staff. The FSA has now formalised this extended audit practice by requiring an audit certificate that provides assurance on the full balance sheet and solvency calculation within the annual return. This would ‘widen the scope of the audit to cover the aspects of the regulatory return that are currently the responsibility of the appointed actuary’ and would ‘require auditors of life firms to obtain a report from an actuary on the valuation of policyholder liabilities as part of their audit work. This advice would be provided by an actuary who is independent of both the regulated firm and its actuarial function. This actuary could be an employee of the audit firm, or any other suitable independent actuary. The actuarial work on the valuation of liabilities would thus be subject to the professional challenge of audit, including review by an independent actuary’ (FSA, 2003a, 7.20 ).9 This increasing focus on the responsibility of the auditor in respect of the actuarial valuation has probably helped to raise debate among accountants as to what the appropriate basis for life insurance accounting should be, as the statutory solvency basis requires, in the main, very prudent assumptions such that it is normal for the writing of new business to produce an initial deficit in respect of those policies, with the surplus on profitable business only emerging much later in the policies’ life. This means that the annual surpluses reported which underlie bonus and dividend declarations bear little if any relation to the actual business performance of a year and indeed are likely to give a misleading message as to how well the business is doing (Whewell, 1990).
A significant European development was the negotiations (which extended for over 20 years) that led to the introduction of the EU Insurance Accounts Directive (‘IAD’) in 1991 and its implementation with effect from 1.1.1995. Despite the many Member State options that remained, the Directive was of greater significance for other European countries because in many cases their ‘Companies Act’ accounts are also the basis of their solvency returns to insurance regulators and the basis for the calculation of legally permissible dividends, whereas in the UK these matters remained regulated by the ICA/FSA solvency requirements. Moreover, the changes introduced by the IAD, and in particular the requirement for disclosure of the market value of investments, brought in practices that were not familiar elsewhere. But for the UK, although the formats of accounts were transformed by the IAD, the resulting ‘Modified Statutory Solvency Basis’ (‘MSSB’) of accounting did not for the most part fundamentally change the principles on which the accounts were prepared, and special provisions recognising the unique ‘fund’ basis of UK life insurance (such as the availability of the FFA for with-profits business) resulted in there being no net effect on bottom line results, at least for traditional with-profits business (Horton & Macve, 1995; Struyven, 1996).10 Nevertheless, because under the IAD auditors would now be
9 Following consultation, the FSA considered requiring the reviewing actuary (the actuary advising the auditor) to give their own personal, public certificate alongside the audit certificate (FSA, 2003b, 6.4). However, it has now been decided that this would result in confusion over responsibilities and potential liability and that therefore the reviewing actuary will report to the auditor and the audit certificate, which will state that appropriate actuarial advice has been received, will be extended to cover the valuation of the policy liabilities (FSA, 2004a, 6.8; FSA, 2004b). The corresponding guidance for auditors is now set out in APB Bulletin 2004/5 (APB, 2004).
10 The ABI’s SORP (ABI, 2003) gives guidance on how to implement the modifications made by the IAD (and consequently by Schedule 9A, CA1985) to the pre-existing statutory solvency basis (‘SSB’) to produce MSSB accounts. SSB itself remains in force under the ICA/FSA solvency regime for the purpose of determining distributable surplus and for regulatory purposes as one of the FSA’s ‘twin peaks’ of ‘regulatory excess capital’ and ‘realistic excess capital’ (further supplemented by ‘Individual Capital Assesments’ (‘ICAs’) under ‘Solvency II’) (FSA, 2004a; 2004c, Annex IG, p. 275; 2004d—see also http://www.fsa.gov.uk/pubs/other/li_newsletter2.pdf ) (cf. FRS27 (ASB, 2004), ‘definitions’)—see further Horton & Macve, 1995, Chapters 3 & 4; 1997, Chapters 3 & 5.