OSFI - Appointed Actuary

Question 1

What are the legal requirements for the appointments of an AA? (1-5)

Answer 1

• the insurer must appoint an AA
• the insurer must notify OSFI of the appointment
• the AA must be an FCIA
• the AA can’t be the CEO, COO, or hold a similar position without authorization from OSFI
• the AA can’t be a CFO without the permission of the audit committee (the audit committee must certify that the AA and the CFO duties can be performed completely and independently)

Question 2

What are the legal requirements for the appointments of an AA? (6-8)

Answer 2

• the insurer must notify OSFI if the BoD (Board of Directors) revoke’s the AA’s appointment
• the outgoing AA must write a report to the BoD, OSFI on the circumstances & reason for leaving
• incoming AA must review outgoing AA’s report within 15 days (if incoming AA does not receive reports within 15 days, they may accept appointment regardless)

Question 3

What is the main duty of the AA?

Answer 3

The AA must perform a valuation of the policy liabilities at year-end using the AAP (Accepted Actuarial Practices).

Question 4

What are the roles and duties of the AA? (3)

Answer 4

• Valuation of reserves
• Reporting
• Final opinion and memo

Question 5

What are the 5 reports that the AA must produce as part of their roles and duties? (hint: AFFMP)

Answer 5

• Appointed Actuary report
• Financial Position report
• Financial Condition report
• Material Adverse Event report
• Policy Holder Fairness report

Question 6

Describe the AA report.

Answer 6

Must be completed at least 21 days before the AGM (Annual General Meeting), and must state whether the Annual Report fairly represents results of valuation.

Question 7

Where’s the AA’s report on financial position sent?

Answer 7

It is completed annually and sent to the BoD (Board of Directors).

Question 8

When and how is the AA’s report on financial condition done and where is it sent? (3)

Answer 8

• it must be completed when directed by OSFI
• it involves a 3-year projection possibly using FCT methodology
• it is sent to the BoD (Board of Directors) and OSFI

Question 9

When is the AA’s Material Adverse Event report done and where is it sent?

Answer 9

The report on MAE (Materially Adverse Event) requiring rectification and it is sent to the BoD (Board of Directors), the CEO, and the CFO.

Question 10

What is another report that must be completed by the AA that relates to policy holders?

Answer 10

The Policy Holder Report, which is completed annually. It is to assess the fairness with which the policy holders are treated regarding dividends, bonus, and other benefits.

Question 11

What does the AA’s final opinion contain?

Answer 11

Opinions on the parts of financial statements requiring discretion or significant calculations and judgements.

Question 12

AA qualifications: Main one & 3 rules

Answer 12

Main: FCIA - and in good standing
RULE 1: PPS w/ ICSC (perform professional services with integrity, competence, skill and care)
RULE 2: PPS only when qualified to do so
RULE 3: meet all applicable SOPs (standard of practice)

Question 13

AA qualifications: OSFI expectations (4)

Answer 13

• must have 3 years of Canadian experience with the past 6 years (incl. 1 year of valuation experience)
• must have experience with CIA’s SOPs (also insurance legislation & regulation)
• must maintain professional development requirements
• must have NO adverse findings with the CIA disciplinary tribunal

Question 14

What are the objectives for a peer review? (3)

Answer 14

ASSIST (OSFI): in assessing insurer safety and soundness
ASSIST (AA): by providing independent advice and a source for professional development
Increase CONFIDENCE in (AA): with management, the public and with regulators

Question 15

How often is a F/S (Financial Statement) peer review performed when there have been NO material changes to the valuation?

Answer 15

At least once every 3 years, all at once OR in phases (with brief annual reports stating that there were no material changes).

Question 16

How often is a F/S (Financial Statement) peer review performed when there HAVE been material changes to the valuation?

Answer 16

Annually.

Question 17

What are a peer reviewer’s work to review? (7)

Answer 17

• Valuation
• I/E (internal/external) changes
• Adequacy of PSW (Procedures, Systems, Work) of others
• AM (Assumptions and Methods)
• Documentation of AM
• Review MCT/BAAT AM
• review FCT AMS (Assumptions, Methods and Scenarios)

Question 18

Peer review - Valuation

Answer 18

Did the AA use the AAP (Accepted Actuarial Principles) in performing the valuation?

Question 19

Peer review - I/E (internal, external) changes

Answer 19

Detailed review of material internal and external changes.

Question 20

Peer review - Adequacy of PSW (Procedures, Systems, Work)

Answer 20

Check the adequacy of the procedures, systems and work of others.

Question 21

Peer review - AM (Assumptions and Methods)

Answer 21

• is each assumption independently reasonable?

- are methods appropriate for each valuation model?

Question 22

Peer review - Documentation of AM

Answer 22

Does the AA’s report accurately document the assumptions and methods used in the valuation?

Question 23

Peer review - MCT/BAAT (AM)

Answer 23

Review the assumptions and methods used in the calculation of MCT/BAAT.

Question 24

Peer review - FCT (AMS)

Answer 24

Review the assumptions, methods and scenarios used in evaluation of the future Financial Condition of insurer.

Question 25

Responsibilities of AA and management in peer review.

Answer 25

Full cooperation - respond to reviewer in a timely manner, with all relevant documentation and information.

Question 26

Who sets the materiality level used for a company's financial statement and at what basis?

Answer 26

The External Auditor, based on the size of the company as a whole.

Question 27

Some material changes to consider. (5)

Answer 27

- systems (eg: valuation software) - material external event (eg: inflation) - valuation assumptions (eg: LDFs, trend) - valuation methods (eg: for claims liabilities) - operations (eg: investment policies, reinsurance practices)

Question 28

Is auditor's level of materiality sufficient for AA, peer review?

Answer 28

- no, a numerical threshold for company as a whole is not sufficient - peer reviewer & AA must use professional judgement for different areas within the company

Question 29

What causes increased rigour?

Answer 29

Getting near internal capital targets, or solvency control levels - small changes could trigger significants actions

Question 30

What is difference between the external audit and the peer review?

Answer 30

AUDIT: check that is F/S (Financial Statement) is free FROM material misstatement as a whole PEER REVIEW: review the AA's F/S work at a more granular level

Question 31

Do audit requirements satisfy peer review requirements?

Answer 31

No.

Question 32

What are the duties that a peer reviewer does not perform? (3)

Answer 32

The peer reviewer DOES NOT: - perform detailed RECALCULATIONS (provided that the AA has controls to detect errors in valuation) - verify DATA - verify CONTROLS

Question 33

What are the contents of the peer review report? (4)

Answer 33

- description of work, timing, and materiality level - compliance with the AAP (Accepted Actuarial Principles) and changes in AM (Assumptions and Methods) - recommendations for further work - relationship with the AA

Question 34

Identify the qualification standards fora peer reviewer - Main one & 3 rules

Answer 34

``` - same as outlined for the AA: Main: FCIA - in good standing RULE 1: PPS with ICSC RULE 2: PPS only when qualified to do so RULE 3: meet all applicable SOPs (Standard Of Practice) ```

Question 35

Required prior experience of peer reviewer before appointment.

Answer 35

- exposure to 2 or more unrelated insurers | - familiarity with a range of practices and assumptions used in Canada

Question 36

What does OSFI expect if a company is hiring/changing the peer reviewer?

Answer 36

Written notification with reasons for the change in peer reviewer, if applicable.

Question 37

Describe OSFI peer reviewer objectivity criteria. (3)

Answer 37

- NOT an employee or AA for the company in past 3 years, a shareholder (or direct investor), or from same consulting firm as AA - NO outside non-work discussion with the AA is permitted - OK if there are indirect financial investment, or if they are from the same consulting firm doing financial statements or from the same audit firm

Question 38

OSFI peer reviewer - not an employee or AA for 3 years

Answer 38

The peer reviewer cannot have been an employee or AA for the company or a subsidiary in the prior 3 years.

Question 39

OSFI peer reviewer - not a shareholder

Answer 39

The peer reviewer may not be a shareholder, nor have any direct financial investment in the company.

Question 40

OSFI peer reviewer - not from the same consulting firm as the AA

Answer 40

The peer reviewer cannot be from the same consulting firm as the AA.

Question 41

OSFI peer reviewer - NO disscussion

Answer 41

The peer reviewer may not have discussion with AA regarding work UNLESS IN THE CONTEXT OF the AA and the peer reviewer's relationship.

Question 42

OSFI peer reviewer - OK to have indirect financial investment

Answer 42

It is OK for the peer reviewer to have an indirect financial investment, be a policyholder, depositor, beneficiary - eg: may own a diversified mutual fund containing the insurer

Question 43

OSFI peer reviewer - OK to be from the same consulting firm doing the financial statements

Answer 43

It is OK for the peer reviewer to be from the same consulting form that does actuarial Financial Statement work if not involved in that work.

Question 44

OSFI peer reviewer - OK to from the same audit firm

Answer 44

It is OK for the peer reviewer to be from the same audit firm, BUT DISCOURAGED if the AA is on the audit team for that company.

Question 45

Identify a reason that a peer reviewer may be from an insurer's audit firm.

Answer 45

- using peer reviewer from audit firm accommodates smaller and simpler insurers - this is discourage for larger insurers (needs a broader perspective)

Question 46

How often should the change of peer reviewer occur?

Answer 46

At least once every 2 cycles (ie: every 6 years)

Question 47

Identify reasons for periodic changes of the peer reviewers. (2)

Answer 47

- enhance objectivity | - increase educational value to the AA

Question 48

How does the AA identify and report material adverse transactions and/or conditions?

Answer 48

IDENTIFY: use FCT, stress testing REPORTING: report to the CEO, CFO with a deadline for corrective action (cc BoD (Board of Directors)) IF DEADLINE IS NOT MET: cc OSFI & outline events leading up to notifying OSFI