MATERIALITY

Question 1

SECT D: MATERIALITY

DEFINITIONS/PROPERTIES OF MATERIALITY STANDARD

Answer 1

• When an omission, understatement or overstatement is likely to affect either the intended principal user’s decision-making or the intended principal user’s reasonable expectations
o Depends on both the relative size & nature of the omission/misstatement
o Disclosure required if omission/misstatement > materiality standard

Question 2

SECT D: MATERIALITY

INTENDED AUDIENCE

Answer 2

• Target users of actuarial communication => excludes those of whom you are unaware
• Reasonable knowledge of business & economic with willingness to study financial statements
• Understands uncertainties are due to estimates, judgements & future contingencies

Question 3

SECT D: MATERIALITY

CONSIDERATIONS IN EVALUATION OF MATERIALITY STANDARD (3)

Answer 3

• Purpose of work & its intended uses
• More rigor for larger entities
• Company’s financial condition

Question 4

SECT D: MATERIALITY

POSSIBILE CONSIDERATIONS/INITIAL STARTING POINTS FOR MATERIALITY STANDARD

Answer 4

• 1-5% of surplus; 20% is common
• % of reserves
• Impact on IRIS ratios
• Impact on RBC results
o Amount of adverse deviation that would cause RBC to fall to the next action level
• Amount of adverse deviation that would cause surplus to fall below minimum capital requirements

Question 5

SECT D: MATERIALITY

RISK OF MATERIAL ADVERSE DEVIATION (2)

Answer 5

1. CARRIED + MATERIAL STANDARD < ACTUARIAL ESTIMATE
2. BRIGHT LINE TEST
   10% CARRIED L&LAE > TOTAL ADJ CAPITAL - COMPANY ACTION LEVEL
   NOTE: COMPANY ACTION LEVEL = 2*ACL