Executive summary

The head of the actuarial function (HAF) plays a key role in protecting insurers and their stakeholders through independent actuarial oversight and strategic guidance. Beyond regulatory compliance, an effective HAF strengthens decision-making, identifies emerging risks and helps ensure sustainable value creation.

Under the South African Solvency Assessment and Management (SAM) regulatory regime, the HAF is a mandatory control function with responsibility for three key areas:

Financial soundness

• Provides critical oversight of technical provisions and capital requirements
• Evaluates reinsurance strategies and other risk mitigation approaches
• Advises the board on dividend capacity and other material financial decisions
• Ensures capital modelling approaches remain appropriate as risks evolve

Risk management framework

• Contributes actuarial expertise to key risk policies and controls
• Reviews economic capital models and standard formula appropriateness
• Provides independent assessment of the Own Risk and Solvency Assessment’s (ORSA) actuarial elements
• Works with other control functions to strengthen risk governance

Product strategy and performance

• Evaluates actuarial soundness of new and existing products
• Reviews pricing strategies and profitability metrics
• Assesses bonus declarations and policyholder reasonable expectations
• Provides early warning of emerging product risks

The decision to appoint an internal or external HAF should consider the insurer's size, complexity and benefit of independence and market insights. For even medium sized insurers, there may be a cost and value benefit of using an experienced outsourced HAF.

Insurers with internal HAF will benefit from regular external peer review, promoting good practices and uncovering blind spots.

Insurance groups face additional considerations around expertise requirements and group-wide consistency.

Background

The HAF role has evolved from the traditional statutory actuary or appointed actuary position. While retaining core actuarial responsibilities, today's HAF operates as a key control function - working alongside Risk, Compliance and Internal Audit to provide comprehensive oversight.

This broader mandate reflects the increasing complexity of insurance markets and the need for robust governance. Beyond technical expertise, the modern HAF must understand business strategy, engage effectively with boards and provide pragmatic guidance on emerging challenges.

The HAF is one of the mandatory control functions an insurer is required to have in place, under the Governance and Operational Standards for Insurers (GOIs) governed by the Prudential Authority (PA).

Criteria for the HAF role

The minimum competency and other criteria prescribed by the GOIs for the HAF states that the HAF must be a natural person who:

• Is Fit and Proper (as discussed in GOI 4)
• Is a Fellow of the Actuarial Society of South Africa
• Has, as an actuary, appropriate practical experience relating to the type of insurance business of the insurer
• Has a relevant practising certificate issued by the Actuarial Society of South Africa (ASSA)

Beyond this, a skilled HAF will:

• Be aware of regulatory developments
• Give early warning of product, solvency or asset-liability management challenges before they become critical
• Provide advice based on years of experience and enable insurers to remediate problems before the regulator is forced to get directly involved
• Have the experience to understand challenges from multiple insurers, streamlining problem solving and having the confidence to apply proportionality where appropriate.

Interaction with other control functions

In addition to the head of actuarial function, insurers also need a head of risk management function (HRMF), a head of compliance function, and a head of internal audit function. Collectively these form another line of defence supporting management’s activities and providing oversight to the board of directors.

The HAF and HRMF typically work closely together. For instance, both are required to provide input into the ORSA. Depending on size and complexity, it may make sense to appoint the same person as the head of these two control functions.

Responsibilities of the HAF

The responsibilities of the HAF are contained in both the Framework for Financial Soundness of Insurers (FSI), which focus on elements of solvency, and the GOIs, which focus on the governance of an insurer.

ASSA’s Actuarial Practice Note (APN) 106/403 provides further guidance for HAFs in fulfilling their roles and responsibilities. The note expands on the details and nuances an actuary should consider, supported by additional ASSA Information Notes published in the years following the implementation of SAM.

The HAF may be supported by a team of suitably skilled staff to deliver on the responsibilities required of the role. The HAF remains ultimately responsible for the final completed work and should ensure there is a sufficient level of review and validations on the work performed by the team.

Financial soundness

The actuarial function is required to evaluate and provide advice to the board, senior management and other control functions on the financial soundness of the insurer, including the impact of any proposed dividend declarations.

Technical provisions and capital requirements

GOI 3 states that each insurer requires an effective actuarial function, capable of expressing an opinion to the board on the reliability and adequacy of the technical provisions, the Solvency Capital Requirements (SCR) and the Minimum Capital Requirements (MCR), amongst others. This opinion must include the following:

This responsibility is reiterated in the FSI statements, further stating that the HAF must consider the impact on the overall financial soundness of the insurer. The opinion expressed should be done so in terms of the GOIs, FSIs and professional standards issued by ASSA.

The HAF’s review of the technical provisions will inform their opinion on capital requirements. Consideration must also be given to the insurer’s investment strategy and asset composition.

Reinsurance and risk mitigation

The use of reinsurance and other risk mitigation techniques ties in closely with the calculation of technical provisions and capital requirements.

With climate change impacting both the pricing and availability of reinsurance globally, an experienced HAF's role in evaluating reinsurance arrangements has become increasingly critical. Beyond traditional adequacy assessments, the HAF must now consider the sustainability and cost effectiveness of reinsurance strategies in a hardening market.

The HAF must assess and express an opinion on the adequacy of all reinsurance arrangements in light of the insurance risks retained by the insurer and advise the board on their appropriate treatment for financial soundness purposes. This is particularly relevant where complex reinsurance structures have developed over time, with risk sharing mechanisms that may not protect the insurer as expected. The input is useful for risk management, regulatory capital, economic capital, and for establishing the value of reinsurance.

The actuarial function must also periodically review the insurer's Reinsurance and Other Risk Transfer Policy and provide an opinion to the board on its appropriateness.

A key responsibility is ensuring that the effect of all eligible risk mitigation instruments in the SCR is materially reflective of the risk mitigation reduction one would expect in a stress scenario (99.5% confidence level in line with the SCR). The HAF must critically assess whether risk mitigation contracts truly transfer risk, factoring in profit share arrangements and other contingent arrangements.

Risk management system and ORSA

The governance and risk management framework described in GOI 3 sets out requirements in line with the broader objectives of risk-based supervision. The over-arching risk management framework must be supported by a range of policies. The responsibilities of the control functions form part of the governance requirements.

Risk management policies

The GOIs make a distinction between the need to express an opinion as to the appropriateness of certain items and evaluating and providing advice in relation to others. We interpret “opinion” to be more formal, where the board should be concerned if there are major findings. “Advice” on the other hand could be considered as one view among several.

The HAF is responsible for expressing an opinion to the board on the appropriateness of the following policies:

• Asset-liability management policy,
• Underwriting policy, and
• Reinsurance and other forms of risk transfer policy.

Separate from these opinions, the actuarial function is responsible for evaluating and providing advice to the board of directors, senior management and other control functions on the investment policy.

For most insurers there is typically interaction between the asset-liability management, investment, credit risk and liquidity management policies. The HAF thus has to ensure that input provided is sufficiently detailed to cover the requirements set out in the standards.

Own Risk and Solvency Assessment

GOI 3.1 states that the heads of both the risk management function and actuarial function are responsible for providing input and assurance to the board about the matters relating to the outcome of an ORSA. For the actuarial function, this includes the actuarial-related matters in the ORSA as per the diagram below.

Controls

The heads of the insurer’s risk management, compliance and actuarial functions are responsible for providing input and assurance to the board. This should cover the operation, efficiency and effectiveness of the components of the systems for risk management and internal controls relevant to their respective areas of responsibility.

Capital models

The actuarial function is required to evaluate and provide advice on capital models used in the business. This includes:

• Assessment of whether the regulatory capital model accurately reflects the insurer's risk profile, board-approved risk appetite, and business strategy
• Use of Insurer Specific Parameters to adjust underwriting risk capital
• Internal models used for actuarial/financial projections and ORSA solvency assessments, where used for regulatory purposes, ensuring internal models meet additional requirements

Other relevant technical considerations include justifying departure from standard yield curves, applications to use an iterative risk margin, allowance for loss absorbing capacity of deferred taxes, with profits business, and contingent commissions.

Significant time has passed since the original calibration of the standard formula. A competent HAF will identify where company experience deviates from standard formula assumptions, particularly in areas such as:

• Risk calibration: mortality catastrophe risk, premium volatility factors
• Market risk: equity stresses, yield curve volatility
• Other key risks: retrenchment risk, type 2 default risk, concentration risk

Depending on the extent of the departure, it may be sufficient to address this in the ORSA and SCR cover target, or through a regulatory application to use insurer specific parameter (ISP), partial internal models, or even a full internal model.

Actuarial soundess of products

The actuarial function is also responsible for evaluating and providing advice on the actuarial soundness of the terms and conditions of insurance contracts. ASSA’s APN 106/406 articulate the following responsibilities in this regard:

• Evaluating and providing advice on the actuarial soundness of product development and design, including the terms and conditions of insurance contracts, premiums, insurance obligations and other values and the estimation of the capital required to underwrite the product. This should be done for new products and for material changes to existing products, including pricing reviews.
• For new products, assess whether the product design and premium rates align with the insurer’s business strategy, risk appetite, profitability criteria, and relevant policies.
• Provide an opinion on whether the premium rates being charged for new or renewal business are appropriate and consistent with the requirements of Insurance Act 18 of 2017.
• Evaluating and providing advice on the awarding of a bonus or similar benefit to participating policyholders in accordance with the principles and practises of financial management of the insurer, with due regard to policyholder’s reasonable benefit expectations.

This should be considered in conjunction with the Policyholder Protection Rules issued by the Financial Sector Conduct Authority (FSCA). Insurers should have the appropriate governance and approval structures established to ensure that the product management process adheres to regulatory requirements and affords the HAF the opportunity to complete their duties.

Formal HAF reporting

The HAF must provide regular reports to the board on matters relating to their duties. Such reporting can be a single overall report covering all the necessary requirements, or it can be made up of individual component reports completed at suitable points in the HAF’s work cycle. The report(s) should be produced annually or more frequently as the board requires.

The intention is not to duplicate other reports presented to the board. However, the HAF should ensure that all the required tasks are reported on in some appropriate way at some stage.

Further guidance on reporting is included in APN 901, which deals with general actuarial practices. When an actuary is completing a report, the actuary should present all information with sufficient detail that another actuary qualified in the same practice area could make an objective appraisal of the reasonableness of the actuary’s work.

The HAF must have direct access to the board or relevant committee, without the presence of senior management if so requested, for the purpose of raising concerns about the effectiveness of the risk management system or systems of internal controls.

Internal or external HAF

The GOIs allow insurers to outsource control functions, including the HAF role, where appropriate given the nature, scale and complexity of the business.

Many insurers find that outsourcing the HAF role strengthens their governance framework. An external HAF can bring greater independence - a critical requirement that's more easily evidenced when the role is outsourced - along with broader market insights and diverse experience from across the industry. This helps ensure the insurer's risk management and control functions remain aligned with evolving market practice.

The largest insurers often appoint internal HAFs and supporting staff, given the significant scope of responsibilities and the need for dedicated resources. This allows them to build deep institutional knowledge while maintaining the necessary independence through appropriate governance structures.

HAF for composite insurers and insurance groups

Insurance groups licenced by the PA are required to appoint a HAF for each licenced insurer in the insurance group. The groups are further required to appoint a group HAF, as prescribed by the Governance and Operational Standard for Insurance Groups (GOG).

Group HAFs have specific additional items to cover, including fungibility and transferability of capital between group entities, considering the impact of different aggregation approaches, and dealing with intra-group transactions and reinsurance. The application of SAM SCR rules to non-South African entities requires diligent interpretation of the requirements and careful explanation of the sometimes counterintuitive results.

Where an insurance group specialises in either life or non-life insurance, the HAF for the underlying insurance entities would typically also serve as the group HAF, depending on the nature, scale and complexity of the group.

For most composite insurance groups that include both life and non-life insurance however, the appointment of a group HAF becomes more complicated. The HAF and actuarial function of each licensed insurer within the group must have appropriate experience for the business they are overseeing. Other considerations are listed below.

Cost

Appointing a single HAF across life and non-life is likely to result in some cost reduction. There may be some overlap between the responsibilities of the HAF of a life and non-life insurer that are part of the same group. Board meetings where the HAF provides comfort to the board on matters relating to the life and non-life insurance businesses may also be combined, saving time and cost.

Conistency

A benefit of a single HAF across the group will be consistency in guidance and opinions provided. Efficiencies will be created where actuarial controls applied across the group are standardised and interpreted and measured in the same way. Communication at an executive level will also be more efficient where a single HAF is involved across the group.

Expertise

Appointing the same person may not be appropriate where such a person does not have the necessary life and non-life experience and expertise. It is a requirement for the HAF role to have a practising certificate, posing a challenge to appoint the same person for the life and non-life HAF position (although there are individuals with both).

Group considerations

Being part of an insurance group introduces group-specific risks such as contagion risk. Having a single HAF for an insurance group will help to identify these group-specific risks and help to get an enterprise-wide view on risk.

Review of the Actuarial Function

The GOIs state that, in addition to performance reviews by the board or relevant board committee, the HAF must periodically be independently peer-reviewed. This should be at least every three years in line with typical internal audit review cycles.

An independent external review will ensure that best practice is maintained, in line with local and global industry best practice. A critical evaluation of current practices can provide peace of mind and sharing of good practices with the internal HAF.

Each control function must also conduct regular self-assessments of their respective functions and implement or monitor the implementation of any needed improvements.

Conclusion

A skilled and experienced HAF is critical for effective governance and sustainable business performance. While all insurers must appoint a suitably qualified HAF under SAM requirements, the real value comes from having a HAF who can identify emerging risks, provide strategic insights and help the board navigate complex actuarial decisions.

For insurance groups, appointing a single HAF across life and non-life businesses can bring consistency and cost efficiency. While this approach requires the rare combination of both life and short-term practising certificates, when available it enables more cohesive group-wide actuarial oversight and risk management.

Many insurers find that outsourcing the HAF role provides the optimal combination of independence, broad market perspective and deep technical expertise. An external HAF brings fresh insights from across the industry while ensuring robust actuarial oversight aligned with regulatory expectations and business objectives.