Life insurers must prepare now to implement with-profits governance reforms

"The new with-profits governance arrangements clarify the responsibilities of boards and senior managements. The new rules make it unequivocally clear that it is for boards and senior managements to make the ultimate judgements about actuarial aspects of the conduct of their with profits insurance business. These new arrangements are central to our reform of the regulation of life insurance, and they begin to take effect next March. It is critical that firms get this right - and, to do so, preparations for Principles and Practices of Financial Management (PPFM), if not already underway - should begin now. Clearly, taking professional advice - legal, accounting and actuarial - is both right and proper, and indeed necessary in this complex area. Such advice is therefore an important input into the boards decision making, but is plainly not the last word on the subject.

From spring next year, firms will be required to make their PPFMs publicly available. Therefore, an immediate priority for boards and their senior management is to engage with our requirements on PPFMs and make considered decisions on content and format. This is not to say that we anticipate that boards and senior management will necessarily be delving into all of the detail. But we do think that they should already be involved in decisions about the broad parameters of PPFMs and in the formulation of the Principles.

As we say in our rules for this area, the Principles must be enduring statements of the overarching standards the firm adopts in managing its with-profits funds. They describe the business model used in meeting the firms duties to policyholders and respond to longer-term changes in the business and economic environment. And any changes will have to be notified to policyholders in advance. The Principles will need to be clear and meaningful, not bland and uninformative. I think the advantage of a structure of a relatively small set of Principles - which cover the ground set out by our rules - supporting more detailed Practices text is there for all to see. Boards also need to be giving serious thought as to how PPFMs can be delivered in language and format that makes them accessible to consumers. We will be publishing our own initial thoughts on this area in a consultation paper later in the year.

We expect that consumer confidence will also be improved by our requirement for the with-profits actuary to make a report to policyholders, as part of the firms annual report to with-profits policyholders. This will give an opinion on whether the way in which the firm has exercised its discretion has taken account of policyholders interests in a reasonable and proportionate manner.

We have also proposed that the reviewing actuary (who will advise the auditors) should provide a public opinion on the valuation of policyholder liabilities. We plan to publish our detailed proposals on this next week.

I am only too aware of concerns in the industry that we are doing too much too soon, both in this area and elsewhere. Our programme of reform is undeniably a demanding one, but it is also a necessary one. As such, the case for pressing ahead and maintaining momentum is, I think, strong. That said, where possible we have tried to be flexible in our approach. For example, we have pushed back the timetable we originally proposed for implementing changes in the role of actuaries to align these with the introduction of new capital requirements."

Notes for editors

1. David Strachan was addressing the Insurance Reporting and Regulation conference in London.

2. With-profits governance and the role of actuaries in life insurers: Feedback on CP 167 was published on 26 June 2003. It can be accessed on the FSA Website at www.fsa.gov.uk. It takes forward proposals set out in CP 167 With-profits governance, the role of actuaries in life insurers, and certification of insurance returns which was published in January 2003.

3. The linkage between the CP 167 proposals and the introduction of the new system for realistic reporting was set out in a speech by John Tiner on Realistic liabilities, With-profits governance and the Role of Life Actuaries (February 2003). This is available on the FSA Website at www.fsa.gov.uk

4. Principles and Practices of Financial Management

   Under the FSAs new rules, the directors will have to certify each year that their with-profits business has been run in accordance with the PPFM and report to policyholders on whether, and how, the firm has complied with its PPFM obligations. The PPFM will cover such issues as:

   • the firm's approach to setting annual and final bonus rates and smoothing the value of with-profits contracts;

   • its investment strategy for with-profits business;

   • the management of any inherited estate and the uses to which this may be put; and

   • its approach to achieving a balance between the interests of with-profits policyholders and the interests of any shareholders of the firm.

5. Strengthening the future role of actuaries

   Other changes, for all life insurers, include replacing the role currently fulfilled by the Appointed Actuary. Two distinct actuarial roles, also requiring FSA pre-approval, will be introduced to ensure that boards obtain actuarial advice on key aspects of their business. For with-profits business specifically, there will be a with-profits actuary whose role it is to provide technical advice to the board focused on the fair treatment of policyholders. He/she could not be a member of the board. All companies undertaking long-term insurance business will be obliged to have an actuary (actuarial function) to provide technical advice to the board on issues such as the valuation of policyholder liabilities.

6. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.

7. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.