INTRODUCCIÓN

Background

1. Financial services in Ireland are regulated by the Central Bank of Ireland (“CBI”). The primary focus of the regulator is to

ensure that insurance companies remain solvent. Most of the reporting requirements of life insurers are aimed at demonstrating solvency. As well as the usual financial reporting required for all companies insurers also have to submit annually a detailed set of forms and text to the CBI. These Annual Returns are public documents. The CBI also requires quarterly reports and may also make other ad-hoc reporting requests.

2. Insurance regulation is driven by a number of legislative and regulatory factors including, European Insurance Directives, Irish Acts of Parliament and Statutory Instruments. ‘The European Communities (Life Assurance) Framework Regulations, 1994’ (“1994 Regulations”) in particular outline the main requirements for life undertakings.

3. Recently introduced regulations applicable to so called Variable Annuities are not described here as neither PAG or ALI have these products in force.

Capital Resource requirements

4. The 1994 Regulations, which detail firms’ capital requirements, give a principles-based approach. The regulations

themselves are not very detailed. It is for the Appointed Actuary to follow the core principles and to ensure that the liabilities are adequately quantified on this basis, taking account of any guidance issued by the Financial Regulator and complying with the Actuarial Standards of Practice (“ASPs”) issued by the Society of Actuaries in Ireland.

Technical Reserves

5. Each insurance undertaking must establish and maintain technical reserves, taking into account the nature and the term of their underwriting liabilities. The determination of liabilities is in accordance with generally accepted accounting concepts, bases and policies or other generally accepted methods appropriate for insurance undertakings. More detailed liability valuation approaches are given in Annex IV of the 1994 Regulations.

6. The liability valuation is not a best estimate valuation. Each of the valuation assumptions should contain a margin for adverse deviation e.g. adverse changes to interest rates, credit spreads, volatilities, asset values, or other relevant factors.

7. The Financial Regulator (absorbed by the CBI in October 2010) issued guidance on an annual basis for appropriate stress tests for resilience reserve setting. The effect of these tests must be considered and an amount added to the liability to reflect any net movement in the excess over the liabilities. The tests for year end 2010 were:

a. a reduction in fixed interest yields of 0.75% combined with a fall in equity and property values of 15%; b. a reduction in fixed interest yields of 0.5% combined with a fall in equity and property values of 25%; and c. a rise in fixed interest yields of 1% combined with a fall in equity and property values of 25% (in this scenario, the

future investment yield assumption may be relaxed to 5.00%).

8. The CBI has not, as at 31 December 2012, issued updated parameters in its subsequent guidance, but points towards the Irish actuaries’ professional requirements to consider the risks facing the firm. That is, the Appointed Actuary must also consider the impact of more extreme variations in markets if appropriate to do so.

9. Allowance for lapses cannot be made if the resulting valuation of liabilities would be lower.

10. For Class III business a unit reserve must be held in respect of policyholder unit liabilities. The unit reserve is set equal to the total number of units allocated to policyholders multiplied by the unit price at the date of the valuation.

Additionally a non-unit reserve is set up to cover any negative cashflows arising from the book of business in the future, this reserve must reflect any policyholder options or guarantees. Cash reserves are calculated on a policy-by-policy basis, projecting expected income and expenditure over the future term with any negative cash reserves eliminated, unless covered by surrender penalties.

11. For products with guarantees where there is potential for shareholder exposure it is generally necessary to reserve on a stochastic basis unless the valuation of these liabilities is immaterial in the context of the overall solvency position of the firm.

12. Companies can take into account the cost and benefits of hedge positions if in the eyes of the Financial Regulator they are following a “Clearly Defined Hedging Strategy”.

13. Firms must cover their technical reserves using admissible assets subject to the rules in Annex V of the 1994 Regulations. All assets must be “realisable in the short term”.

14. Non-linked assets (assets covering the technical reserves, exclusive of the unit reserve) can only be taken in to account if they have a valuation methodology set out in Annex V of the 1994 Regulations. Whereas, linked assets should be valued “in accordance with generally accepted accounting concepts, bases and policies or other generally accepted methods appropriate for insurance undertakings”, therefore a wider base of assets can be used for linked business. Schedule 7 of the 1994 regulations specifies limits on the amounts of individual asset types which may be used to cover technical reserves.

15. 60% of a firm’s linked and non-linked liabilities in respect of business written in the EU must be matched by localised

(“established and maintained” within the EU) assets. 80% of a firm’s non-linked liabilities must be localised.

Solvency Margin and Guarantee Fund

16. In addition to technical reserves, each firm must establish and maintain an adequate solvency margin and guarantee fund in respect of its business and subject to the rules in Annex II of the 1994 Regulations.

17. The solvency margin is subject to a minimum of €3.7 million as at 31st December 2012, which increases periodically with

inflation. Financial Condition Report

18. The Financial Regulator Guidelines stipulate that each authorised life assurance company must prepare and submit a Financial Condition Report (FCR) to its Board and the Financial Regulator at least once every three years. A more frequent reporting schedule may be required in particular cases.

19. The purpose of preparing an FCR is to identify plausible threats to a satisfactory financial condition; actions that lessen the likelihood of those threats; and actions that would mitigate a threat if it materialised. As such, the FCR serves a critical governance function by enabling the Board of Directors and management of the company to focus on its future risk profile and on the risk management options available.