OSFI.AA Flashcards
What are the legal requirements for the appointment of an AA (8)?
- 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 Board of Directors revokes AA’s appointment
- Outgoing AA must write report to (Board of Directors, 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
Summarize the roles & responsibilities of an AA (7)
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
What is the main responsibility of the appointed actuary (1)/7
The AA must perform a VALUATION of the policy liabilities at year-end using AAP (Accepted Actuarial Practice)
Reporting - describe the AA report (2)/7
AA Report:
- Must be completed at least 21 days before the AGM (Annual General Meeting)
- Must state whether Annual Report fairly represents results of valuation
Reporting - where is the AA’s report on financial position sent (3)/7
Financial Position Report:
- Completed Annually
- Send to Board of Directors
- AA must meet with directors or chief agent of company to discuss financial position
Reporting - when & how is the AA’s report on financial condition done & where is it sent (4)/7
Financial Condition Report:
- Must be completed annually
- Involves a 3+ year projection possibly using FCT methodology
- Send to Board of Directors, OSFI
Reporting - when is the AA’s MAE (Material Adverse Event) report done & where is it sent (5)/7
MAE Report:
- Report on Material Adverse Events requiring rectification
- Send to Board of Directors, CEO, CFO
- AA must supply a copy to BoD & ORSI if in the AA’s opinion, suitable action is not being taken
Reporting - what is another report the AA must complete that relates to policyholders (6)/7
Policyholder report:
- Completed Annually
- Assesses fairness with which policyholders are treated regarding dividends, bonus & other benefits & whether it is in accordance with the dividend or bonus policy
Final opinion - what does the AA’s final opinion contain (7)/7
Financial Opinion/Memo:
- Concerns parts of financial statements requiring discretion or significant calculations/judgment
OSFI AA main qualification + 3 CIA rules of professional conduct that AA is subject to
Main qualification: FCIA - in good standing (subject to CIA SOPs)
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 (Standards of Practice)
Briefly describe four qualifications that OSFI expects in assessing the suitability of an AA (4)
AA must be a Canadian professional with Canadian experience:
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 continuing professional development requirements
- No adverse findings with CIA disciplinary tribunal
What are 3 objectives sought by OSFI in requiring a peer review of the work of the AA (3) (Hint: AAR)
- Assist OSFI in its assessment of the insurer’s safety and soundness
- Assist AA: give independent advice & help professional development
- Raise & maintain confidence in AA’s work with public, insurance company management & directors and with OSFI
Abbreviated list of peer review work (1-7)/7
- Am: review/discuss with AA appropriateness of Assumptions & methods
- AA: review if AA used AAP (Accepted Actuarial Practice) in their work
- W: produce a Written report(s) documenting the findings of the peer review
- ie: review internal/external changes to the insurer (if material)
- M: review MCT/BAAT assumptions & methods
- A: validate Adequacy of procedures, systems, work of others used by the AA
- F: validate financial condition reporting scenarios, assumptions, methods (usually done through FCT)
Describe 1st item of peer review work: Am
Am: Assumptions & methods
- Is each assumption independently reasonable
- Are methods appropriate for each valuation model
Describe the 2nd item of peer review work: AA
AA:
- Did the AA use AAP (Accepted Actuarial Practice) in performing the valuation of policy liabilities & ceded reinsurance assets
Describe the 3rd item of peer review work: W
W: Written report
- produce a written report(s) documenting the findings of the peer review
Describe the 4th item of peer review work: ie
ie: internal/external changes
- Review appropriateness & extent of all material internal/external changes regarding the valuation of policy liabilities & ceded reinsurance assets
Describe the 5th item of peer review work: M
M: MCT/BAAT (assumptions & methods)
- Review assumptions & methods used in the calculation of MCT/BAAT
Describe the 6th item of peer review work: A
A: Adequacy (of procedures, systems, work of others)
- Check the adequacy of procedures, systems, work of others that is used by the AA, to the extent that these are not reviewed by the external auditor
Describe the 7th item of peer review work: F
F: FCT scenarios, assumptions, methods
- Review (assumptions, methods, scenarios) used in evaluation of the future financial condition of insurer
Responsibilities of AA, Management with regards to reviewer
Full cooperation - respond to reviewer in a timely manner with all relevant documents/information
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 when peer reviewing (5)
- Change in systems (ex: valuation model or software)
- Change in Material External events suggesting that valuation assumptions/methods may need to be changed (ex: inflation)
- Change in methodology used in the valuation (ex: for claims liabilities)
- Change in company operations or circumstances (ex: investment policies, reinsurance practices)
- Valuation assumption changes (ex: LDFs, trends)
Can materiality for the purposes of peer review be determined solely by means of the application of a numeric threshold?
No! Materiality is also a matter of professional judgement in the particular circumstances. Materiality for the purposes of peer review cannot be determined solely by means of the application of a numberic threshold. General quantitative guidelines are not a substitute for the AA’s and peer reviewer’s professional judgment
What causes increased rigour with regards to materiality?
Materiality should become more rigorous as the company approaches internal capital targets or regulatory capital thresholds
- Small changes could trigger significant actions
Difference in responsibilities between external auditor & peer reviewer
AUDIT:
- Checks that Financial statement is free from material misstatement as a whole
- Uses CICA standard
PEER REVIEW:
- Reviews AA’s financial statement work (valuation of liabilities) at more granular level
- Uses CIA standard
Peer reviewer does not:
- Verify data (auditors do)
- Verify controls (auditors do)
- Perform detailed recalculations (provided AA has controls to detect errors in valuation) (auditors do)
Do audit requirements satisfy peer review requirements (yes/no)?
No (a peer review is more detailed than an audit)
Duties that a peer reviewer does not perform
Peer reviewer Doesn’t Care to do these:
- Perform detailed recalculations (provided AA has controls to detect errors in valuation) (whereas auditors must)
- Data quality verification (whereas auditors must)
- Controls verification
Contents of the peer review report (8)
- A description of the work done by the reviewer (both the specifics of the work and its extent)
- The timing during the year when the work was carried out
- The materiality level used for the review
- The reviewer’s statement of opinion with respect to the AA’s compliance with AAP and any objectives /requirements established by OSFI in Regulations, Guidelines or Memoranda to the AA.
- The reviewer’s observations with respect to changes made in methodology and assumptions
- The reviewer’s acknowledgement that no additional material changes should have been made
- A list of any recommendations for further review or work by the AA in the coming year
- A brief description of the relationship with the AA to support the specific objectives of providing consultation aid, professional education and improving the quality of the AA’s work
Describe the peer review cycle required by OSFI
If there are/have been material changes - annually
If no material changes - At least once every 3 years, all at once OR in phases with brief annual report stating that there were no material changes
Identify the qualification standards for a peer reviewer (7)
- Need to have exposure to 2 or more different (unrelated) insurers
- Need to have same qualifications as the AA (FCIA, Canadian Experience, no adverse finding from CIA tribunal)
- Cannot have a direct financial interest in the company that they review (but can if has an indirect investment in company)
- Cannot have worked for the insurer in the last 3 years
- Can be peer-reviewer even if part of the company’s external audit firm, but companies are not encouraged to use as a peer-reviewer someone from the same firm as auditor
- Cannot be peer-reviewer if involved in any actuarial work related to the financial statements or financial condition reporting for the company
- Cannot be peer-reviewer if from same consulting firm as AA
If (hiring, changing) peer-reviewer OSFI expects?
Written notification (w/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?
At least once every 2 cycles (i.e. every 6 years)
Identify reasons for periodic changes of peer reviewer (2)
- Enhance objectivity of the peer review
- Increase educational value to AA (due to receiving varying opinions)
How does AA identify and report material adverse transactions/conditions?
IDENTIFY: use (FCT, Stress-Testing)
REPORTING: report to (CEO, CFO) with deadline for corrective action (cc: BoD)
IF DEADLINE NOT MET: cc: OSFI & outline events leading up to notifying OSFI
For ex: if there has been a material adverse event, then AA cannot just inform CEO and CFO, must also state specific date for corrective action & notify OSFI if need be
