1   Good morning ladies and gentlemen.

2   It is indeed my pleasure to join you at this inaugural Appointed Actuaries Symposium.  Until today, I have not had the opportunity to meet so many actuaries at the same time.  Some of you may know that MAS was seeking to hire actuaries last year as our only two actuaries decided to return to the industry.  Now, I know where to look.

3   Allow me to thank the Singapore Actuarial Society (“SAS”) for organising this event in Singapore.  I am told that such symposiums for appointed actuaries are regularly held in other countries such as Hong Kong and Canada, and they have been very well received by the actuarial communities there.  I am glad that the actuaries in Singapore now have their own platform to actively exchange their views on issues affecting their roles and responsibilities.

4    The theme of the symposium is “To abolish or enhance the role of the Appointed Actuary?”  I would have thought that the answer is obvious especially amongst the audience here.  But since the Appointed Actuary is a statutory role, it may be useful for me to share with you, from the regulator’s perspective, why Appointed Actuaries are needed.  

Why is the role of appointed actuaries important and necessary in Singapore?

5   MAS has been emphasising to the financial industry that the Board and senior management of financial institutions are ultimately responsible for the prudent management of their own institutions.  In this regard, we have issued regulations and guidelines on the standards of corporate governance expected of financial institutions.  Given that financial institutions have fiduciary responsibilities to depositors, policyholders or investors, they are expected to maintain higher standards of corporate governance compared with other companies.

6   As is the case for other financial institutions, the Board and senior management of an insurer have somewhat conflicting obligations.  While one of their obligations is clearly to maximise return to shareholders within the defined risk profile, they also have the obligation to protect the interests of policyholders.

7   Some may argue that these two obligations are not necessarily conflicting because having satisfied policyholders will generate business growth and hence higher profitability.  That is true if the Board and senior management takes a long-term view.  But as we have seen in a number of instances in recent history, Boards and senior management can easily succumb to pressure to pursue short-term results.  For an insurance company, this could be detrimental to the interests of policyholders. 

8   This is one of the reasons why sound corporate governance principles advocate Board independence and strong checks and balances.  In this regard, independent directors, independent auditors, independent actuaries, etc have important roles to play.  To strengthen their independence, the appointment of external auditors and Appointed Actuaries are protected under statutes and their appointments have to be approved by the MAS.  The corollary to this is that they cannot be removed by the insurer without good justification as MAS would question the reasons for the insurer to appoint a new Appointed Actuary, especially if the existing Appointed Actuary has been performing his duties well.  What then are the roles of the Appointed Actuary that makes them so important?  Allow me to elaborate.   

Estimation of the policy liabilities

9   One of the key roles of an Appointed Actuary is the estimation of policy liabilities and hence the determination of reserves.  An Appointed Actuary is required to conduct an investigation into the valuation of policy liabilities, confirm that it is done in accordance with the valuation framework, and certify the amount of policy liabilities derived.

10   With the introduction of the risk-based capital framework in 2005, the role of the Appointed Actuary has become even more important.  Greater reliance is being placed on the Appointed Actuary’s judgment as he is required to value the policy liabilities realistically based on his best estimate assumptions with provisions for adverse deviations.  In deriving these values, he has to rely on his sound professional judgment.  It is therefore important that he is able to act independently and not be influenced by demands from the business to reflect a more favourable financial result for the insurer.  His responsibility is to ensure that the insurer remains financially sound so that it is able to continue to meet its obligations to policyholders.

Financial condition testing

11   Another key role which an Appointed Actuary has to perform is financial condition testing, better known as stress testing.  Since 2005, Appointed Actuaries have been given greater flexibility on the choice of scenarios on which to conduct stress tests.   For any given stress scenario, they have to consider alternative courses of management action that an insurer could take to mitigate the impact.

12   To do this, an Appointed Actuary would need to possess a good knowledge of actuarial modeling techniques and in-depth understanding of the insurer’s business plans, pricing and bonus philosophies, investment and reinsurance strategies.  He is expected to provide professional advice to the Board and senior management on the key areas of concern which could undermine the insurer’s financial soundness and the mitigating actions that should be taken.  In other words, to put it bluntly, the Appointed Actuary must be prepared to be the bearer of bad news without fear of being given the sack.      

Ensuring appropriateness of premium rates

13   In December 2005, MAS removed the requirement for insurers to seek approval from MAS before launching any product, other than those with features that are new to the insurer.  In August this year, we also removed the requirement for insurers to seek MAS’ prior approval for ILP sub-funds.  With these changes, greater reliance is placed on the Board and senior management of insurers to ensure that proper procedures are in place and adhered to in the development and pricing of their insurance products. 

14   The Appointed Actuaries have an important role to play in this process.  They are expected to provide sound advice to the Board and senior management in ensuring compliance with the risk management and pricing policies set by the Board.  In this regard, their role is similar to that of external auditors who are tasked to ensure that the accounting and internal control systems have been adhered to in the preparation of the financial statements of the company.           

Management of participating business

15   Another area in which the Appointed Actuary has a significant role is the management of participating business.  An insurer’s Board relies on the recommendations of the Appointed Actuary to decide on the amount of bonuses to be allocated to participating policyholders, taking into account amongst other factors, the need to ensure fairness and equity among different cohorts of policyholders and the future financial condition of the participating fund.

16   Next year, MAS will be rolling out enhancements to the guidance on internal governance and disclosure practices to improve the transparency of the management of participating funds.  Appointed Actuaries will be called upon to play a major role in helping insurers ensure that the participating fund is managed in accordance with the rules and guiding principles set out in the companies’ Board-approved policies.  

Formulation of investment policy

17   Appointed Actuaries, given the scope of their responsibilities, are familiar with the nature and term of the insurer’s policy liabilities.  As such, Appointed Actuaries can play an important role to assist insurers in formulating a suitable policy on how the assets of an insurance fund are to be invested.  Among other things, such investment policy should be consistent with the insurer’s asset-liability management strategy and the rules and guiding principles on the management of the participating fund. 

Independent reporting to the regulator

19   An Appointed Actuary has the duty to report to the regulator if he is aware that the insurer has failed to take appropriate steps to rectify a matter which has material adverse effect on its financial condition within a reasonable time.  In other words, the Appointed Actuary is responsible for alerting the regulator if he is of the opinion that the financial soundness of the insurer is under threat.  This is similar to the role of external auditors, who also have the statutory duty to immediately notify the regulator when, in the course of their audit, they have noted serious irregularities in the insurer that could undermine the interests of policyholders.
 
20   The ability of the Appointed Actuary or the external auditors to report directly to the regulator is an important measure in our supervisory tool-kit to enable us to take timely supervisory actions to address any shortcoming in an insurer that could potentially undermine the interests of policyholders.
  
Practices in other jurisdictions

21   I hope I have convinced you of the important role played by the Appointed Actuary and why it should be enhanced and not abolished.  This view is shared by regulators in other major jurisdictions.  In fact, some of these jurisdictions have even taken steps to enhance the independence of the Appointed Actuaries and raise the level of public confidence in the Appointed Actuary system.

22   In the UK, for example, following the Equitable Life saga and the consequential Morris Review, the Appointed Actuary’s role has been replaced by three separate qualified actuaries – two with statutory roles prescribed by the regulator, that is, the actuarial function-holder and the with-profits actuary, and an independent reviewing actuary.  In Canada, OSFI introduced the requirement for an independent review of the Appointed Actuaries’ work in accordance with the Canadian Institute of Actuaries’ standard. In fact, the International Association of Insurance Supervisors (IAIS), in its guidance paper on “The Use of Actuaries as Part of a Supervisory Model”, has recommended that there should be a mechanism for peer reviews of the work of the Appointed Actuary.

Regulator’s expectations of a good appointed actuary

23   While the Appointed Actuary has his work cut out for him, there are certain important competencies and values which I believe every actuary will need to possess to be an effective Appointed Actuary.

Effective communication skills

24   I am told that actuaries have been stereotyped as not being able to convey their views succinctly and in a straightforward manner.  I am sure many of you have heard of this joke where a CEO decided to recruit an actuary with only one arm out of a pool of hopeful candidates.  When the puzzled headhunter asked why, the CEO replied that it was because he was so fed up with his previous actuary telling him “On the other hand…” all the time.  This actually reminds me of the same joke being made of economists.  Hopefully, this joke is not made of regulators.  Otherwise, all of us will have to work with one hand tied behind our back.

25   In the past, actuarial issues have always been viewed to be the domain knowledge of the Appointed Actuaries.  However, more reliance is now placed on the Board and senior management for oversight of areas like product development and pricing, management of participating funds, and stress testing.  As a result, they have to develop a better understanding of the work done by the Appointed Actuaries in order to make informed decisions on the operations of the insurers.

26   Hence, Appointed Actuaries will need to have effective communication skills in order to explain technical and complex issues to the Board and senior management, who are not necessarily actuarially trained.  This is important to ensure that the Board and senior management make well-considered decisions based on the Appointed Actuary’s recommendations.  Besides communicating to the Board and senior management, the Appointed Actuary also needs to be able to explain difficult concepts, such as smoothing of bonuses, in simple language to policyholders who are not well versed in insurance, let alone actuarial concepts.

Professional Integrity

27   As actuaries possess valuable skills in risk management, we have seen Appointed Actuaries being entrusted with additional roles in areas such as financial reporting, marketing, risk management and investment.   However, assuming such multiple roles could put the Appointed Actuary in a potential conflict of interest situation.  The Appointed Actuary’s primary responsibility is to protect the interests of policyholders, but the other roles may require him to seek to maximise shareholder value, which could well be in conflict with his primary responsibility.

28   From a regulator’s perspective, it is preferable that the Appointed Actuary do not assume roles that may conflict with his statutory responsibility.   However, where this is not possible because of shortage of expertise, there should be adequate controls in place to mitigate the potential conflicts.  Ultimately, we have to rely on the professional integrity of the Appointed Actuary to recognise the potential conflict of interest and abstain from making decisions that could undermine his statutory responsibility as an Appointed Actuary.   

Conclusion

29   Appointed Actuaries continue to have an important role to play in the insurance industry.  They are part of an important check and balance system that seeks to ensure that insurers continue to operate prudently in the interests of policyholders.  However, in order to play this important role effectively, Appointed Actuaries have to continually upgrade themselves and keep pace with international developments, not just on actuarial issues, but also in other related areas like accounting and capital market activities.

30   In fact, Continuous Professional Development or CPD has been identified as one of the key recommendations in many jurisdictions to ensure the ongoing competency of professionals.  The reviews in Australia and the UK, and the guidelines issued by the IAIS, have recommended raising the CPD requirements for actuaries.

31   I am glad to note that the SAS has also put in place professional standards on CPD for its fellows.  I would encourage the SAS to continue with the good work and develop more professional guidance notes, for example, on the management of participating business, and practice standards on the conduct of Appointed Actuaries, including managing conflict of interests.  MAS is happy to work with SAS on such initiatives as appropriate.

32   I have shared with you the regulator’s perspective on the roles and responsibilities of the Appointed Actuary.  There will be other speakers who will share with you different perspectives which I hope will generate interesting and useful discussions. 

33   Thank you and I wish you a fruitful symposium.