“The actuarial function is a key function in the product oversight and governance (POG) framework, which aims to ensure that the interests of customers are taken into account during the product design and throughout the product lifecycle.
The actuarial function supports the POG process by providing technical expertise and analysis on the product features, risks and performance. The actuarial function also ensures that the products comply with the applicable laws and regulations, such as consumer protection, data protection and anti-money laundering rules.
The actuarial function has the following roles and responsibilities in relation to the POG framework:
(i) The actuarial function evaluates the design, pricing and valuation of the insurance products offered by the insurer, taking into account the sustainability risks and factors that may affect the profitability of the products and ultimately the solvency of the undertaking.
(ii) The actuarial function expresses an opinion on the underwriting policy of the undertaking, assessing the uncertainty associated with the estimates made in the calculation of technical provisions and the adequacy of the reinsurance arrangements.
(iii) The actuarial function contributes to the effective implementation of the POG requirements by providing relevant information and advice to the management body and other key functions, such as the risk management and compliance functions.
(iv) The actuarial function cooperates with the supervisory authority on the application of the POG requirements, reporting any material issues or deficiencies that may affect the interests of customers or the sound and prudent management of the business.
Hence, the actuarial function plays a vital role in each stage of the product lifecycle, from the initial design to the regular review and adaptation of the products. Indeed, some of the specific tasks that the actuarial function performs in relation to the POG framework are:
1) In the product design stage, the actuarial function evaluates the expected costs and benefits of the products, taking into account the risk profile, profitability and solvency of the insurer. The actuarial function also assesses the impact of external factors, such as market conditions, regulatory changes and environmental, social and governance (ESG) issues, on the product performance. The actuarial function ensures that the products are consistent with the risk appetite and capital requirements of the carrier.
2) In the product approval stage, the actuarial function expresses an opinion on whether the products meet the POG criteria, such as fairness, transparency, suitability and value for money. The actuarial function also verifies that the products comply with the applicable laws and regulations, such as consumer protection, data protection and anti-money laundering rules. The actuarial function provides recommendations and suggestions for improving or modifying the products, if necessary.
3) In the product distribution stage, the actuarial function monitors and controls the distribution channels and methods used by the undertaking to sell or offer its products to customers. The actuarial function ensures that the distribution strategy is consistent with the target market definition and that the customers receive adequate information and advice about the products. The actuarial function also identifies and reports any potential conflicts of interest or mis-selling practices that may arise in the distribution process.
4) In the product review stage, the actuarial function conducts regular reviews and analyses of the products to evaluate their actual performance against their expected performance. The actuarial function also assesses whether there are any changes in customer needs or expectations, market conditions or regulatory environment that may affect the suitability or profitability of the products. The actuarial function proposes corrective actions or adjustments to improve or adapt the products, if necessary.
An example of how the actuarial function contributes to the POG framework is by performing a stress test on a new insurance product before launching it to market. A stress test is a simulation technique that evaluates how a product would perform under different scenarios of adverse events or extreme conditions. The actuarial function uses mathematical models and statistical methods to estimate how various factors, such as interest rates, inflation, mortality rates, claims frequency or severity, would affect the cash flows, profitability and solvency of a product under stress scenarios. The results of a stress test can help to identify potential risks or vulnerabilities of a product and to determine whether it is robust enough to withstand adverse situations. The stress test can also provide insights into how to improve or modify a product to make it more resilient or sustainable.
The actuarial function is therefore an essential part of the system of governance of insurance undertakings, as it helps to ensure that the insurance products are designed and distributed in a way that meets the needs and expectations of customers, while also safeguarding the financial stability and sustainability of the insurance undertakings.
The actuarial function is not only a technical function, but also a strategic and ethical one. It has the power and the responsibility to shape the future of the insurance industry and the society at large, by creating products that are fair, transparent, sustainable and beneficial for all stakeholders. The actuarial function is not a mere follower of the POG framework, but a leader and a innovator of it. The actuarial function is the heart and the brain of the insurance undertakings, and it should always beat and think with the highest standards of professionalism and integrity!”