OSFI.AA Flashcards
What are the 8 legal requirements for the appointment of an AA?
- Insurer must appoint an AA
- Insurer must notify OSFI of the appointment
- Insurer must notify OSFI if Board of Directors revokes AA’s 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 and CFO duties can be performed competently & independently
- Outgoing AA must write report to BoD and OSFI on circumstances & reasons for leaving
- Incoming AA must review outgoing AA’s report within 15 days: if incoming AA does not receive report within 15 days, they may accept appointment regardless
What are the 7 roles & responsibilities of an AA?
- Valuation or reserves
5 reports (AFFMP):
2. Appointed Actuary report
3. Financial Position report
4. Financial Condition report
5. Material Adverse Event report
6. Policy Holder Fairness report
- Final (opinion, memo)
What is the main responsibility of the appointed actuary?
The AA must perform a VALUATION of the policy liabilities at year-end using AAP (Accepted Actuarial Practice).
Briefly describe the 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 the AA’s report on financial position sent?
Completed annually
Send to Board of Directors
When & how is the AA’s report on financial condition done & where is it sent?
Must complete when directed by OSFI
Involves a 3-year projection possibly using FCT methodology
Sent to Board of Directors and OSFI
When is the AA’s MAE (Material Adverse Event) report done & where is it sent?
Report on MAE (Material Adverse Events) requiring rectification
Sent to Board of Directors, CEO and CFO
What is another report the AA must complete that relates to policy holders?
Policy Holder Report:
Completed annually
Assesses fairness with which policy holders are treated regarding dividends, bonus, and other benefits
What does the AA’s final opinion contain?
Parts of financial statements requiring discretion or significant calculations and judgments
Identify the main qualification an AA must posses.
Main qualification: FCIA - in good standing
What are the 3 rules that must be followed by the AA in carrying out their work?
RULE 1: Perform professional services WITH integrity, competence, skill and Care
RULE 2: Perform professional services only when qualified to do so
RULE 3: meet all applicable SOPs (Standards of Practice)
What are OSFI’s expectations regarding the background of an AA? (Experience (2) and professionalism (2))
Experience:
• 3 years 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 3 objectives of a peer review? (Hint: AAR)
Assist OSFI in assessing insurer safety & soundness
Assist AA independent advice & professional development
Raise confidence in AA with regulator, management and public
Identify 4 items reviewed by the peer reviewer.
- Assumptions & methods
- Did the AA use accepted actuarial practice
- Did the AA document assumptions & methods
- Examine internal/external changes (if material)
- Examine MCT/BAAT (assumptions & methods)
- Examine adequacy of procedures, systems and work of others
- Examine FCT scenarios, assumptions and methods
What is the reviewer expecting from AA and management?
Full cooperation: respond to reviewer in a timely manner with all relevant docs and info
Who sets the materiality standards and what is the basis?
External auditor
Basis = size of company
Briefly describe 3 examples of material changes that the peer review is expected to consider.
- Systems (Ex: valuation software)
- material External event (Ex: inflation)
- Valuation assumptions (Ex: LDFs, trends)
- valuation methods (Ex: for claims liabilities)
- Operations (Ex: investment policies, reinsurance practices)
What causes increased rigour?
Getting near internal capital targets and solvency control levels
Small changes could trigger significants actions
Briefly describe the difference between external audit and peer review. (2,2)
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
Do audit requirements satisfy peer review requirements?
No, a peer review is more detailed than an audit.
Identify the 3 duties that a peer reviewer does not perform.
Peer reviewer Doesn’t Care to do these:
• [Pr] → Perform detailed recalculations (provided AA has controls to detect errors in valuation)
• [D] → Data (verification)
• [C] → Controls (verification)
Identify the 4 contents of the peer reviewer report.
- Description of work | timing | materiality level
- Compliance with Accepted Actuarial Practice & changes in Assumptions & 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 yrs, 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 the qualification standards for a peer reviewer.
Same as outlined for AA:
Main qualification: FCIA - in good standing
RULE 1: Perform Professional Services WITH Integrity, Competence, Skill and Care
RULE 2: Perform Professional Services only when qualified to do so
RULE 3: meet all applicable SOPs (Standards of Practice)
What is the required prior experience before appointment of the peer reviewer?
Exposure to 2 or more unrelated insurers
Familiarity with range of practices & assumptions used in Canada
What is the OSFI expectation when in the insurer is hiring/changing his peer reviewer?
Written notification with reasons for change in peer reviewer, if applicable
Does the same standard of materiality can be used for the whole company?
No, a numerical threshold for company as a whole is not sufficient
Peer reviewer & AA must use professional judgment for different areas within company
Identify the 7 OSFI’s peer reviewer objectivity conditions.
Peer reviewer CANNOT be:
1. An employee or AA for the company/subsidiary in past 3 yrs
2. Shareholder or direct financial investor in company
3. From same consulting firm as AA
4. Friend with AA
Peer reviewer CAN be:
5. INDIRECT financial investor in the company
6. From consulting firm doing financial statements for the company (if not involved in that work)
7. From company’s audit firm (but this is not encouraged)
Identify a situation in which it may be acceptable that the peer reviewer is from insurer’s Audit Firm.
Using peer reviewer from Audit Firm accommodates smaller/simpler insurers
This is discouraged for large insurers (large insurers need a broader perspective)
How often should a peer reviewer be changed?
At least once every 2 cycles (i.e. every 6 years)
Identify 2 reasons for periodic changes of peer reviewer.
- Enhance objectivity
- Increase educational value to AA
How does AA identify and report material adverse transactions or conditions?
IDENTIFY: use FCT and/or stress-testing
REPORTING: report to CEO and CFO with deadline for corrective action (cc: BoD)
IF DEADLINE NOT MET: cc:OSFI & outline events leading up to notifying OSFI
Identify basic disclosure items that must appear in the peer review of the AA report (3)
- Main results & findings
- When the review was done
- Name of peer reviewer
