1 Introduction
1.1 A general insurer is required under Section 37(1)(b) of the Insurance Act to have an investigation made by a person approved as an actuary by the Authority, into its premium and claim liabilities in respect of insurance policies. The valuation of insurance policy liabilities of each line of business must comprise:
a) a best estimate of the value of premium liabilities;
b) a best estimate of the value of claims liabilities; and
c) a provision for adverse deviation that relates to the inherent uncertainty in the best estimate value of both the premium and claims liabilities at a minimum 75 per cent level of sufficiency at insurance fund level.
1.2 Where an abstract of the investigation is lodged by the insurer as required under the Act, the Actuary's Report should also be submitted. The actuary valuing the insurance policy liabilities should state in the abstract and report, his name and professional qualifications, and where the actuary is an employee of the insurer or a related company, the capacity in which he is carrying out the investigation.
2 Responsibilities of the Board of Directors and Senior Management
2.1 The primary responsibility for the financial position of an insurer, including the adequacy of its insurance policy liabilities, rests with the Board of Directors and senior management. Hence, the Board and senior management should develop and implement appropriate policies and procedures to ensure adequate oversight and monitoring over the actuarial certification process. The Board and senior management should discuss with the actuary the results of his valuation.
3 Responsibility of the Actuary and Scope of the Actuary's Report
3.1 It is the responsibility of an actuary valuing the insurance policy liabilities for the purpose of compliance with section 37(1)(b) of the Insurance Act to be conversant with the requirements of this Notice. The actuary should disclose the extent of compliance with the requirements specified by the Authority and the reasons for not complying fully with any requirements.
3.2 The Actuary's Report should include the items set out in the following paragraphs, especially those in bold and follow the structure and headings at Annex 1 (PDF, 11.3KB).
4 Data
Basis of data
4.1 For direct insurers, the accident year basis should be used for direct and facultative business, and underwriting year basis for treaty business. Marine and aviation business may be reported on an underwriting year basis, if appropriate. For reinsurers, all statistics should be on underwriting year basis.
4.2 Statistics should be compiled on both gross and net of reinsurance. Statistics on direct and indirect claims handling expenses should also be collated, where material. Insurers should build up at least 8 development years of data.
Data source and verification
4.3 The actuary should ensure that the data used gives an appropriate basis for estimating the insurance policy liabilities. He should disclose the steps taken to verify the consistency, completeness and accuracy of the data collated. The degree to which the actuary relies upon data provided by the insurer, and the work of external auditors or any other third party, including the limitations such reliance places on the actuary's confidence in the data, should be clearly explained in the report.
Grouping of risks
4.4 The valuation of the insurance policy liabilities of the insurer may require the sub-division of risks into lines or divisions of lines of business with similar characteristics. The actuary should determine the most appropriate subdivision for the purpose of the valuation. However, the value of insurance policy liabilities must be reported for each line of business prescribed under Form 7 of First Schedule of Insurance (Accounts and Statements) Regulations. Notwithstanding this, where sub-division of lines of business is made, the actuary should disclose the manner of grouping of risks into lines, the divisions of lines of business and the valuation results for each division of line of business.
Data adjustment
4.5 The actuary may make adjustments to the data collated to account for abnormal items, such as large losses. Where such adjustments are made, the nature, amount and rationale for the adjustments should be clearly stated.
5 Business Profile and Strategy
Business Profile
5.1 The actuary should describe the nature of coverage the insurer provides and the mix of risks it has. He should also address and comment on the impact any changes in the business strategy may have on the valuation of the insurance policy liabilities.
Underwriting Policy
5.2 The actuary should comment on any changes in the underwriting policy for each major line of business within the company such as the selection of risks, delegation of authority, changes in key underwriting personnel, rate levels and premium rating methodology. He should take all these factors into consideration in the valuation of insurance policy liabilities.
Claims Policy
5.3 In the first year of valuation, the actuary should provide a description of the case reserving policy of the insurer, including the setting of initial case reserves. In subsequent years, the actuary should comment on any changes in the case reserving and other claims policy for each major line of business within the company such as the establishment of claim files, closing of claims, use of loss adjusters/solicitors, department structure and case load, claim authority limits and defence of complex claims. He should take all these factors into consideration in the valuation of insurance policy liabilities.
Reinsurance
5.4 The valuation of insurance policy liabilities may be either undertaken on a gross basis, in which case a separate estimate of the value of reinsurance recoveries should be done, or on a net basis. But where there have been significant changes in the reinsurance arrangements or if the outstanding reinsurance recoveries have a material impact on the actuary's estimate of the value of insurance policy liabilities, he should perform his valuation on both the gross and net bases.
General Business and Industry Conditions
5.5 The actuary should take into consideration economic, technological, medical, legal, judicial and social trends within the broader community that may impact upon the valuation of insurance policy liabilities.
6 Analysis of Experience
6.1 In the valuation of insurance policy liabilities, it is likely that the actuary will make assumptions regarding certain variables. The assumptions made should have regard to the insurer's claims experience, highlighting significant aspects of recent experience. The impact of social, economic, environmental, legislative and court precedent factors should also be considered. Where assumptions are implicit in the method selected, this should be stated. Assumptions made regarding the following items should be explicitly stated.
Discounting
6.2 The actuary should consider and disclose whether discounting is used in the valuation of insurance policy liabilities. Where the impact is material, discounting should be carried out.
6.3 The rate to be used in discounting the expected future payments for a class of business is the gross redemption yield, as at the valuation date, of a portfolio of government bonds with currency and expected payment profile (or duration) similar to that of the insurance liabilities for that particular class. The actuary should disclose the quantum of discount rate used.
6.4 If government bonds of the same currency do not exist, then the yield will be based on the yield available on the government bond of another currency with an expected payment portfolio similar to that of the insurance liabilities and a subjective adjustment for currency movement. In the event that no government bonds exist, then the yield should be based on the subjective opinion of the actuary. In the case of subjective adjustments or opinions, appropriate justification shall be given in the actuary's report.
Premium Rate Changes
6.5 The actuary should disclose his assumptions on premium rate changes, taking into account the business environment within which the insurer operates.
Development Factors and Ultimate Loss Ratios
6.6 The actuary should disclose his assumptions underpinning the development factors and ultimate loss ratios selected.
Expense Rate
6.7 The actuary should disclose his assumptions on direct and indirect claim expenses. He should state the expense rate used in the valuation.
Recoveries
6.8 The actuary should disclose how he has taken into account reinsurance and non-reinsurance recoveries and any assumptions made in the process. He should take into account the nature and spread of reinsurance arrangements, including significant changes to the arrangements and non-performance of reinsurance. Non-reinsurance recoveries include salvage and subrogation.
6.9 The actuary should compare the actual experience of the insurer, for both premium and claim liabilities, with the results of the previous valuation. Any significant differences between the two should be highlighted and clearly explained.
6.10 The actuary should also compare the results of the current valuation with those of the previous valuation or earlier reports of a similar nature. If there are material differences in the assumptions or conclusions between the current valuation and previous reviews, or if a different method is used, the actuary should justify the change. He should quantify the financial implication arising from such changes in assumptions, conclusions or method.
7 Methods
Best Estimate
7.1 The report should outline and explain the methods and key assumptions made.
7.2 Where the actuary has used a method that is standard and well understood by the general insurance community (such as chain-ladder method for claims provisioning), a brief reference to the method and an explanation of the elements of the data to which the method has been applied would suffice. Where an unusual or non-standard method has been used, a more detailed description of the method should be given.
7.3 In view of the inherent uncertainty in insurance business, it may be often appropriate for the actuary to use more than one method. The key assumptions of each method should be clearly stated in the report. Where results of different methods differ significantly, the actuary should comment on the likely reasons for the differences and explain the basis for the choice of results. If the actuary's choice of results leads to negative incurred but not reported claim reserves, the actuary should disclose why a release of reserves is justified.
7.4 It is recognised that a full actuarial valuation of premium liabilities is essentially are-underwriting of the portfolio. Where the actuary considers it to be inappropriate or impossible to complete a valuation as is necessary for outstanding claims liabilities, the actuary should state so in the report.
7.5 For a reasonably stable portfolio, it is often possible to extend the outstanding claims valuation models to estimate the premium liabilities, on the basis of claims frequency, average costs, and ultimate loss ratios. If this is done, the actuary should adjust the assumptions to reflect the changes in risk exposure, underwriting standards, rate levels, and other factors on the expected claims experience.
Provision For Adverse Deviation
7.6 The provision for adverse deviation (PAD) is the component of the value of the insurance liabilities that relates to the inherent uncertainty in the best estimate. As the PAD represents an additional component of the liability value, it is therefore aimed at ensuring that the value of the insurance liabilities is established at an appropriate and sufficient level.
7.7 PAD should be determined on a basis that reflects the experience of the insurer. Professional judgement will be needed to determine the PAD for the insurer as a whole, and for each class of business. In determining PAD, regard should be made to the objective of this Notice, and any other guidance notes or relevant professional standards.
7.8 The actuary should state the approach used for the assessment of uncertainty and the derivation of the provision for adverse deviation.
8 Valuation and Presentation of Results
8.1 The actuary should submit the valuation of premium liabilities to the Authority as illustrated in Table 1.
