14 May 2014

Risk.net: UK general insurers grapple with actuarial demands

UK general insurers are under pressure to improve their actuarial functions before the implementation of Solvency II, with many smaller companies behind on their compliance schedules, according to experts.

General insurers have not been required previously to maintain a formalised actuarial function, unlike life insurers for which it has been mandatory since Solvency I came into force.

Christopher Critchlow, consultant actuary at OAC in London, explains: "Non-life insurers have never had this requirement before and they're going through a process of putting an actuarial function in place, but are struggling to understand what this really means in practice. Typically, smaller general insurers calculate their technical provisions on an informal basis using very simple methodologies for the assessment of their liabilities without really digging down into the underlying risks in the business. But now this has to change."

Article 48 of the incoming directive requires firms to provide an "effective actuarial function" to coordinate the calculation of technical provisions and ensure the appropriateness of the methodologies and underlying models used in these calculations. The function must be carried out by a number of actuarial professionals "commensurate with the nature, scale and complexity of the risks inherent in the business" of the host insurer.

Martin Shaw, Lincolnshire-based chief executive of the Association of Financial Mutuals, explains that for smaller insurers, developing an internal or contracting an external actuarial function represents a significant cost, which may explain why few have made significant progress complying with this aspect of the regulation.

OAC's Critchlow believes progress could be accelerated if company boards were better educated about the potential benefits an augmented actuarial function could have for the business. Too many still believe Solvency II is a cost with little benefit, he says. "That's unfortunate because the directive is a good opportunity for firms to use new rules to improve the management of their business. The firms that react in this positive way will be more likely to succeed than those that take a pessimistic view", he adds.

General insurers also need to recognise their liability profiles are shifting in response to emerging trends. For example, the growing prevalence of periodical payment orders is loading longer term liabilities on general insurers' balance sheets.

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