Assessment of investment risks in the explanatory report of the Responsible Actuary

Abstract

Pursuant to Section 141 (5) No. 1 VAG, the responsible actuary must review the financial position of the company to determine “whether the permanent fulfilment of the obligations arising from the insurance contracts is guaranteed at all times”. Furthermore, the responsible actuary must “demonstrate in the explanatory report that the principle of prudence was also applied in the valuation of the assets used to cover the provision for future policy benefits” in accordance with Section 4 (4) No. 4 of the Actuarial Ordinance.

Based on these legal principles, in its guideline “Review of the financial position by the responsible actuary” dated 27.01.2025, the DAV also required - in addition to examining the medium-term development of the financial position and the long-term ability to meet the guarantee obligations - to determine the effects of extreme, short-term capital market fluctuations on the balance sheet coverage at the next year-end. A sole reference to statements by the actuarial function does not appear to be sufficient.

A possible approach to the review is described in more detail below.

The effects of short-term capital market fluctuations are reviewed in this note by extrapolating a simplified balance sheet to the next financial year-end using adverse scenarios for the development of share prices, capital market interest rates, real estate prices and default risks. This involves checking whether the company has ensured that the next balance sheet can be closed by the investments even under these adverse scenarios without the need for external funds. 

In addition, the responsible actuary should also make statements in the actuarial report on the significance of liquidity risk and liquidity management.

The procedure described is based on the current legal situation. 

Professional standards of practice are DAV publications that – together with the rules of professional conduct – set out the fundamental principles for the correct practice of actuarial activities. Professional standards of practice are characterised by their 

• treatment of specialist actuarial and professional issues,
• fundamental significance and practical relevance for actuaries,
• professional legitimisation through a implementation process that allows all actuaries to be involved in such implementation,
• correct application, with members being professionally safeguarded by a disciplinary process.

The professional standard of practice „Einschätzung der Anlagerisiken im Erläuterungsbericht des Verantwortlichen Aktuars (Assessment of investment risks in the explanatory report of the Responsible Actuary)“ is an advisory note. Advisory notes are professional standards that are to be taken into account in actuarial considerations, the application of which can be freely decided upon in individual cases, however, within the framework of the code of conduct, and which address specific questions.