Within the framework of the system of governance introduced with Solvency II, four equally important key functions are defined, which all insurance companies must have: Compliance function, independent risk controlling function (uRCF), internal auditing and the actuarial function (VMF). In the following, Q_PERIOR’s experts, Dr. Sebastian Paik and Jan-Hendrik Uhlenberg, address in detail the tasks of the actuarial function as well as the different structure and organization possibilities for insurers.
Tasks of the actuarial function (VMF)
The actuarial function (VMF) is located in the so-called second line of defense and thus primarily takes on validating tasks in an actuarial context, whereas operative tasks are predominantly located in the continuing departments of the first line of defense, for example in classic actuarial services. The fundamental tasks of the actuarial function are defined in Article 48 of the framework directive. The most important tasks include:
Coordination and calculation of insurance reserves (for the Solvency II balance sheet)
Statement on general underwriting policy
Statement on adequacy of reinsurance arrangements
Contribution to effective support of the risk management with regard to risk modeling, capital requirements and assessment
Assessment of sufficiency and quality of the data used in the calculation of the insurance reserves
Ensuring the appropriateness of the methodologies and the assumptions made in the calculation of the insurance reserves
Furthermore, the framework guideline, the delegated regulation as well as the level 3 texts establish an obligation of information towards management. The central instrument of the information obligation is the written annual report. This includes the documentation of all tasks performed, the results achieved as well as the identification of any deficiencies and recommendation for rectification thereof.
“This report is an addition to the existing reports by the responsible actuary, as for example the adequacy report”, explains Dr. Sebastian Paik from Q_PERIOR. “A combination of these reports is not possible.”
Moreover, it must be taken into account that depending on the structure of the actuarial function (VMF), additional actuarial function (VMF) reports might be required within the group or on group level. In terms of the structure of the report, companies may choose their own design and their own priorities, e.g. with regard to division-specific characteristics.
Delimitation of actuarial function versus responsible actuary
Since the deregulation in 1994, in life and health insurances (as well as HUK pensions and IRB of the damage/accident sector) there is a firmly established responsible actuary who takes on the main tasks with regard to the ongoing satisfiability of the obligations, the adequacy of the excess contribution as well as the issuance of actuarial confirmation below the balance sheet.
The newly created actuarial function (VMF) by Solvency II, however, takes on the tasks mentioned on the previous page with other priorities and contents than the actuary (VM). It must be understood as an addition and it is necessary to avoid conflicts of interest between the two functions.
Organization forms of the actuarial function (VMF)
With regard to the organization of the actuarial function (VM) there are no concrete regulations, but merely the requirement of avoiding conflicts of interest. For this reason, there are many different structure and organization possibilities, which in practice, depend on the company structure and the size of the insurance company:
Actuarial function (VMF) located in the central group actuary unit
Actuarial function (VMF) located in the sector-related individual actuary units
Actuarial function (VMF) as part of risk management
Outsourcing of the actuarial function (VMF)
Actuarial function (VMF) by a committee, whereby a natural person must be hold the key function
The various structure possibilities offer different advantages and disadvantages Centralization generally facilitates a cross-sector perspective, the creation of uniform standards and procedures as well as complete independence from risk-taking. A decentralized structure achieves more proximity to the risks to be assessed and, if applicable, allows for the use of existing models and analysis tools. The option of outsourcing to an external service provider is especially attractive for smaller insurers or e.g. captives, who can purchase actuarial expertise this way, without having to set up their own actuary unit.
Larger intersections between uRFC and VMF through integration of the VMF into risk management
For the concrete avoidance of conflicts of interest, it must be taken into account that the four key functions rank equally. If conflicts of interest are excluded, especially in smaller companies, the VA can also be the same person who holds the key function in the VMF. A bundling of the other key functions (with the exception of internal audit) is also possible, if it is ensured that the tasks of the relevant functions can be fulfilled by one person and that conflicts of interest are avoided.
Are you interested in the topic of actuarial function? Q_PERIOR offers certified actuarial specialists who will, together with you, develop solutions for your actuarial function (VMF) or support your internal audit in the review of your actuarial function (VMF).