Review of the medium-term fulfilment of obligations by the Responsible Actuary

Abstract

According to Section 141 (5) No. 1 VAG, the responsible actuary must ensure, among other things, that the principles of the DeckRV and Section 341f HGB are complied with when calculating the actuarial provision, whereby he must review the financial situation of the company to determine “whether the permanent fulfilment of the obligations arising from the insurance contracts is guaranteed at all times”.

In particular, the cited regulatory requirement contains as a necessary condition for the calculation bases used in calculating the actuarial provision in their entirety that the actuarial provision must be high enough to finance (under “sufficiently prudent” assumptions from today's perspective), together with the expected future income, in particular capital and risk income, the expected future expenses attributable to these contracts. 

Even if this requirement is met for the portfolio under review from a long-term perspective (e.g. in the sense of present values calculated for the remaining term of the portfolio under review), there could still be a risk that the ability to meet obligations in the coming years is not guaranteed. Depending on the investment portfolio and its valuation (possibly hidden liabilities), the development of other sources of income and the interest expense, gross results may fluctuate significantly from year to year over the next few years and may therefore not be sufficient to meet the obligations.

For this reason, the DAV recommends the following review procedure based on a balance sheet projection for a recommended projection period of at least 4 years. The selected length of the projection period should ensure that, for example, the effects of the additional interest reserve on the development of the balance sheet and income statement are sufficiently well captured. The examination of the long-term fulfilment of obligations is the subject of the DAV note “Risk assessment of long-term guarantees”.

In the explanatory report, the responsible actuary must demonstrate in accordance with Section 4 (4) No. 3 AktuarV that the calculation bases used to calculate the actuarial provision contain appropriate safety margins. With regard to the interest calculation basis, the regulation on the additional interest reserve (ZZR) is essential.   When reviewing the medium-term ability to meet obligations, the financing of the requirements from the actuarial interest rate and ZZR under HGB must therefore be considered for the above-mentioned projection period.

However, the approach chosen in this way also includes the other guarantees (from biometrics and costs). This assumes that the calculation bases for biometrics and costs are subject to a separate review within the meaning of Section 4 (4) No. 3 Actuarial Ordinance. 

Due to the above-mentioned obligation of the responsible actuary, it may not be sufficient to carry out this review only once a year as part of the explanatory report. For example, the estimates should also be updated during the year in the event of significant changes to the framework conditions or the assumed future developments and independently of the activities in the annual financial statements and the submission of the actuarial confirmation.

The note on the review of the medium-term ability to meet obligations only describes one possible procedure; this note does not address any consequences that may result from a failure to review this.

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 „Prüfung der mittelfristigen Erfüllbarkeit der Verpflichtungen durch den Verantwortlichen Aktuar (Review of the medium-term fulfilment of obligations by 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.