THE REGULATORY ROLE OF THE ACTUARY
BY C. D. DAYKIN
[Presented to the Institute of Actuaries, 22 February 1999]
The actuary has played a role in regulation in the Un ited Kingdo m since 1819. More recently, in 1974, the Appointed
Actuary system was introduced for life insurance companies, backed by strong professional guidance. Derivatives of
the Appointed Actuary concept have been implemented in a nu mber of other countries. Meanwhile, in the UK, defined
benefit occupational pension schemes are now required to appoint a Scheme Actuary, who has a statutory whistle-
blowing role under the Pensions Act 1995. A nu mber of statutory roles for pension actuaries were in p lace prior to this.
In general insurance, Lloyd's syndicates are now required to obtain an actuarial opinion on the end of year provisions,
as part of the Lloyd's market regulatory structure, and friendly societies must obtain an actuarial opinion on their
technical provisions once every three years. This paper reviews some of the d ifferent re gulatory roles of the actuary in
the UK, draws some co mparisons with the situation in other countries, considers the strengths and weaknesses of the
present situation and invites debate and discussion on the way forward in o rder to optimise the contributio n which the
profession can make to the public interest in the field of regulation.
Regulation; Appointed Actuary; Scheme Actuary; Actuarial Op inions; Whistle Blo wing; Public Interest.
C. D. Daykin, C.B., Hon. D.Sc., F.I.A., Hon. F.F.A., A.S.A., Govern ment Actuary's Department, New King’s Beam
House, 22 Upper Ground, London SE1 9RJ, U.K. Tel: + 44(0)171 -211-2620, Fax: + 44(0)171-211-2650; E-mail:
1.1 The first United Kingdom legislation which assigned a role to the actuary in the regulation of
any financial institution was the Friendly Societies Act 1819. This referred to a requirement for
tables to be approved by two persons known to be professional actuaries. Insurance companies
were not, at that time, subject to any form of regulation, and there was great reluctance on the part
of the Government to legislate. In the mid 1800s there was a spate of merger and acquisition
activity, some life insurance companies grew very rapidly by absorbing other weaker companies,
and there followed the spectacular demise of the Albert and the European, with a serious shortfall
of assets to meet their liabilities. This proved to be the trigger for the Life Assurance Act 1870,
which introduced the principle of 'freedom with publicity' as the watchword for regulation.
1.2 A key element of 'freedom with publicity' was that the financial condition of the company
would be regularly exposed to public scrutiny through the placing on public record of the actuary's
report on the valuation of the assets and the liabilities. Regularity is relative, and companies
established prior to the passing of the legislation were only required to have such a report every 10
years, although then, as now, a lot could happen between valuations. New companies were
required to have a report every five years. Further details of the development of the role of the
actuary in the supervision of insurance in the U.K. can be found in Daykin (1992, 1997).
1.3 Although the role of the actuary was firmly entrenched in life insurance companies from 1870
onwards, both for internal management and for public regulation, there was surprisingly little
change in regulation, and a very modest level of active supervision by the Board of Trade, for the
next hundred years. Actuarial valuations became five yearly and then triennial. The Government
Actuary's Department became involved in advising the Board of Trade on the financial strength of
life insurance companies, and, by the end of the 1960s, had one actuary employed full- time on this
task, as well as part of the time of a senior officer. Today GAD has 17 qualified actuaries engaged
full-time on the supervision of insurance companies and friendly societies and two on the
supervision of occupational pension schemes.
2. THE APPOINTED ACTUARY
2.1 A more comprehensive formal involvement of the actuary in the financial monitoring and
control of the insurance business and the protection of policyholders began to be achieved through
the introduction, in 1974, of the Appointed Actuary concept, which was first enacted in the
Insurance Companies Act 1973. Although the term 'Appointed Actuary' has entered the vocabulary
and is widely referred to, the legislation did not, in fact, use this terminology, s tating simply that
every insurance company transacting long-term insurance business should 'appoint an actuary', who
must, as prescribed in subsequent regulations, be a Fellow of the Institute of Actuaries or a Fellow
of the Faculty of Actuaries and be over the age of 30.
2.2 An important distinguishing feature of this approach from what had gone on before was the
continuous nature of the appointment. The Appointed Actuary is not just required to carry out
specific tasks, such as the periodical valuation of the liabilities and the determination of surplus, but
must be identified as a named individual at all times. The legislation (primary and secondary)
required the Appointed Actuary to carry out an annual valuation of the liabilities of the long-term
insurance business and to determine the surplus available for distribution (or, as the case may be,
the deficit, which must be made good before any upstream holding company of the insurance
company may pay a dividend to its shareholders). The Appointed Actuary must now provide an
annual certificate which details the amount of the required minimum solvency margin and certifies
that the amount published as reserves in respect of the liabilities of the long-term business
constitutes proper provision for those liabilities. The Appointed Actuary must also certify, each
year, that the data are adequate to support the valuation and that the premiums charged have been
adequate in relation to the corresponding liabilities being taken on, having regard to the overall
financial position of the company.
2.3 A remarkable aspect of the U.K. Appointed Actuary system is the extent to which the
responsibilities are spelt out in professional guidance, rather than in legislation or direct
requirements of the insurance supervisory authority (for some years this was the Insurance Division
of the Department of Trade and Industry, before responsibility was transferred to HM Treasury, and
then, in January 1999, contracted out to the Financial Services Authority (FSA)). Following
extensive discussions, the Institute of Actuaries and the Faculty of Actuaries jointly issued a
guidance note in May 1975, subsequently to become known as GN1, which set out in more detail
what was expected of the Appointed Actuary. This included a requirement to have direct access to
the board of directors of the company, to report to the directors on the results of the annual
valuation of assets and liabilities and to ensure that the directors receive a report containing the
actuary's recommendations on the distribution of surplus, before making any decisions on the
declaration of bonuses to policyholders or dividends to shareholders. The discussion on an
introductory note by Barrow (1976) records the profession's reactions to this first set of guidance
2.4 Following the introduction of a minimum statutory valuation basis for the determination of
liabilities, the profession issued a further guidance note, GN8, amplifying the meaning of the
regulations. This guidance note has been updated on a regular basis to reflect changes in the
regulations, most notably to incorporate a formal resilience test and to comply with the changes
induced by the Third Life Directive. More recently, a requirement to report annually to the board
on issues of policyholders' reasonable expectations (PRE) has been introduced into GN1.
2.5 Two other key professional requirements define the distinctive Appointed Actuary role. One is
that the Appointed Actuary must be satisfied, at all times, that, if he or she were to carry o ut a full
actuarial valuation, the financial position would be satisfactory. This represents a fundamental shift
of responsibility for monitoring financial strength from the supervisor to the Appointed Actuary. It
implicitly acknowledges that there is little that the supervisor can do to keep track of developments
between reporting dates. The formal published valuation takes place only annually, is submitted to
the supervisor six months after the date to which it relates, and may not be analysed in detail until
some weeks (or even months) after that. The Appointed Actuary, on the other hand, is deemed to
be in such a key position within the company that he or she should have a good idea of what the
position is at any particular moment, and not just at year ends. In order to be satisfied on this, the
Appointed Actuary has to monitor, in detail all aspects which could impinge upon the company's
financial position, in particular:
- product design;
- methods of marketing;
- volumes of business;
- premium rates;
- options and guarantees;
- surrender values and paid- up values;
- investments held and changes in investment policy;
- derivative exposures;
- current and likely future levels of expenses;
- current and likely future tax bases;
- reinsurance arrangements;
- claims handling policy; and
- any contingent liabilities.
2.6 The Appointed Actuary needs to be able to model the financial behaviour of the company
between valuations, so as to be able to estimate the effects of these various factors on the overall
financial condition and, in particular, on the company's ability to meet (and continue to meet) the
minimum solvency margin requirement.
2.7 The Appointed Actuary is clearly expected to act as a front line controller of prudent financial
management, lessening the need for close regulatory attention which could never, in practice, give
the same degree of continuous monitoring as is required of the Appointed Actuary. The link to the
insurance supervisor is effected through the professional duty to 'blow the whistle' if the board or
the management of the company persists in pursuing a strategy which the Appointed Actuary
believes may have a serious adverse financial impact on the company, in spite of attempts to
persuade them otherwise.
2.8 It is also recommended, in GN2, that the Appointed Actuary should report regularly to the
board of directors on the possible future financial condition of the company. This requires work to
be carried out on a dynamic financial analysis of the company, investigating the possible impact on
the future financial condition of a variety of plausible adverse scenarios (using either deterministic
or stochastic methodology). The idea is to help the board to understand the risks to which the
company is most vulnerable, and to formulate strategies for managing and controlling those risks.
2.9 The extent of professional control over the role of the Appointed Actuary in the U.K. was made
possible by the stature and historical position of the actuarial profession. This has been reinforced
by the legislation, which requires the Appointed Actuary to certify, each year, to the insurance
supervisor that the mandatory actuarial standards of practice have been complied with. There are
procedures whereby the insurance supervisor can approve someone as an Appointed Actuary who
has some other actuarial qualification, but this is made conditional on the individual becoming an
Affiliate Member of the Institute of Actuaries, and hence subject to all the requirements of the
profession, including the standards of practice.
2.10 The Faculty and the Institute of Actuaries only permit their members to take a position as
Appointed Actuary of a life insurance company if they hold a current practising certificate from the
profession. In deciding whether to grant such a certificate, the profession requires evidence of
several years' relevant practical experience, an unblemished professional record and up-to-date
compliance with the requirements of the Continuing Professional Development (CPD) Scheme.
The profession could decline to renew the certificate if there was good evidence of failure to
comply with the code of conduct or applicable standards of practice.
2.11 An insurance company must notify a change of Appointed Actuary to the supervisory
authority, but does not need the supervisor's approval for the new appointment. On receiving such
a notification, the Government Actuary, as principal actuarial adviser to the supervisor, will invite
the new Appointed Actuary for an informal discussion on the ro le and, in particular, on the extent
to which he or she has made arrangements to be in a position to comply with the profession's
standards of practice, including matters such as direct access to the board, influence within the
senior management structure, ability to monitor and influence premium rate adequacy, the
reinsurance programme, investment policy, etc. The new appointee is also required (by the
profession) to consult with the previous incumbent, in order to establish if there are any
professional reasons why he or she should not accept the position.
2.12 An extended discussion of the role of the Appointed Actuary may be found in Johnston
2.13 Another responsibility of the Appointed Actuary (or other actuary called upon to advise) arises
in connection with the regulation of market conduct by what was originally LAUTRO (Life
Assurance and Unit Trusts Regulatory Organisation), became PIA (Personal Investment Authority)
and is being subsumed into FSA (Financial Services Authority). An actuarial role is envisaged in
relation to the disclosure of remuneration by company representatives and in the allocation of
expenses of certain types of product for the purpose of expense disclosures. The requirement stems
from PIA rules (with the Financial Services Act 1986 as the ultimate authority), and the profession
has issued GN22 as a recommended practice guidance note.
3. INTERNATIONAL COMPARISONS
Canada is a country which has adopted many of the features of the original U.K. Appointed
Actuary model, but has adapted the system to a different regulatory and legal environment and has
also expanded the role to general insurance companies. Both life and general insurance companies
are required to appoint an actuary, and there is a high degree o f involvement by the Canadian
Institute of Actuaries (CIA), of which the Appointed Actuary must be a member in good standing.
Because of the perceived risk of litigation, the insurance legislation affords the Appointed Actuary
certain protection against civil suit. The requirement to blow the whistle to the regulator is
contained in the federal legislation, rather than in professional standards of practice. The
Appointed Actuary's scope for professional judgement is somewhat more constrained than in the
UK, since the CIA issues more detailed standards of practice than the U.K. profession, and the
technical provisions are expected to satisfy generally accepted accounting practice as well as the
supervisor's interest in adequate technical provisions. To err too much on the side of conservatism
is, therefore, as unacceptable as to under-reserve. The Appointed Actuary is responsible for the
calculation of the risk-based capital requirement (minimum continuing capital and surplus
requirement - MCCSR), and is also required to report to the board of directors regularly on the
results of dynamic capital adequacy testing (DCAT), along similar lines to the dynamic financial
analysis referred to above in the context of the U.K.
3.2 United States of America
The U.S.A. has not yet introduced a full appointed actuary system. On the life side the role has
changed, in recent years, from evaluating the liabilities in accordance with regulatory norms to
providing an opinion as to whether the assets are adequate to cover the liabilities. Cash flow
testing, using prescribed investment scenarios, is required to be carried out, normally on an annual
basis, to ensure that, on a realistic basis, assets equal to the statutory liabilities are sufficient to
enable policy benefits to be paid out. The scenarios are prescribed by each state regulator, but tend
to follow those first set by the New York Insurance Department. The actuarial profession has
played a significant role in the development of risk-based capital requirements, which have been
adopted in all U.S. jurisdictions through the influence of the National Association of Insurance
Commissioners (NAIC). A number of states have also introduced the concept of an 'illustrations
actuary' to ensure that excessive benefits are not projected at the point of sale. Proposals are under
discussion to place greater responsibility on the actuary for product design and marketing
disclosure, in order to support a move away from guaranteed surrender values, and also, possibly,
to give greater discretion to the actuary with regard to the reserving basis.
3.3 European Union
Significant changes have been taking place in insurance regulation in some continental European
countries, following the move to the concept of a single licence to operate throughout the E.U. The
'framework' directives which completed this process now prevent E.U. supervisory authorities from
exercising prior control on products or premium rates. This has forced a switch from material to
normative controls, and has greatly increased the responsibilities placed on actuaries in some
With a regulatory set-up quite similar to that in the U.K., the Appointed Actuary system is
operated, with a Society of Actuaries in Ireland guidance note closely based o n GN1.
In Germany new insurance legislation requires each life insurance company to appoint a
responsible actuary (verantwortlicher Aktuar), who has to take professional responsibility for
ensuring the adequacy of premium rates and for ensuring that the principles of rating and reserving
which are included in the law are observed. The responsible actuary is responsible for reporting to
the board of directors on proposals for bonus distribution to policyholders, and has a
whistleblowing role similar to that of the U.K. Appointed Actuary. To underpin this important
change in the role of the actuary, German actuaries founded the Association of German Actuaries
(DAV - Deutsche Aktuarvereinigung), which now exists besides the German Society of Insurance
Mathematics (DGVM - Deutsche Gesellschaft fur Versicherungsmathematik), the latter's objectives
being the promotion of actuarial science. The DAV has tight entry standards for full members, and
operates as a professional body, with appropriate standards of professional practice and conduct.
The German supervisory authority approves responsible actuaries and, although membership of the
DAV is not a requirement, it is seen as a strong positive indication (Janotta-Simons, 1998).
Italy has had, for some years, a requirement for an actuarial opinion on the technical provisions of a
general insurance company. This opinion has to be provided to the auditor of the general insurance
company, as part of the process of establishing whether the accounts show a true and fair view of
the financial situation of the company. After several years of debate, it now seems that an
Appointed Actuary role will soon be introduced in respect of the life insurance business.
Finland has had, for some years, a significant level of responsibility for the actuary of both life and
non- life companies, although they did not describe the position as Appointed Actuary. The
responsibilities have focused, in the past, more on the liabilities side of the business, but the actuary
is increasingly involved in overall financial management, a situation which also pertains in Sweden
and in Denmark. The Scandinavian countries have always been strong in the mathematical aspects
of an actuary's training, but the actuarial associations have recently begun to give special attention
to the financial and investment aspects, which have not been as well covered in initial university-
based education, but are important for the modern concept of the actuary's role. Additional subjects
may be introduced through a post-qualification CPD process, or, for future 'appointed actuaries', by
requiring further professional examinations to be passed after completing the basic actuarial
3.8 Belgium and the Netherlands
Belgium has introduced its own version of the appointed actuary system, for both life and general
insurance companies. The Netherlands has a longer tradition of actuarial professional
responsibilities in the area of designing and pricing products for life insurance and in respect of
non- life reserving. The Dutch actuarial profession (Het Actuarieel Genootschap) also has more
experience than most continental European actuarial associations of developing post-graduate
education programmes and comprehensive CPD opportunities.
Switzerland has adopted the same terminology as Germany in the German language version of the
new insurance law. Switzerland is not a member of the E.U., although it is bound by the general
insurance directives under a special mutual recognition treaty which effectively incorporates
Switzerland into the single E.U. market for non-life risks. The responsible actuary role in
Switzerland is to be introduced for general insurance companies as well as for life insurers (the new
law is likely to come into force in the year 2000). Reinsurers will also be required to comply and,
if they are composite reinsurers to appoint both a responsible life actuary and a responsible non- life
actuary. The actuary will be responsible for the integrity of the data needed for pricing and for
valuation purposes, as well as for calculating adequate premium rates, prudent provisions and
assessing the solvency margin requirement. He or she will be required, also, to monitor all
developments which could affect the financial position.
An important exception to the general trend towards giving company actuaries greater professional
responsibility may be observed in France, where a rather different tradition has grown up.
Although France moved away from a detailed prior approval system of regulation several years
before Germany, it has not considered it appropriate to give a specific role to the insurance
company actuary within the insurance law, other than a modest responsibility for approving the use
of mortality tables. Responsibility for proper pricing of products, establishing prudent technical
provisions and exercising sound and prudent overall financial management, rests with the
company's chief executive and the board of directors. Ensuring appropriate actuarial input is just
one of the responsibilities of management. In order to monitor the financial position of insurance
companies, and ensure that products are soundly priced and that proper provisions are established,
the French authorities consider that there is no satisfactory alternative, but for this to be regarded as
a key responsibility of the insurance supervisor. Thus, supervision is based on a strong level of
'contrôle sur place' (control on location, i.e. in the company) to accompany control based on
reported financial statements. The Corps de Commissaires Contrôleurs consists of flying squads of
technician supervisors, with accounting and actuarial expertise, who not only review the financial
statements of their allocated companies, but pay extended visits to the companies to review their
systems and controls, approve their technical bases and methodologies and audit a sample of their
3.11 Other Countries
Outside Europe and North America, Australia and South Africa both have a long-established
professional role for the actuary in environments where supervision has always concentrated on
reserve adequacy and financial strength. Japan had a tradition more closely akin to that of
Germany, but now has introduced a form of appointed actuary system (Hoken-Keirinin) as part of
the deregulatory modifications to the insurance law. The Institute of Actuaries of Japan has issued
a standard of practice which was strongly influenced by the U.K. standard GN1. Hong Kong,
Singapore and Malaysia each have appointed actuary systems, and place considerable professional
responsibility on the actuary. Other countries in east Asia do not have a strong professional role for
the actuary, and rely on more prescriptive regulation. This is also the case in most Latin American
countries, and, to an extent, in the countries in transition in central and eastern Europe. In most of
the latter countries the actuarial profession has recently undergone a rebirth, and actuarial
associations are still at an early stage of development. Insurance supervisors in many of the
countries would like to delegate more responsibility to professional actuaries, having regard to the
general lack of expertise and professionalism in the insurance industry a nd difficulties in
compensating for this within the supervisory authority itself. Emergency programmes of actuarial
education, coupled with the creation and rapid development of embryonic professional
associations, offer some hope of successfully addressing a difficult situation, although developing a
culture of professionalism in short order is not an easy task.
4. PENSION SCHEME ACTUARIES
4.1 Defined benefit occupational pension schemes made use of actuaries from their earliest
manifestation, usually dated to 1743, when the Scottish Ministers' Widows' Fund was established
(Renn et al., 1998). The widespread use of actuaries by funded pension schemes (and indeed by
many unfunded ones) was probably a significant factor in the reluctance of governments to legislate
significant statutory requirements for pension schemes, other than for tax approval, until 1973,
when the Occupational Pensions Board was established by the Social Security Act 1973.
4.2 The Social Security Pensions Act 1975 introduced the State Earnings-Related Pension Scheme
(SERPS) with effect from April 1978, together with the system of contracting out for any defined
benefit occupational pension schemes which could meet the requirements of the requisite benefit
test, and also undertook to provide the guaranteed minimum pension in respect of each individual
member for service from April 1978 onwards. Since these arrangements had the effect of passing
the responsibility for a significant part of the social security benefits to contracted-out occupational
pension schemes, the legislation envisaged that the adequacy of the financial resources of the
contracted-out schemes would be regularly certified by actuaries. The so-called Certificate A had
to be provided by an actuary for a scheme to remain contracted out, and the profession supported
the role of the actuary in giving such certificates through the issue of guidance note GN3 in
4.3 Apart from the test of adequacy of resources for contracted-out schemes, there was no general
solvency or minimum funding requirement for occupational pension schemes. However, in effect a
regime of 'freedom with publicity' operated, with the trustees of occupational pension schemes
receiving regular actuarial valuation reports. This process was e ndorsed by legislation through the
disclosure requirements, which were first introduced by the Social Security Act 1985, following the
recommendations of the Occupational Pensions Board in their October 1982 report. These
provisions (now in Section 41 of the Pensions Act 1995, elaborated by The Occupational Pension
Schemes (Disclosure of Information) Regulations 1996 (SI 1996 No. 1655)) require the trustees to
make available to individual members and to recognised trade unions the report on the actuarial
valuation and the reports on compliance with the minimum funding requirement (see Paragraphs
4.12 and 4.13). An actuarial statement has to be included in the annual report of the trustees. The
report on the actuarial valuation has to comply with the profession's practice standard GN9, which
first took effect in April 1985.
4.4 The actuary was also given a formal role in determining cash equivalents to preserved pension
rights for the purposes of individual transfers. Here, again, the profession developed mandatory
guidance (GN11 - first applied in December 1985), which has, in turn, been formally endorsed by
the regulations (the role of the actuary in the calculation of cash equivalents is now laid down in
Sections 94 to 97 of the Pension Schemes Act 1993 and in The Occupational Pension Schemes
(Transfer Values) Regulations 1996 (SI 1996 No 1847)). Separate regulations define the role of the
actuary in calculating and verifying the value of the protected rights within a transfer value.
4.5 The role of the actuary is also critical in cases of bulk transfers of accrued rights from one
pension scheme to another. This can only be done without obtaining the individual consents of all
the members if an actuary certifies to the trustees of the transferring sche me that the credits to be
received by members in the new scheme represent, in broad terms, no worsening relative to their
prior rights before the transfer. This provision is now covered by Section 73 of the Pension
Schemes Act 1993 and by The Occupational Pension Schemes (Preservation of Benefit)
Regulations 1991 (SI 1991 No 167), as amended.
4.6 From April 1997, however, most defined benefit occupational pension schemes have been
required to appoint a Scheme Actuary. Among the tasks assigned to the Sche me Actuary, apart
from the three-yearly valuation, were monitoring the scheme's compliance with the Minimum
Funding Requirement, advising the trustees on a schedule of contributions and recommending
4.7 The Scheme Actuary is accountable to the trustees, and is, therefore, required to keep in balance
the interests of all participants in the trust, including beneficiaries and deferred beneficiaries, as
well as employees and the employer. Regulation of occupational pension schemes by the
Occupational Pensions Regulatory Authority (Opra) is reactive rather than proactive and relies,
amongst other mechanisms, on the Scheme Actuary blowing the whistle if, broadly speaking, there
is a relevant compliance failure. Unlike the Appointed Actuary's whistle-blowing role, which
relates solely to aspects which might impinge upon the financial condition of the company, the
Scheme Actuary has a duty to blow the whistle under Section 48 of the Pensions Act 1995 if he or
she becomes aware of any failure to comply with the regulations, which, in his or her professional
judgement, could be of material significance to Opra. Although this may appear to place a
significant responsibility on the actuary outwith the scope of his or her professional expertise, Opra
guidance makes it clear that the Scheme Actuary does not have an obligation to seek out
compliance failures, but only to report them if and when they are noticed.
4.8 The Scheme Actuary requirements apply to most defined benefit schemes with two members or
more, and present quite a burden to insurance companies with large numbers of relatively small
schemes for which they are expected to provide actuarial services. The regime has not been in
place for long enough for there to be significant experience of its operation, but the whistle-blowing
provision undoubtedly puts the Scheme Actuary under some pressure, and often in relation to non-
compliance in areas which are unconnected with traditional actuarial aspects.
4.9 Given the greater number of Scheme Actuaries (approximately 850) compared with the number
of Appointed Actuaries (approximately 135), it would not be practical for Opra or GAD (on Opra's
behalf) to conduct an informal interview with each new Scheme Actuary about their statutory and
professional responsibilities. The profession has introduced a mentoring system for inexperienced
Scheme Actuaries, which requires them to nominate a more experienced Scheme Actuary, whom
they may consult when necessary. Also, with the co-operation of Opra and GAD, the profession
has recently run a series of Scheme Actuary seminars around the U.K. to consider particular
problems facing Scheme Actuaries and to provide an opportunity for Scheme Actuaries to put
questions to the GAD actuaries who advise Opra. This sho uld probably be repeated on a regular
4.10 As well as introducing the statutory duty to blow the whistle which applies to Scheme
Actuaries, the Pensions Act 1995 has also given the statutory right to blow the whistle to other
parties, including professional advisers. This statutory backing to the right to whistle-blow is
important, because it protects the whistle-blower from breach of confidentiality lawsuits and,
similarly, against claims of defamation. This right to whistle-blow could apply to other actuarial
advisers involved with a defined benefit scheme or, indeed, to an actuary advising the trustees or
sponsoring employer of a defined contribution scheme.
4.11 Accordingly, GN29, which gives professional guidance on whistle-blowing responsibilities to
Scheme Actuaries and others , defines two new types of Actuary ('Advising Actuary' and 'Other
Actuary') who may have the right to whistle-blow. Indeed, in certain circumstances the profession
has extended the statutory right to whistle-blow into a professional requirement.
4.12 Sections 56 to 61 of the Pensions Act 1995 introduced the Minimum Funding Requirement
(MFR), which is coming into force as a generalised test of adequacy of resources, eventually to
replace the previous tests which were specifically in respect of contracted-out occupational pension
schemes. Although first envisaged as a test of the solvency of a pension scheme in the Report of
the Pension Law Review Committee (1993), the renaming of the Minimum So Solvency
Requirement as MFR in the eventual legislation did signal a somewhat weaker test. In effect, the
MFR centres on the ability of the scheme to pay cash equivalents of accrued early leaver benefits in
respect of all active members and those with preserved pensions, and a corresponding concept for
current pensioners and other beneficiaries. More details of the principles to be followed by the
Scheme Actuary in determining the MFR are given in The Occupational Pension Schemes
(Minimum Funding Requirement and Actuarial Valuations) Regulations 1996 (SI 1996 No. 1536)
as amended, and in the actuarial guidance note GN27.
4.13 The Scheme Actuary has to undertake an MFR valuation annually, although it is not
necessarily envisaged that this will be a regular full- scale valuation of the scheme. The provision
for there to be a full actuarial valuation is still in force (such a valuation now having to be obtained,
broadly speaking, at least every three years), and the report from this latter valuation must be
available to members. Nevertheless, sufficient work must be carried out on an annual basis to
assess compliance with the MFR and to recertify the schedule of contributions. The schedule of
contributions will normally be drawn up on completion of the triennial valuation, amounting to an
agreement between the trustees and the employer, on the recommendation of the actuary, regarding
the contributions to be paid into the pension fund to maintain compliance with the MFR, or, in the
case of a scheme which is shown not to be meeting the MFR, to comply with the statutory
requirements for restoring a satisfactory MFR position.
4.14 A further, and sometimes controversial, role for the Scheme Actuary arises from Section 67 of
the Pensions Act 1995 and The Occupational Pension Schemes (Modification of Schemes)
Regulations 1996 (S.I. 1996 No. 2517), which concern the powers of the trustees to make
modifications to the trust deed or rules of an occupational pension scheme. In effect, this requires
the trustees to get individual consents from all the members or, as an alternative, a certificate from
the actuary that the proposed modification will not adversely affect any member's entitlement or
accrued rights. This is a very strong test, and it may be difficult, in practice, for the actuary to feel
confident about 'signing off' any modification in this way. However, the alternative of 100%
individual consent may be impractical.
4.15 The Scheme Actuary is also required to calculate and verify the liabilities of an occupational
pension scheme which is winding up, and to determine any deficiency (as defined by Section 75 of
the Pensions Act 1995 and The Occupational Pension Schemes (Deficiency on Winding Up, etc.)
Regulations 1996 (SI 1996 No. 3128)) which is to be treated as a debt due from the e mployer.
Further guidance is provided by the Faculty and the Institute of Actuaries through GN19.
4.16 The actuarial certification of adequacy of scheme resources for contracting-out purposes,
originally through Certificate A, continues to be a responsibility laid upon the Scheme Actuary
through Section 9 of the Pension Schemes Act 1993 and associated regulations, which now relate
the test to the MFR. Current legislation requires the certification to continue until 6 April 2007,
although the Government is now consulting on a proposal to dispense with such certification once
the scheme has carried out its first MFR valuation. Before that, a successor to the Certificate A
(Supplementary Certificate A) needs to be provided.
4.17 With the abolition of the guaranteed minimum pension for periods of contracted-out service
after 6 April 1997, schemes which wish to be contracted out must satisfy the reference scheme test.
Sections 12A and 12B of the Pension Schemes Act 1993 set out the details of this test, which
requires certification by an actuary. Regulations provide that, in general, this must be the Scheme
Actuary (although there are some schemes in the public sector which are contracted out that are not
required to have a Scheme Actuary).
4.18 It is clear that there are many aspects of the operation of an occupational pension scheme
which rely on the role of the actuary. Most of these functions are now required to be carried out by
the Scheme Actuary. Regulations require the Scheme Actuary to be a Fellow of the Institute of
Actuaries or a Fellow of the Faculty of Actuaries (subject to a discretionary override by the
Secretary of State) and the Faculty and the Institute require Scheme Actuaries to hold the relevant
practising certificate. It is, perhaps, a little early to make a full assessment of the way in which the
Scheme Actuary role is working out. One potential problem which has been identified is in relation
to insured pension schemes, where the Scheme Actuary role would seem to require a much closer
involvement in the affairs of each pension scheme than would previously have been the case for the
insurance company actuary responsible for the triennial valuation and the other pre-April 1997
duties. With many such actuaries now acting as Scheme Actuaries to a large number of insured
schemes, there is a concern that the load on individual Scheme Actuaries in this situation may be
unacceptably high. Other problems may arise in connection with whistle-blowing. For example,
there has been some concern at the lack of legal protection for a Scheme Actuary who is replaced
by another after blowing the whistle to Opra, and might wish to inform the new incumbent of the
contents of the Section 48 report.
4.19 Another statutory role for the pensions actuary arises from the Finance Act 1986, which
introduced a limitation on the assets which may be held tax free by an approved occupational
pension scheme. The limit is set at 105% of the liabilities on a basis which is defined (to a large
extent) in the relevant regulations. Compliance (or not, as the case may be) has to be certified by an
5. REGULATORY ROLES IN GENERAL INSURANCE
5.1 From year-end 1997 all active syndicates at Lloyd's of London have been required to obtain an
actuarial opinion on the provisions established. When first introduced there were exclusions for
reinsurance bad debt provisions and unallocated loss expense provisions. However, these elements
are covered by the actuarial opinions as at 31 December 1998.
5.2 Guidance is provided in GN20 to actuaries undertaking this work, and there are also separate
advisory notes covering reinsurance bad debts, unallocated claims handling expenses and Y2K
exposures. The uncertainties surrounding reserving for Y2K are recognised in the form of the
opinion required for 31 December 1998.
5.3 The actuarial opinion is required under Lloyd's regulations, but is effectively a statutory role,
because of the approval of these regulations by the Insurance Directorate of HM Treasury as part of
the procedures under the Lloyd's Act 1982 for the approval of Lloyd's rules for valuing assets and
liabilities. The actuarial guidance insists that an actuary giving such an opinion must also prepare a
report which conforms with GN12. In practice, Lloyd's regulatory department asks to see these
5.4 Another form of actuarial certification required by Lloyd's has been in relation to Lloyd's
Byelaw No 17 of 1989, which provided for the possibility of a managing agent leaving a year of
account open because it was not possible to determine a reinsurance to close premium. The actuary
was required to give an opinion that the managing agent had acted reasonably. Professional
guidance was provided to the actuary giving such an opinion in GN14, which was effective from
April 1990. Following changes to Lloyd's Byelaw No 17, this opinion is no longer required, and
GN14 is being withdrawn.
5.5 General insurance companies wishing to write excess and surplus lines business in the U.S.A.
are required by the International Insurers Department (formerly NAIIO) to certify the adequacy of
their reserves each year. GN18 provides guidance to actuaries who are involved in providing such
5.6 The U.S. authorities also require various actuarial opinions to protect the position of U.S.
policyholders insured at Lloyd's. Guidance is provided in GN33 to actuaries giving such opinions.
5.7 Friendly societies writing general insurance business (mainly medical expense insurance) have
to include an actuarial opinion in their return to the Friendly Societies Commission, once every
three years, on the adequacy of the technical provisions. Guidance to actuaries providing such
opinions is given in GN32.
5.8 There is as yet no general requirement for actuarial opinions in respect of the U.K. general
insurance company market, nor, indeed, any statutory requirement to take actuarial advice. The
FSA does, however, have the power to request an actuarial report on the technical provisions or on
the overall financial strength of the company, particularly if it has concerns about the company's
5.9 Formal regulatory roles for actuaries in general insurance are becoming increasingly common
in other countries. As mentioned in Section 3, the appointed actuary system (or similar) has been
extended to general insurance companies in Canada, Belgium, Finland and Switzerland, and
actuarial opinions on non- life provisions are required in Italy.
5.10 Property/casualty (P/C) insurance companies in the U.S.A. are required, under NAIC filing
rules, to have their loss reserves (outstanding claims provisions) certified by an actuary. The
actuarial profession assisted the NAIC in the development of a risk-based capital requirement for
PIC companies, and has been working towards a more developed Appointed Actuary role,
including dynamic financial analysis (or dynamic solvency testing), for which the Casualty
Actuarial Society has developed a manual.
5.11 It would be reasonable to anticipate a growth in the regulatory role of the actuary in general
insurance. Three possible future levels of involvement would be:
- actuarial opinion;
- actuarial opinion on overall financial strength (including dynamic financial analysis); and
- a more continuous monitoring role, as with the Appointed Actuary of a U.K. life insurance
6. PRACTISING CERTIFICATES
6.1 In 1992, as part of a package of measures designed to strengthen the role of the Appointed
Actuary, the profession introduced a requirement for every Appointed Actuary to hold a practising
certificate, issued by the Faculty or the Institute of Actuaries, before being appointed to such a post.
This was designed to make it easier to sanction someone in this key role, without necessarily
having to unleash the full disciplinary process or apply suspension or expulsion as penalties. It also
made it possible to impose specific experience requirements and to require regular adherence to the
Continuing Professional Development Scheme, subject to annual demonstration, with the added
provision that at least 10 hours of the required 15 hours of formal CPD each year should be directly
relevant to the Appointed Actuary's job.
6.2 With the introduction of the Scheme Actuary role, it was decided to require practising
certificates for this purpose also. Practising certificates will be introduced for actuaries giving
Lloyd's opinions from year-end 1999. It remains a matter of debate whether practising certificates
should be introduced for all practising actuaries, or kept restricted to those actuaries who carry out
one of these statutory roles (the CPD requirements are also currently imposed on actuaries who are
authorised to give investment advice by the Institute of Actuaries acting as a Recognised
Professional Body (RPB)).
7. PRESSURES ON THE APPOINTED ACTUARY SYSTEM
7.1 The Appointed Actuary system was reviewed by the Joint Actuarial Working Party (JAWP) in
1992 (the JAWP includes representatives of the Faculty and Institute of Actuaries and of the
Government Actuary's Department, with observers from the insurance supervisory body for the
time being, chaired by the Government Actuary). This led to the introduction of practising
certificates, as mentioned in Section 6, and also to the requirement in regulations for the Appointed
Actuary to certify that the actuarial guidance notes have been complied with.
7.2 A growing concern, however, since that review, has been the extent to which the Appointed
Actuary post appears to have slipped in terms of seniority and prestige in a number of major life
insurers. This tendency may have been reinforced by the profession's own guidance in GN7, which
provides for the Reporting Actuary for the purposes of Companies Act accounts. In group
structures, in particular, this has often led to the designation of a post of Group Chief Actuary or
similar, with Reporting Actuary responsibilities, but often not Appointed Actuary responsibilities
for any of the companies in the group. Appointed Actuaries appear to be less frequently given
board positions than hitherto, and in some companies do not even attend all board meetings, which
ought, perhaps, to be regarded as an essential part of the mandatory board access requirement under
7.3 There is a danger that the Appointed Actuary is regarded as having principally a compliance
orientation, rather than as making an indispensable contribution to the commercial and prudential
management of the business. In some cases the Compliance Officer for market conduct regulation
has become more highly placed than the Appointed Actuary.
7.4 There is a concern that the position of the Appointed Actuary may change, possibly
inadvertently, as a result of the Financial Services and Markets Bill 1998 and the switch of
prudential regulation of insurance companies from Insurance Directorate of HM Treasury to the
Financial Services Authority (FSA). Clause 196 of the Financial Services and Markets Bill gives
powers to the FSA to make rules to require an 'authorised person' (e.g. a particular insurance
company) or an 'authorised person who falls within a specified class' (e.g. all life insurance
companies, all friendly societies, or even, perhaps, all general insurance companies or all unit
- to appoint an actuary to act for him on a continuing basis; or
- to produce periodical actuarial reports (on the total operation, or on such aspects as may be
7.5 Although this certainly leaves open the possibility of all life insurance companies being
required to have an Appointed Actuary (as clearly appears to be the current intentio n), and could
even be said to leave open the possibility of a much wider application of the Appointed Actuary
concept - or of actuarial reporting in various forms - much is left to the elaboration of FSA rules.
This includes the definition of qualifications, experience and other requirements to be satisfied,
information which the actuary may be required to furnish to the FSA (including whistle-blowing
responsibilities) and provisions for removing or disqualifying an actuary.
7.6 In some respects it is natural that the new regulatory structure should seek to formalise into
FSA rules some aspects of the existing structure which are currently wholly reliant on professional
guidance (e.g. whistle-blowing and, perhaps, access to the board), but which in other jurisdictions
(e.g. Canada) and other practice areas (e.g. pensions) have been made statutory duties. A danger
perceived by a number in the profession, however, is that the FSA is likely to be less publicly
accountable in respect of the detailed contents of its rule book than Ministers responsible for
Insurance Directorate (at the Department of Trade and Industry or, more recently, HM Treasury)
have been to Parliament. There are also concerns that some aspects which could be regarded as
core roles for the profession (e.g. the issuance and removal of practising certificates) will be put in
the hands of the FSA, without necessarily any commitment to consult the profession. Part of this
concern may remain in spite of assurances given by the FSA, since it is no t realistic to expect future
officials to feel bound by decisions taken during the transition period.
7.7 Other concerns may derive from experience with a number of the other regulatory bodies now
being absorbed into the FSA, where a different style of re gulation, with more emphasis on rules and
less on professionalism, has been administered on a scale which dwarfs the resources applied in the
past to prudential supervision by Insurance Directorate of HM Treasury and the Government
Actuary's Department. From another point of view, this could also be seen as an opportunity for
some of the lessons of the comparatively successful prudential regulation to be applied more
widely, and also for overlapping, or potentially conflicting areas of responsibility to be more
effectively mastered (such as the link between expectations created by the marketing of products,
and the selling process, with the delivery of policyholder reasonable expectations and the
management of issues of equity amongst and between classes of policyholders and between
policyholders and shareholders). Lack of clarity in the question of defining (and thereby
defending) the reasonable expectations of policyholders was a significant concern in the recent
report of the Treasury Select Committee of the House of Commons on the mis-selling of personal
pensions (Treasury Committee, 1998).
7.8 A further potential source of concern is the extent to which the Appointed Actuary is (or can
be) called to account for his or her work. Clearly the Appointed Actuary must expect to be
accountable, at least to the board and the management of the company, in some respects to the
policyholders and shareholders, and to the insurance supervisory authority. The latter aspect is
currently largely effected through the scrutiny of the Appointed Actuary's report, assumptions,
methodology and results by actuaries at the Government Actuary's Department, acting on behalf of
the supervisor. The profession has, itself, been looking at the implications of some form of peer
review process, in this and in other areas, particularly focusing on how the profession can satisfy
itself that mandatory guidance notes (practice standards) are being complied with. A further
development, which the FSA might push for, is a more regular and formal audit process for the
Appointed Actuary's work.
8. LOOKING FORWARD
8.1 The development of the role of the Appointed Actuary, more recently that of the Scheme
Actuary, and the formal role given to actuaries in connection with Lloyd's syndicates have
demonstrated a high level of public trust in the integrity of individual members of the profession
and belief that the profession is able to maintain high standards of competence and behaviour
among its members. Actuaries occupying such roles are clearly fulfilling functions which are in the
public interest. However, not all members of the profession welcome the emphasis and profile
given to regulatory roles, as it may create an image of excessive prudence which is sometimes
perceived as being in conflict with an entrepreneurial or commercial attitude. Clearly the
Appointed Actuary does have to take a prudent approach, and must often balance the interests of
the different parties, in particular policyholders and shareholders, and the long term against t he
short term. There seems, however, no reason why, given the constraints of the legislation, this
should, in any way, conflict with the best commercial interests of the company. However, to be
effective, the Appointed Actuary needs to operate at the highest level within the company and
contribute actively to all aspects of the decision-making process.
8.2 One of the areas of regulation where there could be said to be significant room for improvement
is the link between marketing and disclosure at the po int of sale and the delivery of PRE. It is
unclear in exactly what form PRE will survive in the new regulatory regime, probably being
replaced, in the generic framework of the Financial Services and Markets Bill, by 'the interests of
customers'. This is not a well-defined legal term, although it will probably mean that there will be
a specific obligation on directors and company management to have regard to the interests of
customers in running the business, similar to that already to be found in paragrap h 7 of Schedule
2A to the Insurance Companies Act 1982. It would be helpful, though, to retain a more specific:
reference to PRE in the FSA rules in order to maintain some degree of continuity with -present
accepted 'practice on the application of this co ncept. This is relevant, on the one hand, to the
determination of an appropriate level of mathematical reserves, and also on the other hand to the
maintenance of a proper balance between the interests of different groups of policyholders. The
actuary would then continue to report to the Board each year on PRE issues.
8.3 Far from a weakening of the role of PRE, the actuarial profession should be arguing for a more
coherent follow-through from the design of products, marketing literature and disclosure at the
point of sale to successful delivery of what the policyholder was sold and given to expect.
Oversight, control and signing off of the process at all stages should be part of the role of the
8.4 The actuarial profession continues to argue that an actuarial opinion would add considerable
value in the regulation of general insurance companies. It may be hoped that satisfactory
experience with the actuarial reports and opinions now provided for Lloyd's syndicates, and the
usefulness of actuarial reports required for specific companies on an individual basis, will convince
both companies and supervisors of the advantages of having such reports on all general insurance
companies. However, in some ways it would be a pity to restrict the actuarial responsibility to the
provisions, as the actuary could provide better value to boards, and probably to the supervisors as
well, by carrying out dynamic financial analysis and advising on future financial condition, as well
as by having more of a continuous monitoring role as appointed actuary.
8.5 The role of the Scheme Actuary is already quite well developed, and should be providing the
kind of assurances needed by Opra, as well as being of great value to pension scheme trustees.
Some actuaries remain concerned about the extent of the whistle-blowing responsibilities, which
certainly put the actuary more in the front line than hitherto in pension scheme regulation.
However, it is to be hoped that this will prove to be workable, as it is a clear p ublic interest role for
the profession, and fits well with the relatively unobtrusive style of supervision by Opra, which
many would regard as welcome.
8.6 It is possible that the whistle-blowing role of the Appointed Actuary of a life insurance
company (or friendly society) could also be given a wider brief. The profession will need to decide
how to react to such proposals, should they come, since a stronger whistle-blowing role will not be
to everybody's liking, even though it could be seen to fit well with the profession's public interest
role. One advantage of the statutory duty to blow the whistle in the Pensions Act 1995 is the
immunity from civil suit.
8.7 The question of the independence of the actuary is sometimes raised as an issue. Traditiona lly,
many Appointed Actuaries of life insurance companies have been employees of the company.
Consulting actuaries are usually only appointed to small companies which cannot afford to employ
a full-time actuary, or, on a temporary basis, whilst an employed Appointed Actuary is recruited or
gains experience. From a regulatory point of view there are disadvantages in the role being
fulfilled a consultant , as he or she is less likely to be fully informed about all that is going on in the
company. On the other hand, the consultant may be perceived as having a greater level of
independence, and may find it easier to stand up to difficult chief executives or senior managers.
Would it be helpful to reinforce the independence of employed actuaries in regulatory roles, by
introducing a formal peer review requirement, or would this undermine their status? Does the fact
that we have a requirement for an 'independent actuary' to report to the court on a proposed transfer
of long-term business (Section 2(i) of Schedule 2C to the Insurance Companies Act 1982, inserted
by Regulation 28 of The Insurance Companies (Third Insurance Directives) Regulations 1994 - S.I.
1994 No. 1696) reflect adversely on the 'independence' of the Appointed Actuary? How could the
position of the Appointed Actuary be bolstered, either by the profession or by the FSA, under the
new supervisory regime?
9.1 The development of statutory, quasi-regulatory roles, such as the Appointed Actuary of a life
insurance company, has served well the interests of both insurers and their regulators, and has led
to a high level of protection for policyholders. However, actuaries need to guard against being seen
as narrow or concerned only with prudential regulatory matters.
9.2 There is little likelihood of any diminution in the importance of regulation. However, there will
probably be a continuing debate over the style of regulation , since the alternative is likely to be
interventionist and rule-book based. The actuarial profession will, no doubt, want to continue to
argue the benefits of there being a significant professional role in regulation, and that we, as a
profession, are well-equipped to play that role.
The following list includes, not only the works referred to in the paper, but also details of other
publications which might prove to be helpful to the reader.
BARROW, G. E. (1976). Actuaries and long-term insurance business. J.I.A. 103, 137-166 and
T.F.A. 35, 123-136.
DAYKIN, C. D. (1991). The role of actuaries in the de velopment of insurance supervision in the
E.C. Mitteilungen der Schweizerischen Vereinigung der Versicherungsmathematiker, 2/1991, 171
DAYKIN, C. D. (1992). The developing role of the Government Actuary's Department in the
supervision of insurance. J.I.A. 119, 313-343.
DAYKIN, C. D. (1996). Developments in life insurance regulation in the E.U. following the
framework directives. Mitteilungen der Aktuarvereinigung Österreichs, 8, 81-113.
DAYKIN, C. D. (1997). Challenges in insurance regulation: a greater role for actuaries. Singapore
International Insurance and Actuarial Journal, 1, 175-206.
DAYKIN, C. D. (1997a). The role of the actuary in the supervision of insurance around the world.
Paper presented to the Fourth Annual Meeting of the International Associa tion of Insurance
Supervisors, Sydney, September 1997.
FACULTY AND INSTITUTE OF ACTUARIES (1996). The role of the Appointed Actuary in the
FACULTY AND INSTITUTE OF ACTUARIES (1997). The role of your actuary in your pension
FACULTY AND INSTITUTE OF ACTUARIES (1998). Actuarial opinions for companies
transacting general business.
FACULTY AND INSTITUTE OF ACTUARIES (1998a). The statutory duties of the actuary.
Manual of Actuarial Practice.
JANOTTA-SIMONS, F. (1998). German experience of introducing the 'Responsible Actuary'.
Paper presented at the Third International Professional Meeting of Leaders of the Actuarial
Profession in Central and Eastern Europe, September 1998, Riga, Latvia.
JOHNSTON, E. A. (1989). The Appointed Actuary. J.I.A. 116, 27-78.
OCCUPATIONAL PENSIONS BOARD (1982). Greater security for the rights and expectations
of members of occupational pension schemes. A report of the Occupational Pensions Board in
accordance with Section 66 of the Social Security Act 1973. Cmmd 86 49. HMSO.
OPRA (1997). Pensions Act 1995: Section 48: Reporting to Opra. Opra Note 1.
PENSION LAW REVIEW COMMITTEE (1993). Pension law reform. The report of the Pension
Law Review Committee (Chairman: Professor Roy Goode). Cm 2342, HMSO.
RENN, D.F. (editor) (1998). Life, death and money. Blackwell, Oxford.
THOMSON, C. G. et al. (1998). The role of the Appointed Actuary under the new supervisory
regime. Report of a Life Board Working Party, submitted to Insurance Directorate of HM Treasury
on 26 June 1998.
TREASURY COMMITTEE (1998). Ninth report. The mis-selling of personal pensions. HC 712-I.