PRA rules made under section 340 of the Act, or for the purposes of PRA Rulebook: Solvency II firms: Conditions Governing Business, 66 must notify the appropriate regulator5 without delay if he:

2 2 5 5
  1. (1)

    is removed from office by a firm; or

  2. (2)

    resigns before his term of office expires; or

  3. (3)

    is not reappointed by a firm.

SUP 4.5.10 R

An actuary2 who has ceased to be appointed under PRA rules made under section 340 of the Act, or for the purposes of PRA Rulebook: Solvency II firms: Conditions Governing Business, 66 or who has been formally notified that he will cease to be so 2appointed, must notify the appropriate regulator5 without delay:

2 2 2 5 2 5
  1. (1)

    of any matter connected with the cessation which he thinks ought to be drawn to the appropriate regulator's attention; or

  2. (2)

    that there is no such matter.

Rights and duties2

SUP 4.5.12 G

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.

SUP 4.5.13 R

2When carrying out his duties, an actuary appointed under PRA rules made under section 340 of the Act, or for the purposes of PRA Rulebook: Solvency II firms: Conditions Governing Business, 6,6 must pay due regard to generally accepted actuarial practice.3

5
SUP 4.5.14 G

2The standards, codes5 and guidance issued from time to time by the Institute and5 Faculty of Actuaries and the Financial Reporting Council5 are important sources of generally accepted actuarial practice.3

5