NBB_2022_26 / Communication on the tasks of the actuarial function and documentation requirements for technical provisions

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National Bank
OF BELGIUM

Communication
Brussels, 2 November 2022
Reference: NBB_2022_26
Your correspondent:
Emmanuel Cortese
Tel. +32 2 221 30 72 emmanuel.cortese@nbb.be

Communication on the tasks of the actuarial function and the requirements regarding the documentation of technical provisions

Scope of Application

• Insurance or reinsurance undertakings governed by Belgian law.
• Insurance or reinsurance undertakings that are part of a group governed by Belgian law within the meaning of Article 339, 2°, of the Act of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings.
• Undertakings governed by Belgian law that are part of a financial conglomerate governed by Belgian law within the meaning of Article 340, 1°, of the aforementioned Act of 13 March 2016.
• Branches of undertakings from third countries that carry out insurance [or reinsurance] activities in Belgium.
• This communication applies to mutual aid insurance companies as defined in Article 15, 79°, of the aforementioned Act of 13 March 2016. For these undertakings, "the Bank" must be replaced by "the Control Service for Sickness Funds and the National Federation of Sickness Funds" as defined in Article 15, 84° of the same Act.
• This communication does not apply to insurance undertakings referred to in Articles 275, 276, or 294 of the aforementioned Act of 13 March 2016.

Summary/Objectives
With this communication, the National Bank of Belgium (hereinafter "the Bank") wishes to remind certain points of the Solvency II regulation concerning the establishment of technical provisions. These points concern in particular the documentation requirements and the tasks of the actuarial function with regard to technical provisions. This communication also clarifies the minimum expectations the Bank has regarding these points of the regulation.

Structure

1. Context
2. Legal Basis
3. Minimum Expectations of the Bank

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Dear Madam,
Dear Sir,

1. Context
   This communication concerns the establishment of technical provisions under the Solvency II regime. The applicable regulation provides for a series of prudential requirements regarding the documentation of these technical provisions and the tasks of the actuarial function. In the framework of their supervisory activities, however, the services of the Bank have established that some of these prudential requirements are not always fulfilled. Consequently, the supervisor considers it necessary to remind the relevant points of the regulation and to further define the minimum expectations the Bank has in this regard.

2. Legal Basis

• Articles 54 and 59 of the Act of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings.
• Articles 265 and 272 of Delegated Regulation (EU) 2015/35 of the Commission of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the access to and the exercise of the activities of insurance and reinsurance (Solvency II).
• Sections 5.1 and 5.3 of Circular NBB_2016_31 (the so-called "overarching circular") as updated by Communication NBB_2020_017 of 5 May 2020.
• Circular NBB_2022_25 concerning the guidelines for the valuation of technical provisions within the framework of Solvency II, as supplemented by Communication NBB_2017_32 concerning the results of the horizontal analysis of the costs used in the valuation of technical provisions.
• Circular NBB_2022_24 concerning guidelines on contract boundaries.
• Circular NBB_2016_25 concerning guidelines on the implementation of long-term guarantee measures.
• Communication NBB_2021_24, concerning the valuation of technical provisions of individual health insurance.

3. Minimum Expectations of the Bank
   The minimum expectations of the Bank with regard to the aforementioned points of the regulation are set out below.

3.1. Regarding the documentation of technical provisions
The Bank emphasizes that technical provisions must be documented exhaustively and systematically. Insurance and reinsurance undertakings are expected to maintain documentation with explanations and justifications for:

• their choices regarding the hypotheses used;
• their methodological choices, at least addressing the calculation methods, their parametrization, and the identification of and justification for non-modelled portfolios;
• the variations in the data used on different calculation dates (such as, for example, not taking certain historical data into account);
• the validation of technical provisions.
  In general, the Bank expects that any use of expert judgment is properly documented. The aforementioned methodological choices and hypotheses also include future management activities that must be included in a comprehensive plan in accordance with Article 23 of Regulation 2015/35, which must be approved at least by the management body of the insurance or reinsurance undertaking. In particular, it is expected that specific documentation is provided for methodological changes, including among other things a chronological overview of the changes.

3.2. Regarding the activities of the actuarial function
The minimum expectations that the Bank has regarding the activities of the actuarial function are the following:

• The preparation of a report that has real added value for audits and supervision and is not primarily a descriptive document (in which, for example, the regulation is mainly recalled and/or a theoretical description is given of all or some calculation bases).
• A genuine ownership of the function, which must be evident from the actuarial function's report, to exclude any form of doubt or ambiguity regarding the origin of the tasks performed.
• The execution of quantitative activities, which are properly documented, such as:
  • an effective and explicit check of the level of the best estimate, which covers (at least) a sufficient material part of it and includes quantitative tests, such as calculations or recalculation;
  • an analysis of the changes in technical provisions from year to year;
  • review of methodological choices (calculation methods, changes in methods, parametrization, identification of and justification for non-modelled portfolios, etc.);
  • comparison of forecasts with experience ('backtesting');
  • sensitivity analyses.
• Precise and strong recommendations based on the findings and conclusions of the activities performed by the actuarial function, which do not amount to a list of tasks for the actuarial function itself.
  In accordance with point 5.1.2 of the overarching circular, the management body of the insurance or reinsurance undertaking must provide the board of directors with an annual report based on which it can verify whether the independent control functions are working well. The Bank expects that this report provides an objective assessment of the extent to which the actuarial function performs the tasks entrusted to it. Insurance or reinsurance undertakings are requested, where necessary, to immediately deploy the necessary resources to comply with the regulation and the Bank's minimum expectations in this regard. A copy of this communication is sent to the commissioner(s), certified auditor(s) of your undertaking.

Sincerely,

Steven Vanackere
Governor
Pierre Wunsch
Governor

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