Guidelines on the Process of Creating Technical Provisions

Warsaw, 2015

Introduction

Taking into account the objectives of financial market supervision specified in Article 2 of the Act of 21 July 2006 on the supervision of the financial market (consolidated text: Journal of Laws of 2015, item 614, hereinafter: the Act), such as ensuring the proper functioning, stability, safety, and trust in the market, as well as ensuring the protection of the interests of its participants, and the task of the Financial Supervision Authority specified in Article 4(1)(2) of the Act, consisting of taking actions serving the proper functioning of the financial market, the Guidelines on the Process of Creating Technical Provisions (hereinafter: the Guidelines) are issued.

Technical provisions are intended to cover current and future liabilities that may arise from concluded insurance and reinsurance contracts. Due to their significance, technical provisions constitute an extremely important element of the liabilities of insurance and reinsurance undertakings, and their valuation should be carried out applying the highest standards of professionalism and taking into account an appropriate level of prudence. The supervisory authority, considering the fundamental role played by technical provisions in the financial economy of insurance and reinsurance undertakings, the results of supervisory actions regarding the creation of technical provisions, and the requirements arising from the Solvency II regime, has deemed it necessary to issue guidelines concerning the process of creating technical provisions.

The Guidelines on the Process of Creating Technical Provisions include standards regarding:

• general principles,
• obligations of the Management Board and the Supervisory Board,
• performance of tasks by the actuarial function,
• valuation of technical provisions,
• IT tools and systems,
• risk management,
• internal control system,
• reporting.

The Guidelines constitute a framework for the proper organization of the process of creating technical provisions and the identification, measurement, monitoring, management, and reporting of risks associated with this process. They are a set of recommended actions regarding internal control systems, which should indirectly and directly ensure the implementation of appropriate standards within the process of creating technical provisions.

The Guidelines should be applied proportionally, which means differentiating the approach depending on the nature, scale, and complexity of risks specific to the activity of the insurance/reinsurance undertaking.

The Financial Supervision Authority expects that appropriate actions aimed at implementing the Guidelines will be carried out in insurance/reinsurance undertakings by 1 January 2016.

Glossary of Terms

For the purposes of the Guidelines:

1. Actuary – a person entered in the register of actuaries, supervising the actuarial function in the Undertaking.
2. Actuarial function – an element of the management system, the scope of activities of which includes performing tasks in the process of creating technical provisions.
3. Technical provisions – technical provisions created for solvency purposes and technical provisions created for accounting purposes.
4. Financial statement – a financial statement prepared in accordance with accounting regulations, a report on solvency and financial condition, and regular reports for the supervisory authority.
5. Internal control system – a system including in particular administrative and accounting procedures, the organization of internal control, appropriate rules regarding reporting at all levels of the Undertaking's organizational structure, and the compliance function.
6. Management system – a system including at least an appropriate, transparent organizational structure in which scopes of responsibility are clearly assigned and appropriately divided, ensuring the effectiveness of information transfer and decision-making. The management system includes risk management, compliance, internal audit, and actuarial functions. Within the management system, the internal control system and the risk management system operate.
7. Risk management system – a system including strategies, rules, and procedures necessary for the identification, measurement, monitoring, and reporting of risks to which the Undertaking is or may be exposed, and the interdependencies occurring between these risks, as well as for their management. The risk management system includes the process of creating technical provisions.
8. Reinsurance contract – an active reinsurance contract under which the Undertaking assumes risk from another insurance or reinsurance undertaking.
9. Undertaking – an insurance or reinsurance undertaking.
10. Insurance and reinsurance liabilities – current and future liabilities that may arise from concluded insurance and reinsurance contracts.

Guidelines

General Principles

Guideline 1. The process of creating technical provisions in the Undertaking, including:

• identification of all insurance and reinsurance liabilities,
• identification of costs other than claims and benefits included in the created technical provisions,
• preparation of data to determine valuation methods and calculate the value of technical provisions,
• determination of methods for valuing insurance and reinsurance liabilities and costs other than claims and benefits included in the created technical provisions,
• performing calculations and checking their correctness,
• recording technical provisions in the accounting books and presenting them in the financial statement,
• testing the adequacy/sufficiency of technical provisions,
• maintaining and updating documentation regarding the valuation of technical provisions, should be carried out with the highest diligence, using all available data affecting the amount of technical provisions, applying appropriate actuarial and statistical methods.

Obligations of the Management Board and the Supervisory Board

Guideline 2. The manner in which the Undertaking conducts insurance activity should be organized to ensure the reliability and stability of the functioning of the process of creating technical provisions. The Management Board is responsible for the proper organization of the process of creating technical provisions. The Management Board is also responsible for organizing appropriate and adequate resources (human, material, intangible) necessary in this process.

Guideline 3. The process of creating technical provisions should be systematically monitored by the Management Board, and the assumptions, rules, and methods used should be updated in accordance with changes in the subject and scope of concluded insurance and reinsurance contracts and the size of the insured/reinsured risk, as well as changes regarding the functioning of the entire insurance market.

Guideline 4. The Management Board is responsible for the correctness of the valuation of technical provisions and risk management in the process of creating technical provisions. At least one member of the Management Board should possess knowledge and experience allowing for an assessment of the correctness of the process of creating technical provisions.

Guideline 5. In fulfilling its functions and responsibility for the risk management system, the Supervisory Board should supervise risk management in the process of creating technical provisions.

Performance of Tasks by the Actuarial Function

Guideline 6. The tasks of the actuarial function should include in particular:

• coordination of determining the value of technical provisions created for solvency purposes,
• ensuring the adequacy of methods and models used, as well as assumptions adopted for determining the value of technical provisions,
• assessing whether the data used to determine the value of technical provisions are sufficient and of appropriate quality,
• comparing best estimates in technical provisions created for solvency purposes with data resulting from accumulated experience,
• informing the Management Board and the Supervisory Board of the Undertaking about the reliability and adequacy of determining the value of technical provisions,
• supervising the determination of the value of technical provisions created for solvency purposes in cases of using approximations, including the individual approach,
• determining the value of technical provisions for accounting purposes,
• expressing opinions on the general risk acceptance policy for insurance,
• expressing opinions on the adequacy of reinsurance solutions,
• participating in the implementation of an effective risk management system.

Guideline 7. The Actuary should have appropriate authority in the organizational structure of the Undertaking to effectively supervise the performance of tasks by the actuarial function in the process of creating technical provisions.

Guideline 8. The actuarial function should be performed by persons possessing the professional knowledge and experience necessary for the proper performance of the tasks of the actuarial function in the Undertaking, taking into account the nature, scale, and complexity of risks specific to the Undertaking's activity.

Guideline 9. The assessment by the actuarial function of the valuation methods adopted and used for individual technical provisions should be carried out periodically, at least once a year.

Guideline 10. The testing by the actuarial function of the adequacy of technical provisions should be carried out periodically, at least once a year.

Guideline 11. The Actuary should periodically, at least once a year, prepare a report addressed to the Management Board containing information on the tasks performed by the actuarial function supervised by him/her, regarding the process of creating technical provisions. The Supervisory Board should receive the report prepared by the Actuary each time.

Guideline 12. The Actuary should inform the supervisory authority of facts indicating the commission of a crime or violation of legal provisions, which were revealed during the performance of tasks by the actuarial function, in particular regarding the determination of the value of technical provisions, and of actions taken by the Undertaking in connection with the disclosure of these facts.

Guideline 13. The Actuary should inform the Management Board and the person supervising the risk management function of all risks, including operational risk, identified in the process of creating technical provisions and present proposals for actions aimed at minimizing these risks.

Valuation of Technical Provisions

Guideline 14. Technical provisions should be created in accordance with legal provisions, in a prudent, reliable, and objective manner.

Guideline 15. The methods used for the valuation of technical provisions should be appropriate to the nature, scale, and complexity of risks underlying insurance and reinsurance liabilities.

Guideline 16. Internal regulations regarding methods for the valuation of technical provisions should meet at least the following conditions:

• internal regulations should be prepared by the actuarial function, and approved and updated by the Management Board,
• provisions contained in internal regulations should be complete, precise, and consistent with each other,
• internal regulations should contain a list of data used in calculating technical provisions and the conditions for collecting and processing the above data,
• valuation methods for individual technical provisions should be described in a clear, unambiguous, and sufficiently detailed manner so that, based on the description contained in the internal regulations, it is possible to understand the calculation process of each of the provisions and the results obtained, as well as any limitations and types of risk associated with the valuation models used, by an independent person possessing the knowledge necessary for the valuation of technical provisions. In particular, internal regulations describing methods for the valuation of technical provisions should contain:
  • a description of all adopted assumptions and rules for determining parameters used in the valuation of individual technical provisions,
  • a description of any simplifications used in the valuation of technical provisions.

IT Tools and Systems

Guideline 17. The Undertaking should possess appropriate IT tools and systems, proportional to the scale and complexity of the conducted activity:

• serving for the collection, management, processing, and storage of data required for calculating the value of technical provisions,
• allowing for performing calculations for the valuation of the value of technical provisions and checking the correctness of these calculations,
• enabling the reproduction of calculations for the entire process of creating technical provisions.

Risk Management

Guideline 18. The Undertaking should possess a risk management system, including operational risk, in the process of creating technical provisions, allowing for the identification, measurement, management, monitoring, and reporting of risks to which the Undertaking is or may be exposed, and the interdependencies occurring between these risks.

Guideline 19. The Undertaking should develop rules regarding risk management, including operational risk, covering the process of creating technical provisions.

Internal Control System

Guideline 20. An effective internal control system should be implemented in the Undertaking in the process of creating technical provisions.

Reporting

Guideline 21. The Undertaking should accurately and timely record in the accounting books and present in financial statements values related to technical provisions, based on adopted internal regulations.

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(Note: The following section repeats and expands upon the previous guidelines with detailed sub-clauses as found in the source text)

General Principles

Guideline 1. The process of creating technical provisions in the Undertaking, including:

• identification of all insurance and reinsurance liabilities,
• identification of costs other than claims and benefits included in the created technical provisions,
• preparation of data to determine valuation methods and calculate the value of technical provisions,
• determination of methods for valuing insurance and reinsurance liabilities and costs other than claims and benefits included in the created technical provisions,
• performing calculations and checking their correctness,
• recording technical provisions in the accounting books and presenting them in the financial statement,
• testing the adequacy/sufficiency of technical provisions,
• maintaining and updating documentation regarding the valuation of technical provisions, should be carried out with the highest diligence, using all available data affecting the amount of technical provisions, applying appropriate actuarial and statistical methods.

Obligations of the Management Board and the Supervisory Board

Guideline 2. The manner in which the Undertaking conducts insurance activity should be organized to ensure the reliability and stability of the functioning of the process of creating technical provisions. The Management Board is responsible for the proper organization of the process of creating technical provisions. The Management Board is also responsible for organizing appropriate and adequate resources (human, material, intangible) necessary in this process.

Guideline 3. The process of creating technical provisions should be systematically monitored by the Management Board, and the assumptions, rules, and methods used should be updated in accordance with changes in the subject and scope of concluded insurance and reinsurance contracts and the size of the insured/reinsured risk, as well as changes regarding the functioning of the entire insurance market.

Guideline 4. The Management Board is responsible for the correctness of the valuation of technical provisions and risk management in the process of creating technical provisions. At least one member of the Management Board should possess knowledge and experience allowing for an assessment of the correctness of the process of creating technical provisions.

4.1 The Management Board is responsible for approving the rules for the valuation of technical provisions and the rules for risk management in the process of creating technical provisions and their appropriate update. The Management Board entrusts the preparation of the rules for the valuation of technical provisions to the actuarial function. The Management Board should introduce appropriate internal control mechanisms minimizing identified risks.

4.2 Within the Management Board, a person should be designated who is responsible for the process of creating technical provisions. This person should possess knowledge and experience allowing for an assessment of the correctness of the organization of the process of creating technical provisions.

4.3 The Management Board should ensure that the Actuary and persons performing the actuarial function possess the appropriate knowledge and experience necessary for the proper performance of activities regarding the valuation of technical provisions.

4.4 Persons and organizational units participating in the process of creating technical provisions in the Undertaking should have clearly defined scopes of responsibility, established by the Management Board or other authorized persons.

Guideline 5. In fulfilling its functions and responsibility for the risk management system, the Supervisory Board should supervise risk management in the process of creating technical provisions.

5.1 The Supervisory Board should possess competencies enabling an understanding of the process of creating technical provisions, in particular regarding the risks occurring in this process and the significance of the correctness of the valuation of technical provisions for the Undertaking's activity.

5.2 The Supervisory Board is responsible for: a. supervising the effectiveness of the Management Board's management of the process of creating technical provisions, b. supervising the effectiveness of the Management Board's management of risk in the process of creating technical provisions, c. supervising the effectiveness of the Management Board's management of the internal control system in the process of creating technical provisions.

5.3 The Supervisory Board should receive a report regarding technical provisions prepared by the Actuary (detailed in Guideline 11).

Performance of Tasks by the Actuarial Function

Guideline 6. The tasks of the actuarial function should include in particular:

• coordination of determining the value of technical provisions created for solvency purposes,
• ensuring the adequacy of methods and models used, as well as assumptions adopted for determining the value of technical provisions,
• assessing whether the data used to determine the value of technical provisions are sufficient and of appropriate quality,
• comparing best estimates in technical provisions created for solvency purposes with data resulting from accumulated experience,
• informing the Management Board and the Supervisory Board of the Undertaking about the reliability and adequacy of determining the value of technical provisions,
• supervising the determination of the value of technical provisions created for solvency purposes in cases of using approximations, including the individual approach,
• determining the value of technical provisions for accounting purposes,
• expressing opinions on the general risk acceptance policy for insurance,
• expressing opinions on the adequacy of reinsurance solutions,
• participating in the implementation of an effective risk management system.

6.1 In the event that the scope of tasks performed by the actuarial function is expanded to include other tasks and actions not explicitly assigned to the actuarial function, including in particular performing calculations of the value of technical provisions created for solvency purposes, the Undertaking should have appropriate procedures ensuring that in such a situation there is no conflict of interest.

Guideline 7. The Actuary should have appropriate authority in the organizational structure of the Undertaking to effectively supervise the performance of tasks by the actuarial function in the process of creating technical provisions.

Guideline 8. The actuarial function should be performed by persons possessing the professional knowledge and experience necessary for the proper performance of the tasks of the actuarial function in the Undertaking, taking into account the nature, scale, and complexity of risks specific to the Undertaking's activity.

8.1 Persons performing the actuarial function should possess knowledge about the process of creating technical provisions in the Undertaking and other processes indirectly related to the valuation of technical provisions, commensurate with the scope of activities performed.

8.2 Persons performing the actuarial function should know the systems used by the Undertaking for collecting, aggregating, and processing data used for the valuation of technical provisions, commensurate with the scope of activities performed.

8.3 Persons performing the actuarial function should know the characteristics of insurance and reinsurance contracts offered by the Undertaking and the administrative and accounting procedures regarding the conclusion, registration, and handling of insurance and reinsurance contracts, as well as the reporting and registration of claims and demands and their examination and handling (settlement), to the extent that the above relates to tasks performed by these persons in the process of creating technical provisions.

8.4 The Undertaking should develop and implement appropriate procedures ensuring that persons performing the actuarial function will meet the requirements of competence and assurance proportionally to the activities performed.

Guideline 9. The assessment by the actuarial function of the valuation methods adopted and used for individual technical provisions should be carried out periodically, at least once a year.

9.1 As part of the assessment of adopted methods for the valuation of technical provisions, it should be examined in particular whether: a. the Undertaking collects and uses in accordance with legal provisions appropriate and sufficient data necessary for the valuation of individual technical provisions, and the IT systems used in the process of creating technical provisions sufficiently support actuarial and statistical procedures, b. the Undertaking's internal regulations specifying adopted valuation methods are consistent with good actuarial practice and applicable legal provisions, c. the adopted valuation methods, considering available data, are appropriate for the insurance and reinsurance liabilities they concern and allow for the creation of technical provisions in an amount ensuring the coverage of future claim and benefit payments and costs that may arise from...