Prudential Regulation Authority Rulebook

6.1

1. (1) A firm must provide for an effective actuarial function to:
1. (a) coordinate the calculation of technical provisions;
2. (b) ensure the appropriateness of the methodologies and underlying models used, as well as the assumptions made in the calculation of technical provisions;
3. (c) assess the sufficiency and quality of the data used in the calculation of technical provisions;
4. (d) compare the best estimate against experience;
5. (e) inform the governing body of the reliability and adequacy of the calculation of technical provisions;
6. (f) oversee the calculation of technical provisions in the cases set out in Technical Provisions 12;
7. (g) express an opinion on the overall underwriting policy;
8. (h) express an opinion on the adequacy of reinsurance arrangements; and
9. (i) contribute to the effective implementation of the risk-management system referred to in 3, in particular with respect to the risk modelling underlying the calculation of the SCR and MCR and to the firm’s ORSA.
2. (2) The actuarial function must be carried out by persons who have knowledge of actuarial and financial mathematics, commensurate with the nature, scale and complexity of the risks inherent in the firm’s business, and who are able to demonstrate their relevant experience with applicable professional and other standards.

[Note: Art. 48 of the Solvency II Directive]

6.2

A firm must provide for an actuarial function that, in coordinating the calculation of the technical provisions, includes all of the following tasks:

1. (1) applies methodologies and procedures to assess the sufficiency of technical provisions and to ensure that their calculation is consistent with the requirements set out in the Technical Provisions Part and the Valuation Part;
2. (2) assesses the uncertainty associated with the estimates made in the calculation of technical provisions;
3. (3) ensures that any limitations of data used to calculate technical provisions are properly dealt with;
4. (4) ensures that the most appropriate approximations for the purposes of calculating the best estimate are used in cases referred to in Technical Provisions 12.2;
5. (5) ensure that homogeneous risk groups of insurance and reinsurance obligations are identified for an appropriate assessment of the underlying risks;
6. (6) consider relevant information provided by financial markets and generally available data on underwriting risks and ensure that it is integrated into the assessment of technical provisions;
7. (7) compare and justify any material differences in the calculation of technical provisions from year to year; and
8. (8) ensure that an appropriate assessment is provided of options and guarantees included in contracts of insurance.

6.3

A firm must ensure that the actuarial function assesses whether the methodologies and assumptions used in the calculation of the technical provisions are appropriate for the specific lines of business of the firm and for the way the business of the firm is managed, having regard to the available data.

6.4

A firm must ensure that the actuarial function assesses whether the information technology systems used in the calculation of technical provisions sufficiently support the actuarial and statistical procedures.

6.5

1. (1) A firm must ensure that the actuarial function, when comparing best estimates against experience, reviews the quality of past best estimates and uses the insights gained from this assessment to improve the quality of current calculations.
2. (2) That comparison of best estimates against experience must include comparisons between observed values and the estimates underlying the calculation of the best estimate, in order to draw conclusions on the appropriateness, accuracy and completeness of the data and assumptions used, as well as on the methodologies applied in the firm's calculations.

6.6

A firm must ensure that:

1. (1) information submitted to the governing body on the calculation of the technical provisions includes at least a reasoned analysis on the reliability and adequacy of its calculations and on the sources and the degree of uncertainty of the estimate of the technical provisions;
2. (2) the analysis referred to at 6.6(1) is supported by a sensitivity analysis that includes an investigation of the sensitivity of the technical provisions to each of the major risks underlying the obligations which are covered in the technical provisions; and
3. (3) the actuarial function clearly states and explains any concerns it may have concerning the adequacy of technical provisions.

6.7

A firm must ensure that the opinion on the overall underwriting policy to be expressed by the actuarial function referred to in 6.1(1)(g) at least includes conclusions regarding the following considerations:

1. (1) sufficiency of the premiums to be earned to cover future claims and expenses, notably taking into consideration the underlying risks (including underwriting risks), and the impact of options and guarantees included in contracts of insurance on the sufficiency of premiums ;
2. (2) the effect of inflation, legal risk, change in the composition of the firm's portfolio, and of systems which adjust the premiums that policyholders pay upwards or downwards depending on their claims history (bonus-malus systems) or similar systems, implemented in specific homogeneous risk groups; and
3. (3) the progressive tendency of a portfolio of contracts of insurance to attract or retain policyholders with a higher risk profile (anti-selection).

6.8

A firm must ensure that the opinion on the adequacy of reinsurance arrangements to be expressed by the actuarial function in accordance with 6.1(1)(h) includes analysis on the adequacy of the following:

1. (1) the firm’s risk profile and underwriting policy;
2. (2) reinsurance providers taking into account their credit standing;
3. (3) the expected cover under stress scenarios in relation to the underwriting policy; and
4. (4) the calculation of the amounts recoverable from reinsurance contracts and special purpose vehicles.

6.9

1. (1) A firm must ensure that the actuarial function produces a written report to be submitted to the governing body, at least annually.
2. (2) The report referred to at 6.9(1) must:
   1. (a) document all tasks that have been undertaken by the actuarial function and their results; and
   2. (b) clearly identify any deficiencies and give recommendations as to how such deficiencies should be remedied.