AA Flashcards
what are the legal requirements for the appointment of an AA
think about need appointment, qualifications and requirements
- insurer must appoint an AA
- insurer must notify OSFI of the appointment
- AA must be a FCIA
- AA can’t be CEO, COO or similar without authorization from OSFI
- AA can’t be CFO without audit committee permission
-> audit committee must certify AA, CFO duties can be performed competently & independently - insurer must notify OSFI if BoD revokes AA’s appointment
- outgoing AA must write report to BoD, OSFI on circumstances & reasons for leaving
- incoming AA must review outgoing AA’s report within 15 days
-> if incoming AA doesn’t receive report within 15 days, they may accept appointment regardless
roles & responsibilities of AA
- valuation of reserves
- 5 reports (AFFMP):
-> appointed actuary report
-> financial position report
-> financial condition report
-> material adverse event report
-> policyholder fairness report - final opinion & memo
main responsibilitiy of the appointed actuary
AA must perform a valuation of the policy liabilities at year-end using AAP
describe AA report
- must be completed at least 21 days before AGM(annual general meeting)
- must state whether annual report fairly represents results of valuation
where is AA’s report on financial position sent
- completed annually
- send to BoD
when & how is the AA’s report on financial condition done & where is it sent
- must complete when directed by OSFI
- involves a 3-5 year projection possibly using FCT methodology
- send to BoD, OSFI
when is the AA’s MAE report done & where is it sent
- report on MAE (material adverse events) requiring rectification
- send to BoD, CEO, CFO
what is another report the AA must complete that relates to the policyholders
- completed annually
- assesses fairness with which policyholders are treated regarding dividends, bonus, other benefits
what does AA’s final opinion contain
concern parts of financial statements requiring discretion or significant calculations, judgments
main AA qualifications + 3 rules
- main qualification: FCIA in good standing
- rule 1: perform professional services with integrity, competence, skill, care)
- rule 2: perform professional services only when qualified to do so
- rule 3: meet all applicable SOPs
OSFI’s expectations regarding an AA
AA must be a Canadian professional with Canadian experience:
Experience:
- 3yrs of Canadian experience from past 6 years including 1 year of valuation
- experience with CIA’s SOPs also insurance legislation & regulation
Professionalism:
- must maintain professional designation requirements
- no adverse findings with CIA disciplinary tribunal
what are the objectives of a peer review
- assist OSFI in assessing insurer safety & soundness
- assist AA independent advice & professional development
- raise confidence in AA with regulator, management, public
abbreviated list of peer review work
(Am AA Die MAD):
- Am: assumptions & methods
- AA: did the AA use AAP
- D: did the AA document of assumptions & methods
- ie: examine internal/external changes if material
- M: examine MCT/BAAT assumptions & methods
- A: examine adequacy of procedures, systems, work of others
- D: examine FCT scenarios, assumptions, methods (formerly DCAT)
describe the 1st item of peer review work: Am
- is each assumption independently reasonable
- are methods appropriate for each valuation model
describe the 2nd item of peer review work: AA
did AA use AAP in performing the valuation
describe the 3rd item of peer review work: D
did AA accurately document assumptions, methods used in the valuation
describe the 4th item of peer review work: ie
review all the material internal/external changes regarding the valuation
describe the 5th item of peer review work: M
review assumptions & methods used in the calculation of MCT/BAAT
describe the 6th item of peer review work: A
check the adequacy of procedures, systems, work of others
describe the 7th item of peer review work: D
review assumptions, methods, scenarios used in evaluation of the future financial condition of insurer
responsibilities of AA, management
full cooperation - respond to reviewer in a timely manner with all relevant docs, info
who sets the global materiality level for a company & what is the basis
- external auditor sets the materiality level for the company as a whole
- basis = size of company (bigger companies have higher materiality thresholds)
material changes to consider
- systems (i.e, valuation software)
- material external event (i.e, inflation)
- valulation assumptions (i.e, LDFs, trends)
- valuation methods (i.e, for liabilities)
- operations (i.e, investment policies, reinsurance practices)
is auditor’s level sufficient for AA, peer review
- no, a numerical threshold for company as a whole is not sufficient
- peer reviewer & AA must use professional judgment for different areas within the company
what caused increase rigour
- getting near internal capital targets, solvency control levels
- small changes could trigger significants actions
difference between external audit and peer review
audit:
- checks that F/S is free from material misstatement as a whole
- uses CICA standard
peer review:
- reviews AA’s financial statement work at more granular level
- uses CIA standard
peer reviewer doesn’t:
- verify data
- verify controls
- perform detailed recalculations
do audit requirements satisfy peer review requirements
no, a peer review is more detailed than an audit
duties that a peer reviewer does not perform
(PDC):
peer reviewer doesn’t care to do:
- perform detailed recalculations
- data verfication
- controls verification
peer review report contents
- description of work/timing/materiality level
- compliance with AAP & changes in assumptions and methods
- recommendations for further work
- relationship with AA
how often is a F/S peer review performed when there have been no material changes to the valuation
at least once every 3 years, all at once or in phases with brief annual report stating that there were no material changes
how often is a F/S peer review performed when there have been material changes to the valuation
annually
identify qualification standards of a peer reviewer
same as AA:
- main qualification: FCIA in good standing
- rule 1: perform professional services with integrity, competence, skill, care
- rule 2: perform professional services only when qualified to do so
- rule 3: meet all applicable SOPs
required prior experience before appointment
- exposures to 2 or more unrelated insurers
- familiarity with range of practices & assumptions used in Canada
if hiring or changing, OSFI expects
written notification with reasons for change in peer reviewer if applicable
identify a reason that a peer reviewer may be from insurer’s audit firm
- using peer reviewer from audit firm accomodates smaller simpler insurers
- this is discouraged for large insurers (large insurers need a broader perspective)
how often should a peer reviewer be changed
once every 2 cycles (i.e, every 6 years)
reasons for periodic changes of peer reviewer
- enhance objectivity
- increase educational value to AA
how does AA identify and report material adverse transactions/conditions
- identify use FCT, stress-testing
- reporting: report to CEO, CFO with ddl for corrective action
- if ddl not met: cc OSFI & outline events leading up to notifying OSFI
briefly describe the responsibilities of AA that have not changed under IFRS 17
(POOR AA):
- policy liabilities: the definition and coverage of ‘policy liabilities’ are unchanged
- opinion: AA continues to provide opinions on policy liabilities
- others: AA both relies on and provides work for others, including external auditors
- reporting: AA still creates formal reports for regulators following appropriate guidelines
- appointment: AA’s role remains reserved and requires a formal appointment
- AAP: AA ensures that calculation of policy liabilities follows AAP in canada
describe situations where AA would use but not take responsibility for the work of others
- if the work conflicts with what would be appropriate for the purpose of the actuarial services
- if the actuary is unable to judge the appropriateness of the work including assumptions & methodology (without lots of extra work beyond the scope of the assignment)
describe when AA would use and take responsibility for the work of others
when such actions are justified based on considerations such as:
- communication with the other person that is early and periodic
- confidence in the other person’s qualifications & competence
- awareness by the other person of how the actuary intends to use the other person’s work
12 items that may be set by someone other than AA
- PAA accounting policy choices
- application of variable fee approach
- discount rates (whether a bottom-up or top-down approach is used)
- directly attibutable expenses
- insurance contract classification
- deferred acuisition expenses
- level of aggregation (threshold for groups with no significant possibility of becoming onerous)
- eligibility for premium allocation approach
- risk adjustment for non-financial risk
- contract boundary (assessment of practical ability to reset the terms of a contract at a renewal date)
- coverage units for amortization of contractual service margin
- reinsurance contracts held
questions AA might ask to determine whether to take responsibility for the work of others
- is the work consistent with a reasonable interpretation of IFRS 17 standard
- is the work consistent with AAP in canada
- has AA confirmed the other person’s qualifications and awareness of how the work is being used
- is the work similar to what AA would have done
- is AA able judge the appropriateness of the work (without substaintial additional work beyond the scope of the assignment)
examples of situations where it may be appropriate to report with reservation
- change in assumption or methodology affecting disclosure items: where an item valued by the actuary is materially affected by a change in assumption or methodology that is not disclosed in the financial statements
- liabilities different than those calculated by the actuary: where the financial statements of an insurer report policy liabilities that are materially different from those calculated and reported to the regulator by AA
- impracticality of restatement: where restating the preceding year valuation to be consistent with the current year valualtion would be appropriate but not practical
- new appointment: where the newly appointed AA uses but is unable to take responsibility for a predecessor AA’s work
- takeover of insurer with insufficient records: where AA is unable to judge the appropriateness of a predecessor AA’s work
standard wording for AA’s opinion according to IFRS 17
To the policyholders and shareholders of the (ABC insurancey company):
- I have valued the policy liabilities of (the company) for its consolidated financial statements prepared in accordance with international financial reporting standards for the year ended 12/31/xxxx
- in my opinion, the amount of policy liabilities is appropriate (deficient/inadequate, redundant/excessive) for this purpose
- the valuation conforms to AAP in Canada and the consolidated financial statements fairly present the results of the valuation
3 differences in the wording of AA’s opinion under IFRS 17 vs. the old standard IFRS 4
IFRS compliance:
- the revised opinion stresses that the policy liabilities valuation complies with relevant IFRS standards
- includes IFRS 17 insurance contracts, IFRS 9 investment contracts and IFRS 15 service contracts
Appropriate for financial statements:
- AA no longer opines that liabilities make ‘appropriate provision for all policy obligations’
- instead, AA now asserts the amount of policy liabilities is appropriate for inclusion in the financial statements
Broader scope:
- the scope of ‘fairly present’ in AA’s opinion is broader under IFRS 17
- this reflects more extensive presentation and disclosure requirements, including details on insurance contract liabilities and more line items derived from AA’s valuation
who sets the requirements for appointed actuary’s report and what is the relevant legislation
- OSFI sets the requirements
- the governing legislation is ICA (insurance companies act)
is the appointed actuary’s report part of an insurer’s annual return
yes, this is a statutory requirement
what’s included in the appointed actuary’s report
- opinion on whether policy liabilities as determined by AA are fairly represented in insurer’s financial statements
- detailed commentary
- supporting data
- calculations
audience for appointed actuary report
- OSFI’s actuaries
- regulators
- insurer’s management
key objective of application of professional standards to the appointed actuary’s valuation
ensure the valuation of insurance contract liabilities adheres to standards set by ICA
role of the appointed actuary in applying professional standards
- use judgment, develop methodologies, but remain consistent with professional standards
- any methodology used should be defensible
the relevant standards regarding the apointed actuary’s data
data must be accurate, relevant, and consistent over time
what should be done if there are changes in data or methodology from the previous year
changes should be justified and disclosed in the report
what are the ddl for submitting AAR, FCT report, and peer review report
- AAR: 60 days post fiscal year end
- FCT Report: earlier of 30 days post presentation to the board or 1 year after fiscal year end
- peer review report: same as P&C financial resturns for pre-release: 30 days post AA’s report release for post-release
can AA’s valuation be different from amounts booked in the annual report
yes, but if the differences is greater than AA’s materiality standard, AAR must provide an explanation
what actions can OSFI take if they find issues during an AAR review
- OSFI can require modifications to assumptions or methods, and mandate a re-fiilng of AAR
- they may also request supporting documentation or a report from an independent actuary
what is expected of the appointed actuary during an OSFI review of AAR
- respond promptly to spplemental requests
- have supporting documentation available for inspection
3 sections should be included in any AAR
any 3 of:
- expression of opinion
- supplementary information supporting the opinion
- materiality standard
- data
- risk adjustment for non-financial risk
- LIC
- LRC
if the actuary was appointed in the last year, what must the AAR include about AA
- the date of their appointment
- the previous actuary’s resignation date
- when OSFI was informed about the appointment
- confirmation of communication with the former actuary as per ICA section 364
- a comprehensive list of the new actuary’s qualifications
identify the annual reporting requirement in the AAR for the Board or Audit Committee - Canadian entities
AAR must disclose the date the AA met with the board or the audit committee
identify the annual reporting requirement in the AAR for the Board or Audit Committee - Foreign entities
AAR must disclose the date the AA met with the chief agents
identify disclosures in the AAR regarding continuing education
AAR must disclosed that AA is in compliance with the continuting professional development requirements of the CIA
identify disclosures in the AAR regarding compensation
- disclose total compensation to ensure unbiased judgment
- methodology for deriving compensation to promote transparency
- compensation details for an internal actuary including salaries and bonuses
- compensation details for an external actuary consulting fees
- disclose compensation details to OSFI in a separate cover letter
identify disclosures in the AAR regarding reporting relationships for an internal actuary
- must disclose the name and position of their direct supervisors, including both solid and dotted line reporting relationships
- should report any changes in reporting relatinships that occurred within the past year
- need to disclose any expected changes in reporting relationships
identify disclosures in the AAR regarding reporting relationships for an external actuary
- should disclose the names and positions of their main contacts within the entity (specifically regarding roles and functions like valuation, FCT, and MCT support)
- must include the name and position of the individual who hired them
- need to disclose the entity employees with whom they discuss their findings and reports
disclosures required by new AA in next AAR
- dates: outgoing AA exit date, incoming AA start date, OSFI notification date
- communication: between incoming AA and outgoing AA
- qualifications: of new AA
identify the purpose of the unpaid claims and loss ratio analysis exhibit (UCLR analysis exhibit)
to allow the presentation of industry loss information in a standard format
the type of analysis the UCLR exhibit is designed to facilitate
- the impact of discounting on estimates of future cash flows
- loss trends
briefly identify the information contained in the UCLR analysis exhibit
it is organized by AY and by LOB and shows:
- paid losses
- LIC including FCFs
- AIC including FCFs
- loss ratio
- claim counts
formula for loss ratio for 2022 and prior
loss ratio = claims / EP
formula for loss ratio for after 2022
loss ratio = claims / insurance revenue
duties of audit committee
(review-require-meetings):
‘- review annual statement before BoD approval
- review such company returns as superintendent may specify
- review investments & transactions with material adverse events brought to audit committee
- require management to implement & maintain internal controls
- meet with auditor: discuss annual report
- meet with actuary: discuss parts of annual report prepared by actuary
- meet with chief internal auditor: discuss effectiveness of internal controls
items BoD must present to stakeholders, policyholders @ AGM
- F/S for most recent 2 years
- auditor’s report
- actuary’s report
- description of roles for auditor & actuary
- anything else required by the by-laws of company
CEO, COO can’t be AA unless
- authorized by OSFI
- expiration of authorization is specified therein but cannot exceed 6 months
can CFO also be AA
yes if:
- audit committee writes to OSFI that duties of CFO & AA can be adequately & independently performed
- OSFI authorizes appointment
ways an actuary may cease to be AA
- death
- resignation
- appointment revoked by BoD
- the person ceases to be an actuary
what must AA do upon recovation/resignment
- write report outlining circumstances & reasons
- send to BoD, OSFI
what must prospective replacement AA do
- request written report on circumstances & reasons for prior AA leaving
- if not received in 15 days, new AA appointment may simply be accepted
AA’s right to information & protection from liability
AA may request records & expectations from
- BoD
- officers
- employees
AA can’t be held liable for such good faith requests
reporting requirements of AA to BoD
- provide report on Financial Position annually
- provide report on Financial Condition, usually DCAT when directed by super
reporting requirements of AA to CEO
report on MAE that require rectification to CEO, CFO and cc BoD
if no suitable action by company on MAE
- send original report on MAE to OSFI
- also send a copy to BoD
what is qualified privilege
if AA makes good faith report under 363, 369 then AA won’t be liable in civil action seeking indemnification
- 363: pertains to report from outgoing AA
- 369: pertains to report on MAE
requirements for foreign companies before issuing insurance
- must have assets > 5m vested in trust or an amount per superintendent
- must appoint an actuary & auditor
- must establish chief agency
- must have min MCT/BAAT ratio
- any other conditions super deems appropriate
OSFI’s peer reviewer criteria
not allowed:
- an employee or AA for the company/subsidiary in past 3 years
- shareholder or direct financial investment in company
- from same consulting firm as AA
- outside non-work discussion with AA (can’t be friends or drinking buddies)
permitted:
- peer reviewers can have an indirect financial investment in the company
- peer reviewers can be from consulting firm doing financial statements for the company if not involved in that work
- peer reviewers can be from company’s audit firm but this is not encouraged
