Central Bank of Ireland Reserving Requirements

On the 19 September 2013 the Central Bank of Ireland (CBI) released a consultation paper (CP 73) covering a number of changes to the current requirements for reserving and pricing for non-life insurers and reinsurers (see our previous blog Consultation Paper on reserving and pricing for non-life insurers and reinsurers).

The consultation closed on 10 December 2013 and 14 responses were received (including one from Barnett Waddingham).  The individual responses can all be found on the CBI’s website.

Following the consultation, the CBI has now published 'Reserving Requirements for Non-Life Insurers and Non-Life and Life Reinsurers'.  Also published are the 'Guidance on Best Estimate and Margin for Uncertainty' and the 'Feedback Statement' containing the feedback received from industry on CP 73 and the CBI’s response to the individual matters raised.

The Requirements are being introduced on a statutory basis as a condition of authorisation and are effective for the financial years ending on or after 31 December 2014.

The feedback statement is over 40 pages long and the aim of this blog is not to go through each individual piece of feedback and the resulting outcome.  Instead we have pulled out a few of the most significant instances where:

1. the industry feedback has led to changes in the requirements proposed in CP 73
2. the industry feedback has led the CBI to provide further clarification on the requirements
3. the CBI has acknowledged the issues raised in the feedback but has chosen not to amend the requirements

Changes to the requirements proposed in CP 73 following industry feedback:

Pricing has been dropped!

The most noticeable change is that the reference to pricing in the title and the underlying pricing requirements in the paper has been removed.  The requirements now relate solely to reserving.  Although the CBI does not currently intend to publish a separate paper on pricing, it welcomes any industry initiatives to provide guidance on best practice in this area.

Risk Margin => Margin for Uncertainty

A significant amount of feedback was received on ‘Guidance on Best Estimate/Risk Margin’ and in response the CBI has changed the term ‘Risk Margin’ to ‘Margin for Uncertainty’ to avoid confusion with the Risk Margin as defined under Solvency II.  It is the Board’s responsibility to set the Margin for Uncertainty and the CBI has stated that is expects stress and scenario testing to be employed when determining the margin.

Reviewing Actuary can be from the same firm as the External Auditor

In CP 73 it was proposed that as well as being external to the Company, the Reviewing Actuary should not be from the same firm as the Signing Actuary or the External Auditor.  There were a number of concerns raised by the industry in response to this including the possible lack of actuarial resources available.  The CBI has amended the requirements to state that the Reviewing Actuary may be from the same firm as the External Auditor but cannot be from the same firm as the Signing Actuary.

Clarification on the requirements following industry feedback

In some cases the industry feedback did not result in changes to the requirements but instead led the CBI to provide further clarification.  A number of examples of these are described below.

One of the most significant requirements proposed in CP 73 was to prescribe the Signing Actuary role as a Pre-Approved Controlled Function (PCF).  Respondents queried what would happen to individuals currently preforming the role of Signing Actuary.  The CBI has stated that these individuals will automatically be grandfathered into the new PCF role.

The majority of respondents also queried whether Signing Actuaries would be required by the CBI to hold Practising Certificates issued by the Society of Actuaries in Ireland (SAI).  The CBI clarified its position by stating that it sees no specific need to include membership of the SAI in the requirements.  However, possession of a Practicing Certificate will be one of the factors which will be taken into account in the PCF approval process.  Similarly, for the role of Reviewing Actuary the CBI will not require individuals in these roles to hold Practising Certificates.

Clarification was sought on whether the 'Peer Review Report', produced to by the Reviewing Actuary, should include an assessment of the Margin for Uncertainty.  The CBI confirmed that this is not required.

CBI stands strong

One requirement which many respondents queried was the need for the Signing Actuary of High Impact companies to be an employee of the company.  Respondents felt that a greater level of independence could be achieved by external Signing Actuary who may not be subject to internal pressures.  The CBI disagreed and stated that the greater level of experience and knowledge of the company generally achieved by in-house Singing Actuaries justifies this requirement!

Now what?

Although the role of the Signing Actuary has not been changed significantly under the new requirements compared to the current regime, there are more onerous requirements around what should be included in the report which accompanies the Statement of Actuarial Opinion (SAO).  The CBI has set out more explicitly the responsibilities of the Board (and other parties) in the reserving process and included requirements to help strengthen the governance and control around the booked reserves.

We believe the new requirements will help to strengthen and improve the industry going forward.  However, in order to meet the requirements by the effective date firms need to start now by assessing their current processes and policies and determining where gaps exist.  Only then can firms start to take the steps necessary to fill the gaps and ensure compliance in time.

Further information

Links to the CBI publications can be found on their website.