Improving the role of the Appointed Actuary

In brief

Written by Partner Andrew Maher and Associate Jane Gregory

In its endeavour to improve the role of the Appointed Actuary in general and life insurance companies, APRA is seeking submissions to a Discussion Paper released earlier this year. The key objective of APRA's review is to 'streamline and sharpen the role' in order to provide the Appointed Actuary with 'greater capacity to play a strategic role within insurers'.¹ The reforms included in the Discussion Paper have been publicly supported by some key stakeholders.

Role of Appointed Actuary

The Appointed Actuary's primary responsibilities within general and life insurance companies include providing:

• advice on the valuation of an insurer's insurance liabilities; and
• an impartial assessment of the overall financial condition of the insurer.²

It is APRA's expectation that the Appointed Actuary should play a significant role in providing independent and unbiased advice on issues that are material to the financial condition of the company, including by providing effective challenge on decisions.³ However, there are concerns that due to the current drafting of the relevant prudential standards, the Appointed Actuary's time is largely dedicated to compliance tasks and they are unable to provide sufficient strategic advice. Further, there are restrictions on what tasks can be delegated. APRA has included a number of proposals in its Discussion Paper to address these issues.

What changes are being proposed?

APRA has introduced five key proposals.

First, APRA intends to insert into the relevant prudential standards a purpose statement which emphasises APRA's expectation that the Appointed Actuary should be a strategic adviser to the board. The statement includes overarching principles and attributes to help guide the role. The proposed wording for the statement is set out below:

The purpose of the Appointed Actuary role is to ensure that the board has unfettered access to expert and impartial actuarial advice and review, to assist with the sound and prudent management of an insurer and that the insurer gives adequate consideration to the protection of policyholder interests.

The Appointed Actuary must have the necessary authority, seniority and adequate support to ensure their views are considered seriously by the board and they are able to make a significant contribution to the debate of strategic issues at the executive level. The Appointed Actuary plays a key role in, and provides effective challenge to, the activities and decisions that may materially affect the insurer's financial condition as well as its treatment of policyholders.⁴

The draft statement usefully clarifies for the insurance industry how APRA perceives the role of the Appointed Actuary and some steps insurers can take to demonstrate that their Appointed Actuary is appropriately appointed and acting consistently with APRA's expectations.

The second proposal is to allow insurers to develop a framework for the provision of actuarial advice. The framework would include:

• identification of areas where actuarial advice would be required within the company;
• a policy identifying the materiality of an item requiring actuarial advice based on its importance to the financial condition of the insurer or the interests of policyholders (only material matters would be required to be the subject of formal actuarial advice and signed off by the Appointed Actuary); and
• a delegations framework identifying appropriately qualified occupants in designated positions that may provide specific types of actuarial advice. The framework would also identify what advice must only be provided by the Appointed Actuary.

For large insurers particularly, a well thought out actuarial framework could create efficiencies by freeing up the Appointed Actuary to provide more strategic advice to the board and allow less material actuarial work to be completed by less senior employees.

The third proposal addresses the management of conflicts of interests. APRA has suggested companies implement a further framework that provides for independent review of Appointed Actuary advice in certain circumstances such as where an Appointed Actuary is required to review work as both the primary and secondary reviewer.

The fourth proposal is to amend the reporting requirements to provide the Appointed Actuary with greater discretion to report on risks and issues that are material to the financial condition of the insurer. This proposal is in response to industry feedback that there is a need for more targeted advice from the Appointed Actuary in reporting. Further, APRA also suggests removing from the prudential standards prescriptive requirements for reporting. For example, in relation to the Appointed Actuary's Financial Condition Report, APRA intends that the prudential standards set out minimum areas that the Appointed Actuary must consider but may decide to comment on, depending on the Appointed Actuary's view of the matter's relevance and materiality to the insurer's financial condition. Further, if the Appointed Actuary concludes that one of those mandated matters is not sufficiently relevant and/or material, they would be required to state briefly in the Financial Condition Report why that matter is not material or relevant.

The fifth proposal involves amending APRA Prudential Standard GPS 320 'Actuarial and Related matters' to make it less prescriptive and create a separate GPS 340 'Valuation of Insurance Liabilities' prudential standard. That standard would capture all the liability valuation requirements that are the responsibility of the insurer, keeping the liability requirements that are the responsibility of the Appointed Actuary in GPS 320.

Key take away messages

Insurers should review how the role of the Appointed Actuary currently fits within their business structure and consider how the proposals could benefit their business. Insurers should also take time to reflect on what APRA expects from the Appointed Actuary as a strategic adviser to the board. Lastly, insurers should take steps to ensure that if the proposed changes are implemented, they are ready to implement those changes.

Submissions for the Discussion Paper close on 21 September 2016. Subject to the outcomes of the consultation on the Discussion Paper, APRA will release for consultation draft prudential standards and, potentially, associated guidance material incorporating the changes proposed in the paper.