Part D Actex Qs

Question 1

On Feb 23, 2010 the AA of ABC Insurance, a federally regulated company, discovers that a single large claim is missing from the company’s claims system. The claim occurred on Feb 15, 2009. The AA has prepared a draft AA Report as at Dec 31, 2009.
Describe the AA’s actions if the impact of the claim is less than the standard of materiality.

Answer 1

AA does not need to change his/her report but would inform the auditor if the effect of the event is greater than an applicable audit materiality threshold.

CIA Subsequent Events

Question 2

On Feb 23, 2010 the AA of ABC Insurance, a federally regulated company, discovers that a single large claim is missing from the company’s claims system. The claim occurred on Feb 15, 2009. The AA has prepared a draft AA Report as at Dec 31, 2009.
Describe the AA’s actions if the impact of the claim is greater than the AA’s standard of materiality.

Answer 2

A corrected analysis is required and needs to be communicated to management and the auditor

CIA Subsequent Events

Question 3

Under the Canadian Insurance Companies Act, what are the duties of the appointed actuary in the following case:
She resigns as the appointed actuary.

Answer 3

She must submit a written statement to the company’s directors and to the superintendent regarding the circumstances and cause of the resignation.

ICA

Question 4

Under the Canadian Insurance Companies Act, what are the duties of the appointed actuary in the following case:
Her appointment is revoked by the directors of the company.

Answer 4

She must submit a written statement to the company’s directors and to the superintendent why she believes the appointment was revoked.

ICA

Question 5

Under the Canadian Insurance Companies Act, what are the duties of the appointed actuary in the following case:
She is considering taking an appointment previously held by another actuary.

Answer 5

She must request the written statement of the previous actuary and not accept the position until receiving the statement or until fifteen days have passed.

ICA

Question 6

In the Canadian Insurance Companies Act, the reporting requirements of the actuary were broadened significantly. Briefly describe two measures contained in the act that illustrate this.

Answer 6

1. The actuary must meet with the directors or audit committee to report on the company’s financial position.
2. The actuary must report in writing to the CEO and CFO the matters having material adverse effects on the company’s finances and require their rectification. The report should also be sent to the BOD. If suitable action is not undertaken, a copy of the report should be sent to the superintendent.

Question 7

According the the Insurance Companies Act, what are the duties of the following person when the actuary of a company resigns or the actuary’s appointment is revoked?
The directors of the company.

Answer 7

The directors must notify the superintendent and fill the vacancy.

ICA

Question 8

According to section 203 of the ICA, chapter 47 of the Financial Institutions Act, is the following a duties of the Audit Committee?
1. Review such investments and transactions that could adversely affect the well-belong of the company.

Answer 8

Yes

ICA

Question 9

According to section 203 of the ICA, chapter 47 of the Financial Institutions Act, is the following a duties of the Audit Committee?
1. Review such returns of the company as the superintendent may specify.

Answer 9

Yes

ICA

Question 10

According to section 203 of the ICA, chapter 47 of the Financial Institutions Act, is the following a duties of the Audit Committee?
1. Review procedures to resolve conflicts of interest.

Answer 10

This is not mentioned (No)

ICA

Question 11

According to the ICA, is the following information that the directors of an insurance company shall place before the shareholders and policyholders at every annual meeting?
The Appointed Actuary’s Report

Answer 11

Yes

ICA

Question 12

According to the ICA, is the following information that the directors of an insurance company shall place before the shareholders and policyholders at every annual meeting?
A description of the roles of the actuary of the company and the auditor of the company in the preparation and audit of the Annual Statement.

Answer 12

Yes

ICA

Question 13

According to the ICA, is the following information that the directors of an insurance company shall place before the shareholders and policyholders at every annual meeting?
A forecasted financial statement for the upcoming year.

Answer 13

This is not mentioned (no)

ICA

Question 14

According to the ICA, the actuary of a company has the reporting duties to the board of directors and the management of the company.
Describe the nature of the actuary’s report to the directors of the company.

Answer 14

This is to be a report “in accordance with GAAP and any direction that may be made by the Superintendent on the financial position of the company and, where so specified in such a direction, the expected future financial condition of the company,”

Question 15

According to the ICA, the actuary of a company has the reporting duties to the board of directors and the management of the company.
Describe the nature of the actuary’s report to the officers of the company.

Answer 15

It is to be a report in writing on “any matters that have come to the actuary’s attention in the course of carrying out the actuary’s duties and that in the actuary’s opinion have material adverse effects on the financial condition of the company and require rectification”

Question 16

According to the ICA, the actuary of a company has the reporting duties to the board of directors and the management of the company.
What should the actuary do if the company fails to take suitable action as identified in the report to the officers.

Answer 16

He should send a copy of the report to the superintendent and tell the directors he has done so.

Question 17

According to the ICA, the actuary of a company may issue a legally binding order to the board directing the company to increase the assets of the company.

Answer 17

False. The superintendent can do this, not the actuary.

Question 18

According to the ICA, in Canada, the chief operating officer of a company may not be permanently appointed to the position of appointed actuary of that company.

Answer 18

True. this is not allowed

Question 19

Describe four duties of the audit committee for a Canadian P&C insurance company.
(Answer lists 7)

Answer 19

1. Review the AS before approved by the directors
2. Review returns specific by the superintendent
3. Require, review, evaluate, and approve internal control procedures
4. Review investments and transactions indicated by the auditor or an officer
5. Meet with the auditor to discuss the annual statement, the annual return, and other indicated transactions
6. Meet with the actuary to discuss the annual statement and the annual return
7. Meet with the chief internal auditor and mgmt regarding control procedures

ICA

Question 20

Based upon the ICA in Canada, answer the following:

Describe four ways in which the AA of a company can cease to hold office.

Answer 20

1. he resigns
2. he ceases to be an actuary
3. he dies
4. his appointment is revoked

Question 21

Based upon the ICA in Canada, answer the following:

When an AA ceases to hold office, what are the responsibilities of the actuary?

Answer 21

The directors shall notify the super and fill the vacancy. The actuary should send a written statement describing the circumstances and reasons involved to the BOD and the super.

Question 22

Based upon the ICA in Canada, answer the following:
What is the new actuary required to do before accepting an appointment to replace an actuary who resigned or had their appointment revoked?

Answer 22

He should request a copy of the written statement submitted by the previous actuary. If none is received within fifteen days after the request, he may accept the appointment.

Question 23

The mgmt of company X fires its AA Bob. Subsequently, the company hires Susie as the AA. Bob believes he was fired because he had substantially increased the level of IBNR beyond the amount that mgmt wanted to book. Outline the duties of Bob, Susie, and the company X under the ICA.

Answer 23

Bob: Must submit a written statement to the company’s directors and to the superintendent regarding the circumstances and cause of dismissal
Susie: She must request a written statement from Bob and not accept the position until receiving the statement or until 15 days has passed.
Company X: The directors must notify the superintendent and fill the vacant.

Question 24

The mgmt of company X fires its AA Bob. Subsequently, the company hires Susie as the AA. Bob believes he was fired because he had substantially increased the level of IBNR beyond the amount that mgmt wanted to book.
A while later, the runoff of company X shows that the company had been highly over reserved while Bob was the AA. Can insurance company X sue Bob for causing the company’s poor financial results during this period?

Answer 24

“The actuary or former actuary of a company who in good faith makes an oral or written statement or report under section 363 or 369 shall not be liable in any civil action seeking indemnification for damages attributable to the actuary or former actuary having made the statement or report.”

Question 25

With whom should the actuary meet to report on the financial position of the company? How often?

Answer 25

The actuary must meet with the directors or audit committee to report on the company’s financial position. These mtgs must occur at least once during each financial year.

ICA

Question 26

A company decides to appoint its CFO, who is also a qualified actuary, to be its AA. What actions should the audit committee take?

Answer 26

Provide the superintendent a written statement indicating that it is satisfied that the duties of both positions in the company will be adequately performed and that the actuarial duties will be performed in an independent manner.

ICA

Question 27

An accounting clerk suggest classifying all bonds as held to maturity. Contrast the volatility of net income under the clerk’s proposed approach to the volatility if all bonds were to be classified as available for sale.

Answer 27

If classified as held to maturity, the volatility is lower. Under this approach, net income is unaffected by changes in fair value, whereas under the available for sale approach, changes in the fair value of assets and liabilities affect comprehensive income.

Question 28

An accounting clerk suggest classifying all bonds as held to maturity. Is this appropriate if the company expects to have to sell a portion of the bonds in the next 6 months?

Answer 28

No. If the company sells more than an insignificant amount of such bonds, “all held to maturity assets must be reclassified as available for sale for at least 2 years”

Question 29

At what value is each type of bond recorded in the financial statement?
1 Held for maturity
2 Available for Sale
3 Held for Trading

Answer 29

1 Amortized Cost
2 Market value
3 Market value

Question 30

If market interest rates decrease. For each of the 3 asset classifications, identify the impact on net income or other comprehensive income.

Answer 30

1. Held for maturity: no effect since losses are discounted at book
2. Available for sale: a decrease in the market yield will increase its value, but the increase will affect “other comprehensive income” not net income.
3. Held for trading: a decrease in the market yield will increase its value, the increase will effect net income.

Question 31

Describe the calculation of investment income shown in the income statement given 3 asset classifications.

Answer 31

= coupons received on bonds AFS, HFT, HTM

+ changes in the difference between fair value and amortized cost of bonds HFT.

Question 32

The CIA’s joint policy statement is concerned with which of the following?

1. An actuary’s use of the work of another actuary
2. An actuary’s use of the work of an auditor
3. An auditor’s use of the work of an actuary
4. 2 & 3
5. None

Answer 32

4 (aka 2 & 3)

Question 33

According to the Canadian Institute Actuaries Joint Policy Statement, is the following true?
The auditor who has been appointed to perform an audit and report on financial statements is responsible for the financial statements.

Answer 33

No, management is responsible for the financial statements.

Question 34

According to the Canadian Institute Actuaries Joint Policy Statement, is the following true?
The actuary has a responsibility to express an opinion on the fairness with which the financial statements presented the financial position of the enterprise being audited.

Answer 34

No, this is the responsibility of the auditor

Question 35

According to the Canadian Institute Actuaries Joint Policy Statement, is the following true?
The reporting professional should obtain confirmation that the specialist has been appointed by the shareholders, policyholders, or mgmt to do the work that the reporting professional intends to use.

Answer 35

Yes

Question 36

The Canadian Institute of Actuaries, in CSOP, outlines the standards of practice that apply to the AA of a P&C insurer when preparing a report on the insurer’s financial condition.
Identify two requirements for an insurer’s financial condition to be satisfactory.

Answer 36

1. the insurer must be able to meet all its future obligations under the base scenario and all plausible adverse scenarios throughout the forecast period
2. The insurer must meet the min regulatory capital requirements under the base scenario throughout the forecast period.

Question 37

The Canadian Institute of Actuaries, in CSOP, outlines the standards of practice that apply to the AA of a P&C insurer when preparing a report on the insurer’s financial condition.
Identify 5 risk categories the actuary would consider threats to capital under plausible adverse scenarios.

Answer 37

1. Freq & Sev
2. Pricing
3. Misestimation of policy liabilities
4. inflation
5. interest rate
6. premium volume
7. expense
8. reinsurance
9. deterioration of asset values
10. government and political action
11. off balance sheet

Question 38

What is the purpose of DCAT, based on the CIA CSOP?

Answer 38

to identify plausible threats to satisfactory financial condition, actions which lessen the likelihood of those threats, and actions which would mitigate a threat if it materialized.

Question 39

Before accepting the role of appointed actuary for a Canadian insurance company, the actuary should ensure that the board of directors understands the duties of the AA. T/F?

Answer 39

True page 2054

Question 40

The AA of a Canadian insurer must ensure which of the following, with respect to using the work of an auditor to verify data used in the AA’s report?
A) the auditor will be using the same materiality level as the actuary
B) The auditor will consider the effect of an event subsequent to the valuation date that is know before the date of the report
C) The Appointed Auditor’s report will be available before the AA’s report is due.

Answer 40

A) False, the auditor should use a materiality level that is appropriate, not the same as the actuary
B) True
C) False, the Actuary only needs to be aware of the timing of the auditor’s work.

Question 41

Under the CIA CSOP 1630, the auditor and the actuary can both be the reporting professional and specialist professional.
Describe a situation where the actuary is the reporting professional while the auditor is the specialist professional.

Answer 41

When the actuary expresses an opinion on appropriateness of amounts in the Annual Statement and uses “the work of an auditor with respect to the accuracy and completeness of data used to determine the amounts.”

Question 42

Under the CIA CSOP 1630, the auditor and the actuary can both be the reporting professional and specialist professional.
Describe a situation where the auditor is the reporting professional while the actuary is the specialist professional.

Answer 42

When the auditor uses amounts in the financial statement determined by an actuary as audit evidence.

Question 43

Describe examples of the responsibilities that an AA of a P&C insurance company has with the following professionals/entities:
A) External auditor of the insurance company

Answer 43

1. inform the specialist of the intended use of his work
2. obtain confirmation of the specialists appointment
3. obtain confirmation that the specialist will carry out his work in compliance with professional standards
4. inform specialist of his needs, including the discussion of the appropriate level of materiality, the treatment of subs events, the verification of data, the timing of the work and other questions
5. communicate with the auditor when he make s report to senior mgmt on a matter needing rectification or an unfavourable financial condition.

Question 44

Describe one example of the responsibilities that an AA of a P&C insurance company has with the following professionals/entities:
B) Office of the Superintendent of Fin Ins

Answer 44

1. report that a deadline for rectification of a condition threatening the insurer’s financial condition has not been met.
2. report the circumstances and reasons for a resignation or revocation of an appointment

Question 45

Describe one example of the responsibilities that an AA of a P&C insurance company has with the following professionals/entities:
C) CEO and CFO of the insurance co

Answer 45

report a condition threatening the insurers financial condition

Question 46

Describe one example of the responsibilities that an AA of a P&C insurance company has with the following professionals/entities:
D) Peer reviewer of the actuarial work product produced by the AA

Answer 46

he “should cooperate fully with the reviewer when the review is being carried out. Best efforts should be used to provide the reviewer with access to any required documents and to provide any additional explanations that may be relevant to the review.”

Question 47

The CIA CSOP identify a threefold purpose of the Joint Policy Statement. Describe each of these three purposes.

Answer 47

1. Discuss communications between actuaries involved in the preparation of financial statements, and auditors, regarding their respective responsibilities.
2. Discuss how those actuaries and auditors would interact in carrying out their respective responsibilities
3. Discuss how their respective responsibilities may be disclosed to readers of financial statements.

Question 48

Describe the responsibilities of management with respect to an insurer’s financial statement as described in the Joint Policy Statement.

Answer 48

the financial statements are the responsibility of management

Question 49

For each of the actuary’s and auditor’s responsibilities, identify whether the actuary is acting in the role of the responding professional or the enquiring professional.
(CIA CSOP Joint Policy Statement)

Answer 49

When the actuary considers the work of an auditor with respect to data integrity and control, he acts as the enquiring professional and the auditor acts as the responding professional.
When the auditor considers the work of the actuary as part of the audit evidence, he acts as the enquiring professional the actuary acts as the responding professional.

Question 50

Describe the responsibilities of the actuary with respect to an insurer’s financial statement as described in the Joint Policy Statement.

Answer 50

the representations contained in the financial statements may include amounts determined by the actuary. In determining those amounts the actuary is responsible for assessing the sufficiency and reliability of the data used in the valuation. The actuary may consider the work of an auditor with respect to data integrity and controls.

Question 51

Describe the responsibilities of the auditor with respect to an insurer’s financial statement as described in the Joint Policy Statement.

Answer 51

The auditor has a responsibility to express an opinion of the fairness with which the financial statements present the financial position, results of operations and CFs in accordance with the applicable financial reporting framework, which will normally be GAAP. When the financial statements include amounts determined by the actuary, the auditor considers the work of the actuary as part of the audit evidence supporting the actuarial valuation.

Question 52

According to the CIA, in its educational note DCAT, certain risks are associated with derivative instruments. Identify three of these risks.

Answer 52

1. Market risk
2. Default or credit risk
3. Management risk
4. Legal risk

Question 53

What is liquidity risk? (CIA DCAT) -as related to derivative instruments

Answer 53

Liquidity risk is the risk of not being able to cancel or unwind one’s contract when desired or at a favourable price.

Question 54

What is basis risk? (CIA DCAT) -as related to derivative instruments

Answer 54

Basis risk is the risk that the derivative’s price behaviour does not act as expected, undoing the intended hedging benefits.

Question 55

What is market risk? (CIA DCAT) -as related to derivative instruments

Answer 55

sum of liquidity and basis risk

Question 56

What is default/credit risk? (CIA DCAT) -as related to derivative instruments

Answer 56

the risk that a loss will be incurred due to default in making the full payments when due, in accordance with the terms of the contract

Question 57

What is management risk? (CIA DCAT) -as related to derivative instruments

Answer 57

the potential for incurring material, unexpected losses on derivatives due to inadequate management supervision and understanding, systems, controls, procedures, accounting and reporting

Question 58

What is legal risk? (CIA DCAT) -as related to derivative instruments

Answer 58

the risk that the derivative agreement is not binding as intended.

Question 59

Define ripple effect (CIA DCAT)

Answer 59

A ripple effect is an event or incident when an adverse scenario triggers a change in one or more interdependent assumptions or risk factors.

Question 60

Give three examples of ripple effects and an adverse scenario that can be associated with each.

Answer 60

1. adjustments to assumptions used in the base scenarios which may no longer be appropriate in the adverse scenario being tested
2. The insurer’s expected response to adversity
3. Policyholder actions
4. Regulatory actions, especially under any adverse scenario where the insurer fails to meet the minimum capital requirement
5. Rating agency actions, especially in adverse scenarios that result in significant changes in capital or surplus
6. Likelihood of changes in planned capital injections or distributions

Question 61

According to the CIA, in it’s CDAT, describe two possible adverse scenarios to “inflation risk”.

Answer 61

1. a significant rapid and sustained increase in the general rate of inflation - this would increase settlement costs and interest rates
2. A significant temporary increase in the cost of labor and materials following a CAT - this would increase the cost of claims & expenses
3. a sever recession in the economy - this may increase the number of claims and their settlement costs.

Question 62

According to the CIA, in it’s CDAT, describe two possible adverse scenarios to “government and political risk”.

Answer 62

1. rate freeze or rollback in lines subject to reg approval
2. change in allowable rating variables affecting rate adequacy or availability
3. change in required benefit levels
4. changed tax rates or rules for corporation
5. nationalization or privatization of a LOB
6. change in legislation affecting distribution channels
7. change in regulatory solvency standards
8. political instability, producing asset confiscation or exchange controls.

Question 63

With respect to DCAT and MCT, is it acceptable practice for the base scenario in a DCAT to assume a capital injection of over 10% of surplus?

Answer 63

There will be some situations where capital injections are a basic part of an insurer’s business plan. The actuary would still be able to sign the usual DCAT opinion even though the business and the DCAT base scenario call for capital injections, if the actuary is satisfied that any such capital injections are the intent of the entity making the injection, and has no reason to believe that such injections are not within the means of that entity.

Question 64

With respect to DCAT and MCT, is it acceptable practice for an AA to use an injection of capital in an adverse scenario to make an unacceptable MCT ratio acceptable? Company managements has confirmed its intention to inject the capital should the adverse scenarios occur.

Answer 64

For testing most adverse scenarios, it would be appropriate to assume no additional capital arises from outside sources, beyond that called for in the business plan and base scenario. In adverse scenarios where the adverse factors are more under managements control, capital injections beyond those anticipated in the base scenario, or management actions may be appropriate.

Question 65

Identify possible management responses to a premium increase adverse scenario.

Answer 65

1. implementing rate changes
2. making underwriting changes in unprofitable markets
3. reviewing distribution channels
4. reducing some expenses
5. using reinsurance to mitigate capital strain

Question 66

Identify a possible ripple effect for the a claim frequency/severity adverse scenario.

Answer 66

1. reinsurer insolvency
2. increased policy liabilities because of adjustable reinsurance contracts
3. loss of reinsurance coverage for the rest of the term
4. increased future reinsurance rates or lack of reinsurance availability
5. postevent inflation
6. forced sale or liquidation of assets
7. increased PACICC assessments
8. rating agency downgrade

Question 67

Describe two possible management responses for the frequency/severity scenario

Answer 67

1. reviewing reinsurance coverage
2. implementing rate increases
3. restricting writing in hazardous areas
4. reviewing the target mix of business
5. reviewing the product types offered
6. selling or reinvesting assets

Question 68

Briefly describe two examples of the ripple effects of a significant understatement of the policy liabilities.

Answer 68

1. Effects on APV for scenarios involving undiscounted liabilities.
2. increased policy liabilities because of adjustable reinsurance contracts
3. increased ultimate claim and expense costs related to the runoff of unearned premium
4. increased ultimate claim and expense costs related to future business
5. forced sale or liquidation of assets
6. rating agency downgrade

Question 69

Define the term “satisfactory financial condition”

Answer 69

The insurer’s financial condition is satisfactory if throughout the forecast period it is able to meet all its future obligations under the base scenario and all plausible adverse scenarios, and under the base scenario it meets the minimum regulatory capital requirement

Question 70

Define underwriting risk (CIA Disclosure)

Answer 70

Exposure to financial loss resulting from the election and approval of risks to be insured as well as the reduction, retention and transfer of risks.

Question 71

According to the CIA, in its educational note on discounting, which of the following should be taken into account when electing a discount rate?

1. The company’s investment philosophy
2. Reinvestment rates
3. Investment expenses

Answer 71

All (1, 2 & 3)

Question 72

According to the CIA, in its educational note on discounting, what considerations should be taken into account by the AA when selecting the discount rate to be used for estimating a company’s actuarial liabilities?

Answer 72

Investment expense level for the company
&
Future reinvestment rates of return

Question 73

According to the CIA, in its educational note on discounting, describe three consideration, other than the purpose of the valuation, which should be taken into account when electing discount rates for the purpose of discounting policy liabilities.

Answer 73

1. Assets selected to support liabilities - whether invested assets are sufficient and if so, which subset is elected?
2. Reinvestment risk - what rate will be earned on a positive net cash-flow
3. liquidation of assets - will future revenue be sufficient to cover expected claims and expenses or will some invested assets need to be liquidated?
4. Investment expenses - what is the expected level of expenses to be incurred in the investment of assets?

Question 74

For each situation, provide a method that an actuary would use to derive the payment patterns for discounting of claims liabilities:

1. Ultimate losses are strictly based on the paid loss development approach
2. Ultimate losses are based on approaches other than the paid loss development approach

Answer 74

1. The claim payment pattern may be derived directly from the elected paid development factors
2. Different methods os selecting the payment pattern may be used, such as historical ratios of paid losses at various maturity dates, to selected ultimate losses.

Question 75

Briefly describe two considerations an actuary should make in determining the cash flow of future reinsurance costs in relation to the discounting of premium liabilities.

Answer 75

1. the timing of payment of applicable reinsurance premium

2. the earning period of the unexpired portion of in-force policies

Question 76

Identify two options an actuary has regarding the discount rate used for the estimation of ceded claim liabilities. Describe one advantage that supports its use.

Answer 76

1. the discount rate elected for NPV (ie. portfolio yield)
   advantage: it may be appropriate if the company’s investments are sufficient to support its gross policy liabilities, or if the assets held by the assuming company to support its net policy liabilities are considered to be similar to the ceding company’s investment portfolio.
2. a risk free rate
   advantage: it would reflect the current, or new money investment return rate for a risk free or other prudently invested portfolio of assets with appropriate duration
3. the discount rate used by the assuming company, such as in the case of cessions to an affiliated company
   advantage: it would reflect an evaluation from the assuming company’s point of view.

Question 77

Describe the concept of materiality as referenced in the CIA report on materiality.

Answer 77

Loosely defined as ‘importance’. The question of whether or not something is material means, quite literally, whether or not it matters to the user of the info. When related to financial information, the question of materiality arises in the context of inclusion, the context of refinement, and in the context of disclosure.

Question 78

The materiality level should be related to the purposes and intended uses of the actuary’s work. For each of the following types of work, describe the basis to which the materiality level is general related.

1. regulatory or solvency issues
2. appraisal work
3. general purpose financial statement work

Answer 78

1. statutory surplus or the solvency benchmark ratio
2. net worth, net income, or earnings per share
3. both net income and net capital (or net surplus)

Question 79

Describe the concept of materiality according to the CIA’s Standards of Practice.

Answer 79

An omission, understatement, or overstatement is material if the actuary expects it materially to affect either the user’s decision making or the user’s reasonable expectations.

Question 80

Briefly describe the difference in the materiality level for DCAT work from the materiality level for valuation work.

Answer 80

For DCAT work, the materiality level is expected to be less rigorous than for valuation work.

Question 81

Identify four characteristics of a company that can influence its selected materiality level.

Answer 81

1. size
2. access to capital
3. stage in the organization life cycle
4. type of business
5. net retention

Question 82

Do the computer models used to estimate PML of an EQ generally incorporate an estimation of the PML figure arising from damage to automobiles?

Answer 82

No

Question 83

According to the EQ Exposure Sound Practices Guideline, the OSFI considers a formal reinsurance agreement between a Canadian incorporated insurance company and its foreign parent to be a financial resource available to cover earthquake insurance claims.

Answer 83

True

Question 84

Identify four risk characteristics to be included in the PML calculation for EQ

Answer 84

1. Age of buildings
2. Building heights
3. Occupancy type
4. Building construction classes
5. Geocoding
6. Soil conditions

Question 85

How is PML for automobile physical damage calculated in EQ measurement?

Answer 85

a percentage factor is applied to the product of the total number of vehicles and the estimated average insured value per vehicle.

Question 86

Describe four factors to consider in an analysis of affiliated or nonaffiliated reinsurance.

Answer 86

1. adequacy of capital base
2. earnings over the last few years
3. Financial strength of shareholders
4. quality of domestic regulatory regime
5. expertise of management
6. history of reimbursements
7. length of time in business

Question 87

The creation of an EQ reserve complement will always have what impact on a company’s P&C 1 financial statements? (all else being equal)

Answer 87

Increase in reserves required

Question 88

The hard reinsurance market has prompted a number of companies to obtain protection from potential weather-related CATs through capital market financing. Which of the following are required to obtain regulatory approval for use of these instruments?

1. risk transferred to investors that meet suitable counterparty standards
2. satisfaction of the provisions in P&C borrowing regulations
3. arrangements must not include any preconditions that delay capital infusion

Answer 88

all 1, 2, 3

Question 89

According to the OSFI, in EQ Exposure Sound Practices Guideline, a company’s gross probable maximum loss must not exceed the sum of what four financial resources on an ongoing basis?

Answer 89

1. EQ reserve required by OSFI
2. Amount of retention the company is currently using to manage its EQ exposure
3. Documented reinsurance coverage
4. Approved capital market financing

Question 90

Briefly describe the limitation that is placed on the retention a company can use to manage its EQ exposure within the OSFI test of preparedness.

Answer 90

it is limited to 10% of capital and surplus.

Question 91

Where relevant, the AA’s report submitted to the OSFI in Canada should specify if a reinsurers is know to have been the subject of regulatory restrictions in its home jurisdictions.

Answer 91

True

Question 92

According to OSFI, name five factors which should be taken into account in determining the proper provision for liabilities in connection with unearned premiums.

Answer 92

1. expected losses, loss expenses and servicing costs on the policies in force
2. expected adjustments to swing rated policies
3. expected changes to premiums as a result of audits, late reporting or endorsements
4. expected commission adjustments on policies with variable commissions
5. anticipated broker/agent commission

Question 93

The US and Canada each have actuarial opinion requirements. For Canada, identify the specific reserves that require comment in the opinion.

Answer 93

For claims liabilities, Canada requires commentary on gross, ceded, and net provisions. For premium liabilities, Canada requires commentary on gross and net policy liabilities in connection with unearned premium, any premium deficiency, and other net liabilities.

Question 94

According to OSFI, the AA’s report should comment on what two specific areas with respect to ceded reinsurance?

Answer 94

1. Unusual problems and/or delays expected to be encountered in collecting the relevant amounts from the reinsurers.
2. How commuted or changed reinsurance agreements were considered.

Question 95

With respect to reinsurance, the actuary must sign an opinion on the basis of ________ business for OSFI.

Answer 95

Gross, ceded, and net claims liabilities and gross and net unearned premium liabilities.

Question 96

Based on Memorandum for the Actuary’s Report on P&C business, the provision for policy liabilities in the liabilities shown in the balance sheet of the Annual Return should be at least as great as the corresponding figures calculated by the actuary.

Answer 96

True

Question 97

Based on Memorandum for the Actuary’s Report on P&C business, can an actuary use his own wording for an unqualified opinion, as long as he covers all the items listed in the instructions?

Answer 97

No, use of different wording will be viewed as a qualification.

Question 98

Which of the following are within the scope of the AA’s report on policy liabilities for federally registered P&C insurance business in Canada?

1. Marine insurance
2. Accident and Sickness insurance
3. Self-insured retention plans

Answer 98

All, 1, 2, 3

Question 99

Should the gross policy liabilities in connection with unearned premiums on Page 20.20 in the P&C1 equal that in the actuary’s estimate column of the expression of opinion in the AA’s Report?

Answer 99

False, they must be greater than or equal to (not equal)

Question 100

For the Canadian branch of a foreign insurer, if the external auditor’s report is not available at the time the AA is supposed to sign the opinion in the AA’s report, the AA’s opinion should be:

Answer 100

Signed with qualification, conditional upon receiving an unqualified opinion from the external auditor.

Question 101

Per instructions from the OSFI, identify five situations that the AA’s Report should address with regard to potential problems or delays in the collection of reinsurance.

Answer 101

1. a dispute has arisen with a reinsurer
2. a reinsurance collectible is significantly overdue
3. the reinsurer has a history of not settling accounts promptly
4. The reinsurer is known to have been the subject of regulatory restrictions in its home jurisdiction
5. The reinsurer has poor credit rating

Question 102

Any departure from the standard language in the SAO (standard of opinion) of a Canadian insurer is considered to be a qualified opinion. Identify four examples of reservations in reporting. For each restriction, state the additional text that should be added to the SAO of the Appointed Actuary’s report.

Answer 102

1. No discounting of loss reserves: “Except for the time value of money, evaluation was made in accordance with actuarial accepted practice”
2. New appointment of an actuary: “I cannot ensure the validity of assumptions and methods used by the former appointed actuary”
3. Takeover of an insurer with inadequate records: “Insurer ABC had poor records when the takeover occurred so I cannot ensure the fairness of policy liabilities related to insurer XYZ”
4. Unavailable auditor’s report: “the opinion is a qualified opinion, conditional on receiving an unqualified opinion from the External Auditor”

Question 103

Based on OSFI’s Memorandum for the Actuary’s Report on P&C Insurance Business,
Fully describe the process that must be followed in the case of a foreign branch for which the external auditor’s report is not available at the time the appointed actuary has to sign his or her opinion.

Answer 103

In such cases a qualified opinion, conditional on receiving an unqualified opinion from the external auditor, must be issued. The qualification must be removed, if appropriate when the Auditor’s work is completed and the regulator must be informed.

Question 104

Based on OSFI’s Memorandum for the Actuary’s Report on P&C Insurance Business,
Identify 3 situations that could lead to a reduction in recoverable reinsurance that should be described within the AA’s report.

Answer 104

1. expected reinsurer defaults
2. disputes
3. time value of money due to delays in payment or a history of such delays
4. regulatory restrictions in its state of domicile
5. poor credit rating

Question 105

Based on OSFI’s Memorandum for the Actuary’s Report on P&C Insurance Business,
Identify two disclosures regarding DCAT reporting that must be included within the AAR

Answer 105

1. dates reports for the last three years were signed
2. dates reports for the last three years were presented
3. to whom reports were presented
4. whether reports were presented in person or as written reports
5. starting dates of the projection periods used in the reports